[Federal Register Volume 70, Number 138 (Wednesday, July 20, 2005)]
[Rules and Regulations]
[Pages 41822-41924]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-14037]



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Part II





Department of Agriculture





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Federal Crop Insurance Corporation



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7 CFR Part 400



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

  Federal Register / Vol. 70, No. 138 / Wednesday, July 20, 2005 / 
Rules and Regulations  

[[Page 41822]]


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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: Interim rule.

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SUMMARY: The Federal Crop Insurance Corporation (FCIC) amends the 
General Administrative Regulations to include provisions regarding the 
requests by approved insurance providers to implement the premium 
reduction plan authorized under section 508(e)(3) of the Federal Crop 
Insurance Act (Act) and the approval of the amount of a premium 
discount to be provided to farmers under the premium reduction plan.

DATES: Effective June 30, 2005.

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.

Paperwork Reduction Act of 1995

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Chapter 35), RMA's request for emergency approval on a new information 
collection, Premium Reduction Plan, was approved under OMB control 
number 0563-0079.

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 to the FCIC Board of 
Directors for approval. The current requirements of the Standard 
Reinsurance Agreement (SRA) and procedures for premium reduction plans 
approved by the Board contain provisions to ensure that small entities 
have access to policies and plans of 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

    On February 24, 2005, FCIC published a notice of proposed 
rulemaking in the Federal Register at 70 FR 9001-9013 to revise 7 CFR 
part 400, subpart V, Submission of Policies, Provisions of Policies, 
Rates of Premium, and Premium Reduction Plans. Following publication of 
the proposed rule, the public was afforded 60 days to submit written 
comments and opinions. Approximately 1,900 comments were received from 
approved insurance providers, farmers, agents and other interested 
parties.
    After consideration of all the comments and the concerns expressed, 
FCIC realizes it needs to proceed cautiously to ensure the continued 
access of farmers to crop insurance and stability of the delivery 
system for the federal crop insurance program. Not publishing a rule is 
not an option because section 508(e)(3) of the Act states that FCIC 
shall consider all applications of the approved insurance providers to 
participate in the premium reduction plan. To allow such application 
without ensuring that premium reduction plans are fair and equitable 
and do not endanger the delivery system would jeopardize the program 
far more than implementing a rule intended to protect these principles.
    However, to allow itself the maximum flexibility in quickly making 
changes to the rule, should they become necessary, FCIC has elected to 
publish this rule as an interim rule. All the comments provided in 
response to the proposed rule were considered when developing

[[Page 41823]]

the interim rule. The Risk Management Agency (RMA), on behalf of FCIC, 
intends to operate the premium reduction plan program for the 2006 
reinsurance year under the interim rule. This will allow time to 
determine how effectively the premium reduction plan program is 
operating. After sufficient time to experience the operation of the 
program, RMA will publish a separate notice soliciting comments. Such 
comments will then be considered when making the rule final.
    When FCIC published the proposed rule, it specifically sought 
comments on certain provisions and proposals and sought comments on the 
proposed rule in general. The comments and responses have been 
categorized in accordance with the specific and general requests for 
comment. Further, RMA has used the term ``few'' to mean two commenters, 
``several'' to mean three to nineteen commenters, and ``many'' to mean 
20 or more commenters. These terms do not reflect the number of 
commenters in each category listed but the total for all categories.

A. Preamble

1. Alternative Proposal
    In the preamble to the proposed rule, RMA suggested an alternative 
proposal that would require the approved insurance providers to base 
any premium discount on actual cost savings for the reinsurance year 
instead of projected savings. The proposal would operate similar to a 
dividend program with premium discounts provided after the costs 
savings were determined, which would be after the end of the crop year. 
This meant farmers would be required to pay the full premium when due 
and receive the premium discount at a later time. RMA was particularly 
interested in comments that addressed 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 farmers, 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. The comments received and FCIC's responses are as follows:
    Comment: An agent commented that in a state that has a significant 
number of rebate laws, the alternate approach offered by RMA may raise 
issues about rebating. The commenter asks how this would affect 
implementation and assume RMA would resolve any rebate issue before 
implementation.
    Response: Whether the premium reduction plan may be a form of 
rebating that is prohibited under most state laws is not material. 
Under section 506(l) of the Act, any state law that is in conflict with 
the Act or any regulation promulgated by FCIC is preempted. Section 
508(e)(3) of the Act expressly authorizes approved insurance providers 
to pay premium discounts to farmers without reference to state law. 
This is in contrast to section 508(b)(5)(B) of the Act that authorizes 
cooperative and trade associations to pay all or a portion of the 
administrative fee on behalf of the farmer or provide a rebate as long 
as such rebate is permitted by the laws of the state. Since section 
508(e)(3) of the Act does not waive federal preemption, the fact that 
such discounts may be considered a prohibited rebate under state law or 
provided to farmers in a manner similar to dividends that are regulated 
by the state does not override the express authority in section 
508(e)(3) of the Act. The application of Federal preemption is 
consistent with section II.A.4. of the 2005 SRA and the approved 
procedures, which make it clear that state law only applies to rebating 
issues involving section 508(b)(5)(B) of the Act and that Federal 
preemption applies to all other aspects of rebating, including section 
508(e)(3) of the Act.
    Comment: Several agents, farmers, approved insurance providers and 
interested parties commented that any discount should be guaranteed up 
front and should be available to farmers whether or not the crop year 
is a good one or a bad one. Commenters state that if the discount is 
not guaranteed, farmers will not enter the program and farmers will not 
take the opportunity to increase coverage.
    Response: RMA understands the position of the commenters and took 
that position in the proposed rule. However, as expressed more fully 
below, it has considered the other comments and its own concerns 
regarding the complexity and burdens on approved insurance providers 
and RMA of having to establish and evaluate projected savings, and the 
impact on the program if such savings are not realized and determined 
that the difficulties in administering the program outweigh the effect 
on farmers of not having the premium discount guaranteed up front and, 
therefore, has elected to adopt the alternative proposal in the interim 
rule. In adopting the alternative proposal, RMA understands that the 
premium reduction plan will likely lose some of its attraction to 
farmers if it is not guaranteed up front. However, at least farmers 
will be guaranteed a stable delivery system with the possibility of a 
premium discount, which if not available to purchase additional 
coverage for the current year, could be used to increase coverage in 
subsequent crop years. Under the proposed system, if the commenters are 
correct, there could be instability introduced into the delivery 
system. RMA does agree that the premium discount should be available 
regardless of whether the farmer suffers a loss and this is included in 
the interim rule.
    Comment: Several agents, farmers, approved insurance providers and 
interested parties commented that farmers take enough risk with 
planting crops and hoping for a good crop year, so why should approved 
insurance providers who are experts at risk management, not be able to 
offer savings to farmers guaranteed upfront if they have the ability 
and option to do so. A commenter also stated that providing only the 
chance for discounts based on profitability will only confuse the 
farmers and open approved insurance providers to potential accounting 
irregularities to limit profits in order to avoid paying dividends.
    Response: RMA disagrees with the commenter that approved insurance 
providers are more likely to engage in accounting irregularities under 
the alternative. First, the payment of a premium discount is not 
conditioned upon profitability of the approved insurance provider. It 
is conditioned upon the approved insurance provider reducing its cost 
to deliver the program to an amount below the amount of administrative 
and operating (A&O) subsidy paid by RMA. Second, the requirement that 
the approved insurance provider must have an independent professional 
audit and certify actual cost efficiencies provides less opportunity 
for accounting irregularities than the use of projected cost 
efficiencies, as established under the proposed rule. RMA also 
understands there may be concerns that the alternative may lead to 
confusion for some farmers regarding whether they will receive a 
premium discount. To prevent such confusion, the interim rule places 
specific restrictions on the advertising or promotion of the premium 
reduction plan to prevent approved insurance providers or agents from 
making promises regarding the payment of premium discounts that the 
approved insurance provider may not be able to keep. While recognizing 
that the alternative approach does not have the guaranteed benefits 
that the proposed

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approach had, RMA had to weigh the potential problems with basing 
premium discounts on projected costs instead of actual costs.
    Comment: An approved insurance provider commented that using 
appropriate business tools, approved insurance providers can accurately 
forecast (and demonstrate to the RMA) the amount of savings necessary 
to offer a premium reduction plan, and should be required to pass those 
savings--up-front--on to farmers. A commenter states that under the 
current structure, another core benefit to farmers is that competing 
approved insurance providers will market their various programs with 
specific discount information, thereby permitting farmers to make 
informed insurance purchasing decisions. The commenter states that the 
alternative approach eliminates this benefit.
    Response: RMA agrees that the alternative approach does not have 
the full benefit of allowing farmers know what their premium discount 
will be up front. However, RMA is not as confident as the commenter 
that approved insurance providers can accurately forecast their savings 
each year. Certain costs are fixed but other costs, such as loss 
adjustment expense, are not. In order to qualify to pay a premium 
discount, the approved insurance provider has to be operating below A&O 
subsidy. In unusually bad loss years, it is possible that some or all 
projected savings could be spent on additional loss adjustment 
expenses. To require approved insurance providers to pay premium 
discounts in such years could financially weaken the crop insurance 
delivery system.
    Comment: An interested party commented that there are problems with 
the alternative approach. The commenter states that farmers face too 
many other uncertainties and not knowing the savings until after the 
end of the end of the crop year just poses another one. The commenter 
also suggests that approved insurance providers would be reluctant to 
participate in the premium reduction plan because it could not use a 
specific discount when competing in the marketplace. The commenter 
suggested that RMA not publish the rule rather than risk the premium 
reduction plan undermining the delivery of the crop insurance program 
and fundamental principle of universal access.
    Response: RMA shares the concerns of these commenters with respect 
to the alternative proposal--that farmers will face yet another 
uncertainty and that an uncertain discount will reduce marketing 
opportunities. However, the premium discount program is totally 
voluntary based on whether the approved insurance provider determines 
it makes sound business sense. RMA cannot structure the program to 
provide an incentive for approved insurance providers to participate if 
there is a possibility that such incentive would prove detrimental in 
the long run. Further, as stated above, farmers will still be receiving 
a benefit if the approved insurance provider attains the necessary 
savings, which can still provide an inducement to purchase insurance 
with a specific approved insurance provider so approved insurance 
providers still have an incentive to participate in the premium 
reduction plan. In addition, approved insurance providers will be able 
to advertise premium discounts paid in the previous reinsurance year to 
give farmers an indication of what premium discount they may be able to 
expect, although such advertising will be accompanied by appropriate 
disclaimers. RMA believes that the advantages of the alternative 
proposal outweigh the disadvantages.
    With respect to not publishing the interim rule, section 508(e)(3) 
of the Act requires RMA to accept any request by an approved insurance 
provider to participate in the premium reduction plan. Not publishing 
the interim rule would mean that the premium reduction plan would 
continue under the existing RMA procedures--procedures that the FCIC 
Board of Directors (Board) has determined to be unsatisfactory--or 
revised procedures. RMA disagrees with the commenter that the interim 
rule would undermine the delivery of crop insurance and universal 
access. As outlined in RMA's responses to the other comments, the 
interim rule includes provisions that ensure universal access and 
protect the delivery of crop insurance.
    Comment: An approved insurance provider commented that a core 
benefit to the current structure is that it requires participating 
approved insurance providers to focus on administrative costs up front, 
to demonstrate savings that can be achieved, and to impose the 
necessary mechanisms to achieve them. The commenter states that the 
alternative structure eliminates this incentive and discourages 
providers from identifying, designing and implementing necessary cost-
saving mechanisms and practices before the savings can be realized.
    Response: While it may have been beneficial for RMA to know how 
approved insurance providers were cutting their costs when the premium 
discounts were based on projected costs, the same need does not exist 
under the alternative proposal. RMA will be looking at the cost savings 
after they have been realized. Further, it is up to the approved 
insurance provider with respect to whether its operation will support 
cost cutting measures sufficient to allow the payment of a premium 
discount. However, approved insurance providers that offer a premium 
discount plan but fail to deliver any premium discounts would likely 
find themselves losing business to approved insurance providers who do 
pay premium discounts. Therefore, there is still an incentive to 
implement the cost-saving measures.
    Comment: An agent commented that agents and approved insurance 
providers should not be given discretion over discounts. The commenter 
stated that other lines of insurance allow agents and approved 
insurance providers to price business based on the ``merits'' of the 
business. The commenter stated that pricing flexibility is not based on 
the merit of an account but used as a marketing tool. Once consumers 
make this discovery, then agents are pitted against each other from 
year to year when delivering proposals. The commenter stated this is 
not something likely to happen as it does not provide a documentable 
reason for the discount.
    Response: RMA agrees that the ability of an agent to use a 
projected premium discount, rather than a premium discount based on 
actual cost savings, raises a cause for concern with respect to the 
marketing of the agent's services. Under the alternative proposal 
adopted in the interim rule, agents would not be able to promise a 
premium discount. The agent could provide policyholders with a history 
of actual premium discount payments that have been documented by the 
approved insurance provider, but would be strictly prohibited from 
inferring that policyholders would, in fact, receive a premium discount 
in the future.
    Comment: An approved insurance provider commented that the 
alternative proposal was conceptually interesting, but inconsistent 
with prospective rating methods used for virtually all other insurance 
products. It would only be modestly easier to validate and assign a 
dollar value to efficiencies post-policy period as opposed to prior to 
it. The commenter stated that the plan would probably invite 
intimations during sales process of anticipated efficiencies at least 
as great as any other approved insurance provider--and if so would 
cause confusion to the farmer.
    Response: As an initial matter, the premium reduction plan has 
nothing to

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do with the rating methodology. The dollar amount of premium to cover 
the risk of loss and a reasonable reserve remains unchanged. The only 
thing that may change is that portion of the premium paid by the 
farmer. Under the alternative adopted in the interim rule, the farmer 
would pay the entire amount of the farmer paid portion and later 
receive a discount from the approved insurance provider. Further, it 
would be much simpler to validate the savings after they have been 
achieved. First, the total A&O costs reported on the Expense Exhibits 
to the SRA is compared with the amount of A&O subsidy received to 
determine whether the approved insurance provider is eligible to pay a 
premium discount. This would permit approved insurance providers whose 
current A&O costs exceed the A&O subsidy to still request to 
participate in the premium reduction plan because the payment of a 
premium discount is contingent upon the approved insurance provider 
sufficiently reducing its costs. This cost accounting is simple and 
avoids the need to demonstrate up front that the approved insurance 
provider will reduce costs sufficiently to be able to pay a premium 
discount.
    Second, the interim rule contains mechanisms to place all costs 
into one of three categories. Based on the category, the costs are 
allocated proportionally to the net book premium in the state or are 
reported in the Expense Exhibits by state. This process provides a 
simple transparent means to allocate costs and determine the amount of 
premium discount that can be paid in each state.
    Third, as stated above, the interim rule contains restrictions on 
the manner in which the premium reduction plan can be promoted or 
advertised. Approved insurance providers will only be able to advertise 
actual premium discounts paid in the past reinsurance year and even 
those must be accompanied by a disclaimer that there is no guarantee 
such premium discount will be paid in the future.
    Comment: Several interested parties commented that the alternative 
had too many loopholes, there were no controls over false promises or 
deceptive marketing practices, and there were no penalties for such 
conduct.
    Response: RMA disagrees with the comment that the alternative has 
too many loopholes. By requiring that premium discounts come from 
realized and certified cost efficiencies, the alternative in the 
interim rule is less subject to loopholes that the program outlined in 
the proposed rule, which permits premium discounts based on forecasts 
that might not be realized.
    RMA agrees with the comments that false promises and potentially 
deceptive marketing practices are more likely to emerge from the 
alternative structure outlined in the interim rule than from the 
structure outlined in the proposed rule. As stated above, to address 
this, the interim rule incorporates specific marketing prohibitions. 
The interim rule also indicates that state insurance departments will 
be enlisted to play a role in the enforcement of market conduct. These 
departments currently have structured market conduct standards and 
enforcement arms, and can ensure that deceptive practices are 
identified, investigated, and penalties assessed to those who engage in 
them.
    Comment: An agent asked if RMA is going to require all approved 
insurance providers to form into a mutual approved insurance provider 
so the insureds can receive the dividend. Minnesota has this 
requirement that for an insurance customer to qualify for a dividend 
they must be part of a mutual approved insurance provider. The 
commenter stated that most approved insurance providers in the MPCI 
market place now are private approved insurance providers and it is 
unlikely they would want to change to a mutual approved insurance 
provider.
    Response: Neither the interim rule nor any other provision in 
section 508(e)(3) of the Act requires that approved insurance providers 
become mutual insurance companies to qualify for the premium reduction 
plan. Although state law may require insurance companies to be mutual 
insurance companies to be able to distribute dividends, the premium 
discount plan authorizes the payment of premium discounts, not 
dividends, even though they may be paid at a similar time as a 
dividend. Further, section 508(e)(3) of the Act provides RMA with the 
authority to allow approved insurance providers to offer premium 
discounts without being a mutual insurance company and such authority 
will preempt state law in accordance with section 506(l) of the Act.
    Comment: An interested party commented that dividend plans may have 
an adverse impact on approved insurance provider participation if the 
procedures established by RMA enable one or more approved insurance 
providers to obtain a competitive advantage over the other approved 
insurance providers. Dividend plans may also adversely affect customer 
service if the efficiencies are achieved through reductions in training 
or other service related functions.
    Response: Although similar to a dividend plan in other lines of 
insurance, the premium reduction plan is not a dividend plan. The 
premium reduction plan is a plan that offers a premium discount to 
farmers based on the efficiencies attained by the approved insurance 
provider. Further, under the alternative approach, approved insurance 
providers are placed in a more equal position because they will not 
have to prove up front that they can deliver the program for less than 
their A&O subsidy. This means that all approved insurance providers can 
request to participate in the premium reduction plan although only 
those approved insurance providers that attain sufficient savings can 
provide a premium discount under such a plan. In addition, under either 
approach, service and training cannot be reduced below what is 
necessary to meet the requirements in the SRA regarding service, which 
are generally contained in procedures such as the Crop Insurance 
Handbook and the Loss Adjustment Manual, and training requirements that 
are generally contained in Appendix IV to the SRA. This is the minimum 
level of service that RMA determines is necessary to properly deliver 
the crop insurance program. To the extent that service currently 
exceeds these standards, RMA cannot take any action against any 
approved insurance providers who do not participate in the premium 
reduction plan and who reduce such service to the level required to 
comply with the SRA and approved procedures. There is no difference 
under the premium reduction plan. RMA will be looking at whether 
approved insurance providers are violating the standards of service 
required by the SRA. If such a violation occurs, RMA can withdraw its 
determination that an approved insurance provider is eligible to 
participate in the premium reduction plan or approval of a premium 
discount, or take such other action as authorized under the SRA.
    Comment: Several interested parties commented that while the 
dividend plan approach is more workable than the up-front premium 
discount approach, both approaches suffer from some of the same 
difficulties. A commenter states that the same issues with 
recordkeeping, accounting practices, and monitoring issues still exist 
with the alternative. A commenter stated that after further review, the 
dividend plan approach should not be pursued at this time, and that RMA 
should conduct additional study to more carefully evaluate whether 
these difficulties can be resolved through careful design of any 
procedures used to

[[Page 41826]]

implement the premium reduction language in the Act.
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. Further, the interim rule 
simplifies many of the recordkeeping and accounting practices that 
would have been required under the approach included in the proposed 
rule. Savings and the amount of any premium discount will be determined 
using the Expense Exhibits provided with the SRA each reinsurance year. 
Further, the procedures accompanying the interim rule contains specific 
allocation requirements for certain costs that will simplify the 
determination of whether a premium discount can be paid. There still 
will be monitoring requirements but the accounting and recordkeeping 
burdens are greatly reduced. RMA intends to test this concept out 
through the interim rule and then seek additional comments to determine 
if further refinement is required.
    Comment: Several agents, approved insurance providers and 
interested parties commented that an approach using ``projected 
savings'' should not be implemented. Approved insurance providers that 
want to participate in a premium reduction plan should be required to 
``show'' rather than ``project'' they can achieve cost savings while 
maintaining necessary service levels. A commenter stated that a 
dividend plan approach would have no effect on data collection, 
reporting, or reinsurance payments. Commenters stated that using actual 
costs evens the playing field, simplifies the program, eliminates 
unfair discrimination and stabilizes the program. A commenter stated 
that it is unlikely any approved insurance provider can accurately 
project costs. A commenter stated the alternative proposal will reduce 
the chance that approved insurance providers will not meet their 
projections and cause market disruption. A commenter stated that by 
delaying the payment until the full year results for the approved 
insurance provider were known, RMA could evaluate a proposal to pay 
dividends based on the financial condition of the approved insurance 
provider. For instance, RMA could elect to deny all dividend payments 
unless the approved insurance provider was profitable on an aggregate 
basis. A commenter stated that use of projected costs will open RMA up 
to the overestimation of savings that can be used to cherry pick 
farmers.
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. RMA believes that a rule 
based on actual cost efficiencies has both advantages and disadvantages 
over the current premium reduction plan based on projected savings that 
must be later confirmed with actual costs. As stated more fully above, 
RMA agrees with the commenters that the interim rule should be based on 
actual rather than, as it is currently operating, projected savings. 
RMA also agrees that the alternative will reduce the chance that 
approved insurance providers will not meet their projections and cause 
market disruption and that the delay in approving the premium discount 
would give RMA time to determine that all requirements in the rule were 
satisfied and to evaluate the financial condition of the approved 
insurance provider. RMA agrees that by using actual rather the 
projected costs, the verification burden placed on RMA would be 
reduced; that the potential for accounting manipulations would be 
reduced; and that the program would be simplified and more stable. 
However, RMA is uncertain whether using actual rather than projected 
costs would necessarily even the playing field or eliminate unfair 
discrimination. Under either approach RMA would have to monitor the 
performance of approved insurance providers to ensure that all farmers 
in the states in which the premium reduction plan will be made 
available have access to the plan.
    Comment: Several interested parties and approved insurance 
providers suggested that the alternative approach is similar to a 
dividend plan, which is common in the insurance industry. A commenter 
stated that distributing costs savings at the beginning of the policy 
year adds elements of uncertainty into the rate setting process because 
it is impossible for an approved insurance provider to know in advance 
what its actual costs savings will be and the alternative eliminates 
the uncertainty. A commenter stated this should not be allowed because 
farmers could not plan or budget for the discount. A commenter stated 
that any pre-advertised premium reduction plan which is based upon 
projected cost savings will lead to unfair discrimination by approved 
insurance providers, agencies, and agents.
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. Further, RMA does not 
agree that basing the premium reduction plan on projected costs would 
unsettle rate setting because rates are based on expected losses and a 
reasonable reserve and premium discounts allowed under the Act are 
based on the reduction in costs below the amount of A&O subsidy paid by 
RMA. RMA understands the concerns of the commenter that the alternative 
proposal would not allow the farmer to plan or budget for the premium 
discount. However, as stated above, RMA believes that the advantages of 
using the projected cost approach are more than offset by the 
disadvantages. RMA also agrees that the alternative proposal will 
reduce the ability of approved insurance providers and agents to 
discriminate against small, limited resource, women or minority farmers 
because they cannot offer a guaranteed premium discount as an 
inducement to large farmers to purchase insurance. Further, the interim 
rule specifically requires that the approved insurance provider develop 
a separate marketing plan demonstrating how it will reach such farmers 
in addition to the efforts of its agents.
    Comment: Several interested parties and approved insurance 
providers commented that dividends would not need changes to accounting 
rules. A commenter stated that marketing of historical performance of 
efficiency efforts would also be more straightforward and provide an 
incentive for approved insurance providers to maintain the efficiencies 
over time, instead of focusing on marketing efficiencies it may expect 
to achieve in the future. A commenter stated this also encourages 
farmer interest in using and supporting the automation approved 
insurance providers will need to implement for further savings in the 
costs of signup and claim settlement processes. A commenter asks if 
purchasing a policy under such a plan gives part ownership.
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. While the alternative 
proposal would not require complex accounting rules, some rules will 
still need to be developed in order to allocate actual costs reported 
on a national basis to a state basis. RMA has elected to base such 
allocation on the percentage of net book premium for the state. For 
example, if the total net book premium for the approved insurance 
provider is $100 million and the net book premium in state A is $15 
million, 15 percent of the total costs reported on a national basis 
would be allocated to State A. The same allocation will be used to 
determine the amount of premium discounts allowed in the state in order 
to ensure compliance with the

[[Page 41827]]

corresponding requirement in section 508(e)(3) of the Act. RMA agrees 
that marketing should be limited to the historical premium discount 
payments made, with appropriate disclaimers, to ensure that there is no 
impression provided that premium discounts are guaranteed. RMA agrees 
that the alternative proposal may provide a greater incentive for 
approved insurance providers to institutionalize the cost saving 
measures to achieve the cost savings each year instead of projecting 
costs up front and then trying to implement cost saving measures to 
meet the projections each year. Although it is unclear how the 
alternative proposal might encourage farmer interest in supporting 
information technology, RMA would agree that such a result would be 
desirable.
    In response to the question on part ownership, the alternative 
proposal provided for in the interim rule would not include legal 
ownership rights in the approved insurance provider. The premium 
reduction plan is not creating mutual insurance companies and the 
approved insurance providers are paying premium discounts, not 
dividends. The premium discount is simply a benefit provided by the 
approved insurance provider in the event it can deliver the crop 
insurance program for less than the A&O subsidy.
    Comment: Several approved insurance providers, interested parties 
and agents commented that to allow approved insurance providers under 
the alternative proposal to refer to historical reimbursements in their 
marketing is also problematic. Commenters asked how RMA and approved 
insurance providers could be assured that farmers would not be misled 
into the perception that a dividend or a return in premium was likely 
to occur if they transferred their coverage to approved insurance 
provider X, when in fact, it was very unlikely. Commenters stated that 
if an approved insurance provider has historically been unable to 
operate within the expense reimbursement, there should be no rational 
expectation the approved insurance provider will be able to operate 
below the expense reimbursement level into the future. A commenter 
states that historical reimbursement levels are not necessarily a 
strong indication of what a farmer will receive in the form of a 
discount in the upcoming year. Market conditions change from year to 
year, and an approved insurance provider that achieves savings in one 
year might not achieve them in the next year. It would also allow an 
approved insurance provider who achieves savings one year to market 
based on those savings the following year, even though it has no 
intention of implementing the necessary measures to achieve them in 
that year.
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. RMA shares the concerns 
of the commenters that under the interim rule, farmers might be mislead 
by the promise of a premium discount that might not be realized and 
that complaints of misconduct might increase. To address these 
concerns, the interim rule incorporates specific marketing prohibitions 
that limit advertising or promotions to actual premium discounts paid 
in the past reinsurance year, and requires a clear disclaimer, the 
wording of which contained in the interim rule or must be approved by 
RMA in advance, that past results do not guarantee a future payment. As 
stated above, states will also be involved in the enforcement of market 
conduct.
    The commenter is correct that some approved insurance providers may 
elect to eligible to participate in the premium reduction plan even 
though it is unlikely that they will achieve the necessary savings to 
provide a premium discount or they do not intend to take any costs 
saving measures. RMA cannot prevent such conduct. However, the market 
itself should eliminate such behavior because farmers are not likely to 
remain with an approved insurance provider that claims it is eligible 
to offer a premium discount plan but never pays a premium discount.
    Comment: Several approved insurance providers, interested parties 
and agents commented that the subsequent failure of the approved 
insurance provider to deliver upon promises made will bring about 
financial hardship for the approved insurance provider itself, a market 
disruption due to an unfair trade practice, and a black-eye for the 
entire crop insurance delivery system including RMA. A commenter stated 
that this approach reduces the likelihood of reduced services to the 
farmer because if that is the approach used to secure the premium 
reimbursement then the farmer will not select that insurer in the 
future. A commenter stated that capping the approved insurance provider 
for the following year or perhaps even the next three years as a 
penalty would help to discourage this practice, but it would not 
necessarily remedy in the meantime the harm caused to reputable 
competitors. A commenter also expressed concerns about whether the 
audits by RMA would be performed a long time after the fact.
    Response: RMA agrees that making false promises of a premium 
discount would be detrimental to the crop insurance program so, as 
stated above, it has placed limitations on any advertising or promotion 
of the premium reduction plan. RMA also agrees that there is unlikely 
to be a reduction in service because RMA would be in a position to 
discover an infraction of FCIC service requirements before approving 
any premium discount and it is unlikely that approved insurance 
providers would jeopardize their SRAs by failing to comply with the 
service requirements contained in the SRA and approved procedures.
    With respect to RMA audits, RMA does not anticipate conducting 
audits under the alternative proposal. Audits of the approved insurance 
providers and their cost efficiencies would be conducted and certified 
by independent certified public accountants with experience in the 
insurance accounting at the expense of the approved insurance provider. 
RMA would verify that these audits met the standards established under 
the interim rule. Clearly RMA could not evaluate the Expense Exhibits, 
audit and proposed premium discount until such information is provided 
after the annual settlement, as required in the interim rule. RMA will 
review the documents and approve or disapprove any premium discount as 
expeditiously as possible after receiving these documents.
    Comment: A few agents and interested parties commented that RMA 
should adopt a dividend program because: farmers will benefit by 
increased competition because approved insurance providers and the 
agent force will seek out cost savings on their own in order to stay 
profitable and also seek to provide the best dividend track record to 
farmers. A commenter also stated that: (1) Farmers will benefit by 
added value because farmers will benefit directly by dividends 
proportionate to their size and also from their ability to select from 
a variety of benefits; (2) there will emerge a broad range of approved 
insurance provider-agent combinations offering various mixes of service 
and dividends to farmers; (3) the crop insurance delivery system will 
not be damaged because approved insurance providers and the agent force 
will not be directly penalized for providing highly skilled and 
personal service to the insured farmer; (4) benefits that are of no 
value to the insured farmers will be purged in order to maintain 
profitability and also

[[Page 41828]]

maximize potential dividends (The most capable of attaining the proper 
benefits mix to insured farmers will benefit from added business); and 
(5) competition could be further fostered because by moderately 
increasing the A&O levels to approximately 23-24%, new entrants into 
the shrinking list of approved insurance providers would be promoted 
(If approved insurance provider innovators are allowed into the crop 
insurance delivery system, eventual cost cutting spurred by dividend 
competition will again benefit farmers with added dividends).
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. RMA agrees with the 
commenter that the alternative proposal has significant potential 
advantages. The potential advantages listed by this commenter, as well 
as other advantages identified by other commenters, have prompted RMA 
to incorporate that alternative proposal into the interim rule.
    Comment: Several approved insurance providers, agents and 
interested parties commented that the burdens placed on RMA would be 
reduced by a system that is based on actual cost savings because RMA 
would not be compelled to evaluate the credibility of projections and 
predictions which, as the proposed rule acknowledges, ``may not be 
realized.'' Commenters stated that a mechanism that is predicated on 
the existence of actual cost savings enables RMA to analyze concrete 
and ``easily verifiable'' figures to determine whether an approved 
insurance provider realized an expected efficiency and diminishes the 
likelihood of creative accounting and similar chicanery. A commenter 
stated that the alternative proposal is easier to administer, monitor 
and regulate. A commenter stated that evaluation of the efficiencies at 
a more detailed level such as by state, crop, plan, and coverage level 
would be possible, but not with the same degree of reliability.
    Response: RMA agrees that the burdens placed on it to determine an 
approved insurance provider eligible to participate in the premium 
reduction plan are greatly reduced from the burdens under the proposed 
rule. RMA also agrees that it will be easier to analyze the actual 
costs and that it reduces the possibility of creative accounting, 
especially since RMA will be using the actual Expense Exhibits provided 
with the SRA to approve or disapprove any premium discount. Having such 
Expense Exhibits audited and certified by an independent certified 
accountant will also reduce the burden on RMA. RMA has determined that 
it is possible to evaluate such costs on a state basis and will provide 
simple allocation procedures to accompany the interim rule. Evaluation 
of the efficiencies at a crop, plan, and coverage level would require 
relatively more complex accounting and cost allocation rules.
    Comment: Several approved insurance providers, agents and 
interested parties commented that a dividend plan approach would also 
have the advantage of eliminating the need for the financial reserve 
plan as described in the proposed rule.
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. RMA agrees that basing a 
premium discount on the actual cost savings achieved by the approved 
insurance provider eliminates the need for a financial reserve plan and 
this requirement has been removed from the rule.
    Comment: An approved insurance provider commented that RMA has also 
stated that the approved insurance providers would not be able to 
market the premium reduction plan ``based on a guaranteed amount of 
premium reimbursement.'' It is unclear whether the RMA is contemplating 
a prohibition against any marketing, even of potential savings, or only 
guaranteed savings. The commenter stated that if approved insurance 
providers are allowed to market potential savings, it could allow or 
even encourage such providers to make unrealistic or exaggerated 
projections about their anticipated savings in order to attract or keep 
their customers in a price competitive market. Not only will this cause 
competitive injury to providers attempting to compete fairly based on 
real cost savings and reasonable projections of such savings, but it 
will inevitably harm farmers who are lured by the potential of large 
cost savings that prove to be illusory in the end. The commenter stated 
that even if RMA's intent is to prohibit marketing of even potential 
savings, how could such a prohibition be enforced and whether the RMA 
has or is willing to commit the kind of resources necessary to enforce 
this market conduct requirement. In the absence of strict enforcement, 
unscrupulous approved insurance providers will inevitably boast 
exaggerated, illusory savings in order to attract market share.
    Response: RMA is not precluding any marketing of the premium 
reduction plan. Approved insurance providers will be able to advertise 
that they are participating in the premium reduction plan and the 
amount of any premium discount paid by the approved insurance provider 
in previous reinsurance years, accompanied by the appropriate 
disclaimers. However, approved insurance providers and agents will be 
prohibited from stating that any premium discount will be provided or 
promising any amount of premium discount. RMA agrees that enforcement 
is important and it will monitor the conduct of the approved insurance 
providers and agents and will collaborate with states that also 
regulate such market conduct issues.
    Comment: An approved insurance provider commented that, in response 
to the RMA's specific question as to provider workload, the workload to 
demonstrate savings up front is not materially greater than the 
workload to demonstrate savings after the fact. A commenter stated that 
dividend plans would still need to be reviewed for reasonableness, and 
approved insurance provider requests to make dividend payments would 
need to be carefully scrutinized prior to approval. RMA would also need 
to develop extensive procedures to evaluate the proposals and to 
establish standards for acceptability. Concerns regarding adverse 
market behavior would still exist under a dividend approach. A 
commenter stated that these should not be considered to be 
insignificant issues.
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. RMA disagrees that the 
workload to demonstrate savings up front is not materially greater than 
the workload to demonstrate savings after the fact. RMA has revised the 
provisions to eliminate much of the up front reporting requirements. 
RMA's evaluation of the request to participate in the premium reduction 
plan will be based on the evaluation of the marketing plan to ensure 
that all farmers in the states in which the premium reduction plan will 
be offered have equal access to the plan. Since premium discounts are 
based on actual savings, RMA does need to know the specifics of how the 
approved insurance provider intends to achieve the savings. RMA agrees 
that there needs to be careful scrutiny of the cost accounting by the 
approved insurance providers on their Expense Exhibits. However, cost 
allocation procedures will be included in procedures to accompany the 
interim rule and are simple. Further, a certification by an independent 
certified public accountant

[[Page 41829]]

will add credibility to the amounts reported. As stated more fully 
above, RMA has added provisions regarding market conduct and will 
enlist the assistance of the states to ensure proper conduct by agents 
and approved insurance providers.
    Comment: An approved insurance provider commented that market 
conduct oversight may be required, especially with respect to 
monitoring competitor assertions of projected savings, impacts on 
competition, and income tax issues, which presumably would simply 
reduce ``insurance expense'' on farmer's income statement.
    Response: RMA agrees that market conduct oversight is required and 
will enlist the assistance of the states to ensure proper conduct by 
agents and approved insurance providers. Further, since premium 
discounts are now based on actual savings and the type of assertions 
that can be made are so limited, the burden on such monitoring should 
be reduced.
    Comment: A few interested parties and approved insurance providers 
recommend that if RMA chooses to implement the premium reduction plan 
using a dividend concept, it should prohibit insurers or insurance 
producers from marketing dividends by guaranteeing them in advance. RMA 
should also prohibit insurers from using policy renewal as a condition 
for receiving a dividend for a prior policy year. A commenter stated it 
does not object to an approved insurance provider notifying insureds 
(and potential insureds) that it has applied for a premium reduction 
plan. A commenter stated that any approved insurance provider that 
violates the restrictions on advertising should be barred from 
submitting a premium reduction plan for a period of two reinsurance 
years.
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. RMA agrees that approved 
insurance providers and their agents should be prohibited from 
marketing practices such as guaranteeing or projecting an amount of the 
premium discount to farmers in advance of the determination of the 
actual premium discount. As stated above, provisions have been added 
that regulate such market conduct. RMA also agrees that premium 
discounts should not be tied to policy renewals because they are based 
on the cost savings attained for the current reinsurance year in which 
the farmer is a policyholder, not the subsequent reinsurance year when 
the farmer may not. RMA has added provisions to the interim rule to 
prevent such conduct. RMA agrees with, and the interim rule allows, an 
approved insurance provider to notify existing and prospective 
policyholders that it is participating in the premium reduction plan. 
RMA agrees that sanctions should accompany violations of advertising 
prohibitions. One potential sanction is to disqualify an approved 
insurance provider or agent from participating in the premium reduction 
plan for a duration commensurate with the offense.
    Comment: An agent suggests dividend restrictions include: (1) 
Requiring approved insurance providers to post March 15 business 
accounting and analysis for the prior crop year netting total actual 
A&O costs versus annual revenue, which would be approved annually by 
RMA for each approved insurance provider; (2) requiring each approved 
insurance provider to be responsible for their annual audit; (3) RMA 
setting an annual industry cap on percentage of dividends payable; and 
(4) not having the dividends contingent on a farmer continuing a policy 
into the next crop year (as in policy loss payments).
    Response: As stated above, while similar to a dividend plan, the 
premium reduction plan is not a dividend plan. Approved insurance 
providers will be offering premium discounts. RMA agrees that approved 
insurance providers should be responsible for the annual audit, there 
should be a cap on the percentage of premium discounts that can be paid 
by any approved insurance provider, and that premium discounts must not 
be contingent upon renewal of the policy and has revised the rule 
accordingly. However, with respect to the accounting used to determine 
a premium discount, RMA will be using the Expense Exhibits provided 
with the Plan of Operations, including an estimate of outstanding 
costs.
    Comment: A few approved insurance providers commented that although 
the determination of whether an approved insurance provider realized 
any cost savings will not occur until after the end of the reinsurance 
year and may take several months to occur, a deadline must be imposed 
on RMA for rendering such determination. Unlike the compliance process, 
the period afforded RMA to evaluate the premium reduction plan 
submissions cannot be limitless. A commenter stated that even if RMA 
was timely, it takes months and even years after the crop season to 
close controversial or disputed claims to determine year-end results. 
The commenter also stated that if the audit showed discrimination of 
some type, it seems likely that RMA would be very vulnerable to 
negative reactions.
    Response: RMA agrees that specific deadlines be imposed on RMA for 
determining whether an approved insurance provider is eligible to 
participate in the premium reduction plan. However, a deadline cannot 
be imposed on the evaluation of the Expense Exhibits to determine 
whether to approve a premium discount. RMA must have the time to 
properly evaluate such Exhibits and it is impossible at this time to 
determine the requisite amount of time. When finalizing the rule, RMA 
will determine whether such a deadline is appropriate. However, RMA 
will expedite its review of the Expense Exhibits. Disputed claims 
should not require adjusting the approval of a premium discount since 
they involve the cost of delivery not the amount of claims, unless the 
resolution of such claims will increase the cost of delivery. To avoid 
having to adjust a premium discount, approved insurance providers could 
hold back some savings achieved to cover such contingent costs.
    Assuming that the commenter is referring to the cost efficiency 
audit in the alternative proposal, it is unclear to RMA how such a 
purely financial audit would reveal discrimination. RMA agrees, 
however, that routine reviews or specific investigations of an approved 
insurance provider by RMA may reveal discrimination which would require 
action by RMA and may produce negative reactions from some quarters.
    Comment: An approved insurance provider commented that although an 
alternative delivery mechanism would be a departure from the proposed 
rule, FCIC does not have to publish a proposed rule describing this 
mechanism. In this regard, the proposed rule provides notice that a 
change is possible, and the public ``reasonably should have filed their 
comments on the subject during the notice-and-comment period.''
    Response: RMA agrees with the commenter.
    Comment: An approved insurance provider commented that the 
alternative proposal warrants further consideration but requires an 
indefinite extension of the comment period and rulemaking procedure 
since no rules have been proposed.
    Response: RMA disagrees that an indefinite extension of the comment 
period is warranted. RMA specifically sought comments on the 
alternative proposal and informed the public it was considering 
including the alternative in the final rule. Therefore, RMA has 
complied with the notice and comment

[[Page 41830]]

rulemaking requirements. However, RMA acknowledges that the alternative 
presents a significant change and it would like an opportunity to test 
this proposal and give the public another opportunity to comment before 
finalizing the rule. That is one reason RMA has elected to make this 
rule an interim rule.
2. State Variability
    In the preamble to the proposed rule, RMA stated that the majority 
of approved insurance providers that had submitted premium reduction 
plans for 2005 had planned to offer the premium reduction plan only in 
certain states and had included variability in the amount of premium 
discount between states as prominent features. RMA further indicated 
that it had several major concerns regarding these proposals. 
Specifically, RMA identified the potential for competitive harm; 
difficulty in administration; and the potential for variability in 
service and treatment of farmers as potential problems if approved 
insurance providers were permitted to select states in which to offer 
the premium reduction plan and to vary the amount of discounts by 
state.
    Consequently, the proposed rule required that the same premium 
discount be offered in all states in which the approved insurance 
provider did business. However, RMA also indicated that it was seeking 
comments on its analysis of the above stated potential problems and 
whether procedures could be developed that would be consistent with the 
principles that allowing approved insurance providers to select states 
and vary the premium discount between states, would not cause 
competitive harm, would be relatively simple to administer, and would 
ensure that service would not be reduced.
    RMA received comments that supported the proposed rule and its 
requirements to offer the same premium discount to all farmers and in 
all states in which the approved insurance provider does business. 
However, comments were also provided in favor of allowing the selection 
of states and variability of premium discounts between states. The key 
reason most often cited for allowing approved insurance providers to 
select states was that not allowing such selection could cause some 
approved insurance providers to leave certain high-risk or low volume 
states rather than being required to provide a premium discount in such 
states. The reason given was that it would no longer be economically 
feasible for the approved insurance provider to operate in such states.
    Another concern of these commenters was that there was significant 
variability in program delivery costs between states and that a one 
size premium discount would not fit all. Commenters were concerned that 
service in certain states could be jeopardized if the approved 
insurance provider was required to reduce costs in those states in 
order to qualify for offering a premium discount.
    RMA has carefully reviewed these comments, especially within the 
context of other changes made to the proposed rule as a result of 
comments being sought. From this review, RMA has determined that the 
concerns identified in its original analysis can be adequately 
addressed and that both the selection of and variability of premium 
discounts between states can be incorporated into the interim rule 
without jeopardizing the integrity of the crop insurance program.
    The most important factor contributing to this determination is, as 
explained more fully above, that RMA has elected to adopt the 
alternative proposal in the interim rule. Compared to the operation of 
the premium reduction plan described in the proposed rule, which 
required that specific premium discounts be guaranteed up front and 
approved insurance providers would make adjustments to their operation 
in an attempt to achieve the necessary cost savings, the alternative 
proposal requires that premium discounts be provided to farmers only 
after actual cost savings have been achieved and verified.
    This alternative method of operating the premium reduction plan 
significantly reduces the administrative requirements of both the 
approved insurance provider and RMA and the likely impact on service 
and business practices of approved insurance providers. These changes, 
in turn, significantly reduce the potential for problems that might 
arise from either state selection or variation of premium discounts, as 
outlined below:
    a. The concern that state variability might cause competitive harm 
in the marketplace. In the proposed rule, RMA was concerned that any 
procedure it devised to accommodate state selection or variability of 
premium discounts might inadvertently give certain approved insurance 
providers unfair marketing advantages in certain states. Therefore, it 
would be difficult to establish a ``level playing field'' for all 
approved insurance providers. This is mostly because, under the 
proposed rule, RMA would approve the premium discount that an approved 
insurance provider would be able to offer in a state before the start 
of the reinsurance year. The approved discount would be based on 
projected cost savings that may be unreasonable or unattainable. Even 
slight differences in the approved premium discount for different 
approved insurance providers in a state could result in significant 
marketing advantages or disadvantages possibly create conditions that 
would be harmful to market competition. Since approval was based on 
projections, it would be impossible for RMA to know the actual savings 
that could be realistically achieved and it might encourage some 
approved insurance providers to project more drastic cost saving 
measures than their operations could handle in an attempt to gain a 
marketing advantage.
    However, this problem is eliminated under the interim rule. Because 
premium discounts are based on actual cost savings in a state, approved 
insurance providers would not be allowed to offer a guaranteed premium 
discount at the time of sale. Further, the interim rule severely limits 
the promotion or advertising of a premium discount to prevent approved 
insurance providers or agents from making any representations about the 
payment or amount of a premium discount. Under the interim rule, 
approved insurance providers can only state the actual amount of the 
premium discounts that have been paid in all previous reinsurance 
years. However, these statements must be accompanied by a prominent 
disclaimer that past results do not guarantee future payments.
    This means that any marketing advantage that an approved insurance 
provider might gain in a state through premium discounts would occur 
only after a performance record of premium discounts based on actual 
savings has been established over several years. Furthermore, even when 
an approved insurance provider has an established premium discount 
performance record, it cannot promise or guarantee that premium 
discounts will continue in the future. As compared to the proposed 
rule, this marketing feature of the interim rule significantly 
diminishes the possibility that allowing approved insurance providers 
to select states or vary the percentage of premium discount between 
states will lead to competitively harmful situations.
    b. The concern that state variability in premium discounts would be 
difficult to administer by the approved insurance provider and to be 
verified by RMA. The proposed rule required that approved insurance 
providers submit rather detailed expense projections when they

[[Page 41831]]

applied for approval to offer premium discounts. RMA was to have 
verified these projections as being reasonable before granting 
approval. In the past several years, approved insurance providers have 
submitted actual costs on the Expense Exhibits provided with their Plan 
of Operations that significantly exceeded the amount of A&O subsidy 
paid by RMA. This means that approved insurance providers would likely 
face some difficulty in demonstrating the reasonableness of projected 
savings, even if approved insurance providers were not permitted to 
vary the percentage of premium discounts between states.
    Under the proposed rule, if RMA allowed approved insurance 
providers to vary the percentage of premium discount between states, 
the A&O costs and projected savings would have to be determined on a 
state basis. The task of demonstrating the reasonableness of state-
level expense projections would have been even more formidable than 
doing so at the approved insurance provider level. RMA was highly 
concerned that some approved insurance providers, if permitted to vary 
premium discounts by state, would inflate cost efficiency projections 
in certain states to qualify to offer a large premium discount in that 
state and, thereby, gain a significant marketing advantage over those 
competitors that submitted more realistic projections to RMA.
    RMA was also concerned because certain costs can only be verified 
on a whole book basis, not a state basis. This means that approved 
insurance providers would have had to allocate these costs between 
states. RMA was concerned because this could have provided a means to 
shift costs and artificially create savings in certain states.
    However, adoption of the alternative proposal and other changes to 
the interim rule eliminates these problems. Under the alternative 
proposal, the approved insurance provider is not required to submit any 
expense information before the reinsurance year to be eligible for the 
opportunity to offer a premium discount. Only the actual costs reported 
at the end of the reinsurance year will be used. Therefore, the burden 
on RMA and the approved insurance provider is greatly reduced and there 
is no opportunity for approved insurance providers to overestimate 
projected savings in certain states.
    Further, under the proposed rule, the approved insurance provider 
was required to file revised Expense Exhibits to the Plan of Operations 
that contained the cost and savings projections and at the end of the 
year, RMA would compare the projected savings with the actual savings 
achieved for the reinsurance year using the actual costs contained on 
the Expense Exhibits filed for the next reinsurance year. In the 
interim rule, RMA will only need to review the actual costs obtained 
from the Expense Exhibits provided with the Plan of Operations. This 
will also reduce the burden on RMA and the approved insurance 
providers.
    In addition, in the preparation of these Exhibits, RMA has 
previously provided instructions on how to allocate costs from the 
statutory accounting statements, which are reported on a calendar year 
basis, to a reinsurance year basis. Therefore, these statutory 
accounting statements provide a basis to verify the reported actual 
costs. Further, RMA is requiring that the Expense Exhibits be audited 
and certified by a public accountant experienced in insurance as to the 
accuracy and completeness of the costs reported and compliance with the 
SRA. Therefore, there is a sound basis to verify that the actual costs 
reported are accurate and complete.
    To solve the problem with the potential to shift costs between 
states, RMA has developed a formula that will be provided to approved 
insurance providers through procedures that RMA will provide to the 
approved insurance providers, and publish on its Web site at http://www.rma.usda.gov, not later than 5 days after publication of the 
interim rule. The formula takes the information reported on the Expense 
Exhibits and allows RMA and the approved insurance provider to 
determine the amount of efficiency, and corresponding premium discount, 
which can be paid in any state. The formula allocates certain costs to 
each state based on the premium volume for that state. While the actual 
costs may vary slightly, this formula approach allows flexibility 
within any approved insurance providers operation but it also sets a 
single standard that will be applicable to all approved insurance 
providers. This eliminates the concerns regarding the different cost 
accounting methods that can be used by approved insurance providers or 
the shifting of such costs.
    This means the interim rule is much simpler for RMA and the 
approved insurance provider to administer and contains specific cost 
accounting requirements that are easily verified. Therefore, there is 
no longer any basis to preclude approved insurance providers from 
selecting states or allowing variation between the percentage of 
premium discount paid between states.
    c. The concern that state variability would disrupt service in 
certain states and have unintended effects on business practices of 
approved insurance providers. Under the proposed rule, RMA was 
concerned that if variability of the premium discount was allowed then 
an approved insurance provider might look exclusively to agent's 
commissions for its cost efficiencies and make drastic cuts in order to 
allow it to pay higher premium discounts. The fear was that this could 
result in agents going out of business in certain states where the 
commissions were already lower than other states, or failure to comply 
with the service requirements of the SRA and approved procedures 
because the commission paid for such policy was so much less than the 
costs to service the policy. RMA was also concerned that state 
variability in premium discounts would have unintentionally favored one 
type of approved insurance provider over another depending on whether 
the provider employed its own full time agents or contracted with 
independent agents.
    However, the alternative proposal adopted in the interim rule can 
accommodate state variability of premium discounts with much less risk 
of potential problems. For instance, the immediate competitive 
pressures of an approved insurance provider to reduce expenses in a 
certain state through agent commission reductions would not be nearly 
as intense under the interim rule as under the proposed rule because 
approved insurance providers and agents will not be allowed to promote, 
advertise or guarantee a specific premium discount in advance.
    Further, the ability to select states also reduces the financial 
burden on agents and decreases the likelihood of reduced service 
because approved insurance providers can elect not to participate in 
the premium reduction plan in those states where the profit margins of 
agents could not withstand a cut in agent commissions. While RMA has 
numerous means at its disposal to enforce the service requirements of 
the SRA and the approved procedures, the goal is to reduce the 
incentives that could result in non-compliance with such requirements. 
RMA believes the interim rule attains this goal.
    Selection of states and variability of premium discounts between 
states under the alternative proposal can also accommodate the business 
practices of the full range of approved insurance providers. Under the 
proposed rule, because cost savings had to be reasonable and 
verifiable, RMA was

[[Page 41832]]

concerned that approved insurance providers would focus on agent 
commissions because approved insurance providers provided their 
commission schedules by state, which would make costs savings more 
easily determined and verified. RMA was concerned that this would not 
easily permit approved insurance providers with captive agents to 
participate, because such agents may be salaried or receive lower 
commissions than contracted agents, or would discourage cost savings 
from other parts of the approved insurance provider's operation.
    The interim rule solves this issue because all costs used in the 
formula, to be provided in the approved procedures and issued not later 
than 5 days after publication of the interim rule, are placed in one of 
three categories: agent compensation, loss adjustment expense, or 
overhead. Agent compensation and loss adjustment expense are both 
reported on the Expense Exhibit and overhead is determined by 
subtracting agent compensation and loss adjustment expense from the 
total costs. Since agent compensation and loss adjustment expense are 
reported on a state basis, no additional allocation rules are 
necessary. Further, because the formula to be published in the 
procedure provides a set means to allocate overhead between the states, 
approved insurance providers can reduce their costs from any aspect of 
their delivery of the crop insurance program. In addition, the formula 
to be published in the procedure can calculate savings that were 
previously achieved. This procedure was developed to accommodate a 
range of approved insurance provider business structures without 
favoring any particular structure.
    With respect to the issue variability of premium discounts by 
state, the comments received and FCIC's responses are as follows:
a. Competitive Harm in the Marketplace
i. Competitive Disadvantage
    Comment: Many agents, farmers, approved insurance providers and 
interested parties commented that the whole premise of the crop 
insurance program is that all farmers pay the same price, regardless of 
the farm size. Price competition is not a factor. Commenters stated 
that at a time when the USDA is trying to encourage more participation 
in the crop insurance program and get away from the yearly disaster 
programs, it is important that all good agents and approved insurance 
providers be able to compete for business on a level playing field. 
Commenters state that price competition will lead to an un-level 
playing field confusion, erode farmer's confidence in the product, and 
reduce the perceived value of the protection to a ``cheapest price'' 
commodity.'' Several commenters stated that the only competition should 
come through ``service'' to the farmer not who can pay the best 
commission to the agent. Farmers can then choose which agent offers the 
best level and quality of personal service. A commenter states that 
value is something other than price. It's having agents that can help 
in the needs analysis, and then matching up products offered at a 
reasonable cost to provide the proper risk management tool for the 
farmer.
    Response: While the premise of the crop insurance program is that 
all farmers pay the same premium, legislative history shows that 
section 508(e)(3) of the Act was included for the specific purpose of 
fostering price competition. There is no way to implement section 
508(e)(3) of the Act without creating price competition because 
participation in the program is voluntary and the amount of any premium 
discount is based on the amount of savings an individual approved 
insurance provider can attain. RMA has no choice but to implement 
section 508(e)(3) as enacted.
    RMA would agree that the value perceived by some farmers is 
something other than, or at least something in addition to, price. Many 
farmers will likely consider a range of factors, including the examples 
of extra service offered by the commenters, in making a choice of agent 
and approved insurance provider. For those farmers that place more 
value on service, approved insurance providers or agents that do not 
offer premium discount plans, and those that do, can still compete by 
offering superior service. It is up to the farmer to determine which it 
values the most. This is the foundation of competition--the market 
determines the value of the product or service.
    Comment: Several agents, approved insurance providers, and 
interested parties commented that the federal crop insurance program 
should NOT be a competitive program. The commenter states that the 
premium reduction plan discount gives the qualifying approved insurance 
provider an advantage over the approved insurance providers that do not 
qualify. This advantage filters down to the agents and no approved 
insurance provider or agent should have a price advantage.
    Response: Although the commenters clearly do not wish for Federal 
crop insurance to be a competitive program, the reality is that section 
508(e)(3) of the Act clearly mandates that crop insurance be allowed to 
be competitive with respect to price and that RMA is to establish the 
limits and procedures needed to facilitate this price competition. RMA 
agrees that approved insurance providers that are eligible to 
participate in the premium reduction plan have a competitive price 
advantage to those that do not. The whole premise of price competition 
is to be able to provide the same product or service for less money.
    However, the interim rule allows any approved insurance provider, 
and its affiliated agents, to be able to participate in the premium 
reduction plan if the approved insurance provider's marketing plan is 
adequate. Whether a premium discount can be paid depends on whether the 
approved insurance provider can deliver the crop insurance program more 
efficiently than the A&O subsidy. Further, as some commenters have 
discussed, farmers also value service and even if agents and approved 
insurance providers do participate in the premium reduction plan, they 
can still compete by offering superior service, which some farmers may 
find to be more valuable than a potential premium discount.
    Comment: An interested party commented that the premium reduction 
plan is expected to exacerbate competition in the low-risk states while 
in and of itself providing no direct incentive for approved insurance 
providers to consider nationwide expansion.
    Response: RMA disagrees with the assumption that the premium 
reduction plan is expected to exacerbate competition in low-risk states 
while not encouraging approved insurance providers to consider 
expanding to high-risk states. Evidence from the operation of the 
premium reduction plan to date, though limited, suggests that approved 
insurance providers that offer the premium reduction plan are not 
fearful to enter high-risk states; the approved insurance provider that 
is currently authorized expanded significantly into Texas in 2004, a 
state that has one of the worst historical loss ratios. Further, it is 
clear that all states have some potential for profit or approved 
insurance providers would not be doing business in such states.
    However, some commenters and expert reviews suggested that not 
requiring approved insurance providers to offer their premium reduction 
plan in all states in which they do business, as required in the 
proposed rule would adversely affect national approved insurance 
providers. RMA has

[[Page 41833]]

reconsidered this issue and now allows approved insurance providers to 
select the states in which to participate in the premium reduction 
plan.
    Comment: Several agents and interested parties commented that the 
impact of the premium reduction plan combined with the proposed budget 
reductions to the crop delivery system will reduce margins and in the 
long run lead to less competition, fewer agents, and diminished service 
to the farmer. Competition is a great means to reduce fraud. A 
commenter stated that the premium reduction plan will drive premiums 
lower. A commenter states that the premium reduction plan issue should 
not be about agents or agent commissions but about maintaining a crop 
insurance program that is working and providing stability in our 
nation's rural economy and America's farmers. The farmers are to be 
focusing on producing good crops and managing their business and not 
worrying about their crop insurance and the rules and regulations of 
the policy.
    Response: Participating in the premium reduction plan is strictly 
voluntary and approved insurance providers have to make the business 
decision whether it is in their and their policyholder's best interests 
to participate. Further, approved insurance providers have to be sure 
they can participate in the premium reduction plan and still be in 
compliance with all the FCIC approved policy and procedures pertaining 
to the delivery of the program. Approved insurance providers are not 
going to risk violations of their SRA because the consequences could be 
much greater than simply withdrawing eligibility to participate in the 
premium reduction plan.
    The expert reviewers generally agree with the commenters that the 
number of agents will decline. However, they generally see the premium 
reduction plan as improving the overall quality of remaining agents, 
the financial health and stability of the industry, and at least one 
reviewer predicted less fraud. But based on the comments received it 
appears that many believe that the premium reduction plan could 
stimulate competition.
    RMA disagrees that farmers should be concerned only with production 
and management decisions and not with their crop insurance policies or 
its rules or regulations. Farmers are legally required and presumed to 
know the contents and requirements of their policies and agents are 
required to ensure that they do. Further, risk management is one of the 
major management issues confronting farmers and crop insurance is a key 
tool in developing the overall protection for the farmer. Therefore, 
farmers need to also focus on crop insurance to ensure that their risks 
are adequately protected.
    RMA also disagrees that the premium reduction plan will drive 
premiums lower. The total amount of premium remains unchanged 
regardless of whether the premium reduction plan is offered or not. All 
that could be reduced is the amount of premium paid by the farmer 
because the premium discount paid by the approved insurance provider 
could be viewed as an additional subsidy. However, under the 
alternative adopted in the interim rule, because the premium discount 
will not be known until after the premium is due, farmers will still 
pay the same amount of premium.
    Comment: A few interested parties commented that the premium 
reduction plan ``concept'' does not fit the business model of the crop 
insurance program. In conventional lines of insurance, carriers 
independently file premium rates, establish underwriting criteria, and 
develop policy language subject to state insurance department 
oversight. In this setting, the existence of a premium discount 
mechanism is consistent with the approved insurance provider's ability 
to set its own rates, select its own mix of insurance products, and 
underwrite against undesirable risks. In contrast, federal crop 
insurance is a national program intended to provide a financial safety 
net for American farmers. The commenter stated that the premium 
reduction plan concept disregards these unique characteristics of the 
federal crop insurance program and proposes a questionable rationale 
for downward premium adjustments based on only a single component of 
the total gain or loss of the approved insurance provider. A commenter 
stated that by segregating the gains and losses on A&O subsidy 
component from the gains and losses on the underwriting component of 
the business, the premium reduction plan can encourage behavior that 
has an adverse impact on approved insurance providers and on the 
program as a whole.
    Response: RMA acknowledges that price competition, as allowed for 
under 508(e)(3) of the Act, is not directly comparable to price 
competition for conventional, private insurance products. This is 
because RMA separates out the risk premium from the A&O subsidy. In 
other lines of insurance, expenses and profit are usually built into 
the premium.
    However, RMA would disagree with the view that price competition 
under the premium reduction plan disregards the unique characteristics 
of the Federal crop insurance program. On the contrary, one could argue 
that these characteristics are specifically considered by the 
requirement that price competition be confined to a single component of 
an approved insurance providers total revenue and cost stream--delivery 
costs compared to the A&O subsidy. It is this requirement that prevents 
price competition from being influenced by the underwriting component 
of an approved insurance provider and thereby affecting the solvency of 
that approved insurance provider and jeopardizing the financial 
stability of the program. Further, since premium discounts are not 
approved until after the end of the reinsurance year, RMA can now 
evaluate the financial condition of the approved insurance provider 
before approving any discount. The interim rule has been revised to 
allow RMA to disapprove a premium discount if the payment of such 
discount could jeopardize the financial solvency of the approved 
insurance provider.
    Comment: An interested party commented that the entity offering the 
premium reduction plan is to demonstrate that the ``discount to be 
extended to the farmer comes directly from demonstrated internal cost 
savings of that entity as directly derived from their developed premium 
reduction plan model.'' The commenter stated that in this regard it is 
the same as an insurer needing to demonstrate that a group discount is 
developed from the expense and cost-savings of the specific group 
itself, and not from the insurer offsetting group expenses across other 
lines to gain a competitive advantage in a select or preferred 
marketplace.
    Response: RMA acknowledges that the requirement that premium 
discounts come from A&O cost savings may be based on a similar 
principle as that which guides approved insurance providers in 
determining whether a specific group discount derived from internal 
cost savings within that group is justified. The commenter is correct 
that this principle and the requirement that premium discounts 
correspond to the cost savings allow approved insurance providers to 
compete on a level playing field and precludes offsetting expenses from 
other lines of insurance to gain a competitive advantage. This is one 
of the reasons that the Expense Exhibits to the SRA are used because 
the costs included on such Exhibits are limited to the costs associated 
with the crop insurance program and not other lines of insurance. RMA 
can compare past Expense Exhibits to determine whether there are 
radical differences and

[[Page 41834]]

whether the claimed changes in the operations of the approved insurance 
provider can account for the changes or there is a likelihood of 
improper cost allocations.
    Comment: An approved insurance provider commented that commission 
reductions distort the original intent of premium reduction plans as 
they do not represent true operating ``efficiencies.'' The commenter 
stated that the manner in which sales entities are rewarded is already 
subject to free market forces. Barriers to entry do not preclude new 
agents from entering the program. A market exhibiting ``excess'' agency 
profits will attract new agents, competition from which tends to shrink 
agent profit margins. The commenter stated that by creating a system 
where agent commissions are the most convenient and verifiable 
efficiency, if marginal agent revenues are artificially driven below 
marginal agent costs (i.e., premium reduction plans based on commission 
reductions), customer service will suffer, competitive harm will ensue 
by repelling new entrants. The commenter stated that the ability and 
quest for ever-increasing efficiencies is already a natural motive in a 
market driven to maximize profits. The market already competes 
vigorously on a non-rate basis and profit-maximization objectives 
already drive efficient delivery.
    Response: The commenter makes the economic argument that, in the 
long run, forces of supply and demand will operate to achieve an 
equilibrium in agent's commissions in which commissions become, by 
definition, fully efficient--i.e. incorporating no excess profits. The 
commenter's conclusion appears to be that, because agent commissions 
demonstrate this tendency, their reduction should not be considered as 
a possible cost efficiency.
    Several economic arguments could be advanced, however, that justify 
considering reductions in agent commissions as an efficiency. First, 
the market for agents is dynamic and seldom if ever in long run 
equilibrium. An approved insurance provider should be able to identify 
instances where agent commissions (or more broadly for any other cost 
input) include excess profits and seek to reduce those excess profits 
for the purpose of achieving cost efficiencies. An approved insurance 
provider's ability to claim some or all of an agent's possible excess 
profits would be determined in a free market negotiation between the 
approved insurance provider and the agent.
    Second, without the premium reduction plan, the delivery of Federal 
crop insurance includes established A&O subsidies and premium rates 
that are not subject to free market forces. These non-competitive 
revenue streams to the approved insurance provider have the potential 
of creating what economists call ``economic rents.'' Economic rents can 
persist over long periods and can sometimes not be reduced by the 
operation of free market forces because they are established by law or 
decree. Academic research has identified economic rents in Federal crop 
insurance that stem from these and other aspects of the Federal program 
and have indicated that portions of these rents have been shared 
between approved insurance providers and agents through the competition 
for agents identified by the commenter. If such economic rents exist, 
as research indicates, the premium reduction plan would foster price 
competition that would extract at least a portion of these rents for 
the benefit of farmers.
    As to the comment regarding deteriorating service if agent 
commission reductions are permitted, as stated above, an approved 
insurance provider seeking cost efficiencies to qualify to pay a 
premium discount must make sure that it can maintain all requirements 
for service under the SRA and approved procedures. An approved 
insurance provider that would allow its service to decline below these 
requirements would jeopardize its eligibility to participate in the 
premium reduction plan, pay a premium discount, and operate under the 
SRA. RMA is confident that such a powerful deterrent, as well as 
vigilant monitoring by RMA and continued competition among approved 
insurance providers and agents, will ensure that any potential agent 
commission reductions will not adversely impact service to 
policyholders.
    Comment: An agent commented that perhaps Congress and even the RMA 
imagined a day where there would be one or two ``premium reduction plan 
players'' in the market and other approved insurance providers would 
run their programs in the traditional manner. Unfortunately, the free 
market system has a way of encouraging and then eliminating 
competition. The commenter states that, as the RMA found out last year, 
current SRA holders are simply not going to set back and let someone 
take business away from them.
    Response: RMA has never had any preconceived notions regarding how 
many approved insurance providers would elect to offer the premium 
reduction plan. RMA has always assumed that each approved insurance 
provider would examine its operations and the interests of its 
policyholders and make a sound business decision with respect to 
whether it would participate in the premium reduction plan. That 
assumption continues to be true under the interim rule. Even if the 
commenter is correct that many or all of the approved insurance 
providers feel compelled to participate in the premium reduction plan, 
the interim rule has provisions that attempt to minimize the negative 
impact of potentially destabilizing forces while allowing the price 
competition that is required in the Act to operate. Under the 
alternative proposal, RMA can determine whether a premium discount 
would put any approved insurance provider into financial difficulties 
before approving payment of any premium discount. The interim rule has 
been revised to allow RMA to disapprove a premium discount if the 
payment of such discount could jeopardize the financial condition of 
the approved insurance provider.
    Comment: A few agents and interested parties commented that if an 
approved insurance provider is able to operate at a higher profit level 
than other approved insurance providers through its ingenuity, 
technology, and entrepreneurial skills why should they be forced to 
pass on these profits to their insureds. The commenter states that 
technically they may not have to offer the premium reduction plan, but 
if other approved insurance providers choose to offer such a plan, then 
in order to remain competitive that approved insurance provider will be 
forced to also offer the premium reduction plan. The commenter asks 
what incentive will there be for an approved insurance provider to 
improve their business if more of the profits will be given away. The 
commenter asked if the premium reduction plan is able to generate a 
cost savings why these savings should be passed on to the insured and 
not the American taxpayer who already foots the bill for most of the 
current program.
    Response: RMA agrees that, if an approved insurance provider can 
operate within the A&O subsidy, it is not required to participate in 
the premium reduction plan and can elect to keep these profits. RMA 
also agrees that competitive forces may move such an approved insurance 
provider to request to participate in the premium reduction plan. The 
potential to gain market share and thereby achieve underwriting gains 
on the additional business is a possible reason why an approved 
insurance provider would be motivated to find cost efficiencies even if 
the approved insurance provider must inevitably return such savings to 
farmers in the form of a premium discount. Although the commenter is

[[Page 41835]]

correct that taxpayers are paying a significant portion of the costs of 
the crop insurance program, section 508(e)(3) of the Act makes it very 
clear that policyholders are the sole recipients of these savings.
    Comment: Several interested parties and agents commented that they 
thought such discounts were against the law in some states, which may 
mean that discounted products may not be made available to all farmers. 
A commenter stated that the premium reduction plan does not provide 
savings because the funds are returned to the farmer as a rebate. A 
commenter states the premium reduction plan is a rebate because the 
savings come from one source, agent commission, approved insurance 
providers have no control over rate making, and the discount is 
conditioned upon the purchase of insurance.
    Response: Whether the premium reduction plan may be a form of 
rebating that is prohibited under most state laws is not material. As 
stated above, under section 506(l) of the Act, any state law that is in 
conflict with the Act or any regulation promulgated by FCIC is 
preempted. As stated above, since section 508(e)(3) of the Act 
expressly allows premium discounts to be provided and does not state 
that such authority is subject to state law, whether the savings come 
from one source or multiple sources, approved insurance providers have 
no control over rate making, or the discount is conditioned upon the 
purchase of insurance does not override this express authority. Since 
state law is preempted, premium reduction plans can be made available 
in all states.
    Comment: An interested party commented that the premium reduction 
plan concept suffers from a fundamental design flaw, whether the 
payment is made up-front or on a delayed basis, in that the payment is 
based on only a single component of the approved insurance provider's 
income. Approved insurance providers would be encouraged to provide 
premium discounts for any savings achieved on the expense component of 
the business even if the approved insurance provider loses money on the 
underwriting component of the program.
    Response: RMA disagrees that the premium reduction plan is flawed 
because it considers only the delivery expense component of an approved 
insurance providers financial statements. Under section 508(e)(3) of 
the Act, these are the only costs that can be used to finance a premium 
discount. However, this does not have to be the only factor RMA 
considers when determining whether to approve a premium discount. As 
stated above, under the alternative proposal adopted in the interim 
rule, RMA has the ability to determine the financial condition of the 
approved insurance provider before any premium discount is approved and 
can deny such approval if there would be an adverse impact.
    Comment: Several interested parties, agents, and approved insurance 
providers commented that premium reduction plans will result in a high 
degree of policyholder turnover or ``churning'' of the book of business 
causing more paperwork, data lost, and data reentered incorrectly. 
Commenters stated that data simply cannot be switched around over and 
over with out losing its integrity. Commenters state this turnover 
could overwhelm the operational and financial capacity of approved 
insurance providers. Commenters stated that the cost to regulate this 
type of turnover and the risks associated with the premium reduction 
plan will far outweigh the small benefits offered to farmers through 
the proposed premium reduction plan rule. A commenter asked whether a 
system cannot be developed that would permit better flow of 
information. A commenter asked how RMA will monitor the capacity and 
what safeguards are in place to assure the farmer that the needed 
infrastructure is available to handle fair, fast claims service and 
timely indemnity payment.
    Response: RMA agrees that expanded participation in the premium 
reduction plan could result in switching of policies between agents and 
approved insurance providers, as policyholders gain increased consumer 
awareness. However, the impact may be mitigated by the fact that 
premium discounts are no longer guaranteed up front in the interim 
rule. Because farmers will no longer know whether they will receive a 
premium discount, or the amount, there will likely be less ``churning'' 
of the book of business.
    Further, any approved insurance provider requesting the opportunity 
to offer a premium discount would need to account for any data 
processing costs associated with acquiring new policies as it evaluated 
cost efficiencies. The approved insurance provider would also need to 
ensure that its infrastructure was sufficient to handle claims. With 
respect to regulating such turnover and claims servicing, RMA would 
continue to hold approved insurance providers accountable under the 
standards established by the SRA. For data processing, for instance, 
those standards are contained in Appendix III of the SRA. Any approved 
insurance provider that is eligible to participate in the premium 
reduction plan must meet those standards. An approved insurance 
provider that becomes overwhelmed by the task of entering new policy 
data or whose data loses its integrity would risk losing the 
eligibility to participate in the premium reduction plan or to operate 
under the SRA. RMA is confident that its data system could handle 
increased policy turnover so that an additional system is not needed. 
RMA is also confident that its systems can adequately monitor existing 
service standards under the SRA.
    Comment: An interested party commented that approved insurance 
providers provide thousands of jobs across the country and asks if the 
U.S. government should be in the business of jeopardizing private jobs 
and substituting them with government employees.
    Response: RMA would agree with the commenter that approved 
insurance providers are responsible, either through direct hires or 
contracts, for the creation of thousands of U.S. jobs and that it is 
possible that jobs may be affected by the premium reduction plan. 
However, neither the Act nor RMA dictate the manner in which approved 
insurance providers obtain their savings under the premium reduction 
plan and RMA has sought to provide greater flexibility in the interim 
rule for approved insurance providers to attain such savings. Market 
forces determined by competition among the approved insurance providers 
will determine how and to what degree savings are obtained.
    Comment: Several agents commented that with increasing expenses 
farmers are looking for ways to cut costs such as crop insurance and 
the premium reduction plan will make it worse. A commenter stated that 
approved insurance providers offering premium reduction plans will just 
be taking advantage of their previous hard work helping and educating 
farmers. A commenter stated that many larger farmers will move to the 
approved insurance provider offering the larger discount.
    Response: RMA would agree that farmers are looking for ways to 
reduce costs, but is unsure of how the premium reduction plan will 
thereby worsen a farmer's condition. RMA would agree that a farmer that 
has been helped in the past by a dedicated and hard-working agent might 
decide to abandon that agent for one offering a price reduction and 
that larger farmers might be particularly attracted to premium 
discounts because of their size of operations. These outcomes are all 
possible under the existing program

[[Page 41836]]

since farmers are free to choose their agents and approved insurance 
providers. While it may be argued that the proposed rule exacerbated 
this problem, the interim rule has been revised to no longer allow 
approved insurance providers to guarantee the premium discount up 
front, limit advertising or other promotions, and require approved 
insurance providers to specifically market the premium reduction plan 
to small, limited resource, women and minority farmers in the states 
where it is available. Further, as some commenters have pointed out, 
farmers also value service and may chose superior service and knowledge 
of their agent over the discount offered by another agent participating 
in the premium reduction plan when determining the best value to the 
farmer.
    Comment: An approved insurance provider commented that 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 farmers. The commenter 
stated the program needs to allow for individual approved insurance 
providers to deliver the program independent of government rules on how 
the agents are compensated. The commenter asked if the approved 
insurance provider is operating through independent agents, whether the 
agent is also required to offer the premium reduction plan to all of 
his customers. If not, the agent may only offer the premium discount to 
the larger customers due to commission considerations.
    Response: RMA agrees that an approved insurance provider's decision 
on the types of agents it uses should be one based on market forces. In 
the interim rule, RMA has attempted to be sensitive to the different 
delivery structures of current approved insurance providers and allow 
approved insurance providers maximum freedom for such decisions. With 
respect to the question of whether an independent agent is required to 
offer premium reduction plan to all of his or her customers, all 
policyholders of an approved insurance provider that participates in 
the premium discount plan will automatically receive any premium 
discount paid by the approved insurance provider. If the agent 
represents more than one approved insurance provider, the agent is 
required to notify all customers of other approved insurance providers 
it represents that participate in the premium reduction plan, but is 
not required to notify the customer of the status of approved insurance 
providers that the agent does not represent. As stated above, market 
forces will generally handle the situation where an agent attempts to 
place all large farmers with the approved insurance provider 
participating in the premium reduction plan and all small farmers with 
the one that does not. Lastly, approved insurance providers are 
required to independently market the premium reduction plan to all 
farmers including small, limited resource, women and minority farmers 
and no agent can refuse to insure any such farmer who requests 
coverage.
    Comment: An approved insurance provider commented that RMA has 
espoused a principle and taken an action that is contrary. RMA states 
that ``[d]ecisions on the use of independent versus salaried agents 
should be based on competitive market forces * * *'' However, RMA has 
crafted regulation that, by FCIC's admission, is intended to protect a 
specific business plan (salaried or ``captive'' agents) from the 
vicissitudes of the market.
    Response: RMA agrees that competition should be based on market 
forces. The principle espoused in the interim rule is that the approved 
insurance provider should, wherever possible, have flexibility in 
identifying cost efficiencies and be able to act to achieve those 
possibilities under competitive market forces. The reference to 
protecting a specific business plan may have been confusing. What was 
meant was that, where specific requirements must be imposed to ensure 
that the objectives of the Act are met, those requirements should not 
create a clear or obvious advantage for one type of business plan over 
another. RMA believes that it is not inconsistent for a regulator to 
encourage competitive market forces whenever possible and, at the same 
time, impose regulations that attempt to balance the interests of 
approved insurance providers with different types of business plans. 
RMA wanted to create a neutral framework and it believes that the 
framework developed would permit all approved insurance providers to 
have equal access regardless of the manner in which it delivers the 
program.
    Comment: An approved insurance provider commented that choosing 
varying delivery mechanisms is a normal function of free market choices 
and does not, therefore, unfairly bias qualification rules, unless they 
opted to affect the manner in which they deliver or account for 
delivery of product. The commenter stated that the competitive 
advantage, or disadvantage, of using captive agents is already 
contemplated in a profit maximizing environment. The commenter stated 
that commissions are already subject to market forces and changes in 
commission rates are already driven by the market. Further, rate 
reductions built on commission reductions, as opposed to true operating 
efficiencies, would compel other approved insurance providers or agents 
to either follow or withdraw from the market, and if the latter, would 
potentially create under-served areas.
    Response: RMA agrees that an approved insurance provider's choice 
of using captive or contracted agents is one to be determined in the 
context of a free market. Further, RMA agrees that commission rates for 
agents are already driven by market forces. However, in structuring the 
interim rule, RMA desires to avoid imposing provisions that would 
unnecessarily favor those approved insurance providers that had elected 
to operate with a captive agent structure or, alternatively those 
approved insurance providers with a contracted agent structure.
    The commenter implies that there is a difference between a 
reduction in commissions and a true operating efficiency. Under the 
law, a reduction in either commission costs or other operating costs 
would be deemed an efficiency as long as the ability of the approved 
insurance provider to maintain service standards under the SRA was not 
adversely affected. Nevertheless, RMA shares the concern of the 
commenter that a reduction in compensation in certain geographical 
areas as a result of the premium reduction plan may cause agents or, 
ultimately, an approved insurance provider to withdraw from those 
areas. The provisions of the interim rule reflect measures designed to 
mitigate this potential, including allowing the approved insurance 
provider to select the states in which to participate in the premium 
reduction plan.
ii. Approved Insurance Providers
    Comment: Many interested parties, agents, farmers, and approved 
insurance providers have commented that the proposed premium reduction 
plan rules will also force many approved insurance providers out of the 
industry, while new participants will not enter, thus reducing 
competition by driving approved insurance providers out of the market 
and forcing agencies into financial disaster and decreasing the 
competitive force that drives the private sector. A commenter stated 
this will increase premiums. Other commenters claim crop insurance has 
experienced high levels of budget cuts and regulation changes in the 
last several years which

[[Page 41837]]

have placed some approved insurance providers on the edge of financial 
disaster. A commenter stated that it looks like a lot of tracking and 
reporting needs to be done by the approved insurance providers and this 
added expense may be too much for smaller approved insurance providers. 
Commenters stated that this industry needs more providers, not less, 
and that competition increases service to farmers. A commenter states 
that farmers need options and this rule will remove several approved 
insurance providers as viable options and that it is not good for the 
system if only a few approved insurance providers remain--giving them 
leverage over the system. Another commenter stated that if the number 
of approved insurance providers is reduced, the approved insurance 
providers remaining will have to take on their business, thus slowing 
down the time a claim can be serviced.
    Response: RMA does not agree with the commenters' basic assumption 
and resulting predictions that price competition will necessarily 
result in fewer approved insurance providers, less competitive approved 
insurance providers, and higher premiums (prices). One could point to 
many instances of government regulated industries where price 
competition has been introduced, such as the telecommunications and 
commercial airlines industries, where precisely the opposite has 
occurred.
    RMA also disagrees that competition will increase premiums. As 
stated above, premiums are determined by the expected losses and a 
reasonable reserve and are independent from any efficiency related 
premium discount. Therefore, the amount of premium is unaffected by the 
premium reduction plan.
    RMA further disagrees with the assumption that regulations and 
budget cuts have placed some approved insurance providers on the edge 
of financial disaster. Each reinsurance year RMA evaluates the 
financial conditions of the approved insurance providers. This 
evaluation has been strengthened considerably since the failure of 
American Growers Insurance Company (American Growers). The most recent 
evaluation shows no deterioration in the financial health of approved 
insurance providers. However, RMA agrees that such budget cuts can 
impact approved insurance providers. For this reason, the election to 
participate in the premium reduction plan is totally voluntary. 
Approved insurance providers are in the best position to determine 
whether they can participate in the premium reduction plan. In 
addition, with the adoption of the alternative proposal, premium 
discounts will not be approved until after the cost savings have been 
proven and RMA determines that the approved insurance provider is in a 
sound financial position to pay the premium discount. Also, an approved 
insurance provider can elect not to request approval to pay a premium 
discount if it is concerned about its financial condition.
    The adoption of the alternative proposal has also significantly 
reduced the paperwork burden on approved insurance providers, 
especially up front. Determinations of premium discounts will now be 
based on the Expense Exhibits that are already provided for the SRA. 
Further, as stated above, the interim rule now contemplates a 
simplified procedure to determine the amounts of premium discounts.
    RMA agrees that it would be desirable to have additional approved 
insurance providers. New ones are being approved each year, even though 
the premium reduction plan has been available. There is no indication 
that this will change under this rule. To the contrary, RMA continues 
to receive inquiries and applications from new approved insurance 
providers to enter the program. Further, nothing in the interim rule 
precludes competition based on service. As stated above, commenters 
have pointed out that some farmers will value service more than the 
discount and likely elect to remain with agents that do not participate 
in the premium reduction plan. Others will choose a mix of service and 
price. These are choices that American consumers make every day.
    Comment: An agent commented that if RMA allows one approved 
insurance provider to offer a premium reduction plan, many other 
approved insurance providers will most likely be motivated to do the 
same thing. If that proves true, RMA will end up with fewer approved 
insurance providers involved and those with economies of size will have 
the advantage.
    Response: RMA would agree with the comment that once one approved 
insurance provider is able to compete on the basis of price, other 
approved insurance providers will likely want to respond. However, RMA 
does not agree that the result of price competition is necessarily 
fewer, larger approved insurance providers. One could point to other 
instances of government regulated industries where price competition 
has been introduced, such as telecommunications and commercial 
airlines, where the precise opposite has occurred.
    Regardless of differing views about the possible impact of the 
premium reduction plan on the industry, RMA has attempted to address 
possible negative industry impacts of the premium reduction plan such 
as allowing approved insurance providers to select those states in 
which it wants to participate in the premium reduction plan and 
reducing the reporting burdens on approved insurance providers electing 
to participate.
    Comment: An agent commented that RMA will require that approved 
insurance providers not reduce its service to their insureds. The 
commenter asked how RMA would entice approved insurance providers to 
continue in this line of insurance. If the profitability is not there 
due to the premium reduction plan and tighter regulations, it would 
obviously have an impact on the overall financial strength of the 
industry.
    Response: As stated above, service cannot be reduced below the 
standards required by the SRA. If an approved insurance provider does 
not think that it could provide this level of service at a cost below 
the A&O reimbursement, it does not have to participate in the premium 
reduction plan. It is approved insurance providers that are in the best 
position to determine whether they have the ability to participate in 
the premium reduction plan and, as stated above, approved insurance 
providers that do not participate can still compete because there are 
farmers that will value service more than the premium discount.
    With respect to the question of attracting new approved insurance 
providers, the recent increase in the number of approved insurance 
providers entering the program demonstrates that there are still 
attractive business opportunities in the crop insurance program. 
Further, it is not evident that the commenter's assumption that the 
premium reduction plan would necessarily lead to lower profitability 
for approved insurance providers. Some of the expert reviewers 
predicted that the industry would become financially healthier under an 
expanded the premium reduction plan because of increased efficiencies. 
In addition, as stated above, the interim rule contains provisions that 
allow RMA to determine the financial condition of an approved insurance 
provider before approving a premium discount.
    Comment: An interested party and agent commented that a premium 
reduction plan will allow new, unproven approved insurance providers to 
enter a marketplace where they may not belong. This could result in 
more approved insurance providers going broke and farmers being left 
with

[[Page 41838]]

unpaid claims for extended periods of time. This could in turn cause 
many farmers to go broke. A commenter stated that sometimes the 
purchase of ``cheap'' insurance results in the failure of the products 
to perform at the time of claims.
    Response: To qualify to participate in the premium reduction plan, 
an approved insurance provider must first be able to meet all 
requirements under the SRA, including financial health and solvency 
standards. Thus, a new approved insurance provider entering the program 
wanting to participate in the premium reduction plan would be no more 
likely to fail than an existing approved insurance provider electing 
not to participate in the premium reduction plan. In addition, under 
the alternative proposal adopted, RMA can now re-evaluate the financial 
strength of the approved insurance provider before approving a premium 
discount based on the actual financial condition of the approved 
insurance provider.
    Further, the commenter's fear about the delay of the payment of 
claims is unfounded. As RMA demonstrated through American Growers, it 
has the commitment and ability to ensure that farmer's claims are paid 
timely.
iii. Agents
    Comment: Several agents commented that if approved insurance 
providers create their efficiency by slashing agent commissions, agents 
may be forced to shift business to other approved insurance providers 
for economic reasons.
    Response: If an approved insurance provider cuts commission too 
deeply, its agents may elect to shift their business to another 
approved insurance provider. However, since approved insurance 
providers have an incentive to keep their business, this is an issue 
between the agent and approved insurance provider. The contract between 
an agent and an approved insurance provider is freely determined in a 
competitive market and RMA would agree that the premium reduction plan 
may result in a reassessment by approved insurance providers and agents 
of the terms of those agreements.
    Comment: Many agents, farmers and other interested parties 
commented that the proposed rules will create super agencies and 
consolidate the bulk of crop insurance business with a couple of 
approved insurance providers who are not familiar with the farmer's 
operation. Commenters stated that the industry can ill afford to become 
smaller. The premium reduction plan will help the large agent eliminate 
the small agent because of the reduced commissions. Commenters state 
that lower commission will mean higher volume will be necessary to 
survive. A commenter stated the premium reduction plan would lower the 
participation in the program and return farmers to depending on 
disaster programs as in years past. Another commenter stated that the 
crop insurance program has succeeded over the years with the basic idea 
of a large number of agents and approved insurance providers selling 
crop insurance policies and the premium reduction plan will end this. 
The result would be fewer choices of approved insurance providers for 
insureds. A commenter stated that the larger the agent, the lower the 
service. A commenter stated that the premium reduction plan favors 
large agencies and approved insurance providers who will not provide 
the personal service of existing community agents.
    Response: Most of the expert reviewers commissioned by RMA 
predicted that, if participation in the premium reduction plan is 
increased, the agent workforce would consolidate with higher average 
numbers of policies per agent and less personal contact between agent 
and policyholder, views that are consistent with the commenters. 
However, this is unlikely to happen to a degree that it harms the 
program because, as stated above, if service is reduced to the point 
that it no longer complies with the requirements of the SRA, approved 
insurance providers would risk their ability to participate in the crop 
insurance program.
    The commenters assume that availability of the premium reduction 
plan will automatically result in farmers leaving their agents to go 
with those that participate in the premium reduction plan. However, the 
competition between the large and small agents currently exists as a 
result of economies of scale and levels of service. Further, commenters 
state that small agents stay in business because of the superior 
service they provide. As other commenters have pointed out, some 
farmers will still value the service from their existing agent more 
than the premium discount that may be available through another agent. 
This superior service should still permit small agents to compete. In 
addition, because the premium discount is no longer guaranteed, the 
switching of agents will likely be mitigated because some farmers will 
likely choose to remain with an agent that knows their operation and 
risk management needs rather than move to a new agent that is not 
familiar with the operation on the chance there may be a premium 
discount at some point in the future.
    It is possible that reduced commissions will require an increase in 
the amount of business for the agent to remain financially viable. 
However, as stated above, there will be a balance between any reduction 
in commission and the point at which the agent elects to take its 
business to another approved insurance provider. Both the agent and the 
approved insurance provider have an incentive to retain the book so 
this will be another opportunity for market forces to control. Further, 
approved insurance providers are not going to risk reducing commissions 
to the point that agents can no longer comply with the service 
requirements in the SRA.
    The commenters fail to explain why the premium discount will result 
in lower participation in the program and reliance on ad hoc disaster 
programs. Most of the experts agree that there is likely to be a modest 
increase in participation and increased buy up at higher coverage 
levels, not a decrease. Further, the ability of a farmer to receive an 
additional benefit is not likely to result in the farmer abandoning the 
program providing the benefit. Even if agents do consolidate, farmers 
must still receive the level of service required by the SRA.
    Comment: Many agents, farmers, approved insurance providers and 
other interested parties commented that widespread cuts in agent 
commissions under these plans would likely force many independent 
agents to stop delivering crop insurance. Commenters state that 
commissions will not be enough to cover the time and expense to 
properly deliver federal crop insurance, which involves more E&O 
exposure. Commenters stated that the agent's time can be spent more 
effectively in other areas of insurance with a lot less responsibility. 
Some commenters state agents will not be able to continue their 
excellent service to the customer and more farmers will fall through 
the cracks or result in poor risk management decisions being made by 
the farmer. A commenter wonders whether there will be enough agents 
left to service the business. Commenters state that farmers will suffer 
the biggest loss in experience and quality. A commenter stated that the 
statement that agents receive 70% of the A&O subsidy in the program is 
flawed. A commenter stated the unemployment rate will go up and asks 
what has been accomplished. A commenter stated that without agents, it 
would be a nightmare for approved insurance providers to obtain the 
necessary information from farmers.

[[Page 41839]]

    Response: It would not be in an approved insurance provider's 
interest to seek large commission reductions from agents if such an 
action would deplete its agent force to a level where it could not 
properly service policyholders under the SRA because that would mean 
that the approved insurance providers eligibility to participate in the 
premium reduction plan and operate under the SRA could be withdrawn. 
Thus, it would be in an approved insurance provider's interest to 
implement only those cost efficiencies that would avoid the situation 
where agents could no longer stay in business or elect to shift their 
efforts to other lines of business that are more attractive. Further, 
it is not in the best interest of approved insurance providers for 
their agents to have more E&O exposure or farmers to make poor risk 
management choices because of poor service from the inexperienced and 
poor quality agents that remain. Both situations would negatively 
impact the ability of the approved insurance provider to reduce costs 
and the profitability of the approved insurance provider.
    While the commenter may question the statement that agents receive 
70 percent of A&O subsidy, approved insurance providers prepare 
detailed Expense Exhibits each year in their Plan of Operations to 
qualify to participate in the delivery of crop insurance for the next 
reinsurance year. Although the figures vary by approved insurance 
provider, total compensation to agents approximates 70 percent of total 
expenses.
    RMA would agree that agents play a vital role in the delivery of 
Federal crop insurance to farmers and that it cannot operate without 
them. However, market forces discussed above, and revisions to the 
proposed rule to require premium discounts be based on actual cost 
savings and allowing approved insurance providers to select states in 
which to participate in the premium reduction plan should mitigate the 
commenter's claimed adverse impacts.
    Comment: Many agents, farmers, approved insurance providers and 
other interested parties commented that they disagree with the 
reviewers' observations about agent compensation, profit levels, and 
displacement of agents by a reduction in compensation because they are 
made without any viable proven facts and should be disregarded. A 
commenter stated that when the numbers of agents decrease, the amount 
of business for approved insurance providers will also decrease.
    Response: RMA cannot address issues that the commenters might have 
with the opinions of the expert reviewers commissioned by RMA to 
examine the premium reduction plan and RMA procedures because the 
commenters have not provided specific information that would refute any 
of the observations, conclusions, or analyses of the reviewers. The 
expert reviews were helpful in the development of a proposed rule and 
RMA has taken into consideration the comments regarding such expert 
reviews in drafting its interim rule. However, even if such expert 
reviews are disregarded, it does not change RMA's obligation to operate 
the premium reduction plan in accordance with section 508(e)(3) of the 
Act. As stated above, RMA has attempted to draft a rule that will 
mitigate the concerns of the commenters regarding the potential adverse 
impact on agents and allow all agents to continue to participate in the 
crop insurance program.
    Comment: Many agents and interested parties commented that removal 
of large farmers from its book of business would force agents out of 
the crop insurance business. Commenters state that already a large 
portion of the policies they service generate the commission do not 
cover expenses. A commenter stated that to retain its largest accounts, 
the agency would be forced to offer them a discount, one which it could 
not afford to pass on to its smaller farmers who are already serviced 
at a loss. A commenter states it may have to drop them as customers all 
together, a thought which it cannot even consider from a legal and 
ethical perspective.
    Response: RMA recognizes that, because servicing a policy by an 
agent entails a relatively large fixed cost, certain small policies 
must currently be serviced at a loss to the agent and the approved 
insurance provider. RMA also agrees that the larger policies tend to 
subsidize these small policies. This condition is not the result of the 
premium reduction plan. However, the commenters indicate that the 
condition that small policies are serviced at a loss might worsen if 
participating under the premium reduction plan were increased, 
presumably because the agent's commission would be reduced under the 
premium reduction plan. While this is certainly possible, as stated 
above, it is unlikely that any approved insurance provider would cut 
commissions to the extent that agents could not cover their costs for 
the book of business. Even with the premium reduction plan, approved 
insurance providers still have an incentive to retain their agents and 
ensure that policyholders are receiving the level of service required 
by the SRA. In addition, if the agent's client base increased as a 
result of attracting clients seeking premium discounts, the agent might 
actually gain in dollar terms.
    However, the commenters are incorrect that they will only be able 
to offer premium discounts to their large farmers. Further, agents 
cannot drop existing policyholders or not offer insurance to new 
applicants without violating the SRA and subjecting the approved 
insurance provider to sanctions. If the approved insurance provider and 
agent participate in the premium reduction plan in a state, and the 
approved insurance provider is approved to pay a premium discount, all 
policyholders insured with the approved insurance provider in the state 
must receive the premium discount. One assumes that these factors will 
probably be taken into consideration when the approved insurance 
provider determines where to cut expenses, including any reductions in 
compensation.
    Comment: Several agents and interested parties claim that with 
fewer agents the service the farmers deserve would be dramatically 
reduced and it would have a negative impact on the economy of rural 
communities, including loss of employers, taxes, donations, etc.
    Response: As stated more fully above, approved insurance providers 
are required to comply with all requirements of the SRA regarding the 
servicing of policies. Failure to comply with these requirements could 
lead to sanctions under the SRA. Therefore, even in the number of 
agents does become reduced, which as stated above is not as likely 
under the revisions made to the proposed rule, approved insurance 
providers are still required to ensure that policyholders receive the 
required service. With respect to a negative impact on rural economies, 
RMA is not sure why this would occur since farmers would be receiving 
an economic benefit and, as discussed above, revisions have been made 
to the rule to mitigate the adverse impacts on agents.
    Comment: Many agents and interested parties commented that 
reductions in agent commissions should come from other efficiencies 
associated with the premium reduction plan delivery, NOT from approved 
insurance providers applying to participate in the premium reduction 
plan.
    Response: The proposed rule has been revised to allow greater 
flexibility in attaining cost savings. Further, the rule specifically 
states that not all savings can come from a reduction in agent 
commissions. If and how much agent

[[Page 41840]]

commissions are reduced is a matter between the approved insurance 
provider and agent. However, as discussed above, approved insurance 
providers have the incentive to retain agents, which means ensuring 
that they make sufficient income to cover the expenses in servicing 
their book of business. RMA has determined that approved insurance 
providers should be allowed to consider a full range of potential cost 
efficiencies to participate in the premium reduction plan, as long as 
the implementation of those cost efficiencies does not cause service to 
fall below SRA standards.
    Comment: Several agents commented that the premium reduction plan 
would affect the agent's ability to even continue living in small towns 
and would at the very least force the agent to find a job in the bigger 
towns and take the agent away from being an active member of the 
community. With a smaller income would come less ability to give to the 
local charities/churches/schools and less expendable income for the 
local businesses, hurting many other businesses along down the line.
    Response: Nothing in the interim rule limits agents' free market 
decisions as to where to establish or maintain their businesses. RMA 
acknowledges that the commenters are likely assuming that the premium 
reduction plan will lead to a reduction in agents' commissions and will 
force some agents to abandon small rural communities. The expert 
reviews commissioned by RMA indicate that some commission reductions 
and consolidation may happen. However, none of the reviews identified 
commission reductions or consolidation as producing a significant 
negative impact on rural economies. Nevertheless, the interim rule 
includes provisions, such as the four percent limit on premium 
discounts and the requirement that not all efficiencies can be achieved 
through reductions in compensation, which would ensure that the crop 
insurance delivery system, including approved insurance providers and 
their affiliated agents, is not destabilized if the premium reduction 
plan were to expand dramatically. Further, as discussed above, market 
forces will generally dictate any reduction in agent commissions 
because approved insurance providers have the incentive to retain their 
agents and too large a reduction in agent compensation would likely 
result in agents leaving crop insurance, which could prevent the 
approved insurance provider from adequately serving farmers, or agents 
moving to other approved insurance providers and taking their books of 
business with them. Approved insurance providers would want to avoid 
either outcome because it could result in the reduced potential for 
underwriting gains or potential sanctions under the SRA.
    Comment: Many agents and interested parties commented that the 
premium reduction plan is funded 100% on the backs of agent's 
commission, the very group that is the most critical to crop insurance 
being delivered. Commenters stated that the agent's income would be 
severely reduced even when expenses are increasing. Commenters state 
that the premium reduction plan approved insurance provider contributes 
nothing to the farmer or to any of the discounted premium and they are 
not in the communities dealing with the farmers on a day-to-day basis 
as current agents do. They state they cannot take another reduction in 
income because the discount will be passed on to the agent, who still 
has bills to pay and families to support. Commenters state that the 
premium reduction plan will make crop insurance unprofitable.
    Response: Nothing in section 508(e)(3) of the Act or the interim 
rule specifies where approved insurance providers can look to find cost 
efficiencies, including agents' commissions. RMA would agree generally 
with the commenters that agents play a vital role in the delivery of 
Federal crop insurance to farmers and that the program cannot operate 
without competent and professional agents to service the risk 
management needs of the farmer. Market forces and limitations in the 
interim rule ensure that it would not be in an approved insurance 
provider's interest to seek large commission reductions from agents if 
such an action would deplete its agent force to a level that would 
endanger, or otherwise lose its capacity to properly service 
policyholders under the SRA. However, as stated above, the interim rule 
also contains provisions that should mitigate adverse impacts on 
agents. Now approved insurance providers can select the states in which 
it wants to participate in the premium reduction plan.
    With respect to the comment that the premium reduction plan will 
make crop insurance unprofitable, RMA disagrees. The choice of an 
approved insurance provider to qualify for and offer a premium discount 
is strictly voluntary. An approved insurance provider will not choose 
to offer premium discounts if it is unprofitable to do so. Moreover, 
the most profitable aspect of the crop insurance business, underwriting 
gains, is not directly impacted by the premium reduction plan. In 
addition, approved insurance providers can now select the states in 
which they will pay premium discounts and the amounts. Further, RMA 
will have the opportunity to determine the financial condition of the 
approved insurance provider before any premium discount is approved. 
Many of the expert reviewers commissioned by RMA to study the premium 
reduction plan issues concluded that the crop insurance industry would 
become financially healthier with price competition.
    Comment: A few agents and interested parties commented that the 
premium reduction plan will severely affect insurance agents that 
concentrate and specialize in crop insurance only.
    Response: Only one of the expert reviewers commissioned by RMA to 
study the premium reduction plan addressed the issue of the impact on 
agents that specialized. That reviewer concluded that the premium 
reduction plan would impact such agents positively, with more of the 
existing book of business shifting to them from part time agents. 
Moreover, the reviewer predicted that this trend would lead to less 
fraud and better service to farmers because the agent workforce would 
become increasingly more knowledgeable and professional through 
specialization.
    Notwithstanding the expert reviewer's opinion, the changes to the 
premium reduction plan previously discussed should mitigate any adverse 
effect on all agents, including those that specialize in crop 
insurance. Further, as discussed above, approved insurance providers 
have an incentive to avoid imposing hardships on their agents because 
approved insurance providers may be left without agents to service the 
business in areas, lose business to other approved insurance providers 
as agents move their book of business, or face the possibility of 
reductions in services to farmers, which can result in sanctions under 
the interim rule and SRA.
    Comment: Many agents and interested parties commented that RMA's 
core assumption that ``efficiencies'' automatically result from 
lowering agent compensation is only true if agents are making excessive 
profits. The commenters state this assumption is based on no empirical 
evidence or expert testimony. A commenter stated that people only spend 
extra time working and servicing programs when rewarded monetarily and 
that agents must receive fair compensation for their services. The 
commenter stated that crop insurance is in rural areas of America, and 
to meet the rising costs of travel, communication, and education in 
rural areas agents and approved

[[Page 41841]]

insurance providers need to be reimbursed fairly.
    Response: Nowhere in the proposed rule did RMA assume cost 
efficiencies claimed by an approved insurance provider must 
automatically result from lower commissions. Further, nowhere in the 
proposed rule did RMA make the claim or imply that agents are receiving 
excess profits. Approved insurance providers are free to assess their 
business structure to determine where it can achieve savings. Further, 
the contract between an approved insurance provider and an agent is 
determined in a competitive market, which will not change under the 
premium reduction plan. As stated above, approved insurance providers 
have the incentive to retain agents and, therefore, would have to be 
judicious in their evaluation of whether to cut agents commissions and 
the amount of such cuts to avoid losing business, suffer a reduction in 
service below SRA required levels, etc.
    RMA agrees that agents deserve fair compensation. However, whether 
under the existing crop insurance program or the premium reduction 
plan, it is the market that determines what is fair. Nothing in the 
interim rule would change this.
    Comment: An agent commented that there should be clear 
documentation and rationalization how agent costs will be reduced 
before any premium reduction plan depending on a reduction in agent 
compensation be considered.
    Response: The interim rule requires that an approved insurance 
provider certify that any cost efficiencies considered for a premium 
discount, including reductions in agent commissions, will not result in 
a reduction in service below the requirements in the SRA and approved 
procedures. Further, now that premium discounts are paid after all 
costs saving measures have been implemented and the impact of such 
measures are known, RMA may determine whether there has been any 
violation of the interim rule, SRA or approved procedures and take the 
appropriate action before any premium discount is approved or paid.
    Comment: Many agents and interested parties commented that crop 
insurance is the largest E & O exposure they have. A commenter stated 
that there will be a lot more E & O claims and that already is an issue 
with E & O companies that either do not want to write crop insurance 
agents or have placed high deductibles on their policies for crop 
insurance claims. The commenter asked if the government is going to get 
into the E & O business.
    Response: The commenters' assume that E&O exposure will increase 
but the commenters do not explain why they believe that it will. The 
commenters apparently assume that reductions in commissions would 
result in reductions in service, leaving agents more exposed to E&O 
claims. Under the interim rule, as stated above, approved insurance 
providers wanting to offer the premium discount will be required to 
maintain the same service standards as required by the SRA. This is the 
same standard under which E&O would be based for the premium reduction 
plan. Approved insurance providers would not have an incentive to 
implement cost efficiencies if the cost savings resulting from such 
actions were to result in increased litigative exposure, thereby 
increasing costs. Further, as stated above, approved insurance 
providers would not have an incentive to cut commissions so low that 
agents, who are needed to service their business, would have no choice 
but to reduce service, move their book of business, or leave the crop 
insurance business.
    Comment: Many agents and interested parties commented that multi-
peril insurance is also the most labor intensive and time-consuming 
line of business that insurance agents write and with the lowering of 
commissions it would make it more difficult to continue writing this 
line of business at a profitable level. A commenter states that agents 
do considerable work to make sure the farmer is adequately covered. A 
commenter states that their expense ratio with crop insurance is 
higher. A commenter stated that the approved insurance providers have 
already transferred a majority of the paperwork and administration onto 
the agents to reduce their expenses so the premium reduction plan will 
compound the problem. A commenter also stated that with the premium 
reduction plan lingering in the background, it cannot make long-term 
business plans because of the uncertainty of projected income. A 
commenter stated that crop insurance is very complicated and it takes 
an enormous amount of education to be able to deliver the products to 
farmers that best meets their needs.
    Response: RMA agrees that the delivery of crop insurance is labor 
intensive and requires substantial paperwork, that agents play a vital 
role in the delivery of Federal crop insurance to farmers, that 
substantial education is required to ensure that a farmer's risk 
management needs are met, that the program cannot operate without 
competent and professional agents that can service policyholders, and 
that the ratio of expenses to premiums may be higher with crop 
insurance than other lines of insurance.
    With respect to the comment that the premium reduction plan would 
``compound the problem,'' the context of the comment would suggest that 
the commenter assumes that a premium discount would add to the 
paperwork or administrative costs incurred by the agent. RMA disagrees 
with this assumption. Although an agent would need to be aware of new 
market conduct rules added to the interim rule regarding how a premium 
discount could be represented verbally and through marketing materials, 
nothing in the interim rule would require additional paperwork by an 
agent that represents an approved insurance provider authorized to 
offer a premium discount. Further, these new market conduct rules were 
necessary to ensure that farmers are not mislead into thinking that 
they will receive premium discount or the amount of any such discount. 
Under the alternative proposal adopted, approved insurance providers 
and agents will not know at the time of sales whether a premium 
discount will be approved.
    To the extent that commenters are assuming that agent commissions 
will be reduced to the point that selling crop insurance is no longer 
profitable, as stated above, it would not be in the best interests of 
approved insurance providers to make such reductions. As stated above, 
approved insurance providers have the incentive to retain agents and 
their books of business to maximize their potential for gains and 
ensure that their policyholders are served in accordance with RMA's 
requirements.
    With respect to uncertainty created in the marketplace from a 
potential expansion of the premium reduction plan, RMA would agree that 
price competition would add another factor an agent or approved 
insurance provider would need to consider in business planning. The 
whole premise of price competition is to be able to provide the same 
product or service for less money.
    However, most businesses in the U.S. economy must consider price 
uncertainty in the normal course of business planning. Further, as 
other commenters have suggested, price is not the only benefit that 
stirs competition. Commenters state, and RMA agrees that there will be 
some farmers who value the service provided by their agents more than 
the premium discount they may be receive at a future date. This is what 
occurs with personal lines insurance that currently allows rate 
competition and there is no reason to believe it would any different 
with crop insurance.

[[Page 41842]]

    Comment: Many agents and interested parties commented that agents 
receive fair compensation for their services and earn the commissions 
they receive. Commenters stated that they do not understand how RMA 
could believe that agents make too much commission. Commenters stated 
they would not be interested in servicing crop insurance for less than 
the current commission. A commenter stated it was not fair to expect 
agents to reduce profits when the profit margin is so small.
    Response: RMA did not take a position in the proposed rule with 
respect to the fairness or possible excessiveness of the current level 
of agents' commissions. RMA assumes that it is solely between the 
approved insurance provider and agent to determine what is fair 
compensation and that this would continue under the premium reduction 
plan. Further, in those states where commissions cannot be cut without 
jeopardizing the agent force, under the interim rule, approved 
insurance providers now can elect not to offer premium discounts in 
such states. As stated above, the amount of commission is between the 
agent and approved insurance provider and approved insurance providers 
have an incentive to retain their agents and ensure that service to 
policyholders meet the standards required by the SRA and approved 
procedures.
    Comment: Many agents and interested parties commented that FCIC 
inaccurately estimates the percentage of administrative expenses 
attributable to agent compensation. The commenter stated that there is 
no empirical evidence in the rulemaking record to show that agent 
compensation is excessive and, worse, there is no evidence to show what 
the effect of a cut in compensation would be on the agent workforce or 
level of service. Without such empirical record evidence, FCIC and RMA 
cannot rationally conclude that a reduction in compensation would yield 
``efficiency'' within the meaning of the Act.
    Response: With respect to the comment that FCIC inaccurately 
estimates the percentage of administrative expenses attributable to 
agent compensation, the commenter does not explain why the estimate is 
inaccurate. Approved insurance providers prepare detailed expense 
reports each year in their Plans of Operation to qualify for 
participation under the SRA for the next reinsurance year. Although the 
figures vary by approved insurance provider and year, total 
compensation to agents for the industry, based on information reported 
by approved insurance providers, approximates 70 percent of total 
delivery expenses.
    The comment suggesting that RMA has not conducted a study to show 
the effects of a reduction of agents' commissions on service assumes 
that the purpose of the rule is to attain efficiencies through the 
reduction in commissions. According to section 508(e)(3) of the Act, an 
efficiency occurs when the approved insurance provider's delivery costs 
are less than the A&O subsidy it receives. The approved insurance 
provider can attain this efficiency in any manner that best suits its 
business structure. A study is not necessary because, as stated above, 
approved insurance providers will not reduce commissions to the point 
that they can no longer provide the required level of service. Further, 
as stated above, approved insurance providers have the incentive to 
retain agents. Therefore, it would be unlikely they would cut 
commissions to the point that agents would move their books of business 
to other approved insurance providers. As has always occurred in the 
program, the market determines fair compensation. Finally, since the 
premium discount will be paid at the end of the process and is not 
guaranteed, approved insurance providers will be able to ensure that 
discounts actually paid will not be so large as to jeopardize the 
providers' financial position or its relationship with its agents.
    Comment: Many agents and interested parties commented that the 
premium reduction plan will hurt the small town agencies that will not 
be able to handle the reduction and they will be forced out of 
servicing crop insurance. Commenters stated that this will leave areas 
without service and will pave the way for more errors, and, 
consequently more fraud, waste and abuse. Commenters state that these 
are the agents who are serving the small family farms. Commenters also 
claim it will be impossible to maintain the level of service the 
insureds currently experience. Commenters state this will harm rural 
communities.
    Response: The interim rule does not limit agents' free market 
decisions as to where to establish or maintain their businesses. The 
expert reviews commissioned by RMA indicate that commission reductions 
and consolidation are likely. However, none of the reviews identified 
commission reductions or consolidation as producing a significant 
negative impact on rural economies. And, contrary to the predictions of 
the commenters, one reviewer suggested that such consolidation would 
result in agents that would provide better service.
    With respect to the comment that, under the premium reduction plan, 
it will be impossible to maintain the level of service that 
policyholders expect, the interim rule requires that any approved 
insurance provider maintain the level of service required by the SRA 
and approved procedures. RMA admits that these required standards may 
be below the level of service provided by some agents. However, RMA 
cannot require that a higher level of service be maintained than is 
currently required by the SRA and approved procedures. It can only 
enforce requirements of the SRA and approved procedures. Further, as 
commenters have stated, this higher level of service that may be 
provided by some agents is a source of competition and that some 
farmers value this high level of service over any premium discount they 
may receive at some future date.
    Lastly, neither RMA nor the approved insurance providers wants to 
harm the economy of any rural community. Such a consequence would 
defeat the purpose of crop insurance, which is to stabilize the 
economies of rural communities. As a result, RMA has added provisions 
to the interim rule that allow approved insurance providers to select 
the states in which they will participate in the premium reduction 
plan. Further, approved insurance providers have an incentive to ensure 
that their actions do not adversely impact rural communities because 
such action would only result in fewer customers, which would adversely 
affect their business.
    Comment: Several agents commented that the premium reduction plan 
could result in crop insurance being delivered by FSA and asked if that 
was the purpose of the premium reduction plan. A commenter stated that 
RMA tried to use FSA to deliver the program before and they couldn't do 
it.
    Response: The commenters assume that there will be insufficient 
agents left to deliver the crop insurance program so that RMA will have 
to deliver the program through FSA. However, as stated above, RMA does 
not believe that agents will be impacted to the extent that they will 
exodus the crop insurance program. This conclusion was supported by one 
of the expert reviewers that studied the impact on premium discounts on 
agents. As stated above, it would not be in the best interest of 
approved insurance providers to cut commissions so much that this would 
occur. The more likely outcome is that agents and approved insurance 
providers will negotiate a commission that is fair to both parties and 
if any savings are achieved, they can be used to pay a premium 
discount. However, it

[[Page 41843]]

is the market that will determine what reductions, if any, will be 
made.
    Comment: An agent asked what RMA will do to protect the smaller 
agents.
    Response: RMA is concerned with any possible negative effects that 
the premium reduction plan might have on the crop insurance delivery 
system. Certain provisions of the interim rule, such as the four 
percent premium discount maximum and the requirement that not all 
efficiencies can come from reduced compensation, seek to ensure that 
any changes resulting from expanded price competition are not so 
excessive that the industry or RMA cannot adjust quickly enough. With 
respect to protection for smaller agents, the fact that an approved 
insurance provider must still meet the standard of service required by 
the SRA and approved procedures for all farmers or risk sanctions under 
the SRA would tend to protect all agents, including smaller ones. For 
instance, if a smaller agent is providing the required service to his 
or her policyholders at an efficient cost, then an approved insurance 
provider could not reduce that agent's commissions without the risk of 
losing that agent, along with that agent's policyholders, to another 
approved insurance provider.
    Comment: An agent commented that the savings to the insured do not 
appear to be that significant but the loss to the agent adds up to 
several dollars.
    Response: If the commenter is correct and that the policyholder 
does not perceive much benefit from the premium discount relative to 
the impact of a commission reduction to the agent, then a free, 
competitive market would suggest that the policyholder would not be 
attracted to a premium discount and the policyholder's agent could 
affiliate with an approved insurance provider that does not offer 
premium discounts without the risk of losing customers. Nothing in the 
interim rule would prevent such free market choices by agents or 
policyholders.
    Comment: An agent commented that the commissions for other types of 
property and casualty insurance are very similar to the commission 
levels for crop insurance.
    Response: RMA has no direct information to be able to respond to 
this commenter's assessment. Moreover, if such rates are consistent 
with a long-term equilibrium, then approved insurance providers would 
not be able to reduce commissions to achieve efficiencies. Commission 
reductions can only be attained if both the agent and the approved 
insurance provider agree to such reductions and, as stated above, the 
agent always has the recourse of moving its book of business to another 
approved insurance provider if there is no agreement on a fair 
commission.
    Comment: An agent commented that if farmers thought agents were 
making too much money and wanted to reduce their salaries and spread 
the wealth, it would require them and RMA employees to take on other 
work to make up for the lost income. The commenter also suggested it 
was unlikely the savings would be passed to the farmer and more likely 
the savings would remain with the approved insurance provider.
    Response: Neither in the proposed rule nor in this interim rule has 
RMA suggested that agent commissions are too high. It is not RMA's 
position that agent commissions are too high or too low. RMA is not 
responsible for the regulation of agent commissions. The approved 
insurance provider and agent are the only parties that can determine 
what is a fair commission. With respect to whether savings would be 
passed to the farmer, the interim rule does not require that any 
savings attained by the approved insurance provider be passed on to the 
farmer. The market forces will determine whether premium discounts are 
paid. However, approved insurance providers have an incentive to pay 
premium discounts because their advertising is limited to past amounts 
that were paid and the year they were paid. Many farmers are not likely 
to change approved insurance providers or agents to sign on with an 
approved insurance provider that does not pay premium discounts.
    Comment: Several agents commented that they have already been 
adversely affected by the premium reduction plan because they've lost 
customers and that it would have an impact on their state.
    Response: RMA acknowledges that under the current premium reduction 
plan, where the premium discount was guaranteed up front in a fixed 
amount, there was a strong incentive for policyholders to shift 
approved insurance providers and agents. This behavior may continue 
under the interim rule but changes to the premium reduction plan will 
allow for a longer term transition and make it less likely. First, the 
premium discount can no longer be guaranteed or an amount promised at 
the time of sale. Second, farmers that are satisfied with the service 
they receive from their current agent are less likely to switch to 
other agents, even if there is a chance that a premium discount may be 
paid at some point in the future.
    Comment: An interested party commented that there are many small 
and mid-sized agents selling and servicing crop insurance who are very 
efficient, as well as the larger agents. The commenter states that to 
make the assumption that these agents will become more efficient simply 
by reducing agent compensation is simply not correct.
    Response: The commenter incorrectly assumes that the purpose of the 
premium reduction plan is to reduce agent commissions and this is not 
correct. The purpose of the premium reduction plan is to implement the 
intent of Congress to permit approved insurance providers to compete on 
price by evaluating their own business operations to determine whether 
they can deliver the program more efficiently. It must be remembered 
that participation in the premium reduction plan is entirely voluntary 
and it is the approved insurance providers that determine where they 
can cut costs and they cannot cut agent commissions without the consent 
of the agents. If agents are already efficient and there is no room for 
negotiation of lower commissions, it is presumed that the approved 
insurance provider will look to other avenues to attain savings.
    Further, under the interim rule, approved insurance providers no 
longer have to report how and from where savings are to be attained. 
Since premium discounts are paid on actual savings, not projected, RMA 
will simply be reviewing the actual costs reported to determine whether 
there has been savings and the amount of premium discount that can be 
paid in each state in accordance with a formula, which will be provided 
in procedures, that looks at the approved insurance provider's entire 
crop insurance operation.
    Comment: Several agents and interested parties commented that for a 
large percentage of policies, the expenses exceed the amount of 
commission earned and for many others the agent barely breaks even. A 
commenter states the part of the book that is earning a profit must 
subsidize the rest of the policies. A commenter stated that it actually 
loses money providing insurance for some small farmers.
    Response: RMA acknowledges that, because servicing a policy by an 
agent entails a relatively large fixed cost, certain small policies 
currently may have to be serviced at a loss to the agent and the 
approved insurance provider and that larger accounts tend to subsidize 
these small accounts. This is a condition that exists notwithstanding 
whether there is a premium reduction plan in existence. Further, when 
RMA determines whether there is an

[[Page 41844]]

efficiency, it is looking at the book of business and the determination 
of the amount of premium discount is done on a state basis. Approved 
insurance providers determine how any savings are attained and, if 
reductions in agent commissions may be a tool, it can decide what 
commissions are cut. There is nothing in the interim rule that would 
preclude an approved insurance provider from only cutting the 
commissions of policies with premiums that exceed a certain threshold 
and leaving the medium and small policies untouched. As RMA has stated 
above, the determination of what constitutes a fair commission is a 
matter between the agent and the approved insurance provider.
    Commenter: Several agents and interested parties commented that 
each year it has to battle retaining the bigger accounts because of 
outfits like the local Farm Credit Service, which have enticed some 
insured's away by offering operating loans at \1/2\% less interest if 
they also carry the client's crop insurance coverage. A commenter 
states that banks and lending institutions should not be able to force 
farmers to insure with them as a condition of getting loans.
    Response: The commenter is referring to an issue that is not 
directly related to the proposed rule. However, the conduct complained 
of may constitute an impermissible rebate. Only cooperatives and trade 
associations that sell crop insurance approved by RMA may take all or a 
portion of the A&O subsidy they receive and pay a portion of their 
policyholders' administrative fees or premium. However, there is no 
authority for any bank or lending institution to offer a reduced loan 
rate conditioned upon the purchase of insurance. If the commenter has 
specific information, it should report it to RMA.
    Comment: Several interested parties and agents commented that 
reduced agent compensation could increase instances of novice agents, 
such as agribusiness firms that sell seeds and equipment, easily 
entering the business of crop insurance in some states. The commenter 
stated that these firms have sources of profit other than agent 
commissions and could thereby help approved insurance providers offer 
crop insurance for lower premiums by servicing policies for less 
compensation than the current agent workforce. However, these firms 
lack the experience and skill of agents in the current delivery system 
and have incentives to bundle lower premiums with other goods and 
services. Commenter states that this could result in practices such as 
illegal rebating and tying arrangements. A commenter suggests that 
these entities could harm existing agents and that RMA should require 
that businesses derive at least 80-90% of their income from insurance 
to market crop insurance.
    Response: As stated above, all approved insurance providers and 
agents must comply with the same requirements of the SRA and approved 
procedures regarding service. Further, approved insurance providers and 
agents must comply with state licensing requirements for agents. If all 
of these requirements are met, RMA cannot preclude any agent from 
participating in the program, regardless of what other business it may 
be affiliated with. Further, farmers will determine if they are happy 
with the level of service they receive. As commenters have stated, 
farmers may be more interested in the level of service they receive 
than the possibility of receiving a premium discount. Therefore, no 
change is made as a result of this comment.
    With respect to the potential for conditioning the sale of crop 
insurance on whether a farmer purchases other products, such practice 
is prohibited under the SRA and if RMA determines that such practices 
are taking place, there are sanctions available under the SRA and, if 
such actions occur under the premium reduction plan, RMA has added 
sanctions to the interim rule that would allow it to withdraw 
eligibility for the opportunity to offer a premium discount, withdraw 
approval of all or a portion of the payment of a premium discount, 
effectively disqualify an approved insurance provider or agent from 
participating in the premium reduction plan, or taking remedial 
measures to correct the problem. The threat of an agent's farmers not 
receiving a premium discount even though farmers with other agents of 
the approved insurance provider receive the premium discount or of 
ineligibility to participate in the premium reduction plan should pose 
a substantial deterrent to, or sanction for, any such prohibited 
activity. If these remedies are insufficient, RMA can take action under 
the SRA. If anyone knows of such conduct, they should be reporting it 
to RMA.
    With respect to the suggestion of requiring that some minimum 
percentage of an agent's revenues come from insurance to qualify as a 
crop insurance agent, such a qualification would likely be extremely 
burdensome on agents, approved insurance providers, and RMA and would 
not necessarily ensure that an agent that met such a requirement would 
be better qualified to serve crop insurance policyholders as one who 
failed to meet such requirement. Further, many agents today derive only 
a portion of their income from selling crop insurance. Therefore, RMA 
does not think such a requirement would be in the best interests of 
farmers or the delivery system.
    Comment: Several agents and interested parties commented that as 
income is drastically reduced, staff would have to be let go even 
though the workload is the same or has greatly increased. A commenter 
stated that, due to drought, changes in the program, and added 
paperwork, it takes a great deal more time to service the needs of 
farmers. A commenter states this additional work would cut into the 
time spent with farmers. A commenter stated it may have to find other 
sources of income. Commenters state that farmers will suffer.
    Response: RMA does not agree with the commenters' initial 
assumption that the premium reduction plan will be the catalyst for 
such a chain of events. As stated above, commissions will only decrease 
in an amount the market can bear. Further, approved insurance providers 
have incentives not to financially stress agents to the point that they 
must let staff go and find other sources of income. Approved insurance 
providers do not want to risk that their agents would be unable to 
service their policyholders in accordance with the requirements in the 
SRA and approved procedures.
    Comment: An agent commented that the premium reduction plan will 
increase regulation in the crop insurance industry and the delivery of 
the crop insurance program, thus negatively impacting farmers.
    Response: RMA disagrees with the commenter's assessment on several 
grounds. First, participation in the premium reduction plan is 
voluntary and only those approved insurance providers that wish to 
participate will need to subject themselves to the added requirements 
of the interim rule. Second, the requirements in the interim rule have 
been drastically reduced from those in the current program or the 
proposed rule. These changes should substantially reduce the 
administrative burdens on approved insurance providers and RMA to carry 
out this regulation. Specifically, RMA has removed the requirements 
that approved insurance providers state how they will attain the 
efficiencies, estimate the amount of such efficiency, provide 
documentation to support such estimates, and determine the amount of 
the premium discount because these requirements are no longer necessary

[[Page 41845]]

now that premium discounts will be paid based on the actual cost 
savings of the approved insurance provider. Now all approved insurance 
providers must provide is the name of the person responsible for 
implementing the premium reduction plan, the states in which the 
approved insurance provider is seeking the opportunity to offer a 
premium discount, a credible marketing plan to ensure that all farmers, 
including small, limited resource, women, and minority farmers have 
access to a premium discount, and a certification that service will not 
fall below that required by the SRA and approved procedures by any cost 
saving measures implemented by the approved insurance provider. The 
burden on the back end is also reduced because the determination of 
efficiencies and the amount of premium discounts will now be based on 
the Expense Exhibits provided with the Plan of Operations and a formula 
that RMA will provide in procedures. Further, many of the other 
requirements, such as no reduction in service, having the operational 
and financial capacity, etc., currently exist in the SRA and are only 
reiterated in the rule to remind participants of their obligations 
under the crop insurance program.
    Comment: An interested party comments that the agent is the 
backbone of the growth and success of this program, and agents are 
receiving little compensation for the amount of work that they do on 
behalf of the farmers of America. The commenter states that as more and 
more regulations and penalties are being placed on the system, the need 
for qualified agents to deliver this product becomes a more necessary 
part of the plan.
    Response: RMA agrees that agents play a vital role in the delivery 
of Federal crop insurance to farmers and that it cannot operate without 
them. RMA cannot pass judgment on the amount or fairness of the 
compensation the agents' receive to perform this service but the level 
of compensation is a result of a voluntary agreement between an 
approved insurance provider and the agent. If compensation were too 
little, then the agent would not choose to enter into the agreement and 
if too much, then approved insurance providers would choose not to.
    RMA also agrees that with the growing complexity of the crop 
insurance program, and RMA's vigilance in ensuring that program 
requirements are complied with, there is a need for knowledgeable, 
qualified agents. However, RMA does not believe that this interim rule 
will negatively affect the knowledge or skill of agents. Many of the 
requirements under this rule are the same requirements that exist under 
the SRA. Further, requiring that any premium discount be paid after 
cost savings have been realized will mitigate or eliminate any 
potential dramatic changes to the program.
    Comment: Many agents and interested parties commented that 
commissions have been reduced drastically in the past few years and the 
premium reduction plan will further reduce commissions but not the 
workload. A commenter stated that costs are increasing. A commenter 
stated that agents are doing twice the work that they used to do in the 
past because of all the different products that have been introduced 
and also that they do most, if not all of the inputting of information 
that used to be completed at the approved insurance provider level. 
Commenters stated that agents are required to attend classes for 
updates to stay on top of the changes and accurately explain the 
coverage options to the farmer and agents have been very patient with 
the constant changes and additional requirement that have been placed 
upon them. A commenter stated agents also put on workshops and hire 
quality speakers to inform clients of the values of having MPCI 
insurance, and have the increased cost of software and computer 
updating.
    Response: RMA admits that the crop insurance program has steadily 
grown more complex with more and varied policies available to farmers. 
RMA admits that agents must be trained each year to stay abreast of 
program changes and explain such changes to their policyholders. 
However, the sharing of the workload involved in the inputting of 
information is an issue between the agent and the approved insurance 
provider. RMA does not dictate who inputs this information.
    Further, because commission rates are a private matter negotiated 
between agents and approved insurance providers, RMA cannot comment 
with respect to whether these commissions have been reduced drastically 
in recent years. However, RMA does know that in the last few years, 
premium volume has increased significantly as farmers purchase revenue 
policies and increased their coverage levels following the increase in 
premium subsidies in 2001. Since agent commissions are generally based 
on the percentage of premium, this means that although an agent's 
commission rate may have fallen through this period, any decline in 
commission rates may have been more than offset by the dramatic 
increase in average premium per policy. This is confirmed by expense 
statements provided to RMA by approved insurance providers, which show 
both total commission dollars paid to agents and dollars commissions 
per policy rising sharply since 2000.
    Comment: Several agents commented RMA should strongly simplify this 
program, and then and only then should they consider any reduction in 
premiums to the agents that are working hard to provide this coverage 
in a timely and efficient manner. A commenter stated that there would 
have been premium savings to farmers, but all at the expense of the 
agent. For example, CRC and RA could be combined, unit structures could 
be simplified, and the time between releasing of Revenue Assurance Base 
Prices and pricing factors and sales closing date could be expanded.
    Response: RMA has been striving to simply the crop insurance 
program. However, it must do so while still maintaining program 
integrity. Therefore, some of the commenters suggestions are under 
consideration, such as the combination of CRC and RA. However, others 
depend on whether adopting such changes would introduce program 
vulnerabilities. Even without simplification, RMA would still be 
obligated to make available the premium reduction plan because it is 
based on whether approved insurance providers can operate the program 
for less than their A&O subsidy. If the costs are too high under the 
current program, then approved insurance providers would not be able to 
participate. However, the intent of section 508(e)(3) of the Act is to 
provide the approved insurance providers with the opportunity to enter 
into price competition.
    With respect to the commenters' prediction that premium discounts 
to farmers will inevitably come at the expense of agents, nothing in 
the premium reduction plan requires this conclusion. Approved insurance 
providers have to assess their business operations to determine the 
most appropriate place for savings. Further, commission is freely 
negotiated between the agent and approved insurance provider. This 
means agents still have a voice because if they do not like the 
commission they are offered, they are free to move their book of 
business to other approved insurance providers. The market will 
determine what, if any, reductions in commissions there will be.
    Comment: A few agents commented that if the workload were reduced, 
the premium reduction plan would be tolerated.

[[Page 41846]]

    Response: The only workload required of agents by RMA are those 
contained in the SRA and approved procedures. RMA continually reviews 
these procedures to ensure that they are meaningful and necessary. As 
procedures no longer become necessary, they will be removed. However, 
RMA is unable to reduce the workload any further than that. Further, 
RMA is unable to change any workload that may be imposed on the agent 
by the approved insurance provider. That is negotiated between the 
agent and approved insurance provider.
    Further, it is the agent's choice whether to write for approved 
insurance providers that are eligible for the opportunity to offer a 
premium discount. As commenters have stated, there are farmers that 
will value superior service over the potential for a premium discount 
and who will remain with the agent even if the agent elects not to 
participate in the premium reduction plan. As RMA has continually 
stated, the purpose of section 508(e)(3) of the Act was to create 
competition so the interim rule allows the market, to the maximum 
extent practicable, to dictate who will participate and who will not.
    Comment: A few interested parties commented that every year there 
are more demands placed on the approved insurance providers for 
training, auditing and reviewing, verifying data certified by the 
insureds, etc. That means that every year the approved insurance 
providers' costs go up. The commenter asks how RMA can expect the 
approved insurance provider to act on all these added demands and THEN 
pay them less for it on a premium reduction plan.
    Response: RMA does not require that an approved insurance provider 
participate in the premium reduction plan. Participation is strictly 
voluntary. Further, no approved insurance provider can pay a premium 
discount until the approved insurance provider can prove that its A&O 
costs are less than the A&O subsidy. Since premium discounts are now 
based on actual cost savings, to the extent that approved insurance 
providers are unable to sufficiently reduce costs, the only consequence 
under the premium reduction plan is that no premium discount will be 
paid. However, if the approved insurance provider can qualify to pay a 
premium discount, section 508(e)(3) of the Act obligates RMA to provide 
the opportunity.
    Comment: Several agents and interested parties commented that the 
lack of agents, less agency office staff, and service centers will 
result in mistakes made on crop policies and the whole crop insurance 
system will suffer, including lower or no indemnity payments. A 
commenter stated that the time that goes into learning all of the 
regulations is very high and if an agent does not take this time, the 
mistakes can be very costly. Another commenter stated that one reason 
the independent agencies are getting out of the business is the 
increased complexity of the program and the potential lawsuits that may 
be filed because of the penalties being applied for honest mistakes. A 
commenter stated that agents take the time to know their farmers 
operations.
    Response: As stated above, the premium reduction plan is unlikely 
to result in reductions in staff if such reductions are likely to 
result in more mistakes. First, the litigation costs associated with 
such mistakes are likely to result in little if any savings upon which 
to pay a premium discount. Further, approved insurance providers have 
an incentive to ensure there is no reduction in service beyond that 
required in the SRA and approved procedures and the imposition of 
sanctions under the SRA would make it untenable to allow such a 
condition to exist.
    Further, the commenter implies that the time an agent takes to know 
their policyholders' operations now might not happen under the premium 
reduction plan. However, under the interim rule, the payment of a 
premium discount is no longer guaranteed up front and the farmer will 
know whether the agent is providing the level of service he requires, 
which may exceed the level required by RMA, long before the farmer 
knows whether he will receive a premium discount. Therefore, agents 
have the incentive to ensure that their customers risk management needs 
are met because they risk losing a customer, even if they have complied 
will all required of RMA.
    Comment: An interested party commented that in the event farmers 
are going to try to purchase this product on the web without the 
counsel of licensed agents, their only recourse in the event that an 
error is made is to sue RMA for damages. The commenter stated the 
farmer will make mistakes, they always do, and when they do they want 
someone to blame, RMA has placed the agent in the forefront of that 
with the SRA, and if RMA removes the agent, RMA is directly in the line 
of fire.
    Response: RMA has not suggested and nothing in the interim rule or 
section 508(e)(3) of the Act suggests that the crop insurance agent 
should be removed from his or her role in helping America's farmers 
with their risk management needs. Further, RMA has not suggested that 
farmers be required to use the internet to purchase crop insurance. 
Approved insurance providers are still required to ensure that their 
policyholders get the service mandated by the SRA and approved 
procedures. Further, even if approved insurance providers elect to 
offer crop insurance via the internet, certain functions are still 
required to be performed by licensed agents and the use of the internet 
does not abrogate this requirement.
    RMA does anticipate that information technology will likely become 
increasingly important in all aspects of the delivery of crop 
insurance. To the extent that an approved insurance provider can 
harness that technology for cost efficiencies for delivery of crop 
insurance, RMA is obligated to consider such cost efficiencies in the 
context of qualifying for the payment of a premium discount.
    Comment: An agent commented that since a farmer's premium 
fluctuates as high as 10-20% every year because the prices and rates of 
each crop change annually, the farmer would not even notice he was 
getting a discount.
    Response: There are price and premium rate fluctuations and 
coverage choices by the farmer each year that affect premiums. However, 
this does not mean the farmer would not notice a premium discount, 
especially when, under the alternative proposal adopted in the interim 
rule, such premium discount is likely to be in the form of a specific 
payment in the future. But even assuming the commenter is correct, this 
provides another reason why the drastic changes that commenters claim 
will occur are less likely. RMA has attempted to craft a program that 
offers the possibility of a benefit to farmers while minimizing adverse 
effects to the program.
    Comment: Several interested parties and agents commented that 
farmers will be forced to make their purchase without the expertise of 
a local, tenured, qualified agent and the end result will most likely 
be greater unpaid claims when the farmers suffer crop losses. 
Commenters also stated that reduction in the agent force will lead to 
many farmers being forced out of business due to inadequate coverage 
levels or crop insurance simply not being practicably available in 
their area. Commenters stated that as many farmers become less 
protected due to inadequate coverage in ensuing years, there will be 
greater support among farmers and their farm groups for disaster aid 
bailouts and less support for a strong national crop insurance program.

[[Page 41847]]

    Response: Nothing in section 508(e)(3) of the Act or in the interim 
rule would force local crop insurance agents out of business, thereby 
causing farmers to make uninformed, poor decisions, suffer from a lack 
of claims servicing, or be deprived of adequate local crop insurance 
products. The commenter's are apparently extrapolating these 
conclusions from an expectation that the proposed rule will cause 
agents' commissions to be cut so deeply that local agents will abandon 
their businesses in significant numbers. As stated above, it will not 
be in an approved insurance provider's interest to devastate its own 
agent force, and the service that its agent force provides, just to be 
able to offer a premium discount. It is also not in the approved 
insurance provider's best interests to take any action that could 
result in its customers being driven out of business.
    Approved insurance providers are also not likely to take any action 
that could result in an inability to service policies as required by 
the SRA and approved procedures. In addition, as stated above, the 
payment of any premium discount will occur long after the farmer's 
policy has been serviced and a claim paid. If the farmer is not 
satisfied with such service or loss adjustment, the farmer is likely to 
move on to another agent or approved insurance provider. Therefore, 
under the interim rule, approved insurance providers have added 
incentives to ensure the proper service of farmers, which includes a 
skilled, knowledgeable agent force. Under the premium reduction plan 
contained in the interim rule, there is no reason why the crop 
insurance program, approved insurance providers, agents, and farmers 
will not continue to thrive.
    Comment: An agent commented that the premium reduction plan will 
reduce the availability of crop insurance to our rural farmers. The 
commenter claims that many elder landowners rely on the agent's 
expertise to enable them to properly choose coverage levels, meet RMA 
deadlines, and inform them of new products.
    Response: There is no reason to assume that crop insurance will not 
be available to any farmer that wants it. As stated above, the interim 
rule now allows approved insurance providers to select states in which 
it wants to participate in the premium reduction plan to avoid 
situations where approved insurance providers may pull out of a state 
to avoid having to provide a premium discount in that state. Further, 
approved insurance providers have an incentive to maintain their 
customer base in order to realize potential gains and would not take an 
action that would result in a lack of agents, reduction in service, or 
farmers seeking other approved insurance providers.
    Further, RMA agrees with commenters that there are farmers who rely 
heavily on the agent. These are the farmers that are likely to value 
service over the potential for a premium discount and are likely to 
remain with their agent, even if the agent does not offer a premium 
discount. Therefore, all agents will be able to compete, either on 
service or with the potential for a premium discount and the market 
will determine how it will meet the greatest needs of farmers.
    Comment: Many agents and interested parties commented that this 
plan is placing additional burdens and work on the farmers. Farmers 
have trouble enough getting their paperwork filed on time with an agent 
calling and explaining things to them. Commenters state that the 
average farmer does not understand their crop insurance policy as well 
as they should. Commenters state that with the premium reduction plan, 
farmers would be expected to understand and file their own crop 
insurance forms and complete the necessary requirements and very few 
would be able to do this as needed and required by the policy. They 
state that farmers would not be willing to attend meetings, updates, 
and review policy changes from year to year and with paperwork not 
being completed as necessary, many farmers could be left out in the 
cold come claim time. Commenters stated that farmers have come to rely 
on agents for assistance with reporting deadlines, screening 
information and quality control. A commenter stated that requiring 
farmers to do their own work could result in increased fraud, waste, 
and abuse. A commenter asked if farmers will be required to obtain E&O 
insurance.
    Response: There is nothing in the proposed or interim rule that 
will increase burdens on farmers or require them to do their own work. 
Approved insurance providers have to evaluate their business operation 
to determine where it can attain savings while still maintaining its 
agent and customer base because the latter is where the approved 
insurance provider makes its profit. Approved insurance providers are 
also not going to take actions that will result in farmers not 
understanding their coverage, missing deadlines, etc. It is in the 
approved insurance provider's best interest to keep their customers 
satisfied or risk losing their customers to a competitor. Therefore it 
is unlikely that the tasks currently being performed by an agents would 
somehow, under the premium reduction plan, be shifted to the farmer--
tasks such as filing forms, attending update meetings, reviewing policy 
changes, ensuring that reporting deadlines are met, screening 
information, and maintaining control over the quality of insurance 
information.
    Further, the SRA and approved procedures mandate certain services 
be provided to farmers and approved insurance providers and agents can 
be sanctioned for failing to provide those services.
    Comment: Many agents and interested parties commented that farmers 
are not ready to use the internet to get their service and they need 
the agent's expertise. A commenter stated that farmers will have to do 
the work themselves or go to large brokers who will not offer the kind 
of one on one advice the local agent gives to the farmer now. A 
commenter stated that having a computer and access to the internet does 
not make a farmer a crop insurance expert.
    Response: As stated above, nothing in the proposed or interim rule 
requires that a farmer use the internet to purchase crop insurance, do 
the administrative work associated with obtaining a policy, or abandon 
the services provided by a traditional agent. Approved insurance 
providers still have the incentive to ensure their customers are 
satisfied or risk losing their business, which affects the approved 
insurance provider's profitability. In addition, the level of service 
required by the SRA and approved procedures must still be provided or 
the approved insurance provider or agent risks sanctions imposed by 
RMA.
    Comment: Several agents commented that if farmers do not have the 
small town agency that they have been using they will have to go to the 
larger agencies which are not always close to where the farmers live. 
Any savings in premium could be eaten up in travel and long distance 
phone calls to service their crop insurance.
    Response: The commenters assume that the premium reduction plan 
will result in the elimination of the small town agency. However, as 
stated above, this is not likely to be the case. The approved insurance 
providers have an incentive to maintain their agent bases to ensure the 
required level of service is provided and enable them to maximize their 
profitability. Therefore, the agents and approved insurance providers 
will determine the fair commission to allow such agents to stay in 
business, provide the required service, and, if possible, allow the 
approved insurance provider to achieve some savings.

[[Page 41848]]

    Comment: An agent commented that it has seen how the discount can 
help farmers. The commenter states that many farmers chose to use the 
discount so that they could purchase additional coverage, and many 
farmers have seen the ads talking about the discount and purchased crop 
insurance for the first time in many years. The commenter stated that 
the premium discount is not going to be used by every farmer because 
many farmers are happy with their current coverage and agents. However, 
there are many farmers who do like to use the discount plan.
    Response: Under the proposed rule, premium discounts were likely to 
increase coverage levels because they resulted in a direct decrease in 
the amount of premium owed, which would allow farmers to increase 
coverage and pay the same amount as they would under the lower coverage 
level. It is not clear whether the interim rule will have the same 
effect because farmers will not receive their premium discount until 
long after premiums have been paid. While hope and the intent is that 
farmers would use the discount to purchase additional coverage in 
future years, farmers are free to use the discount in any manner they 
choose.
    RMA agrees that not all farmers are going to elect to insure with 
approved insurance providers that participate in the premium reduction 
plan. This is especially true under the alternative proposal adopted in 
the interim rule. Some farmers will prefer to receive superior service 
over the premium discount. This simply allows another mechanism for 
competition, price and service, and the market will determine which 
farmers value most.
    Comment: An agent commented that the premium reduction plan 
encourages farmers to go for quick and easy fixes rather than 
determining which true ``risk management'' solutions may best fit their 
operations, which can lead to less information and less proper risk 
management. The commenter stated that purchasing additional coverage 
with the discount is not always beneficial because it may not be 
economical and farmers may actually receive a reduced disaster payment.
    Response: Under the alternative proposal adopted in the interim 
rule, no premium discount is guaranteed up front. Therefore, farmers 
have no incentive to go for quick and easy fixes. Because the premium 
discount payment is based on actual costs and may never be paid for a 
reinsurance year, it is unlikely farmers' behavior will change much and 
it is likely that they will continue to seek the best risk management 
tools for their operation. Further, although premium discounts can be 
used to purchase additional coverage, there is no requirement that they 
do so. The purpose of section 508(e)(3) of the Act is to allow farmers 
to benefit from price competition, which is what the interim rule does.
    Comment: A farmer commented that the premium reduction plan will 
result in farmers being left without coverage and service needed to 
protect their crops.
    Response: It is unclear from the comment why the commenter would 
predict that farmers would be left without coverage as a result of the 
premium reduction plan. If the commenter is concerned that agent 
commissions will be reduced to the point that there will no longer be 
agents in the area to serve the farmers, as stated above, this is not 
likely to occur. The approved insurance provider has too much incentive 
to maintain its customers and agents to cut commissions to the point 
that either or both may go to another approved insurance provider. 
Further, approved insurance providers are required to provide service 
to farmers as required by the SRA and approved procedures. Approved 
insurance providers are not going to risk sanctions under the SRA by 
taking actions which may result in a reduction in this required 
service.
b. Administration and Verification
    Comment: An agent suggested that RMA only allow those approved 
insurance providers with strong financial positions and a strong 
management teams to participate in the premium reduction plan. The 
commenter suggested an approved insurance provider allowed to pay a 
premium discount should be in a strong financial position (EX: At least 
an A-A M Bests rating), not just partnered with a strong reinsurer. The 
commenter also suggested an approved insurance provider allowed to pay 
a premium discount should have an experienced management team with 
minimal turnover of upper management and have trained adjustors in 
EVERY state in which they write business.
    Response: To participate in the premium reduction plan under the 
interim rule, an approved insurance provider must first qualify 
financially and operationally under the SRA. After the insolvency 
issues regarding American Growers, RMA has heightened its scrutiny of 
the approved insurance providers and has required more detailed 
financial information. Further, under the alternative proposal adopted 
in the interim rule, RMA approval for payment of premium discounts is 
conditioned upon the existence of actual cost savings and the approved 
insurance provider's compliance with the SRA, including being in an 
acceptable financial condition. Since approval of the payment of an 
amount of premium discount will not occur until after the end of the 
reinsurance year, RMA should be in a good position to ensure that the 
payment of a premium discount will not jeopardize the financial 
condition of an approved insurance provider.
    Further, because the approval of the payment of premium discounts 
is based on actual cost savings and is made after the financial 
condition of the approved insurance provider is known, there is no need 
to add requirements to those provided for in the SRA regarding the 
partnering of approved insurance providers with strong reinsurers and 
the makeup and turnover of the management teams. The requirements in 
the SRA should be sufficient to ensure the continued financial 
stability of the approved insurance providers.
    With respect to loss adjusters, the loss adjustment process under 
the premium reduction plan is no different than under the current 
policies and approved procedures. Therefore, there is no need to impose 
additional requirements regarding the availability and location of loss 
adjusters. Further, market forces are likely to play a significant role 
because if farmers' claims are delayed, they are likely to move to 
another approved insurance provider. Therefore, the suggested changes 
have not been made.
    Comment: Several agents and interested parties suggested RMA 
consider a premium modification plan that is based on a farmer's good 
experience or loss history. A commenter states that this will reward 
the top farmers and give incentive for quality farming practices by all 
farmers. One commenter stated it has a hard time believing a farmer 
deserves a discount and a loss check in the same year.
    Response: There is no rational basis to condition the payment of 
the premium discount on whether the farmer was paid a loss in a crop 
year or their experience. Under section 508(e)(3) of the Act, approved 
insurance providers can pay premium discounts to their farmers if they 
can prove that their actual A&O costs were less than their A&O subsidy. 
The loss history has no bearing on whether such efficiency is attained 
for a particular reinsurance year. Further, even though in years of 
high losses where it may be difficult for the approved insurance 
provider to achieve the requisite savings because of the increased loss 
adjustment expense,

[[Page 41849]]

there is no justification to punish farmers because of the vagaries of 
weather or other natural disasters. If the approved insurance provider 
attains an efficiency, it must be permitted to pay the premium discount 
to all its farmers. Therefore, the suggested changes have not been 
made.
    Comment: An agent commented that if RMA still thinks it needs to 
offer a premium reduction plan, then the premium discount should be the 
same no matter which approved insurance provider or agent the farmer 
buys it from and there would need to be less regulation and paperwork 
involved in order for an agent to make a living selling it.
    Response: RMA has no choice with respect to whether it will make 
the premium reduction plan available to approved insurance providers. 
Section 508(e)(3) of the Act provides approved insurance providers with 
the right to request to be able to pay premium discounts and if an 
efficiency is attained, RMA can only limit the manner in which such 
payments are approved to be made. Further, RMA cannot require all 
approved insurance providers pay the same amount of premium discount. 
The payment of a premium discount is conditioned upon the approved 
insurance provider attaining an efficiency and the amount must 
correspond to the amount of such efficiency. Since the approved 
insurance providers all have different compositions of their books of 
business and operations, it is highly unlikely that approved insurance 
providers will be able to attain the same amount of savings in the same 
places. Therefore the suggested changes have not been made.
    Comment: A few agents suggested that if RMA must keep the premium 
reduction plan, keep it the way it was planned--through the internet 
exclusively.
    Response: There is no rational basis to restrict the premium 
reduction plan to the use of the internet or any other specific cost 
efficiency. It is the approved insurance providers who are to determine 
whether they can deliver the program for less than the A&O subsidy. 
They are in the best position to determine how to attain savings based 
on their individual operations. It would be arbitrary and capricious 
for RMA to dictate the manner in which the efficiencies must be 
attained, especially since such a requirement could penalize farmers 
who do not have access to the internet. Therefore, the suggested change 
has not been made.
    Comment: A few agents expressed concern that nothing in the rule 
defines expectations for agents selling for more than one approved 
insurance provider.
    Response: RMA agrees with the commenter that the proposed rule did 
not address expectations for agents selling for more than one approved 
insurance provider. However, RMA agrees that there may be legitimate 
concerns that agents that write for more than one approved insurance 
provider will direct the large policies to the approved insurance 
provider that is eligible for the opportunity to offer a premium 
discount and the small farmers to its other approved insurance 
providers. Such a practice is unlikely to persist in the long run 
because those approved insurance providers that write only small 
policies through an agent are apt to either require more equality in 
the distribution of policies from the agent or sever their contractual 
relationship with the agent. However, to ensure that no unfair 
discrimination occurs, the interim rule now requires agents to inform 
their insured of all approved insurance providers they write for that 
are eligible for the opportunity to offer a premium discount.
    Comment: An interested party commented that it should remain a 
concern for RMA that allowing access to approved insurance providers 
that own their own reinsurance company could compromise the program.
    Response: RMA agrees that if commercial reinsurance market 
transactions are not excluded from consideration when determining an 
efficiency, the A&O costs may not reflect the actual cost to deliver 
the program. Commercial reinsurance has nothing to do with the delivery 
of the crop insurance policy to the farmer. It is a tool for approved 
insurance providers to be able to manage their risk and each approved 
insurance provider handles commercial reinsurance differently. 
Therefore, the interim rule considers A&O costs to include only 
compensation paid, loss adjustment expenses, and other operating 
expenses reported on the Expense Exhibits provided with the Plan of 
Operations and has revised the definitions of ``A&O costs,'' ``A&O 
subsidy,'' and ``efficiency,'' to clarify that any costs incurred or 
commissions earned from commercial reinsurance are not included for 
purposes of the premium reduction plan.
    Comment: An approved insurance provider commented that the proposed 
rule does not assist it in lowering its current administrative and 
operating expenses to a level that would qualify it for a premium 
discount. The commenter stated the inefficiencies in the Federal crop 
program are a direct result of the costs associated with interpreting, 
maintaining and implementing the regulatory requirements to administer 
the program to the greatest extent possible. The commenter states it 
prides itself on its compliance with these guidelines and feels a huge 
responsibility to provide financial security to the farmers in the 
States where it does business. Any type of approved premium reduction 
plan must be based on a strict and enforceable process with the 
appropriate penalties in place to ensure the approved provider is not 
compromising service to the farmer.
    Response: RMA agrees that the premium reduction plan does not tell 
approved insurance providers how to be able to deliver the program for 
less than their A&O subsidy. It would be impossible to do so since each 
approved insurance provider operates differently and is in the best 
position to determine whether efficiencies can be had in its operation. 
RMA also agrees that the premium reduction plan must be based on a 
strict enforceable process with appropriate penalties. To accomplish 
this goal, RMA adopted the alternative proposal because it would 
require the approved insurance provider to prove actual costs savings 
instead of relying on projections that might not be realized. There are 
also provisions in the interim rule that require that determinations of 
A&O costs be based on Expense Exhibits that are provided with the Plan 
of Operations and audited and certified by an independent certified 
public accountant experienced in insurance accounting after the 
reinsurance year and before any premium discount can be approved. 
Further, determinations of the premium discount that can be paid in the 
state are based on a formula that will be provided to the approved 
insurance provider through procedures. The standard of service that 
will be used to determine whether there has been a reduction in service 
are those currently contained in the SRA and approved procedures. These 
and other provisions in the interim rule create a strict and 
enforceable standard that can be applied to all approved insurance 
providers. In addition, RMA has added different sanctions, such as 
withdrawing approval for all or part of the payment of a premium 
discount and disqualifying agents or approved insurance providers from 
participating in the premium reduction plan, that allow it to better 
tailor the sanction to the offense.
    Comment: Several approved insurance providers, loss adjusters and 
interested parties commented that if the

[[Page 41850]]

proposed rules are adopted in their entirety and, more importantly, 
followed and evenly enforced for all signatories by RMA, it does not 
appear that any of the current approved insurance providers would meet 
the eligibility criteria. A commenter stated that reductions in the A&O 
subsidy rate will make it impossible to reduce expenses below the A&O 
subsidy paid by RMA. A commenter stated that it is even more difficult 
to envision an approved insurance provider being able to provide a 
premium discount based on delivery cost efficiency because 
implementation of the Combo Policy, a new DAS, and CIMS will require 
millions of dollars to be expended by RMA and the approved insurance 
providers, and will cause a significant strain on staffing resources 
for both RMA and the approved insurance providers for several years to 
come.
    Response: Under the interim rule, it is unlikely that any approved 
insurance provider would fail to be determined eligible for the 
opportunity to offer a premium discount. However, it is true that not 
every approved insurance provider may attain sufficient savings to 
enable them to receive approval to pay a premium discount. The purpose 
of section 508(e)(3) of the Act is not to guarantee that all approved 
insurance providers will qualify to pay a premium discount. Section 
508(e)(3) simply gives approved insurance providers the opportunity to 
compete on service and price and farmers the opportunity to receive a 
benefit they may not otherwise receive. Because the premium discount is 
no longer guaranteed up front, there should be no harm to approved 
insurance providers if they cannot pay premium discounts because the 
farmers should not have expectations regarding the guaranteed receipt 
of such discounts.
    Comment: An agent questioned the proof for RMA's statement that 
``it was also easy to determine whether the reduction in premium from 
the efficiencies corresponded to the states from which they were 
derived.''
    Response: The commenter is referring to the background section of 
the proposed rule dealing with RMA's experience in approving the 
approved insurance provider currently authorized to offer a premium 
reduction plan. The full quote is: ``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 reductions applied to all states in which the approved insurance 
provider wrote business.'' In other words, RMA analyzed the expense 
schedules of the approved insurance provider before and after the 
application of cost efficiencies, including state level information on 
agent commissions. What RMA found in examining these documents was that 
the cost efficiencies (cost reductions) proposed by the approved 
insurance provider were proportionately the same for each state and, in 
total, were equal to the single percentage amount of premium discount 
sought by the approved insurance provider to be offered in all states. 
Therefore, the approved insurance provider complied with the 
requirement in section 508(e)(3) of the Act that premium discounts must 
correspond to cost efficiencies. The fact that a comparison of the 
exhibits in this particular application so clearly demonstrated 
correspondency is the basis for RMA categorizing the process as 
``easy.'' The same was not true for other applications that RMA 
received.
    However, RMA has developed a relatively simple means to allow for 
state variability through the approval of premium discounts for each 
state selected by the approved insurance provider. It developed a 
formula that could be applied based on the information already 
submitted by the approved insurance provider on the Expense Exhibits 
provided with the Plan of Operations. This formula works with all 
business operations and provides an easy means of allocating costs.
    Comment: An agent commented that the rule does not address the 
issues and problems raised by the diverse applications received by RMA. 
The commenter stated that it raised the same issues in 2003 and that if 
the premium reduction plan continues it will lead to the demise of the 
crop insurance program and Congress having to authorize record breaking 
ad hoc disaster relief.
    Response: While the proposed rule sought to eliminate the problems 
and issues raised by the diverse applications received from approved 
insurance providers by requiring the same premium discount be provided 
in all states in which the approved insurance provider did business, 
RMA realized that such a proposal did not meet the business operations 
of all approved insurance providers. From comments and analysis 
provided to the proposed rule, RMA realized that allowing approved 
insurance providers to select the states where they want the 
opportunity to provide a premium discount allowing variations in 
premium discounts between states were important to the financial 
stability of the approved insurance providers and the crop insurance 
program. As a result, RMA adopted the alternative proposal that, as 
stated above, would allow the selection of states and state 
variability. For instance, the issue raised in some applications that 
allowed its agents to carry both the premium reduction plan and non-
premium reduction plan policies for the same approved insurance 
provider is addressed in the interim rule by requiring agents to notify 
their policyholders and applicants of the names of all approved 
insurance providers that are eligible for the opportunity to offer a 
premium discount. Further, the concerns about the ability to allocate 
costs and provide cost projections for savings have been eliminated 
through the adoption of the alternative proposal.
    Comment: An interested party comments that RMA cites an example of 
a 3 percent across the board computing cost efficiency. The commenter 
states that RMA states this would warrant a single discount across an 
entire book of business. However, if the efficiency to discount 
relationship is at the plan of insurance level, an approved insurance 
provider should first allocate computer costs across plans of 
insurance. The commenter states that if it costs $50 in computer costs 
per policy, but each policy generates a different amount of premium, 
then the application of an equal discount, say 1% will not correspond 
to the efficiency at the plan of insurance level. For example, policy A 
generates $1,000 in premium and costs $50 in computing costs. Policy B 
generates $500 in premium and costs $50 in computing costs. A 1% 
discount results in $10 in savings on policy A and $5 in savings on 
policy B. Yet the efficiency is the same dollar amount for both 
policies. Clearly the discount does not correspond to the efficiency in 
this case.
    Response: The commenter is correct that the percentage may not be 
the same on a plan of insurance basis. However, nothing in section 
508(e)(3) of the Act requires that the efficiencies and corresponding 
premium discounts be determined on a plan of insurance level. It would 
be impossible to administer the program at such a level because 
approved insurance providers do not report their costs on a plan of 
insurance basis. RMA would never be able to verify such costs, it could 
lead to manipulations of cost allocations in order to achieve savings.
    As other commenters have pointed out, to properly be able to 
administer the premium reduction plan RMA needs to develop a rule that 
is clear, strict and enforceable. Based on the comments,

[[Page 41851]]

RMA determined that the proposed rule did not meet these criteria 
because they still may have required complex accounting rules and did 
not allow sufficient flexibility for the different business operations 
of the approved insurance providers. However, RMA believes the interim 
rule accomplishes these goals. The criteria for cost allocation is 
relatively simple, based on reported and verifiable information, 
contained in a formula that minimizes the opportunities for the 
manipulation of cost allocations, and it allows the flexibility for 
approved insurance providers to select the states in which it wants to 
participate in the premium reduction plan and allows variation in the 
amount between states.
    Comment: An interested party commented that the current proposed 
rule does not provide for penalties or sanctions for a submitter that 
does not achieve the projected savings. The rules must provide for 
penalties for misrepresentation of a provider's ability to provide the 
premium reduction plan according to the established criteria; i.e., 
reject any and all future premium reduction plans, charge the amount of 
the premium discount as a policy surcharge in the following year, 
require that amount as an additional expense in each of the next two 
reinsurance years, etc.
    Response: Since RMA has adopted the alternative proposal in the 
interim rule, the concerns of the commenters are moot because all 
premium discounts will be based on the actual savings achieved by the 
approved insurance provider and the content of any information that can 
be provided to farmers regarding the certainty or amount of premium 
discounts to be paid under the premium reduction plan is severely 
limited prior to actual results being available and RMA approving the 
payment. This eliminates the need for penalties for approved insurance 
providers that fail to pay premium discounts unless the approved 
insurance provider or its agents violates a requirement in the interim 
rule. In such case, as stated above, RMA has added significant 
sanctions that allow it to better tailor the punishment to the offense.
    In addition, the market will likely naturally sanction approved 
insurance providers that do not pay premium discounts. Farmers who 
insure with approved insurance providers that are eligible to offer a 
premium discount but who continuously fail to do so would be likely to 
move their business to an approved insurance provider that does pay the 
premium discount.
    Comment: An agent commented that it could be difficult to 
impossible for discounts to be ``verifiable''. For example, the 2003 
plan allows a reduction for the farmer reporting via the internet. The 
documentation submitted pointed to a reduction in approved insurance 
provider time in gathering and entering this information. However, 
there was no mention of the cost to the farmers who were too busy to 
report the information or the possibility of the farmer entering it 
incorrectly because they didn't understand all the rules. The result is 
a cost to the farmer far greater than what is saved. The commenter 
stated that while many proposals can outline what they think will be 
the savings, the added costs must also be considered (which in many 
cases will be a net cost to the farmer!)
    Response: RMA disagrees with the comment that its ability to verify 
cost efficiencies would be difficult to impossible. First, the 
efficiencies are measured by whether the approved insurance providers 
A&O costs are less than the A&O subsidy it receives from RMA. The cost 
to farmers because the farmer may have to do additional work is not 
considered unless this burden results in higher costs to the approved 
insurance provider as a result of having to make corrections or in 
legal expenses.
    Further, under the interim rule, the costs are easily verifiable 
because RMA is using the actual costs contained in the Expense Exhibits 
provided with the Plan of Operations to determine efficiencies. These 
Expense Exhibits are verifiable through the statutory accounting 
statements and now require that an independent certified accountant 
with insurance experience audit and certify these Expense Exhibits. 
Increase in approved insurance provider costs because of farmer error 
would be reflected in these actual costs. Further, if farmers are 
required to do more work with an agent or approved insurance provider, 
he may choose to move to another agent or approved insurance provider 
that provides the service he desires.
    Comment: Many agents, approved insurance providers and loss 
adjusters commented that RMA is proposing a plan that will require 
considerable auditing expertise. The auditing would primarily be in the 
area of approved insurance provider expenses and policy issuing 
discrimination. The commenters ask if RMA can say, with confidence, 
that they have sufficient resources to assure the American taxpayer 
that the premium reduction plan is being fairly administered.
    Response: RMA agrees that the proposed rule required considerable 
auditing skill to determine whether the projected cost savings were 
reasonable, were actually achieved, and the cost allocations 
appropriate. The interim rule reduces this burden considerably. First, 
the efficiencies are determined based on the actual costs reported on 
the Expense Exhibits provided in the Plan of Operations, which RMA 
staff is already familiar with. Second, the cost information can be 
readily verified through the annual accounting statements approved 
insurance providers are already required to file and the audit, 
certification and verification of the actual costs as reported in the 
Expense Exhibits. Lastly, the cost allocations have been simplified and 
contained in a formula that will be provided to approved insurance 
providers in procedures. Based on these changes, the current skill and 
knowledge of RMA employees should be sufficient to administer the 
premium reduction plan.
    However, RMA disagrees that the premium reduction plan will require 
extensive auditing to discover evidence of unfair discrimination. The 
interim rule now contains provisions that put approved insurance 
providers on notice that RMA may compare the composition of its book of 
business to other approved insurance providers in the state to 
determine whether there are differences that may warrant further 
investigation to determine whether unfair discrimination is occurring. 
This information is currently contained in RMA's databases and would 
require no more sophisticated auditing than currently done by RMA when 
it runs certain queries for the purposes of its annual summary of 
business, compliance reports, data mining, etc. In addition, provisions 
have been added that allow consumer complaints to be made to RMA. These 
complaints will also be investigated.
    Comment: A few approved insurance providers and interested parties 
commented that all costs should be evaluated by a CPA or auditing firm 
at the end of each crop year to assure compliance with the established 
criteria for offering the premium reduction plan.
    Response: The interim rule contains a provision that the Expense 
Exhibits provided with the Plan of Operations, which will be used to 
determine any efficiency, must be audited and certified by an 
independent certified public accountant with experience in insurance 
accounting.
    Comment: An agent commented that the RMA plan includes audit 
expenses to monitor the program. The commenter

[[Page 41852]]

states that more auditing should be directed toward fraud and abuse by 
some farmers than the approved insurance provider's expenses.
    Response: While RMA agrees with the commenter that fraud and abuse 
are worthy of considerable and increased attention, RMA has no choice 
but to implement the premium reduction plan and ensure it complies with 
the requirements of the Act. Based on the nature of the premium 
reduction plan, compliance requires that RMA be able to verify 
expenses. By structuring the interim rule so that existing 
documentation is used to determine efficiencies and verification, the 
burden imposed on RMA should be minimal and not affect its ability to 
discover and investigate fraud, waste, and abuse.
    Comment: Several interested parties and agents commented that the 
proposed rules contain no mechanisms to detect and prevent anti-
consumer practices, such as rebating and tying, under the premium 
reduction plan. A commenter states that creation of an enforcement 
office would be necessary to monitor anti-consumer practices and 
address farmer complaints. Commenters state that RMA does not have the 
resources to police these practices.
    Response: RMA agrees with the commenters that market conduct issues 
under the premium reduction plan are a significant concern. However, 
RMA disagrees with the comment that the creation of an enforcement 
office is necessary to monitor such conduct under the premium reduction 
plan. The premium reduction plan should have no effect on whether such 
rebating or tying occurs and RMA is currently monitoring such conduct 
today. Further, conduct such as tying is also regulated by the states, 
which have well-established structure for detecting and preventing 
tying. Moreover, RMA is fostering closer ties to the states through 
recently signed Memoranda of Understanding that will expand information 
sharing between the states and RMA. These measures should result in 
synergies between state and federal regulators that will strengthen 
market conduct enforcement, not only for the premium reduction plan but 
for the entire crop insurance program. In addition, RMA has added 
provisions that allow consumer complaints to be made directly to RMA 
and would include market conduct complaints.
    Comment: Many interested parties and agents commented that there 
are insufficient resources and expertise to timely and properly 
evaluate the proposed premium reduction plan submissions, regulate the 
process, and monitor the program to ensure adequate service and prevent 
abuses. Commenters stated that if there were sufficient resources, the 
cost of those resources would far outweigh the minimal benefits offered 
to farmers through the proposed premium reduction plan rule. A 
commenter stated that RMA has a responsibility to supervise the 
approved insurance providers to determine whether they are operating in 
a financially sound manner without reducing service to the farmer. A 
commenter asked how RMA proposes to monitor, control and advance the 
premium reduction plan. A commenter stated that the rule does not 
discuss RMA's resource needs but that it is likely RMA will need to 
establish a premium reduction plan office.
    Response: Under the proposed rule, the premium reduction plan 
demanded considerable resources to evaluate the requests to participate 
in the premium reduction plan. However, RMA has taken two significant 
steps to ensure that it has the resources needed to perform these tasks 
effectively. First, is the adoption of the alternative proposal. Since 
the premium discount is based on actual costs, there is no longer a 
need for RMA to have the resources and expertise to conduct extensive 
audits to verify both forecast expenses under the requests to 
participate in the premium reduction plan and actual expenses and 
efficiency savings after the reinsurance year. Under the interim rule, 
RMA would only have to evaluate the approved insurance provider's 
marketing plan. Determinations of financial condition would be included 
in the evaluation of the approved insurance provider's Plan of 
Operations. Further, since approval of the payment of a premium 
discount and the amount allowed are based on actual cost savings and 
after losses have been paid, RMA is in a much better position to 
evaluate the financial impact of paying such discounts on approved 
insurance providers.
    The second step is that RMA has structured the interim rule so 
existing documentation, such as Expense Exhibits provided with the Plan 
of Operations under the SRA, are used. The result is that much of the 
evaluation and monitoring under the interim rule would be the same as 
is required for any approved insurance provider under the SRA, 
including the determinations of financial solvency. In addition, RMA 
has established a formula that can be applied to each approved 
insurance provider's operation to allow it to calculate the 
efficiencies in each state so it can determine the amount of premium 
discount. Since little additional work is required, RMA should not 
require significant additional resources to complete these reviews. 
Therefore, the costs of regulation should not exceed the benefits of 
premium discounts to farmers and no special premium reduction plan 
office is needed.
    Comment: Many approved insurance providers, interested parties and 
agents commented that the proposed rule should be shelved or there 
should be an indefinite extension of the comment period. A commenter 
asked that RMA postpone adopting rules and approving new premium 
reduction plans until it: (1) Develops an adequate evidentiary record 
and makes available for public comment rules that address the adverse 
consequences that these programs may have on delivery service levels 
and on farmers; (2) establishes an enforcement mechanism that protects 
farmers from unfair discrimination under the premium reduction plans; 
and (3) can avoid adopting rules that include reductions in agent 
compensation which would decrease the amount and quality of services 
available to farmers under the current crop insurance delivery system.
    Response: Based on the changes to the proposed rule discussed 
above, there is no need to extend the rulemaking at this time. However, 
as stated above, RMA has elected to publish this rule as an interim 
rule to allow for additional comments after the premium discount plan 
is implemented. Further, the interim rule clarifies the requirements 
regarding the service of farmers and believes that the current 
sanctions in the SRA and those included in the interim rule should 
provide sufficient deterrent to the possibility of a reduction in 
service below that required in the SRA and approved procedures. In 
addition, the alleged reduction in service is purported to be a 
consequence of severe reductions in agent commission, and as stated 
above, the adoption of the alternative proposal and market forces make 
this less likely.
    With respect to the enforcement mechanism that protects farmers 
against unfair discrimination, the interim rule contains provisions 
that allow RMA to compare books of business to determine whether such 
discrimination is occurring, places the burden on approved insurance 
providers to target marketing to all farmers in a state, including 
small, limited resource, women and minority farmers, and contains 
sanctions that would be a deterrent to discriminatory practices, such 
as withdrawal of eligibility if the approved insurance provider 
unfairly discriminates, the denial of all or part of the premium 
discounts if an approved insurance provider or its agents unfairly 
discriminates and disqualifying the

[[Page 41853]]

approved insurance provider or agent from participating in the premium 
reduction plan.
    With respect to the concern that agent commission will decrease to 
the point that there will be a reduction in service, as stated above, 
there are many market forces and regulatory sanctions that make this 
unlikely. One is that approved insurance providers have the incentive 
to retain agents and farmers to maximize their capacity for 
underwriting gains. Another is that approved insurance providers could 
risk significant sanctions under the SRA if they reduce service below 
that required in the SRA and approved procedures. Agents are also 
likely to move their book of business if the reductions in commission 
are too severe. No changes have been made in response to this comment.
    Comment: An approved insurance provider commented that the proposal 
suggests that costs are to be determined on a reinsurance year basis 
but will use SRA Expense Exhibits, which are on a calendar year basis. 
The commenter claimed there will be allocation, monitoring and audit 
issues because such costs will have to be converted to a reinsurance 
year basis. The commenter stated this will be further complicated 
because certain costs may have to be allocated between several 
different lines of insurance. The commenter stated it is unlikely RMA's 
goal that efficiencies be easily verifiable is attainable.
    Response: In Appendix II of the SRA that is effective for the 2005 
and future reinsurance years, several expense exhibits are required. 
Exhibit 18B is a calendar year accounting of expenses that can be 
reconciled to the Annual Statutory Accounting Statements required by 
state regulators. However, Exhibits 10m, 10n, and 10o show agent 
commission expenses by state, loss adjustment expenses by state, and 
total expense by category, respectively, for the prior reinsurance 
years, the current reinsurance year, and the forecast for the coming 
reinsurance year. These exhibits can be reconciled with those for the 
calendar year guidance that has been provided to the approved insurance 
providers. Further, the interim rule requires that these Expense 
Exhibits be audited and certified by a certified public accountant 
experienced in insurance to verify the reported costs and compliance 
with the requirements of the SRA.
    Since premium discounts will be based on the actual costs and the 
savings attained in a specific reinsurance year, RMA has developed a 
formula that allows it to use Expense Exhibits 10m and 10n to allocate 
certain costs to the state so that it can determine the maximum premium 
discount that can be offered in the state. The formula will be provided 
to the approved insurance providers in procedures. The use of these 
Expense Exhibits and the procedural formula should greatly simplify the 
process.
    Comment: Several approved insurance providers, interested parties 
and agents suggested that an independent CPA or auditing firm should be 
retained to provide comprehensive and objective evaluation of premium 
reduction plans that are submitted to assure that such plans meet or 
exceed the requirements outlined in the regulations. A commenter stated 
the auditor must know and understand how the costs have been allocated 
and if the allocations are complete, reasonable and accurate.
    Response: Adoption of the alternative proposal eliminates much of 
the accounting burden associated with the proposed rule, specifically 
the burden to verify cost projections. However, RMA agrees that the 
actual costs should be audited and certified by the independent 
certified public accountant and that such person be experienced in 
insurance accounting so that they can understand the information 
contained in the Expense Exhibits to determine whether such information 
is complete, accurate and complies with the SRA. This requirement has 
been included in the interim rule. However, RMA believes that its staff 
is qualified to review other aspects of the request to participate in 
the premium reduction plan and approval to pay a premium discount.
    Comment: An agent commented that according to the Federal Register 
information, the estimated total public burden is 7,560 hours annually. 
The commenter asked that if the Administrator is requesting an increase 
in staff years by 17 to meet the current workload, how many additional 
staff years will be required for the premium reduction plans and what 
will the additional cost be.
    Response: This comment is referring to the paperwork burden 
estimated by RMA, as required under the Paperwork Reduction Act. It was 
an estimate of the total amount of time spent annually by all potential 
approved insurance providers to read, understand, develop, prepare, and 
submit a revised Plan of Operations under the SRA that would qualify 
for the premium reduction plan under the proposed rule. The commenter 
appears to mistakenly assume that it reflects an estimate of RMA 
resources needed to regulate the premium reduction plan. It does not 
represent such an estimate. Further, as stated above, much of the 
information collections have been revised significantly in the interim 
rule so the paperwork burden hours for approved insurance providers has 
been significantly reduced. In addition, as stated above, the burden on 
RMA to determine eligibility for the opportunity to offer a premium 
discount and approval of the payment of an amount of premium discount 
should also be significantly reduced.
    Comment: Several approved insurance providers and interested 
parties commented that regardless of the mechanism adopted by RMA to 
administer the submission and approval of premium reduction plans, it 
will be the adequacy and sufficiency of the RMA supervision that will 
determine the success or failure of the premium reduction plan. A 
commenter questions whether RMA is equipped to oversee the delivery of 
the premium reduction plan by the seventeen approved insurance 
providers, due to apparent deficiencies in accounting and fiscal 
expertise, as well as the lack of financial and personnel resources. 
Furthermore, budgetary constraints already are having an adverse effect 
on RMA's information technology capabilities and RMA's data-mining 
initiative may be in jeopardy. A commenter asked that if RMA does not 
have the financial resources to accomplish its existing obligations, 
how RMA proposes to regulate the respective premium reduction plans of 
seventeen approved insurance providers. A commenter stated that this 
oversight function will have to be developed at a time when RMA faces a 
significant loss of staffing due to pending retirements within all 
program areas of RMA and the premium reduction plan will put additional 
strain on RMA's ability to fully manage the program while 
simultaneously ensuring compliance.
    Response: Although the commenters do not specifically define what 
success or failure of the premium reduction plan might be, RMA would 
generally agree that RMA must adequately regulate the premium reduction 
plan if it is to not adversely impact the crop insurance marketplace or 
policyholder service. RMA also agrees that under the proposed rule, the 
premium reduction plan supervision would have required considerable 
personnel resources, financial resources, and expertise. However, as 
stated above, with the adoption of the alternative proposal, the 
oversight, accounting and auditing burden on RMA is significantly 
reduced to not much more than would be

[[Page 41854]]

required when approving the Plan of Operations and oversight of the 
SRA. Use of a procedural formula to determine the amount of premium 
discounts also simplifies the process. Further, RMA's monitoring of the 
means used to accomplish the savings is limited to the assurances that 
there is no reduction in service. RMA has also enlisted the states in 
monitoring market conduct. Consequently, RMA is confident that it has 
the resources and expertise to adequately regulate the premium 
reduction plan.
    Comment: An interested party asked how RMA plans to exercise 
oversight to ensure that premium discounts are commensurate with 
savings. The commenter wants to know at what level does the efficiency 
rule apply and how does RMA plan on enforcing this rule, given that 
approved insurance providers write insurance in different states.
    Response: Although State variation was not permitted under the 
proposed rule, as stated above, RMA has reconsidered this program 
feature based on public comments. The interim rule now allows for 
variation of premium discounts by state to the extent that such 
discounts correspond to documented cost efficiencies for each state. 
With the adoption of the alternative proposal, state level costs can be 
documented and verified at the end of the reinsurance year through the 
use of state level expense reports that approved insurance providers 
already prepare for their annual Plan of Operations and by using 
relative simple procedures to allocate remaining costs by state. 
Further, as stated above, RMA has developed a formula to allow it to 
determine the maximum amount of premium discount that can be paid in 
each state, which will be provided in approved procedures. Therefore, 
it should be relatively simple to determine whether the premium 
discounts correspond to the efficiencies attained in the state. 
However, because costs are not reported below the state level, it would 
be impossible for RMA to track efficiencies below this level without 
the development of complex cost accounting rules, which other 
commenters have asked RMA to avoid.
    Comment: An approved insurance provider commented that the proposed 
rule suggests that RMA puts undue emphasis on simplicity. In doing so, 
RMA inadvertently acknowledges that it has neither the accounting 
expertise to evaluate proposed plans nor the resources to monitor their 
implementation. The commenter states that penalizing an approved 
insurance provider for proposing a plan that accounts for the many 
state-, crop- and policy-related variables, as opposed to one that 
merely is easily verifiable, burdens the approved insurance providers 
with RMA's shortcomings. The commenter states that adequate oversight 
and the availability of resources, not the dumbing-down of proposed 
plans, will ensure the proper regulation of premium reduction plan. RMA 
deludes itself if it believes that an easy or simple plan will not 
spawn program abuse.
    Response: RMA disagrees with the commenter's premise that RMA 
wanted simplicity simply because it lacked the resources to adequately 
review, implement or monitor the premium reduction plans that contained 
state, crop or policy variability. On the contrary, in considering 
premium reduction plan submissions and developing the interim rule, RMA 
discovered through its analytical expertise and resources that more 
complex plans had the general tendency of providing increased 
opportunities for unfair discrimination and abuse of the premium 
reduction plan. In keeping the premium reduction plan relatively 
simple, therefore, RMA was led by a desire to avoid abuse under the 
premium reduction plan, not by a fear of complexity.
    From its evaluation of public comments, RMA acknowledges that the 
proposed rule did not adequately meet this goal. This is one of the 
reasons it adopted the alternative proposal in the interim rule. RMA 
also realized that a one-size fits all approach would not be fair to 
approved insurance providers with different business operations. Under 
the alternative proposal, approved insurance providers can now tailor 
their premium discounts to better meet their business operations. While 
there may be a single formula used to calculate the amount of premium 
discount that can be paid in a state, this formula is flexible enough 
to encompass a broad range of different business operations. It allows 
approved insurance providers to select states in which they want the 
opportunity to offer premium discounts. It also allows for variability 
in the amount of premium discount between states. Variability between 
crops and policies is still precluded because of concerns regarding 
unfair discrimination.
    Further, because premium discounts are based on actual cost savings 
determined from information that is already submitted to RMA and 
verified with statutory accounting statements, an approved insurance 
provider's opportunity to manipulate or hide costs is drastically 
reduced.
    Comment: An interested party commented that the proposed rule has 
some standards but they are not adequate enough to protect the delivery 
system.
    Response: RMA agrees that the proposed rule may not have contained 
sufficient standards to implement and regulate the premium reduction 
plan. However, adoption of the alternative proposal removes the need 
for many standards because the premium discount will be based on actual 
cost savings, not projected. This means the only standard that is 
necessary is how to determine whether there has been an efficiency and 
the amount of premium discount that can be paid in each state. For the 
former, RMA will be reviewing the Expense Exhibits provided with the 
Plan of Operations. Since the manner in which such Expense Exhibits are 
to be prepared has already been provided, no new additional standards 
are required. As stated above, in determining the amount of premium 
discount, RMA has developed a formula that will be provided to approved 
insurance providers through procedures. Because the formula uses only 
information contained on these Expense Exhibits, additional standards 
are not required.
    With respect to other standards, the interim rule contains 
provisions regarding the ability to compare the composition of approved 
insurance providers' books of business to determine whether there is an 
indication of unfair discrimination that may warrant further 
investigations. There are also explicit limitations on advertising and 
the meaning of reduction in service has been clarified to incorporate 
the requirements that currently exist in the SRA and approved 
procedures. Therefore, RMA believes that the interim rule contains 
sufficient standards to allow it and the approved insurance providers 
to implement the premium reduction plan.
    Comment: An interested party commented that approved insurance 
providers can achieve cost reductions in a variety of ways, such as 
training costs, etc. The proposed rules are not specific enough as to 
how and where the savings will come from.
    Response: Since each approved insurance provider's business 
operation is different, it would be impractical and undesirable for RMA 
to dictate how and where the savings must come from. This must be 
determined by the approved insurance provider. However, RMA has made it 
very clear that cost savings cannot come from non-compliance with 
requirements of the SRA or approved procedures or the approved 
insurance provider will be subject to the sanctions

[[Page 41855]]

contained in the SRA or the interim rule as applicable. This would 
include the requirements regarding service, training, loss adjustment, 
etc. This means it is solely the responsibility of the approved 
insurance provider to decide whether it can attain cost savings while 
still complying with all requirements of the SRA, approved procedures 
and this interim rule.
    Comment: An agent commented that while the proposed rule would 
authorize RMA oversight of the program there are no standards of 
measurement for compliance in the proposed rule. The commenter stated 
that this would leave open the opportunity for abuse, as the judgment 
for what constitutes a violation would now be very subjective.
    Response: RMA agrees that there were insufficient standards in the 
proposed rule, especially concerning service and unfair discrimination. 
This issue has been evaluated in the light of public comments received 
and addressed in the interim rule. As stated above, the interim rule 
makes it very clear that approved insurance providers must comply with 
all requirements of the SRA and approved procedures regarding the level 
of service that must be provided. Further, specific standards have been 
set forth regarding allowable marketing of premium discounts. The use 
of Expense Exhibits to determine whether there is an efficiency and the 
amount of any premium discount also sets a very clear standard. 
Providing a formula to determine the amount of premium discount also 
sets a very clear standard. In addition, the ability to compare the 
approved insurance providers' books of business to determine whether 
there is any indication of unfair discrimination also sets a standard. 
These standards remove the subjectivity and permit all approved 
insurance providers to be treated the same.
    Comment: Several approved insurance providers, agents and 
interested parties expressed concern over the cost and expense 
accounting. A commenter stated that it concurred with a quote from a 
member of Congress to RMA stating that premium reduction plans are 
fraught with risk to the stability of the crop insurance program and 
that it is opposed to the program. A commenter asked that since each 
approved insurance provider has its own method of operation, how RMA 
will develop a set of accounting standards which will show the actual 
costs to deliver the program. A commenter stated that most of these 
costs will be allocated, which creates the possibility to shift costs 
between states, coverages, crops, plans of insurance and market 
segments. This will increase the cost of auditing as the approved 
insurance providers will understand their individual accounting system 
better than RMA. A commenter is concerned that RMA is not looking at 
all costs that an approved insurance provider incurs and all 
allocations are not being reviewed to determine that they are adequate 
for an approved insurance provider. Commenters state it will be 
virtually impossible to accurately determine and verify the cost 
reductions and make appropriate comparisons between approved insurance 
providers. A commenter stated that there needs to be consistent expense 
accounting with respect to executive compensation, benefits, legal 
fees, and litigation expenses. A commenter stated that there has to be 
uniformity with each approved insurance provider and that premium 
reduction plan approved insurance providers must be subject to the same 
financial and competency evaluations as regular approved insurance 
providers.
    Response: RMA agrees that cost and expense accounting procedures 
vary by approved insurance provider and that consistent principles must 
be applied to all approved insurance providers participating in the 
premium reduction plan. To accomplish this goal, RMA will use the 
Expense Exhibits provided by the approved insurance providers with 
their Plans of Operations. These Expense Exhibits are required to be 
audited and certified as to their completeness, accuracy and compliance 
with the SRA. Therefore, all costs to deliver the Federal crop 
insurance program should be included. Further, RMA has already provided 
instructions as to how they should be prepared and there are statutory 
accounting statements that have specific accounting rules for their 
preparation that can be used for verification of costs. Failure to 
comply with one of these requirements would not only jeopardize an 
approved insurance provider from participating in the premium reduction 
plan, it would jeopardize its ability to participate in the crop 
insurance program. In addition, RMA has devised a formula that will 
allocate costs in a consistent manner for all approved insurance 
providers for the purposes of determining the amount of any premium 
discount in a state.
    Comment: An agent asked who was going to determine the efficiency.
    Response: As stated above, RMA will determine whether there has 
been an efficiency for the reinsurance year based on the actual costs 
reported on the Expense Exhibits provided with the Plan of Operations. 
It will be relatively simple to compare a total of all of the costs 
reported as A&O costs with the amount of A&O subsidy received and to 
allocate costs across states.
    Comment: Many agents, approved insurance providers, loss adjusters, 
and interested parties commented that RMA requires a certain level of 
service for the insureds. The commenters ask if RMA will require these 
standards for the premium reduction plan and how will this be audited. 
Commenters also ask if RMA has developed service standards for the 
premium reduction plan program and how RMA will audit to determine that 
the service provided under the premium reduction plan meets those 
standards. Commenters also asked if RMA can guarantee agents and 
insureds that the premium reduction plan is the way of the future and 
that quality and service will not be jeopardized. A commenter asked 
what RMA's plan of action is if those standards are not met and will 
more tax payer money be wasted trying to correct the situation.
    Response: With respect to questions of the commenters regarding the 
service standard and the premium reduction plan, any approved insurance 
provider wanting to participate in the premium reduction plan must meet 
all requirements of the SRA and approved procedures with respect to 
service. This is the same requirement for approved insurance providers 
that elect to participate in the premium reduction plan and those that 
do not. Since this is a requirement of the current SRA, RMA already has 
the infrastructure in place to audit these service requirements and 
other SRA requirements through periodic approved insurance provider 
reviews. In addition, the interim rule also contains a mechanism to 
allow farmers to report to RMA if they believe they have received a 
reduction in service. If service requirements are not met by any 
approved insurance provider, then the SRA provides RMA with a range of 
actions it can take against an approved insurance provider, up to and 
including the withdrawal of authority to participate in the crop 
insurance program. The action that RMA would take would depend on the 
severity of the violation.
    RMA cannot speculate, much less guarantee, as to whether the 
premium reduction plan is the way of the future. This is up to Congress 
and whether farmers and approved insurance providers embrace the 
concept. However, as long as section 508(e)(3) of the Act remains 
effective, the premium reduction plan will also be in effect.
    Comment: An agent asked how RMA will monitor qualification for the 
premium reduction plan. The commenter claims the industry does not

[[Page 41856]]

need the negative results of approved insurance providers in financial 
disarray, especially when it gets to that place with the blessing of 
RMA.
    Response: Under the alternative proposal, participation in the 
premium reduction plan should not adversely affect the financial 
stability of approved insurance providers because premium discounts are 
based on actual cost savings, not projected. Further, because the 
premium discount is no longer guaranteed in advance of a given year, 
approved insurance providers are in a better position to evaluate their 
financial condition to determine whether they are in any position to 
take cost saving measures and whether a premium discount should be 
paid. Lastly, RMA has added financial reporting requirements to the SRA 
and has enhanced financial analysis and monitoring of approved 
insurance providers that allow it to be a better gauge the financial 
position of approved insurance providers. Based on this knowledge, the 
interim rule allows RMA to deny the payment of a premium discount if it 
believes it will adversely affect the financial stability of an 
approved insurance provider.
    Comment: An interested party commented that all approved insurance 
providers should be expected to conform to all guidelines regarding 
marketing, adjusting, compliance and reinsurance. This is the only way 
an agent or farmer can be guaranteed the ``Service'' FCIC is supposedly 
protecting and supervising.
    Response: RMA agrees that all approved insurance providers are 
required to conform to all approved procedures regarding marketing, 
adjusting, compliance, and reinsurance. The interim rule reinforces 
this requirement for approved insurance providers that participate in 
the premium reduction plan.
    Comment: An agent commented that RMA should have some type of 
competency requirement for anyone involved in the business. The 
commenter stated that for those who are only writing the coverage 
because it was easy to just make sure the client files his acreage 
reports every year so he can get on with selling life policies and 
promoting investment products, it may not be so easy anymore. The 
commenter stated that in the investment field, there are strict rules 
that dictate what and what not a broker or agent can sell as well as 
regulations trying to certify their competency to do any thing. These 
rules and policies are in effect to protect the consumer/client against 
unscrupulous individuals but most specifically to try and help protect 
their investments, their life saving and retirement nest eggs and their 
very livelihood. The commenter asks why the crop insurance field should 
be any different.
    Response: While this comment is not directly applicable to the 
proposed rule, because the same requirements applicable under the SRA 
apply to the premium reduction plan, it is relevant. A crop insurance 
agent is subject to the licensing, reporting, and educational 
requirements of the state or states in which he or she operates. RMA 
agrees that some of these requirements vary widely between states. 
However, with respect to crop insurance, all agents are subject to the 
training requirements contained in the SRA and if RMA determines an 
agent is not competent to properly sell and service crop insurance, it 
can suspend or debar such agent. RMA agrees that standardizing state 
licensing and competency requirements would be preferable and has 
recently begun working with the states toward this goal.
    Comment: An approved insurance provider commented that the first 
principle of requiring documentation to demonstrate ability to operate 
within expense reimbursement and to reduce costs below the expense 
reimbursement received from RMA is related to the second principle of 
requiring that claimed efficiencies be easily verifiable by RMA. 
Section 508(e)(3) of the Act requires premium discounts to be based on 
real efficiencies that reduce an approved insurance provider's costs 
below the RMA's expense reimbursement and that can be passed through to 
farmers. The commenter stated that allowing price reductions that 
cannot be documented or that exceed objectively demonstrable 
efficiencies likely will invite unfair competition by approved 
insurance providers seeking to undercut their competition with 
discounts that cannot be matched through savings. The commenter states 
that this abuse could threaten the approved insurance provider's 
solvency and also give rise to market disruption by directing farmers 
away from the more reputable providers.
    Response: RMA agrees and shares the expressed concerns regarding 
the verification of cost efficiencies and the possibility for approved 
insurance providers to promise premium discounts that cannot be 
supported by actual savings. RMA elected to adopt the alternative 
proposal because of some of the very concerns raised by this commenter. 
Under the alternative proposal, because all premium discounts are based 
on actual cost savings determined at the end of the reinsurance year 
and the payment or amount is not guaranteed, many of the concerns 
raised have been rendered moot.
    Comment: An interested party commented that there were no formal 
rules governing the marketing and distribution of the premium reduction 
plan and the appropriate procedures were the only way to ensure the 
fair delivery of crop insurance to all farmers regardless of size or 
resources.
    Response: The interim rule now contains specific requirements 
regarding the marketing and distribution of premium discounts. These 
requirements include limitations on advertising, and marketing plans 
that use appropriate media to ensure that all farmers are made aware 
that the approved insurance provider has been determined eligible for 
the opportunity to offer a premium discount. Further, there are 
requirements regarding the distribution of premium discounts payment 
including the preclusion against placing conditions upon such payment 
like requiring renewal of the policy or having no loss for the crop 
year. Further, premium discounts in a state must be provided for all 
crops, coverage levels and plans of insurance. In addition, all farmers 
in the state insured with the approved insurance provider paying the 
premium discount must receive the discount and in the same percentage 
of net book premium.
    Comment: An interested party commented that there are no controls 
in place to regulate false advertising or manipulation. This could 
result in inadequate or improper coverage, and jeopardize a total 
farming operation.
    Response: RMA has added provisions to address these concerns. The 
interim rule now expressly contains provisions regarding advertising 
and contains limitations on the content of such advertising. The 
interim rule also contains provisions allowing consumer complaints 
regarding false advertising to be made directly to RMA. In addition, 
the interim rule allows RMA to take action against an approved 
insurance provider if the state determines that there has been false 
advertising.
    Comment: An approved insurance provider commented that there must 
be better guidelines as to the extent of oversight and regulation by 
RMA.
    Response: As stated more fully above, RMA has revised the rule to 
include better standards regarding the requirements of the program and 
the oversight of RMA, including those related to advertising, service, 
unfair discrimination, whether small, limited resource, women or 
minority farmers are not being given access to premium

[[Page 41857]]

discounts, calculating premium discounts, etc.
    Comment: Many agents, loss adjusters, approved insurance providers 
and interested parties commented that the proposed rule does not 
include an enforcement mechanism that would prevent insurers from 
engaging in unfair discrimination by selecting only agents who 
primarily service large, low risk farmers to deliver their products. 
The commenters stated that RMA currently does not have the resources 
necessary to effectively police unfair discrimination against these 
farmers. Other commenters ask how RMA will police the unfair 
discrimination of approved insurance providers only selecting agents 
who primarily service large, low risk farmers. They also asked whether 
RMA has the resources to effectively police the unfair discrimination 
against these farmers. A commenter suggests that necessary cooperative 
oversight between FCIC/RMA and the state Departments of Insurance 
(DOIs) is imperative.
    Response: As defined in the proposed rule, unfair discrimination 
occurs when an approved insurance provider refuses to provide a premium 
discount to any farmer because of the size of the operation or premium, 
loss history, etc. However, RMA also recognizes that there is a risk 
that approved insurance providers would select only agents that 
service, large low risk farmers, which happens regardless of whether 
the approved insurance provider participates in the premium reduction 
plan. To ensure equal access to the premium discount, RMA requires that 
approved insurance providers specifically market their participation in 
the premium reduction plan to small, limited resource, women and 
minority farmers through the appropriate media designed to reach such 
farmers. This marketing must be in addition to any solicitation done by 
the agent. Failure to comply with the marketing plan could subject the 
approved insurance provider to significant sanctions.
    To enforce this requirement to market to small, limited resource, 
women and minority farmers, RMA will review the marketing plan and may 
compare the compositions of the approved insurance providers' books of 
business to determine whether there is a need for further 
investigation. In addition, provisions regarding consumer complaints 
have been added that would permit any farmer that thought it was 
excluded from receiving a premium discount to complain directly to RMA.
    Since the preliminary steps to identify whether small, limited 
resource, women or minority farmers are not being given access to 
premium discounts can be done through data mining, the amount of 
resources to monitor this issue should not be great. Further, RMA 
currently has staff that is experienced in conducting such 
investigations regarding discrimination.
    Comment: An interested party suggested more extensive reporting on 
marketing would need to be done to prevent cherry-picking, which may 
make the program prohibitively expensive to administer for RMA and the 
approved insurance providers.
    Response: Competition for attractive accounts is not prohibited by 
the SRA or RMA procedures, but unfair discrimination is. There is no 
need for extensive reporting on marketing to police unfair 
discrimination. The 2005 SRA requires certain information regarding the 
minority status of farmers be collected and, reported and, as stated 
above, RMA may elect to compare the compositions of the approved 
insurance providers' books of business to determine whether there are 
any indications that small, limited resource, women or minority farmers 
are not being given access to premium discounts. This can be 
accomplished through analysis of the existing information contained 
RMA's databases. Therefore, the identification and prevention of unfair 
discrimination should not be cost prohibitive to RMA or the approved 
insurance providers. Further, as explained above, the interim rule 
provides a mechanism for policyholders and others to file direct 
consumer complaints to RMA.
    Comment: Many agents and interested parties opposed implementation 
of the proposed rules until FCIC more effectively addresses the unfair 
discrimination concerns and RMA establishes a special enforcement 
office to address the issues that premium reduction plans raise for 
farmers.
    Response: There is no need to create a special enforcement office. 
As stated above, the interim rule now provides RMA with the ability to 
effectively monitor and address any issues regarding unfair 
discrimination or whether small, limited resource, women or minority 
farmers are not being given access to premium discounts. In addition, 
RMA already has a Civil Rights office that is experienced in 
investigating such complaints.
    Comment: Many agents and interested parties commented that RMA 
states ``it was 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.'' Commenters states 
that this is a very bold statement to make, similar to an approved 
insurance provider saying that it is easy to see if workplace 
discrimination is occurring because it is against the law. Just because 
it is outlawed doesn't mean that practices are going to be transparent, 
yet RMA is making that prediction here. RMA is making a broad 
generalization assuming that since discriminatory practices are not 
allowed, then either no one will do so or it will be easy to detect. 
Commenters state that this is impossible without an enforcement 
mechanism.
    Response: In the proposed and interim rules, unfair discrimination 
is defined as denying a farmer a premium discount because of size, loss 
history, etc. Therefore, RMA was correct when it said that unfair 
discrimination would be easy to detect because RMA could examine the 
approved insurance provider's book of business to determine whether 
there was evidence of farmers systematically being denied a premium 
discount. However, as stated above, RMA is also concerned that all 
farmers have access to premium discounts. This is not as easy to detect 
but, as stated above, RMA has added provisions that would allow it to 
analyze the compositions of the approved insurance providers' books of 
business to determine whether there are any indications that small, 
limited resource, women or minority farmers are not be given access to 
premium discounts. Along with the establishment of a consumer complaint 
process and standards included in the interim rule, this enforcement 
mechanism will allow RMA to ensure that all farmers have access to 
premium discounts and apply appropriate sanctions to approved insurance 
providers that do not comply.
    Comment: Several agents and loss adjusters commented that RMA does 
not currently have the assets to investigate more than a small 
percentage of alleged fraud and abuse instances let alone respond to 
greatly increased requirements of policing provider discrimination in 
selection of agents and locales, and ensuring that there is no 
discrimination against minorities and smaller, high risk farmers. A 
commenter stated that the primary focus of RMA should be in protecting 
program integrity. A commenter stated that RMA must be concerned that 
someone is going to commit fraud, waste or abuse of the premium 
reduction plan program.
    Response: RMA does not accept the apparent implication of the 
commenter's assumption that RMA does not have the resources to properly 
deal with fraud, waste, and abuse. RMA investigates all allegations of 
fraud, waste, and abuse. The commenter may be referring to the large 
number of data

[[Page 41858]]

mining results that show anomalies in the program. The commenter is 
correct that RMA would not be able to investigate all anomalies 
indicated by data mining. However, RMA has refined the ability to 
determine when such anomalies are likely indicators of fraud, waste, or 
abuse and it investigates these cases.
    Further, there is no basis to assume that RMA does not have 
resources to properly enforce discrimination provisions under the 
premium reduction plan. As explained above, there is a difference 
between discrimination and selecting only agents that have large, low 
risk farmers in their books of business. With respect to 
discrimination, RMA has the resources and ability to enforce all 
discrimination provisions of the crop insurance program, including 
those included in the interim rule. With respect to the selection of 
agents, RMA has included provisions in the interim rule that would 
allow it to determine whether approved insurance providers have taken 
such action and to require that approved insurance providers take 
remedial corrective measures. Much of the work would be done through 
data mining and responding to consumer complaints, both of which can be 
handled by existing knowledgeable and experienced RMA staff in 
collaboration with state regulatory officials.
    RMA also disagrees with the commenter's unexplained and unsupported 
prediction that fraud, waste, and abuse will arise from the premium 
reduction plan. All current program integrity provisions of the crop 
insurance program will still apply to approved insurance providers 
participating in the premium reduction plan under the interim rule. RMA 
enforcement of these provisions will remain unchanged.
    Comment: Several agents commented that RMA has very strict 
guidelines and rules requiring approved insurance providers to do more 
with less money all the time. The commenter asked how RMA will police 
this program to make sure it is administrated fairly to all insureds 
and agents, as it is now. A commenter asked if the approved insurance 
providers will be expected to police this too and where will the funds 
come from. A commenter stated that the premium reduction plan will 
increase the cost of RMA monitoring, which must be done fairly and 
accurately.
    Response: RMA agrees with the comment that RMA expects approved 
insurance providers to abide by strict guidelines and rules and that 
RMA currently attempts to administer these fairly. RMA also agrees that 
additional requirements will be imposed on those approved insurance 
providers that choose to participate in the premium reduction plan 
under the interim rule. However, as stated above, the provisions in the 
interim rule will significantly reduce the burden over the requirements 
contained in the current procedures and the proposed rule. One means to 
accomplish this is to utilize information already provided to RMA, such 
as Expense Exhibits and policyholder information, to determine whether 
efficiencies are attained, the amount of premium discount and whether 
all farmers are being provided access to the premium discount. Another 
means is the formula to determine the amount of premium discount, which 
will standardize cost allocations and calculations across all approved 
insurance providers. Further, the requirements contained in the SRA 
will continue to apply to the premium reduction plan, such as those 
relating to service, training and loss adjustment. This allows for 
consistent monitoring and the ability to use existing resources.
    Comment: A few agents and interested parties questioned whether 
having one training session at one location meets the qualifications of 
'' * * * training and oversight (must) not be compromised.'' The 
commenter states that most approved insurance providers conduct 
training sessions throughout the various areas to allow agents 
accessibility to these sessions. The commenter asked if an approved 
insurance provider gains ``efficiency'' by cutting back on the number 
of training sessions, but still has them, does it meet the requirement 
of the provision. A commenter states the premium reduction plan does 
not further the critical goal of ``up-to-date'' SRO relationships with 
RMA to foster a better program. A commenter asks RMA to scrutinize 
plans to assure that they continue to provide the necessary training 
for agents and adjustors that is so important for agents' continued 
education.
    Response: RMA agrees with the commenter that agent and loss 
adjuster training is highly important in the ultimate servicing of 
policyholders and that participation in the premium reduction plan must 
be monitored with respect to the sufficiency of training. Under the 
SRA, every approved insurance provider is obligated to conduct training 
for loss adjusters and agents. Specific training requirements are 
contained in Appendix IV of the SRA and approved procedures. RMA 
monitors compliance with these requirements through approved insurance 
provider reviews and other methods. The interim rule makes it clear 
that approved insurance providers must continue to comply with these 
training requirements. The SRA identifies specific actions RMA can take 
if an approved insurance provider fails to meet these training 
requirements. Further, if the approved insurance provider participates 
in the premium reduction plan, sanctions authorized under the interim 
rule can also be applied.
    With respect to the question asked by the commenter on the 
sufficiency of one training session at one location, RMA does not have 
the context in which the commenter asks the question and does not wish 
to speculate on what the context might be. If all the training 
requirements in the SRA can be accomplished in one training session, 
RMA could not preclude this action.
    Comment: Several interested parties and approved insurance 
providers commented that RMA must closely monitor the program, 
including making sure such plans include a complete training program 
for agents who offer the premium reduction plan to farmers that is 
similar to current training requirements for all agents.
    Response: As explained above, approved insurance providers must 
comply with the same training requirements as required under the SRA. 
Further, under the SRA, RMA will monitor the training to ensure 
compliance with all requirements.
    Comment: An interested party commented that RMA has not complied 
with its own rules in requiring Crop1 to submit weekly accounting 
reports verifying their efficiencies and ability to operate under lower 
A & O contracts.
    Response: RMA disagrees with the commenter. Two years ago, the FCIC 
Board directed that RMA receive from Crop1 weekly narrative and 
statistical reports, more detailed quarterly reports and that RMA 
conduct semiannual onsite reviews of Crop1. These requirements were to 
also apply to any other approved insurance provider that RMA might have 
approved to offer a premium reduction plan. Crop1 has complied with the 
directive regarding reports, as required by RMA. There were occasions 
during the annual crop cycle when RMA determined that there was minimal 
activity and excused Crop1 from this requirement until activity again 
warranted weekly reporting. Further, for 2003 and 2004, RMA has 
verified in each mid-year review that Crop1 was on target to achieve 
the projected cost efficiencies and verified at the end of each year 
that it achieved those efficiencies. This Board directive, reporting 
requirements, and the

[[Page 41859]]

procedures used to determine efficiencies will be replaced by the 
interim rule.
    Comment: Many agents, farmers, approved insurance providers and 
interested parties commented that Crop1 is engaging in the type of 
discrimination that RMA purportedly opposes, and RMA is unaware of such 
activities, which indicates RMA's inability to conduct oversight or it 
is uninterested in doing so, which indicates an unwillingness to 
conduct oversight. A commenter states there is abundant anecdotal 
evidence that FCIC has lacked either the resources or the inclination 
to ensure that Crop1 conforms to the standards purportedly established 
by RMA. Commenters stated that if RMA can't or won't police its own 
activities for one small approved insurance provider, there can be no 
chance of policing the entire industry under the proposed rule. A 
commenter states RMA never determined that Crop1 met all the standards 
set by the Board.
    Response: It is unclear what the commenters mean by discrimination 
that RMA purportedly opposes. The commenters do not provide supportive 
explanation or examples. As stated above, unfair discrimination is 
defined as denial of a premium discount based on the loss history or 
size of the farmer. However, it is possible that Crop1, or its agents, 
targeted its marketing to large, low risk farmers. This occurs 
throughout the crop insurance program and is not expressly prohibited 
in any procedures. This means Crop1 was permitted to operate in the 
same manner as all other approved insurance providers in delivering 
crop insurance. Therefore, it was not a matter of RMA electing not to 
enforce a program requirement, it was a situation where the complained 
of conduct was not in violation of any procedures.
    As stated above, RMA recognizes that the program is premised on 
equal access to the crop insurance program and added provisions to the 
proposed rule, and revised and refined them in the interim rule, to 
specifically require that approved insurance providers market to small, 
limited resource, women, and minority farmers and if such marketing 
were inadequate, RMA can require remedial measures such as targeted 
marketing. All approved insurance providers electing to participate in 
the premium reduction plan, including Crop1, will be subject to the 
same requirements and scrutiny.
    Comment: Many agents, farmers, approved insurance providers and 
interested parties commented that fraud and abuse are rampant. 
Commenters stated that Crop1 is going against all the rules of fairness 
and equality and stretching the law beyond limits. A commenter states 
that this failure to enforce the program requirements will likely 
destroy the crop insurance program as we know it, including some 
approved insurance providers and reinsurance sources.
    Response: With respect to the allegation that fraud and abuse are 
rampant with Crop1, the commenter provides no support for this 
allegation. RMA's own data, and independent information from outside 
oversight bodies such as the Office of Inspector General, agree that 
fraud and abuse, while troubling in any amount, nevertheless represent 
a small fraction of all crop insurance business and Crop1 does not have 
a disproportionate amount of fraud or abuse. If anyone has specific 
information on fraud, abuse, or discrimination with respect to any 
approved insurance provider, RMA encourages such persons to bring this 
specific information to RMA's attention.
    Further, RMA is stringently enforcing program requirements but it 
cannot enforce requirements that do not exist. That was one purpose of 
the decision to use rulemaking, to identify weaknesses in the current 
and proposed program so concerns could be adequately addressed. This 
process has worked, RMA has received many valuable comments and has 
addressed these in the interim rule.
    Comment: Many agents, farmers, approved insurance providers and 
interested parties commented that if someone in the hearing process 
were to pursue the question vigorously, new and unwanted answers would 
undoubtedly surface and it definitely should be done by the committee. 
Commenters suggested that these problems combine to justify the 
indefinite extension or termination of the comment period and 
rulemaking procedure for the proposed rule.
    Response: With respect to the comment that RMA should extend the 
comment period indefinitely or terminate rule making because of the 
allegations of these commenters, RMA notes that it is obligated under 
section 508(e)(3) of the Act to operate the premium reduction plan. 
Extending the comment period or terminating the interim rule would 
simply force RMA to operate the premium reduction plan under current or 
revised procedures, which the FCIC Board has already determined to be 
unsatisfactory or revised procedures.
    Further, the purpose of this rulemaking process is to identify 
problems with the current program and create a rule that addresses 
these problems and protects the interests and integrity of the crop 
insurance program. Given the significant number of substantive comments 
received during the 60-day comment period for the proposed rule, it is 
apparent that the public including all interested parties had 
sufficient time to provide comments to identify problems and concerns. 
It is unlikely that an extension of the comment period would yield any 
additional comments or concerns that have not already been presented. 
Based on the comments received, the process has worked and the interim 
rule includes many significant changes that should provide a framework 
for a fair, sound, and stable premium reduction plan. Therefore, RMA 
does not find that there is a rational basis for extending the comment 
period.
    Comment: An approved insurance provider commented that it had 
alerted RMA to misleading statements made by a Crop1 agent in 
conjunction with advertising of Crop1's premium discount plan and 
stated that but for its letter, RMA would have been unaware of these 
misrepresentations. The commenter asked how many other instances of 
false advertising have escaped the notice of RMA and if RMA cannot 
police the marketing practices of one approved insurance provider, how 
RMA proposes to monitor the conduct of seventeen approved insurance 
providers and thousands of sales agents.
    Response: There is no way for any agency to monitor the activities 
of all participants in a program the size of the crop insurance 
program. There may be only a limited number of approved insurance 
providers but there are also thousands of agents and loss adjusters and 
hundred of thousands of farmers, FSA county committees and state 
insurance regulators.
    RMA relies on a variety of ways to monitor approved insurance 
providers with respect to the SRA and the premium reduction plan. The 
commenter has highlighted one of the most valuable and powerful, the 
assistance of the crop insurance participants to report instances where 
there may be violations of the SRA, policy provisions or procedures. 
Even before the premium reduction plan was ever implemented, it was not 
uncommon for approved insurance providers or agents to report to RMA 
instances where competitors may be engaged in rebating or false 
advertising. The fact that RMA assessed the information it received 
from the commenter and took quick action demonstrates its willingness 
to enforce the premium reduction plan and SRA

[[Page 41860]]

requirements with Crop1. Further, because the crop insurance 
participants are in the best position to detect any wrongdoing, RMA has 
and will continue to rely on their assistance in identifying program 
violations. However, this does not mean that RMA is not continuously 
monitoring the conduct of the approved insurance providers. Finally, 
the interim rule added a mechanism for the receiving consumer 
complaints, which is another means for RMA to monitor the 
implementation of this rule.
    Comment: A few agents commented that the agent contract with Crop1 
is very restrictive and is really weighted to the approved insurance 
provider side. For instance, there is no commission paid until the 
farmer pays the premium. The commenter asked when RMA pays the approved 
insurance provider and does Crop1 get paid after the farmer pays the 
premium. The commenter also stated that the contract states that the 
agent can only write a discount plan with them and agents would be 
liable to Crop1 if they did not meet the RMA expense requirements, 
which they have no control over, and all this for a 20 to 40 percent 
decrease in commission revenue. Since they are the only approved 
insurance provider allowed to write a discount plan in 2005 it was not 
an issue. The commenter asked if RMA is aware that this is in Crop 1's 
contract.
    Response: As explained above, the contract between an approved 
insurance provider and an agent is a voluntary arrangement and RMA does 
not regulate such contracts, including such terms as the timing of 
commission payments. As with all agent contracts, provided that there 
are no violations of the requirements of the SRA or approved 
procedures, agents and approved insurance providers are free to 
negotiate the terms of their contracts. Terms like exclusivity and 
paying the commission after the farmer pays the premium do not violate 
any requirement in the SRA or approved procedures. Therefore, RMA 
cannot prevent their inclusion in the agent contracts.
    As stated above, the market will determine the appropriate terms 
and conditions in such contracts, including the timing and amount of 
commission payments. Approved insurance providers will always have the 
incentive to retain agents and their books of business because such 
business provides the potential for underwriting gain.
    Comment: An interested party asked: (1) Why RMA rejected all other 
plans offered by other approved insurance providers and still kept 
Crop1's plan; (2) if RMA looks into the types of plans, coverage levels 
and size of farmers for all approved insurance providers, including 
Crop 1; (3) how RMA monitors compliance with the regulations and the 
Act; (4) how often approved insurance providers are penalized for not 
serving all farmers within a given state; (5) how many ``specialty 
crop'' policies does Crop1 write, such as tomatoes, apples, nurseries 
etc., and (6) how many small farmers are served by Crop1.
    Response: There was never an intent to allow Crop1 to operate the 
only premium reduction plan. It happened that it was the first approved 
insurance provider to submit such a plan and the procedures were 
developed in response to the Crop1 submission, under the direction of 
the FCIC Board, and were designed to allow all approved insurance 
providers to make application. With respect to the premium reduction 
plans submitted by other approved insurance providers for the 2005 
reinsurance year, RMA extensively reviewed each of the proposals 
individually under the procedures and determined they could not be 
approved because they did not meet the requirements. In notifying them 
of this fact, the approved insurance providers were provided with 
detailed information regarding the specific terms of the premium 
reduction plan and the procedures RMA determined the applications did 
not comply with. It should be noted that it took Crop1 over a year and 
multiple submissions to obtain the required approvals to begin offering 
its premium reduction plan. During the time its plan was under 
consideration, it went through a number of changes and reviews.
    With respect to analysis of Approved insurance providers' books of 
business, RMA does routine analyses from its extensive data base. 
However, prior to the implementation of the premium reduction plan, 
such analysis did not focus on the types of plans, coverage levels of 
size of policies because, prior to the 2005 reinsurance year, the SRA 
only required that approved insurance providers sell insurance to all 
eligible farmers. The procedures only required that approved insurance 
providers not unfairly discriminate against farmers.
    RMA did receive allegations that Crop1 was only marketing its 
premium reduction plan to large farmers. However, there was no specific 
requirement in the premium reduction plan procedures or the SRA that 
required approved insurance providers to market its products and 
services, including the premium reduction plan, to all farmers. 
Therefore, RMA could not hold Crop1 to a higher standard than other 
approved insurance providers. It was not until the 2005 SRA that RMA 
affirmatively required all approved insurance providers to market and 
sell crop insurance to all farmers. With the inclusion of this 
provision in the SRA, and the inclusion of this requirement in the 
interim rule, RMA will have to conduct such analysis. If it reveals 
that approved insurance providers are not in compliance with this 
requirement, RMA can take the appropriate action under the SRA or 
require remedial measures under the interim rule.
    With respect to RMA monitoring, RMA engages in a variety of 
activities such as an extensive analysis of each approved insurance 
provider's Plan of Operations before the beginning of the reinsurance 
year; quarterly statutory financial reviews; periodic financial and 
operational reviews; compliance reviews; ad hoc investigations of 
specific operational issues; civil rights reviews, and indemnity 
estimates; just to name a few.
    With respect to frequency of penalties for approved insurance 
providers not serving all farmers, RMA would view a refusal to provide 
insurance to an otherwise eligible farmer as a serious violation of the 
SRA and take the appropriate action. However, such occurrences are 
rare. With respect to the issue of marketing to all farmers, this 
requirement only became effective for the current reinsurance year and 
not all policies have been reported. Therefore, it is not yet possible 
for RMA to conduct a review.
    With respect to the number of specialty crop and small farm 
policies carried by Crop1, such information is protected by the 
confidentiality provisions in the SRA and other privacy statutes. RMA 
can say that it has such information for all approved insurance 
providers in its extensive data base and periodically analyzes such 
data for approved insurance provider monitoring purposes.
    Comment: A few agents and interested parties asked whether the 
approved insurance provider who has delivered premium reduction plan 
policies has been held to the same adjusting, education, and quality 
standards as the balance of the industry.
    Response: All approved insurance providers that are eligible to 
participate in the premium reduction plan under the interim rule and 
those authorized under existing procedures, including Crop1, must first 
and foremost abide by the terms of the SRA. These are standard for all 
approved insurance providers. In addition, Crop1 must abide by 
additional terms and standards

[[Page 41861]]

established by the FCIC Board and by existing premium reduction plan 
procedures. These would include the service, training, loss adjustment, 
quality control, etc. requirements of the SRA and approved procedures.
c. Uniform Service and Unintended Effects
    Comment: Several farmers and agents commented that with the current 
premium reduction plan there has been no reduction in benefits or 
service. Commenters state they are satisfied with the service they 
received from Crop1, its agents and loss adjusters. A commenter stated 
it received as good, if not better service than with other approved 
insurance providers. A commenter stated it was satisfied with the 
prompt accurate adjustment during the year when losses occurred due to 
drought. The commenter stated this not only strengthened Crop1's 
reputation but helped the agency to provide value and service as well. 
The commenter stated that every client has renewed their crop insurance 
since offering the premium discount.
    Response: RMA has monitored service provided by Crop1 and all 
authorized approved insurance providers under the exactly the same 
standards, which are the requirements of the SRA and approved 
provisions, as all other approved insurance providers and has not found 
evidence that service to farmers was reduced. Further, such monitoring 
for compliance with the requirements of the SRA and approved procedures 
will continue under the interim rule. As stated above, provisions have 
been added to the interim rule clarifying these applicable standards.
    Comment: An agent commented that whether the premium reduction plan 
is kept in place or not, it intends to continue providing the existing 
policyholders with the best service that it can. However, the commenter 
asks that RMA understand that the crop insurance program was designed 
for all farmers, not just large farmers, but the medium and small 
farmers.
    Response: RMA hopes that all agents share the desire of this 
commenter to provide the best service possible to policyholders. 
Further, RMA is in total agreement that the premium reduction plan must 
provide access to all farmers in the states in which it is available. 
To accomplish this, RMA is requiring that approved insurance providers 
develop marketing plans designed to reach all farmers, including small, 
limited resource, women and minority farmers, through the appropriate 
media and implement the marketing plan. RMA will monitor performance 
and if it determines that any segment of farmers is not adequately 
being reached, it can require the approved insurance providers to take 
remedial corrective measures, including targeted advertising.
    Comment: Many agents, interested parties, approved insurance 
providers, and farmers commented that the premium reduction plan will 
reduce services to farmers. Some reasons include stricter regulations, 
crop insurance is labor intensive, the inability to make changes to 
honest paperwork mistakes or keying errors by approved insurance 
providers or agents, and reductions in agent commissions. Commenters 
stated that their business is built on service. Commenters state that 
farmers need the assistance from their agents. A commenter stated that 
crop insurance is an increasingly complex subject and requires at least 
the level of service afforded now. A commenter stated that if approved 
insurance providers are cutting service then farmers will not buy the 
product. A commenter stated reduced service will mean poorer risk 
management decisions by farmers. A commenter stated that lesser service 
at a good price is not always a good bargain.
    Response: RMA agrees that crop insurance is a complex, labor 
intensive program and that many farmers may need the expertise provided 
by the agents in selecting the best risk management tool for their 
operation. However, the service requirements under the SRA and approved 
procedures will not change and all approved insurance providers and 
agents are required to comply with these requirements irrespective of 
whether the agent or approved insurance provider participates in the 
premium reduction plan. Failure to comply with these requirements 
regarding service will not only subject approved insurance providers to 
sanctions under the SRA, it may subject agents and approved insurance 
providers to sanctions under the interim rule. Given the significance 
of the consequences, RMA does not believe there will be a reduction in 
service.
    RMA understands that agents may be providing services over and 
above that which is required by the SRA and approved procedures. RMA 
does not require such extra service and cannot preclude a reduction in 
such services. This is strictly a matter between the agent and the 
farmer. As long as such service at least meets the requirements of the 
SRA and approved procedures, RMA will not interfere.
    With respect to strict compliance with regulations, there are few 
additional requirements imposed on agents under the interim rule. The 
only significant requirement is the limitation on marketing practices 
in the promotion of premium discounts to existing and prospective 
policyholders. There should not be any additional paperwork burdens 
because premium discounts are now based on the actual cost savings 
achieved by the approved insurance provider.
    Comment: Many agents, interested parties and farmers commented that 
reductions in service would be particularly true for small or limited 
resource farmers because they will be unprofitable to serve. Commenters 
stated small farmers require as much time, effort, and expense to 
service as large farmers. The commenters stated that if all of the 
larger accounts are switched to the discount plan, then agents will 
barely survive on the large accounts and will lose money on the smaller 
accounts, which they already do, meaning that overall they would be 
losing money and would have to go out of business due to a marketing 
scheme. The commenters state that they are able to serve small farmers 
partly because the larger farmers' policies help with the low or non-
existent profits from the smaller farmers. A commenter stated that he 
or she could not still service areas with farmers in high loss ratios 
the way they deserve, if the premium reduction plan takes place. 
Commenters stated that these small farmers could be left without 
service.
    Response: For the reasons stated above, it is unlikely that there 
will be any reduction in service to any farmer, including small or high 
risk farmers, from the requirements in the SRA and approved procedures. 
Approved insurance providers are not going to pay a commission so low 
that selling crop insurance is no longer economically viable for the 
agent and risk their going out of business. This would result in 
approved insurance providers not having sufficient agents to properly 
service their policyholders. In addition, approved insurance providers 
are not going to risk losing the agent or their book of business to a 
competitor thereby decreasing the potential for underwriting gains. The 
marketplace will determine the fair and equitable commission for the 
agent.
    In addition, RMA has taken steps to ensure that service to small 
farmers is available and is not reduced. One step is to clarify the 
requirements regarding service in the interim rule. Another is to 
specifically require that approved insurance providers develop and 
implement a marketing plan designed to reach small, limited resource 
and

[[Page 41862]]

minority farmers. Provisions have also been added to allow farmers to 
complain directly to RMA if they feel they have been denied access to 
the premium reduction plan or have received reduced service. In 
addition, failure to comply with either the service or marketing 
requirements could result in the imposition of significant sanctions 
under the SRA or the interim rule on the approved insurance provider 
and agent.
    Comment: An approved insurance provider commented that state 
variability could adversely affect the level of service to some 
farmers, which is directly contrary to the fundamental requirement of 
the crop insurance program that all farmers are entitled to the same 
level of service, regardless of their size or loss history.
    Response: As stated above, service cannot be reduced below the 
level required by the SRA and the approved procedures. Further, as 
stated above, approved insurance providers and agents have a strong 
incentive to maintain at least the required level of service. 
Permitting state variability does not change these requirements. 
Further, as stated more fully below, after consideration of the 
comments regarding the inequity of creating a one size fits all program 
when the approved insurance providers have different business 
operations and may incur significantly different costs from one state 
to the next, the adoption of the alternative proposal which bases 
premium discounts on actual savings, the use of existing Expense 
Exhibits to determine efficiencies and the amount of a premium discount 
in a state, and the use of a formula to allocate costs and determine 
the amount of premium discount, there was no reason to refuse to permit 
state variability. However, this means that any approved insurance 
provider seeking state variability must do so while maintaining the 
required level of service.
    In addition, the interim rule expressly contains provisions that 
preclude conditioning the payment or amount of a premium discount on 
the loss history or size of the farm. Violation of one of these 
requirements could also result in the imposition of significant 
sanctions under the interim rule.
    Comment: Many agents, interested parties and farmers commented that 
if the premium reduction plan proposal stays intact as written, it 
would cause many of the personal services and consulting offered by the 
agent to not be available to the average farmer. Commenters stated that 
they meet several times each year with each farmer and reduced 
commissions would mean spending less time and a product that is now 
successful would again take a step backward with reduced time spent 
educating the farmer on risk management. Commenters state that the 
amount of work required increases each year. Commenters state that they 
need the ability to pay office expenses and do not deserve to have to 
attempt to continue to provide superior services at reduced 
compensation. A commenter stated that the amount of commission will not 
cover the amount of work. A commenter stated that crop insurance 
policies will take a back seat to other lines of insurance when the 
revenue generated decreases to a point that the investment of time is 
not feasible. Commenters stated that farmers do not mind paying if they 
get quality service. A commenter stated that the complexity of the 
program has increased the time spent servicing each client tenfold, 
leaving less time each year to solicit new accounts and new accounts 
that are necessary each time a commission reduction is passed down.
    Response: As stated above, the SRA and approved procedures contain 
specific requirements regarding service and all approved insurance 
providers and agents must comply with these requirements or be subject 
to the sanctions in the SRA and interim rule. Therefore, it is unlikely 
that approved insurance providers will reduce commissions to the point 
that agents can no longer afford to comply with these requirements. 
Further, as stated above, it is not in the approved insurance provider 
best interest to cut commission to the point that agents stop selling 
crop insurance. As with all competition, the market will generally 
strike a balance with respect to the reductions in compensation the 
market can bear.
    RMA understands that based on the comments there may be agents that 
are providing services in excess of those required. RMA also 
understands that some farmers find these services invaluable. However, 
since these services are not required by the SRA or approved 
procedures, RMA cannot require that they be maintained. This is a 
matter between the agent and the farmer. Further, the approved 
insurance provider may want to encourage such services in order to 
retain these farmers in its book of business. This would provide 
another incentive for approved insurance providers not to cut 
commissions to the point that agents cannot provide these additional 
services. RMA's obligation is to ensure that the requirements of the 
SRA and approved procedures regarding service are complied with and to 
sanction those agents or approved insurance providers out of 
compliance.
    Comment: Many agents and farmers commented that when discounted 
pricing brings along with it discounted service, the farmer is not 
educated nor guided effectively through all his options. Commenters 
state that this program has become much more labor intensive, complex 
and convoluted by the addition of plans of insurance as well as more 
individual crop policies are offered and the premium reduction plan 
will cause reduced services. A commenter stated that the farmer needs 
the agent to assist them in making sound risk management decisions. 
Agents spend many hours keeping updated on changes. Commenters state 
that farmers want quality service. A commenter stated that the farmer 
relies on the agent to educate them. A commenter stated that there is 
barely enough time in the day to farm, to market, to keep records and 
to do everything else required to stay in business and that the premium 
discount is not worth losing the personal attention from the agent. 
Commenters state that farmers would be harmed without uninterrupted 
service.
    Response: RMA agrees that farmers want quality service and that the 
agent's knowledge and experience is important to the success of the 
crop insurance program and the farmer. However, this does not mean 
there is no room for competition. It is the approved insurance 
providers that are in the best position to judge where efficiencies can 
be obtained without jeopardizing their compliance with the SRA and 
approved procedures or their book of business. Therefore, approved 
insurance providers are not likely to request the opportunity to offer 
a premium discount in states where it is not economically feasible to 
reduce agent commissions or other administrative costs. Further, 
approved insurance providers are likely to only propose cuts in 
commission that will still permit agents to receive a fair and 
equitable commission as determine by the agent and approved insurance 
provider. It is not in the approved insurance provider's best interest 
for the agent to lose customers because the agent can no longer serve 
its customers.
    Comment: Many agents and farmers commented that given the complex, 
labor-intensive nature of crop insurance, any agent faced with a 
reduced commission will be forced to take on additional farmers to make 
up the difference, plus do all the other lines of insurance that they 
have to do just to stay in business. A commenter stated that in order 
for an agent to operate on less commission they would have to

[[Page 41863]]

gain new customers, which means taking clients from another agent. End 
result, someone gets hurt and it could lead to loss of integrity in the 
program. Commenters state that taking on new clients would reduce 
service because all of the marketing energy goes into generating the 
higher volumes.
    Response: It is not uncommon for agents to want to expand their 
client base. Given that the number of potential new insureds is 
limited, agents typically attempt to attract clients from another 
agent. This occurred in the crop insurance program even before the 
implementation of any premium reduction plan. However, as stated above, 
it is unlikely that there will be the severe cuts in commission 
anticipated by the commenters because it is not in the approved 
insurance provider's best interest to lose agents or policyholders.
    Further, what the commenters are describing is competition between 
agents and price will simply be a new component of that competition. 
However, as is currently occurring, service is still another means of 
competition and in some cases may be more valuable than the potential 
of a premium discount several years in the future. The premium discount 
simply provides another tool to be used by agents to attract clients 
and, under the alternative proposal adopted in the interim rule, one 
which is not so overwhelming that agents who provide superior service 
would not be able to compete on a level playing field.
    Comment: An agent commented that self service insurance is a 
disaster waiting to happen for anyone who assumes that simply signing 
up will take care of business.
    Response: There is no expectation that crop insurance will become 
self service. As stated above, agents provide too valuable a service to 
farmers and many farmers could not assess and meet their risk 
management needs without the assistance of the agent. However, as 
occurs in many aspects of life, there will be farmers that are more 
knowledgeable about crop insurance than others and may not need the 
same level of service to meet their risk management needs. As long as 
the service provided to all policyholders at least meets all the 
requirements of the SRA and approved procedures, any service provided 
above that level is totally within the discretion of the agent and 
approved insurance provider. This is true today and will remain true 
under the interim rule. As explained above, agents have always and will 
continue to compete based on the service they provide. It is the agent 
and approved insurance provider who are in the best position to know 
the level of assistance required by their customers.
    Comment: Several agents and interested parties commented that they 
are concerned that a premium reduction plan environment will force 
approved insurance providers and agents to cut funding for training, 
support, and farmer education. Commenters state that the premium 
reduction plan will lead to less knowledgeable or qualified agents. A 
commenter states that this will erode the confidence in the crop 
insurance program. A commenter stated that RMA should not undervalue 
the knowledge, expertise and service the agent provides the farmer.
    Response: All agents and approved insurance providers are still 
required to comply with all requirements of the SRA regarding training 
and the interim rule reinforces this position. Failure to comply with 
such requirements would subject the approved insurance provider to 
sanctions under the SRA. Therefore, participation in the premium 
reduction plan should have no effect on the knowledge or qualifications 
of agents.
    With respect to support and farmer education, to the extent that 
reduction of these would lead to non-compliance with any service 
requirement in the SRA or approved procedures, such reduction would be 
prohibited and could lead to sanctions against the approved insurance 
provider. To the extent that the support and farmer education may not 
be required by the SRA or approved procedures, RMA cannot require that 
approved insurance providers continue these activities. However, as 
stated above, approved insurance providers have the incentive to retain 
customers and to the extent that such activities are needed for such 
retention, it is unlikely that approved insurance providers will cut 
them.
    Comment: An agent commented that the small farmers will more than 
likely remain loyal to approved insurance providers and agencies that 
have done their very best to service their accounts over the years, 
such as developing record keeping systems, acreage mapping, educational 
updating, and constant reminders about proper reporting and compliance 
with the FCIC program. In general, the large farmers work on economies 
of scale and these farmers will be the accounts solicited.
    Response: Large accounts were always the most attractive to solicit 
even before implementation of the premium reduction plan because they 
allowed the most opportunity for agents to profit. The implementation 
of the premium reduction plan does not change this dynamic. However, 
RMA believes that all farmers value superior service and are likely to 
remain loyal to the agent providing valuable service regardless of 
size. The addition of price competition simply gives the farmer a 
choice to decide what it values the most and, since the premium 
discount can no longer be guaranteed at the time of sale, the 
competition is on a more level playing field.
    Comment: Several interested parties and agents commented that 
reductions in service and use of the internet will result in increased 
mistakes and misunderstandings. A commenter stated that farmers need 
personal contact with their agent to prevent these mistakes.
    Response: As stated above, approved insurance providers and agents 
are required to comply with the service requirements in the SRA and 
approved procedures and such requirements, when followed, would 
preclude mistakes and misunderstandings. Therefore, because approved 
insurance providers would be subject to sanctions if service failed to 
meet the requirements, there should not be any increase in mistakes or 
misunderstandings under the premium reduction plan. Further, no 
approved insurance provider can sell and service insurance solely over 
the internet. The Act requires such sales to be made through licensed 
agents. Further, it is unlikely that an approved insurance provider 
could meet all the service requirements in the SRA and approved 
procedures remotely. Therefore, some personal contact between the agent 
and farmer is likely to occur.
    Comment: An agent asks what exactly is service to the farmers. The 
commenter states that if RMA means, timely claims payment, make sure 
they get their bills, etc, the approved insurance providers will do 
this fine but unfortunately, that is not what the farmer considers good 
service. The farmer considers good service to be when his agent helps 
him decide the best coverage, when the agent reminds him that acreage 
and production reports are due and then looks it over to make sure it 
is not missing anything. The entire program has grown because there is 
a committed sales force of agents pushing the program. The approved 
insurance providers cannot and do not make sure that kind of service is 
taking place (except for captive agents). The best they can do is make 
sure agents are fulfilling the obligations of integrity, deadlines, and 
non-discrimination and they do a good job of that. But a commitment to 
servicing the farmer lies with the agent. Some do it well (and they 
grow their business) and others do not (and they lose the business to 
the

[[Page 41864]]

better agent). It is the agent/agency's responsibility to service the 
customer. That is how the farmer defines service.
    Response: As stated above, service requirements are contained in 
the SRA and approved procedures. RMA agrees the service required by the 
SRA and approved procedures do not include the many personal touches 
that individual agents employ in the course of conducting business with 
clients. RMA further agrees that these factors can play a significant 
role in determining whether an agent is successful or not and that it 
is the agent that determines this level of service as a means to 
compete with other agents.
    Nothing in the interim rule changes this dynamic. Agents provide a 
valuable service and farmers are the best judge of the service they 
want. This competition to retain or obtain new customers will still 
exist under the interim rule. However, a new component, price, has been 
added to the competition and agents will have to determine how best to 
compete because commenters are correct that some farmers will value the 
service more and others will value the premium discount.
    Comment: Several agents commented that commissions are being 
reduced by a half or a third. Commenters state that if commissions were 
reduced only the amount of the discount the farmer received, it could 
still deliver the program with the same service. A commenter asked 
where the rest of the savings are going.
    Response: There is no requirement in the interim rule that dictates 
that agent commissions be cut or the amount of commissions to be paid. 
This is a matter solely between the agent and the approved insurance 
provider. Market forces will determine if any cut in commission is 
appropriate and any amount because, as stated above, approved insurance 
providers have the incentive to retain agents and their books of 
business. Further, as stated above, RMA has made revisions to the 
premium reduction plan, such as the selection of states, which will 
provide the maximum flexibility for approved insurance providers to 
made sound, reasoned decisions regarding where they can achieve savings 
in their operations without jeopardizing their book of business and 
potential profitability.
    RMA is not in a position to comment on the extent of the reductions 
in commission or where the savings are going. RMA only examines A&O 
costs and A&O subsidies to determine whether there is a savings. 
Further, there is no requirement in the premium reduction plan that all 
cuts in agent commission be used to fund the premium discount. If the 
approved insurance provider experiences higher costs in other parts of 
its operation, it may be using savings from the reduction in agent 
commissions or other efficiencies to offset such costs. This is totally 
within the discretion of the approved insurance provider.
    Comment: An agent commented that in order to adequately serve all 
customers as they should be served, the reductions in cost of delivery 
should be made at the approved insurance provider level, not at the 
agent level.
    Response: As stated above, the goal of the interim rule is to 
provide the approved insurance providers the maximum flexibility to 
evaluate their business operations to determine where savings can be 
achieved. The approved insurance providers are in the best position to 
determine whether agent commissions or other costs can be reduced while 
still maintaining their potential profitability. As stated above, this 
is a free market issue between the agent and the approved insurance 
provider because if commission cuts are too deep, agents are likely to 
move their books of business to competitors. Further, if RMA were to 
dictate the manner in which savings could be achieved, as suggested by 
the commenter, it could have a detrimental effect on the financial 
stability of the approved insurance provider because each has a 
different business operation, which means different areas where savings 
could be attained.
    Further, as stated above, based on the information reported by the 
approved insurance providers on their Expense Exhibits provided with 
their Plans of Operation, agent commissions represent an overwhelming 
percentage of the total cost to the approved insurance provider to 
deliver crop insurance. To exclude the ability to use commissions to 
achieve savings even though the approved insurance provider has 
determined that this is the most appropriate place to achieve savings 
based on its evaluation of its operation would be arbitrary and 
capricious. However, the interim rule retains the requirement that 
approved insurance providers cannot achieve all of their cost savings 
from agent commissions. To participate in the premium reduction plan, 
approved insurance providers will have to achieve some savings from 
other aspects of their operations.
    Comment: An agent commented that it is concerned that reductions in 
commissions will lead to fewer loss adjusters available to provide 
claims servicing.
    Response: RMA is unsure of why a reduction in agent commissions 
will lead to fewer loss adjusters. Under the SRA, both functions are 
separate and distinct from one another. Further, under the interim 
rule, approved insurance providers must still comply with all the 
requirements of the SRA and approved procedures regarding loss 
adjustment. Failure to comply with these requirements will subject the 
approved insurance provider to sanctions under the SRA.
    Comment: Several agents commented that RMA has stated that an agent 
cannot accompany a loss adjuster on a loss as they have in the past. A 
commenter stated that this goes against the whole principle of having 
an agent, which is service. A commenter asks whether the agent is 
considered part of the approved insurance provider and, therefore, 
can't cut any services that were provided in the past. The commenter 
stated that a large majority of the farmers don't understand the 
adjusting procedures and are being forced to rely on a stranger they 
just met and can only assume that adjuster is qualified to complete 
their loss instead of having someone they know and trust to be there to 
help them know they are being treated fairly. The commenter stated that 
many adjusters fill out papers and say sign here without explaining 
what they have done.
    Response: These comments do not address a matter covered by this 
rulemaking and, therefore, were not considered relevant to the 
consideration of the proposed rule. However, this is an important issue 
that RMA would like to address.
    The role of agents in the adjustment of claims is provided for in 
the SRA. For a number of years, the SRA has prohibited agents from 
being involved in the loss adjustment process. So this is not a new 
requirement and is necessary because in many cases of fraud, waste, and 
abuse, there has been collusion between the agents and loss adjusters. 
In addition, the concerns raised by commenters occurs in most lines of 
insurance, such as auto insurance, where if there is a claim, the 
insured works with the claims representative, who is usually a stranger 
and must assume that the stranger is qualified to complete their loss. 
Many persons are in the same position as the farmer in that they know 
little about the adjustment process. However, the need has been long 
been recognized to separate sales and loss adjustment because of the 
inherent conflict of interest in the position. Agents inherently want 
to keep their clients satisfied so they will remain with the

[[Page 41865]]

agent. However, loss adjusters work for the approved insurance 
provider, who has an interest in containing losses. Therefore, as with 
other lines of insurance, this provision is necessary to protect the 
integrity of the crop insurance program.
    Comment: An agent commented that RMA should consider a premium 
modification philosophy that provides a savings where it can be applied 
without affecting customer service and it prevents applying a discount 
where it will reduce customer service.
    Response: All approved insurance providers must provide the level 
of service required under the SRA and approved procedures. Since 
approved insurance providers and agents already compete based on the 
service they provide, it would be inappropriate for RMA to require as 
part of the interim rule that an approved insurance provider not be 
allowed to adjust the service provided so long as it meets the 
requirements of the SRA and approved procedures. RMA believes that 
decisions by approved insurance providers regarding the level of 
service beyond the minimum should be based on competition in the 
market. Which means policyholders will decide the level of service 
beyond the minimum approved insurance providers and agents must 
provide. To adopt the commenter's suggestions would require RMA to try 
to determine for policyholders the types and level of service that each 
approved insurance provider must provide regardless of its relationship 
to the requirements in the SRA and approved procedures. RMA does not 
believe that such regulation is in the policyholders' or the approved 
insurance providers' best interests.
    Comment: Many agents and interested parties commented that it is 
unrealistic at best to expect to see true realized savings and 
efficiencies through the use of the internet. The commenters stated 
that the complex nature of crop insurance, coupled with recent history 
from the approved insurance provider currently offering the premium 
reduction plan having no success whatsoever with the internet as a 
delivery tool demonstrates this fact. A commenter stated that farmers 
do not have the time or equipment to input the data so agents must 
still do the work. Commenters state that the premium reduction plan 
provides an incentive to use the internet to the detriment of agents. 
Commenters state that farmers need the agents to assist them in making 
their risk management decisions.
    Response: There is no requirement in the interim rule that cost 
savings must be attained through the internet. In fact, RMA agrees with 
the commenters that it is unlikely an approved insurance provider could 
comply with all the service requirements in the SRA or approved 
procedures if it offered crop insurance solely through the internet. 
However, the internet does provide a means where savings can be 
achieved and there are farmers who are willing and able to use the 
internet. Since the premium discount is now based on actual cost 
savings, not projected, approved insurance providers no longer have to 
mandate the use of the internet but could make it available and use any 
savings achieved to justify paying premium discounts.
    Comment: Several agents, interested parties and farmers commented 
that if price is a factor, it seems to become the ``only'' factor when 
discussing a product. A commenter states that crop insurance is a 
valuable asset to any farming operation these days and does not need 
``pricing games'' to become a factor. A commenter stated that agents 
should continue to provide coverage to policyholders based more on 
service and quality than cutting prices. A commenter stated that 
farmers don't go looking for the cheapest rate, they go looking for the 
person who can explain the program and offer the best service. The 
commenter stated that the premium reduction plan is going to make it 
where farmers look for the cheapest plan, and who cares if they know 
what they are buying. A commenter states that if the premium reduction 
plan proposal goes through, agents will water down their competitive 
advantage and have to resort to selling price. A commenter stated that 
others can be trendy and look to the bottom line but agents should be 
motivated by providing the best service they can.
    Response: The commenters seem to suggest that competition on price 
and competition on service are mutually exclusive and that is unlikely 
to be the case. In a complex program where service is so important, it 
is unlikely that price competition, especially the kind included in the 
interim rule, would have the dominating effect on competition that 
commenters seem to suggest. The whole premise of price competition is 
to be able to provide the same product or service for less money. 
Therefore, farmers are still going to want the best risk management 
tool and advice they can get. If they find out they did not receive it 
from one agent, they will move on to another agent because of paramount 
concern to farmers is whether they receive the benefits they are 
contractually entitled to receive under the policy in a timely manner. 
The potential for a premium discount will not override this immediate 
interest. These market forces will always permit competition based on 
service.
    Nothing in the interim rule is intended to minimize the role of the 
agent or change the service received. The interim rule is intended to 
allow price competition when and where the market will bear and the 
approved insurance providers, agents, and farmers are the best 
determinant of these factors.
    Comment: Several agents commented that under the premium reduction 
plan, farmers suffer lack of service, access to all plans of insurance, 
and knowledge of the crop insurance program. A commenter states that 
only those farmers that can educate themselves will benefit. A 
commenter also stated that the access to the premium discount must be 
applied across the board to all types of policies and that farmers 
participating only in catastrophic risk protection (CAT) policies must 
be informed about the reduced premiums in other programs.
    Response: All approved insurance providers must provide access to 
all plans of insurance under the terms of the SRA. The interim rule 
does not change this requirement. Further, the requirements for service 
are also contained in the SRA and approved procedures and all approved 
insurance providers and agents must comply with these requirements or 
risk sanctions under the SRA or interim rule. If the commenters know of 
instances where approved insurance providers or agents have not 
complied with these requirements, they should report such non-
compliance to RMA.
    Promoting certain insurance products is not the same as denying 
access to an insurance product. RMA has not regulated such promotion 
because generally the market forces take care of this issue. For 
instance, if an agent promotes a Group Risk Protection plan of 
insurance and the farmer later discovers that the indemnity payable 
under policy did not meet the farmer's risk management needs and that 
purchase of another product would have, the farmer is likely to go to 
another agent to obtain the coverage. Therefore, it is in the best 
interest of the agent to tailor the insurance coverage to best meet the 
needs of the farmer.
    Regarding the statement that only farmers that can educate 
themselves will benefit, RMA expects that agents participating in the 
premium reduction plan will continue to be motivated to provide crop 
insurance education to farmers in order to remain competitive. Further, 
with respect to the requirement that agents inform their farmers of the

[[Page 41866]]

potential for a premium discount if it buys up, there is no need to 
specifically include this requirement in the rule. Agents already have 
an incentive to suggest to their farmers who purchase CAT coverage to 
buy higher coverages because of the higher commissions the agents can 
receive. The potential for a premium discount would provide an 
additional incentive the agent can use to convince the farmer to buy-up 
to higher coverage levels.
    Comment: Several agents commented that there is currently a 
competitive marketplace with several approved insurance providers' 
agents still competing for new business based on service. If the 
government interferes with the marketplace to the degree that there are 
only one or two providers, the incentive to compete is lost and the 
level of service will certainly decline. A commenter stated that the 
system isn't broke now so why go out of the way to fix something that 
is working fine.
    Response: There is nothing in the interim rule that suggests that 
implementation of the premium reduction plan will result in only one or 
two approved insurance providers. However, RMA has taken measures to 
minimize potential disruption to the marketplace. One is basing premium 
discounts on actual costs savings, instead of projections that may be 
unrealistic or unrealized. Further, the potential for a premium 
discount in the future will be much less disruptive to the market place 
than a guaranteed premium discount at the time of sale. Allowing 
approved insurance providers to select the states in which they will 
participate in the premium reduction plan also eliminates potential 
adverse effects in those states where margins are much less.
    Under the interim rule, agents will still have the ability to 
compete on service. In a complex program, there will still be farmers 
that will value service more than the potential for a premium discount. 
Further, service is not likely to decline such that the requirements in 
the SRA and approved procedures are not met.
    As stated above, RMA has no choice but to implement the premium 
reduction plan. However, it has tried to do so in a manner that 
maintains the best attributes of the crop insurance program, service 
and choice, and minimizes the potential for adverse effects, such as 
financial instability and approved insurance providers pulling out of 
states. As a result, RMA believes it has developed a premium reduction 
plan that can benefit all participants in the crop insurance program.
    Comment: An agent commented that farmers who opt for a discounted 
plan should expect and receive some differentiation in service, to 
offset the cost savings, i.e. earn the discount. Example would be to 
complete the required reporting in some electronic format, which would 
speed up the process for the agent and approved insurance provider 
involved. The commenter also stated a discount may also make sense if 
the policy size were taken into consideration. The commenter stated 
that the time spent by an agent on farmer education, counseling, and 
processing can be just as involved for a 100 acre policy, as a policy 
for 1,000 acres. Consideration for the amount of insurance may be in 
order, and justify some further discount beyond the administrative fee 
alone.
    Response: It is possible that farmers who participate in the 
premium reduction plan will not receive the same level of service as 
before. However, these farmers will still receive the level of service 
required by the SRA and approved procedures. Any service over and above 
that standard is strictly between the agent and the farmer. The interim 
rule does not require that extra service be eliminated.
    Further, the amount of any premium discount takes into 
consideration the size of the policy. A farmer with a 1,000 acre policy 
would likely receive more dollars of premium discount than a farmer 
with a 100 acre policy because of the difference in premium. However, 
as the rule makes very clear, there can be no difference in the 
percentage of discount between the two if both farmers are located in 
the same state. To allow the application of different percentages of 
premium discount in the same state could lead to unfair discrimination. 
There could be different percentages of premium discount paid between 
states, i.e., state variability. However, there is no unfair 
discrimination as long as all farmers within each state are treated the 
same. Such state variability may simply be a function of the 
differences in savings that can be achieved among the states.
    Comment: Several agents and interested parties commented that 
although lower premiums would be beneficial to farmers, they question 
how approved insurance providers will be able to maintain their 
efficiency in servicing the customer. This in the long run will defeat 
the benefits of good crop insurance.
    Response: As explained above, the interim rule requires that all 
farmers must still receive the level of service required by the SRA and 
approved procedures. Therefore, when determining whether an efficiency 
can be achieved, the approved insurance provider must evaluate its 
business operation to determine where savings are possible while still 
maintaining the required level of service and complying with the other 
requirements of the SRA. These requirements limit the actions of 
approved insurance providers and protect the integrity of the crop 
insurance program.
    Comment: A few interested parties and agents commented that service 
centers would not be able to continue working with agencies because the 
approved insurance providers would have no ``room'' in their commission 
structure to offer enough for both a service center and the agent. The 
commenter stated it would drive many service centers out of business 
immediately. The commenter stated that service centers offer a valuable 
service to both agencies and approved insurance providers by acting as 
a buffer for the agent in turning in correct forms, information, etc. 
and reducing the workload of approved insurance providers. Without 
service centers, approved insurance providers would have to hire more 
underwriters at much more expense than a service center costs.
    Response: There is nothing in the SRA or approved procedures that 
require approved insurance providers to use service centers. It is up 
to the approved insurance provider to determine whether or not to use 
service centers and how much to invest in such activities. Nothing in 
the interim rule changes this. While RMA does not doubt that service 
centers provide a valuable service, it is up to the approved insurance 
provider to evaluate its operation and decide where to achieve 
efficiencies. RMA has no rational basis to interfere with this 
relationship.
    Comment: Several interested parties and agents commented that the 
proposed rule would cause an even greater burden on the approved 
insurance providers requiring vast accounting reports, particularly 
ones that are state specific. The A & O was just recently cut for the 
2005 crop year and further cuts are not warranted. The commenters state 
that the proposed rule would require further commission cuts to agents 
in order for the approved insurance providers to comply with the 
premium reduction plan requirements at the same time that RMA continues 
to require more and more paperwork and contacts with its insured's.
    Response: As stated above, RMA revised the proposed rule to require 
premium discounts to be paid on actual cost savings. Therefore, the 
accounting

[[Page 41867]]

reports necessary to determine the projected efficiencies have been 
eliminated. Actual costs savings must still be determined at the end of 
the reinsurance year but the proposed rule was revised to use existing 
Expense Exhibits provided with the Plan of Operations. Further, state 
accounting reports will not be necessary. RMA has developed a formula 
that will be used for each state to determine the premium discount. RMA 
has developed a formula that will be used for each state to determine 
the premium discount to the state level. Apart from the requirement to 
have these expense statements audited, there is no additional burden on 
approved insurance providers.
    RMA disagrees with the comment ``that the proposed rule would 
require further commission cuts to agents * * *'' Participation in the 
premium reduction plan is voluntary for any approved insurance 
provider. If an approved insurance provider chooses to participate in 
the premium reduction plan, agent commission reductions are not 
required. Approved insurance providers are free to evaluate their 
operations to determine where cost savings can be achieved while still 
allowing them to be in compliance with all requirements of the SRA and 
approved procedures, including service, loss adjustment, training, etc.
    Comment: Several agents and interested parties commented that many 
existing Crop1 agents are promoting only the Group Risk Income 
Protection (GRIP) product partially because it requires less work and 
expertise than individual products but also because its very structure 
causes claims to be overpaid. A commenter asked how much money could be 
saved if GRIP claims were not overpaid. A commenter stated such 
promotion may be to the detriment of the insured, who may be better 
served by an individual plan tailored to the farmer's risk management 
needs.
    Response: It is impossible for RMA to determine the motives behind 
the promotion of one insurance product over another. However, the 
allegations by the commenter are not the first time such allegations 
have been made. Several years ago there were allegations that agents 
were promoting CRC to farmers who did not need that level of risk 
protection in order to increase their commissions. In these types of 
situations, it is impossible for RMA to determine the appropriate plan 
of insurance for a farmer or require that agents specifically promote 
certain insurance products or stop promoting another. As with the 
situation with CRC, agents should be advising farmers of the insurance 
product that best meets their risk management needs and if the agents 
are not, farmers will likely take their business to an agent that will.
    Further, RMA is unsure of what the commenter means by the statement 
that GRIP by its very structure result in overpaid claims. If the 
commenter is referring to the fact that GRIP may pay an indemnity even 
if the farmer has not suffered a loss because the county suffered a 
loss, payment for this type of loss is specifically authorized by the 
Act. Further, the flip side is also true in that farmers with GRIP who 
suffer losses may not receive an indemnity because the county may not 
have suffered the requisite amount of loss.
    Comment: Several agents and interested parties commented that Crop1 
uses very deceptive marketing to try to convince people they will 
receive a 10% discount on their premiums. Commenters state that this is 
not the case for all levels of insurance coverage or plans of 
insurance. Commenters asked what happens in the event that the farmer 
would have a claim. The commenter stated the farmer already did not 
receive the discount he was expecting, and asked about the service. A 
commenter stated that farmers do not learn they have been misled until 
loss time.
    Response: While such misunderstanding might have been possible 
under the process established in the proposed rule because approved 
insurance providers were required to project costs savings and such 
projections could be unreasonable or unattainable, the adoption of the 
alternative proposal precludes such conduct. Under the interim rule, 
premium discounts are based on actual cost savings determined after the 
end of the reinsurance year and all approved insurance providers and 
agents will be precluded from advertising that a premium discount will 
be paid or promising an actual or projected amount. Approved insurance 
providers will only be able to advertise actual premium discounts paid 
and even these must be accompanied by prominent disclaimers that past 
results do not guarantee future payments. If RMA discovers that an 
approved insurance provider or agent is not complying with these 
limitations, sanctions will be imposed.
    Regarding the comment about farmers being led astray about the 
premium discounts, RMA has investigated several cases where local 
marketing information from Crop1 and its agents, though not 
conclusively false, could be perceived by some farmers as misleading. 
In such cases, RMA directed Crop1 to cease and desist and Crop1 
complied. RMA has no evidence that widespread false or misleading 
marketing information about Crop1's premium reduction plan was 
disseminated. Any person with specific information coming from Crop1 or 
any other approved insurance provider that is false or misleading is 
encouraged to provide such information to RMA and RMA will take 
appropriate action.
    Comment: Several agents and interested parties commented that Crop1 
does not have an adequate number of loss adjusters. A commenter asked 
that if Crop1 did decide to hire more adjustors where they could find 
ones with enough experience to handle such a large number of losses in 
a short amount of time. A commenter stated that Crop1 is trying to hire 
loss adjusters that from other approved insurance providers who have 
already gone to great expense to train them. A commenter stated that 
Crop1's adjuster force is small. A commenter stated that Crop1 has an 
advantage of no training for agents or loss adjusters.
    Response: Regarding the comment alleging that Crop1 lacks loss 
adjusters, Crop1 has advised RMA that, like nearly every other approved 
insurance provider, it employs a combination of salaried loss 
adjusters, contracted loss adjusters on retainer, and extra contracted 
loss adjusters when needed. RMA has no evidence that Crop1's claims 
service is inferior to other approved insurance providers and has not 
received any more complaints from farmers regarding Crop1's loss 
adjustment than it received about the loss adjustment of other 
similarly sized approved insurance providers.
    Regarding the comments alleging a lack of training of Crop1 agents 
and loss adjusters, the SRA and Appendix IV contain the requirements 
regarding training and all approved insurance providers are required to 
be in compliance with these requirements or face sanctions under the 
SRA. RMA monitors the training of all agents and loss adjusters and, 
through its monitoring activities, RMA has documented training logs and 
materials that confirm that Crop1 conducts training activities for 
agents and loss adjusters that are in compliance with the requirements 
of the SRA and Appendix IV.
    Comment: Several agents commented that the premium reduction plan 
approved insurance provider is seeking people who are not professional 
agents, such as seed dealers and elevators, and have not worked and 
know very little about the realm of crop insurance and that this was 
unfair. A commenter stated the agents were new and inexperienced.

[[Page 41868]]

A commenter claims that one of the people involved with the premium 
reduction plan program stated he knew very little about crop insurance, 
but his job was to sign up ``agents'' willing to sell this type of 
insurance. A commenter claims their selling pitch has nothing to do 
with the integrity of the crop insurance program nor the service and 
hard work that goes with the professional standard of most MPCI agents, 
but only with the fact that ``we can save you 10% on premium.'' A 
commenter states that because of these unprofessional people involved 
with the premium reduction plan program, all agents who have worked so 
hard to improve the program over the years are now going to suffer 
because of these few bad apples. A commenter states that farmers will 
suffer by not getting quality service. A commenter asked how RMA can 
expect a Crop1 insured, a coop employee, or a seed dealer to perform 
policy underwriting with absolutely no experience or training in crop 
insurance.
    Response: Regarding the general comments that Crop1 has relied 
heavily on people who are not professional agents, such as seed 
dealers, etc., Crop1 is required to comply with the same requirements 
in the SRA and approved procedures as all other approved insurance 
providers regarding the licensing and training of agents and service 
provided to farmers. RMA has monitored Crop1's sales activities and has 
not discovered that is in violation of any of these requirements. While 
Crop1 may use persons such as seed dealers to sell crop insurance, 
these persons are licensed and trained agents.
    Further, there is nothing in the SRA that precludes the use of 
inexperienced, trained and licensed agents. New agents are constantly 
entering the crop insurance program and there is no basis to exclude 
their participation. Inexperienced does not mean unprofessional and it 
is up to the approved insurance provider to make sure these new agents 
gain the experience to go along with their training. Further, 
inexperienced does not mean that agents cannot determine the risk 
management needs of the client and properly advise them of the 
insurance product that will meet that need. No agents are authorized to 
sell insurance until they receive this training.
    Further, the fact that agents are selling insurance based on 
``price'' competition instead of service is also not precluded. As 
stated above, the whole purpose of section 508(e)(3) of the Act was to 
introduce price competition into the program. Further, as commenters 
have stated, there will be farmers that will value premium discounts 
over service and those that do not. This allows for a balanced 
competition.
    Crop1 is in the business to make money and as such, it will ensure 
it has the proper personnel to conduct underwriting, sell insurance, 
and conduct loss adjustment. Further, under the interim rule, Crop1 
will operate under the same requirements as all other approved 
insurance providers. The market will determine whether Crop1 can 
successfully compete with its alleged inexperienced personnel and 
agents.
    Comment: An agent commented that Crop1's agents were bragging that 
it only took two days to become certified or eligible to sell its 
products and asked where the due diligence was and why Crop1 did not 
have to follow the same rules.
    Response: All approved insurance providers are required to comply 
with the same licensing and training requirements contained in the SRA 
and approved procedures. As stated above, RMA has monitored Crop1 and 
has found no violation of these requirements. If the commenter knows of 
such a violation, it should report it to RMA.
    Comment: An agent commented that any indication of savings from 
loss adjustment expenses should cause great concern for RMA and asked 
how one reduces costs for loss adjustment without reducing service to 
farmers.
    Response: RMA reiterates that the loss adjustment process is 
separate and distinct from the service provided by agents as required 
by the SRA. Further, all approved insurance providers are still 
required to comply with all the loss adjustment requirements in the SRA 
and approved procedures, regardless of whether they elect to 
participate in the premium reduction plan. However, this does not mean 
that loss adjustment expenses cannot be reduced. RMA has been offering 
a Simplified Claims Process, that is intended to reduce the burden on 
approved insurance providers and use of such claims process could 
result in savings. However, given the importance of the claims process 
to the financial welfare of the crop insurance program, RMA will 
carefully scrutinize situations where there has been a reduction in 
loss adjustment expenses to ensure that such reduction does not violate 
the loss adjustment requirements of the SRA and approved procedures.
    Comment: Several agents commented that if anyone has purchased a 
policy through Crop 1 they have problems getting hold of anyone to 
answer questions in regards to their policies and are constantly 
calling and coming into its office to get the answers to their 
questions. A commenter asked if this is another one of their 
efficiencies. The commenter states that Crop1 will write the business 
but they are not around to service it and let other approved insurance 
provider's agents do the work for them.
    Response: Without additional information, RMA cannot determine 
whether the service requirements in the SRA and approved procedures 
have been violated. However, if farmers are not satisfied with the 
service they are receiving, they can complain to RMA or move their 
business to another agent. This is the free market choice of farmers. 
Further, this situation would appear to provide a great marketing 
opportunity for the commenters because they can point out the benefits 
of continuous access over possible price discounts. This is one of the 
purposes of the program so that farmers could determine which they 
value most. Finally, the interim rule provides a new process to allow 
farmers with complaints to directly report these complaints to RMA.
    Comment: An agent commented that approved insurance providers will 
divide their book of business into additional corporate entities if 
there is a competitive advantage. Such division could allow the 
manipulation of the SRA. The commenter stated that this will also 
create a significant challenge to verify savings as it will allow the 
potential to shift cost allocations between the entities.
    Response: RMA shares the concerns of the commenter--that an 
approved insurance provider could potentially divide a book, create 
opportunities to manipulate allocated costs and, thereby, abuse the 
premium reduction plan. However, to do so, the approved insurance 
provider must create two separate and distinct entities and both 
entities would have to independently qualify for a SRA because RMA does 
not permit an approved insurance provider or its managing general agent 
to operate under multiple SRAs.
    Further, the use of the Expense Exhibits provided with the Plan of 
Operations and the formula to determine the premium discount would 
mitigate any potential manipulation of costs. However, now that 
approved insurance providers have the flexibility to select the states 
in which to participate in the premium reduction plan, can elect 
whether to pay a premium discount in a state, and can vary the amount 
of premium discounts between states, there is much less

[[Page 41869]]

incentive for approved insurance providers to divide their books of 
business.
3. Discrimination
    In the preamble to the proposed rule, RMA stated that one of the 
principles that must be met to comply with the requirements of section 
508(e)(3) of the Act is that no premium reduction plan can unfairly 
discriminate against farmers based on their loss history, size of 
operation, or the amount of premium generated. RMA has tried to address 
this issue in the proposed rule by: (1) Requiring that the premium 
reduction plan be provided to all farmers insured by the approved 
insurance provider; (2) requiring approved insurance providers to 
provide marketing plans for how they will reach these farmers; (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 
sought comments on whether these provisions should be modified or 
additional provisions added to ensure that all farmers have access to 
all premium reduction plans offered in their state. The comments 
received and FCIC's responses are as follows:
a. General
    Comment: An interested party commented that if an approved 
insurance provider is to offer a premium reduction plan, they should be 
able to choose who they offer it to. The commenter states that with the 
wide variety of management skills of today's farmers, why offer a 
premium discount to someone who claims a loss every year. The commenter 
asks if they are truly worthy of having their premium reduced and why 
should a well managed farm pay the same amount of premium as one that 
is poorly organized. The commenter suggests that an insured should 
demonstrate that it is a better risk than a neighbor, and deserving of 
a premium discount.
    Response: Under section 508(e)(3) of the Act, premium discounts are 
based on whether the approved insurance provider can reduce costs under 
the amount of A&O subsidy that is paid by RMA under the SRA. There are 
no other criteria stated in the Act and there is no rational basis to 
adopt the criteria proposed by the commenter. If RMA were to permit 
approved insurance providers to select which farmers receive the 
premium discount based on whether they have a loss, it would permit the 
very discrimination that RMA is trying to avoid.
    Further, well managed farms already do not pay the same premium as 
a poorly managed farm. Premium rates are based on the risk of loss and 
the risk of loss would be greater with a poorly managed farm so more 
premium would be required to cover these losses. Therefore, the 
requested change has not been made.
    Comment: An approved insurance provider commented that approved 
insurance providers who apply and receive approval to offer a premium 
reduction plan should be required to offer the savings to all their 
farmers and that in advance of making the offering, the approved 
insurance provider should be required to prove within their marketing 
plan how they expect to reach these farmers. Thus, the commenter states 
it is supportive of the fourth principle, non-discrimination, and would 
be addressed by: (1) Requiring premium reduction plans to be provided 
to all farmers insured by the approved insurance provider, (2) 
requiring the submission of marketing plans to show how the approved 
insurance provider will reach small and limited resource, women and 
minority farmers; (3) denying approval of premium reduction plans not 
supported by an adequate marketing plan, and (4) allowing for the 
withdrawal of approval of a premium reduction plan for failure to 
implement the approved marketing plan.
    Response: RMA understands the basis for the commenter's position 
that approved insurance providers participating in the premium 
reduction plan should be required to offer premium reductions to all 
producers. This principle was the basis for provisions in the proposed 
rule. However, as stated above, RMA, after reviewing the comments, has 
concluded that this position would give a significant competitive 
advantage to small or regional approved insurance providers that may 
not write in states with marginal or high loss ratios.
    RMA believes that approved insurance providers would withdraw from 
certain states if they are required to provide a premium discount to 
all policyholders. Given the higher costs associated with such states 
and the difficulty or impossibility that approved insurance providers 
could reduce costs sufficiently to offer a premium discount, an 
unintended consequence of the proposed rule was that farmers in some 
states would be left without any approved insurance provider to offer 
insurance because RMA cannot require approved insurance providers to do 
business in any particular state. The harm that such withdrawal would 
cause to the program and the economic stability of farmers far 
outweighs the possibility that farmers in some states may not be 
offered premium discounts. For this reason, RMA is permitting approved 
insurance providers to select those states in which it will participate 
in the premium reduction plan. However, if an approved insurance 
provider selects a state to participate in the premium reduction plan 
and is approved by RMA to provide a premium discount, all policyholders 
of the approved insurance provider in the state will receive the same 
percentage of premium discount.
    Further, to ensure that small, minority, limited resource, etc. 
farmers are aware of the availability of a premium reduction plan in a 
state, the marketing plan provisions have been clarified to require 
approved insurance providers to more clearly specify how they will be 
marketing and that the marketing under the marketing plan is in 
addition to any marketing that may be done by agents. This should 
ensure that all farmers have equal access to the premium discounts.
    Comment: Many agents and interested parties commented that they 
were opposed to the premium reduction plan will because it will lead to 
discrimination. Commenters stated that wholesale ``cherry picking'' 
will take place in the market. A commenter stated that discrimination 
will be impossible for RMA to control. Commenters states that the 
premium reduction plan will lead to discriminatory underwriting. A 
commenter states the premium reduction plan will lead to adverse 
selection and abuse. A commenter states that its members are 99% 
opposed to the premium reduction plan product because of discrimination 
issues. Commenters state that allowing cherry picking is not fair to 
the farmer or the integrity of the crop insurance delivery system
    Response: As stated above, there is a difference between selecting 
agents that solicit the most potentially profitable policyholders and 
denying insurance or a premium discount because of the policy size, 
loss history, etc. The latter is considered unfair discrimination and 
is prohibited in the interim rule. However, the former is not precluded 
under the SRA or the interim rule. Agents are currently trying to 
assemble the most profitable book of business that they can. However, 
while agents may solicit large farmers, they cannot deny insurance to 
any other farmer, including small, limited resource, women and minority 
farmers.
    However, to ensure that all farmers know about and have access to 
the

[[Page 41870]]

premium reduction plan, approved insurance providers will be required 
to design and implement marketing plans to reach all farmers, including 
small, limited resource, women and minority farmers. One way RMA can 
use to determine whether all farmers have been provided access to the 
premium discount is to compare the composition of one approved 
insurance provider's book of business with another. If RMA determines 
that the marketing plan is not adequately reaching such farmers, RMA 
can require remedial measures or impose sanctions under the interim 
rule.
    Comment: Several agents commented that the previous premium 
reduction plan had farmers entering data over the internet to afford a 
premium discount because of ``administrative'' efficiencies. Commenter 
states there is a potential to discriminate against many farmers who 
are not technically literate and those who could not afford technology 
to take advantage of the discount.
    Response: The commenter may be referring to inaccurate accounts of 
the previously approved premium reduction plan that would restrict 
premium discounts to only those farmers who applied for insurance 
through the internet. The premium reduction plan approved by RMA 
included opportunities for farmers to use the internet, but never 
proposed restricting premium discounts to those farmers that used the 
internet.
    Further, costs savings are not determined on a farmer-by-farmer 
basis. As discussed above, since approved insurance providers can now 
select the states in which to participate in the premium reduction 
plan, under the interim rule, cost savings for an approved insurance 
provider are determined on a state basis. Further, to preclude any 
discrimination against farmers in a selected state, if an approved 
insurance provider is approved to pay a premium discount, the same 
percentage amount of premium discount must be paid to all policyholders 
of the approved insurance provider in the state. This means the 
percentage of premium discount may vary between states but it must be 
the same within each state. Therefore, if an approved insurance 
provider requested approval of a premium discount based on savings 
attained through the internet and only intended to pay the discount to 
farmers that used the internet, RMA would have to disapprove the 
payment of such discount under the interim rule.
    Comment: Several agents and interested parties asked whether anyone 
thought about the fact that if agents have a discount plan and every 
crop insurance agency/agent signs up for it, all of the customers would 
have to be switched to the discount plan or face discrimination--not 
only legally but ethically and morally as well. An agent with a 
discount plan available would have no choice but to move every single 
customer to the discount plan. Commenters stated that being able to 
offer the premium reduction plan to one farmer and a regular plan to 
another takes on a discriminatory appearance.
    Response: First, there is no signup for farmers under the premium 
reduction plan. If the approved insurance provider attains an 
efficiency and elects to pay a premium discount the farmers will 
receive the premium discount payment from the approved insurance 
provider. Second, as stated above, the premium reduction plan no longer 
must be available in all states in which the approved insurance 
provider does business. Approved insurance providers will select the 
states in which they will participate in the premium reduction plan. 
However, RMA agrees that once an approved insurance provider elects to 
offer a premium discount in a state, allowing approved insurance 
providers to offer the premium discount to some farmers in the state 
and not to others could result in unfair discrimination. For this 
reason, the interim rule requires that an approved insurance provider 
authorized to offer premium discounts, and its affiliated agents, must 
automatically apply the same percentage premium discount to all of its 
policyholders in the state.
    However, there may be situations where the agent is writing for 
more than one approved insurance provider, some of whom may not be 
participating in the premium reduction plan or not participating in 
that state. There is no requirement in section 508(e)(3) of the Act, 
the SRA, or the interim rule that the agent sign up all its customers 
with the approved insurance provider that participates in the premium 
discount plan. However, as stated above, the interim rule now contains 
provisions that require the agent to inform all its customers of the 
approved insurance providers the agent writes for that participate in 
the premium discount plan. This will allow farmers to make informed 
decisions regarding their insurance.
    Comment: An interested party agrees absolutely that the premium 
reduction plan must be provided to all farmers as a minimal standard 
since it reduces the opportunity for inequitable treatment.
    Response: RMA agrees in part with the commenter that a premium 
discount must be provided to all producers. However, as stated above, 
RMA has to balance the impact of approved insurance providers 
withdrawing their business from a state with the impact that farmers in 
a state may not receive a premium discount. RMA has determined that the 
potential for no crop insurance to be available in the state is more 
harmful than the lack of a potential premium discount. The most 
important consideration is that farmers have access to the risk 
management products they need. However, RMA agrees that once the 
approved insurance provider elects to offer a premium discount in a 
state, all farmers insuring with the approved insurance provider must 
receive the same percentage of premium discount.
    Comment: An approved insurance provider commented that the premium 
reduction plan will cause insurance companies to cater only to large 
farmers because premiums in 2005 will drop due to lower commodity 
prices which, in turn, will reduce the amount of A&O received, even 
though an approved insurance provider's costs are rising.
    Response: The incentive to cater to large farmers exists in the 
current program, apart from any feature of the premium reduction plan. 
However, the interim rule helps to create meaningful program 
opportunities for smaller farmers by requiring that approved insurance 
providers eligible to offer premium discounts implement marketing plans 
that specifically targets such farmers. This affirmative step helps to 
offset the natural tendency of approved insurance providers and their 
agents to seek only the business of larger farmers. Further, RMA will 
monitor such marketing plans to ensure that they are effectively 
reaching the small, limited resource, women and minority farmers and 
require remedial measures or impose sanctions where appropriate.
    Comment: Several agents and interested parties commented that there 
is nothing in the proposed rule to prevent an approved insurance 
provider from advertising a premium reduction plan only to large 
farmers through direct mail telling past customers that they are 
offering a discount and they are the only agent they can get the 
discount from.
    Response: The interim rule precludes this behavior in two ways. 
First, as stated above, advertising and promotion is significantly 
curtailed. No agent or approved insurance provider can advertise or 
promote the availability or amount of a premium discount. Advertising 
and promotion is limited to the past premium discounts that have been 
paid and even they must be accompanied by prominent disclaimers. 
Second, as stated above, the interim rule requires approved insurance 
providers

[[Page 41871]]

to design and implement a marketing plan that will specifically target 
small, limited resource, women and minority farmers. RMA would take 
remedial action or sanction any approved insurance provider that 
attempted to solicit only large or prospectively profitable farmers. 
Further, as stated above, all agents must now inform their customers of 
all the approved insurance providers they write for that are 
participating in the premium reduction plan in the state. This will 
reduce the chance of any agent representing that it is the only agent 
the farmer can get a premium discount through.
    Comment: Several agents, approved insurance providers, and 
interested parties commented there is nothing keeping an agent from 
selling the discount plan from one approved insurance provider and the 
regular plan from another. Agents will be able to pick and choose who 
they write with for given farmers. A commenter states that this may 
lead to market conduct issues regarding the farmers' access to the best 
deal that the approved insurance providers, states and RMA will not be 
able to police or monitor. A commenter stated that the agent recommends 
placing a policy with a given approved insurance provider and the 
farmer almost always goes along. It is a homogeneous product and the 
farmer trusts his agent to tell him which approved insurance provider 
will offer him the best service on timely claims adjustment and 
payment. The farmer chooses his agent and the agent chooses the 
approved insurance provider.
    Response: RMA acknowledges there may be an issue when an agent 
writes for both an approved insurance provider that offers the premium 
reduction plan and one that does not. There is nothing in the SRA that 
would require an agent to inform a farmer of the products offered by a 
competing approved insurance provider with whom it writes. RMA 
acknowledges that an agent that represents both an approved insurance 
provider eligible to participate in the premium reduction plan and an 
approved insurance provider that does not can strongly influence which 
approved insurance providers to promote among his or her existing or 
prospective policyholders. Further, the approved insurance provider 
recommended to the policyholder by the agent might reflect compensation 
or other benefits to the agent rather than what might be in the 
policyholder's best interest. RMA is concerned that the misuse of such 
influence by agents could result in certain farmers not having an equal 
opportunity to participate in the premium reduction plan. To mitigate 
the situation, RMA requires the approved insurance provider to develop 
and implement the marketing plan separate from the solicitation done by 
agents. This way all farmers regardless of size should be informed of 
the availability of the premium reduction plan in their state. Further, 
RMA is requiring that all agents to disclose to all farmers the list of 
all approved insurance providers with which they write that are 
participating in the premium reduction plan. This, coupled with the 
marketing campaigns of the approved insurance providers who participate 
in the premium reduction plan, will allow farmers to make informed 
decisions.
    With respect to the policing of such conduct, RMA will be 
monitoring the situation and will also rely on state regulators, who 
have extensive experience in regulating market conduct by agents.
    Comment: A few agents commented that the crop insurance program 
(before the premium reduction plan) was easier to promote and keep 
other agents honest because the agent could tell the customer that the 
base multi-peril federal subsidized program was the same cost no matter 
which agent or approved insurance provider they buy it from. The 
commenter asked how to police that problem in the future other than to 
make the premium all the same. The commenter said this could lead to 
accusations of ``bid rigging.''
    Response: With respect to changes resulting from the premium 
reduction plan, RMA would agree that the premium reduction plan may 
require that agents adjust their marketing methods from those based on 
the premise that a policyholder pays the same premium regardless of 
approved insurance provider. Further, RMA shares the concern of the 
commenter that these changes could pose problems such as 
misrepresentations of premium discounts by agents. However, provisions 
have been specifically added to the interim rule that severely limit 
the advertising or promotion of a premium discount. Approved insurance 
providers can only advertise actual historical premium discounts and 
they still must be accompanied by a prominent disclaimer, either 
contained in the interim rule or approved by RMA.
    RMA cannot consider the commenters suggestions of making premium 
discounts the same for all approved insurance providers because section 
508(e)(3) of the Act is very specific that such discounts must be based 
on the savings achieved by the approved insurance providers are not all 
approved insurance providers will be able to achieve savings in all 
states or achieve the same amount of savings.
    With respect to policing of the situation, as stated above, 
promotions and advertising alleged to be discriminatory will be 
reviewed by RMA and state regulators and corrective actions required. 
The marketing concerns raised by the premium reduction plan are similar 
to other market conduct issues that insurance regulators regularly face 
especially with respect to the marketing of insurance plans by mutual 
and other similar types of approved insurance providers that offer 
payments to policyholders similar to the premium discount. While RMA 
shares the concerns of the commenter, RMA believes that these concerns 
can be addressed through cooperation between RMA and state insurance 
regulators.
    Comment: Several interested parties commented that they oppose 
implementation of the premium reduction plan, which opens the door to 
discrimination and significant program risks because the opportunity 
for all farmers to obtain coverage with a premium discount, is simply 
not available, either by state, crop, or approved insurance provider. 
The commenter states that RMA is assuming that all approved insurance 
providers will apply for and be approved to offer the premium reduction 
plan. But since only one approved insurance provider has been approved 
to offer this type of coverage, a large portion of the farming segment 
is left without the availability to purchase this coverage, which is 
itself discriminatory. The commenter also stated that no one or two 
approved insurance providers could currently handle this volume of 
business.
    Response: The commenter suggests that since only one approved 
insurance provider, with a relatively small client base, is currently 
authorized to offer premium discounts, that RMA is discriminating 
against the relatively large segment of policyholders that do not have 
the opportunity to receive premium discounts. The commenter further 
implies that RMA is discriminating if it does not approve enough 
approved insurance providers with sufficient capacity to be able to 
provide premium discounts to every crop insurance policyholder. The 
commenters are incorrect.
    Participation in the premium reduction plan is strictly voluntary. 
Further, RMA is obligated to comply with section 508(e)(3) of the Act, 
which requires approved insurance providers be able to deliver crop 
insurance for less than the A&O subsidy received to qualify to pay a 
premium discount.

[[Page 41872]]

There never was, nor could there be, a guarantee that all approved 
insurance providers would request to participate in the premium 
reduction plan or they would qualify.
    The fact that not all approved insurance providers may participate 
in the premium reduction plan or, as stated above, RMA has elected to 
permit approved insurance providers to elect which states in which they 
will participate, does not mean that farmers have been unfairly 
discriminated against. By definition, unfair discrimination occurs when 
an approved insurance provider elects to offer the premium discount to 
certain farmers and elects not to provide it to others when the premium 
reduction plan is available based on factors such as policy size or 
loss history.
    Within each state the approved insurance provider elects to 
participate in the premium reduction plan, all farmers in that state 
will have equal access to the premium discount and to ensure that all 
farmers are informed about the opportunity to receive a premium 
discount, approved insurance providers must implement a marketing plan 
that specifically targets small, limited resource, women, and minority 
producers. Further, as stated above, all agents must identify all 
approved insurance providers for which they write that participate in 
the premium reduction plan. These measures should ensure equal access 
to premium discounts in a state and if they are not effective, RMA has 
the authority to require other remedial measures or impose sanctions.
    Finally, RMA has attempted to simplify the process for approved 
insurance providers to request to participate in the premium reduction 
plan. Based on these changes, coupled with the strong interest by most 
of the approved insurance providers to participate in the premium 
reduction plan for the 2005 reinsurance year, RMA believes that the 
premium reduction plan will be available to an increasing number of 
farmers over time.
    Comment: Many approved insurance providers, agents and farmers 
commented that the premium reduction plans do not support the objective 
of preventing unfair discrimination. A commenter stated that the 
reductions in A&O already eliminate any broad based business 
opportunity for approved insurance providers or agents to offer further 
reductions in premium. Commenters stated the premium reduction plan is 
inherently discriminatory particularly based on what has been 
implemented to date and what is proposed in the new rules.
    Response: If the commenters are correct in their assessment that 
reductions in the A&O subsidy remove opportunities to reduce premiums, 
then approved insurance providers will not request the opportunity to 
offer a premium discount under the premium reduction plan or submit 
premium discounts for RMA approval. Participation in the premium 
reduction plan is voluntary based on whether an approved insurance 
provider can achieve cost efficiencies that would qualify under section 
508(e)(3) of the Act.
    Further, the commenters do not provide an explanation to support 
the conclusion that the premium reduction plan does not support the 
objective of preventing unfair discrimination and that it is inherently 
discriminatory. The interim rule addresses the potential for 
discrimination on several fronts. First, the interim rule requires that 
the approved insurance provider first meet all requirements to qualify 
for crop insurance participation under the SRA, including certifying to 
abide by all Federal regulations prohibiting discrimination. Second, 
the interim rule requires that an approved insurance provider must 
automatically provide the same percentage of premium discount to all 
policyholders in the state if it elects to pay a premium discount. 
Third, the interim rule requires that for an approved insurance 
provider to be authorized to offer a premium discount, it must develop 
and implement a marketing plan which specifically targets small, 
limited resource, women, and minority farmers.
    Comment: Several agents, approved insurance providers, and 
interested parties commented that RMA has further discriminated against 
the farmer by not allowing all approved insurance providers to offer 
plans and by allowing one new applicant for an SRA to offer a premium 
reduction plan as part of its SRA application based upon unpublished 
procedures and criteria. The commenter claims RMA has now denied all 
applications for plans based upon the Managers Bulletin No. MGR-03-008, 
dated May 1, 2003, and apparently it has not applied the same criteria 
to the only approved insurance provider approved for the premium 
reduction plan. A commenter claims this has allowed unfair competition 
in the marketplace to the detriment of other SRA Holders large and 
small. Commenters have stated the premium reduction plan should not be 
provided by only one approved insurance provider.
    Response: Although section 508(e)(3) of the Act allows approved 
insurance providers to offer premium discounts, the approved insurance 
provider must be able to demonstrate that it can deliver insurance for 
less than the A&O subsidy, that its premium discounts correspond to 
cost efficiencies in delivery, and that it can meet other requirements 
established by FCIC. These additional requirements have been contained 
in several FCIC Board resolutions and Manager's Bulletin MGR-03-008. 
RMA has applied these requirements evenly across all approved insurance 
providers submitting premium reduction plans, including the only 
approved insurance provider that has been authorized to offer a premium 
reduction plan. In most cases where RMA has not approved an approved 
insurance provider, it has been because the approved insurance provider 
has not been able to demonstrate that it can deliver crop insurance for 
less than the A&O subsidy.
    Notwithstanding what has occurred in the past, the interim rule is 
significantly different from the procedures or proposed rule because 
now approved insurance providers will not have to demonstrate they can 
deliver the crop insurance program for less than the A&O subsidy 
received from RMA before they are found eligible to participate in the 
premium reduction plan. RMA will simply be evaluating the marketing 
plan to determine whether it is likely to meet the requirement of 
reaching small, limited resource, women and minority farmers. If it is 
likely to be effective, approved insurance providers will be eligible 
for the opportunity to offer a premium discount to their policyholders. 
However, no premium discount can be paid until the approved insurance 
provider can demonstrate it has attained actual cost savings. This 
means that all approved insurance providers will be on equal footing 
under the interim rule.
    Comment: A few agents and interested parties commented that the 
premium reduction plan is blatantly unfair to the different states it 
covers. The commenter states that certain states routinely make the 
insurance industry the profits they are required to make just so they 
can pay the amount of claims that occur in other states with poor loss 
history. With the requirement that all the states have to be treated 
the same the program discriminates against the farmers in those states.
    Response: Because approval to pay a premium discount is determined 
by the actual expenses of an approved insurance provider in delivering 
crop insurance to farmers, underwriting gains or losses in a state 
should not be a consideration. The proposed rule was

[[Page 41873]]

based on that premise. However, RMA now recognizes that many factors, 
including underwriting gains or losses, may influence an approved 
insurance provider's decision to enter, remain in, or exit a state. As 
stated above, RMA has evaluated the consequences of approved insurance 
providers withdrawing from certain states if it required the approved 
insurance provider offer the premium reduction plan in all states and 
has elected to allow approved insurance providers to select those 
states in which it will participate in the premium reduction plan. 
Further, as stated above, the fact that some farmers will not have 
access to the premium reduction plan because one is not offered in the 
state is not discrimination as long as all farmers in the state are 
treated the same.
    Comment: A few approved insurance providers and agents commented 
that the premium reduction plan discriminates against approved 
insurance providers that write on a national basis and are not cherry 
picking by selling on a geographical area basis. The commenter stated 
that these geographical areas tend to have the best performance. The 
commenter stated that the premium reduction plan also favors start up 
approved insurance providers that have no track record of performance.
    Response: After further reviewing this situation in light of this 
and other similar comments received on this issue, RMA agrees that the 
proposed rule tended to favor regional approved insurance providers who 
generally sell in the lower risk areas. As stated above, RMA was 
concerned that requiring approved insurance providers to participate in 
the premium reduction plan in all states in which they do business 
would encourage approved insurance providers to pull out of states 
where they could not reasonably cut costs so that they could cut costs 
and offer a premium discount in other states to remain competitive. As 
stated above, RMA weighed interest of the farmer in receiving insurance 
versus the potential to receive a potential premium discount in the 
future and determined the former was much more important. For this 
reason, RMA revised the rule to allow approved insurance providers to 
select the states in which they will participate in the premium 
reduction plan.
    Comment: An approved insurance provider commented that the current 
proposed rules do not provide adequate public disclosure to assure non-
discriminatory program delivery in the future. As a result, these 
problems will inevitably persist.
    Response: Much of the information provided by approved insurance 
providers is confidential business information which is protected from 
public disclosure. However, RMA has taken other measures to assure non-
discrimination in the delivery of the program. One measure is the 
marketing plans that specifically targets small, limited resource, 
women and minority farmers. To ensure that such marketing plans are 
working, RMA may compare the compositions of the approved insurance 
providers' books of business. RMA can take remedial actions or impose 
sanctions if there is evidence that small, limited resource, women, or 
minority farmers are not being provided access to the premium discount. 
Another measure implemented in the interim rule is the consumer 
complaint provisions. These allow farmers to complain directly to RMA 
if they believe they have not been provided access to the premium 
reduction plan or have been unfairly discriminated against.
    Comment: An interested party commented that the premium reduction 
plan should be implemented only with the strictest caution only for 
those approved insurance providers who have already demonstrated the 
capacity to fairly serve all farmers and that the final rule should 
include specific provisions designed to guarantee equitable services to 
minority farmers.
    Response: The interim rule requires that approved insurance 
providers eligible for the opportunity to offer premium discounts first 
meet all requirements of the SRA. The SRA and approved procedures 
includes provisions regarding the service requirements to fairly serve 
all farmers. Further, the interim rule specifically requires approved 
insurance providers to market to all farmers, including small, limited 
resource, women, and minority farmers. In addition, since the premium 
discount is determined based on actual savings achieved during the 
reinsurance year, RMA will be able to evaluate the service provided and 
whether small, limited resource, women, and minority farmers were 
adequately served before approving any premium discount.
b. Crop1
    Comment: Many agents, farmers, and other interested parties claimed 
that Crop1 is selecting only large farmers to offer the discount to and 
not all of their customers. A commenter stated that a marketing mailer 
from Crop1 seemed to be sent only to customers who had at least 750 
acres. A commenter stated that Crop1 agents misrepresent quotes in 
order to mislead another agent's clients. Commenters state that they 
cannot make a living if they lose their large customers. A commenter 
stated that Crop1 only advertises to large farmers. Commenters stated 
that Crop1 was not being forced to market with equal resources to all 
farmers. A commenter stated that approval of Crop1 was irregular, 
discriminatory and illegal because it ignored the civil rights statutes 
and the provisions of the SRA requiring approved insurance providers to 
sell to all farmers.
    Response: Under existing RMA procedures, any approved insurance 
provider authorized to offer premium discounts, including Crop1, must 
automatically provide the discount to all of its policyholders. RMA has 
no evidence that any Crop1 policyholder has ever been denied the 
appropriate premium discount. As part of its premium reduction plan 
monitoring effort, RMA monitors the marketing materials and practices 
of Crop1. As far as RMA has been able to determine, none of these 
marketing activities, including advertising, have been directed to 
farmers of a certain size. RMA does not regulate agent solicitation 
activities and, therefore, cannot eliminate the possibility that agents 
representing Crop1 may target larger farms through their mailings or 
through other means. Such conduct by agents is not precluded in the SRA 
or the existing procedures.
    Further, to the extent that such conduct has occurred in the past, 
the interim rule has provisions to mitigate such conduct, such as 
requiring approved insurance providers to design and implement their 
marketing plan to specifically reach small, limited resource, women and 
minority farmers and to require agents identify to farmers all approved 
insurance providers for which it writes that participate in the premium 
reduction plan. Further, RMA can compare approved insurance providers' 
books of business in the states in which participate in the premium 
reduction plan to identify when small, limited resource, women and 
minority farmers may not be receiving access to the premium discount 
and take the appropriate action.
    Comment: Several agents and an interested party commented that the 
premium reduction plan agencies do not offer nor advertise to their 
current customer base the availability of the premium reduction plan 
unless they specifically ask about it and only use the premium 
reduction plan to attract new business. A commenter states that agents 
are only pushing the premium reduction plan in the one area where it 
does not have much business but where

[[Page 41874]]

the agent has a lot of business, farmers are being told the premium 
reduction plan is a bad thing and that they do not want to use it. A 
commenter stated the reason they do not offer it aggressively to their 
current customer base is that it will reduce their commissions by as 
much as one-half. A commenter concludes that the agents who have signed 
on with Crop1 use it only as a tool of last resort to capture business 
from other agents who do not offer it, while at the same time trying to 
make sure their current customers do not hear about it. A commenter 
stated that farmers do not receive real service just so Crop1 can have 
a competitive advantage. Commenters stated the premium reduction plan 
is being used as a predatory tool.
    Response: Under the existing premium reduction plan procedures as 
well as under the interim rule, if an agent represents an approved 
insurance provider authorized to offer the premium reduction plan, then 
all policyholders of that approved insurance provider through that 
agent will automatically receive the premium discount that has been 
authorized. RMA is not aware of any cases where a policyholder of an 
approved insurance provider that is authorized to offer the premium 
reduction plan has been denied the premium discount. Moreover, agents 
routinely solicit the most profitable farmers under the existing crop 
insurance program. As stated above, RMA does not regulate the 
solicitation activities of agents. It regulates the marketing of the 
approved insurance provider to ensure that small, limited resource, 
women, and minority farmers receive access to the premium discount and 
these requirements have been strengthened and clarified in the interim 
rule.
    The commenter appears to be describing a situation in which an 
agent represents both an approved insurance provider eligible for the 
opportunity to offer a premium discount as well as one or more other 
approved insurance providers. The commenter seems to believe that the 
requirement of the approved insurance provider to offer the premium 
reduction plan to all of its policyholders is implicitly extended to 
agents. This is not the case. However, to ensure that all farmers are 
made aware of the opportunity to participate in the premium reduction 
plan, agents are now required to inform all of their customers of all 
the approved insurance providers they write for that participate in the 
premium reduction plan. Lastly, any advertising by agents and approved 
insurance providers prior to being approved to pay a premium discount 
has been significantly curtailed because premium discounts are now 
based on actual, not projected savings. Therefore, no agent can 
advertise that a premium discount is available in order to obtain new 
policyholders.
    Comment: An agent commented that because Crop1 is limited as to how 
much insurance it can write and can only write in certain states, the 
premium reduction plan is not available to all farmers, which 
contradicts RMA's statements regarding discrimination.
    Response: RMA is obligated to comply with section 508(e)(3) of the 
Act regardless of how many approved insurance providers qualify to be 
able to offer premium discounts, how many states they write in, or how 
much premium they are authorized to write. Only approved insurance 
providers that have actual A&O costs less than their A&O subsidy can 
pay a premium discount. However, under the alternative rule, this 
burden does not have to be proven up front and any approved insurance 
provider can qualify for the opportunity to offer a premium discount 
based on the marketing plan and other standards contained in the 
interim rule. The payment of any premium discount will still be 
conditioned upon a showing of the requisite savings.
    Further, as stated above, as long as all farmers are treated the 
same where a premium reduction plan is available, there is no 
discrimination. It is only where farmers in a state where the premium 
reduction plan is available are treated differently is there 
discrimination.
c. Small, Women, Minority Farmers
    Comment: A farmer commented that they had heard agents comment that 
small farmers will be hurt by not being serviced. The commenter stated 
that the agent's definition of a small farm may be more like a 10 or 20 
acre special farm (i.e. organic or other), not USDA's definition of 
gross income of $250,000 or less. The commenter asked that when RMA is 
confronted by the approved insurance providers' reasons against the 
premium reduction plan that RMA is on the same page with the 
terminology. The commenter asserted that it is illegal to NOT sell to a 
farmer customer, no matter how big or small and that one would think 
the agent would not risk an E&O claim.
    Response: RMA agrees that the SRA prohibits an approved insurance 
provider or its agents from refusing to provide crop insurance to an 
otherwise eligible farmer, regardless of size. Approved insurance 
providers can be sanctioned for non-compliance. Nothing in the interim 
rule would change this requirement and would extend sanctions in the 
interim rule to agents as well as approved insurance providers that 
violate this prohibition.
    Moreover, the interim rule contains features that help ensure that 
service to small farmers will be adequate, in contrast to what the 
commenter had heard from certain agents. Under the interim rule, all 
approved insurance providers are required to comply with the service 
requirements of the SRA and approved procedures for all policyholders, 
both small and large or be subject to sanctions. Further, the marketing 
plan requirement is designed to ensure that small farmers have access 
to any premium discount. Unless otherwise provided for in procedures, 
RMA will be relying on the definition of ``small farm'' issued by USDA. 
However, RMA wants the flexibility to adjust the definition if the need 
arises.
    Comment: Several agents commented that they had not seen unfair 
discrimination against farmers as noted in the proposed rules. The 
commenters stated they were servicing the small and large farmer just 
as other agencies did prior to the premium reduction plan, with no 
decline in claims servicing and it does not matter if our grower is 
male or female; if they are insuring as little as 25 acres crop or up 
to 27,798 acres. A commenter states that when given the option to buy 
insurance at the usual price or a premium reduction plan price, farmers 
chose the premium reduction plan. A commenter states this is one area 
where farmers were able to secure a savings that they could show their 
lender; that gave them an opportunity to buy-up; or assisted with off-
setting increased input costs. Knowing their savings up-front provided 
an offense against the many unknown factors that confront them every 
year when they go into the field. A commenter stated that the premium 
reduction plan is of extra importance to smaller farmers that don't 
have the financial strength to purchase the coverage that they really 
need. Although the total savings to a small farmer seems negligible, 
the per acre savings is significant.
    Response: RMA would agree with the commenters that unfair 
discrimination provisions are being effectively enforced, that service 
requirements under the SRA and approved procedures are being 
maintained, and that small farms are receiving premium discounts. 
However, although RMA agrees that knowing the amount of premium 
discount up front can be beneficial, as stated more fully above, the 
ability to effectively regulate the

[[Page 41875]]

program will be difficult. Therefore, RMA has elected to base premium 
discounts on actual savings, not projected savings, thereby reducing 
the burden on approved insurance providers in becoming eligible for the 
opportunity to offer a premium discount and on RMA and approved 
insurance providers in determining the amount of any premium discount, 
if any, that is available for the reinsurance year. RMA anticipates 
that this will effectively give more farmers the opportunity to receive 
such premium discounts. Further, when evaluating the possibility that 
an approved insurance provider may leave a state versus the payment of 
a premium discount, RMA determined that the former was more critical 
and have given approved insurance providers the option to select 
states.
    Comment: Many agents, approved insurance providers, loss adjusters 
and other interested parties claim that new or small farming 
operations, women, minority, and limited resource farmers will be 
harmed the most. Commenters stated these groups will have more 
difficulty competing with larger, lower risk farmers and farms in high 
risk areas will end up without service. They claim FCIC's proposed 
rules concerning administration of the premium reduction plans do not 
adequately protect small and minority farmer from unfair discrimination 
on the basis of size and risk of loss. Commenters stated approved 
insurance providers will target farmers considered to be the most 
profitable based on their acreage size, the loss ratios of the counties 
they are in--particularly whether the county or state is in a favorable 
or unfavorable loss area--and whether farmers can afford to pay higher 
premiums for higher coverage levels. A commenter stated that these are 
the farmers crop insurance was intended to protect. The commenters also 
claim the agents will have to accept less commission and, therefore, 
spend most of the time servicing only the larger farmers in their 
agencies. One commenter claims it would not be fair to small farmers 
nor to loyal agents who have represented FCIC well in this part of the 
country. A commenter states that typically, smaller farm operations 
tend to have higher loss ratios, so again small family farmer clients 
will suffer the most. A commenter stated that the premium reduction 
plan will put many of the smaller farmers at risk for a catastrophe.
    Response: RMA disagrees with the comments that high-risk areas will 
lose service and that the interim rule does not protect against unfair 
discrimination on the basis of size and risk of loss. Any approved 
insurance provider that is eligible to participate in the premium 
reduction plan must qualify under the terms of the SRA, which prohibits 
an approved insurance provider from denying insurance to any eligible 
farmer, regardless of size or loss history, and establishes specific 
requirements for policyholder service. The interim rule adds a further 
restriction that an approved insurance provider cannot deny a premium 
discount to any existing or prospective policyholder on the basis of 
size or loss history. It is doubtful that an approved insurance 
provider would risk sanctions under the SRA and interim rule by 
allowing service to fall below SRA and approved procedure requirements 
or by denying insurance or premium discounts to otherwise eligible 
farmers.
    The interim rule further prevents an approved insurance provider 
from ignoring the risk management needs of small, limited resource, 
women, or minority farmers because to qualify for the opportunity to 
offer a premium discount, an approved insurance provider must develop 
and implement a marketing plan, which specifically targets such 
farmers. Further, RMA will be closely monitoring the situation to 
ensure such farmers are not denied access to premium discounts.
    With respect to an approved insurance provider targeting only the 
most profitable areas based on their loss history, a strong incentive 
to do this exists currently and has existed ever since the delivery of 
Federal crop insurance was transferred to private approved insurance 
providers. However, as stated above, the interim rule does require the 
approved insurance provider to also target small, limited resource, 
women and minority farmers and RMA will be monitoring their efforts. 
With respect to agents' shifting service away from smaller 
policyholders to better service larger policyholders because, the 
commenters assume, commission rates would decline, an approved 
insurance provider and its affiliated agents are obligated to maintain 
a required level of service under the terms of the SRA and approved 
procedures for all policyholders, both large and small. If a group of 
policyholders fail to receive the required level of service, the 
approved insurance provider risks sanctions under the SRA and interim 
rule. In any event, as stated above, the interim rule contains 
provisions specifically designed to protect the interests of small, 
limited resource, women, and minority farmers and RMA has added teeth 
to its sanctions to provide the incentive to comply.
    Comment: An interested party commented that RMA spends millions 
each year in educational outreach and maybe it should take some of that 
money and contract for a study of the impact of this education on 
small, limited resource and medium-sized family farms.
    Response: Although the commenter's suggestion may have some merit, 
it does not address issues concerning the proposed rule.
    Comment: A few agents commented that farmers can currently purchase 
CAT coverage for very minimal expense and in some cases free for 
limited resource farmers but they don't participate in the crop 
insurance program now. The commenters asked how the premium reduction 
plan would benefit them or increase participation.
    Response: The commenter may be correct that some farmers may not 
avail themselves of the benefits of crop insurance regardless of the 
incentive that might be provided by premium discounts. The legislative 
history of section 508(e)(3) of the Act suggests that increased price 
competition among approved insurance providers is the major objective 
and increased participation may be the result of such competition.
    Comment: Several agents and an approved insurance provider 
commented that as the large accounts are ``cherry-picked'' by the 
premium reduction plan, the smaller farmers will be left to bear alone 
the overhead and cost of the traditional plans. A commenter stated it 
will be financially challenged to continue servicing smaller accounts. 
A commenter stated that the premium reduction plan is NOT being used as 
a beneficial option to farmers but is instead being used to ``cherry 
pick'' the existing policies of big farmers who are current customers 
of other agencies. A commenter also stated that premiums for smaller 
farmers will necessarily increase, thus exacerbating the current 
deplorable situation that is rapidly destroying this nation's family 
farms. Some approved insurance providers are discriminating against 
small farmers by cherry picking large farmers and offering to bundle 
other services at reduced prices at the expense of small farmers.
    Response: RMA has investigated the marketing activities of the 
approved insurance provider currently authorized to offer the premium 
reduction plan and has found no evidence that the approved insurance 
provider is specifically and exclusively targeting large farmers. 
However, RMA accepts the possibility that some agents of the approved 
insurance provider currently

[[Page 41876]]

authorized to offer the premium reduction plan might be targeting 
larger and more profitable policyholders of competing agents. As stated 
above, such practices are not be prohibited by the Act or the SRA. RMA 
does not regulate the conduct of agents in the solicitation of 
business.
    However, to mitigate such conduct by the agent, the interim rule 
puts the burden on the approved insurance provider to ensure that the 
premium reduction plan is adequately marketed to small, limited 
resource, women and minority farmers. As stated above, RMA will be able 
to monitor the situation and determine whether approved insurance 
providers' marketing plans were successful before it approves any 
premium discount. Further, market forces are the best means to control 
the conduct of agents because approved insurance providers are unlikely 
to be the recipient of only the potentially unprofitable policies while 
competitors get the potentially more profitable policies.
    With respect to the comment that agents that do not offer the 
premium reduction plan will be left to service only smaller accounts, 
the commenter is describing a situation that is possible regardless of 
whether the premium reduction plan is operating or not. However, the 
interim rule has taken measures to mitigate potential problems. Now 
approved insurance providers will be allowed to select the states in 
which to participate in the premium reduction plan. This would allow 
approved insurance providers to elect not to participate in states 
where its cost margins are low.
    Further, as stated above, approved insurance providers have the 
incentive to ensure that agents are provided a fair commission. 
However, the determination of what constitutes fair compensation is 
strictly between the approved insurance provider and agent. In 
addition, commenters have pointed out that some farmers will value 
superior service over any premium discount, especially when such 
discount is no longer guaranteed. Therefore, even those agents that do 
not participate in the premium reduction plan could still compete.
    With respect to the comment that premiums for smaller farmers will 
necessarily increase, the commenter does not indicate why the premium 
reduction plan would cause this to happen. Premiums are determined by a 
rating methodology based on the frequency or severity of losses and are 
not related to premium discounts. The amount of premium paid each year 
to cover losses is not changed under the premium reduction plan. The 
only thing that is changed is that the approved insurance provider now 
pays to the farmer a discount based on cost savings expressed as a 
percentage of the total premium.
    With respect to the comment that some agents will use the premium 
reduction plan to bundle crop insurance with other products offered by 
the agent, this is an issue that also is outside the interim rule. Such 
conduct is prohibited by the SRA and agents are under the scrutiny by 
both RMA and the states with respect to market conduct and illegal 
rebating through bundling. Nothing in the interim rule would make it 
more attractive to engage in such illegal practices.
    Comment: An agent commented that the areas it serves have a number 
of limited resource, socially disadvantaged, and minority farmers. The 
commenter asked that once it is forced out of business due to the 
proposed marketing scheme, who will service this segment.
    Response: The commenter predicts that he or she will be forced out 
of business as a result of the premium reduction plan. However, as 
state above, approved insurance providers have an incentive to retain 
their agents and their books of business to maximize profits and ensure 
that customers are receiving the required level of service. Further, 
the interim rule now bases premium discounts on actual savings and 
severely limits advertising or promotions. Therefore, the impacts on 
the program should be significantly decreased and effectively phased-in 
over time because the discounts will be paid after the end of the 
reinsurance year. Even if the commenter is correct and some agents go 
out of business, under the SRA, it is the approved insurance provider's 
responsibility to assign other agents to provide the required service 
to these policyholders.
    However, RMA understands the agent's concerns that approved 
insurance providers may withdraw from states if they are forced to 
offer a premium discount in all states in which they do business. As 
stated above, RMA has elected to allow the approved insurance provider 
to select which states to participate in the premium reduction plan. 
While this may mean that some farmers may not be able to receive a 
premium discount, it assures that these same farmers will have 
continued access to crop insurance.
    Comment: A few agents commented that back in the late 80's agents 
wanted to give cash discounts to farmers who paid their premiums early, 
but RMA said they could not because it favored the larger farmers. The 
commenter stated that now RMA is trying to give the larger farmers an 
unfair discount. The ones (family farms) that need the help are not 
receiving it.
    Response: The commenter does not make the distinction between an 
unauthorized initiative of certain agents to offer discounts according 
to their own terms and section 508(e)(3) of the Act, which permits 
approved insurance providers to offer premium discounts. Under section 
508(e)(3), RMA is obligated to provide approved insurance providers 
with the opportunity to pay premium discounts, subject to the 
limitations it establishes. As stated above, one of the limitations is 
that premium discounts have to be specifically marketed to small, 
limited resource, women, and minority farmers. Therefore, RMA is not 
trying to give larger farmers an unfair discount.
    Comment: Several agents and other interested parties commented that 
crop insurance was designed to give all farmers protection from natural 
disasters and that all farmers means large and small. They claim that 
RMA tells them that they must service all farmers equally and 
rightfully so. They claim that it is ironic that RMA is proposing just 
the opposite and that if the premium reduction plan is approved then 
the civil rights laws and regulations applicable to federally assisted 
programs must be amended to require removal of the ``Justice for All'' 
poster because the premium reduction plan will not be providing justice 
for all.
    Response: RMA would agree with the commenters that the benefits of 
crop insurance are intended for both small and large farmers and that 
those that participate in the program are expected to treat all farmers 
equally. However, RMA disagrees with the comment that RMA is proposing 
the opposite to this. In any state that an approved insurance provider 
participates in the premium reduction plan, it must make any premium 
discount available to all farmers large and small. To ensure this 
occurs, RMA requires the design and implementation of a marketing plan 
for all farmers, including small, limited resource, women and minority 
farmers. As long as all farmers within a state are treated equally, 
there is no discrimination. If RMA determines that not all farmers have 
been treated equally, it can impose sanctions. Further, RMA can make 
this determination before any premium discount is approved. Finally, 
under the interim rule, farmers who believe they have not been treated 
fairly have a means of bringing their complaints directly to RMA.

[[Page 41877]]

    Comment: Many agents, interested parties, approved insurance 
providers and loss adjusters commented that the premium reduction plan 
could encourage selective ``red-lining'' of specific states, crops and 
agencies without federal oversight. They claim the approved insurance 
providers will only write in areas that are profitable. A commenter 
states that the requirement that national approved insurance providers 
provide premium reduction plan discounts in the unprofitable states 
creates an incentive for these approved insurance providers to withdraw 
from these areas in order to concentrate on the more profitable states. 
A commenter is concerned that some farmers with poor loss histories in 
certain states will be excluded by certain approved insurance providers 
because the approved insurance providers would not be willing to write 
in those states. A commenter stated that due to the danger of a 
``domino effect'' on approved insurance provider participation, farmers 
in these states could be left without an opportunity to obtain 
protection for their farm operations. A commenter states that this 
jeopardizes the national characterization of crop insurance, which is 
necessary to its future.
    Response: Selective redlining of states can occur now. RMA does not 
require approved insurance providers to offer crop insurance in all 
states. The approved insurance provider selects the states in which it 
will do business. Presumably, this selection process is based on the 
potential profitability of the state in light of the terms provided 
under the SRA. Even considering profitability, approved insurance 
providers are currently participating in high risk states.
    However, as stated above, RMA acknowledges that if an approved 
insurance provider is required to offer a premium discount in all 
states in which it does business, it may withdraw from certain states, 
leaving farmers with no coverage. To prevent this, RMA has elected to 
allow approved insurance providers to select the states in which it 
will offer a premium discount. While this may exclude farmers in a 
particular state from receiving a benefit that others in an adjoining 
state may receive, at least these farmers will still have access to 
crop insurance even if they do not have access to a premium discount. 
Within a state where a premium discount is being paid, all farmers 
insured with the approved insurance provider making the payment will 
receive the premium discount regardless of their loss history.
    Comment: An interested party commented that the requirement in 
section II.A.2 of the SRA that approved insurance providers offer the 
premium reduction plan in all states they do business makes it clear 
that cherry picking is not acceptable.
    Response: RMA disagrees with the commenter that section II.A.2 of 
the SRA states that an approved insurance provider must offer the 
premium reduction plan in all states. Section II.A.2 of the SRA 
obligates the approved insurance provider to provide insurance to all 
farmers who make application unless such farmer is ineligible. The 
requirement that approved insurance providers offer a premium discount 
plan in all states arose in the proposed rule and, as stated above, RMA 
has reconsidered this position and will now allow approved insurance 
provider to select the states in which it will participate in the 
premium reduction plan. In those states where the approved insurance 
provider elects to participate, the approved insurance provider must 
make pay any premium discount to all farmers or it will be in violation 
of the interim rule and subject to sanctions.
    Comment: A few agents commented on the potential ability of 
approved insurance providers to offer discount and non-discount 
insurance in the same state. The commenter claims this goes against 
everything that the current crop insurance delivery system stands for. 
The commenter states that letting approved insurance providers' offer 
both discount and non-discount insurance in the same state would lead 
to the biggest case of ``Cherry-Picking'' the crop insurance industry 
has ever seen.
    Response: RMA agrees completely with the commenter. Both the 
proposed rule and the interim rule require that an approved insurance 
provider must automatically pay any premium discount to all 
policyholders in a state in which the approved insurance provider is 
participating in the premium reduction plan and it is approved to pay a 
premium discount. Approved insurance providers that only pay the 
premium discount to certain farmers in a state will be subject to 
sanctions under the interim rule.
    Comment: An approved insurance provider commented that FCIC appears 
to have understated the extent of this problem in the Federal Register 
release when it states, ``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.'' 
However, approved insurance providers can pay different agent 
commissions and agent profit-share levels based on the state or agency 
to which it is marketing. The commenter stated that an approved 
insurance provider would be more likely to emphasize marketing of the 
premium reduction plan in a state or part of a state where it can 
produce a superior underwriting gain, leaving less profitable regions 
underserved. The commenter stated that such an outcome would directly 
undermine the principle 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.''
    Response: RMA questions the commenters' assumption that an approved 
insurance provider would be more likely to market premium discounts in 
areas where the approved insurance provider expects underwriting gains 
and to ignore them in high risk areas. The ability to be approved to 
pay premium discounts depends on the approved insurance provider's 
ability to deliver crop insurance for an amount less that the A&O 
subsidy, not underwriting gains. Further, RMA's experience with the 
premium reduction plan to date indicates that an approved insurance 
provider is not necessarily averse to marketing the premium reduction 
plan in a state with large historical loss ratios.
    Nevertheless, RMA is concerned with the number of comments it has 
received that high risk areas might be underserved and that requiring 
an approved insurance provider to participate in the premium reduction 
plan in all states could lead to a decision to leave certain states by 
approved insurance providers. Therefore, the interim rule allows an 
approved insurance provider to select those states where it elects 
participate in the premium reduction plan. This change should help 
ensure that farmers in certain areas do not lose their opportunity to 
obtain crop insurance protection. Further, RMA cannot require that 
approved insurance providers pay premium discounts in states where the 
achieving of cost efficiencies put the program in that state at risk. 
Therefore, while loss experience and premium size may play a role 
because of the amount of expense required to service such policies, RMA 
has determined that the continued availability of crop insurance is 
more important that the possibility of receiving a premium discount in 
the future.
    Comment: Several agents, approved insurance providers and 
interested

[[Page 41878]]

parties commented that USDA can ill-afford more discriminations suits. 
A commenter suggested the premium reduction plan will cause ill 
feelings toward the government.
    Response: RMA disagrees with the implication that the premium 
reduction plan will generate discrimination litigation. As stated 
above, discrimination only occurs when farmers in the same state are 
treated differently. As stated above, RMA has taken measures to ensure 
this does not happen, including the ability to evaluate whether 
discrimination has occurred before approving a premium discount. 
Therefore, the potential for discrimination litigation should not be 
any greater than under the current crop insurance program.
4. Expert Reviews
    Comment: Many agents, approved insurance providers, interested 
parties, and a loss adjuster commented that RMA chose not to seek 
independent review by parties with expertise in the marketing, selling, 
and operations conducted by insurance agents in the delivery of crop 
insurance. They state RMA should revisit agent compensation by seeking 
review by qualified insurance agency sales and management experts--and 
get knowledge-based advice regarding the negative impact that reduction 
in agent compensation will have on the crop insurance delivery system, 
and the economy of our rural communities. A commenter also states that 
RMA should conduct a study to anticipate what effects widespread 
adoption of the premium reduction plan might have on the public/private 
partnership that has been so successful in reducing farmers' reliance 
on ad hoc relief.
    Response: While commenters may disagree with the expert reviewers 
selected, their input was only to assist in creating the proposed rule. 
When creating the interim rule, RMA has sought the opinions of the very 
people that would be most affected by the rule, agents, farmers and 
approved insurance providers through the notice and comment rulemaking 
process. Through these comments, RMA has been able to more accurately 
determine the impact of the premium reduction plan. As a result of 
these comments, as stated above, RMA has made considerable changes to 
the proposed rule to address the commenters concerns.
    However, RMA agrees that additional input may be valuable so it has 
decided to implement this rule as an interim rule so that additional 
comments may be sought during the initial implementation of this 
regulation.
    Comment: Many agents, farmers, interested parties and approved 
insurance providers stated that the independent reviewers commissioned 
by RMA found that premium reduction plan proliferation will only result 
in a modest increase in participation in the crop insurance program. 
The commenters stated that only those already insured will participate, 
which will do nothing to contribute to a reduction in ad hoc disaster 
relief and that the premium reduction plan will do nothing to promote 
new participation by those who are currently not purchasing crop 
insurance.
    Response: The commenters assume that objectives of the premium 
reduction plan are to increase participation and to reduce the need for 
ad hoc disaster aid. However, from its legislative history, the stated 
objective of the premium reduction plan is to allow for price 
competition in the market for crop insurance. Any increase in 
participation would be an effect, not the objective. Therefore, 
regardless of whether there is any increase in participation, RMA is 
obligated to implement section 508(e)(3) of the Act.
    Comment: Several agents and interested parties commented that they 
disagreed with the independent reviewer's assessments of the impact of 
the widespread use of the proposed premium reduction plan. One 
commenter stated the assessments were devoid of facts or statistics. 
One finding in particular estimated that there would be an increased 
use of the crop insurance program by farmers. The estimated increase on 
a nationwide basis was a total of 3,312,934 row crop acres. The 
commenter asks how the experts arrived at these figures and stated the 
experts should show their work. A commenter stated fewer agents will 
make it harder for farmers to participate. A commenter stated that the 
premium reduction plan has not brought any of the uninsured acreage 
into the crop insurance program.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmers 
to benefit.
    Further, as stated above, it is unlikely that the premium reduction 
plan will result in a substantial reduction of the number of agents. 
Approved insurance providers have the incentive to retain their agents 
and their books of business to maximize profitability and ensure a 
stable workforce that will provide farmers with the service required by 
the SRA and approved procedures. In addition, as stated above, RMA has 
revised the proposed rule to reduce the incentive for approved 
insurance providers to make drastic cuts to agent commission or cause 
market disruptions.
    Comment: An agent commented that RMA's independent reviewers seemed 
to believe that the premium reduction plan would increase farmer 
participation in the program. The commenter claims this is an incorrect 
assessment. The insurance program is complicated enough. Taking a 
complicated process into more of a self-service mode is not likely to 
increase program participation to any measurable degree.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    Further, as stated above, there is nothing in the interim rule that 
would require insurance be self service. In fact, the interim rule 
makes it very clear that approved insurance providers and agents are 
required to comply with the service requirements in the SRA and 
approved procedures or risk the imposition of sanctions. In this 
respect, RMA believes that even with the participation in the premium 
reduction plan of another agent, many farmers will choose to remain 
with their agent based on the service provided by that agent. The 
premium reduction plan will introduce price competition as an element 
in the decision making of farmers. However, it will not be the only 
factor and frequently will not be the deciding factor.
    Comment: An interested party commented that when increasing levels 
of coverage costs over 50% in premium from one level to the next, a 5% 
or 10% reduction will not do anything to increase participation by the 
farmer. What it may create, is a rate war between the approved 
insurance providers until no one can afford to service the policies the 
way you expect them to be serviced.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the

[[Page 41879]]

program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    Further, as stated above, RMA has revised the proposed rule to 
remove the incentive for approved insurance providers to engage in 
premium discount wars and instead has developed a process that allows 
the approved insurance provider to conduct a reasoned analysis of its 
business to determine where costs savings may be appropriate and allows 
RMA to ensure that all SRA, approved procedures and the premium 
reduction plan requirements have been complied with and that the 
financial stability of the approved insurance provider will not be 
adversely affected before approving the payment of any premium 
discount. Therefore, insurance agents should not be driven out of 
business and farmers still should be adequately served.
    Comment: Many agents, approved insurance providers and farmers 
commented that farmers who want crop insurance are already buying it so 
participation will not increase under the premium reduction plan. 
Commenters stated that if farmers are not buying crop insurance with a 
38% to 67% subsidy, the 5-10% premium reduction plan discount will not 
make them buy it. A commenter stated that program participation is 
nearly 80% now so it is clear that the premium reduction plan has not 
been necessary to achieve current participation levels. A commenter 
stated that most farmers saved about $1.00 per acre with the premium 
reduction plan and that if the $1.00 savings meant that much to a 
farming operation as far as the farmer being able to farm in the 
future, than that operation has other factors that will keep him in or 
out of business in the future.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    Further, if the commenters are correct and that the typical 
policyholder will not be motivated much by premium discounts, then 
there should be minimal impact on the crop insurance program by the 
implementation of the interim rule.
    Comment: An agent commented that currently, participation in crop 
insurance is at about eighty percent and that there is not an agent 
alive who wants those last twenty percent. The commenter stated that 
those that make up that twenty percent are very non-government and 
would rather live without crop insurance.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    Comment: A few agents and interested parties commented that the 
argument that more farmers will buy crop insurance if it is cheaper is 
false. The commenter stated that if RMA wants more farmers to buy crop 
insurance, make crop insurance mandatory to get a farm payment. Another 
way would be to reduce disaster payments and put that money towards 
more subsidies of higher levels of crop insurance. Make farmers 
responsible for their own operation.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    Further, commenters suggestions regarding the use of disaster 
payments or a requirement that farmers purchase crop insurance to 
receive farm payments is outside the scope of this rule. Consequently, 
RMA cannot consider taking this action.
    Comment: Several agents and interested parties commented that 
farmers were unlikely to use the premium reduction plan savings to 
increase coverage. A commenter stated it sold the premium reduction 
plan to battle competitors. A commenter stated that those customers 
that did buy the premium reduction plan, none of them bought higher 
coverage because of the discount. Another commenter said only a few 
farmers increased coverage. Commenters state that those participants 
will most likely redirect their premium savings to another product as 
opposed to purchasing additional coverage, and it will do nothing to 
promote new participation by those who are currently not purchasing 
crop insurance.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    Comment: An agent commented that he or she hoped that the available 
discount would entice more local customers to join the agency but the 
only customers he or she gained were smaller farmers who actually were 
not engaged in farming on a full-time basis.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    Comment: A few agents and interested parties commented that the 
premium reduction plan will not increase participation. A commenter 
suggested that the premium reduction plan would negatively impact the 
delivery system. Commenters stated that the crop insurance program 
needs to be simple. A commenter suggests making it an entire farm 
income program. A commenter stated that farmers don't like all of the 
plans to choose from and all they want is a policy based on a flat 
dollar amount of protection per acre. A commenter suggests that this 
should be looked at before RMA lowers premium and find it only did just 
that. A commenter suggested making the delivery system more efficient.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    However, RMA agrees that simplification is beneficial to the crop 
insurance program and it has taken considerable measures to simplify 
the premium reduction plan and the process under the interim rule. In 
addition, RMA is always looking at ways to simplify the delivery of 
crop insurance, such as the combination of policies, simplifying the 
claims process, etc.
    The commenter also implies that in the premium reduction plan, RMA 
is lowering premiums. This is not correct. The amount of premium stays 
the same. What is occurring is that approved insurance providers can 
pay premium discounts to farmers to help them, if they so choose, to 
defray their premium costs.
    Comment: An interested party commented that there will likely be a 
decrease in participation because agents will drop out of the business 
and

[[Page 41880]]

farmers will drop out because there are no agents nearby to service 
them.
    Response: As stated above, it is unlikely that the premium 
reduction plan will result in a substantial reduction of the number of 
agents. Approved insurance providers have the incentive to retain their 
agents and their books of business to maximize profitability and ensure 
a stable workforce that will provide farmers with the service required 
by the SRA and approved procedures. Failure to meet those requirements 
could result in the imposition of sanctions. In addition, as stated 
above, RMA has revised the proposed rule to reduce the incentive for 
approved insurance providers to make drastic cuts to agent commission 
or cause market disruptions.
    Comment: An interested party commented that the premium reduction 
plan will increase participation in the program the longer it is 
available.
    Response: As stated above, the purpose of the premium reduction 
plan is not to increase participation. It is to allow price 
competition. If one effect of this price competition is to increase 
participation, the program benefits. However, regardless of whether the 
program benefits, premium discounts to farmers will allow the farmer to 
benefit.
    Comment: An agent commented that the expert reviewer was incorrect 
when he stated that a cozy relationship between the agent and farmer 
suggests fraud. The commenter stated that the agent needed to be well 
grounded with farmers to be able to serve them.
    Response: The comment is unrelated to the interim rule. Nothing in 
the interim rule would change the relationship a farmer has with his or 
her crop insurance agent.
    Comment: Several interested parties and agents commented the five 
experts have the opinion that crop insurance agents are overpaid. A 
commenter suggests they get their license and try delivering crop 
insurance to the farmer. A commenter stated that agent commissions have 
been in a steady and consistent decline since the first SRA was put in 
place by RMA. In fact they had dropped between 40-50% from original 
levels. A commenter states that agent commissions are at rock bottom 
levels NOW and that between the 2004 and 2005 insurance years, net 
income will be reduced by about 15% due to cuts in the A&O from the 
renegotiated SRA.
    Response: As stated above, RMA only sought the opinion of the 
expert reviewers to assist it in the development of the proposed rule. 
However, with respect to the interim rule, RMA has sought and received 
comments, through the notice and comment rulemaking process, from the 
parties most affected by the rule and it has examined these comments 
and made appropriate changes to the proposed rule to minimize the 
adverse impact on agents, farmers, approved insurance providers and the 
integrity of the program.
    Comment: Several interested parties and agents commented that RMA, 
in its exuberance to implement the premium reduction plan program, 
purchased 5 opinions and most of the five opinions made many points 
about the premium reduction plan, bringing to light the many flaws in 
trying to deliver crop insurance on a cut rate basis. A commenter asked 
why RMA does not get a true ``expert'' opinion from someone working 
directly in the system in a rural area and not from a high priced 
consultant based in Washington, DC. A commenter stated that three of 
the purchased opinion providers then have the audacity to give a 
summary that flies in the face of many of the flaws they had previously 
stated in their report. It should be noted that there is no research to 
back the purchased opinions. A commenter disagreed with an expert 
opinion that it costs ``about $50 to write a new client.'' A commenter 
states that the actual annual cost per farmer client to maintain all 
agency systems and do the job in keeping with its responsibility level 
is about 10 times that amount.
    Response: As stated above, RMA only sought the opinion of the 
expert reviewers to assist it in the development of the proposed rule. 
However, with respect to the interim rule, RMA has sought and received 
comments, through the notice and comment rulemaking process, from the 
parties most affected by the rule and it has examined these comments 
and made appropriate changes to the proposed rule to minimize the 
adverse impact on agents, farmers, approved insurance providers and the 
integrity of the program.
5. Other
a. For the Premium Reduction Plan
    Comment: An approved insurance provider commented that the proposed 
rule strikes the correct balance between the various interests at 
stake, including the interests of farmers in obtaining crop insurance 
at the lowest possible cost. The balance struck in this proposal 
ensures a stable, competitive crop insurance market, and protects the 
industry delivery system as approved insurance providers compete for 
agents. The commenter states that the fundamental purpose of section 
508(e)(3) was to offer farmers more choices while saving money on crop 
insurance, by increasing competition in the crop insurance market 
through offering crop approved insurance providers the opportunity to 
compete on price. The introduction of the premium reduction plan into 
the market allows approved insurance providers to compete on price and 
service to farmers, rather than simply on who pays the highest 
commissions. The commenter also states that the proposed rule promotes 
the interests of the American farmer by institutionalizing the premium 
reduction plan approval process into a permanent rule that will enable 
approved insurance providers to pass along cost savings to farmers.
    Response: RMA agrees that the proposed rule attempted to implement 
508(e)(3) of the Act in a manner that strikes a balance that allows for 
a competitive market place between approved insurance providers with 
respect to price, protects the delivery system, and promotes the 
interests of farmers. Further, the interim rule built on that framework 
and addressed the concerns of adverse impacts on the program.
    Comment: Many farmers, agents and interested parties commented that 
the premium reduction plan helps farmers. Commenters stated that in 
today's farm economy, farmers are faced with rising costs of almost all 
inputs and that farmers constantly have to look for ways to keep farms 
efficient, cost effective, and competitive in a world market and 
getting a discount on crop insurance is a step in that direction. A 
commenter stated that farmers are viewing crop insurance more and more 
like an input such as seed, fuel and fertilizer. Commenters stated that 
as farmers have little to no control of commodity prices, discounts on 
any farm related expenses are appreciated. One commenter states that 
while there has been opposition to the discount plan within the 
insurance industry in the past, agents and approved insurance 
providers, like farmers, need to look for efficiencies as well.
    Response: RMA agrees that the premium reduction plan was intended 
to ultimately benefit farmers by allowing approved insurance providers 
to compete for their business on the basis of price as well as service, 
like the other vendors with which the farmer does business. RMA also 
agrees that the premium reduction plan will result in approved 
insurance providers examining their operations to find cost 
efficiencies.
    Comment: Many farmers and agents commented that with the premium 
reduction plan farmers are able to

[[Page 41881]]

increase coverage levels at a discount, which has helped to better 
control risks. Commenters claim farmers saved significant savings on 
premiums. Commenters stated that current insureds enrolled in the 
premium reduction plan would be very disappointed if the program was 
discontinued.
    Response: RMA agrees with the comment that the premium reduction 
plan allows farmers to consider increasing coverage for better 
protection and that some farmers may receive a significant premium 
discount. However, as stated above, such cost savings under the interim 
rule will not directly reduce the cost of premiums because the premium 
discount will not be paid to the farmer until after the premium is due. 
Therefore, there is no guarantee that farmers will receive premium 
discounts. However, for those approved insurance providers that can 
achieve efficiencies, they have the incentive to pass those 
efficiencies on to their customers.
    Comment: Several interested parties, farmers, and agents commented 
that the idea of giving the farmer more for less is a good idea. A 
commenter stated that if the customer did not benefit, the discount 
would go away on its own. A commenter said it is great that Crop1 is 
willing to abide by government rules, and be able to offer the same 
coverage for a better value to the farmer.
    Response: RMA agrees that the premium reduction plan generates 
benefits for farmers. RMA also agrees that, because participation by 
approved insurance providers in the premium reduction plan is 
voluntary, approved insurance providers and farmers would not 
participate if they did not perceive a benefit. The commenter is also 
correct that based on the reviews conducted by RMA, Crop1 did operate 
in compliance with the requirements of the SRA and approved procedures, 
including the premium discount plan procedures.
    Comment: An agent commented that many farmers are seeking a more 
knowledgeable crop insurance agent and that is exactly what the agent 
is offering. The commenter stated that the ``new generation'' of agents 
truly understands risk management for farmers. The commenter stated 
that with a background of providing marketing advice and hedging 
strategies, more and more farmers are seeking services. Being able to 
offer them a discount allows clients to manage their overall risks at 
less cost.
    Response: RMA agrees that many farmers are seeking more 
knowledgeable crop insurance agents, including those that offer other 
risk management tools. RMA does not believe that the premium reduction 
plan will reduce that interest or that agents will stop competing on 
the basis of superior service. Competition on price and service can 
only benefit the crop insurance program.
    Comment: A few farmers and agents commented that they were 
impressed with Crop1's technology. The commenters stated they liked the 
internet access because with the world becoming more technologically 
advanced it is nice to see an approved insurance provider stepping up 
to the plate and becoming a leader, rather than waiting until everyone 
else does it first. A commenter stated that with the Crop Saver 
analysis by Crop1, it was able to accurately show the comparative 
premium for the different levels of coverage and the total revenue 
farmers would receive with multiple peril versus coverage with Revenue 
Assurance and that Crop1's technology is allowing the agency more time 
to service clients and also prospecting for new clients.
    Response: Increased use of beneficial technology by farmers and 
agents is one of the possible outcomes from the premium reduction plan. 
The cost savings that may accrue through the use of such technologies 
will be considered when determining whether to approve the amount of 
premium discount.
    Comment: A farmer commented that several other approved insurance 
providers have also applied, but have not been granted access and that 
there seem to be enough approved insurance providers filing for 
bankruptcy. The commenter stated that it is great that those approved 
insurance providers that can operate efficiently can be rewarded for 
doing so.
    Response: The commenter is correct that other approved insurance 
providers applied to offer the premium reduction plan under RMA's 
existing procedures but were not approved. An important qualification 
for an approved insurance provider to be able to offer the premium 
reduction plan is that the approved insurance provider's expenses are 
less than the A&O subsidy. This qualification exists to ensure that the 
payment of premium discounts do not stress the financial capabilities 
of the approved insurance providers. For this reason, premium discounts 
under the interim rule are paid on actual, not projected, cost savings 
and RMA will have the opportunity to determine the financial condition 
of the approved insurance provider before it approves the payment of 
any premium discount.
    Comment: Several agents, interested parties and farmers commented 
that with the current premium reduction plan program, there is a choice 
to offer the same insurance with a discounted program and with any 
program this is strictly voluntary, not a requirement and no strings 
attached. A commenter stated it is important to offer a discounted 
insurance program as a way to manage risk in today's environment. A 
commenter stated that because such a program is strictly the farmer's 
choice there is no reason to discontinue this program.
    Response: RMA agrees that participation in the premium reduction 
plan by an approved insurance provider is strictly voluntary and that a 
farmer can freely choose between an approved insurance provider that 
offers a premium discount and one that does not. RMA further agrees the 
merits of the premium reduction plan can ultimately be determined by 
the choices made by approved insurance providers and farmers in a 
competitive marketplace. In addition, the adoption of the alternative 
proposal and allowing approved insurance providers to determine when it 
is appropriate to pay efficiencies out as premium discounts allows the 
decision to be made based on the prevailing market forces, as is the 
case in most business settings.
    Comment: An agent commented that Crop1 has been a pleasure to work 
with due to the fact they really understand the business from an 
agent's perspective. The commenter stated that when the premium 
reduction plan first came out, agents screamed that the premium 
reduction plan would come out of commissions and that the agent would 
be replaced by direct selling over the internet. The commenter stated 
that this was not the case because Crop1 sent letters and postcards to 
farmers, increasing the growth of the business. The commenter stated 
that Crop1 does offer lower commissions, but they have great paper and 
software. The commenter also stated that if acres or production are 
reported on time, agents can receive a bonus so Crop1 is making it 
possible for agents to make, or better, the commissions than with other 
approved insurance providers.
    Response: The premium reduction plan, as regulated through the 
interim rule, allows the approved insurance provider to structure a 
range of cost efficiencies within the context of the approved insurance 
provider's business plan, including those identified by the commenter. 
RMA agrees with the commenter's assessment that agents are unlikely to 
be replaced as a result of the implementation of the interim rule. 
Further, the proposed and interim rules clarify many concepts that were 
not

[[Page 41882]]

included in the existing procedures, including the treatment of 
bonuses, etc.
    Comment: Several agents and farmers commented that agents do not 
want to sell the premium reduction plan due to the simple fact that 
they do not want to take a cut in commissions, even though the premium 
reduction plan would save farmers. Commenters state that this is the 
only reason for resistance to the premium reduction plan and that the 
premium reduction plan saves farmers money, which enables them to put 
more back into the local economy. A commenter stated that if the 
approved insurance providers really cared about the farmer, there would 
be more approved insurance providers involved in developing new 
policies and projects for the good of the farmer, not just the concern 
to preserve the agent's commission. A commenter states that the farmer 
wants the discount, but many are apprehensive to participate because of 
mistruths and intentional misinformation from the agent not willing to 
offer the discount.
    Response: RMA agrees that much of the controversy surrounding the 
premium reduction plan comes from the perception that agents' 
commissions will necessarily be reduced and the impact this would have 
on agents and farmers. RMA cannot voice an opinion with respect to the 
motives behind the concerns regarding agent commissions but recognizes 
that the concerns expressed in the comments to the proposed rule are 
real and legitimate and have been addressed in the interim rule.
    RMA would also agree that the benefits a farmer receives from 
premium discounts would extend to the local economy. However, without 
more specific information from the commenter, RMA cannot address the 
allegation that certain agents present mistruths to discourage some 
farmers from seeking to buy insurance from an approved insurance 
provider eligible for the opportunity to offer a premium discount.
    Comment: An approved insurance provider commented that agent 
compensation is a large component of the expenses that are incurred in 
the delivery of crop insurance (currently seventy percent), and thus 
its reduction is a common, if not universal, component of the premium 
reduction plan. The commenter stated that just as agents are free to 
find the approved insurance provider that will enable them to maximize 
their income, farmers should have a similar option enabling them to 
maximize profit by reducing their premium cost and that such a choice 
for the farmer can strengthen the crop insurance delivery system. The 
commenter stated that without a strong premium reduction plan, the crop 
insurance industry will simply fall back to the cycle of increasing 
commissions to gain new business that in the long-run endangers the 
delivery system.
    Response: RMA agrees that agent compensation is the single largest 
component of approved insurance provider expenses and, consequently, it 
is a prime candidate for consideration when approved insurance 
providers seek cost efficiencies. However, the changes to the proposed 
rule reflected in the interim rule increase the flexibility of approved 
insurance providers to enable them to make a measured evaluation of 
their operations and determine the most appropriate places to achieve 
efficiencies. Such changes include allowing approved insurance 
providers to select the states in which they participate in the premium 
reduction plan and allowing the payment of variable premium discounts 
between states.
    RMA also agrees that competition between agents and approved 
insurance providers as well as price competition for farmers are forces 
that can strengthen the delivery system. To the extent that the premium 
reduction plan can provide a competitive incentive to maintain the 
balance of these forces, RMA would agree that the premium reduction 
plan may contribute to the long run financial health of the delivery 
system.
    Comment: An agent commented that while a greater number of farmers 
have not taken advantage of the premium discount, there has been 
respectable growth in the numbers of farmers who want to take advantage 
of the discount. The commenters stated that some of the reasons farmers 
have not taken greater advantage of the premium reduction plan are: (1) 
They have been insured with and have developed a relationship with 
their current agent and they trust the agent ``to take care of them,'' 
(2) Many farmers do not totally understand crop insurance and have 
relied on their agents deceptive, misinformed or ignorant reasons for 
discrediting the premium discount; (3) Agents have put their own 
selfish interests (loss of customers or commissions) ahead of the 
benefit to farmers and have failed to promote the premium discount with 
ANY approved insurance provider; and (4) Many farmers buy their crop 
insurance from their lender and it has either been insinuated that they 
must buy their insurance from the lender or the farmer feels he is 
jeopardizing his ability to obtain credit if he doesn't buy crop 
insurance from them.
    Response: RMA would agree that many factors can potentially 
influence a farmer to choose to buy insurance from an approved 
insurance provider offering a premium discount or from another approved 
insurance provider, including some of the factors identified by the 
commenter. However, since RMA is unaware of the specific ``deceptive, 
misinformed or ignorant'' reasons cited by the commenter, RMA is unable 
to respond. Further, lending institutions are prohibited from 
conditioning their loans on the purchase of crop insurance with them. 
If the commenter knows of a specific case where this is occurring, it 
should report it to RMA. Eventually, there will be competition on 
service and price and it will be up to the farmers to determine which 
is more valuable to them.
    Comment: A few agents commented that RMA will receive an 
overwhelming, positive response from farmers who would like to see the 
premium discount continue. The commenter stated that farmers may not so 
respond because in addition to this being a very busy time of the year 
for them, they expect their insurance agent to ``take care of them.'' 
By their very nature, farmers aren't ``letter writers.'' The commenter 
stated on behalf of every crop insurance customer they all want the 
premium discount to continue to be made available.
    Response: RMA would agree with the commenters that the range of 
comments received under the proposed rule may not be proportionate to 
or fully representative of the views of farmers. By the same token, RMA 
cannot agree with the commenter who states that he or she represents 
every crop insurance customer in voicing a desire for the premium 
discount to continue. In any case, the rulemaking process does not 
represent a referendum on the premium reduction plan but rather the 
development of a framework that allows participation from all 
interested parties regarding the implementation of this Congressionally 
mandated option for approved insurance providers.
    Comment: An agent commented that selling the premium reduction plan 
has resulted in growth to the book of business each year.
    Response: RMA recognizes that growth in a book of business may be a 
result of the price competition created by the premium reduction plan.
    Comment: An interested party commented that it supports the premium 
reduction plan for all crops in all states. The commenter claims it 
balances the interests of the farmers and the agencies providing it, 
for the

[[Page 41883]]

betterment and furtherance of agriculture.
    Response: The rulemaking process does not represent a referendum on 
the premium reduction plan but rather the development of a framework 
that allows participation from all interested parties regarding the 
implementation of this Congressionally mandated option for approved 
insurance providers. However, RMA agrees that it is in the best 
interest of the crop insurance program and farmers to require the same 
premium discount for all crops but as stated above, in response to the 
significant concerns raised by commenters, RMA has elected to allow 
approved insurance providers to select states in which to participate 
in the premium reduction plan and will allow variability of premium 
discounts between states.
    Comment: An agent commented that without price competition, RMA 
leaves the program open for various types of non-price competition and 
there have been a lot of crazy plans by approved insurance providers to 
compete with various non-price service offers (mapping, agronomy 
services, etc). The commenter asks why RMA does not keep it simple and 
direct for the customer. The commenter stated that price competition 
works for everything else (including other insurance, utilities, phone 
service, airlines and others that are traditionally thought of as 
natural monopolies) and asks why it isn't good for crop insurance.
    Response: The purpose of section 508(e)(3) of the Act was to 
introduce price competition into the crop insurance program. In 
response to comments, RMA has developed an interim rule that make the 
program much simpler to administer. Now approved insurance providers 
and agents can compete on service and price, maximizing the potential 
benefits to farmers.
    Comment: An interested party stated that they have seen grave 
changes within the program as well as availability of delivering 
approved insurance providers. Overpayment of agents in the Midwest and 
impractical use of the funds available have crippled and dissolved some 
approved insurance providers as they pursue business with commission 
payments above the A&O reimbursement. The commenter stated that the 
approved insurance providers were also tied to underwriting and 
multiple years of loss in both A&O and underwriting, which also 
crippled their financials. The commenter stated that agents in the 
Midwest have been paid above the A&O while other agents in higher loss 
ratio states have been paid minimally. The commenter stated it is a 
much greater burden for agents in higher loss ratio areas. The 
commenter stated that with the current limited plan under the premium 
reduction plan there still may be disparity, however it is not as great 
as in the regular system.
    Response: The commenter's assessment of certain practices, economic 
forces, and geographical disparities in the crop insurance delivery 
system is basically consistent with several studies that investigated 
the financial failure of American Growers in 2002. RMA also agrees that 
to the extent that there is disparity in the payment of agent 
commissions between states, now allowing approved insurance providers 
to select the states in which they will participate in the premium 
reduction plan will not acerbate this problem and may reduce some of 
the disparity.
    Comment: An interested party commented that it is not opposed to 
the concept of the premium reduction plan for crop insurance, but is 
concerned about the proper and complete implementation of such a 
program. Full consideration must be given to the impact of a premium 
reduction plan program on the availability and viability of the 
delivery and service of crop insurance to America's farmers. If the 
premium reduction plan is not structured, administered, regulated and 
implemented with careful thought and planning it could have the 
unintended result of lower service quality and less effective cost 
controls for the farmers who rely upon crop insurance protection.
    Response: RMA agrees the interim rule must reflect a careful 
consideration of the viability and service of crop insurance to 
farmers. Through the rulemaking process, RMA has been able to receive 
input regarding the impact of the premium reduction plan on agents, 
farmers, and approved insurance providers, who will be the parties most 
affected. Further, RMA has carefully considered all comments and 
structured a program that minimizes the administrative burdens while 
still protecting the integrity of the program, such as requiring agents 
and approved insurance providers to comply with all the requirements of 
the SRA and approved procedures regarding service, loss adjustment, 
quality control, etc.
    Comment: An agent commented that although it opposed the premium 
reduction plan, it would offer it to stay competitive in the 
marketplace if it looks like it will become a significant offering.
    Response: Under the interim rule, it is expected that all agents 
and approved insurance providers will assess their business situation 
to determine whether it is economically feasible to participate in the 
premium reduction plan. However, even those that choose not to 
participate in the premium reduction plan will still have the 
opportunity to compete based on service, if not price. Farmers are the 
ones who will ultimately determine what is most valuable to them.
    Comment: A few agents commented that the timing could be better and 
asked that the premium reduction plan not be implemented now. A 
commenter stated that if the premium reduction plan is in the future, 
all approved insurance providers involved in crop insurance need to be 
able to provide the exact same product and the industry as a whole 
needs more time to implement that type of change. With more time and 
input from everyone involved in this business a fair and equitable 
policy should be possible.
    Response: RMA understands that there may be parties that want to 
delay implementation of the premium reduction plan but that is not an 
option. Section 508(e)(3) of the Act requires that RMA give approved 
insurance providers the opportunity to apply to provide a premium 
discount. Further, it would be impossible for RMA to structure the 
premium reduction plan so that approved insurance providers all provide 
the same product and remain in compliance with the Act. Under section 
508(e)(3), premium discounts are based on the efficiencies attained by 
the approved insurance providers. Since all approved insurance 
providers operate differently, they would not attain efficiencies in 
the same manner or in the amount. The interim rule allows flexibility 
for such difference in business operations.
    Further, through this rulemaking process, RMA has provide all 
interested parties the opportunity to provide input and has carefully 
considered such input when developing the interim rule.
b. Against the Premium Reduction Plan
    Comment: An approved insurance provider commented that the General 
Accounting Office is conducting an audit of the premium reduction plan 
to evaluate how the one approved plan is operating and the impact on 
the nation's farmers and the integrity of the Act. The commenter states 
that the results of this audit should be reviewed before any final 
rules are promulgated.
    Response: As stated above, section 508(e)(3) of the Act obligates 
RMA to consider any request by an approved insurance provider to offer 
a premium discount. If RMA were to postpone

[[Page 41884]]

implementation of the interim rule to wait for information from one or 
more studies, RMA would need to operate the premium reduction plan 
under existing procedures which the FCIC Board of Directors has 
determined to be inadequate or revised procedures. Consequently, RMA 
cannot adopt the suggestion of the commenter to postpone the interim 
rule.
    Further, through this rulemaking process, RMA has been able to 
obtain comments from all interested parties regarding the impacts of 
the premium reduction plan and, given the significant number of 
comments received, has a good understanding of the concerns. In 
response to these comments, RMA has made significant changes to the 
proposed rule to make the premium reduction plan much simpler, less 
burdensome, and less likely to cause any significant market 
disruptions. In addition, RMA has elected to implement this rule as an 
interim rule to allow it to collect additional comments so it can 
better understand, and make adjustments if needed, the impact of the 
premium reduction plan as contained in the interim rule.
    Comment: An interested party suggested that the Board should insist 
on a contractor review of the existing the premium reduction plan 
program before implementing any rule. The commenter states that the 
existing program has no protection against discrimination or adequate 
disclosure to the Board.
    Response: As state above, RMA is obligated by law to operate the 
premium reduction plan. If RMA were to postpone the interim rule to 
await information from one or more studies, RMA would need to operate 
the premium reduction plan under existing procedures which the FCIC 
Board of Directors has already determined to be inadequate or revised 
procedures. Consequently, RMA cannot adopt the suggestion of the 
commenter to postpone the interim rule.
    Further, RMA disagrees that the existing program has no protection 
against discrimination or inadequate disclosure to the Board. As stated 
above, all approved insurance providers are required to sell insurance 
to all interested farmers as long as they are eligible. Further, 
approved insurance providers are required to comply with all anti-
discrimination provisions in the SRA. This requirement did not change 
under the existing premium reduction plan or under the interim rule.
    However, RMA acknowledges that the existing program did nothing to 
change the longstanding practice of allowing agents to only solicit 
large farmers. However, the interim rule rectifies this matter and 
requires that the approved insurance provider solicit small, limited 
resource, women and minority farmers through its marketing plan.
    Further, disclosure to the Board under the existing program has 
been adequate. Crop1 has submitted regular reports to RMA, who provides 
an update to the Board at every Board meeting. Further, RMA has 
conducted periodic reviews of Crop1's operations and reported to the 
Board its findings. In addition, RMA briefed the Board on all new 
requests to provide premium discounts for the 2005 reinsurance year and 
sought the Board's input on the proposed and interim rules.
i. Procedural
    Comment: A few approved insurance providers commented that the 
premium reduction plan is providing burdens on the state without 
providing funding. A commenter states this could raise the issue of 
state premium taxes. A commenter stated that while the standard of what 
constitutes ``sufficient implications'' under Executive Order 13132 to 
warrant consultation with the states is not known nor are the 
intergovernmental consultation standards set in Executive Order 12372, 
prior premium reduction plan experience and the requirements of the 
proposed rule itself create potentially significant burdens on state 
government--specifically state insurance departments--such that some 
detailed analysis and potential consultation under these Executive 
Orders appears warranted. The commenter stated RMA should ask the 
insurance departments in the states where the premium reduction plan is 
approved by FCIC for the 2003-2005 crop years whether that program 
created an ``insignificant'' burden. Furthermore, the proposed rule 
requires any premium reduction plan-participating approved insurance 
provider to file its marketing strategy with each state in which the 
program will be offered ``for its [the state's] 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''. The 
commenter asks where RMA proposes the state is going to get the 
resources to conduct the above review. This review alone, along with 
all implementation aspects of the plan and its potentially 
discriminatory impact both at the agent and consumer level, will 
undoubtedly constitute a significant impact on state insurance 
departments and would presumably warrant consultation with the states 
prior to the implementation of any final rule. The commenter suggested 
the proposed rule may even need evaluation, contrary to the conclusion 
reached above, under the Unfunded Mandates Reform Act of 1995.
    Response: RMA recognizes that the provisions in the proposed rule 
that required state approval of the premium reduction plan submissions 
and marketing plans may have created unnecessary burdens on states. 
Consequently, these provisions have been removed from the interim rule. 
However, states remain involved in monitoring market conduct to ensure 
farmers are not misled but this is not a new burden. States have always 
been responsible for monitoring such market conduct since they license 
approved insurance providers and agents. Therefore, there are no 
unfunded mandates in the interim rule.
    Further, with respect to Executive Order 13132, RMA agrees that the 
premium reduction plan had Federalism implications because it is 
regulating certain conduct relating to marketing and allowing premium 
discounts that some states may construe to be illegal rebates. However, 
the crop insurance program is a national program and there needs to be 
uniformity in the application of its requirements. In addition, section 
4 of that Executive Order authorizes agencies to preempt state law 
where there is a Federal statute that contains an express preemption 
provision. As stated above, section 506(l) of the Act is an express 
preemption provision. Therefore, RMA is authorized to take promulgate 
regulatory provisions that preempt state law.
    With respect to the consultation requirement in Executive Order 
13132, RMA maintains contact with the National Association of Insurance 
Commissioners and actively participates in its crop insurance working 
group. Through this relationship, RMA is able to consult with the State 
Departments of Insurance of any actions it proposes to take and obtain 
the necessary feedback.
    Comment: An approved insurance provider commented that it disagreed 
with RMA's assessment that, with respect to the Regulatory Flexibility 
Act, the proposed rule will not have a significant economic impact on a 
substantial number of small entities. The commenter stated that the 
proposed rule would affect the sales strategies, sales techniques and 
income of thousands of agents, most of whom qualify as small entities. 
The commenter stated that since the prime effect of the rule is likely 
a reduction in

[[Page 41885]]

commissions, the effect is likely to be direct and immediate.
    Response: RMA disagrees with the comment. As stated above, the 
purpose of the premium reduction plan is to provide the potential for 
greater benefits to farmers, agents and approved insurance providers 
through free market competition. As stated above, participation in the 
premium reduction plan is strictly voluntary. Therefore, if agents feel 
that they would be harmed by participating, they can elect not to.
    In addition, neither the proposed nor the interim rule mandates 
that agent commissions be reduced. Commission rates are freely 
negotiated between the agent and the approved insurance provider. In 
addition, as stated above, approved insurance providers have an 
incentive to pay agents a fair commission and only the agents and 
approved insurance providers can be the judge of that. Further, as 
stated above, RMA has revised the proposed rule to minimize the 
potential for market disruption. Therefore, the interim rule will only 
have a significant economic impact on the agent if the agent elects to 
receive such impact. This is a matter solely up to the agent. 
Therefore, RMA was correct in its assessment that no Regulatory 
Flexibility Act analysis is required.
ii. Current
    Comment: Several agents and interested parties commented that it 
has taken many years to develop the current delivery system of 
providing insurance to the farmers. That was accomplished in part with 
the partnership of independent agents across rural America. Commenters 
state that under the current system the government receives an 
efficient and effective delivery system and the farmer receives a good 
product at a fair price with equal access to the approved insurance 
providers. A commenter stated that farmers like it and approved 
insurance providers and agents have been knowledgeable and expert 
distributors. A commenter states that no farmer has ever complained 
that premiums are too high. A commenter stated that when used as a risk 
management tool, crop insurance works well. A commenter states that the 
program has made many improvements over the years, new products and new 
crops have been added, and participation and value to the farmer has 
continued to improve.
    Response: RMA generally agrees that the current crop insurance 
program provides a system that can claim many successes in helping 
farmers protect their livelihood and demonstrates a successful 
partnership between the private sector, including approved insurance 
providers and their agents, and the Federal government. RMA agrees that 
crop insurance appears to be working well for many farmers and has 
steadily improved, as evidenced by growing participation at increasing 
coverage levels. RMA also recognizes the vital role that the agent 
plays in providing information and service to farmers in the current 
delivery system.
    RMA strongly disagrees with the claim that no farmer has ever 
complained that crop insurance premiums are too high. Whenever RMA 
meets directly with farmers, they often argue that crop insurance 
premiums are too high and are a major concern.
    Notwithstanding these concerns, the purpose of the premium 
reduction plan is to improve the crop insurance program by allowing 
price competition. The assumption is that the crop insurance industry 
will respond as have most competitive industries with a better product, 
better service, at a better price.
    Further, as stated above, RMA has revised the proposed rule to 
minimize potential market disruptions so that the crop insurance 
program can continue to provide valuable risk management to farmers 
long into the future.
    Comment: Several agents and interested parties commented that when 
crop insurance was solely a government project 72 cents of all premium 
was for administration and the balance for losses. As private 
enterprises, only 23.5 cents is paid for administration. A commenter 
states that this shows the private enterprise should not be kicked out 
of the current program. You get what you pay for, and cheap is not 
always the answer.
    Response: RMA agrees that the private sector has a well established 
and valuable role in the delivery of Federal crop insurance. However, 
RMA disagrees with the implication of the comment that the interim rule 
somehow seeks to replace the private sector role. On the contrary, the 
stated objective of the premium reduction plan is to foster price 
competition in the program. The whole premise of price competition is 
to be able to provide the same product or service for less money.
    Further, cheap is not the goal. As stated above, as with all 
competition in the business world, the goal is to allow approved 
insurance providers and agents to provide a better product, better 
service, at a better price.
iii. Program Harm
    Comment: Several approved insurance providers, farmers, interested 
parties and agents commented that the Crop Insurance Reform Act of 2000 
[Agricultural Risk Protection Act of 2000] helped the American farmer 
out the most by giving them a higher subsidy for their premium. A 
commenter stated that since the 2000 Reform Act; the policy count has 
gone upward every year. A commenter stated that the legislation to 
allow for the premium reduction plans was approved at a time (1993) 
[1994] when there were approximately sixty four (64), and there are now 
seventeen (17) approved insurance providers, when premium subsidies to 
farmers were much lower, and the subsidy for administrative and 
operation expenses to approved insurance providers was approximately 
thirty-three percent (33%) higher. The intent of the legislation was to 
encourage approved insurance providers to develop efficiencies in their 
operations and pass the savings on to the farmers in the form of 
reduced premiums for them and the 2000 Reform Act accomplished this 
goal and approved insurance providers have already had to reduce their 
costs.
    Response: RMA agrees that the additional premium subsidy in the 
Agricultural Risk Protection Act of 2000 contributed to an increase in 
crop insurance participation. RMA also agrees that the premium 
reduction plan was legislated when there were more approved insurance 
providers, lower premium subsidies, and a higher A&O subsidy rate. 
However, the primary stated objective of the premium reduction plan, as 
reflected in the legislative history of section 508(e)(3) of the Act, 
was to foster price competition in the crop insurance marketplace. This 
objective has yet to be accomplished and the presumption is that such 
price competition will further benefit farmers because it will allow 
approved insurance providers and agents now to compete on service and 
price, which can benefit the farmer and the crop insurance program.
    Comment: Several agents and interested parties commented that if 
the premium reduction plan program is not rescinded and stopped, it 
will cause the current crop insurance program to fail in its ultimate 
goal to replace disaster programs. A commenter stated that ad hoc 
disaster programs would be needed on even a greater scale. A commenter 
stated that crop insurance has the ability to eliminate ad hoc disaster 
and that the current farm program, with loan deficiency payments, 
counter-cyclical payments, fixed-direct payments, etc., is less 
productive and provides less true protection to the American farmer 
than does the crop insurance program.

[[Page 41886]]

    Response: RMA is unsure of why the commenters predict that the 
premium reduction plan will cause the failure of crop insurance to 
replace ad hoc disaster aid and that ad hoc disaster aid demands will 
increase as a result of the premium reduction plan and the commenters 
provide no information to support these predictions. In fact, the 
premium reduction plan does not affect the coverage provided to the 
farmer. Therefore, it should not have any impact on the need for ad hoc 
disaster programs.
    If the commenters are premising their statements on the fact that 
agent commissions will decrease to the point that agents can no longer 
serve farmers, who will then have no access to crop insurance and 
require ad hoc disaster programs, these issues have been addressed 
above. As with all competition, prices will only change by an amount 
the market will bear. This includes agent commissions. Approved 
insurance providers have the incentive to retain agents to maximize 
their potential underwriting gains and to service their customers. 
Therefore, approved insurance providers and agents will negotiate a 
fair commission rate. Further, as stated above, RMA has built in 
safeguards into the interim rule to ensure that farmers receive the 
required level of service. In addition, adoption of the alternative 
proposal will slow down price competition and allow it to proceed in an 
orderly, managed manner, without market disruptions.
    With respect to the benefits of other farm programs, such programs 
are outside the scope of this rule and RMA is not in any position to 
comment.
    Comment: Several agents commented that it is common knowledge in 
the industry today that every approved insurance provider, with the 
exception of one, opposes any premium reduction plan. However, these 
approved insurance providers must develop a plan in order to compete 
and hold their share of business. A commenter states this will 
ultimately require the approved insurance providers to cut cost, which 
will lead to less service, less value, and possibly less products 
available to the farmer regardless of size.
    Response: RMA acknowledges that the commenters may be correct in 
asserting that there may be resistance among approved insurance 
providers with respect to the premium reduction plan concept. However, 
Congress has enacted section 508(e)(3) and RMA must respond to approved 
insurance providers who wish to take advantage of this provision, which 
does benefit farmers.
    RMA does not agree with the implication that the introduction of 
cost efficiencies by approved insurance providers will necessarily lead 
to a deterioration in service, less value, or fewer products available 
to farmers. The purpose of price competition is to provide a framework 
whereby the participants in the market will try to provide a better 
product, better service, for less money. However, to ensure that 
service is not reduced, RMA has added provisions to provide sanctions 
in the event service fails to comply with the requirements of the SRA 
and approved procedures. In addition, the requirement to sell all 
insurance products offered by RMA contained in the SRA still applies. 
Further, adoption of the alternative proposal will allow price 
competition to proceed in an orderly, managed manner, without market 
disruptions.
    Comment: A few agents and interested parties commented that, 
nationwide, the program would not be as profitable. A commenter stated 
this would certainly reduce the financial strength of the industry and 
affect the ability of the RMA to meet its intended goal of a 1.075 
national loss ratio. A commenter stated it may actually result in an 
increase in premiums.
    Response: It is unclear to RMA why the premium reduction plan will 
adversely affect expected underwriting gains of approved insurance 
providers, RMA's ability to maintain a national loss ratio of 1.075, or 
crop insurance premium rates. Any premium discounts are paid through 
savings achieved in the operations of the approved insurance providers. 
The amount of premium paid to cover losses and the potential 
underwriting gains of the approved insurance provider will remain 
unchanged. Therefore, there should not be any negative impact on the 
financial strength of the industry, the ability of RMA to hit its 
targeted program loss ratio, or premium rates.
    Comment: Many agents, approved insurance providers and other 
interested parties commented that they opposed the premium reduction 
plan. Commenters stated that the premium reduction plan will cause 
significant damage to the federal crop insurance program and harm 
farmers, agents and approved insurance providers, and the credibility 
and delivery of the program. Commenters state that there are too many 
disruptive problems with the premium reduction plan at a time when the 
program is more complex, with more products and less income. Commenters 
stated that the federal crop insurance program is one of the most 
successful public-private partnerships. Commenters state that while 
there are limited tangible economic benefits associated with the 
premium reduction plan implementation, these benefits are small 
relative to the risks to farmers, and the political and economic costs 
that will be required to achieve them. Commenters state that the 
premium reduction plan risks the most fundamental principle of crop 
insurance--universal access by all farmers, regardless of size.
    Response: RMA disagrees with the commenters' assessment that the 
premium reduction plan will cause significant damage to the crop 
insurance program; harm farmers, agents, and approved insurance 
providers; and impair program delivery. The crop insurance industry is 
not the first to have price competition and for the most part, 
industries thrive under such competition and there is no reason to 
believe the crop insurance program would respond any differently. 
Further, as stated above, RMA has built in safeguards into the interim 
rule to ensure that farmers receive the required level of service. In 
addition, adoption of the alternative proposal will allow price 
competition to proceed in an orderly, managed manner, without market 
disruptions.
    Commenters also point to the complexity of the current program, the 
success of the public/private partnership; limited benefits of the 
premium reduction plan relative to risks; and the threat to universal 
access by all farmers as the principle factors supporting this 
assessment.
    RMA agrees that the current program is complex but, as stated by 
commenters, approved insurance providers and agents are doing a 
superior job in delivering that program to farmers. Further, the 
complexity of the program will remain unchanged under the interim rule. 
In addition, as stated above, it is up to farmers to determine whether 
the premium reduction plan will benefit them. Under the premium 
reduction plan, farmers will be able to determine what is the greatest 
value to them, service or price, or a combination of the two. Lastly, 
as stated above, RMA has taken steps to ensure universal access to the 
premium reduction plan by requiring approved insurance providers to 
specifically market it to small, limited resource, women and minority 
farmers.
    Comment: Several interested parties commented that the premium 
reduction plan would disrupt the delivery of crop insurance to many 
farmers and this would negatively impact many banks that strongly urge 
farmers to purchase crop insurance as a backstop to help

[[Page 41887]]

farmers repay their loans in the event of a disaster or significant 
loss.
    Response: RMA assumes that the commenters are referring to the 
possibility of reductions in agent commissions causing agents to leave 
the business and farmers to be left without insurance. These issues 
have been addressed above. As with all competition, prices will only 
change by an amount the market will bear. This includes agent 
commissions. Approved insurance providers have the incentive to retain 
agents to maximize their potential underwriting gains and to service 
their customers. Therefore, approved insurance providers and agents 
will negotiate a fair commission rate. Further, as stated above, RMA 
has built safeguards into the interim rule to ensure that farmers 
receive the required level of service. In addition, adoption of the 
alternative proposal will allow price competition to proceed in an 
orderly, managed manner, without market disruptions. Therefore, the 
premium reduction plan should not adversely impact banks or other 
lenders.
    Comment: A few interested parties and agents commented that the 
federal crop insurance program has been highly successful in the past 
primarily because of the larger subsidies passed on to its customers 
the last few years.
    Response: RMA agrees that larger subsidies provided under the 
Agricultural Risk Protection Act of 2000 resulted in farmer 
participation at higher levels of coverage. However, as stated above, 
the primary purpose of the premium reduction plan is not to increase 
participation, even though that may be one of the effects. The purpose 
is to stimulate price competition so that farmers receive the benefits 
of competition for both price and service.
iv. Alternative cost cutting
    Comment: An interested party stated that if RMA is trying to 
regulate what the agents are getting paid, then RMA should put in the 
SRA what the maximum all approved insurance providers can pay an agent. 
The commenter stated that by using a ceiling on what all approved 
insurance providers can pay an agent will almost guarantee no more 
bankrupt approved insurance providers.
    Response: The purpose of the premium reduction plan is not to 
regulate agent commissions. An agent's compensation is freely 
negotiated between an agent and an approved insurance provider and 
nothing in the proposed or interim rule would change or preclude it. 
Further, approved insurance providers are in the best position to 
examine their operations and determine the appropriate amount of 
commission and other expenses. Moreover, approved insurance providers 
can fail because of any number of factors, possible excess agent 
compensation being only one.
    Comment: An agent commented that if RMA wants to save money, get 
rid of the Crop Revenue Coverage or Revenue Assurance as they are 
almost identical. The commenter stated RMA could save millions in not 
having to support both systems.
    Response: This comment is beyond the scope of the proposed rule. 
Therefore, RMA is unable to respond. However, RMA has considered such 
cost saving measures, agrees with the commenter, and has announced its 
intent to merge the CRC and RA policies.
    Comment: A farmer commented the agriculture budget is roughly \1/2\ 
of 1 percent of the Federal Budget but the agricultural industry is 
responsible for 15 percent of the nation's gross domestic product, and 
provides for 25 million jobs. The commenter stated the President needs 
to increase the subsidies by 20% to give all farmers better coverage at 
the higher levels at a lower rate.
    Response: This comment is beyond the scope of the proposed rule. 
Therefore, RMA is unable to respond.
    Comment: Several approved insurance providers and interested 
parties commented that premium reduction plan should be implemented 
only with the strictest caution only for those economically viable 
approved insurance providers who have already demonstrated the capacity 
to fairly serve all farmers. Commenters stated it seems somewhat risky 
to be offering reduced premiums through a start up approved insurance 
provider in a weak financial condition. If a widespread disaster were 
to occur, the approved insurance provider may not survive and there may 
be problems with everyone getting paid without a considerable infusion 
of cash from the federal government.
    Response: There are guidelines in place to ensure the financial 
stability of approved insurance providers through the approval process 
when an approved insurance provider submits an application for an SRA 
or its annual Plan of Operations. Nothing in the premium reduction plan 
changes these requirements. Therefore, no approved insurance provider 
that was not economically viable would be approved for a SRA, much less 
be eligible to participate in the premium reduction plan.
    However, RMA does share the concern that even though approved 
insurance providers may have achieved efficiencies, they may also 
sustain significant underwriting losses in years where there are 
multiple widespread disasters. The payment of premium discounts under 
such circumstances could stress the financial condition of the approved 
insurance provider. RMA has addressed this issue in the interim rule in 
two ways. The first is to only require approved insurance providers to 
pay premium discounts if the approved insurance provider makes a 
request to pay such discounts and it is approved. Therefore, if the 
approved insurance provider determines it is not in the financial 
position to pay the premium discount, it could not request approval to 
pay any discounts. The second is to give RMA the authority to deny the 
payment of a premium discount if there is evidence it may weaken the 
financial condition of the approved insurance provider.
    Comment: An agent commented that RMA should not offer both the 
existing multi-peril program and the proposed premium reduction plan. 
The commenter states there is no reason to complicate crop insurance 
more than it already is. The commenter suggested finding a level of 
subsidy that keeps the insurance affordable to the farmers and still 
provides a fair return to the approved insurance providers and the 
independent agents that write for them.
    Response: The commenter appears to assume that the premium 
reduction plan will complicate the crop insurance policy. However, this 
is not the case. The obligations of the parties and the coverage remain 
the same under the policy regardless of whether the premium reduction 
plan is in effect. Further the requirements regarding service, loss 
adjustment, etc. remain the same. The premium reduction plan will 
simply provide the farmer with the opportunity to receive a payment if 
the approved insurance provider achieves the requisite level of cost 
savings for the reinsurance year.
    With respect to the issue of subsidy, this comment is beyond the 
scope of the proposed rule. Therefore, RMA is unable to respond.
    Comment: A farmer commented that the problem with the crop 
insurance program is not the amount of subsidies, it is the low yields.
    Response: This comment is beyond the scope of the proposed rule. 
Therefore, RMA is unable to respond.
    Comment: An agent commented that any farmer that has any quantity 
of land carries crop insurance, and has done so for the past 15-20 
years. The reason there are ``large'' farmers is that they know the 
programs inside and out. The

[[Page 41888]]

commenter stated that these large farmers form new ``entities'' and 
move one or two extremely high yielding pieces (APH) of ground into 
these new ``entities'' and then ``add land to an existing unit'' and 
transfer their high yielding ``new entity'' land to all the ground they 
just took away from their neighbors. The commenter claims this is one 
of the processes destroying family farms. Large farmers know the 
programs inside and out, and will do anything and everything to have 
the advantage in our so-called free market. The commenter claims this 
has crippled the concept of free enterprise by a program designed to do 
good. Over the last ten years, land prices have tripled and cash rents 
have also tripled while small farmers continue to go out of business. 
Meanwhile the taxpayer funds an average of 55% of the crop premium. 
Adding an additional 3%-5%-8% discount to this program will again be 
greeted by smiles from the people that benefit the most--large farmers. 
The commenter stated that if RMA wants to save money and positively 
impact agriculture, change the practice that only large farmers use--
multiple entities. These educated farmers will find ways to circumvent 
changes unless it is plain and simple.
    Response: This comment is beyond the scope of the proposed rule. 
Therefore, RMA is unable to respond.
    Comment: Several agents commented that the premium reduction plan 
is being used to cut program costs. A commenter stated to save costs, 
either the farmer should pay more premium or the approved insurance 
providers receive less A&O, which will result in agents getting paid 
less commission. A commenter stated this goal was already met when A&O 
was reduced in the 2005 SRA and the large reduction in A&O that has 
occurred between 1994 and today. The commenter stated that if savings 
is the goal, keep the premiums the same for all approved insurance 
providers in all states and cut the reimbursement and cut the paperwork 
requirements. A commenter stated that if RMA wants to cut back in 
spending get rid of all the subsidy programs and force all farmers to 
buy crop insurance if they want any government assistance or take the 
farm program payments and put them into the crop insurance program. 
This would tell farmers they can protect themselves if a disaster 
happens but it is their choice.
    Response: The comments assume that RMA is seeking to reduce program 
costs through the interim rule. This is not the case. The premium 
reduction plan is intended to allow approved insurance providers to 
compete on the basis of price. Nothing in the premium reduction plan 
will decrease the overall costs to the crop insurance program because 
the payment of A&O subsidy will remain the same, or could actually 
increase if additional levels of coverage were purchased.
    With respect to the comments regarding other subsidy programs, this 
comment is beyond the scope of the proposed rule. Therefore, RMA is 
unable to respond.
    Comment: Several approved insurance providers and agents commented 
that farmers do not need further reductions to the highly subsided 
premiums. A commenter stated that if it is the intent of Congress to 
further reduce premiums to farmers then it is best to increase 
subsidies to all farmers uniformly. The commenter stated that any 
attempt to reduce farmer premium through premium discount plans which 
cannot reach all farmers in an equitable manner should be abolished.
    Response: As stated above, section 508(e)(3) of the Act obligates 
RMA to consider requests by approved insurance providers to provide 
premium discounts. This obligation was not changed, even when Congress 
substantially increased the premium subsidy rates. Therefore, RMA has 
no choice but to implement section 508(e)(3) as written.
    With respect to the issue of raising all premium subsidies equally, 
this comment is beyond the scope of the proposed rule. Therefore, RMA 
is unable to respond.
    Further, RMA does not agree with the assumption that the premium 
reduction plan cannot reach all farmers in an equitable manner. As 
stated above, the interim rule provides specific protections against 
unfair discrimination and requirements for broad and equitable 
marketing of the premium reduction plan.
    Comment: Many agents, approved insurance providers, farmers and 
interested parties suggested that if RMA wants to increase 
participation in the program it should increase the percentage of 
subsidy for all farmers. This would have the same effect to the farmer 
but would not drive out of business the independent agency. A commenter 
suggested that it would like to see the subsidies around 60% to help 
the younger farmers protect their investments.
    Response: As stated above, the primary purpose of the premium 
reduction plan is not to increase participation, although that may be 
an effect. The primary purpose is to introduce price competition into 
the crop insurance program so that farmers can benefit from the 
competition for both price and service.
    With respect to the issue of raising all premium subsidies for all 
farmers, this comment is beyond the scope of the proposed rule. 
Therefore, RMA is unable to respond.
    Comment: An agent suggested that when balancing budget needs and 
approved insurance provider stability, it made more sense just to 
reduce A&O and commissions 3.5% and leave crop insurance the same price 
with less need for additional subsidies.
    Response: The comment assumes that the purpose of the premium 
reduction plan is to balance the budget. This is not the case. As 
stated above, the primary purpose of the premium reduction plan is to 
introduce price competition into the crop insurance program so that 
farmers can benefit from the competition for both price and service. In 
addition, RMA does not regulate agent commissions. Such commissions are 
determined by free market negotiations between the agent and approved 
insurance provider.
    Comment: Several agents commented that it would make sense for 
discounts be based on loss ratios. A commenter stated that any other 
lines of insurance operate in this fashion but due to the fear of 
discrimination federal crop insurance can not operate in this way. This 
is unfortunate.
    Response: The commenter is correct that one of the fundamental 
principles of crop insurance is equal access and equitable treatment. 
However, crop insurance does operate like other lines of insurance in 
that the higher the risk of loss, the higher the premium rate, and vice 
versa. Therefore, in a sense, farmers with good loss ratios do receive 
a ``discount'' in the form of lower premium rates. However, in the 
context of the premium reduction plan, there is no rational basis to 
tie such discounts to loss ratios because, unlike other lines of 
insurance, the cost savings are not achieved through underwriting 
gains. The cost savings are from operational structures or changes that 
allow the approved insurance provider to operate for less that the A&O 
subsidy it receives.
    Comment: An agent suggested that farmers be given a 1% discount for 
every year they've been in the program, up to 10 years, without 
breaking continuity. The commenter suggested making the discount 
standard and available to all farmers.
    Response: With respect to the issue of giving all farmers a 
discount based on the length of time participating in the program, this 
comment is beyond the

[[Page 41889]]

scope of the proposed rule. Therefore, RMA is unable to respond.
    Comment: An interested party commented that deliberation and 
implementation of the premium reduction plan requires an allocation of 
political and economic resources by FCIC, RMA, private industry, and 
other interested parties. The commenter states that, in lieu of the 
premium reduction plan, these groups could be working on an alternative 
set of program endeavors, which have a much greater potential for 
social return and overall economic benefit to the program, such as 
successful implementation of the Combo Policy.
    Response: As stated above, RMA is obligated to consider requests by 
approved insurance providers to offer premium discounts in accordance 
with section 508(e)(3) of the Act. RMA has no choice but to implement 
the premium reduction plan.
    Comment: Several agents and interested parties commented that RMA 
should just decrease premium rates. A commenter stated that this new 
rule is ultimately saying that rates are too high and RMA can afford to 
step back the rates in certain cases. A commenter stated that this 
would allow real savings to every farmer. Less premium is generated so 
less commission is paid. A commenter stated that once again, RMA is 
choosing to make this much harder than it has to be and if RMA truly 
cared about whether or not this was a good idea, why have they not 
asked agents directly for input.
    Response: This comment assumes that the purpose of the premium 
reduction plan is to reduce premium rates and this is not correct. 
Premium rates must be sufficient to cover anticipated losses and a 
reasonable reserve. The premium discount plan is based on whether 
approved insurance providers can deliver the crop insurance program for 
less than the A&O subsidy it receives and will not affect the premium 
rates. These cost savings can be passed from the approved insurance 
provider to the farmers to help defray the cost of the premium normally 
paid by farmers, but premium rates themselves are unaffected. 
Therefore, RMA cannot reduce premium rates under the premium reduction 
plan.
    Further, through this rulemaking process, RMA has sought the input 
of agents and has carefully considered their comments when developing 
the interim rule.
    Comment: A few agents commented that the current program is a 
wonderful program, and has worked very well. The commenter stated that 
if the program needs changing it suggests something as simple as 
acreage reporting date for crop insurance to coincide with acreage 
reporting deadline at the local FSA office. Another commenter suggested 
that FSA and RMA remove duplicate reporting. The commenter stated that 
this would result in program savings, which could be passed on to the 
farmer as reduced premiums.
    Response: As stated above, the purpose of the premium reduction 
plan is to introduce price competition to allow farmers to benefit from 
both price and service competition. As stated above, RMA is obligated 
to consider requests by approved insurance providers to offer premium 
discounts. Premium discounts can only be paid if the approved insurance 
provider's costs to deliver the program are less than its A&O subsidy. 
In fact, the cost saving measures discussed by the commenter can be the 
foundation for the cost savings under the premium reduction plan. 
However, while RMA is always looking for ways to simplify the program 
and reduce costs to approved insurance providers, it cannot simply pass 
those savings on to farmers as reduced premiums. Premium rates must be 
sufficient to cover anticipated losses and a reasonable reserve and are 
not affected by the premium reduction plan.
    Comment: A few agents and interested parties commented that if cuts 
need to be made, eliminating premium subsidies to large corporate 
farmers would do more for the economic stability of the farmers the 
premium reduction plans are supposed to help.
    Response: This comment assumes that the premium reduction plan is 
intended to cut costs and that it can seek other methods for 
accomplishing this objective. This is not the case. As stated above, 
the purpose of the premium reduction plan is to introduce price 
competition to allow farmers to benefit from both price and service 
competition.
    With respect to the issue of eliminating premium subsidies to large 
corporate farmers, this comment is beyond the scope of the proposed 
rule. Therefore, RMA is unable to respond.
    Comment: An interested party commented that this plan has no value 
at all unless it helps the small farmers. The commenter states that 
large agribusiness should be ineligible for this program because it is 
clear taxpayers have been funding huge agribusiness conglomerates and 
American citizens should not be insuring them at all. The commenter 
recommends RMA restructure this program to help small poor farm 
families and downsize the rest.
    Response: RMA agrees that the premium reduction plan should help 
small farmers. To accomplish this goal, the interim rule will require 
that approved insurance providers specifically market the premium 
reduction plan to small, limited resource, women and minority farmers. 
This should ensure that all farmers, both large and small, have equal 
opportunity for premium discounts.
    With respect to the issue of not allowing large conglomerates to 
participate in the crop insurance program, this comment is beyond the 
scope of the proposed rule. Therefore, RMA is unable to respond.
    Comment: Many agents and interested parties and an approved 
insurance provider commented that the crop insurance program is a 
complex program that requires extensive time with each customer if all 
available options are to be adequately explained and that such 
requirements continue to increase. They state it takes the same amount 
of time to sell a small account as it does with the larger one. The 
commenters stated that if all of the larger accounts are switched to 
the discount plan, then agents will barely survive on the large 
accounts and will lose money on the smaller accounts, which they 
already do, meaning that overall they would be losing money and would 
have to go out of business due to a marketing scheme. The commenters 
state that they are able to serve small farmers partly because the 
larger farmers' policies help with the low or non-existent profits from 
the smaller farmers. They also claim that if the premium reduction plan 
becomes a reality, they do not know how they will be able to take care 
of everyone and provide the service they have done in the past. 
Commenters claim that this flies in the face of what Congress intended 
when it passed the Agricultural Risk Protection Act of 2000.
    Response: RMA recognizes that, because servicing a policy by an 
agent entails a relatively large fixed cost, certain small policies 
must currently be serviced at a loss to the agent and the approved 
insurance provider and that larger policyholders tend to subsidize 
these small policies. This condition currently exists in the crop 
insurance program and is not the result of the premium reduction plan.
    Further, the commenters predict that reductions in agent commission 
will make it uneconomical to service small policies. As stated above, 
it is unlikely that there will be any reduction in service to any 
farmer, including small or high risk farmers, from the requirements

[[Page 41890]]

in the SRA and approved procedures. Approved insurance providers are 
not going to pay a commission so low that selling crop insurance is no 
longer economically viable for the agent and risk them going out of 
business. This may result in approved insurance providers not having 
sufficient agents to properly service their policyholders. In addition, 
approved insurance providers are not going to risk losing the agent or 
their book of business to a competitor thereby decreasing the potential 
for underwriting gains. The marketplace will determine the fair and 
equitable commission for the agent.
    In addition, RMA has taken steps to ensure that service to small 
farmers is available and is not reduced. One step is to clarify the 
requirements regarding service in the interim rule. Another is to 
specifically require that approved insurance providers develop and 
implement a marketing plan designed to reach small, limited resource, 
women and minority farmers. Provisions have also been added to allow 
farmers to complain directly to RMA if they feel they have been denied 
access to the premium reduction plan or have received reduced service. 
In addition, failure to comply with either the service or marketing 
requirements could result in the imposition of significant sanctions 
under the SRA or the interim rule against the approved insurance 
provider and agent.
    Comment: An interested party commented that RMA was incorrect when 
it made statements that it is compelled to offer the premium reduction 
plan unless Congress passes a law instructing them otherwise. The 
commenter states that section 508(e)(3) of the Act is not in a vacuum 
and RMA has no authority to implement a program that is contrary to the 
other requirements of the law and regulation. The commenter also 
suggests that RMA has shown bias and has determined it will ignore the 
many issues and legal deficiencies raised by the comments in violation 
of the Administrative Procedures Act.
    Response: The commenter states that RMA is not obligated to offer 
the premium reduction plans because it would be contrary to the other 
requirements of the law and regulation. However, the commenter fails to 
identify the laws or regulations to which it is referring. Therefore, 
RMA is unsure of how to respond except to state that section 508(e)(3) 
of the Act states that if an approved insurance provider can deliver 
the program from less that its A&O subsidy it may request the authority 
to offer a premium discount. This is not a provision that gives RMA the 
authority of whether to implement the provision or not. It gives the 
right to make application to the approved insurance providers.
    RMA is also unsure of the basis for the commenter's allegations 
that RMA has shown bias and will ignore the issues raised by the 
commenters, in violation of the Administrative Procedure Act. In fact, 
RMA has carefully considered all the comments received and made 
numerous, significant changes to the proposed rule as outlined in this 
Notice.
    Comment: An agent commented that it would be better for RMA to help 
the agent by dissolving illegal cooperatives and those that are 
fraudulently selling crop insurance than by proceeding with the premium 
reduction plan.
    Response: This comment is beyond the scope of the proposed rule. 
Therefore, RMA is unable to respond.
    Comment: An agent asked who is the backbone behind the premium 
reduction plan--large approved insurance providers that pay their staff 
little to nothing thus creating a profit for themselves. The commenter 
asked what they are going to propose when they have driven out all the 
agents that could no longer hold on to their agencies and they have all 
the farmers insured under the premium reduction plan. The commenter 
states that the way crop insurance has been for the last two decades 
will become very attractive to them at that point and they will need 
the extra commission dollars at that point because they have 
accomplished what they have set out to do.
    Response: As stated above, it is unlikely that there will be mass 
exodus of agents from the program as a result of the premium reduction 
plan. Approved insurance providers are not going to pay a commission so 
low that selling crop insurance is no longer economically viable for 
the agent and risk their going out of business. This may result in 
approved insurance providers not having sufficient agents to properly 
service their policyholders. In addition, approved insurance providers 
are not going to risk losing the agent or their book of business to a 
competitor thereby decreasing the potential for underwriting gains. 
Further, approved insurance providers are not going to risk the 
possibility that they will have insufficient agents to service the 
business as required under the SRA and approved procedures.
    It is generally acknowledged that agents are a necessity in the 
crop insurance program and, because of this, the marketplace will 
determine the fair and equitable commission for the agent.
    Comment: Several agents and interested parties commented that it 
would be wise for RMA to spend a little more time investigating some 
lending institutions and other entities that offer rebates to loan 
customers if they will move their crop insurance to the bank's 
insurance agent. This is illegal. The commenter states that the premium 
reduction plan will create the same problem. Some farmers will be 
offered the plan and some will not and that this is also illegal. A 
commenter stated that there are a lot of cases where customers of these 
businesses when approached for their crop insurance say they can't help 
but feel obligated since they are dependent on these businesses in 
order to run their farming operations. In some case these farmers are 
being told they will have to place their insurance with them in order 
to get a crop loan.
    Response: This comment is beyond the scope of the proposed rule. 
Therefore, RMA is unable to respond. However, if the commenter has 
specific information regarding such practices, it should notify RMA.
    Comment: An agent commented that the rebating done by cooperative 
and trade associations is what was authorized or previously approved 
and that state approval is required but seldom provided.
    Response: RMA is unsure of what the commenter is referring to since 
rebating by cooperatives and trade associations are not referred to 
anywhere in section 508(e)(3) of the Act. It is possible that the 
commenter is referring to section 508(b)(5) of the Act, which does 
authorize the payment or all or a part of the premium by cooperative or 
trade associations. However, that provision is beyond the scope of the 
proposed rule. Therefore, RMA is unable to respond.
    Comment: Many agents and interested parties commented that RMA 
outlines 9 pages of historical problems with the premium reduction plan 
program, but the 4 pages of rules simply do not adequately address 
them. Commenters stated that RMA should seek additional comments and 
not approve any premium reduction plan applications. Commenters also 
state that the premium reduction plan should be shelved. A commenter 
states that there is precedence because RMA did it with the 1999 
proposes rule.
    Response: RMA agrees that the proposed rule did not address all the 
concerns raised by RMA in the preamble to the proposed rule. However, 
through this rulemaking process, RMA has been able to consider these 
problems and the concerns of the interested parties and has developed 
an interim rule that adequately addresses

[[Page 41891]]

them. The premium reduction plan under the interim rule is simpler, 
less burdensome, verifiable, is less likely to cause market 
disruptions, is less likely to adversely impact the financial condition 
of the approved insurance providers, and guarantees access by all 
farmers. For this reason, even if RMA could, there is no reason to 
shelve the premium reduction plan. In addition, although RMA received a 
considerable number of comments to the proposed rule, RMA acknowledges 
that it may want additional input and, therefore, has elected to 
publish this rule as an interim rule in order to obtain more comments 
as RMA begins the process of implementing this regulation.
    Further, although RMA never published a final rule in 1999, the 
premium reduction plan was not shelved. RMA determined that the Act 
permitted it to implement the program through procedures. As soon as 
the first application for the premium reduction plan was received, such 
procedures were implemented.
    Comment: A few agents commented that in order to keep up with the 
daily changes, the agent looks at the RMA website on a daily basis and 
did not see any mention about the new premium reduction plan and the 
comment period that ends on 4/25/05. The commenter states it did not 
know about this proposed plan until it received the Big ``I'' Agent 
News Update dated 4/14/05 and then an e-mail from Rain & Hail dated 4/
20/05. The commenter asks why the notice of the New Crop Insurance 
Premium Reduction Plan and the comment period was not put on the RMA 
Web Site and was the intention to pass this new plan and not let crop 
insurance agents know about it. An agent also commented that there is 
no agent representation on the Board so RMA does not know all the 
facts.
    Response: An announcement regarding the proposed rule was posted on 
the RMA website on February 24, 2005, the same day the proposed rule 
was published in the Federal Register. This announcement was 
prominently displayed on the front page of the website for every day of 
the public comment period through April 25, 2005. Even though it is 
only required to publish noticed of proposed rulemaking through the 
Federal Register, RMA announced the proposed rule on its website to 
ensure that interested parties had notice and an opportunity to 
comment. The overwhelming number of respondents confirms that this 
effort was successful.
    Although no agent is currently serving on the FCIC Board, an agent 
has served in the past. Further, RMA is able to know the facts of the 
premium reduction plan as it relates to agents and to otherwise obtain 
the perspective of agents through the many comments provided by agents 
to the proposed rule.
    Comment: An interested party commented that the Board makes all 
kinds of spending decisions on American taxpayers backs without letting 
American taxpayers know or have any input on any of this excessive 
bureaucratic boondoggle spending.
    Response: The premium reduction plan is not a spending decision 
determined by the Board. Further, it is the approved insurance 
providers that would be paying for any premium discount and even if 
approved insurance providers did not pay a premium discount, it could 
still take whatever action it wanted to cut costs as long as it still 
complied with all requirements of the SRA and approved procedures and 
keep whatever savings accrued.
    In addition, the public was informed of the proposed rule and 
provided an opportunity to comment. Such comments were considered when 
the interim rule was developed. Therefore, the public did have input.
    Comment: An agent commented that farmers rely on crop insurance and 
reducing subsidies will set farming back in time. The commenter states 
that with products like Crop Revenue Coverage and Revenue Assurance, 
the program is state of the art. The commenter states that farmers are 
better managers today and one reason is crop insurance.
    Response: The commenter has the mistaken assumption that the 
premium reduction plan will reduce subsidies. In fact, the premium 
reduction plan is intended to benefit the farmer through the payment of 
a premium discount.
    Comment: Several agents asked what the intent is of the premium 
reduction plan, to save money for the government, make crop insurance 
delivery more efficient or force more agents out of the business of 
delivering crop insurance.
    Response: As stated above, the intent of the premium reduction plan 
is to introduce price competition to allow farmers to benefit from 
competition on both price and service. The government does not save 
money through the premium reduction plan. The amount of A&O subsidy 
paid to the approved insurance provider and premium subsidy paid on 
behalf of farmers remains the same regardless of whether there is a 
premium reduction plan in place or not. Further, the goal is not to 
drive agents out of the business. As stated above, RMA is in agreement 
regarding the importance of agents to the crop insurance program and 
has attempted to minimize any market disruptions as a result of 
potentially widespread implementation of the premium reduction plan.
    Comment: A few interested parties and agents stated that hundreds 
of claims were paid on soybeans in Iowa without any complaints to 
Congress. The commenter stated that this was amazing for a government 
program.
    Response: RMA assumes that the context of this comment is that the 
claims were serviced by the approved insurance provider currently 
authorized to offer the premium reduction plan. As stated above, the 
requirements to provide service, loss adjustment, etc., contained in 
the SRA and approved procedures continues to apply under the premium 
reduction plan and approved insurance providers and agents could be 
subject to sanctions it they failed to comply with such requirements.
    Comment: A farmer commented that the new rules to protect against 
fraud are overkill. The commenter stated that most farmers use the 
program for risk management and realize the need to protect program 
integrity. The commenter stated that it is only a few who abuse the 
system and the approved insurance providers are better equipped to 
detect them than is RMA.
    Response: This comment is beyond the scope of the proposed rule. 
Therefore, RMA is unable to respond.
    Comment: An agent commented that a premium discount has been around 
since the early 1980's for multi-year policies and good loss 
experience. The commenter stated that no matter who the farmer insured 
with, it got the reduction.
    Response: The commenter is apparently referring to the fact that a 
policyholder's rates already reflect certain risk factors, including 
whether the farmer's production history has been maintained and whether 
losses have occurred. This means the higher the risk, the higher the 
premium. Nothing in the interim rule would change this system. The 
premium discount paid under the premium reduction plan is based on the 
efficiencies of the approved insurance provider, not the risk 
associated with the farmer.
    Comment: Several agents commented that they saw a letter from Crop1 
asking everyone to write a letter to show they want the premium 
reduction plan and if the farmer forwards a copy of the letter to RMA, 
the farmer would receive free leather gloves. The commenters asked if 
Crop1 is rebating as well as offering a discount to large farmers. A 
commenter stated that this was a perversion of the rulemaking process.

[[Page 41892]]

    Response: RMA has investigated this case. The precise offer was if 
the commenter sent a copy of the comment to Crop1, it would receive a 
set of leather gloves. Nothing in the law prevents an approved 
insurance provider from offering an item of nominal value to its 
clients to obtain copies of comments filed with RMA regarding this 
regulation. It is assumed that such an offer would encourage some to 
make favorable comments to RMA. However, since the proposed rule was 
not a referendum, the positive votes did not matter. RMA considered all 
the comments to determine how it could improve the premium reduction 
plan and believes the interim rule accomplishes this goal.
    Comment: Several agents and interested parties commented that the 
premium reduction plan was someone's idea to gain an unfair marketing 
advantage so an approved insurance provider could quickly grow. This 
approved insurance provider could not have had the impact it did 
without some marketing advantage such as price.
    Response: As stated above, the very purpose of the premium 
reduction plan is to introduce the concept of price competition into 
the crop insurance program. Under the premium reduction plan all 
approved insurance providers have the opportunity to compete on price 
as long as their A&O costs for the reinsurance year are below the A&O 
subsidy they receive. Since all approved insurance providers are 
subject to the same standard, there is no unfair marketing advantage. 
The whole premise of price competition is to be able to provide the 
same product or service for less money.
    Comment: A few agents commented that many agents selling the 
premium reduction plan now do not carry errors and omissions insurance 
and many selling do not have a license to market crop insurance as is 
required by Independent Insurance Agents.
    Response: Any approved insurance provider participating in the 
premium reduction plan, including Crop1, must first meet all 
requirements of the Act and the SRA, including that all agents must be 
properly licensed to offer crop insurance in the states in which they 
write. There is no requirement in the Act, SRA or approved procedures 
that would require an agent to carry E&O insurance. If the commenter 
has specific information regarding an agent that is writing crop 
insurance policies in a state without a license, such information 
should be provided to RMA.
    Comment: An agent commented that the current proposed rules have 
not been followed or adhered to by either Crop1 or RMA.
    Response: Any approved insurance provider participating in the 
premium reduction plan, including Crop1, must first meet all 
requirements of the SRA and approved procedures. In addition, RMA 
developed procedures and the FCIC Board resolutions that prescribe the 
premium reduction plan requirements. Beyond those requirements 
specified in the SRA, Crop1 has been subject to RMA procedures and FCIC 
Board passed a resolution that contain requirements for participating 
in the premium reduction plan. There is no evidence that Crop1 has not 
complied with the SRA, approved procedures, or the procedures and Board 
resolution.
    Further, there are many requirements in the proposed rule that were 
not applicable to Crop because that rule is not yet in effect. When the 
interim rule is published, it will be applicable to all participants, 
including Crop1.
    Comment: An agent commented that it took 4-8 weeks for checks to 
arrive after they were written, which is not good for the survival of 
the program.
    Response: RMA has not received any complaints regarding the timing 
of payments by Crop1. If the commenter has specific information, it 
should provide this information to RMA or through the procedures for 
complaints provided for in the interim rule.
    Comment: An agent commented that until all the issues are resolved, 
there should not be any more policies written even for the approved 
insurance provider currently selling the premium reduction plan. The 
commenter suggested they could leave those policies they have but not 
be allowed to write any more under the premium reduction plan but could 
write any new policies the same as all approved insurance providers can 
write.
    Response: As stated above, RMA has no choice but to implement the 
premium reduction plan. However, through this rulemaking process, RMA 
has been able to consider the issues and the concerns of the interested 
parties and has developed an interim rule that adequately addresses 
them. The premium reduction plan under the interim rule is simpler, 
less burdensome, verifiable, is less likely to cause market 
disruptions, is less likely to adversely impact the financial condition 
of the approved insurance providers, and guarantees access by all 
farmers. For this reason, even if RMA could, there is no reason to 
shelve the premium reduction plan. In addition, although RMA received a 
considerable number of comments to the proposed rule, RMA acknowledges 
that it may want additional input and, therefore, has elected to 
publish this rule as an interim rule.
    Comment: An interested party commented that without the agent 
force, there is a complete breakdown in the premium reduction plan 
delivery system for crop insurance. For crop insurance to be of any 
value, someone will need to perform the agent function.
    Response: RMA would agree that crop insurance agents perform a 
valuable and necessary function in the delivery of the crop insurance 
program. Nothing in the interim rule would change this principle. 
Further, as stated above, the adoption of the alternative proposal 
should minimize market disruptions and permit agents to continue to 
participate in the crop insurance program. Further, as stated above, 
approved insurance providers have an incentive to retain their agents 
in order to maximize their potential underwriting gains and ensure that 
all policyholders receive the required level of service.
    Comment: Several agents and approved insurance providers commented 
that the way the system was setup with Crop1 was a person was to 
receive a discount if they bought through the Internet and this is not 
the case now. A commenter questioned whether it was possible to show a 
hard efficiency. A commenter stated that once Crop1 changed the way 
they administered the purpose of the discounts, RMA should have shut 
their doors to the discounts. A commenter asked that RMA not make the 
decision to allow everyone to sell at a discount to cover-up this past 
mistake.
    Response: The purpose of Crop1's premium reduction plan was not to 
deliver crop insurance over the Internet. Use of the Internet was 
simply the means that Crop1 stated it was using to achieve the cost 
savings required by section 508(e)(3) of the Act to be able to pay a 
premium discount. However, there is nothing in the Act that limits the 
means used by an approved insurance provider to achieve savings, 
provided such means do not violate existing provisions of the SRA or 
approved procedures or jeopardize the integrity of the crop insurance 
program. Therefore, RMA did not have the authority to prevent Crop1 
from implementing any other cost saving measures. In fact, approved 
insurance providers that currently operate under the A&O subsidy do not 
have to make any changes to their operations to qualify to pay such 
savings as a premium discount.

[[Page 41893]]

    This same standard applies to all other approved insurance 
providers. As long as they can deliver the program for less than their 
A&O subsidy, they can request to pay a premium discount and under the 
interim rule, approved insurance providers will not have to report how 
they intend to achieve their cost savings. This will be solely within 
the discretion of the approved insurance provider subject to the 
conditions stated above.
    Comment: An agent commented that it believed that the Crop1 agents 
are using the premium reduction plan to transfer customers that may not 
have a clue to what would happen if Crop1 does not have the funds to 
pay out indemnities in case of a poor crop year. The commenter also 
stated that the farmer does not understand that there is a possibility 
that the premium that they were quoted may not be as low as they 
expected.
    Response: To participate in the crop insurance program, all 
approved insurance providers must satisfy all requirements of the SRA, 
which includes the financial solvency to withstand several consecutive 
poor crop years. Nothing in the premium reduction plan changes this 
fundamental requirement. Therefore, before Crop1 was approved to 
participate in the premium reduction plan, it had demonstrated the 
requisite financial ability. If there ever is a situation where an 
approved insurance provider can no longer satisfy the requirements of 
the SRA, including the ability to pay indemnities, the SRA contains 
provisions that allow RMA to ensure that losses are timely and properly 
paid.
    The comment that a farmer's insurance quote may not be as low as 
expected is unclear. When a farmer applies for insurance, agents can 
give them a general idea of the amount of premium that may be owed but 
such premium amount is subject to many factors such as the number of 
acres insured, the coverage level selected, the actual production 
history of the farmer, whether any acreage is classified as high risk, 
etc. If the commenter has specific information where a commenter was 
actually misled by Crop1 or an agent regarding the amount of premium 
discount to which the farmer was entitled, the commenter should provide 
such information to the local RMA office.
    Comment: An agent commented that it hopes Crop1's problem with its 
reinsurer does not rub off on other approved insurance providers.
    Response: Since the commenter did not identify the problem to which 
it is referring, RMA cannot provide a substantive response.

B. Program Provisions

Section 400.701

    Comment: An approved insurance provider commented that the 
definition of ``administrative and operating costs'' should exclude the 
costs associated with CAT because CAT policies will not be subject to 
the premium reduction plan because the farmer pays no premium. The 
commenter stated it is also not clear what expenses should be included, 
such as cost of reinsurance, fronting fees, allocated costs, etc.
    Response: RMA agrees with the commenter that the costs associated 
with CAT should be excluded and has revised the provisions accordingly. 
In addition, RMA has clarified that policies insured at the CAT level 
of insurance are not eligible for a premium discount.
    Further, because the costs associated with CAT are removed from the 
A&O costs, the loss adjustment expense subsidy for CAT policies is 
removed from the A&O subsidy. To simplify the removal of these costs 
and ensure consistency between approved insurance providers, RMA has 
fixed these costs as the amount of the loss adjustment expense subsidy 
for CAT policies. Therefore, the same amount is reduced from the A&O 
costs and A&O subsidy.
    With respect to which costs must be included, RMA cannot provide a 
list because each approved insurance provider will have different 
costs. RMA has included in the definition those costs that are 
specifically excluded. Further, as the definition states, only those 
costs associated with the delivery of crop insurance can be included. 
These are generally the same costs that are annually reported on 
several of the Expense Exhibits provided with the Plan of Operations.
    Comment: An approved insurance provider comments that the 
definition of ``administrative and operating subsidies'' should exclude 
the subsidies associated with CAT.
    Response: As stated above, RMA agrees and has revised the 
provisions accordingly.
    Comment: A few approved insurance providers asked if, in the 
definition of ``compensation,'' this statement should be ``will be'' 
rather than ``will not'' be. A commenter stated that the reference to 
profit sharing within the ``compensation'' definition needs to be 
reviewed and further refined. The commenter states it does not 
understand the intent of the provision as written or specifically how 
it will be used. The commenter also stated the sub points 1, 2 and 3 
seem easily manipulated because profit sharing arrangements can be used 
if they are contractual or triggered by something other than 
underwriting gains, but yet the underwriting gains are profit. A 
commenter stated that subpoint 1 is confusing because most profit 
sharing is contractually obligated if certain conditions are met. The 
commenter suggested it would be better if it read ``1) the payments 
under such arrangements are guaranteed regardless of the approved 
insurance provider's overall underwriting performance.''
    Response: RMA agrees with the commenters regarding the omission of 
the word ``not'' and has revised the provision accordingly. RMA also 
agrees that the reference to profit sharing arrangements within the 
definition of ``compensation'' needs clarification and has revised the 
definition of both ``profit sharing arrangement'' and ``compensation'' 
accordingly.
    The intent of the reference to profit sharing arrangements within 
the definition of ``compensation'' is important because it prevents 
approved insurance providers from reducing agent commissions to show a 
reduction in compensation for the purposes of calculating the A&O costs 
from later making up the difference through an arrangement to classify 
as a profit sharing arrangement so such costs would not be included as 
A&O costs. This provision is intended to preclude such manipulation of 
costs.
    The commenter is correct that underwriting gains are profit but 
only if the whole book shows an underwriting gain. If several states 
showed an underwriting gain and other states are in a loss situation 
such that overall, the approved insurance provider is in a loss 
position, it is hard to argue that the approved insurance provider 
earned a profit. These definitions are provided to ensure that only 
profits for the entire book of business is the ultimate determinant for 
profit sharing arrangements.
    Comment: A few approved insurance providers and interested parties 
agreed that in the definition of ``compensation'' the concept for the 
underwriting gain for the whole book should be used when determining 
contingent commissions. The commenter states that if approved insurance 
providers were allowed to pay contingent commissions on a state basis, 
it could pay in one state even though the entire book of business had a 
loss. The commenter stated that this could reduce the financial 
stability of

[[Page 41894]]

the approved insurance provider in a catastrophic year.
    Response: RMA agrees that, to be considered a profit sharing 
arrangement, the payment under such profit sharing arrangement must 
contain the requirement that the approved insurance provider's whole 
book of business show an underwriting gain, even though other 
requirements to trigger the payment may also be included, and has 
clarified the provision accordingly.
    Comment: An interested party commented that RMA started a program 
and it is strict in its offering and many approved insurance providers 
cannot comply with the rules without change. The commenter stated that 
changing the rules for approved insurance providers and allowing 
underwriting gains to play a part or allowing payment if they are 
profitable makes very little sense as there is a system already in 
place and available to all through stock and cooperatives.
    Response: RMA agrees with the commenter that allowing the use of 
underwriting gains to show an efficiency should not be permitted. In 
fact, such a practice is specifically precluded by section 508(e)(3) of 
the Act that requires approved insurance providers be able to show they 
can deliver the program for less than the A&O subsidy. Underwriting 
gains are not considered, except, as stated above, in the determination 
of whether certain profit sharing arrangements are considered as 
compensation.
    Comment: Several approved insurance providers and interested 
parties commented that contingency commissions should be included as 
expense.
    Response: RMA agrees that there are circumstances where contingent 
commissions are considered as A&O costs. In its definition of 
``compensation,'' RMA identifies situations where contingency 
commissions or payments may be classified as profit sharing 
arrangements but they are considered compensation if they are not 
contingent upon the profitability of the approved insurance provider's 
whole book of business. The proposed rule was also revised to specify 
that other conditional payments will be considered as compensation if 
they are contingent upon something other than underwriting gains, such 
as bonuses paid for agents turning in their applications, production 
reports or acreage reports timely, etc.
    Comment: Several approved insurance providers and interested 
parties commented that ceding commissions should not be included in the 
``compensation'' calculation. A commenter stated that ceding commission 
would reduce the approved insurance provider's direct expenses. The 
commenter stated that the rule was unclear whether this reduction in 
expense is included. The commenter stated including ceding commission 
would be unfair to approved insurance providers that only cede a small 
amount of their business to outside reinsurers. The commenter asked why 
approved insurance providers that rely heavily on reinsurance should 
have an unfair advantage when calculating the premium reduction plan. A 
commenter states that ceding commission changes each year. A commenter 
stated that if RMA allows approved insurance providers to consider any 
other forms of income beyond FCIC-paid expense reimbursement in 
qualifying for a premium reduction plan, FCIC would open the door to 
situations where no real efficiency exists and would invite reinsurance 
schemes designed to artificially inflate an approved insurance 
provider's ceding commission in order to provide sufficient ``income'' 
for the approved insurance provider to demonstrate an efficiency.
    Response: RMA agrees with all comments that reinsurance 
transactions should not be a factor in the evaluation of an approved 
insurance provider's cost efficiencies under the premium reduction 
plan. Currently, ceding commissions and reinsurance premiums are 
expressly excluded from the Expense Exhibits provided with the Plan of 
Operations. One reason is the A&O subsidy is suppose to reimburse 
approved insurance providers for their selling and servicing of Federal 
crop insurance policies and these types and amounts of payments from 
commercial reinsurance transactions would appear to be a cost or income 
associated with the financial risk management strategy of an approved 
insurance provider, rather than a necessary expense in the delivery of 
crop insurance.
    RMA acknowledges that the National Association of Insurance 
Commissioners (NAIC) allows ceding to be offset against the approved 
insurance providers expenses. However, for the purpose of NAIC, all 
expenses of the approved insurance provider are reported, regardless of 
whether such expenses are specifically related to the delivery of the 
crop insurance program. However, section 508(e)(3) of the Act 
specifically refers to the costs to deliver the Federal crop insurance 
program, which is a much narrower definition of the expenses that is 
allowed by NAIC. As stated above, while ceding commission may be 
treated as a negative expense by statutory accounting rules, it is not 
directly related to selling and servicing the Federal crop insurance 
program.
    Further, the expenses reported for the purpose of the premium 
reduction plan are required to be compared to the A&O subsidy received. 
For years, RMA has required approved insurance providers to report the 
costs that RMA considered directly related to the delivery of the 
Federal crop insurance program on the Expense Exhibits provided with 
the Plan of Operations. Ceding commission has not been included as a 
negative expense on these Exhibits and there is no rational basis to 
include such negative expenses for the premium reduction plan when they 
would not be considered for expense reporting purposes under the SRA.
    In addition, these Expense Exhibits are used by RMA and its 
oversight bodies to determine whether the amount of A&O subsidy is 
appropriate to cover these expenses. When reviewing the issue of ceding 
commission, RMA's oversight bodies have directed RMA to exclude non-
related expenses, such as commercial reinsurance payments. Therefore, 
RMA has excluded ceding commissions and reinsurance premiums from A&O 
costs and A&O subsidy.
    Comment: An approved insurance provider suggested another argument 
for not including ceding commission as ``compensation'' is that the 
reinsurer is paying the ceding commission because they expect an 
underwriting gain large enough to pay the commission. Therefore, it has 
nothing to do with expense efficiency.
    Response: RMA agrees that ceding commissions should not be allowed 
as an offset to costs included in the expense statement and the 
provisions are revised accordingly.
    Comment: A few approved insurance providers and interested parties 
commented that excess-of-loss reinsurance cost paid by an approved 
insurance provider should be included as compensation because it 
applies to the entire book of business and is a cost of doing business. 
The commenter stated that in many cases it is a necessary expense 
because approved insurance providers could not afford to absorb 
catastrophic losses and it is required to be reported on the expense 
exhibit.
    Response: As stated above, commercial reinsurance ceding 
commissions or premiums are not included on the Expense Exhibits that 
contain the costs for delivering the Federal crop insurance program 
provided with the Plan of Operations. As stated above, this is because 
ceding commission or premiums for

[[Page 41895]]

commercial reinsurance transactions are not necessary to the delivery 
of the Federal crop insurance program to farmers. They are expense 
associated with the management of the approved insurance provider's 
risks. Further, allowing commercial reinsurance ceding commissions or 
premiums to be included to offset expenses could also create potential 
distortions in the commercial reinsurance market. Therefore, no change 
has been made in response to this comment.
    Comment: A few approved insurance providers and interested parties 
commented that approved insurance providers must include all expenses, 
including general management, underwriting overhead, information 
systems and allocated and unallocated claims expense, as well as the 
direct expenses of salaries, commissions, benefits, travel, phones, 
rent, etc.
    Response: RMA agrees with the comment that all operational expenses 
that involve the delivery of the Federal crop insurance program should 
be incorporated into the Expense Exhibits provided with the Plan of 
Operations and used to determine efficiencies and premium discounts 
under the interim rule. These are already required for the Expense 
Exhibits provided with the Plan of Operations so no changes would be 
required in the reporting requirements.
    Comment: An approved insurance provider suggested that the amount 
of any profit sharing payment under the premium reduction plan should 
be subject to the same limit as the premium discount. For example, if 
the maximum premium discount is 4% under the premium reduction plan, 
the commenter recommends that this be the maximum profit sharing 
payment allowed in the year covered by the premium reduction plan. In 
addition, to enhance the stability of the crop insurance program, the 
commenter suggests that approved insurance providers should not be 
allowed to pay a ``profit sharing bonus'' if they have not generated an 
average underwriting gain of at least 15% of gross premium over the 
preceding two years.
    Response: Section 508(e)(3) of the Act is only intended to provide 
the conditions under which approved insurance providers can pay premium 
discounts. It is not intended to permit RMA to regulate the general 
management decisions of the approved insurance providers. RMA has no 
authority to preclude an approved insurance provider from making profit 
sharing payments or to limit when such payments can be made. Approved 
insurance providers are in the best position to determine whether their 
financial condition will permit profit sharing payments. Further, RMA 
monitors the financial conditions of the approved insurance providers 
as a means to ensure the financial stability of the crop insurance 
program and can require remedial measures if the approved insurance 
providers are unable to meet the financial requirements of the SRA and 
applicable regulations. However, there is no rational basis for RMA to 
impose the requirements suggested by the commenters when there is no 
evidence that the approved insurance providers are in financial 
jeopardy. Therefore, no change has been made in response to this 
comment.
    Comment: An agent commented there is no definition in the rule for 
the term ``efficiency''. The commenter stated that as presently 
written, this could allow an approved insurance provider to reduce 
agents' commissions or lower wages paid to loss adjusters, to name a 
few, and call it an ``efficiency''. The commenter stated that while 
this would be a cost savings, one would be hard pressed to show this as 
more efficient. The commenter stated this was clearly not the intent of 
Congress when the Act was written, and is not their intent today.
    Response: RMA disagrees with the comment. First, there is a 
definition of ``efficiency'' in the proposed and interim rules. Second, 
section 508(e)(3) of the Act specifically states that approved 
insurance providers can pay premium discounts when approved insurance 
providers can demonstrate they can deliver the program more efficiently 
than their A&O subsidy. The use of the monetary term A&O subsidy to 
determine whether an efficiency exists allows RMA to look at 
efficiencies as cost savings as well as changes in operations and the 
interim rule has been clarified to more clearly reflects this position. 
RMA has deleted those provisions in the definition of ``efficiency'' 
that would require a change to an approved insurance provider's 
operation because this provision unfairly penalized approved insurance 
providers that were currently operating before their A&O subsidy. 
However, RMA has retained the requirement that an efficiency must not 
come exclusively from a reduction in agents' commissions.
    Comment: A few approved insurance providers and interested parties 
asked that with respect to the definition of ``efficiency,'' whether 
the same caveats apply to reductions in compensation. The commenter 
also stated that it was unlikely that approved insurance providers 
would be able to have expenses less than the A&O subsidy and gave the 
example 21.5% minus (1) reinsurance costs >= 3%, (2) Loss adjustment >= 
4%, (3) General & admin >= 5% and commissions >= 10). A commenter 
stated that the negative gap between A&O reimbursement and actual 
approved insurance provider expenses is an enormous hurdle that 
approved insurance providers would need to overcome in order to qualify 
for the premium reduction plan.
    Response: RMA assumes that the caveats to which the commenter 
refers is the preclusion of the use of cost savings attributable to 
projected increased sales or proposed reductions in loss adjustment 
expenses as an efficiency. The caveat regarding the cost savings 
attributable to projected increased sales has been removed from the 
interim rule because premium discounts are now based on actual costs 
not projected costs. Further, because premium discounts are now based 
on actual cost savings, the limitation with respect to reduction in 
loss adjustment expenses has also been removed. Since losses vary by 
year, it would be impossible to verify that cost reductions were the 
result of the premium reduction plan and now RMA will have an 
opportunity to determine whether loss adjustment was conducted properly 
before approving the payment of a premium discount.
    The commenter also opines that qualifying for the premium reduction 
plan would be extremely difficult for an approved insurance provider 
because of a large negative gap between actual expenses of approved 
insurance providers and the A&O expense reimbursement. This may be true 
although the commenter mistakenly includes reinsurance costs, which are 
expressly excluded in the interim rule. However, section 508(e)(3) of 
the Act was only intended to provide approved insurance providers with 
the opportunity to compete on price. The fact that Congress conditioned 
such competition on the condition that approved insurance providers 
operate below their A&O subsidy shows that the opportunity is not 
guaranteed.
    Comment: An approved insurance provider commented that it supported 
the complete definition of ``efficiency'' and felt that RMA's effort 
not to place specific limits on compensation is appropriate. The 
commenter states that an approved insurance provider's overall cost of 
operation is what is most important and that the free market will 
ultimately determine the appropriate balance between agent compensation 
levels and service provided. The

[[Page 41896]]

commenter states that agents should have the option to seek the most 
attractive compensation available in a competitive market, just as 
farmers should be able to seek the most attractive crop insurance 
program available to them. The commenter states that the most 
attractive program for agents and farmers will likely require them to 
consider both associated costs and the level of service provided.
    Response: RMA agrees that the premium reduction plan should operate 
within the free market principles expressed. Price competition is 
premised on the ability to provide the same product or service at a 
better price, or provide a better product or service for the same 
price. Therefore, farmers are likely to consider both service and cost 
when they select an approved insurance provider. However, to protect 
the integrity of the program and ensure that all farmers have equal 
access to at least the same level of service, RMA has clarified that a 
reduction in service means when the agent or approved insurance 
provider fails to comply with all the requirements of the SRA or 
approved procedures regarding service. Further, as stated above, RMA 
had to revise the definition of ``efficiency'' to reflect that premium 
discounts will now be based on actual costs, not projected.
    Comment: An approved insurance provider commented that approved 
insurance providers should not be penalized because they have a 
different business philosophy. The commenter states that 
``efficiencies'' currently exclude projected or actual underwriting 
gains. The commenter states that it does not operate within the A&O 
paid under the SRA because of its expenses associated with training and 
oversight, which allows it to minimize fraud, waste, and abuse and 
outperform other approved insurance providers. The commenter asks RMA 
to revisit the issue and allow gains when considering efficiencies.
    Response: Section 508(e)(3) of the Act precludes the consideration 
of underwriting gains when determining an efficiency. Underwriting 
gains would be considered an income and the only income that can be 
considered under the Act is the A&O subsidy. As stated above, it is up 
to the approved insurance provider to evaluate its operation to 
determine whether it can attain cost savings and still comply with all 
requirements of the SRA and approved procedures. However, RMA does 
recognize that certain profit sharing arrangements can legitimately be 
considered distribution of profits rather than A&O costs and the 
definition of ``compensation'' in the interim rule reflects that.
    Comment: An approved insurance provider supported allowing only a 
portion of the savings come from reductions in compensation, without 
which the playing field would be tilted in favor of large approved 
insurance providers over smaller providers. The commenter stated it was 
a strong believer in free market competition, which requires a fair, 
level playing field in which small and large providers alike may 
compete for the benefit of farmers.
    Response: RMA agrees that only a portion of savings should come 
from reductions in agents' compensation and has clarified and retained 
this provision in the interim rule.
    Comment: An approved insurance provider asked if the efficiency is 
more than commissions, how RMA will be able to verify the accuracy of 
such savings. It is easy to verify that the agent's commission has been 
reduced at no loss of service to the insured by auditing approved 
insurance provider numbers and calling insureds. The commenter asked 
how long it takes to verify adjusters are following claim's procedures, 
agents are following underwriting guidelines, or compliance reviews are 
being completed thoroughly. The commenter is concerned that when these 
errors are finally discovered, many millions of dollars may need to be 
recovered from farmers.
    Response: As stated above, premium discounts are now based on 
actual cost savings, not projected. Further, RMA has elected to use 
Expense Exhibits provided with the Plan of Operations to determine 
efficiencies and premium discounts because such Expense Exhibits can be 
verified by the approved insurance provider's statutory accounting 
reports and must be audited and certified by a certified public 
accountant experienced in insurance accounting.
    Since the premium discount is based on actual cost savings 
determined after the end of the reinsurance year, RMA can determine an 
approved insurance provider's compliance with all the requirements of 
the SRA and approved procedures regarding service, loss adjustment, 
quality control, etc., before approving the payment of any premium 
discount. Such requirements will be monitored in the same manner as 
currently under the SRA.
    Comment: An approved insurance provider commented that with respect 
to the definition of ``efficiency,'' the procedural determination of 
what is to be allowed as A&O income, and what must be accounted for as 
an A&O expense, raises several questions. Any departure from the 
practice of allowing only A&O income from FCIC to be considered when 
determining an ``efficiency'' for purposes of the premium reduction 
plan would contradict legislation and create opportunities for abuse. 
The commenter stated that allowing any A&O expenses to be excluded from 
consideration when determining the discount would open the door to 
creative accounting schemes detrimental to the stability of the 
approved insurance provider and the delivery system overall as well as 
RMA's ability to regulate the system.
    Response: RMA agrees with the commenter that only A&O subsidy paid 
by RMA can be included as income and all costs directly related to the 
delivery of the Federal crop insurance program must be included as A&O 
costs. For this reason, RMA has elected to use the current mechanism 
for reporting these costs through the Expense Exhibits provided with 
the Plan of Operations to determine whether there has been an 
efficiency. As stated above, these Expense Exhibits are verifiable and 
must be audited and certified regarding their completeness, accuracy 
and compliance with the SRA. However, as stated above, because the 
premium reduction plan is not available for policies with the CAT level 
of coverage, the A&O costs and A&O subsidy associated with such 
policies have been excluded.
    Comment: Several approved insurance providers and interested 
parties commented that the definition of ``efficiency'' is vague 
because it is silent as to the meaning of the terms ``portion'' or ``a 
reduction in compensation.'' A portion is a vague, nonspecific amount 
that is ``a part of the whole.'' Webster's Third Internatl. Dictionary 
at 1768 (Rev. Ed. 1993). A commenter stated that this means a 
``portion'' may vary from one percent to 99 percent and asked if 99 
percent of the savings could be predicated on reduced compensation. If 
not, the commenter asked what ``portion'' of savings may be associated 
with ``a reduction in compensation.'' A commenter proposed it should be 
restated as follows: ``Not more than 25% 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.''
    Response: RMA agrees with the commenter that the term ``portion'' 
in the definition of efficiency could reflect a wide range of 
possibilities. However, it would be impossible to set a specific 
standard for ``portion'' because of the

[[Page 41897]]

wide variety of business operations of the approved insurance 
providers. It is the approved insurance provider that must evaluate its 
operation to determine where it can cut its costs. The proposed and 
interim rule simply requires that to qualify to pay a premium discount, 
at least some of these savings must come from changes other than 
compensation. With respect to a definition for ``reduction in 
compensation,'' such a definition is not required. The term 
``compensation'' is defined in the interim rule and standards for 
reporting compensation on the Expense Exhibits currently exist. 
Further, as stated above, RMA has developed a formula that will be used 
to determine when there has been a reduction in compensation and 
changes in the operation.
    Further, as stated above, approved insurance providers have an 
incentive to retain agents so they would not set commission rates at so 
low a rate that they risked agents going out of business or moving 
their books of business to other approved insurance providers. The free 
market forces will determine what will constitute a fair commission. 
Therefore, no change has been made in response to this comment.
    Comment: Several interested parties commented that the premium 
discount should be shared at least 50/50 with the approved insurance 
provider. A commenter recommends a split of 75/25 with the insured 
provider contributing a majority to the premium discount. A commenter 
stated it would show that both the agent and approved insurance 
provider are willing to participate. A commenter stated that coupling 
this with approved insurance providers staying below A&O and keeping 
any reinsurance gain or loss out of the schedule will guarantee the 
program's integrity and longevity.
    Response: As stated above, it would be impossible to set a specific 
standard for ``portion'' because of the wide variety of business 
operations of the approved insurance providers. It is the approved 
insurance provider that must evaluate its operation to determine where 
it can attain efficiencies and still comply with all the terms of the 
SRA and approved procedures. Further, as stated above, the approved 
insurance provider's incentive to retain agents should mitigate the 
possibility of approved insurance providers making such drastic cuts in 
agent commissions that agents can no longer afford to sell crop 
insurance or are forced to move their book of business to other 
approved insurance providers.
    Comment: A few interested parties commented that ``efficiency'' is 
defined in the dictionary as acting or producing effectively with a 
minimum of waste, expense, or unnecessary effort and exhibiting a high 
ratio of output to input. The commenter stated that in the business 
world, this means to produce more with a given amount of resources or 
produce the same with fewer resources. The commenter stated that cost 
cutting is not considered an efficiency. Cost cutting generally results 
in receiving less goods or services or both. The commenter stated that 
this does not meet the requirements of ``more efficiently'' in the Act.
    Response: RMA disagrees with the commenter. Section 508(e)(3) of 
the Act specifically uses the term efficiency to compare the difference 
between the costs to deliver the Federal crop insurance program with 
the A&O subsidy. Therefore, cost cutting would meet this requirement. 
Further, the intent of section 508(e)(3) of the Act is to allow price 
competition. As stated above price competition occurs when there is the 
same level of service for a reduced price, or a higher level of service 
for the same price. Another commonly accepted definition of 
``efficiency'' (Webster's Third New International Dictionary) is 
``capacity to produce desired results with a minimum expenditure of 
energy, time, money or materials.'' To ensure that this principle 
remains in the premium reduction plan, RMA mandates that there cannot 
be a reduction in service, which is defined as the requirements 
contained in the SRA and approved procedures.
    Comment: An approved insurance provider commented that the 
definition of ``efficiency'' is discriminatory against approved 
insurance providers that are operating under the A&O because it states 
that the monetary savings must result from changes in the 
administrative and operating procedure and expenses of the approved 
insurance provider. The commenter stated that the original language did 
not require changes in procedures or expenses. The commenter stated 
that an approved insurance provider should be able to show it is 
operating under the A&O under its current procedures. The commenter 
stated the proposed language favors approved insurance providers that 
pay high commissions because they can demonstrate the changes and 
disfavors approved insurance providers who are keeping commission costs 
down. The commenter proposes that an approved insurance provider 
demonstrate for not less than a year that they can operate below the 
A&O before they have a premium reduction plan in place. The commenter 
stated that the plan would then be based on actual not projected 
efficiencies.
    Response: RMA agrees that definition of efficiency in the proposed 
rule may have discriminated against approved insurance providers that 
currently deliver the crop insurance program for less than the A&O 
subsidy and has removed the requirement from the interim rule. Further, 
as stated above, RMA is requiring that premium discounts be based on 
actual cost savings.
    Comment: An approved insurance provider commented that limiting the 
amount of the savings that is related to ``a reduction in 
compensation'' is contrary to FCIC's goal of ensuring easily verifiable 
efficiencies. Indeed, the proposed rule recognizes that savings based 
on state-by-state reductions to agent commissions ``would be 
straightforward,'' and ``easy to verify.'' Moreover, the proposed rule 
acknowledges that the expert reviewers confirmed the economic rationale 
underlying a system in which an approved insurance provider based its 
efficiencies on reduced commissions. The commenter questions why FCIC 
has decided to limit the amount of an approved insurance provider's 
``monetary savings can come from a reduction in compensation.''
    Response: RMA does not agree that limiting reductions in 
compensation reduces RMA's ability to verify other cost saving 
measures. As stated above, RMA is using the Expense Exhibits to the 
SRA, which contain costs that are verifiable. In addition, RMA has 
developed a formula that will allow it to allocate costs not 
attributable to agent compensation or loss adjustment expense to each 
state. This formula is straightforward, relatively simple to apply, and 
will be provided to approved insurance providers through approved 
procedures.
    As stated above, it is up to the approved insurance provider to 
analyze its operation to determine where any cost savings can be 
achieved. Further, the use of the term ``portion'' provides approved 
insurance providers considerable latitude in making this analysis.
    Comment: An approved insurance provider commented the definition of 
``efficiency'' is inconsistent with the Act. The definition 
distinguishes between costs relating to compensation and costs relating 
to administrative and operating procedures. The Act does not define the 
term ``administrative and operating.'' However, section 516(a)(2)(A) of 
the Act authorizes the appropriation of ``such sums necessary to cover 
* * * [t]he administrative and

[[Page 41898]]

operating expenses of the Corporation for the sales commissions of 
agents.'' The administrative and operating costs for which FCIC 
subsidizes the approved insurance providers pursuant to section 
516(a)(2)(A) and which approved insurance providers must reduce to 
qualify for the premium reduction plan pursuant to section 508(e)(3) 
contemplate only one type of expense--agent commissions. For FCIC to 
restrict the degree to which approved insurance providers reduce agent 
commissions in order to achieve program efficiency contravenes both the 
meaning and intent of the Act.
    Response: To adopt the commenter's interpretation would mean that 
RMA would only be able to reimburse approved insurance providers for 
the agent commission they pay and not the other expenses they incur, 
which means the entire amount paid as A&O subsidy must be paid by 
approved insurance providers to agents as commission. Such an 
interpretation would be contrary to section 508(k)(4) of the Act which 
states that the A&O subsidy is to ``reimburse approved insurance 
providers and agents for the administrative and operating costs of the 
providers and agents.''
    Further, this interpretation is incorrect because it refers to the 
``administrative and operating expenses of the Corporation for the 
sales commissions of agents.'' FCIC does not incur any administrative 
and operating expense for the sales commissions of agents. Such 
expenses are incurred by the approved insurance providers who contract 
with and pay agent commissions. These commission payments would be 
considered as part of the approved insurance providers administrative 
and operating expenses and payment is authorized under sections 
516(a)(2)(B) and 516(b)(1)(C) of the Act.
    Comment: An interested party commented that the definitions of 
``compensation'' and ``profit sharing'' are not well crafted and 
require extensive editing before the interim rule can be effectively 
analyzed.
    Response: RMA agrees that the definitions in the proposed rule 
require clarification and has revised both definitions.
    Comment: An approved insurance provider supported the definition of 
``profit sharing arrangements'' as a whole, but point out specifically 
that `` * * * gain on the total book'' is important because the 
alternative would allow an approved insurance provider to divide its 
book for purposes of creating incentives and disincentives for agents. 
Since the law requires equal service to all farmers, the commenter 
views the division of books of business to create such incentives/
disincentives and any resulting market segmentation as likely to result 
in approved insurance providers and/or their agents avoiding their 
legal obligation to serve all farmers on an equal basis.
    Response: RMA agrees that profit sharing arrangements must be based 
on the total underwriting gain of the approved insurance provider's 
book of business. To allow otherwise would not only allow approved 
insurance providers to divide its book of business for the purpose of 
creating incentives, as stated above, it would permit the approved 
insurance provider to pay profits even though it earned no profits for 
the reinsurance year. This could jeopardize the financial stability of 
the approved insurance providers in loss years.
    Comment: An approved insurance provider commented that it supported 
the definition of ``unfair discrimination'' because it ensures that 
approved insurance providers and their agents serve all farmers.
    Response: RMA agrees with the commenter and this definition is 
included in the interim rule.
    Comment: An approved insurance provider suggested a clear 
definition for ``producer.'' The commenters recommend that ``producer'' 
be defined as a ``crop insurance policy holder.''
    Response: Producer cannot be defined as a ``crop insurance 
policyholder'' because many of the references refer to farmers who may 
not yet have applied for insurance and become policyholders. Further, 
producer is a common, well known term in the crop insurance program, 
used on the Act, regulations, the SRA, and approved procedures. 
Therefore, no change is made.

Section 400.714

    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.714(a), the ``15 day'' window for submission of revised 
Plans of Operations is appropriate for this year only, since the 
finalization of the proposed rule will leave a very tight time frame.
    Response: RMA agrees with the comment and has preserved this 
provision in the interim rule.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.714(b), May 1 would be a more appropriate deadline for 
subsequent applications because an April 1 deadline for submissions 
comes too closely after the spring crops sales closing deadline, there 
is also an approved waiting period in which the agent can complete 
record keeping, and RMA needs the opportunity to spread its work load 
evenly.
    Response: RMA recognizes and appreciates the commenter's concerns 
about the timing and workload burden required for preparing requests 
for the opportunity to pay premium discounts under the proposed rule. 
However, as stated above, those burdens have been significantly reduced 
in the interim rule. Under the interim rule there will be two deadlines 
for requests. The first will be when an approved insurance provider 
seeks eligibility to offer a premium reduction plan. This request will 
be very limited in the information required and will be due with 
submission of the Plan of Operations. Because of the limited nature of 
the information, approved insurance providers should have little 
difficulty providing this information at that time. Because RMA will 
also be reviewing the Plans of Operation during this time and RMA needs 
sufficient time to evaluate the requests before the beginning of the 
reinsurance year. The second request is for RMA approval to pay a 
discount, which is due not later than December 31 after the end of the 
reinsurance year.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.714(c), it supports this provision because it is committed 
to a level playing field in which farmers have the opportunity to make 
insurance choices having full access to the information they need to 
make informed business decisions. In order to allow farmers this 
opportunity, the premium reduction plans must be submitted by all 
approved insurance providers and approved by the RMA in a timely and 
consistent fashion.
    Response: RMA agrees that the proposed rule provides a framework 
for requesting the opportunity to offer a premium discount that 
provides equal opportunity to all existing approved insurance providers 
and retained the provisions in the interim rule. However, RMA 
determined that additional provisions were necessary to address the 
situation where approved insurance providers that enter the crop 
insurance program after the start of the reinsurance year. Therefore, 
RMA has added provisions to the interim rule to allow new approved 
insurance providers to include their requests for an opportunity to 
offer a premium discount with their application for a SRA.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.714(d), it supports the provision since the law clearly 
requires that

[[Page 41899]]

approved insurance providers who make savings must pass them on to 
farmers, there would be no valid reason to withdraw the premium 
reduction plan once savings are proven since they must be passed on to 
the farmers. This provision benefits farmers, as well as the crop 
insurance program as a whole, because it provides strong protections to 
farmers.
    Response: Since the interim rule revised the requirement that 
premium discounts be paid on actual savings determined at the end of 
the reinsurance year, there is no longer a requirement for a provision 
to allow approved insurance providers to withdraw their request. 
Premium discounts are no longer guaranteed and farmers are expressly 
informed that such discounts may not be approved to be paid. Therefore, 
approved insurance providers that are unable to, or elect not to, pay a 
premium discount can simply not request approval for the payment of a 
discount.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.714(e), it is absolutely necessary that all trade secrets 
and confidential commercial or financial information in submissions 
remain completely confidential. However, the commenter notes that 5 
U.S.C. 554(b)(4) protects ``trade secrets'' as well as commercial or 
financial information. Accordingly, the commenter suggest adding the 
following language to this subsection in order to track 5 U.S.C. 
552(b)(4): ``Any trade secrets and commercial or financial information 
submitted with a revised Plan of Operations will be protected * * *.''
    Response: Since this provision only referred to the existing 
protections in law, there is no need to include such a provision here. 
Existing law regarding the protection from disclosure of such 
information will continue to apply.

Section 400.715

    Comment: An approved insurance provider commented that in Sec.  
400.715(a) RMA is allowing as much as a 4 percent reduction in the net 
book premium. With the reduced A&O reimbursements found in the 2006 
SRA, the commenter states a four percent reduction is too much. Most 
premium is produced from revenue coverage such as Crop Revenue Coverage 
or Revenue Assurance, and in a number of states, the 80 percent 
coverage and higher is selected, driving the average A&O near 20 
percent. There is no way for an approved insurance provider to service 
such a complicated line of business at today's commodity prices in the 
16 percent range. With threatened budget cuts to the crop insurance 
program, the A&O may be reduced even more. Only an irresponsible 
approved insurance provider would make such a filing. This approved 
insurance provider would need to take shortcuts to make such a filing 
possible. RMA should consider capping the discount at 2 percent until 
it is sure that approved insurance providers can write at such a low 
expense ratio and still service the business properly.
    Response: Since the interim rule requires that all premium 
discounts be based on the actual cost savings of the approved insurance 
providers, the commenters concerns that a 4 percent reduction A&O costs 
is unrealistic have already been addressed. An approved insurance 
provider can only pay the 4 percent maximum premium discount if it can 
prove that it had the requisite cost savings and it was in compliance 
with all requirements of the interim rule, the SRA, and applicable 
procedures, including the requirements regarding service, loss 
adjustment, quality control, etc. Compliance with these requirements 
will be monitored under the SRA and approval of the payment of a 
premium discount will not be provided until compliance has been 
determined. However, RMA will retain the cap to allow it to manage the 
premium reduction plan to ensure there are no market disruptions from 
approved insurance providers trying to cut costs too drastically. 
Therefore, no change has been made in response to this comment.
    Comment: An approved insurance provider commented that 
philosophical and competitive impact concerns notwithstanding, from 
solely a cost accounting view, the cap on premium discounts should not 
be a concern if the cost savings from efficiencies are valid. However, 
the commenter suggests they may not be valid.
    Response: Since premium discounts are based on the actual cost 
savings of the approved insurance provider, the maximum premium 
discount may not be needed. However, as stated above, to ensure that 
there are no market disruptions from approved insurance providers 
trying to cut costs too drastically, RMA is retaining the cap. It can 
be removed or adjusted at a later date if it proves not to be 
necessary.
    Comment: A few interested parties agreed with the cap. A commenter 
stated that the limits to adjusting and other costs outlined in Sec.  
400.715(a), Sec.  400.716(h) and Sec.  400.719 are particularly crucial 
to the viability of the program as well as the solvency issues raised 
above. These limitations will ensure that reductions are based on cost 
efficiencies achieved by the participating approved insurance provider. 
The commenter urges RMA to consider carefully the impact of increases 
in the future maximum limitations on the premium discount and what 
those changes will mean to other approved insurance providers, while 
maintaining competition in the marketplace. A commenter stated no caps 
would result in a bidding war and service to farmers would be 
drastically hindered.
    Response: As stated above, the use of actual cost savings to 
determine premium discounts may eliminate the need for the cap in the 
future, but RMA is retaining it to manage expectations of the limits of 
this program and to ensure that there are no market disruptions. RMA 
will consider the effect on the market when it determines whether there 
is a need for such a cap and the appropriate amount in the future.
    Comment: An approved insurance provider commented that Sec.  
400.715(a) allows premium discounts to vary from 1.0 to 4.0 percent 
between approved insurance providers. The commenters state that this is 
inherently discriminatory and farmers do not have equal access to the 
best reductions. It depends upon the approved insurance provider 
writing their insurance. Premiums charged the farmers for their crop 
insurance are the same regardless of the approved insurance provider 
that insures them so it only follows that the discounts should be 
identical between approved insurance providers.
    Response: Section 508(e)(3) of the Act clearly gives the right to 
any approved insurance provider that can deliver crop insurance at a 
cost less than the A&O subsidy to pay a premium discount on the basis 
of such savings. There is no requirement that each approved insurance 
provider pay the same premium discount. Such a requirement would be 
contrary to the very price competition that section 508(e)(3) was 
intended to promote. Further, it would be impossible to impose such a 
burden on the approved insurance providers because their operations are 
so different. Only they can determine where it would be appropriate to 
cut costs while still complying with all requirements of the SRA and 
approved procedures.
    Further, allowing these differences is not discriminatory because 
every farmer has the free market choice to be insured with the approved 
insurance provider that historically pays the highest premium discount. 
RMA agrees that its election to allow approved insurance providers to 
select the states in which it will participate in the premium reduction 
plan could result in farmers

[[Page 41900]]

not having access to premium discounts. However, as stated above, when 
weighed against the possibility that approved insurance providers will 
withdraw from such states, leaving these farmers without any insurance 
protection, the loss of the opportunity to receive a premium discount 
at such later date seemed the most appropriate option.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.715(a), it supports the imposition of a cap. The commenter 
states it provides a benefit to farmers by acting as a stabilizer to 
the marketplace and making sure that approved insurance providers who 
seek approval of a premium reduction plan do so with due care and 
submit only accurate information. However, the commenters suggest the 
cap be raised to 5.0%. The commenter stated it will continue to benefit 
farmers while maintaining stability in the market if the RMA allows 
this additional amount of flexibility for approved insurance providers 
to identify and pass through cost savings to farmers, and for the RMA 
to approve them if they are adequately documented.
    Response: As stated above, premium discounts are based on the 
actual cost savings achieved by the approved insurance provider. 
However, RMA has elected to retain the maximum 4.0 percent cap to 
manage program expectations and to avoid market disruptions that could 
occur if approved insurance providers attempt to cut costs too 
drastically. Until it has more information, RMA is reluctant to raise 
the cap but, in the future, RMA will re-evaluate the cap to determine 
whether it is necessary or what would be the appropriate amount. 
Therefore, no change is made in response to this comment.
    Comment: An approved insurance provider commented that in Sec.  
400.715(b), now redesignated Sec.  400.715(h), RMA is proposing that 
the premium reduction plan be instituted for all premium written by the 
approved insurance provider regardless of crop or state of location. 
Some approved insurance providers only write in the Midwest where the 
underwriting gain has been good. In states where the results have been 
less favorable, sometimes the only reason to write there is for the A&O 
subsidy. The commenter stated that an approved insurance provider may 
consider withdrawing from such a state to keep rates competitive in 
profitable states. The commenter asked whether RMA is concerned that 
the few approved insurance providers writing in a number of these 
unpopular states might withdraw to file a premium reduction plan to 
compete in the profitable Midwest.
    Response: As stated above, RMA has reconsidered the requirement 
that approved insurance providers offer the premium discount in all 
states in which they write business for the very reasons mentioned by 
this commenter. RMA determined that the possibility of a farmer being 
left without insurance protection was far worse than that same farmer 
not having an opportunity to receive a premium discount in the future. 
As a result, the interim rule will allow approved insurance providers 
to select the states in which it will participate in the premium 
reduction plan.
    Comment: Several approved insurance providers and agents commented 
that the premium reduction plan should only be done over all policies, 
plans and states. Otherwise, expense loading could be easily shifted to 
those policies which the premium reduction plan is not offered. A 
commenter stated that such shifting will likely occur due to the 
questionable ability for any approved insurance provider to operate 
within A&O reimbursement. A commenter stated that it is not fair to 
allow an approved insurance provider to offer the premium reduction 
plan and the traditional crop insurance in the same state. The 
commenter stated agents should not be able to ``pick'' who would be 
offered the premium reduction plan. A commenter stated that to suddenly 
allow a myriad of state-by-state choices could foster an unstable 
situation and that the ``all states/all crops/all insurance policies 
and plans'' requirement minimizes the risk of unfair competitive 
disadvantage among premium reduction plans.
    Response: RMA agrees with the comment that, within a state, an 
approved insurance provider participating in the premium reduction plan 
must pay the approved premium discount to all policyholders, regardless 
of the crop insured, the coverage level or the plan of insurance. This 
requirement has been retained. However, as stated above, the real 
concern that approved insurance providers may withdraw from states 
necessitated allowing approved insurance providers the ability to 
select the states in which to participate in the premium reduction 
plan. As stated above, RMA has dealt with the expense loading issue 
through the use of Expense Exhibits to the SRA to determine 
efficiencies and the development of the formula that contains the 
allocation of costs and allows RMA and approved insurance providers to 
determine the amount of premium discount. Further, there should not be 
an issue regarding unfair competitive advantage because the purpose of 
the premium reduction plan is to introduce price competition and now 
all approved insurance providers have the option to select the state in 
which to participate in the premium reduction plan so the playing field 
is level.
    Comment: Several approved insurance providers commented that in 
Sec.  400.715(b), now redesignated Sec.  400.715(h), forcing an 
approved insurance provider to offer the premium reduction plan in all 
states in which it does business penalizes national carriers and, as 
explained in connection with Sec.  400.175(c), ignores critical 
differences that exist among the various states, crops and policies. 
Only two approved insurance providers sell and service policies 
nationally and nothing precludes them from withdrawing from high-risk, 
low-reward states. The commenter stated that RMA's shortsighted 
decision to prohibit the premium reduction plan from varying by state 
only increases that likelihood.
    Response: RMA agrees with the commenter and, as stated above, the 
interim rule now allows approved insurance providers to select the 
states in which it will participate in the premium reduction plan and 
to vary its requested discount by state within the maximum discount 
allowed. However, within a state, the interim rule still requires that 
the premium discount be the same for all crops, plans of insurance, and 
coverage levels.
    Comment: An approved insurance provider commented that, with 
respect to Sec.  400.715(b), now redesignated Sec.  400.715(h), if the 
marketplace and competition compel the approved insurance provider to 
implement the premium reduction plan, the approved insurance provider 
will do so. To that end, if FCIC mandates that the approved insurance 
provider offer its plan in all states or in none, the approved 
insurance provider likely will reconsider its role as a national 
carrier. The commenter stated the approved insurance provider would 
sooner abandon marginal states than allow its quality business to be 
eroded by regional carriers who would profit from FCIC's inability to 
recognize or unwillingness to acknowledge the economic variables that 
exist between the states.
    Response: As stated above, RMA agrees with the commenter and the 
interim rule now allows approved insurance providers to select the 
states

[[Page 41901]]

in which it will participate in the premium reduction plan. However, 
within a state, the interim rule still requires that the premium 
discount be the same for all crops, plans of insurance, and coverage 
levels.
    Comment: Several approved insurance providers, agents, farmers and 
interested parties suggested that with respect to Sec.  400.715(b), now 
redesignated Sec.  400.715(h), approved insurance providers who offer 
the premium reduction plan make it available for all insurance plans 
and for all crops grown in all of the states they serve. If an approved 
insurance provider offers the discount in one area then they should 
make it available in all areas and not discriminate by crop, insurance 
plan, or state location.
    Response: RMA agrees with the comment that a premium discount 
should not vary by crop, plan of insurance, or coverage level. However, 
RMA has assessed the possible impact of not allowing approved insurance 
providers to select the states in which it will participate in the 
premium reduction plan and has determined that the adverse effect of 
possible withdrawal of approved insurance providers significantly 
outweighs the effect on farmers if they do not have the opportunity to 
receive a premium discount in the future.
    Comment: An approved insurance provider recommends that, with 
respect to Sec.  400.715(b), now redesignated Sec.  400.715(h), and 
Sec.  400.715 (c), approved insurance providers have the option not to 
offer a premium discount on CAT policies as farmers do not pay a 
premium (only an administrative fee) for CAT policies. Further, the 
commenter would recommend the clause ``or any other basis'' be 
eliminated and replaced with ``or any basis which could limit or 
restrict access to a premium reduction, in whole or in part, to some 
producers.'' As long as cost savings programs are fair and equally 
available to all farmers, they should be presented to and considered by 
the RMA.
    Response: As stated above, RMA has added a provision that would 
make policies insured at the CAT level of coverage ineligible for the 
premium reduction plan.
    However, RMA disagrees with the suggestion to replace the clause 
``or any other basis.'' This clause is intended to be all inclusive to 
prevent any means to exclude a policy from receiving a premium 
discount. RMA is concerned that making the recommended change could 
lead to farmers being denied access to the premium discount or 
receiving a different amount of premium discount based on whether they 
are small, limited resource, women, or minority farmers or on their 
loss history, which is exactly what the interim tried to avoid. 
Therefore, no change is made in response to this comment.
    Comment: An approved insurance provider commented that varying 
levels of agent compensation from state to state should not be allowed 
to justify a difference in premium discount from state to state, 
although the commenter acknowledges that market forces cause approved 
insurance providers typically to pay different rates of agent 
compensation around the country.
    Response: The proposed rule did require that the approved insurance 
provider pay the same premium discount in each state. This would mean 
that approved insurance providers would need to cut the same amount of 
costs from each state in order to meet the requirement in section 
508(e)(3) of the Act that efficiencies correspond to the premium 
discount. However, as the commenter correctly states, approved 
insurance providers already vary the amount of agent commissions by 
state. Further, the costs within each state may well be different and 
to require that the same cost savings could very well jeopardize the 
operations of the approved insurance provider in the state and its 
ability to comply with all the requirements of the SRA. For these and 
the other reasons stated above, RMA has elected to allow approved 
insurance providers to select the states in which it will participate 
in the premium reduction plan and the amount of premium discount to 
vary between states. However, within a state, the amount of premium 
discount must be the same.
    Comment: Several agents commented that the concept of the premium 
reduction plan is good, but the rules that the RMA has proposed are too 
restrictive. The commenter states that Sec.  400.715(b), which forces 
the approved insurance providers to offer the premium reduction plan in 
all geographies makes the premium reduction plan a very bad idea. The 
commenter stated that if approved insurance providers agree to all of 
the rules of the premium reduction plan as they stand today they are 
putting themselves at a huge financial risk. This in turn creates the 
potential for destabilizing the industry.
    Response: RMA agrees with the commenters and, as stated above, the 
interim rule now allows approved insurance providers to select the 
states in which they will participate in the premium reduction plan. 
However, within a state, the interim rule still requires that the 
premium discount be the same for all crops, plans of insurance, and 
coverage levels.
    Comment: An interested party expressed concern that the premium 
reduction plan may, in fact, be a form of rebating, which is prohibited 
under most state laws. The commenter stated anti-rebating laws prohibit 
insurance agents and/or insurers from returning any portion of a 
commission as an inducement for an applicant to do business. The 
commenter stated that the language in Sec.  400.715(b) and Sec.  
400.715(c) of the current proposed premium reduction plan, requiring 
that the rebate be distributed equally across ``all states and for all 
crops, coverage levels, policies or plans of insurance, or on any other 
basis'' does not provide or eliminate an inducement to do business for 
any particular applicant or group of applicants.
    Response: As stated above, whether the previous premium reduction 
plan or the proposed or interim rule may allow a form of rebating that 
is prohibited under most state laws is not material. Under section 
506(l) of the Act, any state law that is in conflict with the Act or 
any regulation promulgated by FCIC is preempted. As stated above, since 
section 508(e)(3) of the Act expressly allows premium discounts to be 
provided and is not expressly made subject to state law, the fact that 
such discounts may be an inducement to purchase insurance does not 
override this express authority. The provisions of the interim rule 
preempt state law.
    Comment: Several approved insurance providers, farmers and agents 
suggested that with respect to Sec.  400.715(b), redesignated as Sec.  
400.715(h), to simplify the programs accessibility and accountability 
the program should be offered to all states and crops that the approved 
insurance provider operates in. The commenter stated that due to recent 
accounting problems the program should remain the same throughout with 
the same reduction available to all states. This would also help in 
monitoring the program. A commenter also stated that all approved 
insurance providers operating under the premium reduction plan should 
do so within the A&O and reinsurance funds should not be filtered back 
into the program. A commenter stated that the intent of the program is 
to learn to operate below the A&O reimbursement by implementing 
creative and process altering systems or procedures that will make it 
easier for the farmer to participate. The ability of the approved 
insurance provider to document their plan in such a way that expense 
reductions can be easily

[[Page 41902]]

verified by RMA is essential to the integrity of the program. A 
commenter stated that this will also eliminate any concerns of 
discrimination that some have suggested would occur.
    Response: RMA agrees with the commenters that offering a premium 
discount in all states and for all crops that an approved insurance 
provider services would simplify accounting and monitoring issues and 
ensure that all farmers would participate equally. This feature was 
included in the proposed rule. However, after considering the concerns 
raised by several commenters regarding the factors approved insurance 
providers must consider in deciding to enter or leave a state and how 
the requirement that approved insurance providers must provide the same 
premium discount in all states in which the approved insurance 
providers do business might affect this decision, as stated above, RMA 
determined that the adverse effects of not allowing an approved 
insurance provider to select the states in which it participates in the 
premium reduction plan or allowing the amount of premium discount to 
vary between states outweighed the potential benefit that a farmer may 
receive a premium discount in the future. Therefore, as stated above, 
the interim rule now allows for both selection of states and 
variability in premium discounts between states.
    RMA also agrees with the comment that the integrity of the premium 
reduction plan depends on the ability of RMA to verify actual delivery 
expenses. As stated above, the interim rule strengthens this effort 
through the requirement that premium discounts be based on actual cost 
savings, the use of Expense Exhibits provided with the Plan of 
Operations, which can be verified through the statutory expense 
accounts and by requiring that the Expense Exhibits be audited and 
certified by an independent certified public accountant experienced in 
insurance accounting.
    RMA agrees with the comment that the potential for discrimination 
will likely be reduced to the extent that an approved insurance 
provider can accurately report its expenses and RMA can verify the cost 
savings. Again, the interim rule includes provisions to ensure that 
these activities occur.
    Comment: A few approved insurance providers commented that, with 
respect to Sec.  400.715(c), there should not be any variability of 
discounts among states, crops, and insurance plans and policies. A 
commenter stated that variability requires complex accounting 
decisions. The commenter states that ``all states/all crops/all 
insurance plans and policies requirement'' also makes it easier for 
customers, and eases the accounting and other necessary tracking of its 
business systems. The commenter states it allows RMA to verify savings, 
and allows farmers to make informed business decisions without having 
to evaluate different pricing structures offered by multiple providers 
based on numerous factors. In addition, state variability would require 
additional, more complicated bookkeeping not only for the RMA, but also 
for the approved insurance provider and agent. It would also 
disadvantage captive agent approved insurance providers, for whom such 
bookkeeping would be even more burdensome and complex.
    Response: While RMA expressed most of these same reservations in 
the preamble to the proposed rule, as stated above, RMA had to rethink 
its position because of the very real possibility that national 
approved insurance providers may pull out of certain states, leaving 
those farmers without access to any crop insurance protection. To 
protect these farmers and the financial stability of the approved 
insurance providers and crop insurance program, RMA is allowing 
approved insurance providers to select states in which they will 
participate in the premium reduction plan and allow a variation in 
premium discounts between states based on the actual cost savings.
    As stated above, this will allow approved insurance providers to 
better determine where savings can be achieved while still allowing 
them to remain in compliance with the SRA. It should not be confusing 
to farmers because the premium discount within the state will remain 
the same and cannot vary by crop, coverage level or plan of insurance 
within a state.
    To address the cost accounting issues, as stated above, RMA has 
found ways to simplify such accounting and reduce the burden on 
approved insurance providers. One is through the adoption of the 
alternative proposal, which eliminates the burden to project cost 
savings up front and allows premium discounts to be based on actual 
cost savings. Another simplification is the use of existing Expense 
Exhibits. Further, RMA has developed a standard formula that can be 
applied to all approved insurance providers to allocate certain costs 
and determine the amount of premium discount that could be paid in each 
state.
    Comment: An approved insurance provider commented that, with 
respect to Sec.  400.715(c), currently premiums charged by state, crop 
or plan of insurance differ based upon actuarially determined 
differences (loss costs, loss adjustment expense, etc.). The commenter 
states it does not follow that premium discounts should be identical as 
a percent reduction in premium. Farmers in states with the highest 
premiums, or plans of insurance with the highest premiums, would 
receive the largest discounts in terms of dollar savings. The commenter 
stated that business generating the largest losses would receive more 
discount. The commenter claimed that savings derived because of 
operating efficiencies should be affected based upon a dollar amount 
per policy or per crop insured. The fixed cost to process and service a 
policy is the same regardless of the amount of premium. The commenter 
states that only commissions vary by state so the discount should be 
the same unless the commissions are reduced by differing amounts 
between states.
    Response: RMA agrees with the commenter that premiums charged by 
state, crop, plan of insurance, and coverage level vary considerably 
and that delivery cost structures for policies also differ considerable 
depending on these factors. RMA further agrees that for the policies 
that have the same amount of acreage, policies with higher losses pay 
higher premiums. However, the same is true for policies with higher 
coverage levels, different unit structures, additional options, revenue 
coverages, etc. Therefore, the higher premium is not necessarily as a 
result of higher actual losses but because of a higher risk of loss or 
the potential for a higher indemnity if a loss is paid. Further, 
premiums do not take into consideration loss adjustment expense. Such 
expense is part of the A&O subsidy the approved insurance provider 
receives or the CAT loss adjustment expense, which as stated above, is 
no longer taken into consideration under the premium reduction plan.
    While it is possible to structure the premium discount as a set 
amount based on the fixed costs of delivery and savings, this process 
would not be fair or equitable. It could result in small farmers paying 
little or no premium, or actually receiving money back, and large 
farmers receiving very small premium discounts that are insignificant 
in terms of their operation. RMA has determined that a percentage of 
premium was the most fair and equitable payment structure because it 
allowed proportionally the same savings for all farmers and did not 
favor one size operation over another.
    The commenter also suggested that premium discounts be allowed to 
vary by state only if the agent commission varies by state. RMA does 
not believe

[[Page 41903]]

the rule should be so restrictive. Under the formula, all costs will be 
placed into one of three categories: Agent compensation, loss 
adjustment expense or overhead. Loss adjustment expense and agent 
compensation are reported on a state basis so that reductions in either 
could allow for state variability. Therefore, no change is made based 
on this comment.
    Comment: Several approved insurance providers, loss adjusters, 
farmers and interested parties commented that the requirement in Sec.  
400.715(c) that the amount of the premium discount offered may not vary 
between states, crops, coverage levels, policies, or plans of 
insurance, or any other basis fails to recognize the significant 
differences between states, crops, coverage levels, policies, plans of 
insurance. A commenter stated that it does not appear feasible to 
mandate non-variable efficiencies in an environment full of variable 
costs. A commenter stated that RMA should not expect costs to be the 
same for corn versus a fruit or tree policy and policies in Iowa versus 
those in Florida. A commenter stated that this proposed regulation may 
have the unintended result of an approved insurance provider not doing 
business in states that are not profitable and therefore depriving or 
limiting the choices of farmers in those states relative to crop 
insurance. A commenter also stated that regional approved insurance 
providers, operating only in historically profitable states, would have 
an unfair advantage over national operations in determining 
efficiencies and discounts. A commenter stated that consideration 
should be given to allow for these cost variances and a differing 
reduction in premium based upon those factors.
    Response: RMA agrees that the proposed rule, which required the 
same premium discount for all states, could result in some approved 
insurance providers deciding to withdraw from certain states. RMA also 
agrees that this provision could favor regional over national approved 
insurance providers. Consequently, the interim rule allows the premium 
discount to vary by state based on the actual cost savings and for 
approved insurance providers to select those states in which to 
participate in the premium reduction plan. However, the premium 
discount within a state will remain the same and may not vary by crop, 
coverage level or plan of insurance. While the costs may be different 
for the different crops, costs are not reported by crop, coverage level 
or plan of insurance. Therefore, complex accounting rules would have to 
be developed, which is the very thing RMA has sought to avoid and 
commenters have stated would be detrimental to the program because of 
the undue burdens that would be imposed and the potential for 
misallocation of costs.
    Comment: An agent commented on Sec.  400.715(c) and expressed 
concern about the equity of the premium reduction plan in terms of 
applying the discount to various sizes of farm operations and also 
within various states where loss ratios can vary by incredible margins. 
As it stands now, farmers in SW Nebraska would receive the same 
discount as those in say Eastern Iowa. The commenter suggested that RMA 
check some loss ratios and justify that because it can't be justified.
    Response: As stated above, now approved insurance providers will be 
able to select the states in which they participate in the premium 
reduction plan and can vary the amount of premium discount between 
states based on the actual cost savings. However, the variation in 
premium discount between states is based on the actual cost savings 
achieved in each state, not the loss ratio of the state. Section 
508(e)(3) of the Act only allows premium discounts to be based on the 
cost savings of the approved insurance provider and while loss ratios 
may play a factor in the approved insurance provider's election to 
participate in a state or the amount of cost savings that can be 
achieved, it cannot be used to determine the amount of the premium 
discount.
    Comment: An approved insurance provider commented that with respect 
to Sec.  400.715(c) FCIC is incorrect that the Act requires uniformity 
with respect to the amount of the reduction and prohibits distinctions 
based on states, crops, coverage levels, policies, plans of insurance. 
The commenter states that although the language may support FCIC's 
contention that the premium discount must correspond to the efficiency 
underlying that discount, nothing in section 508(e)(3) of the Act 
precludes an approved insurance provider from establishing different 
premium discounts on a state-by-state or plan-by-plan basis.
    Response: Section 508(e)(3) of the Act states that premium 
discounts are subject to the limits and procedures established by FCIC. 
The requirement in the proposed rule that the same premium discount be 
offered across all states, crops, coverage levels, policies, and plans 
of insurance was such a limitation based on the concerns of RMA that to 
allow variability would require complex cost accounting rules that may 
not be suitable for all the approved insurance providers' business 
operations, would be burdensome to administer by both RMA and the 
approved insurance provider, and could adversely affect program 
integrity because of the potential for misallocation of costs.
    As stated above, RMA has reconsidered its position to require the 
same premium discount be provided in all states in which the approved 
insurance provider does business and the interim rule allows the 
approved insurance provider to select the states in which to 
participate in the premium reduction plan and allows variation in the 
amount of premium discount between states based on the actual cost 
savings. This is because, as stated above, RMA found ways to eliminate 
most of the concerns regarding the burdens and other risks of such an 
approach. However, RMA is retaining the limitation of varying the 
premium discount by crop, coverage level or plan of insurance because, 
as stated above, costs are not currently reported in this manner and 
all the concerns raised by RMA would still exist. Cost accounting rules 
would be complex and allow for the potential of misallocation of costs 
and there would be significant burdens on RMA and the approved 
insurance provider to administer the program.
    Comment: An approved insurance provider commented that with respect 
to Sec.  400.715(c) the most persuasive evidence supporting the 
argument that approved insurance providers should be permitted to vary 
premium discounts by state and by plan of insurance is the A&O subsidy 
provided by FCIC. The A&O subsidy paid by FCIC varies by plan of 
insurance and by coverage level. For example, in 2005, the A&O subsidy 
for the revenue plans ranges from 21.0 percent (75 percent coverage 
level or less) to 19.6 percent (85 percent coverage level). By 
contrast, the A&O subsidy associated with the APH plan of insurance 
varies between 24.4 percent (75 percent coverage level or less) to 22.8 
percent (85 percent coverage level). The approved insurance provider 
asked if FCIC recognizes the differences in plans of insurance and 
coverage levels for purposes the A&O subsidy, why FCIC disregards those 
same differences for purposes of the premium reduction plan.
    Response: RMA agrees that the A&O subsidy varies by plan of 
insurance and by coverage level. However, section 508(e)(3) of the Act 
states that premium discounts must be based on the savings achieved by 
the approved insurance provider, not the manner in which the A&O 
subsidy is paid. While variation by coverage level or plan of insurance 
may be permitted under the Act, premium

[[Page 41904]]

discounts are subject to the limits established by RMA and RMA must be 
able to verify that premium discounts correspond to cost efficiencies. 
As stated above, costs are not reported by the approved insurance 
provider by coverage level or plan of insurance. Therefore, there is no 
way to ensure that the cost savings corresponded to the premium 
discount on a coverage level or plan of insurance bases without complex 
accounting rules. As stated by other commenters, RMA must avoid the 
need for complex accounting rule. While RMA has avoided the need for 
such rules with respect to state selection and variability of the 
premium discount between states, there is no easy way to further break 
down these costs within a state by coverage level or plan of insurance.
    Comment: An approved insurance provider contends that, with respect 
to Sec.  400.715(c), FCIC has a statutory obligation to permit approved 
insurance providers to vary the premium discount by product and 
coverage level. More specifically, section 508(e)(3) of the Act 
provides that an approved insurance provider may offer a premium 
discount ``[i]f an approved insurance provider determines that the 
provider may provide insurance more efficiently than the expense 
reimbursement amount established by the Corporation.'' The term 
``expense reimbursement amount'' refers to the A&O subsidy, and, as 
shown above, the A&O subsidy varies by insurance plan and coverage 
level. Thus, to provide insurance more efficiently than the 21.0 
percent expense reimbursement amount established by FCIC for revenue 
plans may necessitate different cost reductions than are necessary to 
provide insurance more efficiently than the 24.4 percent expense 
reimbursement amount established by FCIC for the APH plan. In short, to 
comply with section 508(e)(3)'s requirement that the efficiency be 
judged in relation to the expense reimbursement amount, FCIC must allow 
approved insurance providers to tailor the premium discount to plan of 
insurance and coverage level. The commenter states that FCIC was so 
concerned with satisfying the condition established in the second 
clause of the first sentence in section 508(e)(3) that it neglected to 
implement the first clause.
    Response: The flaw to the commenter's logic is that even though the 
A&O subsidy is tied to the coverage level or plan of insurance, the 
expenses are not necessarily on the same basis. Since costs are not 
reported by coverage level or plan of insurance, complex accounting 
rules would need to be developed that would impose a significant burden 
on approved insurance providers. Further, because there is no way to 
verify such costs, the possibility of misallocation is significant.
    While RMA agrees that section 508(e)(3) of the Act does not 
preclude premium discounts based on coverage levels or plans of 
insurance, that section does give RMA the authority to impose such 
rules and limitations as are necessary to protect the integrity of the 
program. Not allowing variability of premium discounts by coverage 
level or plan of insurance is such a limitation. Therefore, no change 
has been made in response to this comment.
    Comment: The approved insurance provider commented that, with 
respect to Sec.  400.715(c), the proposed rule oversimplifies the 
manner in which an approved insurance provider might reduce costs. To 
wit, the proposed rule includes, as an example, this statement: ``if 
the approved insurance provider can reduce costs by 2.5 percent, such 
reduction must be provided to all policyholders in all states.'' The 
commenter states that this example assumes, incorrectly, that all 
approved insurance providers gauge their respective costs on a program-
wide basis. In fact, the commenter states it calculates its costs on a 
state-by-state and product-by-product basis. Accordingly, the approved 
insurance provider's ability to decrease costs by 2.5 percent on corn 
in Iowa does not correlate to a 2.5 percent reduction in the costs 
associated with nursery in Florida.
    Response: The proposed rule contained the requirement that all 
premium discounts be the same because of RMA's concern stated above 
regarding the projections of costs, the burdens on approved insurance 
providers to administer the program, and the potential for 
misallocation of costs. RMA considered all the comments on this issue, 
including the comments regarding the variability of costs between 
states, and determined that it could address these concerns and still 
allow variability of premium discounts by state, which it did.
    However, even though the commenter claims it calculates costs on a 
state-by-state and plan of insurance basis, RMA has no way of knowing 
whether all costs are calculated in this manner. For example, RMA knows 
that agent compensation and loss adjustment expenses are calculated and 
accounted for on a state-by-state basis but it does not know whether 
such overhead costs, other employee or contractor compensation, etc., 
is also calculated and accounted for on a state-by-state or insurance 
plan basis. RMA also does not know whether all approved insurance 
providers may calculate or accounted for costs in this manner.
    Further, even if approved insurance providers did calculate costs 
in this manner, agent compensation and loss adjustment expenses may be 
reported to RMA on a state-by-state basis, it is not reported on a plan 
of insurance basis. Further, all other costs are reported on a book of 
business basis. Therefore, even if approved insurance providers 
calculate such costs on a state-by-state basis, RMA has no way to 
verify whether such costs were correctly allocated. This means that 
complex accounting rules would be required and the burden on the 
approved insurance providers and RMA would significantly increase. This 
is precisely the situation that RMA has sought to avoid in the interim 
rule.
    Comment: An approved insurance provider commented that, with 
respect to Sec.  400.715(c), the proposed rule's prohibition against 
variances in premium reduction plan submissions is at odds with the 
experts that reviewed the proposed rule prior to its publication. The 
commenter asked that if the expert reviewers recognize that the 
difference between states, crops, policies, and plans of insurance, why 
does FCIC not and on what basis did FCIC reject these suggestions.
    Response: The expert reviewers recognized that costs varied between 
states, policies and plans of insurance. RMA acknowledges that this is 
correct. However, the expert reviewers did not examine the complex cost 
accounting rules that would be required to verify and approve savings 
on this basis or assess the burden on approved insurance providers or 
RMA to administer the program in this manner. RMA has done this 
assessment and determined that it could structure a rule that would 
permit variability among states because certain costs are already 
allocated and reported by state and the others could be allocated by 
state through a formula designed by RMA.
    However, as stated above, because costs are not reported on a crop 
or plan of insurance basis, RMA has no way to verify that such costs 
are correctly allocated. Further complex accounting and allocation 
rules would be required and the burdens on RMA and the approved 
insurance providers would increase significantly. This is precisely the 
situation that RMA has sought to avoid in the interim rule.

Section 400.716

    Comment: An interested party commented that regulators are always

[[Page 41905]]

concerned about the possibility of financial stress placed on approved 
insurance providers who feel they have to reduce essential operating 
costs in order to compete in the marketplace. Such competitive 
pressures can reduce competition in the marketplace as approved 
insurance providers are no longer able to write business profitably, or 
in the worse case scenario, causes insolvency, which is a burden to the 
regulatory authority, state guaranty funds, the RMA and not least, the 
consumer. Transparency of the efficiency and constraints on what types 
of expenses can be included in the premium reduction plan are essential 
to the integrity of such a program and the financial well being of the 
participating approved insurance providers. The commenter states the 
language in Sec.  400.716 sufficiently documents the approved insurance 
provider's premium reduction plan such that the extent and nature of 
the efficiencies are known and understood by regulators.
    Response: RMA shares the concern of the commenter that the 
provisions of the interim rule need to protect against the possibility 
that increased price competition under the premium reduction plan would 
lead to unnecessary insolvencies. RMA has reduced the financial stress 
on approved insurance providers to cut costs in essential operations in 
several ways. One is to only require premium discounts to be based on 
actual costs savings and no promise that any discount will be made 
unless savings are achieved. This will reduce the stress on approved 
insurance provider to fund promised premium discounts. Another way is 
the allowance of approved insurance providers to select the states in 
which they will participate in the premium reduction plan and vary the 
amount of premium discount between states. This will allow approved 
insurance providers to select those aspects of its operation where it 
can safely cut costs without jeopardizing their ability to comply with 
all requirements of the SRA. RMA has also retained the premium discount 
maximum of four percent.
    RMA also agrees with the commenter that transparency and 
consistency in the application of expense reporting is essential in a 
sound premium reduction plan and, as stated above, the use of existing 
Expense Exhibits that are verifiable and certified and the use of a 
standard formula applicable to all approved insurance providers to 
determine the amount of premium discounts for each state creates a 
transparent and consistent process.
    Comment: An interested party commented that the initial application 
process should include an analysis of the impact on how the premium 
discount would affect minority farmers.
    Response: As stated above, the initial application process has been 
revised significantly and now approved insurance providers will only be 
requesting the opportunity to be able to offer a premium discount in 
the event it can deliver the Federal crop insurance program for less 
than the A&O subsidy. However, RMA has taken several measures to ensure 
that small, limited resource, women and minority farmers are not 
adversely impacted by the premium reduction plan. RMA has retained the 
requirement that approved insurance providers submit marketing plans 
that demonstrate how they will market the premium reduction plan to 
small, limited resource, women and minority farmers. RMA has also added 
provisions that such marketing plan must be addition to any 
solicitation done by the agent and that if RMA discovers that the 
marketing plan is not effectively reaching such farmers, RMA can 
require remedial measures or impose sanctions. RMA has also clarified 
that all farmers must receive at least the level of service required by 
the SRA and approved procedures and added consumer complaint provisions 
that allow farmers to complain directly to RMA.
    Comment: An approved insurance provider commented that Sec.  
400.716 addresses the contents of a revised Plan of Operations. The 
commenter stated that the reporting requirements detailed in this rule 
will substantially add operating expense to the approved insurance 
provider and works counter to the intent of generating operating 
efficiencies to pass along to farmers in the form of a premium 
discount. The commenter states that subsections (h) and (i) are 
particularly onerous and that the alternative proposal offered by RMA 
for consideration would be less costly to administer and would assure 
that the efficiencies derived are actual rather than projected.
    Response: As stated above, the initial application process has been 
revised significantly and now approved insurance providers will only be 
requesting the opportunity to be able to offer a premium discount in 
the event they can deliver the Federal crop insurance program for less 
than the A&O subsidy. Further, as stated above, RMA has adopted the 
alternative proposal, which will significantly reduce the burdens on 
the approved insurance provider. In addition, the requirements in 
subsections (h) and (i) have been removed from the interim rule and the 
process considerably streamlined.
    Comment: An approved insurance provider asked, with respect to 
Sec.  400.716(e), redesignated Sec.  400.716(c), if RMA will be 
advising approved insurance providers of specific standards or criteria 
that must be met for marketing to small farmers, limited resources 
farmers, women and minorities. The commenter asked if RMA will test 
such standards or criteria to determine if the marketing plan is 
acceptable to prevent discrimination. The commenter also asked if the 
approved insurance provider does not meet the RMA standards, will the 
approved insurance provider be assessed penalties.
    Response: RMA has revised redesignated Sec.  400.716(c) to clarify 
that the marketing plan must identify the media used, that such media 
must be designed to reach small, limited resource, women and minorities 
farmers, and that such advertising must be in addition to any 
solicitation done by the agent. However, RMA cannot set specific 
standards because it would be impossible for RMA to know in advance of 
a request being received what would be the most appropriate form of 
media in a particular market. The approved insurance providers, because 
they have local personnel such as agents or loss adjusters, would be in 
the best position to know how to reach these farmers. Further, RMA 
recognizes that each approved insurance provider will face different 
circumstances, depending on its geographical presence and other 
factors. RMA will provide feedback during the review process if the 
marketing plan is deemed inadequate in providing a level of outreach 
that is commensurate with the size and geographical presence of the 
approved insurance provider.
    Regarding whether RMA will test to determine whether the marketing 
plan is acceptable to prevent discrimination, the purpose of the 
marketing plan is to ensure that all farmers are aware of how to have 
access to a premium discount in a state in which it is offered. RMA 
will monitor indicators of possible discrimination and the success of 
the marketing plan under the SRA, based on the number of consumer 
complaints, and a comparison of the composition of the approved 
insurance providers' books of business in the area. An ineffective 
marketing plan could result in the imposition of remedial measures or 
sanctions.
    Comment: An interested party commented that, with respect to Sec.  
400.716(e), redesignated Sec.  400.716(c),

[[Page 41906]]

a marketing plan must be a minimal requirement of the program. Most 
farmers participating in the crop insurance program obtain crop 
coverage as well as marketing and other farm related educational advice 
from their trusted agents. The commenters stated that minority farmers 
should have access to this same level of added information. The 
commenter also stated that this requirement helps the agency to 
implement section 10708 of the 2002 Farm Bill, which states that 
approved insurance providers should actively seek the assistance of 
community based organizations in such data collection and analysis.
    Response: RMA agrees that an adequate marketing plan should be 
included as a condition for participation in the premium reduction plan 
and the interim rule reflects this requirement. RMA has also referenced 
community based organizations to identify them as a valuable resource 
to reach small, limited resource, women and minority farmers. Further, 
the interim rule will provide a process for farmers to complain about 
their treatment directly to RMA.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.716(h), to ensure that efficiencies are evaluated 
accurately, any efficiencies related to agent compensation be evaluated 
on the basis of information that must be reported to the IRS and 
counted on 1099 tax forms. The commenter also notes there is a conflict 
here in terms of reporting--annual basis vs. crop year basis--for 
bonuses which could be paid to agents after the crop season is over and 
after providers have accurately determined the amount of realized 
profits, if any.
    Response: As stated above, subsection (h) has been removed from the 
rule. However, with respect to the demonstration of actual cost 
savings, the current Expense Exhibits provided with the Plan of 
Operations requires that an approved insurance provider submit 
information on both a calendar and reinsurance year basis. RMA also 
provides instructions as to how costs should be allocated between these 
formats. Therefore, since these existing Expense Exhibits will be used 
for determining cost efficiencies and the amount of premium discounts, 
no conflict exists. Further, the adoption of the alternative proposal 
in the interim rule eliminates concerns regarding costs incurred after 
the crop year. The cost accounting occurs after the end of the 
reinsurance year when a majority of all expenses, including bonuses, 
have been paid, and the approved insurance provider is required to 
report an estimate of any costs that have not yet been paid. RMA will 
be able to determine whether costs have improperly been shifted by 
comparing the costs reported on the various statutory accounting 
statements and Expense Exhibits. If there is improper reporting, RMA 
may impose sanctions on the approved insurance provider.
    Comment: An interested party commented that RMA states that 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 discount in 
the state would be enormous. The commenter states that this conflicts 
with RMA's statement that ``in accordance with Sec. Sec.  400.716(h) 
and 400.719(a)(6) of the proposed rule, RMA would track the expense 
performance of the approved insurance provider at the state level to 
ensure that costs are reduced in each state by an amount that is at 
least equal to the premium reduction.'' The commenter states that 
Sec. Sec.  400.716(h) or 400.719(a)(6) do not say anything about a 
state level accounting requirement yet it is clear that RMA intends to 
enforce an ``enormous'' expense on the industry.
    Response: As stated above, Sec.  400.716(h) has been removed. 
Further, by adopting the alternative proposal in the interim rule, RMA 
has removed the burdensome requirement for the approved insurance 
provider to forecast and justify proposed efficiencies for the 
reinsurance year and for RMA to verify the reasonableness of such 
forecasts and then to go through the same process at the end of the 
reinsurance year. Under the interim rule, cost efficiencies are to be 
determined based on information currently reported in the Expense 
Exhibits provided with the Plan of Operations and verified after they 
have been realized. This will significantly reduce the workload on RMA 
and the approved insurance providers.
    Further, although RMA now allows variations in premium discounts 
between states, it has developed a standard formula that can be applied 
to all approved insurance providers and will allow the allocation of 
certain costs by state. This will reduce the burden on approved 
insurance providers to maintain and report certain costs by state that 
are currently reported on a book of business basis. This formula will 
be provided to the approved insurance providers through procedures.
    Comment: An approved insurance provider commented that in Sec.  
400.716(i) a financial reserve of 25 percent of the projected savings 
as a contingency fund seems excessive, except for years such as from 
2004 to 2005 in which the commodity prices are significantly dropping. 
The commenter asked if the 25 percent reserve was determined from 
judgment only or were there calculations used to determine this 
percentage.
    Response: The adoption of the alternative proposal in the interim 
rule eliminates the need for Sec.  400.716(i) and it has been removed 
from the interim rule.
    Comment: An approved insurance provider commented that, with 
respect to Sec.  400.716(i), it supports this provision, but suggests 
that it be clarified to recognize that additional ``income'' may come 
from contracts or third party agreements executed by the approved 
insurance provider that are designed to provide a reserve for such a 
contingency.
    Response: The adoption of the alternative proposal in the interim 
rule eliminates the need for Sec.  400.716(i) and it has been removed 
from the interim rule.
    Comment: An approved insurance provider commented that Sec.  
400.716(i) would not account for a major misrepresentation in the 
premium reduction plan. The commenter stated that if such a plan is 
necessary, the approved insurance provider should be responsible for 
the entire amount of the savings and be willing to provide access to 
those additional funds.
    Response: The adoption of the alternative proposal in the interim 
rule eliminates the need for Sec.  400.716(i) and it has been removed 
from the interim rule.
    Comment: An agent commented that with respect to Sec.  400.716(l), 
if agents have state approval for marketing the product, then this plan 
will never happen in Kansas. The commenter stated that its agency 
proposed a plan to allow agents to offer $20 gift cards to anyone 
wishing to stop by an agent's office for an auto insurance quote. The 
commenter stated that this proposal never made it out of committee 
because the concept was rejected on the basis of violating existing 
rebating statutes. The commenter claims this example also has 
implications for Sec.  400.719(a)(10), which says that the premium 
reduction plan must not violate applicable state laws concerning 
solicitation and sale of insurance. The commenter states that if it 
cannot get approval to offer a $20 gift card how can anyone be expected 
to be able to get approval to offer a premium discount for hundreds of 
dollars.
    Response: Section 400.716(l) required approved insurance providers 
to submit to the states its marketing strategy

[[Page 41907]]

submitted under proposed Sec.  400.716(d). However, with the adoption 
of the alternative proposal, RMA determined that such marketing 
strategy was no longer required because premium discounts would be 
based on actual cost savings and approved insurance providers should 
not be locked in regarding how those savings are achieved as long as 
all provisions of the SRA and approved procedures are complied with. 
Therefore, proposed Sec.  400.716(l) has been removed from the interim 
rule. RMA will work with state insurance regulators, which have the 
responsibility to monitor marketing conduct with respect to any 
advertising and promotion of the premium reduction plan and ensuring 
that all agents are properly licensed by the state.
    Comment: An agent commented that the requirement that approved 
insurance providers provide their premium reduction plan to the state 
to determine whether the licensing and conduct of the agents complies 
with state law ignores the fundamental principle of state law that all 
agents must be licensed if they sell, negotiate or solicit any type of 
insurance.
    Response: As stated above, proposed Sec.  400.716(l) has been 
removed from the interim rule. RMA agrees that the states will still 
monitor market conduct with respect to any advertising and promotion of 
the premium reduction plan and continue to ensure that all agents are 
properly licensed by the state.
    Comment: An interested party commented the language in Sec.  
400.716(l) requiring the approved insurance provider to provide a copy 
of its marketing strategy to the State Insurance Department for review 
in all states in which the approved insurance provider does business is 
crucial for state regulators to perform their market conduct regulatory 
functions.
    Response: Since a review of the marketing strategy by the State is 
no longer required, proposed Sec.  400.716(l) is rendered moot. 
However, the interim rule makes it very clear that approved insurance 
providers and agents must comply with all requirements of the SRA and 
approved procedure and RMA agrees that the RMA and the states already 
share responsibility to monitor market conduct with respect to 
advertising and promotion and ensure that all agents are properly 
licensed by the state.
    Comment: A few approved insurance providers asked if one state does 
not approve the marketing plan, whether the plan can be offered in the 
other states as an exception to the premium reduction plan rule that 
requires all policies be allowed the discount. A commenter stated that 
requiring an approved insurance provider to provide the state approved 
insurance provider a copy of its marketing strategy would not only be 
confusing, but burdensome to the state government. Furthermore, the 
commenter stated that if the state insurance department elected to 
review the plan, their timing could be long after the initiation of the 
plan. The commenter asked what happens to the policies that have 
already been sold. A commenter stated it supported the idea that if one 
state rejects the marketing plan, the approved insurance provider 
cannot offer the premium reduction plan.
    Response: As stated above, proposed Sec.  400.716(l) has been 
removed from the interim rule. RMA agrees that the states will continue 
to monitor market conduct with respect to advertising and promotion of 
the premium reduction plan and ensure that all agents are properly 
licensed by the state. This responsibility is no different than their 
existing responsibility.
    Comment: A few approved insurance providers and interested parties 
commented that an issue that must be addressed is potential conflicts 
between federal and state law and among the states. If adopted, Sec.  
400.716(l) would require approval of various State Departments of 
Insurance with respect to marketing issues, including the licensing of 
agents and the conduct of agents in the solicitation and sale of 
insurance. The commenter states that this approach is understandable, 
especially given the potential for premium reduction plan abuse and the 
risk of illegal rebating. On the other hand, the federal crop insurance 
program is national in scope and, in accordance with 7 U.S.C. 1506(l) 
and 7 CFR 400.352, virtually all state regulation is preempted. 
Commenters stated that there are substantial risks that individual 
states would view the premium reduction plan offerings by multi-state 
approved insurance providers differently. Because state-by-state review 
explicitly is required in the proposed rule, RMA is inviting this level 
of regulatory conflict and resulting confusion. If this approach is to 
be utilized, RMA should not publish a final rule until it has 
established a mechanism for resolving all such potential conflicts 
among state regulators. The commenter also states that there is a 
distinct risk that market conduct issues will be viewed differently 
between RMA and a particular state. While the Supremacy Clause of the 
Constitution generally should favor RMA's position, the commenter 
states that the text of 7 CFR 400.352 is not sufficiently clear to 
support this proposition. Also, the commenter suggests that the text of 
Sec.  400.716(l) of the proposed rule could be viewed as a voluntary 
surrender by RMA of its supremacy powers. At a minimum, the proposed 
premium reduction plan rule introduces a very complex set of 
considerations involving the interplay of federal and state regulation 
of approved insurance providers, and RMA should think this through very 
carefully and strengthen the proposed rule before promulgation as a 
final rule. Such strengthening must address both the breadth of federal 
preemption and the details of resolving potential federal-state 
conflicts.
    Response: As stated above, proposed Sec.  400.716(l) has been 
removed from the interim rule. Further, nothing in the interim rule 
changes the relationship between state and Federal law with respect to 
the premium reduction plan. Federal preemptive authority under the 
Federal Crop Insurance Act is limited, not general. As a result under 
the interim rule, states will still have the same responsibility to 
monitor market conduct with respect to any advertising and promotion of 
the premium reduction plan and ensure that all agents are properly 
licensed by the state. RMA looks forward to working with state 
insurance regulators to address any advertising or market conduct 
concerns that arise in the implementation of this regulation.

Section 400.717

    Comment: An interested party commented that newly formed approved 
insurance providers would be required to amortize start-up costs up to 
three years in the premium reduction plan. The commenter is concerned 
that including start-up costs in the premium reduction plan will create 
a disadvantage to start-ups as they compete with larger established 
approved insurance providers who are able to pass along efficiencies 
under the plan. This provision could deter approved insurance providers 
from entering the market and thereby reducing competition.
    Response: RMA shares the concern of the commenter that the interim 
rule should not contain unnecessary barriers to a new approved 
insurance provider participating in the premium reduction plan. 
However, the intent of the interim rule is to provide neither 
established nor new approved insurance providers with a competitive 
advantage, and to exclude start-up costs could provide a competitive 
advantage to new approved insurance providers, especially when 
established approved insurance

[[Page 41908]]

providers are still incurring the same type costs because of updating 
systems or equipment, etc. The interim rule must recognize that there 
may be some costs incurred regardless of whether the approved insurance 
provider is new or established but that generally the costs to create a 
system are generally larger than those for updating or modifying a 
system. Therefore, three year amortization represents a reasonable 
compromise in that such start-up costs must be reported on the Expense 
Exhibits but that all the costs will not count against one reinsurance 
year.
    Comment: An approved insurance provider objects to the provision 
that grants new approved insurance providers the right to amortize so-
called ``one time start-up costs.'' The costs briefly described in the 
parenthetical are costs that all approved insurance providers incurred 
when they entered the crop insurance program. The commenter asked why 
FCIC affords these new approved insurance providers benefits not 
provided the existing approved insurance provider and how FCIC 
rationalizes providing new approved insurance providers with an 
economic advantage. In proposing the premium reduction plan 
regulations, FCIC claims to be ``striving to develop procedures that 
provide a level playing field.'' Allowing new approved insurance 
providers the ability to amortize start-up costs, a benefit not 
afforded existing approved insurance providers, is inconsistent with 
this purported goal.
    Response: RMA agrees that some of the costs included as start-up 
are incurred by all approved insurance providers when they start up. 
However, the premium reduction plan identifies whether an approved 
insurance provider would be able to deliver the Federal crop insurance 
program in the current reinsurance year. If the start-up costs were not 
incurred in the current reinsurance year, they would have no bearing on 
whether the approved insurance provider has such an efficiency for such 
year. Therefore, new approved insurance providers are not being 
provided a competitive advantage. In fact, if RMA did not allow the 
amortization of such costs, new approved insurance providers would be 
at a competitive disadvantage because they would be incurring costs 
that established approved insurance providers would not. This means the 
new approved insurance providers' A&O costs would be higher, decreasing 
the likelihood they could achieve an efficiency. The three year 
amortization is a reasonable compromise that RMA anticipates will 
neutralize these factors in favoring neither existing nor new approved 
insurance providers in determining whether approved insurance providers 
can pay premium discounts.
    Comment: An approved insurance provider concurs with RMA 
clarification limiting new entrants 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. 
Requiring new entrants to include startup costs over a three-year 
period shows a commitment to new entrants without unfairly 
discriminating against approved insurance providers involved in the 
program since its inception.
    Response: RMA agrees that allowing amortizing of start-up costs 
would allow new approved insurance providers to enter the program and 
compete with existing approved insurance providers without a 
competitive advantage or disadvantage.
    Comment: An approved insurance provider commented that, with 
respect to Sec.  400.717, approved insurance providers would amortize 
over one year to develop a higher ``efficiency'' in year two. The 
commenter stated that RMA's ``level playing field'' objective would 
suggest they permit new entrants to exclude those costs.
    Response: The purpose of the amortizing is not to create 
efficiencies. The purpose is to put new and existing approved insurance 
providers on relatively the same footing with respect to reporting the 
A&O costs for the crop year. Further, the interim rule requires that if 
the approved insurance provider is going to amortize start-up costs, 
they must be amortized equally over the three years. However, any new 
approved insurance provider could elect not to amortize the start-up 
costs and report them all in the first year. For every year thereafter, 
the approved insurance provider would be treated as every other 
approved insurance provider and would have the same opportunity to 
achieve savings.
    RMA considered allowing new approved insurance providers to exclude 
start-up costs but it realized that existing approved insurance 
providers still incur similar costs, such as updating or modifying 
systems. Therefore, it would be inequitable to exclude all such costs. 
However, since such costs are generally higher with start-up than 
maintenance, amortization provides a more equitable solution.
    Comment: An approved insurance provider commented that the proposed 
rule strikes the right balance between allowing new entrants into the 
crop insurance marketplace, but with adequate controls to ensure that 
farmers are protected.
    Response: RMA agrees with the comment.
    Section 400.718
    Comment: An agent does not believe September 1, 2005 is a realistic 
date. The commenter states the date should be pushed back considerably 
because the timeline would not support this as a realistic date. The 
commenter hopes that after receiving comments to the proposed rule it 
will conduct another round of review and comments. The commenter 
suggested Congress may want to hold hearings.
    Response: As stated above, adoption of the alternative proposal has 
permitted RMA to significantly reduce the reporting requirement and 
burden on approved insurance providers. Many of the requirements in the 
proposed rule regarding the cost accounting, state review, etc., have 
been removed and essentially all approved insurance providers must do 
is select the states in which they will participate in the premium 
reduction plan and develop and submit their marketing plans.
    However, because RMA was unsure of the date the interim rule would 
be published, it revised the provision to require RMA to respond not 
later than 30 days after the date the approved insurance provider 
submits its request for eligibility to offer a premium discount under 
the premium reduction plan.
    With respect to the solicitation of additional comments, RMA 
recognizes that additional comments may be desirable to determine 
whether the premium reduction plan is operating properly and, 
therefore, has elected to implement the rule as an interim rule. This 
would allow RMA to solicit additional comments.
    However, there is no legal basis for RMA to not implement the 
premium reduction plan for the 2006 reinsurance year. As stated above, 
section 508(e)(3) of the Act obligates RMA to consider all requests by 
approved insurance providers. The interim rule simply provides the 
framework under which to consider such requests. Further, as stated 
above, RMA has responded to the comments by creating a more simple, 
streamlined, less burdensome, more verifiable rule that should benefit 
all participants.

Section 400.719

    Comment: Several agents and interested parties asked that any and 
all applications for the premium reduction

[[Page 41909]]

plan be considered by the full FCIC Board. RMA would still be able to 
evaluate the applications. The commenter also asked that a guideline be 
added that fully reviews the impact to approved insurance providers and 
agents.
    Response: The FCIC Board has the authority to review requests to 
participate in the premium reduction plan and approve the payment of 
premium discounts. However, as with many of the day-to-day operations, 
it has chosen to delegate that authority to the Manager of FCIC, i.e., 
the Administrator of RMA. The Board has not rescinded this delegation 
because the changes to the interim rule have mitigated many of the 
concerns of the Board, as expressed in the preamble, and that RMA has 
the personnel and knowledge to best administer the program. However, 
the Board has asked the FCIC Manager to review with the Board the 
agency's analysis of the premium reduction plan requests before the 
Manager determines the approved insurance provider is eligible to 
participate or approves the payment of any premium discount under the 
existing delegation.
    With respect to adding a requirement for an impact review, it is 
RMA's position that an approved insurance provider would likely already 
consider the full impact of the premium reduction plan on it, its 
competition, and its agents before requesting to participate in the 
premium reduction plan. Further, many of the changes to the interim 
rule were in response to comments expressing concerns regarding these 
impacts. In addition, through publication of the rule as an interim 
rule, RMA has left open the possibility that it will solicit additional 
comments regarding the impacts of the rule.
    Comment: An approved insurance provider commented the discount must 
be offered ``in all states where the approved insurance provider does 
business.'' The commenter asks why the provision indicates that the 
reduction ``correspond to the location where the premium reduction is 
offered.'' The commenter asserts that this statement in the standards 
for approval appears inconsistent with the intent discussed in the 
proposed rule.
    Response: The requirement that any premium discount correspond to 
the cost efficiency comes directly from 508(e)(3) of the Act. The 
legislative history of this section confirms that the ``corresponding'' 
principle was added intentionally and, therefore, must be given 
meaning.
    However, as stated above, RMA agrees that requiring the same 
premium discount in all states in which the approved insurance provider 
does business could create a strain on the business operations of the 
approved insurance providers by requiring them to achieve the same cost 
savings in each state. As stated above, RMA has eliminated this 
requirement and now allows approved insurance providers to elect the 
states in which it will participate in the premium reduction plan and 
allows variation of premium discount among states. As stated above, 
this is to allow approved insurance providers to better evaluate their 
operations to determine the best means to achieve savings while still 
complying with all requirements of the SRA and approved procedures.
    Comment: An approved insurance provider commented that proposed 
Sec.  400.719(a)(7)(ii) requires that ``The efficiency must not be 
derived from any marketing or underwriting practices that are unfairly 
discriminatory.'' The commenter states that in order for premium 
reduction plans to not be unfairly discriminatory, all approved 
insurance providers must be able to offer the plans. Otherwise, all 
farmers do not have equal access to premium discounts. Furthermore, 
unless all approved insurance providers are approved to offer premium 
discount plans the situation will exist that an agent representing more 
than one approved insurance provider may have one approved insurance 
provider approved and others not approved for premium discount plans. 
Agents will be able to write some farmers with discounts and others 
without. There will be no guarantee that all farmers have been offered 
the discount plan.
    Response: As stated above, unfair discrimination occurs when 
farmers are denied access to the crop insurance program or the premium 
reduction plan. Since such conduct is regulated under the SRA, it was 
not necessary to reiterate the requirement here, especially since 
approved insurance providers no longer report the actions they propose 
to take to achieve the cost efficiency when requesting eligibility for 
the opportunity to offer a premium discount. Therefore, Sec.  
400.719(a)(7)(ii) has been removed. In addition, equal access to the 
premium reduction plan is accomplished through other means, such as the 
marketing plan.
    With respect to the concern that unfair discrimination occurs if 
not all approved insurance providers participate in the premium 
reduction plan or agents write for more than one approved insurance 
provider, which may not participate, as stated above, there is a 
difference between being treated differently than other farmers where 
the premium reduction plan is available and residing in a state where 
no approved insurance provider may be participating in the premium 
reduction plan. The former would be prohibited and, as stated above, 
provisions have been added to ensure that all farmers in a state are 
paid the same percentage of premium discount, have awareness and access 
to the premium reduction plan, do not suffer from reduction in service, 
etc. In addition, as stated above, agents that write for more than one 
approved insurance provider must notify their customers of all the 
approved insurance providers they write for that are participating in 
the premium reduction plan in the state so farmers can make informed 
decisions.
    Comment: An approved insurance provider comments that, with respect 
to proposed Sec.  400.719(a)(9), now redesignated Sec.  400.718(c)(2), 
it very much supports the need to actively market to small, limited 
resource, women and minority farmers, as defined above. However, the 
commenter states it is concerned that as the size of acreage declines, 
so do the savings. The commenter respectfully suggests that the 
standard should focus only on whether the plan is reasonable in its 
approach and not on the marketing ``effectiveness'' of the plan's 
reach. In cases where it appears that the plan's reach is not working 
effectively, the RMA will work with the approved insurance provider to 
strengthen the plan.
    Response: RMA agrees that when the marketing plan is submitted, it 
will be difficult to determine whether it effectively reaches small, 
limited resource, women, and minority farmers. Therefore, RMA has 
revised the provision to require that the marketing plan be designed to 
effectively reach such farmers. However, size of the farming operation 
and declining savings are not considerations when determining whether a 
marketing plan is designed to reach small, limited resource, women, and 
minority farmers. The interim rule requires the approved insurance 
provider to use the appropriate media to reach such farmers. Further, 
RMA has added provisions that state that RMA will monitor the marketing 
plan and if RMA determines the marketing plan is not effective, it can 
require remedial measures or impose sanctions, as appropriate.
    Comment: A few approved insurance providers stated RMA is requiring 
that the approved insurance provider not

[[Page 41910]]

reduce its service to the insureds. The commenter asked how RMA will 
audit to determine that service is remaining constant to their farmers 
and whether RMA has standards of service developed. A commenter asked 
how FCIC measures ``service.''
    Response: As stated above, service is required to be provided in 
accordance with the SRA and approved procedures. Any violation with one 
of these requirements would be considered a reduction in service. 
Therefore, there are clear standards that are applicable to all 
approved insurance providers and agents. RMA will monitor service as it 
currently does through the SRA and RMA has added provisions to the 
interim rule to allow consumer complaints to be made directly to RMA.
    Comment: An approved insurance provider and interested party 
commented that, with respect to proposed Sec.  400.719(a)(11), now 
redesignated Sec.  400.718(c)(4), the one approved premium reduction 
plan provides commissions for agents substantially below what are 
offered to agents from other approved insurance providers. The 
commenter states that agents have reported that they cannot afford to 
provide the same level of service to farmers. Fewer visits to the farms 
and less assistance is offered to the farmers to complete the complex 
paperwork and advise the farmers concerning which plan is best suited 
to them. The commenter stated that the premium reduction plan and the 
entire Federal crop insurance program is a very complex line of 
insurance and it requires well trained agents to assist the farmers in 
making the appropriate decisions and following all the rules and 
procedures. Less service is harmful to the interests of farmers and 
potentially undermines the integrity of the crop insurance program.
    Response: As stated above, the interim rule outlines the standards 
for service that must be maintained for an approved insurance provider 
to participate in the premium reduction plan, which are identical to 
those needed to operate under the SRA. Therefore, at a minimum, all 
farmers will receive at least the level of service that would permit 
them to understand the available plans of insurance, program 
requirements, etc. This should ensure that program integrity is 
maintained.
    As stated above, RMA recognizes that some agents may wish to offer 
special educational and other services above these standards to 
differentiate themselves from other agents in a competitive 
marketplace. This is part of cost competition; can the same service be 
provided at a better price or can superior service be provided for the 
same price. It is up to the marketplace to determine the value of these 
additional services and whether the farmer wants to bear the cost. As 
some commenters have stated, some farmers will value the superior 
service over the possibility of a premium discount, which maintains the 
possibility of competition on both price and service, which can only 
benefit the farmer.
    Comment: An approved insurance provider commented that, with 
respect to proposed Sec.  400.719(a)(12), now redesignated Sec.  
400.718(c)(3), RMA has not been able to enforce this provision in the 
past two years. Agents and adjusters have reported from the field that 
the one approved insurance provider approved for the premium reduction 
plan is not providing the required training for agents and adjusters. 
This was required by Manual 14 and also is required by the 2005 SRA, 
addendum IV. The commenter states that this is harmful to the interests 
of farmers and potentially undermines the integrity of the crop 
insurance program. Furthermore, if these training requirements were 
adhered to it would add to the operating expenses of the one approved 
insurance provider and make it difficult for it to operate within the 
A&O expense reimbursement from RMA. The principal reason asserted by 
RMA in its declining the applications for the premium reduction plan of 
the other approved insurance providers was that they currently were not 
operating within the A&O expense reimbursement. The proposed premium 
reduction plan will not cure this deficiency.
    Response: RMA disagrees that it has not enforced the provision of 
the proposed rule regarding the required training of agents and loss 
adjusters for the premium reduction plan, which is the same requirement 
as that contained in the SRA. As stated above, all approved insurance 
providers are required to provide information regarding the training 
provided to its loss adjusters and agents. In its monitoring of the 
approved insurance provider currently authorized to offer the premium 
reduction plan, RMA has received, reviewed and confirmed training 
activity logs, training curricula, and other documentation showing that 
the approved insurance provider is in compliance with SRA training 
requirements.
    In addition, the approved insurance provider has demonstrated that 
it can operate at less than the A&O subsidy and still comply with all 
requirements of the SRA and approved procedures. Because all approved 
insurance providers are being held to the same standards, the integrity 
of the insurance program is maintained. If the commenter has evidence 
of any particular instance where the approved insurance provider was 
not in compliance with the training or any other requirement of the 
SRA, it should provide such evidence to RMA.
    Comment: An approved insurance provider commented that, with 
respect to proposed Sec.  400.719(a)(13), now redesignated Sec.  
400.718(c)(3) and (5), this cannot be achieved unless all approved 
insurance providers are approved to offer the premium reduction plan 
and agent commissions are not reduced to a level which removes the 
incentive for offering premium discount plans to the farmers.
    Response: Section 400.719(a)(13), now redesignated Sec.  
400.718(c)(3) and (5), requires that participation in the premium 
reduction plan not result in a reduction in the total delivery system's 
ability to service all farmers. RMA agrees that the provision as 
drafted would appear to judge each individual approved insurance 
provider by the ability of all other approved insurance providers to 
deliver the Federal crop insurance program and this is not the intent. 
The reference to total delivery system was intended to refer to the 
whole delivery system of the approved insurance provider, such as 
managing general agents, agents, loss adjusters, any service providers, 
etc. Redesignated Sec.  400.718(c)(3) and (5) are much clearer that the 
requirement applies to the performance of the approved insurance 
provider, not competitors.
    Comment: An approved insurance provider asked what is meant by ``a 
reduction in the total delivery system's ability to serve all producers 
. . .'' in proposed Sec.  400.719(a)(13), now redesignated Sec.  
400.718(c)(3) and (5). The commenter asked how FCIC determines whether 
there has been ``a reduction in the total delivery system's ability to 
serve all producers'' and how FCIC determines whether that reduction 
resulted from the premium reduction plan or from other causes. The 
commenter asked if an approved insurance provider's ability to 
implement the premium reduction plan is contingent upon the overall 
crop insurance program. The commenter asked if the approved insurance 
provider would otherwise qualify for the premium reduction plan, does 
FCIC have the ability to reject the approved insurance provider's plan 
based on the service provided to ``all producers.'' If so, it seems 
FCIC is penalizing the approved insurance provider for the

[[Page 41911]]

inadequacies of its competitors. Moreover, nothing in section 508(e)(3) 
suggests that the ability of an individual approved insurance provider 
to achieve program efficiencies is trumped by program-wide 
inefficiencies.
    Response: As stated above, the language in proposed Sec.  
400.719(a)(13) was misleading. However, as explained above, it was 
never the intent of RMA to approve or disapprove an approved insurance 
provider from participating in the premium reduction plan or paying a 
premium discount based on the performance of its competitors. The only 
exception to that statement is that the composition of the approved 
insurance providers' books of business may be compared to determine 
whether the marketing plan is effective. Redesignated Sec.  
400.718(c)(3) and (5) have been clarified that RMA will be looking at 
the performance of the approved insurance provider and the various 
components of its delivery system.
    Comment: An interested party commented recommended that any 
marketing plan that does not invest resources in the development of 
minority and other limited resource farmers be denied. The commenter 
stated that any marketing plan must pay particular attention to, and 
invest substantive resources in, closing this gap in eligibility for 
crop insurance. Similarly, the marketing plan must include 
comprehensive training of agents in specific methods needed to serve 
minority farmers, including partnerships with community based 
organizations serving minority farmers.
    Response: RMA agrees that the marketing plan must be specifically 
designed to reach small, limited resource, women and minority farmers 
and must identify and use the appropriate media to reach these farmers, 
including the use of community based organizations. Further, as stated 
above, provisions have been added regarding the monitoring of these 
marketing plans and actions that may be taken if they are not 
effective.
    However, RMA is unsure of what the commenter was referring to 
regarding comprehensive training of agents in specific methods needed 
to serve minority farmers. The SRA requires that approved insurance 
providers serve all farmers and the interim rule reiterates that the 
approved insurance provider must have the ability to effectively market 
to, and is operationally and financially capable and ready to serve, 
all farmers in the state. This would include small, limited resource, 
women and minority farmers.

Section 400.720

    Comment: An approved insurance provider comments that, with respect 
to proposed Sec.  400.720(a), now redesignated Sec.  400.719(a), for 
good business planning purposes as well as maximizing stability in the 
crop insurance marketplace, approvals should continue beyond one year. 
As long as the rules are met, approved insurance providers should not 
have to reapply for annual approval of the premium reduction plan.
    Response: RMA disagrees that eligibility should extend beyond one 
year. The SRA states that it is not effective for the reinsurance year 
until the annually filed Plan of Operations is approved by RMA. 
Therefore, it would be inappropriate to allow eligibility for a period 
longer than the effective period for the SRA. This could result in 
approved insurance providers being eligible to offer a premium discount 
even though they have not been approved for an SRA. In addition, since 
approval of the premium discount is based on the actual cost savings 
achieved for the reinsurance year, approval to pay a premium discount 
must be given each year. However, as stated above, the burden on the 
approved insurance provider to request eligibility to participate in 
the premium reduction plan has been significantly reduced. Therefore, 
no change has been made as a result of this comment.
    Comment: An approved insurance provider comments that proposed 
Sec.  400.720, now redesignated Sec.  400.719, addresses the terms and 
conditions for the approved premium reduction plan. The commenter 
stated that the reporting requirements detailed in this rule will also 
significantly add to the operating expense to the approved insurance 
provider and defeats the intent of the premium reduction plan to reduce 
operating expenses. The cost alone of CPA certification as required in 
subsection (f), now redesignated Sec.  400.720(a)(1), will be 
substantial.
    Response: RMA recognizes that an approved insurance provider that 
chooses to participate in the premium reduction plan under the interim 
rule will incur certain costs when requesting approval to pay a premium 
discount. However, the incurrence of such costs will not occur until 
after the end of the reinsurance year and the approved insurance 
provider intends to request approval to pay a premium discount. This 
means that in crop years where there has been insufficient savings 
achieved, the approved insurance provider does not have to request 
approval to pay a premium discount and will not have to incur such 
costs.
    Further, as stated above, RMA has sought to minimize such costs by 
eliminating the projected cost accounting up front, using the Expense 
Exhibits already provided with the Plan of Operations, and eliminating 
many of the other reporting requirements.
    Comment: An approved insurance provider states that Sec.  
400.720(e), now redesignated Sec.  400.715(h), changes the premium 
reduction plan from an offer that must be made to farmers with the 
right to reject the premium discount to a mandatory premium discount 
for all farmers. The wording throughout the proposed rule clearly makes 
the premium discount an offer to farmers which they may opt to decline. 
The commenter states that if the proposed wording of subsection (e) 
remains and the premium discounts are mandatory for all insureds of the 
approved insurance provider, then it follows that all approved 
insurance providers must be approved for the plan to avoid rate 
discrimination between the insureds based upon the approved insurance 
provider providing the insurance.
    Response: RMA disagrees that all approved insurance providers must 
be determined eligible to participate in the premium reduction plan to 
avoid rate discrimination. First, as long as all farmers have access to 
the premium reduction plan, there is no discrimination unless an 
approved insurance provider refuses to insure an otherwise eligible 
farmer. To ensure universal access, approved insurance providers 
eligible to offer a premium reduction plan must execute a marketing 
plan that is designed to reach all farmers in the state, in addition to 
any promotional activity of its agents. In addition, all agents that 
represent at least one approved insurance provider that offers a 
premium reduction plan in the state must inform their customers of the 
names of all approved insurance providers that they represent that are 
also eligible to participate in the premium reduction plan in the 
state. Therefore, farmers can make an informed choice of approved 
insurance providers.
    Second, the proposed rule makes it clear that all farmers that 
insure with the approved insurance provider authorized to provide a 
premium discount will receive the discount. This requirement remains in 
the interim rule. The approved insurance provider approved by RMA to 
pay a premium discount in a state must pay the premium discount to all 
its insureds in the state. Obviously it is the farmer's choice with 
respect to whether to accept

[[Page 41912]]

the premium discount and some may elect not to if it would adversely 
affect the payment under other farm programs. However, to allow 
approved insurance providers to select who receives a premium discount 
could lead to unfair discrimination.
    In addition, the whole purpose of the premium reduction plan is to 
introduce price competition. Therefore, it is assumed that there will 
be differences between those approved insurance providers that 
participate in the premium reduction plan and those that do not and 
even among approved insurance providers that participate.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.720(e), now redesignated Sec.  400.715(h), it supports 
this provision because approved insurance providers who offer the 
premium reduction plan must be required to serve all farmers/all crops 
in the states in which they are licensed. This prevents ``cherry-
picking'' and thus furthers Congressional intent. However, the 
commenter strongly feels that this sentence should include the word, 
``applicable'' following the words ``receive the'' in the preceding 
sentence. As previously noted, for CAT policies, no premium discount 
would be applicable as the farmer pays no premium.
    Response: RMA agrees with the comment regarding the requirement 
that premium discounts will automatically be provided to all of an 
approved insurance provider's insured in a state where it has been 
approved to pay a premium discount. RMA also agrees that there should 
be language stating that CAT policies or ineligible farmers will not 
receive the premium discount and has revised redesignated Sec.  
400.715(h) accordingly.
    Comment: A few approved insurance providers and interested parties 
commented that proposed Sec.  400.720(f), now redesignated Sec.  
400.720(a)(1), which requires certification by a CPA, should be signed 
by the person authorized to sign the SRA to emphasize the importance of 
the document.
    Response: As stated above, under the alternative proposal adopted 
in the interim rule, only actual costs will be provided to determine 
whether there has been an efficiency and the amount of any premium 
discount and such costs will be based on the Expense Exhibits provided 
with the Plan of Operations, which is already signed by the person 
authorized to sign the SRA. Therefore, it is not necessary to have such 
person sign the audit and certification of these Expense Exhibits. 
Therefore, no change has been made as a result of this comment.
    Comment: An interested party commented that proposed Sec.  
400.720(g), now redesignated Sec.  400.719(d), would require that 
approved providers periodically report to the RMA on the average number 
of acres insured both before and after the premium reduction plan, the 
number of small, limited resource and minority farmers insured, and the 
number of agents selling and servicing policies by state. Such 
reporting would not identify efforts by approved providers to 
consolidate business among agents with only large, low risk customers. 
The commenter states that under the proposed rules, approved providers 
could effectively use agent business as a litmus test for choosing the 
states in which they do business and the agents who sell and service 
their policies.
    Response: RMA agrees that the required report would not identify 
efforts by approved insurance providers to consolidate agents or select 
agents with only large, low risk customers, nor is the report intended 
to accomplish this. Neither the current SRA nor the proposed or interim 
rule precluded this conduct. To ensure that small, limited resource, 
women and minority farmers have access to the premium discount plan, 
approved insurance providers are required to target market through the 
appropriate media designed to reach these farmers and agents are 
required to inform all customers of the names of all approved insurance 
providers they write for that are eligible for the opportunity to offer 
a premium discount. This report, which has been substantially modified 
to remove the information collections that could be obtained through 
the summary of business or other RMA databases, is intended as a tool 
to assess the effectiveness of the marketing plan.
    Further, as stated above, because of the real possibility that 
approved insurance providers would withdraw from states if they were 
required to participate in the premium reduction plan in all states in 
which they do business, RMA has elected to allow approved insurance 
providers to select the states in which they will participate in the 
premium reduction plan. This is because the risks associated with the 
possibility of no insurance coverage outweigh the risks associated with 
the possibility of not receiving a premium discount in the future.
    Further, the selection criteria of the states is solely in the 
discretion of the approved insurance provider because only the approved 
insurance provider is in the position to determine where savings can be 
achieved without risking non-compliance with the requirements of the 
SRA or approved procedures.
    Comment: An interested party commented that the approved insurance 
providers should be required to report the proposed impact of the 
premium reduction plan on the various types of products offered, by 
race, gender and ethnicity. In lieu of comprehensive data on race, 
gender and ethnicity, the approved insurance providers should further 
be required to report by scale and value of operation the number of 
farmers of various sizes enrolled in basic CAT coverage and other 
levels of more comprehensive coverage, and where reduced premiums were 
allocated.
    Response: As stated above, much of the information collected in 
proposed Sec.  400.720(g), now redesignated Sec.  400.719(d), has been 
removed because such information is already collected under Appendix 
III to the SRA and maintained in RMA databases. It is only that 
information that is not currently collected, such as the number of 
small, women, and minority farmers making application and the 
resolution of any complaints that RMA will require approved insurance 
providers to report. The remaining information listed by the commenter 
is retained in RMA databases so there is no need for an additional 
information collection.
    Comment: An approved insurance provider commented that the 
requirements in Sec.  400.720(g), now redesignated Sec.  400.719(d), 
requiring approved insurance providers to report the average number of 
acres insured under all policies by State before and after 
implementation of the premium reduction plan could create inaccuracies 
where a farmer has policies in different counties. The commenter stated 
that, at a minimum, the requirement should be restated to include ``the 
average number of acres on a crop, county, and entity basis insured 
under all policies by State before and after implementation of the 
premium reduction plan,'' and should also require premium growth by 
crop in each state. In addition, these semi-annual reports should be 
made available to the public.
    Response: As stated above, this information collection has been 
removed from the interim rule because such information is already 
collected under Appendix III to the SRA. Therefore, there should not be 
a problem with inaccurate reporting. In addition, much of this 
information is available to the public in the aggregate in the summary 
of business published on RMA's website. However, to the extent that the 
semi-annual reports

[[Page 41913]]

required by the interim rule contain confidential business information, 
such information is protected from release to the public.
    Comment: An approved insurance provider comments that, with respect 
to proposed Sec.  400.720(g)(3), now redesignated Sec.  400.719(d), it 
is very important that premium discounts are offered to all farmers. 
The required reporting, however, should not be of the numbers of small, 
limited resource, women and minority farmers that have made 
applications. In some regions of the country, it is likely there will 
be very few, if any, small/limited resource/women/minority farmers. It 
is also likely for newer crop approved insurance providers that their 
sales to such groups may not be statistically valid as they enter new 
states. Thus, the commenter recommends that each approved insurance 
provider offering the premium reduction plan only be required to 
report, and judged on, their outreach efforts as a whole in all states 
in which they are licensed.
    Response: RMA agrees that the number of small, limited resource, 
women, and minority farmers is likely to vary dramatically according to 
geographical regions. Further, RMA recognizes that such figures when 
expressed as percentage of the total business in the state may present 
skewed figures, especially for new approved insurance providers. 
However, this information is still useful. Under the marketing plan, 
approved insurance providers are required to target these farmers. If 
RMA does not collect the information regarding their participation, RMA 
will have no way to judge whether the marketing plans are successful. 
Further, as stated above, any comparison between approved insurance 
providers would be based on the composition of their books of business, 
not just gross numbers.
    RMA does not agree that approved insurance providers should only be 
judged on the outreach effort as a whole in all states. The whole 
purpose of the marketing plan is to increase participation of a 
traditionally underserved segment of farmers in each state where these 
farmers are located. However, because approved insurance providers can 
now select the states in which they participate in the premium 
reduction plan, the reporting must only be done for those states the 
approved insurance provider selects. Without such information, RMA 
would not be able to judge whether additional remedial measures are 
required by the approved insurance providers to reach these farmers. 
Therefore, no change has been made in response to this comment.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.720(h), it supports this provision on the basis that an 
``overstated'' premium discount is unfair to farmers. Any approved 
insurance provider applying for approval to offer the premium reduction 
plan should be required to accurately document their savings, allowing 
for the ``financial reserve plan'' as a back-up. Overall, the commenter 
states it see this as protection to farmers, since approved insurance 
providers might be tempted to use the premium reduction plan as a loss-
leader to enter new markets if the savings are not substantiated and if 
they are not penalized for failing to achieve the savings they 
represented to the RMA would be made.
    Response: As stated above, since RMA has adopted the alternative 
proposal in the interim rule, and premium discounts are based on actual 
cost savings, not projected, this provision is no longer required and 
has been removed from the interim rule.
    Comment: An approved insurance provider commented that 400.720(h) 
says there is no penalty for not achieving the projected savings needed 
to cover the premium discount. The approved insurance provider is 
limited to no more than the ``actual cost savings'' in the future year 
with no consequence for the year of misrepresentation to the farmers. 
The commenter states that this creates an unfair competitive advantage 
to a provider willing to takes its chances on RMA not discovering their 
error with no financial impact at all to the approved insurance 
provider. There needs to be a provision added to portray the severity 
of this type of misrepresentation, i.e. reject any and all future 
premium discounts, charge the amount of the premium discount as a 
policy surcharge in the following year, require that amount as an 
additional expense in each of the next two reinsurance years, etc.
    Response: As stated above, since RMA has adopted the alternative 
proposal in the interim rule, and premium discounts are based on actual 
cost savings, not projected, this provision is no longer required and 
has been removed from the interim rule. With respect to the sanctions 
for misrepresentation, as stated above, additional sanctions have been 
added that allow RMA to tailor the sanction to the offense and they 
include the ability to disqualify an agent or approved insurance 
provider from participating in the premium reduction plan.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.720(i), now redesignated Sec.  400.719(e), Congress and 
RMA has been very clear that no ``cherry-picking'' is allowed in the 
delivery of the crop insurance program. Exceptions for the premium 
reduction plan should not be made. The commenter specifically supports 
this provision on the basis that a premium reduction plan is and should 
be good for all farmers.
    Response: RMA agrees with the comment. While RMA cannot prevent 
agents from competing for large attractive accounts, RMA can take 
action when insurance is denied to any eligible farmer, especially 
small, limited resource, women and minority farmers.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.720(j), now redesignated Sec.  400.719(f), FCIC and RMA 
should not have any liability for damages arising from these matters, 
but is concerned that this provision attempts to re-allocate liability 
for damages among private parties, which should be left to state law. 
For example, in the implementation of an approved premium reduction 
plan, an agent could make errors or misrepresentations for which the 
agent bears some or all of the liability to third parties injured 
thereby under applicable state law. Moreover, this provision could be 
interpreted to create a new, federal cause of action for these matters, 
which the commenter does not believe is or should be the RMA's intent. 
The commenter stated that state law should govern both the existence of 
a cause of action for these matters, as well as the allocation of 
liability among private third parties. Accordingly, the commenter 
proposes the provision be changed to read ``In no event shall RMA, FCIC 
or any other agency of the United States Government be liable for any 
damages caused by any mistakes, errors, misrepresentations, or flaws in 
the premium reduction plan or its implementation.''
    Response: RMA agrees and has revised the provision accordingly.
    Comment: An approved insurance provider commented that Sec.  
400.720(k) seems to suggest this program will only be ``periodically 
reviewed'' by RMA. It is imperative to the integrity of this program 
that a formal and regular review of an approved audit procedure be in 
place with necessary staff to analyze the results annually. This 
element of control and accountability is essential to the fairness to 
all farmers and to all approved providers.
    Response: RMA agrees that monitoring is important. Under the 
interim rule, monitoring will occur under the SRA and under the premium 
reduction plan. However, since

[[Page 41914]]

adoption of the alternative proposal, many of the monitoring activities 
stated in proposed Sec.  400.720(k) have been rendered moot and removed 
from the interim rule.
    Comment: An approved insurance provider comments that, with respect 
to Sec.  400.720(m) and (n), now redesignated Sec. Sec.  400.719(j) and 
400.721(a), RMA should be able to withdraw approval or require 
modification of the premium reduction plan if any of the criteria in 
(m) exists. However, the commenter states that before it withdraws 
approval, RMA should give the approved insurance provider a thirty day 
cure period. The approved insurance provider may not have been aware of 
the problem, and this gives it a reasonable period within which to fix 
it. Additionally, the commenter requests that an approved insurance 
provider whose premium reduction plan has been withdrawn or required to 
be modified should have the right to request reconsideration, as Sec.  
400.719(c)(2) of the proposed rule would allow if a revised Plan of 
Operations is disapproved.
    Response: Section 400.719(j) provides RMA with additional options 
so that sanctions can be tailored to the offense. One of the options is 
to require remedial measures to eliminate the problem. In addition, RMA 
has added a reconsideration process if any of the sanctions are 
applied, including denial of the payment of a premium discount or 
withdrawal of eligibility for the opportunity to offer a premium 
discount. RMA has also added an appeals process to the Board of 
Contract Appeals to avoid confusion regarding the proper forum to 
handle appeals. The Board of Contract Appeals was determined to be the 
proper forum because the premium reduction plan has been incorporated 
by reference into the SRA, monitoring will occur under the SRA, 
sanctions may be imposed under the SRA, and the documents reviewed are 
provided under the SRA.
    Comment: An approved insurance provider proposes that, with respect 
to Sec.  400.720 RMA add a new subsection (o) stating as follows:

    ``(o)(1) Before withdrawing or modifying its approval of a 
premium reduction plan, RMA will notify the provider in writing of 
the contemplated withdrawal or modification of approval and the 
reason therefore, and allow the provider at least thirty days to 
cure. If the provider does not cure within such period to the RMA's 
reasonable satisfaction, the withdrawal or modification shall be 
effective after the expiration of such thirty day period and as of 
the date specified in the notice.
    (2) If approval of a premium reduction plan is withdrawn or 
modified, the approved insurance provider may request, in writing, 
reconsideration of the decision with the Deputy Administrator of 
Insurance Services, or a designee or successor, within 30 days after 
the effective date of such withdrawal or modification and such 
request must provide a detailed statement of the basis for the 
reconsideration.''

    Response: As stated above, RMA has added provisions that allow RMA 
to require remedial measures instead of withdrawal of eligibility for 
the opportunity to offer a premium discount. Such remedial measure 
could include a cure period. In addition, reconsideration and appeals 
provisions have also been added.
    Comment: An interested party recommended that a process should be 
established to monitor compliance, planned outcomes and results of 
marketing plans.
    Response: RMA agrees that it have a process in place that monitors 
approved insurance provider performance with respect to the marketing 
plans. The semi-annual reports will be used. In addition, RMA can 
compare the compositions of the books of business of the approved 
insurance providers to determine whether there are any anomalies that 
suggest the marketing plan is not effective. RMA has also created a 
mechanism whereby farmers can file complaints directly to RMA for 
investigation and resolution.
    Following are a summary of the current procedures and the adopted 
changes in the interim rule.
    1. Fundamental Principles. Under the existing procedures, approved 
insurance providers could name the states and crops for which the 
premium reduction plan would be applicable. As stated more fully above, 
after careful consideration of all the comments, RMA has elected to 
retain the provisions regarding the selection of states. In the interim 
rule, approved insurance providers will be able to select those states 
in which it wants the opportunity to offer a premium discount. RMA 
retained this provision because of the concerns raised by commenters 
that approved insurance providers would pull out of unprofitable 
states, leaving those farmers without access to crop insurance. RMA 
balanced the interests of farmers potentially receiving a premium 
discount with the possibility that farmers could be left with no 
coverage and determined that it was more important to ensure that 
farmers have access to crop insurance than that they potentially 
receive a premium discount.
    However, to avoid any unfair discrimination all farmers within that 
state must be treated the same. Therefore, RMA has removed the 
provisions allowing approved insurance providers to select specific 
crops. Allowing such a practice could lead to unfair discrimination 
against farmers of certain crops.
    Under the existing procedures, the same premium discount was 
provided in all states. The interim rule changes this requirement to 
allow approved insurance providers to vary the discount by state 
because the A&O costs of approved insurance providers can vary 
significantly by state. It is safer for the crop insurance program for 
approved insurance providers to cut costs in those states where it 
would not affect their ability to deliver the crop insurance program 
than to require approved insurance providers make the same cuts in all 
states.
    However, as stated more fully above, the premium reduction plan has 
been redesigned so that RMA approves the amount of premium discount 
that can be paid in any state. Further, it allows for true competition 
because the market will determine the appropriate amount of premium 
discounts. In addition, RMA is now requiring that not all efficiencies 
can come from reductions in agents' compensation.
    In the interim rule, RMA still had to address the concerns 
expressed by commenters that the premium reduction plan would require 
complex cost accounting rules and there would be cost allocation 
issues. There was also the concern that RMA would not have the adequate 
skilled staff to be able to oversee and administer each of the 
potentially different premium reduction plans that could be submitted 
by the approved insurance providers.
    As discussed more fully above, adoption of the alternative proposal 
mitigates or eliminates most of these problems. Under the alternative 
proposal, premium discounts are based on actual cost savings attained 
for the reinsurance year. Further, RMA has broken the A&O costs into 
three categories and has determined simple cost allocation rules where 
necessary. Approved insurance providers will be provided with 
procedures that set forth a formula that will be used to determine 
efficiencies and the amount of premium discount that can be paid in a 
state. These procedures will be published on RMA's website at 
www.rma.usda.gov not later than 5 days after the publication of the 
interim rule in the Federal Register.
    With respect to when payments can be made, under the existing 
procedures, premium discounts are based on projected cost savings and 
the approved insurance provider may advertise and guarantee those 
savings to the farmer

[[Page 41915]]

before they are realized. This means that farmers see an immediate 
reduction in the amount they owe on their premium bill for the crop 
year.
    Under the interim rule, premium discounts will be based on the 
actual costs realized in a reinsurance year so payment of a premium 
discount cannot be made until after all such costs are accounted for, 
reported to RMA, and RMA approves the amount of premium discount that 
can be paid in any state. This means the farmer may not see the benefit 
of a premium discount until well after the end of the crop year and 
there is no guarantee that any premium discount will be paid for the 
year. While this may preclude farmers from receiving the immediate 
benefits, it allows the premium reduction plan to operate in a manner 
that reduces the possibility that an approved insurance provider may 
not be able to attain its projected savings, that such cost saving 
measures may affect the financial stability of the approved insurance 
provider and the delivery system, and reduces the burden on approved 
insurance providers and RMA to administer the premium reduction plan.
    2. Revisions of Definitions. Most of the definitions from the 
current procedures have been included in this interim rule, although 
some have been modified to conform to the SRA. The definitions of 
``administrative and operating (A&O) costs'' and ``administrative and 
operating (A&O) subsidy'' have been revised to eliminate the costs and 
loss adjustment expense subsidies related to the sale and service of 
catastrophic risk protection (CAT) policies. This change was made 
because no premium is owed under a CAT policy. Therefore, the premium 
discount would not be applicable. For the ease of cost accounting, and 
because there is little variation in the sale or service of CAT 
policies because options are so limited, these definitions create an 
assumption that the loss adjustment expense subsidy paid by RMA is 
equal to the amount of costs associated with the sale and service of 
CAT policies.
    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.
    A definition of ``approved procedures'' is added for clarification. 
Definitions of ``eligible crop insurance contract'' and ``eligible 
producer'' have been added consistent with such definitions in the 
Standard Reinsurance Agreement. 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 ``reduction in service'' is added to clarify 
that approved insurance providers are only required to meet the 
requirements for service contained in the SRA, procedures, and other 
directives of RMA. Therefore, a reduction in service occurs when there 
has been a failure to comply with one of the requirements. RMA 
acknowledges that there may be agents who have been providing many more 
services than those required but RMA cannot require that such service 
be maintained. It can only enforce the requirements it has set out.
    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 
farmers 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 discount will be applicable. In the interim rule, for the 2006 
reinsurance year, revised Plans of Operations must be received by RMA 
not later than 15 days after publication of the interim 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 with the Plan of Operations 
for the reinsurance year. RMA has elected to have a single submission 
window each reinsurance year to ensure that all approved insurance 
providers are playing on a level field, as requested by the commenters. 
However, RMA has added provisions that would allow new approved 
insurance providers to request an opportunity to offer a premium 
discount in their request for approval of an SRA.
    Under the existing procedures, approved insurance providers were 
required to implement the premium reduction plan once it was approved 
by RMA. This provision has been removed. Approved insurance providers 
have the ability to determine whether it can effectively implement cost 
cutting measures necessary to achieve the requisite efficiency. The 
interim rule now reflects that if the approved insurance providers 
requests approval to pay a premium discount, it must pay the premium 
discount if it is approved by RMA. Since approved insurance providers 
have the option of requesting approval to pay a premium discount, the 
existing procedures allowing the approved insurance provider 15 days to 
withdraw its premium reduction plan were also not included in the 
interim rule.
    4. Confidentiality Requirements. The existing procedures contained 
confidentiality requirements. However, since such procedures do nothing 
more than restate the law, RMA has elected to remove them from the 
interim rule. This will allow flexibility should such laws be revised.
    5. Contents of Revised Plans of Operations. The current procedures 
require five copies and both a hard copy and electronic version of the 
revised Plan of Operations and other documentation. The interim rule 
has been revised to remove this requirement because there is no longer 
a need to submit a revised Plan of Operations. The current Expense 
Exhibits submitted with the Plan of Operations will be used, along with 
any estimated A&O costs for the reinsurance year that were not included 
in such Expense Exhibits. The current 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 
discount to be offered to farmers, 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 
discount to be provided to the farmers. Except for providing the name 
of the person who will be responsible for the premium reduction plan, 
all these other requirements have been removed from the interim rule. 
Such requirements are no longer necessary because premium discounts are 
now based on actual costs, not projected costs. Further, the 
availability or amount of the premium

[[Page 41916]]

discount is no longer known or guaranteed. The interim rule does 
require that approved insurance providers provide a report of the 
actual premium discount payments made for the previous year but such 
report must be provided not later than 15 days after the payment of the 
premium discounts.
    The existing procedures also require the approved insurance 
provider to list the proposed crops and states where the efficiency is 
being gained and the estimated number of farmers. As stated above, the 
requirement to list the states has been retained but the requirement to 
list the crop has been removed from the interim rule because this 
provision was rendered moot by the requirement that premium discounts 
be paid for all crops in those states listed by the approved insurance 
provider.
    The existing procedures also require that approved insurance 
providers state how they intend to deliver the premium reduction plan 
and to identify the cost saving measures that will be used to attain 
the projected efficiency. These requirements were removed from the 
interim rule because RMA no longer has to determine up front whether it 
is realistic for approved insurance providers to meet their projected 
efficiencies.
    The requirements in the existing procedures stating how projected 
efficiencies are calculated, requiring detailed accounting statements, 
and the other accounting matters have been removed from the interim 
rule. Now that the premium discount will be based on actual cost 
savings instead of projected cost savings, such information is no 
longer required to be provided up front. Cost accounting information 
necessary for the approval of the premium discount that can be offered 
in a state is already contained in the existing Expense Exhibits to the 
SRA. Further, RMA will provide a formula for calculating the premium 
discount to be used in the approval process through procedures.
    The requirement that counsel from the approved insurance provider 
certify that the manner in which the premium reduction plan will be 
delivered is in accordance with state law has been removed from the 
interim rule. It is the responsibility of the approved insurance 
provider to ensure that it delivers the crop insurance program in 
compliance with the requirements of the SRA. Failure to comply with any 
requirements can subject the approved insurance provider to sanctions 
under the SRA. Therefore, this requirement was no longer necessary.
    The existing procedures also required that approved insurance 
providers provide an analysis of whether the premium reduction plan is 
unfairly discriminatory or could be perceived as such. This provision 
has been removed from the interim rule and instead, approved insurance 
providers are required to provide marketing plan for all farmers, 
including small, minority, women and limited resource farmers to 
address concerns that such farmers will not receive access to premium 
discounts.
    RMA has added provisions that limit the marketing that can be done 
regarding premium discounts because they are no longer guaranteed up 
front. After the approved insurance providers have been determined to 
be eligible for the opportunity to offer a premium discount, approved 
insurance providers and their contractors and employees will only be 
able to advertise that they have been determined to be eligible and 
state the premium discounts that have been paid in previous reinsurance 
years. Disclaimers must also be prominently displayed that state that 
past premium discounts to not guarantee that a future discount will be 
paid or its amount. RMA is also enlisting the states to assist it in 
monitoring the marketing conduct of the approved insurance providers 
and their contractors and employees because states currently monitor 
such activities so they already have the infrastructure in place.
    RMA has also added a requirement to the interim rule that approved 
insurance providers must provide a certification that their cost saving 
measures will not result in a reduction in service as defined in the 
interim rule. This is to reinforce the importance of this requirement.
    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 establish 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 interim 
rule, such startup costs must be included as expenses but the approved 
insurance provider will be 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 interim rule, for the 2006 reinsurance year, RMA will 
notify the approved insurance provider not later than 30 days after the 
approved insurance provider requests the eligibility to offer a premium 
discount, whether it is eligible for the opportunity to offer a premium 
discount under the premium reduction plan. For all subsequent 
reinsurance years, current procedures require RMA to provide a response 
to the approved insurance provider regarding its eligibility for an 
opportunity to offer a premium discount not later than 30 days prior to 
the first sales closing date. This provision has been revised to 
require that the request be made with the Plan of Operations. Since 
approved insurance providers will no longer be able to market premium 
discounts like they did under the existing procedures, the additional 
lead time is not as critical.
    RMA has also added provisions setting forth the criteria under 
which RMA will determine an approved insurance provider eligible for 
the opportunity to participate in the premium reduction plan. A new 
criteria is that the marketing plan be designed to reach small farmers, 
limited resource farmers as defined in section 1 of the Basic 
Provisions, 7 CFR 457.8, women and minority farmers. Disclaimers have 
also been added to the interim rule to inform participants in the crop 
insurance program that RMA determination of eligibility does not

[[Page 41917]]

guarantee that it will approve a premium discount.
    8. Standards for Approval. The current procedures require that the 
premium reduction plan not result in the reduction of service to 
farmers or be harmful to the interest of farmers, 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 to monitor its compliance with the 
provisions of the interim rule, and the premium reduction plan meet all 
other requirements of the Act and the SRA. These requirements have been 
retained in this interim rule but moved to the previous section 
because, in the interim rule, RMA has separated the process for 
determining eligibility for an opportunity to offer a premium discount 
under the premium reduction plan from the approval of the amount of 
premium discount.
    To be approved for a premium discount, the approved insurance 
provider must provide an audit of its Expense Exhibits to the SRA and 
an estimate of additional A&O costs for the reinsurance year not 
included in such Exhibits, certified by an independent public 
accountant with experience in insurance accounting, a detailed 
description of the profit sharing arrangements, the amount and 
percentage of premium discount in each state determined by the approved 
insurance provider, and the amount of premium discount the approved 
insurance provider intends to pay. RMA has also added provisions 
requiring that the cost of such audit be included in the A&O costs. The 
criteria for approval of the amount of premium discount includes: (1) 
The Expense Exhibits to the SRA must show the approved insurance 
provider's A&O costs were less than its A&O subsidy for the reinsurance 
year; (2) a determination of whether the approved insurance provider 
had an efficiency and the amount of premium discount that can be paid 
in any state; (3) whether the amount of premium discount determined by 
the approved insurance provider exceeds the amount determined by RMA; 
and (4) whether the approved insurance provider has complied with all 
requirements of the rule.
    9. Disapproval. RMA has revised the existing procedures and 
combined them with the review and approval process as stated above.
    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 discounts 
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 interim rule, although modified slightly to 
reflect that premium discounts are based on actual cost savings and 
they now apply after RMA has determined the approved insurance provider 
is eligible for the opportunity to offer a premium discount under the 
premium reduction plan.
    RMA has revised the procedures regarding reporting to ensure the 
information provided is adequate to review and assess the impact on 
program participants, including small farmers, limited resource 
farmers, women and minority farmers and on the crop insurance program. 
RMA will also utilize other information it obtains to monitor 
compliance with the rule. RMA has also revised the procedures to 
clarify that farmers will automatically receive the premium discount in 
those states listed by the approved insurance provider where it is 
approved to pay premium discounts. RMA has also added provisions making 
it clear that eligibility for the opportunity to offer a premium 
discount under the premium reduction plan is only for one reinsurance 
year and approved insurance providers must reapply for subsequent 
years.
    Additionally, RMA has added provisions requiring agents to notify 
all existing policyholders or potential policyholders of all the 
approved insurance providers the agent represents that are eligible for 
the opportunity to offer a premium discount. As stated above, this is 
to help ensure that all farmers in states where premium discounts may 
be available to have access to such discounts. Further, RMA added 
provisions specifying that it will closely monitor the approved 
insurance provider's efforts to market the premium reduction plan to 
small farmers, limited resource farmers, women and minority farmers to 
ensure that no unfair discrimination takes place and that if it is 
discovered, RMA may take such action as authorized in the rule.
    The existing procedure requiring the approved insurance provider to 
offer a premium reduction plan has been removed and new provisions 
added giving the approved insurance provider the option of whether to 
request approval to pay a premium discount in any reinsurance year. 
However, once approved, the premium discount must be paid in accordance 
with the rule. The existing procedures regarding the withdrawal of 
approval have been retained but additional remedies, such as denial of 
all or part of a premium discount and remedial actions have been added.
    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 maximum amount of premium 
discount RMA may authorize for at least the first two reinsurance years 
a premium discount is paid, and thereafter unless modified or 
eliminated by RMA, 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 financially vulnerable by cutting 
their costs too much. This means the cap could be in effect for at 
least 4 reinsurance years depending on when the premium discount is 
paid.
    RMA has also created a new section that contains provisions 
regarding the reconsideration of actions taken by RMA and requires 
appeal of the decision in such reconsideration be made to the Board of 
Contract Appeals.
    A new section has also been added regarding consumer complaints. 
These provisions provide a mechanism for reporting violations of the 
interim rule.
    Good cause is shown to make this rule effective less than 30 days 
after publication in the Federal Register. A case for good cause is 
needed to make a rule effective less than 30 days after publication. 
Good cause exists when the 30 day delay in the effective date is 
impracticable, unnecessary, or contrary to the public interest.
    With respect to the provisions of this interim rule, it would be 
contrary to the public interest to delay implementation of the 
procedures under which approved insurance providers may request to 
participate in the premium reduction plan under section 508(e)(3) of 
the Act and seek approval to pay premium discounts if they have 
attained the requisite efficiency. The public interest is served by 
this interim rule

[[Page 41918]]

because: (1) It will greatly reduce the complexity and the burden on 
approved insurance providers and RMA to administer the premium 
reduction plan; (2) it will replace administrative procedures that have 
been determined by FCIC's Board of Directors to be inadequate because 
they fail to take into consideration the different business operations 
of the approved insurance providers; (3) to be given its full effect, 
the provisions of the interim rule must be implemented as soon as 
possible because the 2006 reinsurance year began on July 1, 2005; (4) 
time is needed for approved insurance providers to submit requests to 
participate in the premium reduction plan, RMA to determine their 
eligibility to participate, and for agents to be trained ahead of key 
fall sales closing dates; and (5) approved insurance providers, 
farmers, and the public will not be disadvantaged by the immediate 
implementation of the rule.
    If RMA is required to delay the implementation of this rule 30 days 
after the date it is published, there will be inconsistency in the 
administration of the premium reduction plan for the 2006 reinsurance 
year because fall planted crops may have to be administered under the 
existing procedures while spring planted crops would be administered 
under the interim rule. This will cause confusion in the marketplace 
and the potential for certain farmers to miss the opportunity to 
receive a premium discount.
    For the reasons stated above, good cause exists to implement this 
interim rule less than 30 days after the date of publication in the 
Federal Register.

List of Subjects in 7 CFR Part 400

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

Interim Rule

0
Accordingly, as set forth in the preamble, the Federal Crop Insurance 
Corporation amends 7 CFR part 400 subpart V, applicable for the 2006 
and succeeding reinsurance years, as follows:

PART 400--GENERAL ADMINISTRATIVE REGULATIONS

0
1. The authority for 7 CFR part 400 continues to read as follows:

    Authority: 7 U.S.C. 1506(1), 1506(p), 1508(e)(3).

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

0
2. Revise the heading for subpart V to read as set forth above.


0
3. Amend Sec.  400.700 by designating the existing paragraph as 
paragraph (a) and adding a new paragraph (b) to read as follows:


Sec.  400.700  Basis, purpose, and applicability.

* * * * *
    (b) The purpose of the premium reduction plan is to foster 
competition in the crop insurance program, thereby providing producers 
with an opportunity to receive a premium discount, as authorized in 
section 508(e)(3) of the Act. RMA has sought to accomplish this 
purpose, while still maintaining the financial stability of the 
delivery system and the integrity of the crop insurance program, by 
implementing a premium reduction plan where approved insurance 
providers participate in the premium reduction plan by requesting the 
opportunity to offer a premium discount and later requesting approval 
from RMA to pay a premium discount if the insurance provider has 
achieved an efficiency based on the actual savings it has attained 
through the reinsurance year.
    (1) Since the payment of any premium discount is determined based 
on actual reported cost information for the reinsurance year, and must 
be approved by RMA, the disclosure to policyholders of the amount of 
the premium discount and the payment of the premium discount will not 
occur until after the close of any given reinsurance year.
    (2) This premium reduction plan substantially limits the burden on 
approved insurance providers and RMA and provides for flexibility for 
approved insurance providers to choose the States in which they will 
offer premium discounts and vary the amount of premium discount between 
States.
    (3) Under the premium reduction plan, the payment and amount of 
premium discounts cannot be guaranteed, or identified as to amount or 
certainty of payment, in advance of the sale of an eligible crop 
insurance contract. However, producers will have the potential to 
receive monetary assistance in defraying the costs of their future 
premium.


Sec.  400.701  [Amended]

0
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,'' ``Approved 
procedures,'' ``Compensation,'' ``Efficiency,'' ``Eligible crop 
insurance contract,'' ``Eligible producer,'' ``Managing General Agent 
(MGA),'' ``Plan of Operations,'' ``Premium discount,'' ``Profit sharing 
arrangement,'' ``Reduction in service,'' ``Standard Reinsurance 
Agreement (SRA),'' ``Third Party Administrator (TPA),'' ``Underwriting 
gain,'' and ``Unfair discrimination'' in alphabetical order to read as 
follows:


Sec.  400.701  Definitions.

* * * * *
    Administrative and Operating (A&O) costs. The costs of the approved 
insurance provider, and any MGA and TPA, which are directly related to 
the delivery, loss adjustment and administration of the Federal crop 
insurance program. Costs associated with the sale or service of 
catastrophic risk protection (CAT) eligible crop insurance contracts in 
an amount equal to the loss adjustment expense subsidy for CAT eligible 
crop insurance contracts, ceding commission received for ceding any 
portion of the risk associated with any eligible crop insurance 
contract authorized under the authority of the Act with a reinsurer, 
and payments for the purchase of reinsurance and related credits are 
not considered as A&O costs.
    Administrative and Operating (A&O) subsidy. The subsidy for the 
administrative and operating expenses authorized by the Act and paid by 
FCIC on behalf of the producer to the approved insurance provider. Loss 
adjustment expense reimbursement paid by FCIC for CAT eligible crop 
insurance contracts, and any ceding commission received for ceding any 
portion of the risk associated with any eligible crop insurance 
contract authorized under the authority of the Act with a reinsurer are 
not considered as A&O subsidy.
    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 employed by, or under contract with, the approved insurance 
provider, or its designee, to sell and service such eligible crop 
insurance contracts.
* * * * *
    Approved procedures. The applicable handbooks, manuals, memoranda, 
bulletins or other directives issued by RMA or the Board. For purposes 
of Sec. Sec.  400.714 through 400.722 only,

[[Page 41919]]

approved procedures include all provisions of the SRA.
* * * * *
    Compensation. The total amount of any guaranteed salary or payment, 
commission, or anything that has a quantifiable value or benefit 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 or its contractor either directly or indirectly 
through a third party. Payments conditioned upon something other than 
the underwriting gains of the approved insurance provider are 
considered as compensation, such as bonuses or other conditional 
payments or commission based upon whether an agent timely turns in 
applications, production reports or acreage reports, etc. A profit 
sharing arrangement will be considered compensation unless and only to 
the extent that:
    (1) Such profit sharing arrangement contains a provision that would 
require a pro rata reduction in the amount or percentage of profit 
contained in such arrangement if the total amount of underwriting gain 
paid by FCIC for the applicable reinsurance year is not sufficient to 
cover the amount or percentage of profit; or
    (2) At least one of the required triggers for the payment under the 
profit sharing arrangement is that the approved insurance provider 
receives from FCIC an underwriting gain for its whole book of Federally 
reinsured crop insurance business for the applicable reinsurance year.
* * * * *
    Efficiency. Monetary savings realized when the approved insurance 
provider's A&O costs are less than the amount of the A&O subsidy paid 
by FCIC. If the approved insurance provider is reducing agent 
compensation as a means to achieve an efficiency, not all of the 
efficiency can come from such reduction in agent compensation. 
Efficiency does not include any actual or projected underwriting gain 
earned from the SRA, private reinsurance revenues or expenses, or any 
investment returns on the approved insurance provider's reserves.
    Eligible crop insurance contract. An insurance contract for an 
agricultural commodity authorized by the Act and approved by FCIC, with 
terms and conditions in effect as of the applicable contract change 
date, which is sold and serviced consistent with the Act, FCIC 
regulations, and approved procedures having a sales closing date within 
the reinsurance year, and with an eligible producer.
    Eligible producer. A person who has an insurable interest in an 
agricultural commodity, who has not been determined ineligible to 
participate in the Federal crop insurance program, and who possesses a 
United States issued social security number (SSN), employer 
identification number (EIN), or such other identification as required 
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.
* * * * *
    Plan of Operations. The documents and information the approved 
insurance provider must submit in accordance with section IV.F.2. and 
Appendix II of the SRA and applicable approved procedures.
    Premium discount. A payment made by the approved insurance provider 
to the policyholder to help defray the cost of premium, in an amount 
equal to the dollar amount or corresponding percentage of net book 
premium approved by RMA, as authorized by section 508(e)(3) of the Act.
    Profit sharing arrangement. An arrangement to make a payment to an 
employee, agent, loss adjuster or other contractor conditioned upon 
whether the approved insurance provider receives an underwriting gain 
on the crop insurance business. Payments made to commercial reinsurers 
or ceding commissions paid to the approved insurance provider for the 
reinsurance year for the crop insurance book of business are not 
considered as profit sharing arrangements for the purposes of 
determining A&O costs or A&O subsidy.
    Reduction in service. When the approved insurance provider, agent 
and loss adjuster, or any other contractor or employee of the approved 
insurance provider that assists in or provides any service for a 
Federally reinsured eligible crop insurance contract, sells, services 
or administers such eligible crop insurance contracts at a level of 
service less than that required under all applicable regulations and 
approved procedures. A violation of a provision in an approved 
procedure will be considered to be a reduction in service.
* * * * *
    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 service the 
eligible crop insurance contracts for which the premium discount is 
proposed. All references to the SRA will also include any other 
reinsurance agreements entered into with FCIC, including the Livestock 
Price Reinsurance Agreement, unless otherwise stated in such 
reinsurance agreement.
    Third Party Administrator (TPA). A person or organization that 
processes claims or performs other administrative services and holds 
licenses, as applicable, in States in which services are provided with 
respect to the Federal crop insurance business 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, including but not limited to 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, service, loss adjustment and administration of the Federal 
crop insurance program.
    Unfair discrimination. An approved insurance provider's 
implementation of the premium reduction plan will be considered 
unfairly discriminatory to a producer if the availability of eligible 
crop insurance contracts sold under the premium reduction plan, or the 
percentage of net book premium upon which the premium discount is paid, 
is based on the loss history of the producer, the amount of premium 
earned under the eligible crop insurance contract, the producer's size 
of the operation or number of acres to be insured, or precludes in any 
manner producers from participating in the premium reduction plan in a 
State where an approved insurance provider is eligible for the 
opportunity to offer a premium reduction plan.
* * * * *

0
5. Add a new Sec.  400.714 to read as follows:

[[Page 41920]]

Sec.  400.714  Requests for the opportunity to offer a premium 
discount.

    (a) To participate in the premium reduction plan, approved 
insurance providers must make a request to RMA for the opportunity to 
offer a premium discount for the reinsurance year in accordance with 
Sec.  400.716.
    (b) If RMA determines that the approved insurance provider is 
eligible for the opportunity to offer a premium discount under the 
premium reduction plan for the reinsurance year, the approved insurance 
provider will only be allowed to pay a premium discount if:
    (1) The approved insurance provider has submitted the required 
information applicable for that reinsurance year in accordance with 
Sec.  400.720;
    (2) The approved insurance provider has demonstrated to RMA that it 
has operated sufficiently below its A & O subsidy to support the 
payment of such discount; and
    (3) RMA has approved the dollar amount, and the corresponding 
percentage of net book premium, for the premium discount.
    (c) For the 2006 reinsurance year:
    (1) For an approved insurance provider with an approved SRA for the 
2005 reinsurance year, requests for the opportunity to offer a premium 
discount must be received by RMA not later than August 4, 2005; and
    (2) For an approved insurance provider that did not have an 
approved SRA for the 2005 reinsurance year and did not request such 
agreement until after the deadline contained in paragraph (c)(1) of 
this section, requests for the opportunity to offer a premium discount 
must be provided with the application for approval of a SRA.
    (d) For all subsequent reinsurance years:
    (1) For an approved insurance provider with an approved SRA for the 
previous reinsurance year, requests for the opportunity to offer a 
premium discount 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; and
    (2) For an approved insurance provider that did not have an 
approved SRA for the previous reinsurance year and did not request such 
agreement until after the deadline contained in paragraph (d)(1) of 
this section, requests for the opportunity to offer a premium discount 
under the premium reduction plan must be provided with the application 
for approval of a SRA.
    (e) Any request for the opportunity to offer a premium discount 
under the premium reduction plan that is not submitted by the 
applicable deadlines contained in paragraphs (c) and (d) will not be 
considered until the next reinsurance year.
    (f) The request for the opportunity to offer a premium discount 
under the premium reduction plan must be sent to the Director, 
Reinsurance Services Division (or designee).

0
6. Add a new Sec.  400.715.


Sec.  400.715  Limitations and prohibitions.

    (a) For the first two reinsurance years that RMA approves the 
payment of a premium discount, the approved insurance provider may not 
pay a premium discount under the premium reduction plan to a producer 
greater than 4.0 percent of the net book premium for the eligible crop 
insurance contract. For subsequent reinsurance years, the 4.0 percent 
of the net book premium for the eligible crop insurance contract will 
remain the maximum amount of premium discount authorized to be approved 
by RMA unless otherwise stated by RMA.
    (b) All premium discounts must be based on an actual accounting of 
efficiencies achieved by the approved insurance provider for the 
reinsurance year and may not be distributed to policyholders until the 
payment and the amount of such discounts have been approved by RMA in 
writing in accordance with Sec.  400.720.
    (c) The approved insurance provider may not impose any term or 
condition upon the distribution or amount of any premium discount (such 
as conditioning the premium discount based upon the renewal of the 
eligible crop insurance contract with the approved insurance provider 
or not having a loss for the crop year), except those included in 
Sec. Sec.  400.714 through 400.722.
    (d) Premium discounts under the premium reduction plan are not 
available for:
    (1) Eligible crop insurance contracts at CAT level of coverage; and
    (2) Ineligible producers.
    (e) No approved insurance provider or its representatives, agents, 
employees or contractors may advertise or otherwise communicate to any 
producer the availability, potential availability, or existence of:
    (1) The opportunity to offer a premium discount under the premium 
reduction plan until the approved insurance provider receives written 
notice from RMA that it is eligible for the opportunity to offer a 
premium discount;
    (2) A specific amount of premium discount prior to such amount 
being approved in writing by RMA in accordance with Sec.  400.720; and
    (3) Past or projected ability of the approved insurance provider to 
operate at less than the approved insurance provider's A&O subsidy.
    (f) After RMA has determined that the approved insurance provider 
is eligible for the opportunity to offer a premium discount in a State, 
the approved insurance provider and its representatives, agents, 
employees or contractors may advertise and communicate to producers 
that there is an opportunity for the approved insurance provider to 
offer a premium discount in that State and:
    (1) If they advertise or otherwise communicate that there is an 
opportunity to offer a premium discount in that State, such 
advertisements or other communications:
    (i) Can only state the dollar amounts or corresponding percentage 
of net book premium of premium discount actually paid to producers in 
the State for each reinsurance year for which the approved insurance 
provider paid a premium discount; and
    (ii) Must contain a prominently displayed disclaimer that:
    (A) States ``The past payments of premium discounts are not a 
guarantee that future payments will be made or an indication of the 
amount of future premium discounts''; or
    (B) States a similar statement that must be approved in writing by 
RMA; and
    (2) RMA may impose a sanction authorized in Sec.  400.719(j) if:
    (i) RMA determines that the approved insurance provider or its 
representative, agent, employee or contractor is not in compliance with 
the provisions of this section; or
    (ii) Any State regulatory authority determines that an approved 
insurance provider or its representatives, agents, employees or 
contractors has violated any State law regarding the advertising, 
marketing or solicitation of customers with respect to a premium 
discount under the premium reduction plan.
    (g) The approved insurance provider shall not distribute any 
premium discount payment:
    (1) Until the dollar amount, and corresponding percentage of net 
book premium, for the premium discount have been approved by RMA in 
writing (For example, RMA may approve a dollar amount of premium 
discount in a State of $500,000, which corresponds to a percentage of 
premium discount of 3% of the net book premium for the State); and
    (2) In an amount that is greater than the dollar amount, and 
corresponding percentage of net book premium, for the premium discount 
approved by RMA.

[[Page 41921]]

    (h) If RMA approves a dollar amount, and corresponding percentage 
of net book premium, for the premium discount in a State:
    (1) All producers insured by the approved insurance provider in 
that State for the corresponding reinsurance year will automatically 
receive that percentage of net book premium of premium discount (For 
example, if an approved insurance provider is approved to pay a 
percentage of premium discount of 3% of the net book premium for 
efficiencies attained during the 2006 reinsurance year in a State, all 
producers insured with that approved insurance provider during the 2006 
reinsurance year in that State will receive a premium discount that is 
3% of the net book premium for their eligible crop insurance contract); 
and
    (2) That same RMA approved premium discount percentage of net book 
premium must be paid for all crops, coverage levels except the CAT 
coverage level, and plans of insurance written by the approved 
insurance provider in that State.
    (i) The approved insurance provider must be in compliance with all 
requirements of the approved procedures to be able to pay a premium 
discount.

0
7. Add a new Sec.  400.716.


Sec.  400.716  Contents of the request for the opportunity to offer a 
premium discount.

    Each request for the opportunity to offer a premium discount under 
the premium reduction plan must include all of the following:
    (a) The name of the approved insurance provider; the person who may 
be contacted for further information regarding the request for an 
opportunity to offer a premium discount under the premium reduction 
plan; and the person who will be responsible for the administration of 
the premium reduction plan.
    (b) A list of the States where the approved insurance provider 
wants the opportunity to offer a premium discount under the premium 
reduction plan.
    (c) A detailed marketing plan that describes how the approved 
insurance provider will promote the premium reduction plan to all 
producers, especially small producers, limited resource farmers as 
defined in section 1 of the Basic Provisions in 7 CFR 457.8, women and 
minority producers. With respect to the marketing plan, it must:
    (1) Identify and utilize the appropriate media with the capacity to 
reach all producers, especially small producers, limited resource 
farmers as defined in section 1 of the Basic Provisions in 7 CFR 457.8, 
women and minority producers, in the State in which the premium 
reduction plan will be offered, such as advertising through farm 
journals, farm radio, community based organizations, etc.;
    (2) Be in addition to any solicitation or advertising done by 
agents of the approved insurance provider; and
    (3) Contain a certification by the person responsible for signing 
the SRA that any cost saving measures will not result in a reduction in 
service to any producers, especially small producers, limited resource 
farmers as defined in section 1 of the Basic Provisions in 7 CFR 457.8, 
women and minority producers in the State in which the premium 
reduction plan will be offered.
    (d) A report of the total dollar amount of premium discount and the 
corresponding premium discount percentage by State paid for the 
previous reinsurance year (Such report must be provided to RMA not 
later than 15 days after making the premium discount payments); and
    (e) Such other information as deemed necessary by RMA.

0
8. Add a new Sec.  400.717.


Sec.  400.717  New approved insurance providers.

    There may be instances where a new approved insurance provider is 
entering the crop insurance program for the first time and such 
approved insurance provider is not affiliated with an MGA, a TPA, 
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.
    (a) 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 or approved 
procedures, 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.  400.720, in a manner 
determined by RMA.
    (b) If the approved insurance provider is affiliated with a MGA, a 
TPA, another approved insurance provider that previously participated 
in the crop insurance program but such MGA, TPA, or other approved 
insurance provider can demonstrate that it no longer has the 
infrastructure to operate the program, the FCIC Board of Directors, in 
its sole discretion, can authorize the amortization of start-up costs 
in accordance with paragraph (a) of this section.

0
9. Add a new Sec.  400.718.


Sec.  400.718  RMA Review

    If an insurance provider requests eligibility for the opportunity 
to offer a premium discount under the premium reduction plan:
    (a) For the 2006 reinsurance year, RMA will notify the approved 
insurance provider not later than 30 days after the date the approved 
insurance provider submits its request for eligibility for the 
opportunity to offer a premium discount under a premium reduction plan, 
whether it is eligible.
    (b) For all subsequent reinsurance years, RMA will notify the 
approved insurance provider at the same time it approves the Plan of 
Operations whether it is eligible.
    (c) An approved insurance provider may be determined to be eligible 
for the opportunity to offer a premium discount under the premium 
reduction plan if, in the sole determination of RMA, all of the 
following criteria are met:
    (1) All information required in Sec.  400.716 is included in the 
request for the opportunity to offer a premium discount under the 
premium reduction plan;
    (2) The marketing plan is designed to be effective at reaching all 
producers in the State, especially small producers, limited resource 
farmers as defined in section 1 of the Basic Provisions in 7 CFR 457.8, 
women and minority producers;
    (3) The implementation of any activities to enable the approved 
insurance provider to pay a premium discount does not impede the 
approved insurance provider's ability to comply with all requirements 
of the approved procedures, law, and regulation;
    (4) There must be a reasonable assurance that producers, especially 
small producers, limited resource farmers as defined in section 1 of 
the Basic Provisions in 7 CFR 457.8, women and minority producers, 
insured by the approved insurance provider will not experience a 
reduction in service;
    (5) The insurance provider can demonstrate that it is operationally 
and financially capable and ready to serve, all producers in that 
State; and
    (6) The approved insurance provider's resources, procedures, and 
internal controls are adequate to provide a premium discount under the 
premium reduction plan, make approved premium discount payments in a 
timely manner, prevent unfair discrimination,

[[Page 41922]]

and comply with all applicable laws, regulations and approved 
procedures.
    (d) If the approved insurance provider is determined by RMA to be 
eligible for the opportunity to provide a premium discount under the 
premium reduction plan, the approved insurance provider will be 
notified in writing by the Director, Reinsurance Services Division, or 
a designee or successor.
    (e) Notification that an approved insurance provider is eligible 
for the opportunity to offer a premium discount under the premium 
reduction plan is not a guarantee that a premium discount payment will 
be approved by RMA for the reinsurance year. Approval of a premium 
discount cannot be provided by RMA until the actual A&O costs and A&O 
subsidy are reported for the reinsurance year and RMA determines that 
all the requirements of Sec. Sec.  400.714 through 400.722 have been 
met.

0
10. Add a new Sec.  400.719.


Sec.  400.719  Terms and conditions for the Premium Reduction Plan.

    The following terms and conditions apply to all approved insurance 
providers that RMA has determined are eligible for the opportunity to 
offer a premium discount under the premium reduction plan:
    (a) RMA's determination that the approved insurance provider is 
eligible for the opportunity to offer a premium discount under the 
premium reduction plan will only be effective for one reinsurance year. 
Approved insurance providers must reapply each reinsurance year in 
accordance with Sec. Sec.  400.714 through 400.716.
    (b) All procedural issues, questions, problems or clarifications 
with respect to implementation of the premium reduction plan must be 
addressed by the approved insurance provider by the deadline determined 
by RMA.
    (c) The agents employed or under contract with an approved 
insurance provider that RMA has determined is eligible for the 
opportunity to offer a premium discount under the premium reduction 
plan must disclose to all producers, insured with the agent or 
inquiring about insuring with the agent, in writing the names of all 
approved insurance providers that the agent represents that RMA has 
determined are eligible for the opportunity to offer a premium discount 
under the premium reduction plan.
    (d) The approved insurance provider must provide to the Director, 
Reinsurance Services Division semi-annual reports, or more frequent 
reports as determined by RMA, that, along with other information 
obtained by RMA, permit RMA to accurately evaluate the effectiveness of 
the approved insurance provider's implementation of the premium 
reduction plan, in the manner specified by RMA. At a minimum, each 
report must contain for each State listed by the approved insurance 
provider under Sec.  400.716(b):
    (1) The number of small producers, limited resource farmers as 
defined in section 1 of the Basic Provisions in 7 CFR 457.8, women and 
minority producers making application; and
    (2) The number, substance, and final or pending resolution of 
complaints from producers regarding the service received under the 
premium reduction plan.
    (e) RMA will monitor the approved insurance provider's efforts to 
market the premium reduction plan to small producers, limited resource 
farmers as defined in section 1 of the Basic Provisions in 7 CFR 457.8, 
women and minority producers.
    (1) RMA may compare the composition of the approved insurance 
provider's book of business in a State with the composition of the 
books of business of other approved insurance providers in that State 
to assist in determining whether the marketing plan has been effective 
or there is credible evidence of unfair discrimination by the approved 
insurance provider or its agents.
    (2) If at any time RMA determines that the marketing activities of 
the approved insurance provider are not effective in reaching small 
producers, limited resource farmers as defined in section 1 of the 
Basic Provisions in 7 CFR 457.8, women and minority producers or there 
is credible evidence of unfair discrimination by the approved insurance 
provider or its agents in any State listed by the approved insurance 
provider under Sec.  400.716(b), RMA will take the appropriate action 
authorized in paragraph (j) of this section (Remedial measures may 
include additional targeted advertising by the approved insurance 
provider or other appropriate measures to ensure the insurance provider 
is adequately serving small producers, limited resource farmers as 
defined in section 1 of the Basic Provisions in 7 CFR 457.8, women and 
minority producers or that such unfair discrimination has been 
discontinued and corrective action taken).
    (f) In no event shall RMA, FCIC or any other agency of the United 
States Government be liable for any damages caused by any mistakes, 
errors, misrepresentations, or flaws in the premium reduction plan or 
its implementation.
    (g) If RMA approves a dollar amount, and corresponding percentage 
of net book premium, for the premium discount for a State in accordance 
with Sec.  400.720, it will be applicable to the reinsurance year in 
which the efficiencies were attained and the approved insurance 
provider must pay that dollar amount, and corresponding percentage of 
net book premium, for the premium discount to its policyholders in that 
State for that reinsurance year. If the approved insurance provider 
fails to pay this amount, the approved insurance provider:
    (1) Will not be eligible for the opportunity to offer a premium 
discount for the reinsurance year immediately following RMA's approval 
of the payment of a premium discount; and
    (2) Must disclose in all its promotional and advertising material 
that it was approved to pay a premium discount by RMA but elected not 
to pay such discount, unless approval to pay the premium discount was 
withdrawn by RMA, for the next two reinsurance years subsequent to the 
failure to pay the premium discount.
    (h) For policyholders that were insured with the approved insurance 
provider in the reinsurance year from which the approved premium 
discount is applicable but are not currently insured with the approved 
insurance provider, any premium discount payments must be sent to the 
last known address of the policyholder.
    (i) The approved insurance provider and its representatives, 
agents, employees and contractors must fully cooperate with RMA and any 
State or Federal government agencies in any review of the operations or 
activities of the approved insurance provider and its representatives, 
agents, employees and contractors, with respect to the premium 
reduction plan.
    (j) At its sole discretion and upon written notice, RMA may 
withdraw a determination of eligibility for the opportunity to offer a 
premium discount under the premium reduction plan or approval of all or 
a part of a premium discount payment, preclude eligibility for the 
opportunity to offer a premium discount, or otherwise participate, 
under the premium reduction plan for a period determined by RMA 
commensurate with offense, take such other actions as authorized under 
the SRA, or require appropriate remedial measures as determined by RMA, 
if RMA determines that:
    (1) Any approved insurance provider or its representative, agent, 
employee or contractor has failed to comply with any term or condition 
contained in 7 CFR 400.714 through 400.721; or

[[Page 41923]]

    (2) The payment of a premium discount could adversely affect the 
financial or operational stability of the approved insurance provider, 
its MGA or TPA as required by applicable regulations or approved 
procedures.
    (k) The insurance provider may be held solely responsible for the 
actions of its representatives, agents, employees or contractors with 
respect to any violation of any term or condition contained in 
Sec. Sec.  400.714 through 400.721 or action under paragraph (j) of 
this section may be taken individually against the insurance provider 
or its representatives, agents, employees or contractors.

0
11. Add a new Sec.  400.720.


Sec.  400.720  Standards for approval of a premium discount.

    For approval of a premium discount:
    (a) If the approved insurance provider intends to offer a premium 
discount in a State listed by the approved insurance provider under 
Sec.  400.716(b) based on efficiencies attained during the reinsurance 
year, the approved insurance provider must, not later than December 31 
after the annual settlement for the reinsurance year, submit to RMA:
    (1) An audit, in a format approved by RMA, of the Expense Exhibits 
provided with the Plan of Operations, and the estimated A&O costs for 
the reinsurance year that were not included in such Expense Exhibits, 
certified by an independent certified public accountant with experience 
in insurance accounting, who must certify to the accuracy and 
completeness of the costs stated therein and the Expense Exhibits' 
conformance with the requirements of the SRA (The costs associated with 
such audit and certification will be at the approved insurance 
provider's expense and must be included in the approved insurance 
provider's A&O costs for the purposes of determining an efficiency);
    (2) A detailed description of all profit sharing arrangements that 
the approved insurance provider claims are not to be included as 
compensation (RMA reserves the right to request copies of such profit 
sharing contracts or other agreements); and
    (3) The dollar amount, and corresponding percentage of net book 
premium, for the premium discount that the approved insurance provider 
will pay in the State.
    (b) RMA will use the Expense Exhibits required to be submitted as 
part of the Plan of Operations to determine:
    (1) Whether the approved insurance provider's A&O costs were less 
than its A&O subsidy for the reinsurance year for the entire book of 
business; and
    (2) The actual dollar amount of efficiency attained by the approved 
insurance provider for the reinsurance year for each State where the 
approved insurance provider was eligible for the opportunity to offer a 
premium discount under the premium reduction plan. The dollar amount of 
efficiency and the dollar amount, and corresponding percentage of net 
book premium, for the premium discount must be prepared and submitted 
in accordance with approved procedures.
    (i) For the 2006 reinsurance year, such approved procedures will be 
issued within 5 days after July 20, 2005; and
    (ii) For all subsequent reinsurance years, such procedures will 
remain in effect unless revised and if such approved procedures will be 
revised, these approved procedures will be issued not later than 
January 1 before the start of the reinsurance year.
    (c) For each State listed by the approved insurance provider under 
Sec.  400.716(b) for which the insurance provider requests approval to 
pay a premium discount, RMA will compare the dollar amount, and 
corresponding percentage of net book premium, for the premium discount 
determined in accordance with applicable approved procedures with the 
dollar amount, and corresponding percentage of net book premium, for 
the premium discount submitted by the approved insurance provider.
    (d) RMA may approve the dollar amount, and corresponding percentage 
of net book premium, for the premium discount submitted by the approved 
insurance provider if and to the extent that:
    (1) The dollar amount, and corresponding percentage of net book 
premium, for the premium discount submitted by the approved insurance 
provider does not exceed the dollar amount, and corresponding 
percentage of net book premium, for the premium discount determined by 
RMA in accordance with paragraph (b) of this section; and
    (2) If all other requirements of Sec. Sec.  400.714 through 400.722 
have been met.
    (e) If the dollar amount, and corresponding percentage of net book 
premium, for the premium discount submitted by the approved insurance 
provider exceeds the dollar amount, and corresponding percentage of net 
book premium, for the premium discount determined by RMA in accordance 
with paragraph (b) of this section, the approved insurance provider 
will be limited to paying the dollar amount, and corresponding 
percentage of net book premium, for the premium discount determined by 
RMA.

0
12. Add a new Sec.  400.721


Sec.  400.721  Determinations and reconsiderations.

    (a) If RMA takes any action authorized in Sec.  400.719(j), the 
Director, Reinsurance Services Division, or a designee or successor 
will notify the approved insurance provider or its representatives, 
agents, employees or contractors against whom such action is taken, as 
applicable, in writing:
    (1) Of the action taken;
    (2) The date such action is effective; and
    (3) The basis for such action.
    (b) If eligibility for the opportunity to offer a premium discount, 
or to participate, under the premium reduction plan is withdrawn, the 
approved insurance provider or agent, as applicable, must notify its 
policyholders it is no longer eligible to offer a premium discount, 
cease any advertising or other communication regarding a premium 
discount effective for the next sales closing date, and no premium 
discount may be distributed to any producer of the insurance provider 
or agent, as applicable, for the reinsurance year.
    (c) If notice is provided under paragraph (a) of this section to an 
approved insurance provider or its representatives, agents, employees 
or contractors:
    (1) The approved insurance provider or its representatives, agents, 
employees or contractors, as applicable, may request, in writing, 
reconsideration of the decision with the Deputy Administrator of 
Insurance Services, or a designee or successor, within 30 days of the 
date stated on the notice provided in paragraph (a) of this section;
    (2) Such request must provide a detailed narrative of the basis for 
reconsideration; and
    (3) The Deputy Administrator of Insurance Services, or a designee 
or successor will issue its reconsideration decision not later than 45 
days after receipt of the request for reconsideration.
    (d) Reconsideration decisions issued in accordance with paragraph 
(c) of this section are considered as final administrative 
determinations rendered under Sec.  400.169(a) and if the approved 
insurance provider or its representatives, agents, employees or 
contractors who received such reconsideration decision disagrees with 
this final administrative determination, it may appeal in accordance 
with Sec.  400.169(d).

[[Page 41924]]

    (e) If eligibility to offer a premium discount plan has been 
withdrawn by RMA under Sec.  400.719(j), the approved insurance 
provider may request eligibility for the opportunity to offer a premium 
discount for the next applicable reinsurance year if the condition 
which was the basis for such withdrawal has been remedied.

0
13. Add a new Sec.  400.722.


Sec.  400.722  Consumer complaints.

    Consumer complaints regarding an approved insurance provider's 
violation of the requirements of Sec. Sec.  400.714 through 400.721 
should be sent in confidence to RMA, attention: The Director of the 
Reinsurance Services Division, or a designee or successor.
    (a) Consumer complaints must include:
    (1) A specific citation of the requirement in Sec. Sec.  400.714 
through 400.721 that has allegedly been violated;
    (2) A detailed listing of the actions alleged to have taken place 
that violate the requirement;
    (3) Specific identification of persons involved in the violation, 
and
    (4) The date, place and circumstances under which such violation 
allegedly occurred.
    (b) Any complaint that does not meet the requirements in paragraph 
(a) of this section may be returned to the sender for further details 
before RMA can pursue investigation of the complaint.
    (c) RMA may seek additional information to assist in investigating 
the complaint.
    (d) If RMA's investigation determines there has been a violation of 
a requirement in Sec. Sec.  400.714 through 400.721, it may take the 
appropriate action authorized under Sec.  400.719(j).

    Signed in Washington, DC, on July 13, 2005.
Ross J. Davidson, Jr.,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 05-14037 Filed 7-13-05; 3:54 pm]
BILLING CODE 3410-08-P