[Federal Register Volume 59, Number 113 (Tuesday, June 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14296]
[[Page Unknown]]
[Federal Register: June 14, 1994]
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DEPARTMENT OF AGRICULTURE
Federal Crop Insurance Corporation
7 CFR Part 400
General Crop Insurance Regulations; Reinsurance Agreement--
Standards for Approval
AGENCY: Federal Crop Insurance Corporation, USDA.
ACTION: Proposed rule.
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SUMMARY: The Federal Crop Insurance Corporation (FCIC) proposes to
amend the General Crop Insurance Regulations, effective for the 1995
and succeeding reinsurance years to revise the general qualifications
for being awarded a Standard Reinsurance Agreement. This rule intends
to provide additional information so that FCIC can more accurately
identify those insurance companies at risk of bankruptcy.
DATES: Written comments pursuant to this rule must be received by June
29, 1994.
ADDRESSES: Comments pursuant to this proposal should be sent to Mari
Dunleavy. Regulatory and Procedural Development Staff, Federal Crop
Insurance Corporation, U.S. Department of Agriculture, Washington, DC,
20250. Hand messenger delivery may be made to, Suite 500, 2101 L
Street, NW., Washington, DC. Comments received may be viewed and copied
at Suite 503, 2101 L Street, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Mari Dunleavy, Regulatory and Procedural Development Staff, Federal
Crop Insurance Corporation, U.S. Department of Agriculture, Washington,
DC, 20250, telephone (202) 254-8450.
SUPPLEMENTARY INFORMATION: This action has been reviewed under USDA
procedures established by Departmental Regulation 1512-1. This action
does not constitute a review as to the need, currency, clarity, and
effectiveness of this regulation under those procedures. The sunset
review date established for these regulations is March 31, 1999.
This rule has been determined not significant for purposes of
Executive Order 12866 and, therefore, has not been reviewed by the
Office of Management and Budget.
This action will not have a significant economic effect on a
substantial number of small entities. This action does not increase the
paperwork burden on the reinsured company because the reinsured company
must already provide the additional information required by this
regulation to the state in which it is licensed. Therefore, this action
is determined to be exempt from the provisions of the Regulatory
Flexibility Act and no Regulatory Flexibility Analysis was prepared.
This program is listed in the Catalog of Federal Domestic
Assistance under No. 10.450.
This program is not subject to the provisions of Executive Order
12372 which requires intergovernmental consultation with state and
local officials. See the Notice related to 7 CFR part 3015, subpart V,
published at 48 FR 29115, June 24, 1983.
This action is not expected to have any significant impact on the
quality of the human environment, health, and safety. Therefore,
neither an Environmental Assessment nor an Environmental Impact
Statement is needed.
The Office of the General Counsel has determined that these
regulations meet the applicable standards provided in subsections 2(a)
and 2(b)(2) of Executive Order 12778. The provisions of this rule are
not retroactive and will preempt state and local laws to the extent
such state and local laws are inconsistent herewith. The administrative
appeal provisions located at 7 CFR 400.169, must be exhausted before
judicial action may be brought.
Since reinsured companies must already provide the additional
information required by the proposed rule to the state which licenses
them, this proposed rule does not contain information collections that
require clearance by the Office of Management and Budget under the
provisions of 44 U.S.C. chapter 35, the Paperwork Reduction Act.
It has been determined under section 6(a) of Executive Order 12612,
Federalism, that this proposed rule does not have sufficient federalism
implications to warrant the preparation of a Federalism Assessment. The
policies and procedures contained in this rule will not have
substantial direct effects on states or their political subdivisions,
or on the distribution of power and responsibilities among the various
levels of government.
Background
The standard requirements for being eligible to obtain a Standard
Reinsurance Agreement (Agreement) with FCIC are found in 7 CFR 400,
subpart L, and currently require that a reinsured company pass eight
out of eleven National Association of Insurance Commissioners (NAIC)
Insurance Regulatory Information System (IRIS) ratios. These ratios are
meant to be an early warning device, alerting state regulators to
insurance companies that may be in financial distress. These ratios are
indicators that evaluate changes in an insurance company's financial
condition. This rule proposes that FCIC add six additional radios to
the current eleven IRIS ratios to improve the overall evaluation of a
reinsured company's financial condition, to require the reinsured
company to explain discrepancies in all ratios, and to provide a
financial plan to overcome each discrepancy. The additional ratios
include one new IRIS ratio, Gross Premium to Surplus, three ratios used
by A.M. Best (Combined Ratio After Policyholder Dividends, Quick
Liquidity, and Return on Surplus) found in Best's Key Rating Guide, a
Two-Year Change to Surplus Ratio developed by FCIC which calculates the
same as the One-Year Change to Surplus IRIS ratio but for a two-year
period; and a Net Change in Cash and Short-Term Investments ratio also
developed by FCIC to measure net cash flow development.
Thirty-three profitability, leverage, liquidity, and loss reserve
ratios were calculated by FCIC for each current reinsured company.
These calculations include both (NAIC), (IRIS), and A.M. Best ratios
representing the current industry standard with which the reinsured
company should be familiar. While it is proposed that only selected
ratios will be used to determine eligibility, all ratios are available
for financial analysis. The data required to complete the ratio
calculations are derived from the Statutory Annual Financial Statement
submitted by the reinsured company to the state insurance departments
and FCIC. However, FCIC may supplement financial information contained
in the Statutory Annual Financial Statement with information obtained
from other audited or unaudited financial statements prepared in
accordance with Generally Accepted Accounting Principles.
The ratios were evaluated to determine which ratios within each
category best represent Multiple Peril Crop Insurance (MPCI) liability
and its impact on insurance companies. The selection criteria included
factors such as the short-term nature and annual cash flow cycle of
MPCI insurance, and the varying size and business mix of the insurance
company. For each ratio an acceptable range was established to
determine whether a company passed or failed the ratio.
The current surplus requirement utilizes a Minimum Surplus Factor
which limits a reinsured company's liability under the MPCI program
based on the surplus available to the reinsured company. The
liabilities of other lines of business written by the reinsured company
are generally not considered. However, if a reinsured company
underwrites only MPCI and crop-hail insurance, both liabilities will be
considered. Since much of FCIC's MPCI insurance is delivered by
insurers that write considerable premium and policies in the crop-hail
market, increased evaluation using additional ratios for evaluating and
comparing each company's financial integrity is necessary.
Seventeen ratios were selected for the general qualifications,
including the eleven present NAIC IRIS ratios. Company profitability is
measured by the following six ratios: Combined Ratio After Policyholder
Dividends, Two-Year Overall Operating, One-Year Change in Surplus, Two-
Year Change in Surplus, Return on Surplus, and Investment Yield. The
profitability on an MPCI reinsured company is dependent on company
underwriting practices, catastrophic loss experience and recovery, and
its ability to generate an adequate return on investments.
A reinsured company's liquidity and cash management are measured by
the following four ratios: Agents' Balances to Surplus, Quick
Liquidity, Liabilities to Liquid Assets, and Net Change in Cash and
Short-Term Investments. The combination of varying annual loss
experience, loss payout to premium collection time frame, and MPCI
accounting procedures, require the company maintain sufficient
liquidity. Cash and short-term investment management is a key factor in
maintaining sufficient liquidity and meeting current obligations.
The four leverage ratios used are: Gross Premium to Surplus, Net
Written Premium to Surplus, Change in Net Writings, and Surplus Aid to
Surplus. These measures will indicate if a reinsured company may be
overexposing their surplus to risk variation and reinsurance
dependency. The three loss reserve ratios used are: One-Year Reserve
Development to Surplus, Two-Year Reserve Development to Surplus, and
Estimated Current Reserve Deficiency to Surplus. These ratios determine
if reserves have been understated to increase surplus and to estimate
current reserve adequacy.
Section 400.173 is removed as it is not necessary after revising
Subpart L to determine if the insurer is otherwise financially sound.
If an insurer does not pass the required ratios and submits a financial
plan that does not alleviate discrepancies in the required ratios, the
reinsured company will be considered not financially sound and will not
be awarded a Standard Reinsurance Agreement.
All participating insurance companies in the crop insurance
industry have been fully advised of the content of this proposed rule
during the preparation stage and in fact have participated in
developing this rule. Since the rule must be effective prior to the
effective date of the Standard Reinsurance Agreement (July 1, 1994), it
has been determined that for good cause, a 15 day comment period is
sufficient. In May, FCIC held a meeting for the express purpose to
introduce and discuss the SRA and its standards for approval prior to
its publication. All parties interested in the SRA were invited. Prior
to its publication, a copy of this rule was sent to all persons
interested in the crop insurance program.
List of Subjects in 7 CFR Part 400
Crop Insurance.
Proposed Rule
Accordingly, pursuant to the authority contained in the Federal
Crop Insurance Act, as amended (7 U.S.C. 1501 et seq.) the Federal Crop
Insurance Corporation hereby proposes to amend 7 CFR part 400, subpart
L of the General Administrative Regulations effective for the 1995 and
succeeding reinsurance years as follows:
1. The authority citation for 7 CFR part 400, subpart L is revised
to read as follows:
Authority: 7 U.S.C. 1501-1520.
2. The heading for subpart L is revised to read as follows:
Subpart L--Reinsurance Agreement--Standards for Approval
3. Section 400.161 is amended by removing paragraph (f),
redesignating paragraphs (a) through (e) as paragraphs (b) through (f),
and adding a new paragraph (a) to read as follows:
Sec. 400.161 Definitions.
* * * * *
(a) Annual Statutory Financial Statement means the annual financial
statement of an insurer prepared in accordance with Statutory
Accounting Principles and submitted to the state insurance department
if required by any state in which the insurer does business, and the
subsequent Audited Financial Report filed with the state insurance
department as prescribed in the National Association of Insurance
Commissioners Property and Casualty Annual State Instructions. These
statement are to be audited by an independent Certified Public
Accountant.
* * * * *
4. Section 400.162 is revised to read as follows:
Sec. 400.162 Qualification ratios.
The seventeen qualification ratios include:
(a) Twelve National Association of Insurance Commissioner's (NAIC)
Insurance Regulatory Information System (IRIS) ratios found in
Sec. 400.170(d)(1) (i) and (ii) and Sec. 400.170(d)(2) (i), (ii),
(iii), (vi), (vii), (ix), (xi), (xiii), (xiv), and (xv) and referenced
in ``Using the NAIC Insurance Regulatory Information System''
distributed by NAIC, 120 West 12th St., Kansas City, MO, 64105-1925;
(b) Three ratios used by A.M. Best Company found in
Sec. 400.170(d)(2) (v), (viii), and (x) and referenced in Best's Key
Rating Guide, A.M. Best, Ambest Road, Oldwick, N.J., 08858-0700;
(c) One ratio found in Sec. 400.170(d)(2)(iv) which is formulated
by FCIC and is calculated the same as the One-Year Change to Surplus
IRIS ratio but for a two-year period; and
(d) One ratio found in Sec. 400.170(d)(2)(xii) which is also
formulated by FCIC by dividing the net change in cash and short-term
investments by the cash and short-term investment balance for the prior
year.
5. Section 400.170 is revised to read as follows:
Sec. 400.170 General qualifications.
To qualify initially or thereafter for a Standard Reinsurance
Agreement with FCIC, an insurer must:
(a) Be a licensed or admitted insurer in any state, territory, or
possession of the United States;
(b) Be licensed or admitted, or use as a policy-issuing Company an
insurer that is licensed or admitted, in each state from which the
insurer will cede policies to FCIC for reinsurance;
(c) Have surplus, as reported in its most recent Annual Statutory
Financial Statement, that is at least equal to the MPUL for the gross
premium proposed to be reinsured multiplied by the appropriate Minimum
Surplus Factor, found in the Minimum Surplus Table. For the purposes of
the Minimum Surplus Table, an insurer is considered to issue policies
in a state if at least two and one-half percent (2.50%) of all its
reinsured gross premium is written in that state;
(d) Have and meet the ratio requirement of Gross Premium to Surplus
and Net Written Premium to Surplus and at least ten of the fifteen
optional ratios in this section based on the most recent Annual
Statutory Financial Statement, and comply with Sec. 400.172:
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Ratio Ratio requirement
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(1) Required:
(i) Gross Premium to Surplus.......... Less than 900%.
(ii) Net Written Premium to Surplus... Less than 300%.
(2) Optional:
(i) Two-Year Overall Operating Ratio.. Less than 100%.
(ii) Agents' Balances to Surplus...... Less than 40%.
(iii) One-Year Change in Surplus...... Greater than -10%.
and less than 50%.
(iv) Two-Year Change in Surplus....... Greater than -10%.
(v) Combined Ratio After Policyholder Less than 115%.
Dividends.
(vi) Change in Writings............... Greater than -33%.
and less than 33%.
(vii) Surplus Aid to Surplus.......... Less than 15%.
(viii) Quick Liquidity................ Greater than 20%.
(ix) Liabilities to Liquid Assets..... Less than 105%.
(x) Return on Surplus................. Greater than -5%.
(xi) Investment Yield................. Greater than 4.5%.
and less than 10%.
(xii) Net Change in Cash/Short-Term Greater than -20%.
Investments.
(xiii) One-Year Reserve Development to Less than 20%.
Surplus.
(xiv) Two-Year Reserve Development to Less than 20%.
Surplus.
(xv) Estimated Current Reserve Less than 25%.
Deficiency to Surplus.
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(e) Submit to FCIC all of the following statements:
(1) Annual Statutory Financial Statements;
(2) Statutory Management Discussion & Analysis;
(3) Most recent State Insurance Department Examination Report;
(4) Actuarial Opinion of Reserves;
(5) Annual GAAP Statement or Form 10K (does not apply to Mutual
Insurance Companies);
(6) Audited Annual Report to Shareholders; and
(7) Any other appropriate financial information or explanation of
IRIS ratio discrepancies as determined by the company or as requested
by FCIC.
6. Section 400.171 is revised to read as follows:
Sec. 400.171 Qualifying when a state does not require that an Annual
Statutory Financial Statement be filed.
An insurer exempt by the insurance department of the state from
submitting an Annual Statutory Financial Statement must, in addition to
the requirements of Sec. 400.170(a),(b),(c),(d), and (e), submit an
Annual Statutory Financial Statement certified by a Certified Public
Accountant, which if not exempted, would have been filed with the
insurance department of any state in which it does business.
7. Section 400.172 is revised to read as follows.
Sec. 400.172 Qualifying with less than twelve ratios meeting the
specified requirements.
An insurer with less than twelve ratios meeting the requirements
contained in Sec. 400.170 may qualify if, in addition to the
requirements of Sec. 400.170(a),(b),(c) and (e), the insurer:
(a) Submits a financial management plan, acceptable to FCIC, to
eliminate each deficiency indicated by the ratios, or provide an
acceptable explanation if any failed ratio is not relevant to the
insurer's insurance operations; or
(b) Has a binding agreement with another insurer that qualifies
such insurer under this subpart to assume financial responsibility in
the event of the reinsured company's failure to meet its obligations on
FCIC reinsured policies.
Sec. 400.173 [Removed]
8. Section 400.173 is removed and reserved.
Sec. 400.174 [Amended]
9. In Section 400.174, the words ``financial statement'' are
removed and the words ``Annual Statutory Financial Statement'' are
added in their place.
Sec. 400.175 [Amended]
10. In Section 400.175(a), the words ``financial statement'' are
removed and the words ``Annual Statutory Financial Statement or
Financial Statement'' are added in their place.
Done in Washington, DC on June 2, 1994.
Kenneth D. Ackerman,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 94-14296 Filed 6-13-94; 8:45 am]
BILLING CODE 3410-08-M