[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Rules and Regulations]
[Pages 57900-57904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28558]



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[[Page 57901]]


DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Part 400

RIN 0563-AB08


General Administrative Regulations; Reinsurance Agreement--
Standards for Approval

AGENCY: Federal Crop Insurance Corporation.

ACTION: Final rule.

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SUMMARY: The Federal Crop Insurance Corporation (``FCIC'') hereby 
amends its General Administrative Regulations, effective for the 1997 
and succeeding reinsurance years, by revising the general 
qualifications for being awarded a Standard Reinsurance Agreement. The 
intended effect of this rule is to provide additional information and 
amended procedures so that FCIC can more accurately identify those 
insurance companies experiencing a significant weakening in financial 
conditions.

EFFECTIVE DATE: November 24, 1995.

FOR FURTHER INFORMATION CONTACT: Diana Moslak, Regulatory and 
Procedural Development Staff, Federal Crop Insurance Corporation, U.S. 
Department of Agriculture, Washington, D.C. 20250. Telephone (202) 254-
8314.

SUPPLEMENTARY INFORMATION: This action has been reviewed under United 
States Department of Agriculture (``USDA'') procedures established by 
Executive Order 12866 and Departmental Regulation 1512-1. This action 
does not constitute a review as to the need, currency, clarity, and 
effectiveness of these regulations under those procedures. The sunset 
review date established for these regulations is March 31, 1999.
    This rule has been determined to be ``exempt'' for the purposes of 
Executive Order 12866 and, therefore, has not been reviewed by the 
Office of Management and Budget (``OMB'').
    This rule does not contain information collection requirements that 
require approval by OMB under the Paperwork Reduction Act of 1995 (44 
U.S.C. chapter 35).
    It has been determined under section 6(a) of Executive Order 12612, 
Federalism, that this rule does not have sufficient federalism 
implication to warrant the preparation of a Federalism Assessment. The 
provisions and procedures contained in this rule will not have a 
substantial direct effect on states or their political subdivisions, or 
on the distribution of power and responsibilities among the various 
level of government.
    This regulation will not have a significant impact 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 (5 U.S.C. 605) 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 require 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.
    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 contained in the Standard Reinsurance Agreement must 
be exhausted before judicial action may be brought.
    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.

Background

    On Tuesday, June 14, 1994, FCIC published a proposed rule in the 
Federal Register at 59 FR 30533 proposing to amend the General Crop 
Insurance Regulations, subpart L, Reinsurance Agreement; Standards for 
Approval by revising the general qualification requirements for being 
awarded a Standard Reinsurance Agreement (Agreement).
    Following publication of the proposed rule, the public was afforded 
15 days to submit written comments, data, and opinions. The comments 
received and FCIC responses are as follows:
    Comment: Two comments, one from an insurance company and one from a 
legal firm, stated that the proposed regulations would greatly increase 
the insurance company's paperwork burden and would have a significant 
adverse economic effect on a substantial number of small entities and 
should, therefore, require a Regulatory Flexibility Analysis and be 
subject to the provisions of the Regulatory Flexibility Act.
    Response: The information required by these regulations is 
currently required by and filed with the state insurance departments 
where a company is licensed. With the exception of the requirements 
contained in Sec. 400.171, financial reports not currently prepared by 
an insurance company will not be requested unless determined to be 
critical to the qualification process. This action will not have a 
significant economic impact on small entities and their ability to 
compete. These regulations are the basis of company financial condition 
evaluation to ensure that the obligations to both the policyholder and 
FCIC are met, regardless of the company's size.
    Comment: Two comments, one from an insurance company and one from 
the parent company of an insurance company, objected to the required 
submission of an annual Generally Accepted Accounting Principles (GAAP) 
financial statement stating that this would be an additional burden and 
cost if the insurance company does not prepare financial statements in 
accordance with GAAP.
    Response: FCIC agrees with the comment and has removed 
Sec. 400.170(e) (5) and (6). As a result of this change, 
Sec. 400.170(e)(7) is redesignated as Sec. 400.170(e)(6). However, 
these and other statements may be requested by FCIC under 
Sec. 400.170(e)(6).
    Comment: One comment from a professional association stated that 
the definition of Annual Statutory Financial Statement in 
Sec. 400.161(a) should be clarified as it appears that a new audit is 
required. They also stated that the term ``certified'' in Sec. 400.171 
should be replaced by ``audited'' and that ``in accordance with 
generally accepted auditing standards'' should be included when making 
reference to a Certified Public Accountant audit.
    Response: FCIC has revised the definition of ``Annual Statutory 
Financial Statement'' and added Sec. 400.170(e)(5) the ``Annual Audited 
Financial Report'' prepared by an independent Certified Public 
Accountant and filed with the state insurance department as prescribed 
in the National Association of Insurance Commissioners Property and 
Casualty Annual Statement Instructions. The other recommended revisions 
have also been made.
    Comment: One comment from a professional association stated that 
the requirement proposed in Sec. 400.170(e)(6) for an ``Audited Annual 
Report to Shareholders'' should be restated as 

[[Page 57902]]
``Annual Report to Shareholders'' because the report itself is not 
audited but rather the financial statements included in the report.
    Response: FCIC agrees with the comment and the requirement 
contained in Sec. 400.170(e)(6) has been removed.
    Comment: Four comments, two from insurance companies, one from a 
legal firm and one from the parent company of an insurance company, 
stated that proposed regulations favor large multiple line companies 
when there is no valid correlation between a company's size and its 
financial soundness. The ratio results for a company writing primarily 
crop insurance business may be adversely impacted due to the unique 
nature of crop insurance, compared to a company writing standard 
property and casualty lines for which these ratios were developed.
    Response: FCIC disagrees with the comment. The proposed regulations 
incorporate the use of financial ratios which are calculated from the 
Annual Statutory Financial Statement. The ratios are a quantitative 
measure of potential financial weakness regardless of company size. 
FCIC is aware that the insurance lines of business a company writes may 
impact the ratio results and gives a company the opportunity to address 
this impact under Sec. 400.172(a).
    Comment: Two comments, one from an insurance company and one from a 
legal firm stated that the statement in Sec. 400.170(d), ``and comply 
with Sec. 400.172.'' was illogical.
    Response: The proposed language in Sec. 400.170(d) contained a 
typographical error and has been changed to read ``or comply with 
Sec. 400.172.''
    Comment: Four comments, two from insurance companies, one from a 
legal firm and one from the parent company of an insurance company, 
questioned requiring the Gross Premium to Surplus ratio when the 
reinsured company does not have the option of rejecting MPCI business, 
and FCIC as a reinsurer is not considered a collection risk.
    Response: FCIC agrees with the comment and has defined ``Gross 
Premium'' in the Gross Premium to Surplus ratio in Sec. 400.162(c) as 
the company's gross premium adjusted to exclude MPCI premium assumed by 
FCIC. The reduction in a company's gross premium by the amount assumed 
by FCIC will give a more accurate measure of a company's reliance on 
commercial reinsurance.
    Comment: Two comments, one from an insurance company and one from a 
legal firm, objected to requiring the two ratios--Gross Premium to 
Surplus of less than 900% and Net Premium to Surplus of less than 
300%--stating that no single ratio should be weighted more than 
another.
    Response: FCIC disagrees with the comment. The MPUL calculation 
determines the amount of MPCI premium and associated liability a 
company may retain based on policyholder surplus. The Gross Premium to 
Surplus and Net Premium to Surplus ratios measure the adequacy of 
surplus to absorb above-average losses considering the company's total 
book of business, exclusive and inclusive of the effects of 
reinsurance. A company's surplus exposure must be addressed considering 
its use in ratio and MPUL calculations.
    Comment: Two comments, one from an insurance company and one from a 
legal firm, objected to the requirement that a company satisfy at least 
10 of the 15 optional ratios, stating that a company ``should have the 
opportunity to explain non-compliance and should not be automatically 
eliminated for failure to meet ten of the ratios.''
    Response: FCIC disagrees with the comment. Failure to meet the 
requirements of Sec. 400.170(d) does not automatically eliminate a 
company from participating in the MPCI program. Section 400.172 allows 
a company the opportunity to address the ratios failed in 
Sec. 400.170(d). If a company meets the requirements of Sec. 400.172, 
the company may continue to participate in the MPCI program.
    Comment: Three comments, one from an insurance company, one from a 
legal firm and one from the parent company of an insurance company, 
objected to the Maximum Possible Underwriting Loss (MPUL) calculation 
provided in Sec. 400.170(c) and its interpretation by FCIC. They stated 
that using MPUL to determine adequate surplus level was inconsistent 
with basic insurance underwriting principles, and that revising the 
MPUL to maximum probable underwriting loss would be more reasonable.
    Response: FCIC disagrees with the comment. The proposed MPUL 
calculation adequately considers MPCI loss potential, over-lapping of 
reinsurance years, and a company's geographic spread of risk.
    Comment: Two comments, one from an insurance company and one from a 
legal firm, addressed FCIC's statement in the background section of the 
proposed rule referencing the current surplus requirement that, if a 
reinsured company underwrites only MPCI and crop hail insurance, both 
liabilities would be considered in calculating the minimum required 
surplus. They stated there was no rational basis for including crop 
hail liabilities in the MPUL calculation when a company writes only 
crop hail and MPCI business, while using only MPCI liabilities for 
companies writing multiple lines.
    Response: FCIC agrees with the comment and will not consider crop-
hail, or any other lines of business in the MPUL calculation. All other 
lines of business written by a company will be analyzed to determine 
their impact on the ratio results of Sec. 400.170(d), and the company's 
overall financial condition.
    In addition to the changes indicated in the responses to comments, 
FCIC has made the following changes:
    l. The definition of ``financial statement'' contained in 
Sec. 400.161 was not removed as proposed but revised to mean ``any 
documentation submitted by a company as required by this subpart''.
    2. A definition for ``Quarterly Statutory Financial Statement'' was 
added to Sec. 400.161 to facilitate its use in Sec. 400.170(c).
    3. The definitions of ``Current Assets'', ``Current Liabilities'', 
and ``Non-affiliated Company'' were removed from Sec. 400.161 because 
these terms are no longer used in this subpart.
     4. Section 400.163 has been revised to reflect that these 
regulations are ``effective for the 1997 and subsequent reinsurance 
years''.
    5. In Sec. 400.170(c) ``MPUL for the gross premium'' was replaced 
with ``MPUL for the company's estimated retained premium'' to be 
consistent with the MPUL definition.
    6. In Sec. 400.170(c) ``all its reinsured gross premium'' was 
replaced with ``all its reinsured retained premium'' to accurately 
represent geographic spread of risk.
    7. The proposed Secs. 400.162(d) and 400.170(d)(xii) were deleted 
after determining them to be non-essential.
    Accordingly, the rule, ``General Crop Insurance Regulations; 
Reinsurance Agreement--Standards for Approval'' published at 59 FR 
30533 as revised and set out below is hereby adopted as final rule.

List of Subjects in 7 CFR Part 400

    Crop insurance.

Final 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 amends 7 CFR part 400, subpart L of the 
General Administrative Regulations, effective for the 1997 and 
succeeding reinsurance years, as follows: 

[[Page 57903]]


PART 400--GENERAL ADMINISTRATIVE REGULATIONS

Subpart L--Reinsurance Agreement--Standards for Approval; 
Regulations for the 1997 and Subsequent Reinsurance Years

    1. The authority citation for 7 CFR part 400, subpart L is revised 
to read as follows:

    Authority: 7 U.S.C. 1506(l).

    2. The heading for part 400, subpart L is revised as set forth 
above.
    3. Section 400.161 is amended by removing paragraphs (c), (d) and 
(j); redesignating paragraphs (a) and (b), (e) through (i), (k) and 
(l), and (m) through (o), as paragraphs (b) and (c), (d) through (h), 
(i) and (j), and (l) through (n), respectively; and revising 
redesignated paragraph (e) and adding new paragraphs (a) and (k) 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 is licensed.
* * * * *
    (e) Financial statement means any documentation submitted by a 
company as required by this subpart.
* * * * *
    (k) Quarterly Statutory Financial Statement means the quarterly 
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 is licensed.
* * * * *
    4. Section 400.162 is revised to read as follows:


Sec. 400.162  Qualification ratios.

    The sixteen qualification ratios include:
    (a) Eleven National Association of Insurance Commissioner's 
(NAIC's) Insurance Regulatory Information System (IRIS) ratios found in 
Secs. 400.170(d)(1)(ii) and 400.170(d)(2) (i), (ii), (iii), (vi), 
(vii), (ix), (xi), (xii), (xiii), and (xiv) 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)(1)(i) is calculated the same 
as the Gross Premium to Surplus IRIS ratio, with Gross Premium adjusted 
to exclude the MPCI premium assumed by FCIC; and
    (d) 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.
    5. Section 400.163 is revised to read as follows:


Sec. 400.163  Applicability.

    The standards contained herein shall be applicable to insurers who 
apply for or enter into a Standard Reinsurance Agreement effective for 
the 1997 and subsequent reinsurance years or who continue with a prior 
years Standard Reinsurance Agreement into the 1997 and subsequent 
reinsurance years.
    6. 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 licensed or admitted 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 or 
Quarterly Statutory Financial Statement, that is at least equal to the 
MPUL for the company's estimated retained 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 (2.5%) of all its reinsured retained 
premium is written in that state;

                          Minimum Surplus Table                         
------------------------------------------------------------------------
                                                               Minimum  
                                                               surplus  
 Number of states in which a company issues FCIC-reinsured      factor  
                          policies                           (multiplied
                                                               by MPUL) 
------------------------------------------------------------------------
1 through 10...............................................          2.5
11 or more.................................................          2.0
------------------------------------------------------------------------

    (d) Have and meet the ratio requirements of the Gross Premium to 
Surplus and Net Premium to Surplus required ratios and at least ten of 
the fourteen analytical ratios in this section based on the most recent 
Annual Statutory Financial Statement, or comply with Sec. 400.172:

------------------------------------------------------------------------
                   Ratio                          Ratio requirement     
------------------------------------------------------------------------
(1) Required:                                                           
    (i) Gross Premium to Surplus..........  Less than 900%.             
    (ii) Net Premium to Surplus...........  Less than 300%.             
(2) Analytical:                                                         
    (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 Writing................  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 Asset......  Less than 105%.             
    (x) Return on Surplus.................  Greater than -5%.           
    (xi) Investment Yield.................  Greater than 4.5% and less  
                                             than 10%.                  
    (xii) One-Year Reserve Development to   Less than 20%.              
     Surplus.                                                           
    (xiii) Two-Year Reserve Development to  Less than 20%.              
     Surplus.                                                           
    (xiv) Estimated Current Reserve         Less than 25%.              
     Deficiency to Surplus.                                             
------------------------------------------------------------------------

    (e) Submit to FCIC all of the following statements:
    (1) Annual and Quarterly Statutory Financial Statements;
    (2) Statutory Management Discussion & Analysis;
    (3) Most recent State Insurance Department Examination Report;
    (4) Actuarial Opinion of Reserves;
    (5) Annual Audited Financial Report; and
    (6) Any other appropriate financial information or explanation of 
IRIS ratio discrepancies as determined by the company or as requested 
by FCIC.
    7. Section 400.171 is revised to read as follows: 

[[Page 57904]]



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 states where 
they are licensed from filing an Annual Statutory Financial Statement 
must, in addition to the requirements of Sec. 400.170 (a), (b), (c) and 
(d), submit an Annual Statutory Financial Statement audited by a 
Certified Public Accountant in accordance with generally accepted 
auditing standards, which if not exempted, would have been filed with 
the insurance department of any state in which it is licensed.
    8. Section 400.172 is revised to read as follows:


Sec. 400.172  Qualifying with less than two of the required ratios or 
ten of the analytical ratios meeting the specified requirements.

    An insurer with less than two of the required ratios or ten of the 
analytical ratios meeting the specified requirements in Sec. 400.170(d) 
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 an acceptable 
explanation why a failed ratio does not accurately represent 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  [Reserved]

    9. Section 400.173 is removed and reserved.


Sec. 400.174  [Amended]

    10. In Sec. 400.174, the words ``financial statement'' are revised 
to the plural form ``financial statements''.


Sec. 400.175  [Amended]

    11. In Sec. 400.175(a), the words ``financial statement'' are 
revised to the plural form ``financial statements''.


Sec. 400.177  [Reserved]

    12. Section 400.177 is removed and reserved.

    Done in Washington, D.C., on November 9, 1995.
Kenneth D. Ackerman,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 95-28558 Filed 11-22-95; 8:45 am]
BILLING CODE 3410-FA-P