[Federal Register Volume 70, Number 36 (Thursday, February 24, 2005)]
[Proposed Rules]
[Pages 9001-9013]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-3435]



[[Page 9001]]

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DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Part 400

RIN 0563-AB95


General Administrative Regulations, Subpart V--Submission of 
Policies, Provisions of Policies, Rates of Premium, and Premium 
Reduction Plans

AGENCY: Federal Crop Insurance Corporation, USDA.

ACTION: Proposed rule with request for comments.

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SUMMARY: The Federal Crop Insurance Corporation (FCIC) proposes to 
amend the General Administrative Regulations (7 CFR part 400, subpart 
V--Submission of Policies, Provisions of Policies, and Rates of 
Premium), to include provisions regarding the necessary revisions to 
the Plan of Operations and administration of the premium reduction 
plans authorized under section 508(e)(3) of the Federal Crop Insurance 
Act (Act).

DATES: Written comments and opinions on this proposed rule will be 
accepted until close of business April 25, 2005, and will be considered 
when the rule is to be made final. Comments on the information 
collection requirements must be received on or before April 25, 2005.

ADDRESSES: Interested persons are invited to submit written comments to 
the Director, Reinsurance Services Division, Risk Management Agency, 
United States Department of Agriculture, 1400 Independence Avenue, Ag 
Stop 0805, Washington, DC 20250. Comments titled ``Premium Reduction 
Plan'' may be sent via the Internet to [email protected], or the 
Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
online instructions for submitting comments. Faxed comments may be 
faxed to (202) 690-2095, Attn: PRP Rule comments. If you are planning 
on submitting by mail, please be advised to submit your comments not 
later than 30 days after the date of publication of the rule to be 
assured of consideration when the rule is made final. A copy of each 
response will be available for public inspection and copying from 7 
a.m. to 4:30 p.m., CDT, Monday through Friday except holidays, at the 
above address.

FOR FURTHER INFORMATION CONTACT: For further information, contact Lee 
Ziegler, Economist, Reinsurance Services Division, Risk Management 
Agency, United States Department of Agriculture, 1400 Independence 
Avenue, Room 6739-S, Washington, DC 20250; telephone number (202) 720-
0191, e-mail address: [email protected].

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be not significant for the 
purposes of Executive Order 12866, and, therefore, it has not been 
formally reviewed by the Office of Management and Budget (OMB).

Independent Review

    The Risk Management Agency (RMA) provided five independent 
reviewers with a copy of the Federal Crop Insurance Act (Act), the 
current procedures, the Board of Directors' Memorandum, the submissions 
received from the approved insurance providers and a series of 
questions regarding the premium reduction plans, including: (1) An 
estimation of the effects of producer use of insurance as a risk 
management tool; (2) the impact on the delivery system such as agents, 
claims adjustment, approved insurance providers, and service; (3) the 
impact on small, minority and limited resource farmers; (4) whether 
phase-in should be required; (5) cost allocation for complex plans; (6) 
the affect of the use of affiliated entities; and (7) the impact on 
agent compensation plans.
    In summary, the reviewers stated that implementation of a premium 
reduction plan could result in a modest increase in participation in 
the crop insurance program, although increases in coverage levels are 
more likely. Depending on how the premium reduction plans are 
structured, there could be significant changes in the delivery system 
through possible consolidation among agents or approved insurance 
providers, fewer part-time agents, and an increase in highly 
knowledgeable agents. The impact on small producers, limited resource 
farmers, women and minority producers is expected to be small. In 
proportion to the complexity of the premium reduction plans, 
verification of costs could have a significant impact on the workloads 
of the approved insurance providers and RMA and accounting guidelines 
may have to be developed that would increase the workload.
    Complete copies of the reports of the independent reviewers is 
available to the public on RMA's Web site at http://www.rma.usda.gov. 
However, confidential business information has been redacted from such 
reports.

Paperwork Reduction Act of 1995

    In accordance with section 3507(j) of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501), the information collection and record keeping 
requirements included in this rule have been submitted for approval to 
OMB. Please submit written comments to the Desk Officer for 
Agriculture, Office of Information and Regulatory Affairs, Office of 
Management and Budget (OMB), Washington, DC 20503. A comment to OMB is 
best assured of having its full effect if OMB receives it within 30 
days of publication of this rule.
    Comments are being solicited from the public concerning this 
proposed information collection and record keeping requirements. This 
outside input will help:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information has practical utility;
    (2) Evaluate the accuracy of our estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumption used;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (4) Minimize the burden of the collection of information on those 
who are to respond (such as through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., permitting electronic 
submission responses).
    Title: General Administrative Regulation; Submission of Policies, 
Provisions of Policies, Rates of Premium, and Premium Reduction Plans.
    Abstract: FCIC proposes to amend the General Administrative 
Regulations (7 CFR part 400, subpart V--Submission of Policies, 
Provisions of Policies, and Rates of Premium), to include provisions 
regarding the necessary procedures that are applicable to revised Plans 
of Operations submitted by approved insurance providers for the purpose 
of obtaining approval of premium reduction plans as authorized under 
section 508(e)(3) of the Act.
    Purpose: To amend 7 CFR part 400 by revising subpart V, to include 
specific information that must be submitted by approved insurance 
providers for the purpose of obtaining approval of premium reduction 
plans. This rule will have a separate paperwork package submitted to 
OMB to ensure that all the burden hours are accounted for.

[[Page 9002]]

    Burden statement: This rule is necessary to ensure that RMA 
receives complete revised Plans of Operations from approved insurance 
providers for the purpose of obtaining approval of premium reduction 
plans.
    The burden associated with this rule, with the exception of reading 
the rule, is in the modification to the Plans of Operations. FCIC 
estimates that annually 15 people (excluding Federal employees) will 
spend 2 hours reading this document for a total of 30 hours (15 x 2 = 
30). FCIC estimates people in 6 positions (financial manager, 
accountant, computer programmer, underwriter, manager, and office 
assistant) will respond for a total of 90 respondents (6 positions x 15 
submissions = 90). FCIC estimates 180 annual responses (15 x 12 = 180) 
due to 15 approved insurance providers submitting revised Plans of 
Operations complying with twelve requirements. To determine approximate 
annual burden hours, FCIC estimates 15 entities will prepare a revised 
Plan of Operations and will spend the following amount of time for each 
of the twelve requirements: (a) Identifying the approved insurance 
provider, naming the person who may be contacted for further 
information regarding the revised Plan of Operations, and naming the 
person who will be responsible for administration of the premium 
reduction plan--1.25 hours (15 approved insurance providers x 5 minutes 
= 1.25 hours); (b) preparing a detailed description of any and all 
terms and conditions that affect its availability--15 hours (15 
approved insurance providers x 1 hour = 15); (c) preparing a detailed 
statement as to the amount of the premium reduction that is proposed to 
be offered to each eligible producer, how it will be calculated, and 
how it will be reported to RMA--60 hours (15 approved insurance 
providers x 4 hours = 60); (d) preparing a detailed proposal of how the 
approved insurance provider intends to deliver the premium reduction 
plan to producers--60 hours (15 approved insurance providers x 60 hours 
= 60); (e) preparing a detailed marketing plan focused solely on how 
the premium reduction will be promoted to small producers, limited 
resources farmers as defined in section 1 of the Basic Provisions, 7 
CFR, 457.8, women and minority producers--30 hours (15 approved 
insurance providers x 2 hours = 30); (f) preparing a detailed statement 
explaining how the approved insurance provider proposes to revise its 
procedures for the delivery, operation or administration of the Federal 
crop insurance program in order to achieve the specified efficiency and 
how the premium reduction will correspond to the efficiency--45 hours 
(15 approved insurance providers x 3 hours = 45); (g) revision of 
applicable expense exhibits required by the Standard Reinsurance 
Agreement, or the applicable regulations if required by RMA, that are 
revised to reflect the implementation of the premium reduction plan and 
any documentation necessary to support the revisions--240 hours (15 
approved insurance providers x 16 hours = 240); (h) A statement, based 
on the applicable expense exhibits, that summarizes the A&O costs 
before implementation of the efficiency, the cost savings associated 
with the efficiency, the administrative and operating (A&O) costs after 
implementation of the efficiency, the expected A&O subsidy and the 
projected total dollar amount of premium reduction to be provided to 
producers--30 hours (15 approved insurance providers x 2 hours = 30); 
(i) a financial reserve plan--60 hours (15 approved insurance providers 
x 4 hours = 60); (j) preparing a detailed description of all profit 
sharing arrangements paid by the approved insurance provider--45 hours 
(15 approved insurance providers x 3 hours = 45); (k) certification by 
approved insurance providers of the reasonableness, accuracy, and 
completeness of all cost projections relating to the efficiencies and 
the total dollar in premium reduction for the reinsurance year the 
premium reduction plan will be offered = 30 hours (15 approved 
insurance providers x 2 hours = 30); (l) certification that a copy of 
its marketing strategy under subsection (d) has been provided to the 
State Department of Insurance for all states where the premium 
reduction plan will be offered for its review to determine whether the 
licensing of agents and the conduct of agents in the solicitation and 
sale of insurance under the proposed premium reduction plan is in 
accordance with applicable state insurance laws--15 hours (15 approved 
insurance providers x 1 hour = 15).
    Estimate of Burden: The public reporting burden for this collection 
of information is estimated to average 42 hours per response.
    Respondents: Approved insurance providers who wish to revise their 
Plans of Operations for the purpose of obtaining approval of a premium 
reduction plan.
    Estimated Annual Number of Respondents: 90.
    Estimated Annual Number of Responses Per Respondent: 2.
    Estimated Annual Number of Responses: 180.
    Estimated Total Annual Burden of Respondents: The total public 
burden for this rule is estimated at 7,560 hours. Record keeping 
requirements: FCIC requires records to be kept for three years, and all 
records required by FCIC are retained as part of the normal business 
practice. Therefore, FCIC is not estimating additional burden related 
to record keeping.

Government Paperwork Elimination Act (GPEA) Compliance

    In its efforts to comply with GPEA, FCIC requires all approved 
insurance providers delivering the crop insurance program to make all 
insurance documents available electronically and to permit producers to 
transact business electronically. Further, to the maximum extent 
practicable, FCIC transacts its business with approved insurance 
providers electronically.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) 
establishes requirements for Federal agencies to assess the effects of 
their regulatory actions on State, local, and tribal governments and 
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 the private sector. Therefore, this rule is not 
subject to the requirements of sections 202 and 205 of UMRA.

Executive Order 13132

    It has been determined under section 1(a) of Executive Order 13132, 
Federalism, that this rule does not have sufficient implications to 
warrant consultation with the states. The provisions contained in this 
rule will not have a substantial direct effect on states, on the 
relationship between the national government and the states, or on the 
distribution of power and responsibilities among the various levels of 
government.

Regulatory Flexibility Act

    FCIC certifies that this regulation will not have a significant 
economic impact on a substantial number of small entities. This action 
does not increase the burden on any entity because it merely clarifies 
the process to submit premium reduction plans of insurance to the FCIC 
Board of Directors for approval. The current requirements of the 
Standard Reinsurance Agreement and procedures for premium reduction 
plans approved by the Board contain provisions to ensure that small 
entities have access to policies and plans of

[[Page 9003]]

insurance, including premium reduction plans. The requirement to apply 
for a premium reduction plan is the same for small entities as it is 
for large entities. A Regulatory Flexibility Analysis has not been 
prepared since this regulation does not have an impact on small 
entities, and, therefore, this regulation is exempt from the provisions 
of the Regulatory Flexibility Act (5 U.S.C. 605).

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, unless otherwise specified in the rule. The 
appeals procedures at 7 CFR 400.169 and 7 CFR part 24 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 economic impact 
on the quality of the human environment, health, and safety. Therefore, 
neither an Environmental Assessment nor an Environmental Impact 
Statement is needed.

Background

    Under the Act, authority over the Federal crop insurance program is 
provided to FCIC, which is managed by the Board. However, section 226A 
of the Department of Agriculture Reorganization Act of 1994, gave the 
RMA supervision of FCIC and the administration and oversight over the 
programs authorized under the Act. The Board delegated certain 
functions to the Manager of FCIC, which are carried out through RMA. 
The Board also retained certain authorities or requires briefing by the 
Manager to the Board prior to the Manager taking certain actions. For 
the purposes of the background information, FCIC and RMA are 
collectively referred to as ``RMA.''
    In October 1994, Congress amended the Act to add section 508(e)(3), 
which states: ``If an approved insurance provider determines that the 
provider may provide insurance more efficiently than the expense 
reimbursement amount established by the Corporation [FCIC], the 
approved insurance provider may reduce, subject to the approval of the 
Corporation [FCIC], the premium charged the insured by an amount 
corresponding to the efficiency. The approved insurance provider shall 
apply to the Corporation [FCIC] for authority to reduce the premium 
before making such a reduction, and the reduction shall be subject to 
the rules, limitations, and procedures established by the Corporation 
[FCIC].''
    This means that an approved insurance provider can apply to RMA for 
authority to reduce premiums payable by producers if the approved 
insurance provider is able to provide insurance more efficiently than 
the administrative and operating expense reimbursement paid by RMA. RMA 
administers such reimbursements under a cooperative financial 
assistance agreement between FCIC and the approved insurance providers 
known as the Standard Reinsurance Agreement (SRA). The SRA contains 
various requirements, limitations and procedures that approved 
insurance providers must follow to sell and service Federal crop 
insurance to producers in accordance with Federal law and regulations 
and to qualify for Federal reinsurance, premium subsidy, and 
administrative and operating expense reimbursement under the Act.
    Since section 508(e)(3) involves administrative and operating 
expense reimbursement, a term contained in the SRA, RMA had a choice. 
The implementation of this provision could have been accomplished by 
simply incorporating it into the SRA, like any other term and condition 
of RMA reinsurance, or RMA could implement this provision through an 
amendment to the regulations governing the Federal crop insurance 
program contained in 7 CFR part 400. Initially, RMA determined to 
implement the provision through the SRA. Effective for the 1997 
reinsurance year, the SRA was amended to add a section III.I., which 
stated, ``In the event the Company determines that it can deliver 
multiple peril crop insurance policies more efficiently than the amount 
of premium subsidy attributed to the administrative and operating 
expenses paid under this section, it may apply to FCIC for authority to 
reduce the amount of premium charges to the policyholder by an amount 
commensurate with the amount of the efficiency.'' Effective for the 
1998 reinsurance year, the SRA language was changed slightly to read, 
``In the event the Company determines that it can deliver eligible crop 
insurance contracts for less than the A&O subsidy paid under this 
section, it may apply to FCIC for approval to reduce the amount of 
producer premium charged to policyholders by an amount corresponding to 
the value of the efficiency.''
    In 1999, the Federal crop insurance program was facing numerous 
issues regarding rebating, patronage refunds, and insured-owned and 
record-controlling entities. It became clear that some parties, in 
addition to approved insurance providers, may be directly affected and 
concerned about these issues. Therefore, RMA decided to solicit 
comments and address these concerns through a rulemaking process. 
Because of the similarity of premium reduction plans to rebates, which 
at the time were prohibited, RMA decided to clarify the situation by 
including some rules and limitations on premium reduction plans in this 
rulemaking activity. The proposed rule was published in May 1999.
    During the rulemaking process, the Agricultural Risk Protection Act 
of 2000 (ARPA) was enacted. Section 103 of ARPA amended section 
508(b)(5) of the Act and authorized cooperatives and trade associations 
to pay the catastrophic risk protection fee on behalf of their members 
in states where rebating was permitted and in contiguous states. 
Section 508(b)(5) of the Act also authorized cooperatives and trade 
associations who received funds from an approved insurance provider to 
pay a portion of the premium for their members if permitted by state 
law. The provisions contained in section 103 of ARPA were significantly 
different than what was proposed by RMA in its May 1999 proposed rule. 
RMA determined that the provisions regarding rebating and patronage 
refunds in the proposed rule were no longer applicable.
    RMA determined the issues that remained from the proposed rule 
after enactment of section 103 of ARPA should be handled 
administratively. With respect to the issue of premium reduction plans, 
RMA elected to continue to handle the issue through the SRA as it had 
done in the past, since the SRA requires approved insurance providers 
to comply with the procedures and directives of RMA. RMA determined it 
could issue procedures under the SRA if necessary.
    In July 2002, a revised Plan of Operation for a premium reduction 
plan

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for the 2003 crop year was received by the Board from an approved 
insurance provider under section 508(h) of the Act. The approved 
insurance provider claimed the authority for the submission came from 
section 523(d) of the Act. Section 523(d) of the Act applies when 
approved insurance providers believe the risk premium charged to 
producers is too high and that the premium can still be actuarially 
sound if less total premium is charged. It was not until the revised 
Plan of Operations was reviewed by the Board that it was discovered the 
approved insurance provider was seeking to reduce the producer paid 
portion of the premium because the approved insurance provider claimed 
it could deliver the crop insurance program for less money than 
received for the administrative and operating expense reimbursement. 
This meant it would be more appropriate to consider the revised Plan of 
Operations under section 508(e)(3) of the Act than section 523(d) of 
the Act.
    After reviewing this approved insurance provider's revised Plan of 
Operations for premium reduction plan, the Board determined that 
procedures were necessary to address certain issues raised by the 
revised Plan of Operations that had not previously been raised 
regarding premium reduction plans, including the issue of an approved 
insurance provider that was new to the crop insurance program and, 
therefore, lacked a track record to assess the extent of any proposed 
efficiencies. In December 2002, the Board provided guidance and 
conditions for the development of such approval procedures to the 
Manager of FCIC in Board Memorandum No. 694, Docket No. CI-PDP-02-1 
(Board Memorandum). Under such guidance, premium reduction plans are 
required to be offered initially in a limited number of states and 
expanded over time as the capacity and ability of the approved 
insurance provider to deliver the plan is determined. Further, the 
Manager is required to report the performance of any premium reduction 
plan to the Board at each meeting.
    For the 2003 crop year, the approved insurance provider's proposed 
premium reduction plan reduced producer paid premium by an amount equal 
to 3.5 percent of net book premium for all Federally reinsured plans of 
insurance for corn, grain sorghum, soybeans, sugar beets, and wheat in 
Iowa, Illinois, Nebraska, Kansas, Minnesota, Indiana, and North Dakota. 
The premium reduction was based on administrative efficiencies attained 
by the approved insurance provider through sales of the premium 
reduction plan over the Internet, through their operational and 
distribution systems, and certain reductions in agent commissions. RMA 
evaluated the approved insurance provider's proposed premium reduction 
plan, determined that it met the conditions imposed by the Board and 
approved the plan in January 2003, effective for the 2003 crop year.
    Part of the Board's guidance required that the conditions of 
approval contained in the Board Memorandum must apply to all subsequent 
approved insurance providers. Consistent with the Board Memorandum, RMA 
established procedures that were reviewed by the Board and transmitted 
to the approved insurance providers through Manager's Bulletin MGR-03-
008.
    Some of the substantive provisions included in the procedures and 
Board Memorandum were the requirement that there not be a reduction in 
service to policyholders; assurance that the premium reduction plan is 
not unfairly discriminatory; requiring detailed information regarding 
any efficiency, its previous costs and the costs to be incurred after 
application of the efficiency; ensuring that a premium reduction plan 
will not place an excessive operational or financial hardship on the 
approved insurance provider; requiring descriptions and examples of how 
any premium reduction will be calculated and presented to the 
policyholder; requiring the determination of the number of producers 
affected and the projected total amount of any reduction; and requiring 
that any efficiency be subject to verification by RMA.
    In addition, the procedures included accounting for startup costs 
for newly approved insurance providers; ensuring the use of licensed 
agents; requiring greater detail in the expense documentation, 
including certification from a certified public accountant regarding 
the reasonableness, accuracy and completeness of the accounting 
statements; comprehensive reviews by the approved insurance provider of 
the potential impact of the premium reduction plan and any steps to be 
taken to address potential vulnerabilities; and requiring semi-annual 
reports by the approved insurance provider to assist RMA in monitoring 
the program.
    The approved insurance provider's premium reduction plan was 
reviewed at the end of the 2003 crop year to determine whether it met 
stated efficiencies. RMA's analysis found that it was less than one 
percent short of meeting its stated efficiencies on a dollar basis. The 
revised Plan of Operations contained a contingency plan to allow for a 
further reduction of costs to ensure it attained the efficiencies 
claimed. The contingency was applied and RMA determined that the 
approved insurance provider was in compliance with the procedures, the 
Board's conditions, and section 508(e)(3) of the Act.
    For the 2004 crop year, the approved insurance provider sought 
expansion of its premium reduction plan. RMA evaluated its revised Plan 
of Operations for the 2004 crop year under the procedures and reviewed 
the revised Plan of Operations with the Board. To address potential 
concerns regarding the possibility of unfair discrimination, the Board 
required the approved insurance provider make the premium reduction 
plan available to producers of all crops in the states it was approved 
to offer the premium reduction plan, not just selected crops. The Board 
viewed the expansion to several more states as particularly important 
to test the premium discount plan in states with varying crop insurance 
performance.
    Once the approved insurance provider agreed to this condition, its 
previously approved premium reduction plan was amended and approved to 
include all crops in Illinois, Indiana, Iowa, Kansas, Michigan, 
Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Texas, 
and Wisconsin. The approved insurance provider was recently approved to 
again offer a premium reduction plan for 2005 under the same terms and 
conditions as the 2004 premium reduction plan but expanded the number 
of states where it was offered.
    The approved insurance provider's premium reduction plan is simple. 
As currently approved, the same efficiencies applied to all states the 
approved insurance provider does business and there is only one level 
of premium reduction applicable to all such states. This made 
verification of expense reductions associated with the efficiency 
straightforward because all costs associated with the sale and service 
of Federal crop insurance policies were considered and compared with 
the amount the approved insurance provider claimed was needed to 
deliver the program (e.g. 24.5 percent [2004 A&O] - 3.5 percent = 21.0 
percent of the net book premium for all policies). Further, it would be 
easy to determine if practices were unfairly discriminatory because the 
approved insurance provider was required to offer the discount to all 
producers who wanted it. It was also easy to determine whether the 
reduction in premium from the efficiencies corresponded to the states 
from which they were derived since the same efficiencies and same

[[Page 9005]]

reductions applied to all states in which the approved insurance 
provider wrote business.
    Over the last few months, RMA has received additional revised Plans 
of Operations for premium reduction plans for the 2005 crop year from 
other approved insurance providers. The revised Plans of Operations 
received are diverse: some offering a premium reduction for select 
plans of insurance, in select states; some at different premium 
reduction rates; some under new and complex organizational structures; 
and, finally, some at the discretion of the approved insurance provider 
or agent.
    These diverse plans raised issues or problems that had not been 
previously considered by RMA when it developed its procedures. Requests 
to offer a premium reduction plan for only select plans of insurance, 
in select states or at differing premium reduction rates raised issues 
regarding the requirement in the Act that the efficiencies correspond 
to the amount of the premium reduction. Corresponding means that the 
dollar amount of savings from the efficiencies implemented in a state 
must correspond to the amount of premium reduction in that state. 
Further, it means that if the premium reduction is only available for 
select plans of insurance, the efficiencies must come from those plans 
of insurance. It also means that when the amount of premium reduction 
differs among states, the dollar amount of efficiency in each state 
must be sufficient to cover the premium reduction in that state. 
Savings realized from one state could not be used to finance a premium 
reduction in another state without violating the corresponding 
requirement in the Act. A review of the premium reduction plans with 
these options revealed that RMA could not verify that efficiencies 
corresponded with the premium reductions and that very complex 
accounting rules would be required to allocate costs on a state or 
insurance plan basis.
    These plans also raised the possibility that there could be unfair 
discrimination. Unfair discrimination results when producers are denied 
an opportunity to participate under the premium reduction plan based on 
their risk of loss or farm size. The ability to offer premium reduction 
plans in certain states or plans of insurance could result in the 
approved insurance provider only offering such plans in states with 
good loss history or with larger than average farm sizes.
    Another problem identified with these premium reduction plans is 
the proposal to change the operational structure to have one or more 
entities associated with the approved insurance provider offer a 
premium reduction plan and another entity not, or allow agents to 
decide whether or not they will offer premium reduction plans and to 
whom. Again, this raises the possibility that approved insurance 
providers could divide their book of business between the two or more 
entities such that one entity receives the policies with a good loss 
history and the others received the policies with a bad loss history. 
Not only would this be unfair discrimination, such division could be 
used to manipulate gains and losses under the SRA if it was based on 
loss history. Further, some of the potential organizational structures 
may have been in violation of the SRA, such as the use of two managing 
general agents.
    RMA recognizes that premium reduction plans may be controversial. 
From the beginning, RMA has attempted to strike a balance between the 
interests of producers in having their premiums reduced through 
competition in the marketplace and the need to have a strong delivery 
system. RMA has attempted to address problems and issues as they have 
arisen to ensure a strong, stable program.
    Throughout the consideration process of premium reduction plans, 
RMA determined that there were several principles that must be met in 
order to comply with the requirements of section 508(e)(3) of the Act. 
The first is that the approved insurance provider must provide 
sufficient documentation to demonstrate that not only can the approved 
insurance provider operate within its administrative and operating 
expense reimbursement, but it can also reduce its costs to a level 
below the amount received from RMA for administrative and operating 
expense reimbursement. The second is that the efficiencies claimed by 
the approved insurance provider must be easily verifiable by RMA 
through auditing and monitoring. The third is that the premium 
reduction plan must comply with all requirements of the Act, the 
regulations, procedures, and the SRA.
    The last principle is that no premium reduction plan can be 
unfairly discriminatory against producers based on their loss history, 
size of operation, or the amount of premium generated within the 
program. There have been concerns expressed that premium reduction 
plans may lead to unfair discrimination against small producers, 
limited resource farmers, women and minority producers. As stated 
previously, variations in premium reductions among states or only 
offering premium reduction plans in certain states or with certain 
plans of insurance could result in unfair discrimination against such 
producers. Even if the premium reduction is the same for all states and 
plans of insurance, there is the possibility that limited resources 
farmers could be excluded from the marketing of premium reduction 
plans.
    RMA has tried to address this issue in this rule by: (1) Requiring 
that the premium reduction plan be provided to all producers insured by 
the approved insurance provider; (2) requiring approved insurance 
providers to provide marketing plans for how they will reach these 
producers; (3) denying approval for premium reduction plans with 
inadequate marketing plans; and (4) allowing for withdrawal of approval 
by RMA for failure of the approved insurance provider to follow the 
marketing plan. RMA is expressly seeking comments on whether these 
provisions should be modified or additional provisions added to ensure 
that all producers have access to all premium reduction plans offered 
in their state.
    RMA is also considering an alternative program structure to that 
contained in this proposed rule. The main feature of this alternative 
is that any premium reimbursement to the producer would be based on the 
actual cost savings realized by the approved insurance provider after 
the application of the efficiencies; not projected cost savings. The 
approved insurance provider would apply to be able to provide a 
reimbursement to producers based on the intent to implement specified 
efficiencies, but the approved insurance provider would have to 
validate the cost savings and receive approval of the applicable 
premium reimbursement from RMA after the end of the applicable 
reinsurance year before the provider could announce and remit the 
reimbursement to the producer.
    As a result, approved insurance providers would project what they 
intend to save through efficiencies and estimate the amount of the 
premium reimbursement in their revised Plan of Operations, but they 
would not be able to advertise or otherwise represent the amount of the 
premium reimbursement to producers in advance of the sale because they 
would not know the final amount of savings or the approved 
reimbursement at the time they submitted their revised Plan of 
Operations. Approved insurance providers may only be able to refer to 
historical reimbursements in accordance with applicable State laws.
    This alternative structure is intended to avoid the uncertainty 
resulting from reliance on cost projections and to

[[Page 9006]]

reduce the chance that an approved insurance provider will fail to 
achieve the represented savings, thereby causing disruption in the 
marketplace. Use of actual costs would preserve program integrity and 
the financial stability of the approved insurance providers.
    Under the alternative structure, approved insurance providers would 
not be able to market the plan to producers based on a guaranteed 
amount of premium reimbursement. The alternative structure would 
eliminate the need for approved insurance providers to build a reserve 
into the plan because the premium reimbursements would be based on 
actual verified savings from applied efficiencies rather than 
projections that may not be realized.
    Because of the timing of the financial accounting of the approved 
insurance provider, the actual costs and savings will not be known 
until months after the end of the crop year and premium reimbursements 
cannot occur until after such accounting. This means producers will be 
required to pay the full amount of their premium before they receive 
any possible reimbursement.
    RMA is soliciting comments on this alternative process to determine 
if such a structure should replace the proposed structure when RMA 
finalizes the proposed rule. RMA is particularly interested in comments 
that address issues relating to the benefits of using actual versus 
projected costs, impacts on the workload of the approved insurance 
providers and RMA, market conduct oversight requirements that may be 
required, impacts on competition, the delay in the reimbursements to 
producers, whether such reimbursements create any income tax issues, or 
any other substantial adverse or positive effect of this approach in 
contrast to the approach included in the proposed rule.
    An analysis of the existing procedures and review of the recently 
submitted revised Plans of Operations revealed that revisions to the 
procedures were necessary. Following are a summary of the current 
procedures and the proposed changes.

1. Fundamental Program Change

    Under the existing procedures, approved insurance providers could 
name the states and crops for which their premium reduction plan would 
be applicable. RMA explored continuation of this practice but it has 
identified significant problems in the administration of a program that 
permits state or other types of variability. Problems were identified 
in the selection of states. Allowing approved insurance providers to 
select states may result in unfair discrimination because approved 
insurance providers could elect only to offer a premium reduction plan 
in states with low risks. In addition, RMA determined that state 
variability would require complex accounting rules because section 
508(e)(3) of the Act requires the efficiencies to correspond to the 
location and amount of premium reduction. As stated above, this means 
that the dollar amount of savings from the efficiencies implemented in 
a state must correspond to the amount of premium reduction in that 
state. Further, the workload on RMA and approved insurance providers to 
identify cost allocations and determine whether the projected cost 
savings from efficiencies are reasonable and correspond to the premium 
reductions in the state would be enormous. This would be followed by 
the workload required to verify that savings in each state were 
realized and that premium reductions paid out did not exceed the amount 
of such savings.
    RMA considered whether it was possible to remedy all the problems 
that allowing variability by state could produce and discovered it 
could not. Therefore, the proposed rule requires that approved 
insurance providers who submit revised Plans of Operations must offer 
the premium reduction plan to all producers, in all states where the 
approved insurance provider does business, and for all applicable 
crops, policies and plans of insurance. The amount of the premium 
reduction based on the percentage of the net book premium may not have 
any variations. For example, variations by state, coverage level, etc. 
are not permitted. In reaching its conclusion, RMA considered the 
following principles and is soliciting comments on its analysis and 
whether a premium reduction plan could be developed that allowed for a 
variation of the reduction by state consistent with these principles.
    a. The ability to offer such a reduction by state must not cause 
competitive harm in the marketplace. Premium reductions plans are 
intended to create competition in the marketplace. However, the 
procedures governing such plans cannot be developed in such a manner as 
to create a competitive disadvantage. Therefore, RMA is striving to 
develop procedures that provide a level playing field to the maximum 
extent practicable.
    The ability to vary the reduction by state could represent a 
substantial advantage for an approved insurance provider to be able to 
target reductions to meet specific market conditions in a particular 
state. As a result, RMA believes that such an advantage must be 
available to all approved insurance providers, if it is to be available 
to any.
    One cost reduction measure that appears in nearly all proposed 
premium reduction plans received by RMA where the reduction varies by 
state is the varying of agent commission reductions by state. The focus 
is on agents' commissions because they are relatively easy to 
administer by the approved insurance provider and verify by RMA, and 
agent compensation constitutes about seventy percent of the expenses 
that are incurred in the delivery of the crop insurance program. 
Because the crop insurance books of business of all approved insurance 
providers are currently divided by state and agent commissions are 
reported to RMA by state, it would be straightforward to allocate the 
cost reductions by state. However, not all approved insurance providers 
in the Federal crop insurance program use independent agents who are 
paid on a commission basis. Some approved insurance providers use 
``captive agents'' that are employees of the provider who are 
compensated on a salary, not a commission, basis and may be doing 
business in more than one state.
    RMA believes that it would be very difficult, if not impossible, 
for these approved insurance providers to allocate their agent 
compensation costs in a manner that would clearly show how such agent 
compensation reductions matched the associated premium reduction on a 
state by state basis. If RMA were to allow premium reductions on a 
state by state basis, and such reductions were generated by reductions 
in agent compensation, approved insurance providers with ``captive 
agents'' would likely suffer from a competitive disadvantaged simply 
based on how they obtain, and compensate for, agent services.
    b. A premium reduction plan where the efficiencies and reductions 
vary by state must be easy for the approved insurance provider to 
administer and easy for RMA to verify. The purpose behind section 
508(e)(3) of the Act is to encourage approved insurance providers to 
reduce administrative and operating expenses in order to provide 
competitive discounts to producers. RMA believes it would be directly 
against the intent of this provision to authorize premium reduction 
plans that require the application of complex cost accounting rules to 
ensure that the premium reductions correspond to the efficiencies, as 
specifically required by the Act. Other than efficiencies tied to 
reductions in agent compensation,

[[Page 9007]]

nearly all of the efficiencies that varied by state in the premium 
reduction plans submitted to RMA for the 2005 reinsurance year involved 
cost reductions in general operating costs of the approved insurance 
provider, which are incurred in many states (e.g. information 
technology costs, policy servicing costs, and basic overhead costs). 
For example, the approved insurance provider proposes savings as a 
result of the implementation of a new computer system that would reduce 
errors by 20 percent. The computer system is applicable to all policies 
in the approved insurance provider's book of crop insurance business. 
If the premium reduction plan calls for different premium reductions in 
each state, the approved insurance provider would have to allocate the 
dollar savings associated with the new software to each state. It is 
also possible that such computer software is used in the approved 
insurance provider's other lines of business, which would require 
additional allocations. This type of allocation would have to be done 
for each type of efficiency. Therefore, to allocate these costs to each 
state would require the application of very complex cost accounting 
rules. Further, to the extent these costs represent activities 
conducted by salaried employees, as opposed to independent contractors, 
the cost accounting rules become even more difficult. Salaried 
employees and some contract employees, such as loss adjusters, 
frequently conduct work in more than one state. To allocate the costs 
among the states would also require additional complex accounting 
rules.
    c. Uniform service and preventing unintended effects on the 
business practices of the approved insurance providers. One of the 
major principles of the crop insurance program is that approved 
insurance providers must provide insurance to all eligible producers 
and agents are required to perform certain services for each producer 
regardless of the producer's size or loss history. By introducing state 
variability in savings and premium reductions, there is a concern that 
it will result in variability of service to producers. For example, 
based on a review of the 2005 premium reduction plans submitted by 
approved insurance providers, it was apparent that reductions in agent 
compensation was the easiest way to establish efficiencies that support 
state variable premium reductions. RMA is concerned that variable 
reductions in agent compensation may result in reduced service to some 
producers below the standards set by RMA in the SRA. The burden on RMA 
and the approved insurance providers to monitor agents' conduct to 
ensure that no such reduction in service occurs could be considerable 
and could reduce a significant portion of the savings generated by the 
efficiencies.
    Further, there are numerous approved insurance providers and each 
has a unique operational structure and manner of doing of business. RMA 
wants to avoid implementing any rule that unnecessarily dictates the 
business practices of the approved insurance providers. As stated 
above, efficiencies based on the reduction of independent contractor 
compensation, such as agent commissions, are easy to verify and 
allocate on a state-by-state basis. Therefore, state variability 
provides an economic incentive to approved insurance providers to 
achieve their efficiencies through reductions in agent commissions. 
This conclusion was confirmed by the independent reviewers. This 
incentive could result in all approved insurance providers being driven 
to use commission to compensate their agents in order to be 
competitive.
    In addition, as stated above, some approved insurance providers use 
salaried agents instead of independent contractor agents, likely 
increasing the difficulty for such approved insurance providers to 
allocate the salaried agents' compensation among states. RMA believes 
that the economic incentive created by state variability and the need 
for easily verifiable and allocable compensation may drive these 
approved insurance providers to change the way they deliver the program 
or could result in competitive disadvantages. The intent of the premium 
reduction plan is not to dictate the manner in which the approved 
insurance provider does business. Decisions on the use of independent 
versus salaried agents should be based on competitive market forces and 
service considerations, not a government regulation intended to provide 
a benefit to producers.

2. Revisions of Definitions

    Most of the definitions from the current procedures have been 
included in this proposed rule, although some have been modified to 
conform to the SRA. RMA has also revised the definition of 
``compensation'' to clarify that compensation includes any benefits, 
including those from third parties, that are guaranteed, even though 
the amount may differ year to year, regardless of the existence of an 
underwriting gain for the approved insurance provider, and to clarify 
when profit sharing arrangements will not be included as compensation. 
The definition of ``efficiency'' is revised to clarify that cost 
savings must be attributable to operational efficiencies or a reduction 
in expenses but such savings cannot solely result from reductions in 
compensation, and that economies of scale from increased sales due to 
the offering of a premium reduction plan of insurance or projected 
reductions in loss adjustment expenses, unless authorized by RMA, are 
not considered an efficiency. A definition of ``procedures'' is added 
for clarification. A definition of ``profit sharing'' is added to 
clarify the difference between guaranteed benefits, which are 
considered compensation, and contingent benefits based on underwriting 
gains. A definition of ``underwriting gain'' is added to clarify that 
such gains include the net gain payment made to the approved insurance 
provider on its whole book of business under the SRA, less any costs it 
pays from such gains, including any costs related to the delivery of 
the program in excess of the amount of administrative and operating 
subsidy received from RMA. The definition of ``unfair discrimination'' 
has been modified to clarify that approved providers cannot exclude 
producers based on the loss history or the size of the policy.

3. Timing of the Submission of Revised Plans of Operations

    The current procedures require revised Plans of Operations be filed 
not later than 150 days prior to the first sales closing date where the 
premium reduction will be applicable. In this proposed rule, for the 
2006 reinsurance year, revised Plans of Operations must be received by 
RMA not later than 15 days after publication of the final rule to allow 
RMA time to consider such revised Plans of Operations before the fall 
sales closing dates. For subsequent reinsurance years, all revised 
Plans of Operations must be received by RMA not later than April 1 
before the start of the reinsurance year. RMA has elected to have a 
single submission window each reinsurance year to ensure that all 
producers have access to the benefits under any premium reduction plan 
and that the timing of the submission of the revised Plans of 
Operations does not create an unfair competitive advantage. Revised 
Plans of Operations that are not timely submitted will be rejected. 
Approved insurance providers will have 15 days after the date a revised 
Plan of Operation is received by RMA to withdraw it. If not timely 
withdrawn, any approved premium reduction plan

[[Page 9008]]

must be implemented for the reinsurance year.

4. Confidentiality Requirements

    The confidentiality requirements remain the same but have been 
incorporated into a different section.

5. Contents of Revised Plans of Operations

    The current procedures require five copies and both a hard copy and 
electronic version. The provision has been revised to require an 
electronic copy. Both the current and proposed procedures require the 
approved insurance provider to provide the name of the person 
responsible for the administration of the premium reduction plan, the 
reinsurance year the plan will be in effect; a statement of the amount 
of the premium reduction to be offered to producers, how it is 
calculated, and reported to RMA; a list of any and all terms and 
conditions that affect its availability; and the projected total dollar 
amount of the premium reduction to be provided to the producers. The 
requirements in the existing procedures to list the proposed crops and 
states where the efficiency is being gained and the estimated number of 
producers have been removed from the proposed rule because such 
provisions were rendered moot by the requirement that the premium 
reduction plan be offered in all states for all crops where the 
approved insurance provider does business. The procedures have been 
revised to more clearly specify that existing Expense Exhibits provided 
with the Plan of Operations will be used in determining costs 
projections to ensure such reporting is standard among approved 
insurance providers and to ensure that such standards are tied to the 
information reported in the SRA. The procedures are also revised to 
only require the approved insurance provider to certify to the 
reasonableness, accuracy, and completeness of the projected costs 
relating to the claimed efficiencies and calculating the dollar amount 
of premium reduction provided since this information is not reported in 
the SRA. Revisions have also been made to the procedures to require the 
revised Plan of Operations to include a marketing plan for small, 
minority and limited resource farmers to address concerns that such 
producers will not receive the benefit of the premium reduction plans. 
The existing procedures are further revised to require the approved 
insurance provider include a proposal of how it intends to deliver the 
premium reduction plan for all producers in its revised Plan of 
Operations. This plan should include whether the approved insurance 
provider will use the Internet, captive agents, affiliates, etc. 
Further, the approved insurance provider must certify that a copy of 
such strategy is sent to all State Departments of Insurance where it 
does business for a determination of whether the premium reduction plan 
is in conformance with state laws with respect to the licensing and 
conduct of agents and provide all responses from the states to RMA. The 
proposed rule further clarifies the existing procedures by requiring 
approved insurance providers to demonstrate how the premium reduction 
will correspond to the efficiencies, as required by section 508(e)(3) 
of the Act. This means the premium reduction must be provided in the 
same state from which the efficiency is implemented. Further, the 
amount of the premium reduction in a state must be commensurate with 
the amount of savings obtained from the efficiencies in that state. For 
example, an efficiency derived in Iowa cannot be used to fund a premium 
reduction in Texas. Further, the approved insurance provider cannot 
reduce costs in some states by 5 percent and in other states by 2.5 
percent and give all producers the same premium discount. Such 
proposals would violate the Act. Further, revisions have been made to 
the procedures to require approved insurance providers to provide a 
summary of all profit sharing arrangements so that RMA can determine 
whether such profits should be considered as compensation and included 
as an expense or is solely based on the underwriting gains of the 
approved insurance provider and excluded. The procedures have also been 
revised to require the premium reduction plan contain a financial 
reserve plan that would contain additional actions to be implemented in 
the event that actual cost savings are insufficient to cover the amount 
of the premium reduction, which would generate additional 
administrative and operating savings or provide access to additional 
funds equal to 25 percent of the premium reduction. For example, if the 
dollar amount of the proposed premium reduction is $10 million, the 
approved insurance provider must implement the efficiencies to attain 
such dollar amount of premium reduction as applicable during the 
reinsurance year. However, prior to submitting a revised Plan of 
Operation, the approved insurance provider must also determine what 
other actions are necessary to guarantee that it will have access to an 
additional $2.5 million (25 percent of $10 million) to cover the 
premium reductions. While the implementation of such other actions 
would not be necessary unless the cost savings from the original 
efficiencies were insufficient to cover the premium reduction, the 
ability to obtain the additional funding must be demonstrated in the 
revised Plan of Operations. Such other actions could include additional 
cost cutting measures, access to additional lines of credit, guaranteed 
loans, etc. However, these other actions, if implemented, will not be 
considered when determining the amount of premium reduction authorized 
for subsequent years. The purpose of such financial reserve plans is to 
ensure that any error in projections does not affect the financial 
solvency of the approved insurance provider or prevent the producer 
from receiving the premium reduction specified in the premium reduction 
plan.

6. New Approved Insurance Providers

    The existing procedures allow certain costs associated with new 
approved insurance providers and with respect to expansions by existing 
approved insurance providers be included in the A&O costs for the 
purposes of determining the efficiency. RMA has elected to remove the 
provisions regarding existing approved insurance providers because it 
is impractical to track those costs associated with normal expansion 
and those attributable to the premium reduction plan. Further, the Act 
does not make any distinction between the types of costs against which 
to measure the efficiencies. However, it is only the new entrants into 
the crop insurance business that have the exceptional costs associated 
with such entrance. Existing approved insurance providers may incur 
some additional costs but not nearly to the extent that new entrants 
would. Further, some of these costs associated with expansion may be 
captured if the approved insurance provider can established a higher 
expected premium volume for the year. RMA has clarified that new 
entrants are limited to those that have not participated in the program 
previously or are not affiliated with a managing general agent, another 
approved insurance provider, or other such entity that already has the 
infrastructure necessary to deliver crop insurance. The existing 
procedures have also been revised to no longer allow the new entrant to 
exclude the startup costs from its expenses reported under the premium 
reduction plan. In the proposed rule, such startup costs must be 
included as expenses but the approved insurance provider will be

[[Page 9009]]

permitted to spread such costs equally for up to three reinsurance 
years.

7. RMA Review Process

    The current procedures require RMA to evaluate the completeness of 
a revised Plan of Operations and notify the approved insurance provider 
within 30 days. This provision has been removed because of the 
administrative burden it places on RMA to review the revised Plan of 
Operations twice and provide two separate responses. In the proposed 
rule, for the 2006 reinsurance year, RMA will notify approved insurance 
providers not later than September 1, 2005. For all subsequent 
reinsurance years, RMA has retained the provision that requires it to 
provide a response to the revised Plan of Operations not later than 60 
days prior to the first sales closing date but added a provision that 
this requirement applies only if the revised Plan of Operations was 
timely submitted and if the 60 day requirement is not waived by the 
approved insurance provider.

8. Standards for Approval

    The current procedures require that the premium reduction plan not 
result in the reduction of service to producers or be harmful to the 
interest of producers, not place a financial or operational hardship on 
the approved insurance provider or undermine the integrity of the crop 
insurance program. Further, such procedures require the approved 
insurance provider have the financial and operational capacity and 
expertise to deliver the crop insurance program after implementation of 
the premium reduction plan, there be adequate internal controls, and 
the premium reduction plan meet all other requirements of the Act and 
the SRA. These requirements have been retained in this proposed rule. 
RMA has added a provision that clarifies that approved insurance 
providers must be able to demonstrate they are operating under the A&O 
subsidy they receive from RMA, and if such information is based on 
projected costs and subsidy, such amount must be reasonable, before any 
revised Plans of Operation can be approved. RMA has also added 
provisions requiring that the efficiencies come from reductions in A&O 
costs and not underwriting gains and that they be verifiable; that the 
amount and location of the premium reductions correspond to the 
efficiencies; that there be enough efficiencies to cover all the 
premium reductions; and that training and oversight not be compromised 
to ensure the proper administration of the premium reduction plan 
program. RMA added provisions that the financial reserve plan provide a 
guarantee of funding. RMA has also modified the procedures relating to 
unfair discrimination to ensure that there is no such discrimination 
based on the size of the farm or premium, the risk of loss, or against 
small, minority or limited resource farmers and that the marketing plan 
and delivery system for the premium reduction be reasonable and, with 
respect to the delivery system, in accordance with state law. RMA has 
also added provisions regarding the process of notification of approval 
and the requirement that if approved, the premium discount plan must be 
implemented for the next applicable sales closing date for the 
reinsurance year, unless otherwise determined by RMA. This requirement 
is to ensure that all producers receive equal access to approved 
premium reduction plans and that expectations created by the submission 
of a revised Plan of Operations for a premium reduction are realized.

9. Disapproval

    RMA has revised the existing procedures, and combined them with the 
approval process, to provide the approved insurance provider with the 
right to seek reconsideration of a disapproval and specify that if a 
revised Plan of Operations is disapproved, the insurance provider 
cannot submit another revised Plan of Operations until the following 
reinsurance year.

10. Requirements After Approval of a Premium Reduction Plan

    The current procedures specify that all procedural issues, 
problems, etc. will be addressed by the approved insurance provider; 
premium reductions must be implemented in accordance with the premium 
reduction plan, the approved insurance provider is liable for all 
mistakes, errors, etc. The current procedures also required the 
approved insurance provider to assist RMA in any reviews conducted to 
determine whether the efficiency is generated and there is compliance 
with the premium reduction plan and to make any changes required by 
RMA. These provisions have been basically retained in the proposed 
rule. RMA has added a requirement that the approved insurance provider 
immediately report in writing all operational and financial changes 
that could cause a material impact upon an approved premium reduction 
plan. RMA has revised the procedures regarding reporting to make them 
more detailed to ensure the information provided is adequate to review 
and assess the impact on program participants, including small 
producers, limited resource farmers, women and minority producers and 
on the crop insurance program. RMA has also revised the procedures to 
clarify that producers will automatically receive the premium 
reduction. RMA has added a requirement that the approved insurance 
provider have an independent certified accountant certify as to the 
reasonableness, accuracy, and completeness of all actual costs relating 
to the efficiencies and the total dollar in premium reduction for the 
reinsurance year the premium reduction plan will be offered, in a 
format approved by RMA, not later than April 1 after the close of the 
reinsurance year. RMA has also added provisions requiring that the cost 
of such certification be included in the projected costs used to 
determine whether an efficiency has been attained. RMA has also added 
provisions making it clear that approval of a premium reduction plan is 
only for one year and new revised Plan of Operations must be made for 
subsequent years. RMA has also added provisions clarifying that if RMA 
discovers that the efficiencies were insufficient to cover the premium 
discount, the efficiencies are not attained or the premium reduction is 
not corresponding to the efficiency, the amount of premium reduction 
that can be approved for the next applicable reinsurance year will be 
limited to the actual amount of savings attained, excluding any actions 
taken under the financial reserve plan. Further, RMA added provisions 
specifying that it will closely monitor the approved insurance 
provider's efforts to market the premium reduction plan to small 
producers, limited resources farmers, women and minority producers to 
ensure that no unfair discrimination takes place and that if it is 
discovered, RMA may withdraw approval of the premium reduction plan. 
RMA has also clarified its provisions regarding when it can modify or 
withdraw approval, how such modification or withdrawal will be 
communicated and the effect of such action for ease of use.

11. New Provisions

    Unlike the procedures, RMA has added provisions that expressly 
state the limitations and prohibitions on the premium reduction plan 
program in order to simplify and clarify the program. Such limitations 
include a cap on the amount of premium reduction for the first two 
years the premium reduction plan is offered to allow RMA to evaluate 
the effect such plan may have on the crop insurance program and ensure 
that approved insurance providers are not leaving themselves

[[Page 9010]]

financially vulnerable by cutting their costs too much.

List of Subjects in 7 CFR Part 400

    Administrative practice and procedure, Crop insurance, Disaster 
assistance, Fraud, Penalties, Reporting and recordkeeping requirements.

Proposed Rule

    Accordingly, as set forth in the preamble, the Federal Crop 
Insurance Corporation proposes to amend 7 CFR part 400 by revising 
subpart V, effective for the 2006 and succeeding reinsurance years, to 
read as follows:

PART 400--GENERAL ADMINISTRATIVE REGULATIONS

    1. The authority citation for 7 CFR part 400 continues to read as 
follows:

    Authority: 7 U.S.C. 1506(a), 1506(p), 1508(e)(3).

Subpart V--Submission of Policies, Provisions of Policies, Rates of 
Premium, and Premium Reduction Plans

    2. Revise the heading for Subpart V to read as set forth above.
    3. Amend Sec.  400.700 by adding two sentences to the end of the 
section to read as follows:


Sec.  400.700  Basis, purpose, applicability.

    * * * This subpart also provides procedures that are applicable to 
revised Plan of Operations submitted by approved insurance providers 
for the purpose of obtaining approval for a premium reduction plan in 
accordance with section 508(e)(3) of the Act. The offering of such 
premium reduction plans without RMA's prior written approval is 
prohibited.


Sec.  400.701  [Amended]

    4. Amend Sec.  400.701 by revising the definition of 
``Administrative and operating (A&O) subsidy'' and by adding the 
definitions of ``Administrative and operating (A&O) costs'', ``Agent'', 
``Compensation'', ``Cost accounting'', ``Efficiency'', ``Managing 
general agent'', ``Premium reduction'', ``Profit sharing 
arrangements'', ``Standard reinsurance agreement'', ``Third party 
administrator'', ``Underwriting gain'', and ``Unfair discrimination'' 
in alphabetical order to read as follows:


Sec.  400.701  Definitions.

* * * * *
    Administrative and operating (A&O) costs. Costs of the approved 
insurance provider and any MGA and TPA that are related to the 
delivery, loss adjustment and administration of the Federal crop 
insurance program.
    Administrative and operating (A&O) subsidy. The subsidy for the 
administrative and operating expenses authorized by the Act (including 
the catastrophic risk protection loss adjustment expense reimbursement) 
and paid by FCIC on behalf of the producer to the Company.
    Agent. An individual licensed by the State in which an eligible 
crop insurance contract is sold and serviced for the reinsurance year, 
and who is under contract with the Company, or its designee, to sell 
and service such eligible crop insurance contracts.
* * * * *
    Compensation. Any guaranteed salary, commission, or any other 
guaranteed payment or anything of value or benefit that has a 
quantifiable value that is not contingent on the existence of an 
underwriting gain of the approved insurance provider, including, but 
not limited to, the payment of health or life insurance, deferred 
compensation (including qualified and unqualified), finders fees, 
retainers, trip or travel expenses, dues or other membership fees, the 
use of vehicles, office space, equipment, staff or administrative 
support paid by the approved insurance provider either directly or 
indirectly through a third party. Profit sharing arrangements will not 
be considered compensation, when:
    (1) The payments under such arrangements are contractually 
obligated;
    (2) The total amount paid under the aggregate of all profit sharing 
arrangements exceeds the total amount of the underwriting gain for the 
applicable reinsurance year; or
    (3) The profit sharing payment is triggered by anything other than 
whether the approved insurance provider receives an underwriting gain 
for its whole book of Federally reinsured crop insurance business for 
the applicable reinsurance year.
* * * * *
    Efficiency. Monetary savings realized when an approved insurance 
provider sells and services its Federal crop insurance policies for 
less than the amount of the A&O subsidy paid by FCIC, which must result 
from changes to the administrative and operating procedures and 
expenses that the approved insurance provider employs in delivering 
Federally-reinsured policies in accordance with the Act, the SRA, and 
all applicable regulations, directives, bulletins and procedures. Only 
a portion of the approved insurance provider's monetary savings can 
come from a reduction in compensation, the rest must come from changes 
in administrative and operating procedures. Efficiency does not include 
any actual or projected underwriting gain earned from the SRA, 
reinsurance revenues, or the investment returns on the approved 
insurance provider's reserves. Cost savings attributed to projected 
increased sales due to the offering of a premium reduction plan of 
insurance are not considered an efficiency, nor are proposed reductions 
in loss adjustment expenses, unless such reductions in loss adjustment 
expense are a result of implementing loss adjustment procedures 
authorized by RMA.
* * * * *
    Managing general agent (MGA). An entity that meets the definition 
of managing general agent under the laws of the State in which such 
entity is incorporated and in every other state in which it operates, 
or in the absence of such State law or regulation, meets the definition 
of a managing general agent or agency in the National Association of 
Insurance Commissioners Managing General Agents Act, or successor Act.
* * * * *
    Premium reduction. Reduction of the insured's premium by the 
approved insurance provider in an amount approved by RMA in accordance 
with section 508(e)(3) of the Act, all applicable regulations, and 
these procedures.
    Procedures. The applicable handbooks, manuals, memoranda, bulletins 
or other directives issued by RMA or the Board.
    Profit sharing arrangements. An arrangement to make a payment based 
on whether the approved insurance provider receives an underwriting 
gain on the total book of crop insurance business, except payments made 
to commercial reinsurers, or reinsurance revenues paid to the approved 
insurance provider for the reinsurance year.
* * * * *
    Standard reinsurance agreement (SRA). The reinsurance agreement 
between FCIC and the approved insurance provider, under which the 
approved insurance provider is authorized to sell and reinsure the 
policies for which the premium reduction is proposed.
* * * * *
    Third party administrator (TPA). A person or entity that processes 
claims or performs other administrative services and holds licenses, as 
applicable, in states in which the approved insurance provider does 
business for services

[[Page 9011]]

related to the delivery, loss adjustment and administration of the 
Federal crop insurance program in accordance with a service contract or 
an affiliate or any other type of relationship.
    Underwriting gain. For the purposes of the premium reduction plan, 
the amount of gains paid under section II.B.10. of the SRA less any 
amounts paid from such gains, such as payments to commercial 
reinsurers, taxes, licensing fees, payments to parent companies or 
subsidiaries, etc., and any costs incurred by the approved insurance 
provider in excess of the A&O subsidy related to the delivery, loss 
adjustment and administration of the Federal crop insurance program
    Unfair discrimination. A premium reduction plan will be considered 
unfairly discriminatory to a producer if the availability of such 
premium reduction plan, or the amount of the premium reduction, is 
based on the loss history of the producer, the amount of premium earned 
under the policy, or precludes in any manner producers in an approved 
State from participating in the program.
* * * * *
    5. Add Sec.  400.714 to read as follows:


Sec.  400.714  Revised Plans of Operations for premium reduction plans.

    (a) For the 2006 reinsurance year, revised Plans of Operations must 
be received by RMA not later than [date 15 days after the date of 
publication of the final rule].
    (b) For all subsequent reinsurance years, revised Plans of 
Operations must be received by RMA not later than April 1 before the 
reinsurance year, or the date RMA otherwise determines the Plan of 
Operations is due.
    (c) Any revised Plans of Operations that is not timely submitted 
will not be considered by RMA and any other revised Plans of Operations 
submitted by the approved insurance provider during the reinsurance 
year will not be considered until the next reinsurance year.
    (d) A revised Plan of Operations may be withdrawn no later than 15 
days after the revised Plan of Operations has been received by RMA. If 
a revised Plan of Operations has not been timely withdrawn, the 
approved insurance provider will be required to implement an approved 
premium reduction plan.
    (e) Any confidential commercial or financial information submitted 
with a revised Plan of Operations will be protected from disclosure to 
the extent permitted by, and in accordance with, 5 U.S.C. 552(b)(4).
    (f) The revised Plans of Operations under this subsection must be 
sent to the Director, Reinsurance Services Division (or designee) at an 
address to be announced by RMA.
    6. Add Sec.  400.715 to read as follows:


Sec.  400.715  Limitations and prohibitions.

    (a) For the first two reinsurance years after [effective date of 
the final rule], the premium reduction plan may not offer a premium 
reduction based on an efficiency less than 1.0 percent nor greater than 
4.0 percent of the net book premium. For subsequent reinsurance years, 
RMA will announce the minimum and maximum limitation on the premium 
reduction, if applicable. Premium reductions must be offered in .5 
percent increments.
    (b) If a premium reduction plan is offered it must be offered in 
all states where the approved insurance provider is doing business and 
for all crops, coverage levels, policies.
    (c) The amount of the premium reduction offered based on the 
percentage of the net book premium may not vary between states, crops, 
coverage levels, policies or plans of insurance, or on any other basis 
(For example, if the approved insurance provider can reduce costs by 
2.5 percent, such reduction must be provided to all policyholders in 
all states where the approved insurance provider is doing business).
    7. Add Sec.  400.716 to read as follows:


Sec.  400.716  Contents of the revised Plans of Operations for a 
premium reduction plan.

    A revised Plan of Operations must be submitted electronically, in a 
manner determined by RMA. Each revised Plan of Operations must include 
the following:
    (a) The name of the approved insurance provider, the person who may 
be contacted for further information regarding the revised Plan of 
Operations, and the person who will be responsible for administration 
of the premium reduction plan;
    (b) A detailed description of any and all terms and conditions that 
affect its availability;
    (c) A detailed statement as to the amount of the premium reduction 
that is proposed to be offered to each eligible producer, how it will 
be calculated, and how it will be reported to RMA;
    (d) A detailed proposal of how the approved insurance provider 
intends to deliver the premium reduction plan to producers;
    (e) A detailed marketing plan focused solely on how the premium 
reduction will be promoted to small producers, limited resources 
farmers as defined in section 1 of the Basic Provisions, 7 CFR 457.8, 
women and minority producers;
    (f) A detailed statement explaining how the approved insurance 
provider proposes to revise its procedures for the delivery, operation 
or administration of the Federal crop insurance program in order to 
achieve the specified efficiency and how the premium reduction will 
correspond to the efficiency;
    (g) Applicable Expense Exhibits required by the SRA, or the 
applicable regulations if required by RMA, that are revived to reflect 
the implementation of the premium reduction plan and any documentation 
necessary to support the revisions;
    (h) Based on the applicable Expense Exhibits, a statement that 
summarizes the A&O costs before implementation of the efficiency, the 
cost savings associated with the efficiency, the A&O costs after 
implementation of the efficiency (which includes the budgeted cost of 
all reports and certifications required in Sec. Sec.  400.714-720), the 
expected A&O subsidy, and the projected total dollar amount of premium 
reduction to be provided to producers (This statement must demonstrate 
that after the implementation of the premium reduction plan, the 
approved insurance provider's A&O costs, including the budgeted cost of 
all such reports and certifications, plus the amount of any premium 
reductions will not be greater than the provider's A&O subsidy);
    (i) A financial reserve plan that:
    (1) Is triggered immediately upon discovery by the approved 
insurance provider or RMA that the total dollar amount of the actual 
efficiency is not sufficient to cover the total dollar amount of the 
premium reduction provided to producers;
    (2) Consists of actions to be taken by the approved insurance 
provider that would produce cost savings or income that is at least 25 
percent of the projected total dollar of premium reduction to be 
provided to producers immediately upon discovery under paragraph (i)(1) 
of this section;
    (j) A detailed description of all profit sharing arrangements paid 
by the approved insurance provider;
    (k) A certification, in a format approved by RMA, by the person 
designated by the approved insurance provider to execute the SRA, of 
the reasonableness, accuracy, and completeness of all cost projections 
relating to the efficiencies and the total dollar in premium reduction 
for the reinsurance year the premium reduction plan will be offered;
    (l) A certification from the approved insurance provider, by the 
person designated by the approved insurance provider to execute the 
SRA, that it has

[[Page 9012]]

provided a copy of its marketing strategy under paragraph (d) of this 
section to the State Department of Insurance for all states where the 
premium reduction plan will be offered for its review to determine 
whether the licensing of agents and the conduct of agents in the 
solicitation and sale of insurance under the proposed premium reduction 
plan is in accordance with applicable state insurance laws (All 
responses from the states must be provided to RMA not later than 10 
days after receipt of the response by the approved insurance 
provider);and
    (m) Such other information as deemed necessary by RMA.
    8. Add Sec.  400.717 to read as follows:


Sec.  400.717  New approved insurance providers.

    There may be instances where a new approved insurance provider is 
entering into the crop insurance program for the first time and such 
approved insurance provider is not affiliated with a MGA, another 
approved insurance provider, or any other entity that possesses the 
infrastructure necessary to deliver the crop insurance program, that is 
currently or has previously participated in the crop insurance program. 
In such instances, the one time start-up costs that are associated with 
entering the crop insurance business (e.g., creation of a claims 
system, interface with RMA's data acceptance system, initial marketing 
costs, set up charges) must be included in the Expense Exhibits 
required by the SRA, or the applicable regulations if required by RMA, 
but the costs may be amortized in equal annual amounts for a period of 
up to three years for the purpose of determining the efficiency on the 
documents described in Sec.  400.716, in a manner determined by RMA.
    9. Add Sec.  400.718 to read as follows:


Sec.  400.718  RMA review.

    (a) For the 2006 reinsurance year, RMA will notify the approved 
insurance provider by September 1, 2005, of its approval or disapproval 
of the revised Plan of Operations for a premium reduction plan; and
    (b) For all subsequent reinsurance years, RMA will notify the 
approved insurance provider at least 60 days before the applicable 
sales closing date of its approval or disapproval of the submitted 
premium reduction plan, unless the approved insurance provider waives 
this 60 day prior notification requirement in writing.
    10. Add Sec.  400.719 to read as follows:


Sec.  400.719  Standards for approval.

    (a) RMA may approve the revised Plan of Operations if, in the sole 
determination of RMA, the revised Plan of Operations demonstrates that 
the following criteria are met:
    (1) All information required in Sec.  400.716 is included in the 
revised Plan of Operations, in the format required, and is reasonable 
and supported by documentation;
    (2) The approved insurance provider can demonstrate that its A&O 
costs, or projected A&O costs, are less than the A&O subsidy received, 
or projected to be received, from RMA and if based on projections, such 
projections are reasonable;
    (3) The approved insurance provider can reduce A&O costs by a 
specific amount through identified efficiencies in the delivery of the 
Federal crop insurance program;
    (4) The identified efficiencies must be measurable in dollar terms 
and supported by documentary evidence;
    (5) RMA is able to verify the source and amount of the identified 
efficiencies as provided by the approved insurance provider and all 
applicable costs and savings before and after implementation of the 
premium reduction plan;
    (6) The efficiencies must be sufficient to cover the dollar amount 
of the premium reduction, and correspond to the location where the 
premium reduction is offered;
    (7) The efficiency must:
    (i) Be derived from activities for which the A&O subsidy is 
provided and not from any expected underwriting gain; and
    (ii) Not be derived from any marketing or underwriting practices 
that are unfairly discriminatory;
    (8) The financial reserve plan is reasonable and provides the 
necessary guarantee of funding, as required by Sec.  400.716(i);
    (9) The marketing plan must be reasonable and effectively reach 
small producers, limited resources farmers as defined in section 1 of 
the Basic Provisions, 7 CFR 457.8, women and minority producers;
    (10) The proposal of how the approved insurance provider intends to 
deliver the premium reduction plan must be reasonable and not violate 
applicable state laws regarding the licensing and the conduct of agents 
in the solicitation and sale of insurance;
    (11) The premium reduction plan must not result in a reduction in 
the service to policyholders required by RMA approved procedures;
    (12) The premium reduction plan must not result in a reduction of 
training and supervising of agents, loss adjusters, or underwriting and 
quality assurance personnel required by the procedures, law, regulation 
or the SRA;
    (13) There must not be a reduction in the total delivery system's 
ability to serve all producers, including small producers, limited 
resource farmers as defined in the Basic Provisions, 7 CFR 457.8, women 
and minority producers, and producers located in areas with small 
volumes of crop insurance business;
    (14) The premium reduction plan must not adversely impact the 
financial and operational capacity and expertise of the approved 
insurance provider to properly deliver the Federal crop insurance 
program;
    (15) The approved insurance provider's resources, procedures, and 
internal controls are adequate to make the premium reduction plan 
available to producers in a timely manner and to protect the integrity 
of the Federal crop insurance program, including the prevention of 
fraud, waste and abuse; and
    (16) The premium reduction plan meets all other relevant 
requirements of the Act and the SRA.
    (b) If the revised Plan of Operations is approved, the approved 
insurance provider:
    (1) Will be notified in writing by the Director of the Reinsurance 
Services Division, or a designee or successor; and
    (2) Must implement the premium reduction plan beginning with the 
next applicable sales closing date for the reinsurance year, unless 
otherwise determined by RMA, in accordance with Sec.  400.720.
    (c) If the revised Plan of Operations is disapproved, the approved 
insurance provider:
    (1) Will be notified in writing of the basis for disapproval by the 
Director of the Reinsurance Services Division, or a designee or 
successor.
    (2) May request, in writing, reconsideration of the decision with 
the Deputy Administrator of Insurance Services, or a designee or 
successor, within 30 days of disapproval and such request must provide 
a detailed narrative of the basis for reconsideration.
    (3) May not submit any additional revised Plans of Operations for a 
premium discount plan for the reinsurance year.
    11. Add Sec.  400.720 to read as follows:


Sec.  400.720  Terms and conditions for approved premium reduction 
plans.

    The following terms and conditions apply to all approved insurance 
providers whose revised Plans of Operations are approved:
    (a) Approved revised Plans of Operations for premium reduction will 
only be effective for one reinsurance year.

[[Page 9013]]

    (b) The approved insurance provider must immediately report in 
writing all operational and financial changes that could cause a 
material adverse impact upon its approved premium reduction plan to the 
Director of the Reinsurance Services Division, or a designee or 
successor.
    (c) All procedural issues, questions, problems or clarifications 
with respect to implementation of the premium reduction plan must be 
timely addressed by the approved insurance provider.
    (d) The approved insurance provider must implement the premium 
reduction plan in accordance with the terms and conditions of approval.
    (e) All producers insured by the approved insurance provider will 
automatically receive the premium reduction contained in the approved 
premium reduction plan.
    (f) An independent certified public accountant must certify to the 
reasonableness, accuracy, and completeness of all actual costs relating 
to the efficiencies and the total dollar in premium reduction for the 
reinsurance year the premium reduction plan will be offered, in a 
format approved by RMA, not later than April 1 after the annual 
settlement for the reinsurance year (The costs associated with such 
certification will be at the approved insurance provider's expense and 
must be included in the approved insurance provider's projected 
expenses for the purposes of determining an efficiency);
    (g) The approved insurance provider must provide semi-annual 
reports, or more frequently as determined by RMA, that permit RMA to 
accurately evaluate the effectiveness of the premium reduction plan, in 
the manner specified by RMA. At a minimum, each report must contain:
    (1) The number of producers making initial application for 
insurance by State;
    (2) The average number of acres insured under all policies by State 
before and after implementation of the premium reduction plan;
    (3) The number of small producers, limited resources farmers as 
defined in section 1 of the Basic Provisions, 7 CFR 457.8, women and 
minority producers making application as result of the implementation 
of the marketing plan;
    (4) The average coverage level purchased by producers insured by 
the approved insurance provider before implementation of the premium 
reduction plan and after;
    (5) The number of agents selling and servicing policies on behalf 
of the approved insurance provider by State; and
    (6) The number, substance, and final or pending resolution of 
complaints from producers regarding the service received under the 
premium reduction plan.
    (h) If at any time RMA discovers that the cost reduction or 
efficiencies contained in the premium reduction plan are not attained, 
are not sufficient to cover the dollar amount of premium reduction, or 
that the reduction in premium is not corresponding to the efficiency, 
RMA will require that the amount of efficiency used to determine the 
premium reduction for the next applicable reinsurance year be limited 
to the actual cost savings obtained for the reinsurance year, excluding 
any financial reserve plan measures that may have been used to make up 
for the effects of the deficiency.
    (i) RMA will closely monitor the approved insurance provider's 
efforts to market the premium reduction plan to small producers, 
limited resources farmers as defined in section 1 of the Basic 
Provisions, 7 CFR 457.8, women and minority producers to ensure that no 
unfair discrimination takes place and if it is discovered, RMA may 
withdraw approval for the premium reduction plan, in accordance with 
paragraph (n) of this section.
    (j) The approved insurance provider is solely liable for all 
damages caused by any mistakes, errors, misrepresentations, or flaws in 
the premium reduction plan or its implementation.
    (k) The approved insurance provider must fully cooperate with RMA 
in its periodic review of the operations of the approved insurance 
provider for the purpose of assuring that the efficiencies are 
generated, that the projected cost reductions materialize, that the 
premium reduction plan is administered in the manner presented in the 
revised Plan of Operations, that the solvency and operational capacity 
of the approved insurance provider remains unimpaired, and that the 
interests of producers and taxpayers are protected.
    (l) The approved insurance provider may be required by RMA to 
modify its implementation of an approved premium reduction plan to 
ensure compliance with 7 CFR 400.714-720, the Act, regulations, the 
SRA, and any applicable policy provisions and approved procedures, and 
to protect the interests of producers and taxpayers, and the integrity 
of the program.
    (m) At its sole discretion and upon written notice, RMA may 
withdraw or modify its approval of any premium reduction plan if RMA 
determines that:
    (1) The approved premium reduction plan, or its implementation, no 
longer satisfies all the terms and conditions in 7 CFR 400.714-720;
    (2) There have been instances of unfair discrimination;
    (3) The stated efficiencies have not been realized or the approved 
premium reduction is not provided to all existing policyholders and 
producers as required by subsection (e); or
    (4) The integrity of the crop insurance program is jeopardized in 
any way, as determined by RMA, by the premium reduction plan.
    (n) If any condition in paragraph (m) of this section exists, RMA 
will notify the approved insurance provider in writing:
    (1) That approval has been withdrawn or a modification to the 
premium reduction plan is required;
    (2) The date such withdrawal is effective or modifications must be 
made;
    (3) If modified, such modification must be approved by RMA before 
implementation;
    (4) The basis for such withdrawal or modification; and
    (5) If approval is withdrawn, the approved insurance provider must 
cease offering the associated premium reduction effective for the next 
sales closing date.

    Signed in Washington, DC, on February 17, 2005.
Ross J. Davidson, Jr.,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 05-3435 Filed 2-23-05; 8:45 am]
BILLING CODE 3410-08-P