**STATEMENT OF KEITH COLLINS**

**CHIEF ECONOMIST, UNITED STATES DEPARTMENT OF AGRICULTURE**

**BEFORE THE HOUSE AGRICULTURE SUBCOMMITTEE ON**

**GENERAL FARM COMMODITIES AND RISK MANAGEMENT**

**Wednesday, March 15, 2006**

Mr. Chairman and Members of the Subcommittee, thank you for the
opportunity to join Administrator Gould today to report on the status of
the Federal crop insurance program. My comments today are from the
perspective of the Board of Directors (Board) of the Federal Crop
Insurance Corporation, which I chair. The Board has general management
responsibility for the Federal Crop Insurance Corporation (FCIC).

At the outset, I would like to acknowledge the outstanding efforts and
accomplishments of the FCIC Board. In addition to myself, current voting
Board members include J.B. Penn, Under Secretary for Farm and Foreign
Agricultural Services; John Askew, a producer from Iowa; Frank Jones, a
producer from Texas; Tim Kelleher, a producer from California; Luis
Monterde, a producer from Mississippi; Bill Classen; a resident of Iowa
with expertise in the insurance industry; and Mike Pickens, an attorney
from Arkansas with expertise in insurance regulation. Risk Management
Agency (RMA) Administrator Eldon Gould is Manager of FCIC and a
nonvoting member of the Board. The Board also greatly benefits from the
assistance of Floyd Gaibler, Deputy Under Secretary for Farm and Foreign
Agricultural Services, and Brent Doane, Secretary to the Board.

Since the Agricultural Risk Protection Act (ARPA) was signed into law in
mid 2000, the Federal crop insurance program has undergone a number of
changes that have made crop insurance more popular with producers and a
more reliable and versatile risk management tool. In 2000, prior to
ARPA, participation in the program was high based on acreage covered,
but producers generally had low levels of coverage, with many insured at
the catastrophic (CAT) level, which indemnifies only 27.5 percent of the
value of production in the event of a total loss. CAT coverage is
minimal and many producers need more coverage to permit financial
recovery in the event of a major loss. In addition to low coverage
levels, farmers in the Northern Plains had suffered multiple year crop
losses, which reduced their guarantees for the next year, which are
based on their actual production history (APH yield). The 1998 drought
in Texas and the Southeast and subsequent natural disasters triggered
repeated ad hoc disaster assistance programs in 1998, 1999, and 2000.
Thus, an important goal of ARPA was to address low coverage levels and
improve programs generally to obviate the need for ad hoc disaster
assistance. With tools provided by ARPA, the RMA and the Board have
worked together to build a stronger, more effective crop insurance
program. While we believe the program has been significantly
strengthened, a perceived need for ad hoc disaster assistance has not
yet been eliminated.

**Key Parameters Established by ARPA**

ARPA reforms included increased premium subsidies for all levels of
coverage, making crop insurance more affordable for farmers and
encouraging higher participation and coverage levels. ARPA also
authorized coverage for livestock on a pilot basis. ARPA streamlined the
process that encouraged private sector development of new products by
clarifying and placing time limits on product approval and by allowing
developers of successfully approved products to be reimbursed for their
research and development costs. ARPA also emphasized new ways to control
fraud, waste, and abuse.

**Crop Insurance Today**

For the 2005 crop year, there were 1.2 million Federal crop insurance
policies in force with a liability of over \$44 billion covering 246
million acres and 320 commodities. This compares with 1.3 million
policies with a total liability of \$34 billion covering 206 million
acres for the 2000 crop year, just prior to enactment of ARPA.

While we have seen expected growth in insured liability for the big row
crops since 2000, we have also seen an increase in coverage for many
specialty crops. Insurance products that offer whole farm or revenue
protection have also shown growth, with the Revenue Assurance plan
leading the way by increasing total liability from under \$700 million
in 2000, to \$13.5 billion in 2004. Compared with the 2000-crop year
liability level, Group Risk Income Protection (GRIP) has increased
tenfold in liability and the Adjusted Gross Income (AGR) plan of
insurance has increased by over 30-fold.

Since the increase in premium subsidies under ARPA, more farmers are
buying levels of coverage above CAT. In 2000, CAT coverage accounted for
21 percent of the program's total liability. In 2005, 16 percent of
liability was at the CAT level. Buy-up levels of insurance increase the
possibility of financial recovery following a severe crop loss for most
farmers. Some producers may find that CAT or similar low coverage levels
offer an optimum level of coverage for their business, such as producers
having crop income that is only a small part of their farm income,
facing very infrequent losses due to natural disasters, having
sufficient assets to self insure, or being able to take proactive
measures to reduce natural disaster risks. However, for most producers,
buying policies with increased buy-up coverage appear to be necessary to
allow them to move away from reliance on Government disaster assistance
and be able to accept greater responsibility for managing the risks they
face.

The actuarial performance of Federal crop insurance has steadily
improved over the years. During l981-1990, the loss ratio, which is
total indemnities divided by premiums, averaged 1.53. During the
1991-2000, the loss ratio declined to an average of 1.07. And during
2001-2005, with 2005 being an estimate, the loss ratio has averaged an
even lower 0.93. Over time, premium rates have increased to cover
expected losses. Part of the increase in premium rates was due to the
assessment of historical experience and establishment of target rates by
RMA to better cover expected losses, and part of the increase was due to
changes in the types of policies purchased by producers, including more
buy-up coverage. The increase in premium subsidies under ARPA also
increased participation, drawing more low risk producers into the
program, thereby reducing adverse selection and improving actuarial
performance.

An important principle for the Board is, "USDA does not sell a single
crop insurance policy." Federal crop insurance is entirely delivered to
producers by private insurance companies (companies). Over time, some
companies have exited the business, others have merged or been acquired,
and new entrants have joined the program. The Board and RMA serve as
regulators of this private sector delivery structure, which must be
efficient and financially healthy if the Federal crop insurance program
is to succeed. Today, RMA has a Standard Reinsurance Agreement (SRA)
with the 16 companies that constitute the public-private partnership for
the delivery of Federal crop insurance. The SRA defines the risk sharing
agreement between the government and the companies that is crucial to
the efficient operation of the program. By being able to share in the
underwriting gains, companies have an incentive to participate in the
program and expand sales, and by sharing in the losses, they have an
incentive to ensure policies are properly underwritten and loss
adjusted.

The SRA also establishes the reimbursement to the companies for
administrative and operating (A&O) expenses in accordance with the
provisions of the Federal Crop Insurance Act (Act). For the 2006
reinsurance year, the rate at which we reimburse the companies' A&O
costs has changed compared with earlier years. In 2000, the average
reimbursement rate was 25.7 percent of net premium. In 2005, the average
was 21.8 percent of net premium, and for the 2006-crop year, the average
reimbursement is 20.7 percent.

For the 2005 insurance year, A&O reimbursements are estimated at \$830
million, up from \$550 million in 2000. Despite the decline in the A&O
reimbursement percentage, the total dollar reimbursement is up because
of the increase in premium per policy, primarily due to higher average
coverage levels, greater purchase of revenue insurance, and RMA rate
adjustments. Underwriting gains for the companies are up as well, rising
from \$270 million in 2000 to \$870 million estimated for 2005. The
combined increases in A&O and underwriting gains have helped improve the
financial performance of the companies and encouraged new entrants into
the program. Having highlighted the large increases in companies' gross
returns, it should be noted that a major national weather catastrophe
could lead to very large underwriting losses in any year.

One of ARPA's significant provisions was reform of the development and
approval process for new insurance products. In the mid 1990s, when
companies introduced new products, such as Crop Revenue Coverage and
Revenue Assurance, they shouldered the research and development costs,
and their products were immediately adopted by their competitors without
compensation. Section 522(b) of the Act provided that private entities
may be reimbursed for research and development and maintenance costs for
four years if the product is submitted under Section 508(h) of the Act
(508(h) products) and approved by the Board for use in the Federal crop
insurance program. A total of 59 proposals have been submitted to the
Board under Section 508(h) of the Act since mid 2000. Of that total, 33
have been approved by the Board, 7 have been disapproved or a notice of
intent to disapprove has been issued, 13 were withdrawn by the
submitter, 4 were returned or deemed incomplete, and 2 have been tabled
pending further action. Approved 508(h) products range from a hybrid
seed price endorsement to livestock price and revenue products to
AGR-Lite.

**Board Activities and Priorities**

Management of the FCIC is vested in a Board of Directors subject to the
general supervision of the Secretary of Agriculture. Board members take
actions necessary to protect the interests of producers, improve the
actuarial soundness of the program, and apply program provisions to all
companies and insured producers in a fair and consistent manner.

The Board carries out its business through public meetings held 8-10
times per year and other working sessions among its members. The Board
has executed a detailed division of responsibilities between itself and
RMA. With respect to those functions delegated to RMA, the Board
regularly reviews RMA's performance. The Board also establishes the
priority for RMA efforts to improve the operation of Federal crop
insurance.

A high priority of the Board has been to work with RMA to deal with a
large backlog of pilot programs that must be evaluated and then modified
and continued, approved for permanent programs, or terminated. Many of
these programs were initiated in the late 1990s to address perceived
areas of insufficient insurance coverage, or they were authorized by
ARPA. RMA currently administers 26 pilot programs for the 2006 crop
year. Because pilot programs are new, they must be continually monitored
to ensure acceptable performance, and if they are not, immediate
corrections must be made. After a period of 3-5 years, a thorough
evaluation is conducted on each pilot program and the results of the
evaluation are brought to the Board for action. Of the pilots initiated
in the late 1990s or under ARPA, the Board has voted to terminate four
programs, extend two programs to gain additional experience, and make
five pilot programs permanent. In addition, the Board has revised and
made available three new programs. There are final evaluations under way
on eight pilot programs upon which the Board expects to make decisions
within the next two years. Generally, the process of going from an idea
to a permanent program takes many years for an FCIC-originated product.
As a result of the limitations on RMA to conduct research and
development contained in the Act, the process includes a contracted
feasibility study, a contracted policy development study, 3-5 years of
piloting the program, a contracted evaluation study, and conversion to a
permanent policy through notice and comment rulemaking.

One difficult example the Board dealt with was the sweet potato pilot
program. It began in 1998 in eight counties to assist growers with a
crop requiring high capital investment and operating expenses combined
with limited margins. Loss ratios were unacceptably high, indicating
rating, underwriting and loss adjustment problems, so the Board approved
a series of changes with the 2003-crop year and asked RMA to contract to
develop a new sweet potato crop insurance pilot. A revised sweet potato
pilot came before the Board in July 2004, and after review, the Board
terminated the existing sweet potato pilot program in October 2004 and
implemented the newly developed pilot.

In deciding the fate of a pilot program, as for any decision the Board
makes, the Board considers whether its actions are in the interests of
producers and the crop insurance program, whether such action can be
implemented in an actuarially sound manner, and whether program
integrity will be protected. A recent complex issue for the Board and
RMA is the Florida Fruit Tree Program. The Board voted last fall to
implement numerous program improvements for 2006 for the existing pilot
program, which was not working well for Florida citrus producers. The
changes included an occurrence loss option and an option for
comprehensive tree value, which covers the lost asset value of destroyed
trees. While the policy provided coverage for losses due to citrus
canker, indemnification was predicated on an eradication order and the
destruction of the trees, which was required if citrus canker was
discovered.

However, following last fall's hurricanes, the spreading of citrus
canker changed the assessment of expected losses on which the premium
rate structure of the policy was calculated. In addition, the policy of
requiring the destruction of the trees is now changing, and we have
found it necessary to modify the policy again. The Board has met with
citrus canker experts and RMA has been working closely with other USDA
agencies to monitor the changing approach to controlling citrus canker
in the state of Florida. As a result, the Board has authorized RMA to
move forward with policy modifications that will provide new policy
features for losses that are not related to citrus canker but still
offer coverage for citrus canker in a responsive and prudent manner
considering changes in the citrus canker program. The details of the new
policy are still being developed.

Another issue of concern to the Board is implementation and maintenance
cost for insurance products that do not sell well and thus offer limited
benefits to the producer. The Board has requested additional information
on potential sales and costs from submitters before considering a
product for approval and from RMA before taking action on pilot program
evaluation. The Board considers whether the product could be better
structured to meet the needs of producers and looks closely at the cost
of research and development, the cost of maintenance, and the
administrative complexity of a program. High costs to USDA and the
companies, which include agent training costs, relative to policies sold
has been a factor in the Board's determination of whether approval is in
the best interest of producers. When rejecting a product or terminating
a pilot program, the Board also considers alternative risk management
tools available to the producers, including the availability of other
products, such as AGR and AGR-Lite, which cover all of the farm's income
from production. The Board is hopeful that continual improvements in AGR
and AGR-Lite will be part of the answer to the rising expense of
administering a large number of crop-specific programs that generate a
low level of sales.

In November 2005, the Board voted to adopt improvements in AGR and
AGR-Lite. The 2004 and 2005 crop years saw little change in the
participation levels of AGR with both years having around \$300 million
in liability. AGR-Lite increased from \$3 million to \$13.4 million in
liability between 2004 and 2005. Recent Board actions taken on AGR and
AGR-Lite include reducing the number of commodities required for higher
coverage levels and discontinuing the 75 percent coverage level/65
percent payment rate option. AGR and AGR-Lite may become a valuable risk
management tool especially for diverse farms and livestock operations.
However, these are complex policies that require considerable agent time
and expertise to service and sell. The Board has been interested in
simplifying these policies but has found that task difficult to this
point.

There are areas where simplification is proceeding. For example, the
Board worked with RMA to initiate development of a proposed rule
combining a number of existing APH and revenue insurance plans into one
consolidated plan of insurance. The producer will be able to choose a
yield-based or revenue-based product from the options in the combined
policy according to individual needs.

There has historically been a key gap in insurance coverage of
livestock. ARPA authorized pilot programs to evaluate effectiveness of
risk management tools for livestock producers with an annual spending
limit of \$20 million. The first livestock pilot was offered in 2003 for
swine in Iowa. We now have Livestock Risk Protection (LRP), which covers
hog, fed cattle, and feeder cattle prices, and Livestock Gross Margin
(LGM), which has covered the margin between hog prices and feed costs.
LGM is being extended to fed and feeder cattle in 2006. In the 2005 crop
year, the FCIC insured over 540,000 hogs under the LGM program with a
liability of \$51 million. The LRP program for 2005 insured over a
quarter million head of livestock with a liability of \$104 million.
Both programs had very low loss ratios. Recently, the Board and the
submitter of a LRP pilot program for lamb agreed to table consideration
of this pilot to permit academic and industry experts to evaluate the
concept of econometric modeling as a basis for establishing an insurance
guarantee for those commodities for which there is no established market
that permit price discovery. This study could affect not only the
proposed LRP Lamb Program but other products for which an established
commodity market does not exist.

The Board made development of insurance products for pasture and
rangeland a top priority for addressing the needs of livestock
producers. There are over 400 million acres of rangeland, 120 million
acres of pasture, and 62 million acres of hay in the United States.
Because pasture, rangeland and forage situations are so diverse across
the country, existing insurance products are limited in their
usefulness. Existing products are based on an individual's forage
production or on NASS estimates of hay production. Working with RMA, in
January, 2006, the Board culminated a several year process of
development by approving two pasture, range, and forage pilot programs.
The new insurance products are area based products that trigger
indemnities based on indexes. One index is based on accumulated rainfall
and the other is based on a temperature-adjusted measure of vegetation
obtained from the National Oceanographic and Atmospheric Administration.
Both products will use new technology to help solve the problem of the
inability to directly measure forage production across the diverse range
and pasture settings on U.S. farms and ranches. Each pilot program will
be offered in 2006 in 6 states.

The issue of premium discounts has taken considerable Board time in the
last few years. Section 508(e)(3) of the Act provides the opportunity
for an insurance company in the program to offer a premium reduction
plan (PRP). The Manager of the FCIC approved one company to offer PRP
for the 2003 crop year, and you are aware of the controversy that
ensued. Then, a larger number of companies applied to be eligible to
offer the program, raising implementation issues. The Board determined
that rulemaking was necessary to establish the application, approval,
and payment process. A proposed rule was published, and based on the
comments received, RMA elected to publish an interim rule to implement
the PRP program. Congress subsequently prohibited RMA administrative
expenses to be spent on considering applications to offer PRP for the
2007 insurance year. The Board continues to work with RMA to monitor PRP
for the 2006-crop year.

The Board has also been involved in two significant contracted research
efforts to address program concerns. One effort is to address the
effects of declining yields on producers' abilities to buy sufficient
insurance coverage for the next year. Two separate development contracts
are underway on potential solutions to declining APH yields due to
successive years of crop losses. One contractor is developing an indexed
yield approach for corn, cotton, soybeans, and wheat. Another contractor
is developing alternatives to the current APH yield methods that limit
the amount yields may drop for annual crops and analyzing applicability
for perennial crops. A feasibility report and presentation is scheduled
for RMA for May 2006.

**Conclusion**

Six years is not a long time in the world of crop insurance where long
time series of data are needed to make sound decisions. Yet, much has
been accomplished since ARPA was enacted. It has not, as hoped,
prevented ad hoc disaster assistance and it has also not generated the
volume of new product submission from the private sector that may have
been envisioned. But, implementation of ARPA has significantly
strengthened the risk protection tools available to producers and the
actuarial performance of the program. As we look forward to a new Farm
Bill and the next generation of farm programs, the need for risk
management tools such as crop insurance will not lessen. The
attractiveness of insuring an uncertain crop outcome is the certainty of
the financial result for the insured producer. With adequate protection,
farmers need not jeopardize their livelihood as a result of natural
disasters. The FCIC Board will continue to diligently examine,
encourage, and demand improvements in insurance products that are in the
interest of producers, that are actuarially appropriate, and that
protect the interests of the American taxpayer. That completes my
comments.