[Federal Register Volume 63, Number 170 (Wednesday, September 2, 1998)]
[Proposed Rules]
[Pages 46703-46705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23523]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 63, No. 170 / Wednesday, September 2, 1998 / 
Proposed Rules  

[[Page 46703]]


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DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Part 400

RIN 0563-AB66


General Administrative Regulations; Nonstandard Underwriting 
Classification System

AGENCY: Federal Crop Insurance Corporation, USDA.

ACTION: Proposed rule.

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SUMMARY: The Federal Crop Insurance Corporation (FCIC) proposes to 
remove and reserve Subpart O of the General Administrative Regulations, 
effective for the 2000 (2001 for Texas and Arizona and California 
Citrus) and succeeding crop years. This proposed action is intended to 
eliminate the unintended adverse effects of the Nonstandard 
Underwriting Classification System (NCS), simplify and update program 
underwriting rules consistent with the program's current and future 
anticipated experience, and to ensure that crop insurance premiums are 
applied to all producers in a fair and consistent manner.

DATES: Written comments and opinions on this proposed rule and related 
preliminary cost-benefit analysis will be accepted until close of 
business October 19, 1998 and will be considered when the rule and 
cost-benefit analysis are to be made final.

ADDRESSES: Interested persons are invited to submit written comments to 
the Director, Claims and Underwriting Services Division, Risk 
Management Agency, United States Department of Agriculture, 1400 
Independence Avenue, S.W., STOP 0803, room 6749-S, Washington, D.C., 
20250-0803. A copy of each response will be available for public 
inspection and copying from 7:00 a.m. to 4:30 p.m., EDT, Monday through 
Friday, except holidays, at the above address.

FOR FURTHER INFORMATION CONTACT: For further information and a copy of 
the preliminary cost-benefit analysis to the General Administrative 
Regulations; Nonstandard Underwriting Classification System, contact 
Michael F. Hand, Director, Claims and Underwriting Services Division, 
Risk Management Agency, at the Washington, D.C. address listed above, 
telephone (202) 720-3439.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    The Office of Management and Budget (OMB) has determined this rule 
to be economically significant and, therefore, this rule has been 
reviewed by OMB.

Cost-Benefit Analysis

    A preliminary cost-benefit analysis has been completed and is 
available to interested persons at the address listed above. The 
preliminary cost-benefit analysis summarizes the impact of the rule in 
the following manner:
    (1) NCS first was established in 1991 as an effort to control 
losses attributed to persons whose insurance experience differed 
materially from the norm for an area. For a number of reasons, it has 
come under criticism;
    (2) A review of the current NCS process determined that it cannot 
meet desired performance goals under any circumstances. Therefore, a 
replacement is needed;
    (3) Recent actuarial research and premium rate models developed for 
other products indicate that the current actuarial processes used by 
FCIC do not produce an adequate premium rate for yields lower than the 
county average in many situations, especially when the county average 
premium rate is relatively low. A simulation of the effects of higher 
premium rates at the lower yields indicates that the NCS-rated premiums 
paid by the few NCS individuals who chose to insure can be replaced. In 
addition, additional premiums will be collected from persons who have 
not yet been detected by the NCS, thereby reducing the number of 
persons who might qualify even if NCS were continued;
    (4) This analysis concludes that the benefits of the current NCS 
are extremely small in terms of recovering accrued losses paid by 
individuals who are selected under it. It is a labor-intensive system 
that requires substantial resources, both computer and human, to 
operate. It adds complexity to the delivery of the crop insurance 
product. In the aggregate, the benefits are small compared to the 
resources expended for its operation; and
    (5) The proposed alternative process is consistent with the 
mandates of the Federal Crop Insurance Act that require simplification 
of the program to the maximum extent while assuring actuarial 
soundness. More producers will be affected in any year under the 
alternative, but many of these producers ultimately may have been 
selected under the NCS after 3 or more losses had occurred. The 
alternative targets specific units that may be the primary cause of 
losses rather than affecting the entire operation of individuals. It 
does not create the stigma currently associated with the NCS. The 
alternative is demonstrated to be actuarially sound, with the effect of 
reducing excess losses currently carried in the baseline. This 
reduction in excess losses offsets additional subsidies to producers 
and insurance providers that result from the change. The additional 
cost to producers occurs solely because those persons selected for the 
NCS now overwhelmingly elect to cancel insurance coverage rather than 
pay the sharply higher premiums that are imposed under it.
    FCIC encourages and welcomes any comments you may have with respect 
to the preliminary cost-benefit analysis findings. Before publishing 
the final rule, FCIC will complete a final cost-benefit analysis and 
your comments will be taken into consideration in developing that final 
cost-benefit analysis.

Paperwork Reduction Act of 1995

    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).

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments or the private sector. This rule contains no Federal 
mandates (under the regulatory provisions of title II of the UMRA) for 
State, local, and tribal governments or

[[Page 46704]]

the private sector. Therefore, this rule is not subject to the 
requirements of sections 202 and 205 of the UMRA.

Executive Order 12612

    It has been determined under section 6(a) of Executive Order 12612, 
Federalism, that this rule does not have sufficient federalism 
implications to warrant the preparation of a Federalism Assessment. The 
provisions 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 levels of 
government.

Regulatory Flexibility Act

    This regulation will not have a significant economic impact on a 
substantial number of small entities. NCS program determinations are 
applied equally to all producers on a county basis and affect only a 
small number of policyholders (approximately 1-2 percent of all 
policyholders nationwide). Further, since this rule proposes to 
eliminate the NCS program, the burden on the insurance providers will 
be significantly reduced. 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.

Federal Assistance Program

    This program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.450.

Executive Order 12372

    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.

Executive Order 12988

    This rule has been reviewed in accordance with Executive Order 
12988 on civil justice reform. The provisions of this rule will not 
have a retroactive effect. The provisions of this rule will preempt 
State and local laws to the extent such State and local laws are 
inconsistent herewith. The administrative appeal provisions published 
at 7 CFR part 11 must be exhausted before any action against FCIC for 
judicial review may be brought.

Environmental Evaluation

    This action is not expected to have a 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

    FCIC proposes to remove and reserve the General Administrative 
Regulations (7 CFR part 400, subpart O; Nonstandard Underwriting 
Classification System) effective for the 2000 (2001 for Texas and 
Arizona and California Citrus) and succeeding crop years.
    NCS began as an underwriting process in 1991 to identify those 
insureds who were collecting a disproportionate percentage of all crop 
insurance indemnities and individually adjust their coverages and rates 
to offset their higher risk. NCS has been used to avoid inequitable, 
across-the-board rate increases which would otherwise be required to 
achieve actuarial sufficiency.
    Under NCS, rate increases can be substantial, and coverage 
reductions severe, depending upon an insured's loss experience. 
Insureds selected may request a reconsideration, followed by two levels 
of appeal. The insured also retains recourse to formal litigation.
    Insureds are selected for NCS based on loss frequency and loss 
severity as compared with general crop insurance experience in the 
area. An insured must have at least three years of insurance experience 
in which indemnities exceed the annual premiums paid by the producer. 
Loss years also must represent 60 percent or more of the years the 
person was insured during the 10-year base period. To meet the loss 
severity requirement, the insured generally must have an ``adjusted 
loss ratio'' (a loss ratio adjusted to account for different premium 
rate levels) of 2.0 or greater. Loss severity requirements are 
established by crop and region to recognize different premium rate 
levels between different crops and regions.
    The NCS process is standardized to ensure equitable treatment of 
all insureds. Disaster adjustment procedures have been developed to 
recognize catastrophic conditions affecting crop production. Under this 
process, the loss history of the insured is adjusted when area-wide 
disasters affect crop production. For years in which the county yield 
deviates greatly from the long-term county average, a factor is 
determined to reduce the amount of indemnity which is used for NCS 
purposes for that crop year, thus mitigating the effect of widespread 
crop disasters.
    NCS has been criticized by producers and their representatives for 
several years and became a major issue with the repetitive floods in 
the Upper Midwest and multi-year droughts in the Southwest. Complaints 
have included claims that the current NCS procedures: (1) do not 
adequately exclude widespread causes of loss (disaster adjustment) as 
intended; (2) fail to recognize diverse conditions within a county; (3) 
unfairly impact new or marginally profitable insureds caught by 
repetitive disasters; (4) set too high a premium for those insureds 
listed; and (5) are applied unfairly to non-NCS insureds through share 
arrangements with insureds selected for NCS. Additionally, the current 
NCS process can be complicated to explain to the insureds and their 
agents who service crop insurance policies. The NCS process is also 
labor intensive for RMA and insurance providers at a time of 
increasingly smaller budgets and reduced resources. Reducing or 
eliminating program regulations that provide little benefit or can be 
accomplished through other more appropriate or cost efficient means is 
consistent with the Federal Crop Insurance Act requirement for 
simplification and the Administration's emphasis for regulatory 
reduction.
    On Wednesday, September 17, 1997, FCIC published an Advanced Notice 
of Proposed Rulemaking (ANPR) in the Federal Register at 62 FR 48798 to 
announce a public comment period and to seek comments from the public 
on options to improve NCS. Following publication of the ANPR, the 
public was afforded 30 days to submit written comments and opinions. 
Twenty-two comments were received from crop insurance agents, 
producers, insurance providers, and producer associations in response 
to the ANPR.
    Three comments received from a crop insurance agent and insurance 
provider were substantive and contained proposals that were considered 
in the review process. The proposals included using a yield floor 
surcharge as a means of increasing rates for producers with below 
average production histories and a recommendation to reinstate 
experience tables, which had been used in the past to surcharge 
insurance premiums on the basis of the producer's loss ratio. 
Additionally, nine comments recommended that NCS be eliminated 
altogether, six suggested that a moratorium be imposed while further 
study was conducted, four noted that the current actual production 
history (APH) program sufficiently addresses adverse crop insurance 
loss experience, and one did not address NCS specifically, advocating a 
production expense insurance plan in place of the current crop 
insurance program.

[[Page 46705]]

    FCIC stated in the advanced notice that if NCS were eliminated, 
with no additional action taken for adverse loss experience, the 
average policy premium would have to increase by $78 to offset NCS 
losses not currently used to calculate premium rates. FCIC's objective 
has been to derive an alternative that would result in an equitable 
process to charge appropriate premiums for insureds with adverse 
experience, but not to the extent of the premium increases that can 
result under the current NCS program.
    The current APH process assesses higher premiums on insureds with 
lower than average yields. Three comments suggested that the APH 
process could be used to offset the increased rates that would be 
necessary if NCS were abolished. RMA analyses conducted during the 
development of the Revenue Assurance crop insurance program, and 
separately in a study conducted by Millman and Robertson (a consulting 
actuarial firm), indicate a need to raise the rates for insureds with 
lower than average yields. RMA has reviewed its current APH program and 
developed an alternative rating methodology to adjust premium rates for 
below average yields to compensate for the additional risk associated 
with adverse loss experience. RMA recognizes that further analysis and 
study had to be completed of NCS producers and their adverse experience 
to determine the impact on the crop insurance program.
    A recommendation from the ANPR relating to yield floor surcharges 
suggested that rates should be increased based on the number of times 
producers fall below the yield floor. For the major crops, premium 
rates are calculated on the actual APH yield, recognizing the risk for 
that yield (for other crops, there are procedures that apply a 5 
percent surcharge to the applicable rates found on the actuarial table 
in order to accomplish the same result). The comment to the ANPR 
suggested that for every succeeding year a producer falls below the 
floor, the premium surcharge would be raised to recognize the increased 
risk associated with lower actual yields.
    RMA examined increasing premium rates based on the producer's lower 
APH yields and using a yield floor surcharge to determine if this 
process would adequately address the need for increased premiums to 
account for adverse loss histories based on the frequency and severity 
of losses. Surcharges based on the frequency with which floor yields 
apply are not effective because they would not serve to simplify 
administration of the crop insurance program and could penalize 
insureds under prolonged and unfavorable growing conditions. The 
administrative complexities of this suggestion outweighed the expected 
program benefits.
    By February 1998, RMA had completed the final review of the NCS 
program. The results indicated that modifying the existing NCS 
regulations would not address most of the criticism. The review also 
confirmed that the overall impact of NCS was relatively small. For the 
1997 crop year, NCS was applied to approximately 50,000 crop policies, 
equaling 1-2 percent of the total crop policies nationwide. NCS 
included approximately $2.2 billion (about 2 percent of the total) in 
liability and $0.9 billion (nearly 10 percent of the total ) in losses 
during the life of the program.
    The review indicated that NCS had been applied to only a small 
percentage of the total number of insureds who had collected at least 
three losses, had adverse loss ratios, and were responsible for a 
significant share of the losses paid. The analysis also indicated that 
the number of active NCS policies had declined 52 percent from 1996 to 
1997 (4,800 to 2,300) and that the liability associated with NCS 
policies declined from $37 million in 1996 to only $20 million in 1997.
    The results indicated that many insureds selected for NCS canceled 
their insurance policies because, in general, NCS was applied after 
losses had reached a point where the cost was too high for these 
insureds to continue to participate in the program. The conclusion was 
that any replacement to NCS must intervene more quickly before losses 
are too great to expect recovery.
    The Federal Crop Insurance Act, as amended, directs the premium 
rate to be adequate to cover anticipated losses and a reasonable 
reserve. Program improvements, including revised APH procedures, 
improved policy underwriting, updated T-yields, other actuarial 
modifications, and improved producer tracking implemented since 1991 
have corrected many of the problem areas that created the need for NCS.
    In order to correct the identified NCS deficiencies, RMA determined 
that any rate adjustment must fit the existing actuarial structure, 
avoid excessive operational changes, and promote simplification, as 
mandated by the Federal Crop Insurance Act.
    When the existing NCS regulation is removed, RMA will replace NCS 
with an alternative rating system that increases the rate for insureds 
with lower than average yields in recognition of the additional risk 
associated with these insureds. This change in the rating process will 
be more proactive in recognizing situations which may result in adverse 
loss experience and determining a rate appropriate for these 
situations.
    By using an alternative that simply requires adjustment to the 
current rating methodology as a replacement for NCS, the proposed 
removal of the NCS regulation can be implemented beginning with crops 
planted in the fall of 1998. The general financial impact on insureds 
will be variable (but generally moderate) rate increases for those 
units with lower than average yields. More specific details on the 
financial impact of this action can be found in the ``cost-benefit 
analysis'.
    By implementing this alternative rating process, RMA will: (1) 
eliminate the ``lag'' year currently included in the process; (2) make 
adjustments automatic, thereby improving the process for insureds, 
agents, and RMA; (3) incorporate the adjustments into the actuarial 
tables, which will eliminate the currently maintained lists and 
required notification requirements; (4) calculate adjustments on a unit 
rather than policyholder basis; and (5) increase premiums less abruptly 
once adjustments are triggered.

List of Subjects in 7 CFR Part 400

    Crop insurance, Nonstandard Underwriting Classification System.

Proposed Rule

    Accordingly, for the reasons set forth in the preamble, the Federal 
Crop Insurance Corporation hereby proposes to amend 7 CFR part 400, 
subpart O, as follows:

PART 400--GENERAL ADMINISTRATIVE REGULATIONS

Subpart O--Nonstandard Underwriting Classification System; 
Regulations for the 1991 and Succeeding Crop Years

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

    Authority: 7 U.S.C. 1506(1), 1506(p).


Secs. 400.301-400.309  (Subpart D) [Removed and Reserved]

    2. In part 400, subpart O is removed and reserved.
John Zirschky,
Acting Manager, Federal Crop Insurance Corporation.
[FR Doc. 98-23523 Filed 9-1-98; 8:45 am]
BILLING CODE 3410-08-P Department