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REVIEW OF THE FEDERAL CROP

INSURANCE SYSTEM

HEARING

BEFORE THE

SUBCOMMITTEE ON

GENERAL FARM COMMODITIES

AND RISK MANAGEMENT

OF THE

COMMITTEE ON AGRICULTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 4, 2005

Serial No. 109–7

(

Printed for the use of the Committee on Agriculture

agriculture.house.gov

COMMITTEE ON AGRICULTURE

BOB GOODLATTE, Virginia, Chairman

JOHN A. BOEHNER, Ohio,

Vice Chairman

RICHARD W. POMBO, California

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

JERRY MORAN, Kansas

WILLIAM L. JENKINS, Tennessee

GIL GUTKNECHT, Minnesota

ROBIN HAYES, North Carolina

TIMOTHY V. JOHNSON, Illinois

TOM OSBORNE, Nebraska

MIKE PENCE, Indiana

SAM GRAVES, Missouri

JO BONNER, Alabama

MIKE ROGERS, Alabama

STEVE KING, Iowa

MARILYN N. MUSGRAVE, Colorado

RANDY NEUGEBAUER, Texas

CHARLES W. BOUSTANY, JR., Louisiana

JOHN J.H. ‘‘JOE’’ SCHWARZ, Michigan

JOHN R. ‘‘RANDY’’ KUHL, JR., New York

VIRGINIA FOXX, North Carolina

K. MICHAEL CONAWAY, Texas

JEFF FORTENBERRY, Nebraska

——— ———

COLLIN C. PETERSON, Minnesota,

Ranking Minority Member

TIM HOLDEN, Pennsylvania

MIKE MCINTYRE, North Carolina

BOB ETHERIDGE, North Carolina

JOE BACA, California

ED CASE, Hawaii

DENNIS A. CARDOZA, California

DAVID SCOTT, Georgia

JIM MARSHALL, Georgia

STEPHANIE HERSETH, South Dakota

G.K. BUTTERFIELD, North Carolina

HENRY CUELLAR, Texas

CHARLIE MELANCON, Louisiana

JIM COSTA, California

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

RICK LARSEN, Washington

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

PROFESSIONAL STAFF

WILLIAM E. O’CONNER, JR., Staff Director

KEVIN J. KRAMP, Chief Counsel

JOHN HAUGEN, Communications Director

ROBERT L. LAREW, Minority Staff Director

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

JERRY MORAN, Kansas, Chairman

JOHN A. BOEHNER, Ohio,

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

WILLIAM L. JENKINS, Tennessee

TIMOTHY V. JOHNSON, Illinois

MIKE PENCE, Indiana

SAM GRAVES, Missouri

JO BONNER, Alabama

STEVE KING, Iowa

MARILYN N. MUSGRAVE, Colorado

RANDY NEUGEBAUER, Texas

CHARLES W. BOUSTANY, JR., Louisiana

K. MICHAEL CONWAY, Texas

JEFF FORTENBERRY, Nebraska

BOB ETHERIDGE, North Carolina,

Ranking Minority Member

JOHN T. SALAZAR, Colorado

JIM MARSHALL, Georgia

STEPHANIE HERSETH, South Dakota

G.K. BUTTERFIELD, North Carolina

CHARLIE MELANCON, Louisiana

JOHN BARROW, Georgia

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

RICK LARSEN, Washington

BEN CHANDLER, Kentucky

DAVID SCOTT, Georgia

JIM COSTA, California

TYLER WEGMEYER, Subcommittee Staff Director

(II)

(III)

C O N T E N T S

Page

Butterfield, Hon. G.K., a Representative in Congress from the State of North

Carolina, prepared statement ............................................................................. 4

Etheridge, Hon. Bob, a Representative in Congress from the State of North

Carolina, opening statement ............................................................................... 2

Johnson, Hon. Timothy V., a Representative in Congress from the State

of Illinois, prepared statement ............................................................................ 3

Moran, Hon. Jerry, a Representative in Congress from the State of Kansas,

opening statement ................................................................................................ 1

WITNESSES

Burger, Greg, president, Farmers Crop Insurance Alliance, Eau Claire, WI,

on behalf of the American Association of Crop Insurers .................................. 35

Prepared statement .......................................................................................... 73

Collins, Keith, Chief Economist, U.S. Department of Agriculture, and Chairman, Federal Crop Insurance Corporation ........................................................ 5

Prepared statement .......................................................................................... 53

Davidson, Ross J., Jr., Administrator, Risk Management Agency, U.S. Department of Agriculture .............................................................................................. 6

Prepared statement .......................................................................................... 56

Nielsen, Norman A., president, Associated Insurance Counselors, Inc., Preston, IA, on behalf of the Independent Insurance Agents & Brokers of

America ................................................................................................................. 39

Prepared statement .......................................................................................... 70

Rose, Billy, chief executive officer, Crop1 Insurance, Des Moines, IA ................ 40

Prepared statement .......................................................................................... 84

Sieben, Mike, president, Farm Bureau Mutual Insurance Company, and vice

chairman, Crop Insurance Research Bureau, Manhattan, KS, on behalf

of the Crop Insurance Research Bureau ............................................................ 37

Prepared statement .......................................................................................... 91

SUBMITTED MATERIAL

American Soybean Association, statement ............................................................ 105

Grabinski, Ray, president, Progressive Ag, Fargo, ND, statement ..................... 110

(1)

REVIEW OF THE FEDERAL CROP INSURANCE

SYSTEM

WEDNESDAY, MAY 4, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GENERAL FARM COMMODITIES

AND RISK MANAGEMENT, COMMITTEE ON AGRICULTURE, Washington, DC.

The subcommittee met, pursuant to call, at 10:10 a.m., in room

1300 of the Longworth House Office Building, Hon. Jerry Moran

(chairman of the subcommittee) presiding.

Present: Representatives Everett, Jenkins, Johnson, Bonner,

King, Neugebauer, Boustany, Conaway, Fortenberry, Moran, Goodlatte [ex officio], Osborne, Etheridge, Salazar, Marshall, Herseth,

Butterfield, Melancon, Pomeroy, Boswell, Larsen, Chandler, Scott,

Costa, and Peterson [ex officio].

Staff present: Craig Jagger, Tyler Wegmeyer, Callista Gingrich,

clerk; Chip Conley, and John Riley.

OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS

Mr. MORAN. Good morning. This hearing of this subcommittee

will now come to order.

We are here today to review the Federal Crop Insurance System,

a topic that this subcommittee has taken seriously for several years

now. I very much appreciate the witnesses that will join us in a

moment. And we are here for the purpose of finding ways to improve the delivery and effectiveness of crop insurance producers

across America.

In the last Congress, we held oversight hearings here in Washington along with a hearing in Minnesota and Texas. We sought

input from farmers from farm organizations, commodity groups,

and the Risk Management Agency on how the crop insurance system could be improved.

I thought today would be useful for our subcommittee members

to have RMA and the industry evaluate what progress and challenges there currently are in the crop insurance program. I think

it is very useful for members of this subcommittee on a regular

basis to hear from RMA, from the industry, and from farmers

themselves as to what is working and what improvements are

needed.

We are here to consider ways to improve crop insurance as a risk

management tool for our farmers, ranchers, and producers. A couple of issues that are particularly important to me today that are

2

on my list are topics of soybean rust, which this subcommittee and

Mr. Lucas’ subcommittee examined in another arena last week,

and the Premium Reduction Plan, which has received a lot of attention from the industry. The topic of multi-year disasters is one

that is very important to me as a Member of Congress from Kansas. We have suffered many years of drought, and I look forward

to hearing the current status from the RMA of that project to provide a new tool for our farmers in those circumstances.

I stated last year at our soybean rust hearing that our farmers

need to be correctly informed as to what production practices will

be required of them in order for them to qualify for indemnity

under the Crop Insurance Policy.

I look forward to hearing from RMA about education efforts and

procedures that are in place and about the concerns of the industry

that industry has for their business.

PRP, which has been on the books since 1994, has just recently

been brought to the forefront of the issues that the industry is

dealing with, with the comment period on a proposed rule just ending last April 25. And I look forward today to know some of the

conclusions that have been made from the over 600 comments I understand that were received and what the current plan is for PRP

now.

Some in the industry have not been pleased with the program,

while others have embraced it as an opportunity, and today, we

have witnesses on both sides. I would welcome the subcommittee

members to raise other issues, not necessarily the ones that I just

mentioned, that are important to them and their farmers at home.

I conclude my remarks with just a mention of the renegotiation

of the SRA. Plenty of concerns were raised by lawmakers and crop

insurance companies last year. I am pleased that the companies

have all signed the SRA. My concern has always been about the

lack of competition should we see further consolidation of the industry.

This hearing is not designed to address the issue of SRA or its

negotiations, but I would not be surprised if that is a topic that

Members may wish to address.

I again thank Mr. Davidson and Dr. Collins for joining us today.

And I now turn to the gentleman from North Carolina for any

opening remarks he would like to make.

OPENING STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH

CAROLINA

Mr. ETHERIDGE. Thank you, Mr. Chairman.

Let me thank you for convening the subcommittee for what I

think is a very important hearing regarding Federal crop insurance. I want to commend you for your diligence where oversight of

the program is concerned.

Mr. Chairman, the section of the Federal Crop Insurance Act

that allows for Premium Reduction Plans laid dormant for nearly

a decade since it was first enacted on the recommendation of the

Clinton administration in 1994. As Crop1 proceeds into its third

year of sales of the discounted products and the States it serves,

3

the issues raised by this provision of the law have really begun to

crystallize.

The one thing that our witnesses do agree on is that the Government’s response to the concerns that are raised will be tremendously important to the future of the Crop Insurance Program.

Also, Mr. Chairman, the arrival of a new, as you have just indicated, and potential devastating disease, Asian soybean rust, to our

country is also presenting particular challenges for the Risk Management Agency and its administration of the Crop Insurance Program. I think we can agree this disease is probably here to stay,

and it is crucial, in my view, that our subcommittee continue to

stay apprised of how the agency and the industry will respond to

this disease that could be devastating to some of our farmers.

Mr. Chairman, I am grateful for our witnesses who have taken

the time to be with us today, and I look forward to their testimony

on both sides of the issue, because I know it will be enlightening

as we deal with an issue this important to the future of agriculture.

Thank you, and I yield back.

Mr. MORAN. I thank the distinguished gentleman from North

Carolina.

The Chair would request that other Members submit their opening statements for the record, so that witnesses may begin their

testimony and we have plenty of time for questioning.

PREPARED STATEMENT OF HON. TIMOTHY V. JOHNSON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ILLINOIS

I appreciate the opportunity to provide comments on the Risk Management Agency’s proposed rule regarding the ‘‘Submission of Policies, Provisions of Policies,

Rates of Premium, and Premium Reduction Plans.’’ I strongly support maintaining

a crop insurance program that is working and providing stability in our Nation’s

rural economy for the America’s farmers and specifically for farmers of the 15th district of Illinois; whom I represent.

There are businesses in my district with extensive experience providing crop insurance. I understand first-hand the complicated and costly nature of delivering

crop insurance to farmers. While I support the effort of the RMA to find ways to

reduce costs to farmers and pledge our continuing efforts to assist in this cause—

I’m very wary of PRPs that promise lower costs but, ultimately, deliver little value

to farmers.

I believe the implementation of the proposed rule calls into question the availability of crop insurance to small farmers and could also result in companies pulling

out of high loss ratio or high expense rate states, thus reducing the availability of

the program in some States across the country.

I respectfully submit the following comments to the Subcommittee on General

Farm Commodities and Risk Management:

Cost Savings Must be Verified

Approving a PRP based on ‘‘projected savings’’ should be avoided. I’m very concerned that a company could ‘‘project’’ savings, offer lower prices to farmers based

on these ‘‘projections’’ and attract a sizable portion of crop insurance sales. Should

these ‘‘projections’’ not be accurate, however, the farmers who signed up with the

company would feel the ultimate impact through inadequate service and inadequate

coverage. I’m very concerned that an insurance provider would offer a discount, expand its market share and then find out that it couldn’t deliver on its promises. Inevitably, the Federal Government, along with other crop insurance providers that

acted more responsibly—provided there were any remaining to deliver insurance in

a particular State, would be left to pick up the pieces of the failed experiment.

Any company that wishes to engage in a PRP should be required to demonstrate,

based on actual experience, its ability to achieve cost savings in delivering plans of

insurance to farmers. Most importantly, it should demonstrate to RMA its ability

to provide the appropriate level of service to farmers on an ongoing basis.

4

Impact on Service to Farmers

I have heard from a few of my constituents groups that have experience delivering

crop insurance that crop insurance delivery costs cannot be noticeably reduced without significantly reducing the level of service provided to farmers. Tailoring the vast

array of crop insurance products to suit the needs of individual farmers is time consuming and requires significant expertise.

This necessary level of expertise requires significant ongoing training and support. Without it, farmers are unlikely to be served either at the level they are served

today or at a level sufficient to meet their needs in the future. In whatever PRPs

that RMA chooses to endorse, the agency should closely monitor—and require as a

condition of approving the plan—a complete training program for agents who will

offer the plan to farmers based on the criteria established in appendix IV of the

2005 SRA.

The preservation of crop insurance integrity is tied to the level of service needed.

Given the number of and complexities of crop insurance products offered, there

should be some simplification of products before any PRP rules are implemented.

For example, Revenue Assurance and Crop Revenue Coverage products are similar

(yet different enough) so that some years one product is more attractive than the

other. As long as products like RA and CRC are separate, implementation remains

more complex making it harder to achieve the efficiencies to deliver PRP.

Producer Access to Products

The RMA requires that producers have access to all products approved by the

agency. This ‘‘universal service’’ approach is a central tenet of the crop insurance

program. It ensures that all farmers, regardless of size, pay the same price for the

same level of crop insurance coverage.

Because the delivery system is compensated, by and large, according to a percentage of the premium sold, there is a built-in incentive to write larger policies. In

many cases, the sales of larger policies actually help cover the costs of selling and

servicing smaller farmers. It is unlikely insurance providers, already facing tight

margins, will be willing to actively seek the business of smaller farmers if the return in doing so is reduced.

There is nothing in the proposed regulations keeping an agent from selling a discount plan from one crop insurance company to a large producer and a regular plan

from another company to a small producer. The regulation offers no means to ensure that discounted products will be made available to small producers. There will

be additional workload and challenges for RMA in the approval, implementation

and monitoring of PRP.

PREPARED STATEMENT OF HON. G.K. BUTTERFIELD, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF NORTH CAROLINA

Mr. Chairman, thank you for holding this hearing. Crop insurance is a critical element of the safety net that exists for farmers throughout our Nation.

One such company that writes crop insurance for farmers in my home State of

North Carolina is here today, Mr. Billy Rose of Crop1, whose issuing company, Occidental Fire & Casualty serves a large number of farmers in my district.

Mr. Chairman, crop insurance is a critical part of the safety net in the farm bill.

My congressional district is exceptionally prone to severe hurricanes, with an average of two hurricanes coming ashore in my district in eastern North Carolina per

year. Farmers in some parts of the State have suffered catastrophic loss multiple

times in their lifetimes and it is the crop insurance programs mandated in the farm

bill and provided by companies in North Carolina that enables them to continue operations in the future years.

In 1988, Hurricane Floyd came ashore in my district, resulting in a once in a

thousand years flood. Some parts of eastern North Carolina were submerged in as

much as 30 feet of water and over $6 billion in damage was incurred.

I thank the chairman and ranking member.

Mr. MORAN. We have, at our table already, Dr. Keith Collins, the

Chief Economist to the U.S. Department of Agriculture, and he is

here in his capacity as Chairman of the Federal Crop Insurance

Corporation, and also Mr. Ross J. Davidson, Jr., who is the Administrator of the Risk Management Agency, U.S. Department of Agriculture.

Dr. Collins, you may begin at your pleasure.

5

STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE, AND CHAIRMAN, FEDERAL

CROP INSURANCE CORPORATION

Mr. COLLINS. Thank you very much.

Mr. Chairman, Mr. Etheridge, and other members that are here

today, thank you for the opportunity to participate with Mr. Davidson in today’s hearing.

I think I will use my few minutes to briefly discuss some of the

recent key actions the Board of Directors of the Federal Crop Insurance Corporation has taken over the past year. The Board, as

you all know, has general management responsibility for FCIC.

During the past year, we have focused on evaluating FCIC’s product portfolio, considering new products, improving and expanding

existing products, and dealing with the Premium Reduction Plan,

as you just discussed, as well as dealing with other issues.

The Federal Crop Insurance Program is growing. I believe it is

getting better, and I believe it generally serves the public well

today. Acreage in the program and insured liability have reached

record highs as farmers have increasingly turned to crop insurance

to manage their risks and also as more products have been developed and approved for more crops and in more locations.

Livestock pilot programs again occupied the attention of the

Board this past year as BSE and other issues necessitated that we

stop sales of the Livestock Risk Protection and Livestock Gross

Margin Pilot Policies. Changes were approved by the Board, making it possible for the Board to reopen sales of improved plans of

these livestock products with the start of the fiscal year we are now

in. And we are planning soon to contract for an evaluation of these

livestock plans of insurance.

During the past year, the Board also approved the significant expansion of Adjusted Gross Revenue Lite, known as AGR-Lite. This

policy, first offered in Pennsylvania in 2003, has now been expanded to include 17 States, including Pennsylvania. AGR-Lite covers adjusted gross revenue from the whole farm based on 5 years

of Federal income tax return data and expected income from the

current year. The Board believes that AGR-Lite can fill an important void in our product portfolio, especially by appealing to small

to medium-sized producers and producers of livestock and specialty

crops. Sales, however, have been slow of this product, and the

Board is working with the submitter to consider ways to make the

policy more attractive. In fact, we had a Board meeting last week,

and in our Board meeting, we sent out for expert review a series

of potential changes in AGR-Lite that are designed to improve the

product and increase participation.

Other products recently approved by the Board include a Silage

Sorghum Pilot Program, the Group Risk Income Protection Plan of

insurance for grain sorghum, a new pilot Group Risk Plan for

rangeland, a new pilot program for sweet potatoes, and permanent

programs for mustard, mint, wild rice, and cabbage.

A major issue the Board continues to address is the provision for

a premium reduction for producers. Section 508(e)(3) of the Federal

Crop Insurance Act requires the FCIC to allow approved insurance

providers to offer a Premium Reduction Plan if they meet the legal

requirements. In 2002, as noted, one company, Crop1, requested

6

Board approval for a PRP. By resolution in December of 2002, the

Board established certain standards that such a PRP should meet.

The Board also directed RMA to develop more detailed procedures

under which Crop1, and other companies, could apply for and operate a PRP. Since then, several other insurance companies, representing over 80 percent of the crop insurance business, have requested approval to offer a Premium Reduction Plan. Given the diversity of these proposals, implementation and regulatory issues

that they raised, and various concerns expressed by the public, including companies, agents, producers, and others, the Board decided that all stakeholders should have an opportunity to present

their views on Premium Reduction Plans. Accordingly, the Board

directed, and RMA is proceeding, with notice and comment rule

making to establish the framework by which such plans will be

evaluated, approved, regulated, and operated.

During this rule-making process, the Board has provided its

counsel to RMA on a range of PRP-related issues. We created an

ad hoc committee that has reviewed the proposed rule, and we will

continue to work with RMA on the development of the final rule.

After the final rule is issued, the Board plans to review with the

manager of FCIC, Mr. Davidson, all submissions for approval of a

PRP.

Mr. Chairman, that concludes my comments.

[The prepared statement of Mr. Collins appears at the conclusion

of the hearing.]

Mr. MORAN. Thank you, Dr. Collins.

Mr. Davidson.

STATEMENT OF ROSS J. DAVIDSON, JR., ADMINISTRATOR,

RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE

Mr. DAVIDSON. Thank you, Mr. Chairman. I appreciate the opportunity to appear before you today and report on the progress

and the challenges of the Federal Crop Insurance Program.

Twenty-five years ago, the Federal Crop Insurance Act of 1980

became law, creating a unique partnership between the private insurance companies that deliver this program and the Federal Government within the crop insurance program.

The program has experienced extraordinary growth since then.

Through the private sector delivery system in crop year 2004, RMA

provided approximately $46.7 billion of protection to farmers on

over 358 commodity types, covering over 80 percent of planted acreage in major commodities. This coverage was offered through 22

plans of insurance, and approximately 1.25 million policies that insured about 221 million acres of farmland.

Attached to my testimony are several charts that provide further

background and highlight the growth of the Federal Crop Insurance Program. In 2004, crop insurance provided approximately $3.1 billion in in- demnity payments to farmers and ranchers, including $218 million

for the four hurricanes in the Southeast, and approximately $337

million for upper Midwest freezes.

We now have 16 approved insurance providers selling and servicing crop insurance, compared to 14 when the 2005 Standard ReinVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
7

surance Agreement was signed. Most of these companies have requested authorization to increase the amount of premium that they

write and the number of States that they intend to serve. Since the

SRA was signed, three new insurance companies have been approved.

The 2004 reinsurance year was exceptionally profitable for the

companies and their commercial reinsurers, with an estimated

$700-plus million in underwriting gain. In 2003, as a comparison,

companies had an underwriting gain of $380 million, and of course

we all know, in 2002, that there was an underwriting loss of about

$46 million in the program. The Administrative and Operating Expense Reimbursement has also risen from $626 million in 2002 to

an estimated $889 million in 2004.

I would like to provide a brief update on some of the key issues

that the subcommittee has identified for interest. As Dr. Collins

has expressed, and you, Mr. Chairman, Congress added section

508(e)(3) of the Federal Crop Insurance Act in 1994, which allows

approved insurance providers to offer premium reductions to farmers corresponding to demonstrated efficiencies in delivering crop insurance below the administrative and operative expense reimbursement. The Act requires that the efficiency be subject to the rules,

limitations, and procedures established by the Federal Crop Insurance Corporation. The Board of Directors approved standards for

allowing insurers to be approved to offer Premium Reduction Plans

in early 2003 in response to the application of one company, and

that company was approved and has been operating for 3 years.

Those procedures, which were available to all companies, have continued until recently. As Dr. Collins has indicated, the Board directed that we go through a notice and comment rule-making process in response to a number of applications that have been made

to the agency that varied significantly from the established procedures.

The proposed rule for PRP was published in the Federal Register

on February 24, 2005, and the comment period for 60 days has just

closed. We received approximately 800 separate mailings pertaining to the PRP proposed rule, and we are in the process of categorizing those and analyzing them.

Soybean rust is a major issue for us, and we have issued a number of communications on soybean rust and continue to provide

clarification when we are asked to do that and have communicated

through the companies, as well as augmenting that communication.

Multi-year disasters for declining yields continues to be a concern. We are in the process of negotiating on two contracts. Because we are in that contracting process, we can’t disclose the details but it is clear from the effort that were put forward that any

proposal to effectively address this issue will require additional

funding and possibly additional authority.

We continue to work on fraud, waste, and abuse through data

mining and other advanced technologies to leverage our resources

within the agency. We have saved multiple millions of dollars in

deterreing fraud, waste, and abuse and hope to be able to continue

that based upon continued funding for datamining.

We have also issued a memorandum with regard to conflicts of

interest and implementing the Standard Reinsurance Agreement.

8

Companies and agents have asked for further clarification, and a

manager’s bulletin is pending.

Pasture, forage, rangeland and hay initiatives are in the works

as well, and we hope to be able to provide effective coverage for a

broad range of the 400 to 600 million acres of private forage and

rangeland and pasture that exists in the United States.

So with that, Mr. Chairman, I would be happy to respond to any

questions.

[The prepared statement of Mr. Davidson appears at the conclusion of the hearing.]

Mr. MORAN. Thank you for your statements, and thank you very

much.

I, of course, have had a long history with RMA in regard to

multi-year disasters and the attempt to provide a policy or an addon to coverage for farmers who experience difficult times, multiyear disasters, in our case, drought, year after year. You indicate

that at this point in time you can’t publicly release the details of

those proposals. Your next sentence in your testimony is that any

proposal to effectively address this issue will require additional

funding and possibly new statutory authority. Can you give us a

timeline in which you might be back before us with any kind of request in regard to this issue?

Mr. DAVIDSON. Well, Mr. Chairman, we are very close to being

able to finalize these contract negotiations, and within about a

month, we should finish and be able to talk publicly about these

proposals. At that point in time, I would anticipate that we would

come to you and let you know what elements of that might require

additional funding and authority.

Mr. MORAN. Assuming that Congress responded to your request,

what crop year would that opportunity then exist for farmers in the

United States?

Mr. DAVIDSON. Well, of course, depending upon how fast that

would happen, it would take a little while to go through the actual

development process of the product. As you know, it takes some

time for the vetting and the development of the product. And so it

probably would be a couple of years before we would be able to do

something.

Mr. MORAN. Dr. Collins, along this line of multi-year disasters,

do you have suggestions for Congress? We have had the opportunity and have taken advantage of the opportunity to provide ad

hoc disaster assistance to farmers. Is there something that should

be done legislatively, administratively in crop insurance to reduce

the need for ad hoc disaster? One of the questions I have asked numerous experts, and perhaps I have asked you in the past, is it

possible to do away with ad hoc disaster assistance by creating an

insurance policy or program that eliminates that need?

Mr. COLLINS. Mr. Chairman, I don’t know if I could answer that.

I thought at one point we might be heading down that road as the

remuneration rates in disaster bills declined, we started offsetting

the costs of disaster bills and we started capping the sum of disaster payments plus crop insurance indemnities. I thought all of that

was probably a reflection of an improved crop insurance support

system, but I have been told by many others that it is not. It is

just simply budget requirements that have led to all of that.

9

I think we are on the right track, though. If you look at what

the problems are that necessitate ad hoc disaster assistance, one

long-standing problem has been participation in the Crop Insurance Program. When we had our first crop insurance reform bill in

1994, participation was 38 percent of eligible acreage. Today, it is

80 percent of eligible acreage. We have improved. One of the most

dramatic changes in crop insurance over the last few years has

been buy-up coverage. In 1998, 8 percent of policies were 70 percent or higher coverage. For the 2004 crop, it was 58 percent. I

mean, these are astonishing developments in crop insurance. But

there are still gaps, and gaps where you get problems and motivations for ad hoc disaster. One major gap has been fruits, vegetables, and specialty crops. I think in that area, we have also made

dramatic progress. The 2002 farm bill identified 31 horticultural

crops of special interest. We now have programs for 21 of those 31

crops, and we have contract work underway for 6 of the remaining

10. So we are plugging the gap on fruits and vegetables, and we

are making those products better. A lot of participation in those

crops has been at catastrophic levels for lots of reasons, but I think

we are improving those so that we might get buy-up in those as

well.

The third major area is livestock. Of course, we have a livestock sector that produces $100 billion worth of value a year in the

United States, and we have a cap on what we can spend on livestock products for crop insurance at $20 million a year. So there

is not much we can do on the livestock animal side, although we

have a couple of price pilots going. The big gap is rangeland, pasture, forage, hay, improving those products, which have not performed very well. We have had one rangeland product with about

15 million acres in it.

One of the things the Board did this past year was eliminate that

existing pilot, replace it with a new one. We have potentially as

much as 60 million acres that could participate in that program.

So I think we are on the right track there.

The answer to your question is we are on the right track. We are

going in the right direction. And what we are going to do for Congress is we are going to give you the confidence that if you don’t

want to fund an ad hoc disaster bill for budget reasons, that you

will have the justification for doing so based on having a Crop Insurance Program that is working well.

Mr. MORAN. I agree. In my conversations with my colleagues in

seeking support for ad hoc disaster, there is always a belief that,

first of all, the farm bill should have taken care of this, and then

once you get beyond that, well, then crop insurance should have

taken care of this.

Mr. COLLINS. Right.

Mr. MORAN. I do think that it has been the constraints of the

budget. I don’t know if we will have any success upon the departure of the gentleman from Nebraska, Mr. Osborne, in getting disaster assistance again. I am losing my ally, so it becomes even

more difficult over time.

On PRP, Dr. Collins, you and I had conversation on the phone

at least once, maybe twice, and ultimately, the rule-making process

began. What issues should we be concerned about in the overall efVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
10

fect of PRP upon the crop insurance delivery system? What are the

issues that arise that create a challenge, potential problem, or is

there just all benefit to the system?

Mr. COLLINS. That is a question that will be answered probably

100 times this morning.

Clearly, there are some benefits. Let me start with that. One of

the things that we did in trying to get a handle around PRP was

to go to our expert reviewers that we have under contract and

asked them to take a look at PRP. And one of the questions we

asked them is the underlying rationale for PRP is to give producers

a break on premium, to increase participation, to increase buy-up

coverage, will those things happen? And generally, they felt that

they would. I mean, there was some difference of opinion about

what the increase would be. One of the analyses we contracted for

suggested for wheat, corn, and soybeans, we might get a 2 percent

increase in acreage participating, and we might get a 41⁄2 percent

increase in buy-up coverage with a 31⁄2 percent premium reduction.

So I think there are some benefits. Those are the benefits: higher

participation and lower premiums for producers and income benefit

for producers.

On the challenge side, on the problem side, what we are doing

with this provision is we are taking a highly-regulated industry,

like a public utility, where we set the rates, where we contract to

deliver the program, where we pay costs of delivery for the companies, and we are trying to peel away part of that rigid regulatory

structure and introduce competition. And when you introduce competition in such a regulated structure, and this may not be the best

way in the world to introduce it, but when you introduce competition in this kind of a structure, change is going to occur. And when

change occurs, that creates dislocation and disruption costs for people. And one of those costs might be some restructuring of the

agent workforce, and I think that is a concern that people have

raised. Another one of those costs is hypothesized under-serving of

small, limited resource, women or minority producers. So that is

another thing we want to watch. We were cognizant of those kinds

of effects when the proposed rule was crafted.

But I would say the primary issue is the potential for high-risk

producers or small producers not having the service that they

might have had in the past and then the competition, the effects

that that would have on agent compensation and the size and quality of the agent workforce. I think those are the main issues. The

question is, can we deliver a final rule that can provide the benefits

that I have discussed and try to mitigate or ameliorate those kinds

of challenges or disadvantages.

Mr. MORAN. Dr. Collins, thank you.

The last time Dr. Collins appeared before our subcommittee, I

asked him how many times he had appeared before a congressional

committee, maybe just the Agriculture Committee, and the answer

is in excess of 70. I guess we are not tired of hearing from you yet:

we keep inviting you back. We are glad you are here, Dr. Collins.

We have both our chairman of the full committee and the ranking member, who we are delighted to have, and the Chair now recognizes the gentleman from Minnesota, Mr. Peterson.

Mr. PETERSON. I thank you, Mr. Chairman.

11

And Mr. Davidson, you may or may not know, up in the northern

part of my district, we have a turf grass industry that is really developing. They used to mostly grow bluegrass, but now they have

gotten into a lot of different other types of grasses for golf courses

and one thing and another. And apparently, they have been working through the system since 2000 trying to get a crop insurance

product that they can use for that industry. And I guess you sent

a survey out to the producers in our area. I guess they produce this

in the Northwest. I am not exactly sure, but could you tell me

where that is at and what happens next in the process?

Mr. DAVIDSON. Sure. As I am sure you know, under ARPA guidelines, we are required to contract out the development of new products and grass seed is one of those products that we have contracted out for a feasibility study to see whether a product could

be developed. That feasibility study is conducted by a third-party

contracted entity, and that entity is in the survey process right

now. So that is what you are describing. When we heard that there

was interest on the part of your producers, we added them to that

survey, and they will be part of the feasibility study. We anticipate

that that feasibility study will be delivered to RMA some time in

2006. Pending the results of whether or not it is feasible to develop

an insurance product, it will take about a year and a half to develop a product, and then we will pilot that product in certain

States. And so that is the process that we will go through, but they

are included in that feasibility study.

Mr. PETERSON. There is a concern. The people in my area definitely want this product as soon as they can get it, but there is a

concern that apparently producers in other areas don’t want this.

Do you know anything about that? And will that affect the outcome?

Mr. DAVIDSON. Yes. We have not received the feasibility report.

That aspect of demand for a product is addressed within the balance of a feasibility report, and what we need to do when we receive that, is to assess where the demand is, how broadly based

that demand is, and of course, the Board of Directors takes that

into account as they determine whether or not to go ahead with the

development of a product.

Mr. PETERSON. If they determine it is feasible and yet some other

part of the country doesn’t want it, you could probably do a pilot

in the area where they do want it?

Mr. DAVIDSON. That is entirely possible that just because one

sector doesn’t want it and another one does it doesn’t necessarily

mean that we don’t do it.

Mr. PETERSON. You are looking at 2007 or 2008 at the earliest.

Mr. DAVIDSON. Probably, yes. For a pilot program, about 2008 is

my guess.

Mr. PETERSON. In your charts and stuff that you gave us, I think

Mr. Collins testified to this, too, that over 80 percent of the planted

acreage is covered. I assume that includes people that have CAT

coverage and people that have buy-up?

Mr. DAVIDSON. Yes, it does. Yes, it counts all levels of coverage.

Mr. PETERSON. All right. What percentage of that is CAT coverage, and what percentage is buy-up, do you know?

12

Mr. DAVIDSON. I don’t have that on the top of my head, but it

is a declining percentage. Over the years, we have seen CAT generally decline and be replaced by buy-up.

Mr. Collins?

Mr. COLLINS. I think I have it here. It is, let us see, 2004. Maybe

I don’t have it.

Mr. DAVIDSON. It is a relatively small percentage. It is about——

Mr. COLLINS. Thirty one million acres is CAT coverage.

Mr. DAVIDSON. Yes, so about 15 percent.

Mr. PETERSON. Fifteen percent?

Mr. DAVIDSON. And that has declined from a much higher percentage from before ARPA.

Mr. PETERSON. Do you have the information about what that percentage is in different States and regions?

Mr. DAVIDSON. Yes, we do.

Mr. PETERSON. Could you make that available?

Mr. DAVIDSON. We will.

Mr. PETERSON. And do you have the trend line on that, too, in

the different areas?

Mr. DAVIDSON. We can show you for multiple years how that has

been going.

Mr. PETERSON. OK. All right. Thank you.

Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Peterson.

Also joining us today is the chairman of our committee. I recognize the gentleman from Virginia, Mr. Goodlatte.

The CHAIRMAN. Mr. Speaker—Mr. Chairman. Mr. Speaker, that

sounds good to you, doesn’t it?

Mr. MORAN. Mr. Chairman sounds fine, too.

The CHAIRMAN. Well, for the morning, Mr. Chairman, it is a

pleasure to participate in your hearing, and I want to thank you

for what you have done on this issue.

As you know, when I became chairman of the full committee, one

of my top five priorities for the committee that I announced at that

time was to expand and improve crop insurance, and you have, and

your subcommittee has, been very tenacious in pursuing that issue.

I think some of the problems have come forward today, primarily

a lack of resources, and that is what I wanted to ask Dr. Collins

about.

As you may know, my district is primarily livestock oriented, and

the ability to get involved in this area is very limited, as you noted,

with just $20 million available. As we look ahead, though, to the

next farm bill, when resources may be available and adjusted, do

you have any thought on what type of resources the amount of

money we might require to do an effective job with livestock?

Mr. COLLINS. Mr. Chairman, I am sorry. I don’t. I think that

when the Agricultural Risk Protection Act of 2000 was passed, it

gave us the authority to run livestock pilots. It was a very general

authority. We weren’t familiar with livestock. We were a crop insurance business. One of the things that provision does is it gives

the FCIC authority to basically underwrite trade options. That is

basically what we are doing with our Livestock Risk Protection and

our Livestock Gross Margin products. Those are price insurance

products, or margin insurance products. We have had a lot of deVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
13

bate within the Board of Directors on whether that is the appropriate direction to go for the future for livestock. Some people think

that those things are awfully close to options contracts and that

maybe we are infringing on an area of private sector commercial

business we shouldn’t. Others think that these products can change

over time and become maybe more complicated in more useful type

derivatives. And in fact, we have before us a new submission that

we just got last week for another version of Livestock Gross Margin

that would apply to different species.

So these products are expanding. We have expanded into more

States and more species. But the jury is out on those. The Board

has been particularly concerned about whether this is the right direction. We would like to be able to contribute to the process for

the 2007 farm bill on this.

The CHAIRMAN. In that regard, have you looked at insurance that

guards against various types of animal diseases?

Mr. COLLINS. We have. We have had one private sector submission. That submission was withdrawn, and it was withdrawn primarily because the Board was not comfortable with it. And I think

that we weren’t comfortable with it because the whole issue of how

you deal with livestock diseases from a broad Federal perspective

has not been resolved. It is unsettled. We have authorities, for example, in the Animal and Plant Health Inspection Service for compensation. How do those compensation authorities work together

with a private sector animal disease insurance product? How do we

rate for terrorist action or things like that, if terrorism was going

to be included in an animal disease product?

There was a tremendous number of questions like that that led

us not to want to deal with it when it was submitted at that time.

Subsequent to that, we contracted with SAIC to do a study of livestock disaster-related products. We have that study. I am not sure,

has that study been completed?

Mr. DAVIDSON. No.

Mr. COLLINS. No, the study has not been completed. We have

contracted with them to help inform us on this issue. We are also

going to contract this summer for an evaluation of the LRP and

LGM plans of insurance. When we get the results of that study and

the SAIC study, I think we will be in a better position to say what

we think might be the appropriate future direction for crop insurance.

I will mention one other thing, and that is Adjusted Gross Revenue policies. We have had the pilot going on for several years for

Adjusted Gross Revenue. That policy is a whole farm policy, but it

has a limitation on livestock liability. It can’t exceed 35 percent of

the total liability of the policy. Subsequent to that, we approved

AGR-Lite, Adjusted Gross Revenue Lite. One hundred percent of

the whole farm revenue can come from livestock. But we capped

the total liability to $250,000. So it is designed for very small producers.

Now we are struggling with that. We are thinking that AGR-Lite

might be a product that we could expand in the future and be

much more appealing to livestock producers if we can figure out

how to deal with the cap on that policy and figure out how to deal

with the diversification issue. That policy requires that it should be

14

a diversified operation, and a lot of livestock operations aren’t. So

that is exactly what we just sent for expert review last week to see

if we can figure out how to deal with the coverage levels, the liability cap, and the diversification factor in AGR-Lite, and I am hopeful that maybe that, too, could be a product for livestock down the

road.

The CHAIRMAN. In any of these trial programs that you have

been able to do with the limited resources you have, have poultry

been included?

Mr. COLLINS. Not to my knowledge.

The CHAIRMAN. I see Mr. Davidson is shaking his head yes.

Mr. DAVIDSON. Well, poultry is being considered, and we do have

a feasibility study that we are looking at for poultry. The challenge

that we have with poultry is the way the industry is organized.

And our authority allows us to cover producers if they actually own

the product. And as you know, poultry has been organized such

that the producers are more contractors for raising the product

than the actual ownership of the product is——

The CHAIRMAN. It isn’t very vertically integrated.

Mr. DAVIDSON. No. So that creates a challenge for us.

The CHAIRMAN. Well, I see my time is expired.

Let me just say, Dr. Collins, as you move forward on this, it

would be very, very helpful to this committee, first, to have a copy

of that report on livestock when it becomes available, and second,

and I realize I have caught you flatfooted today without any warning, but to look at what kind of resources you think we are talking

about as we expand in this area and a whole host of other areas.

As you know, we cover about 90 percent of the value of commodities, but we only cover about 10 percent of the types of commodities. And so as you move into all of the different types of specialty

crops in the country, that is another area that is very difficult I

know but also one where if we are going to continue to add value

to our agriculture to remain competitive internationally, having

this safety net expanded into more and more products is vital. And

it is going to cost money. We know it. So the more we know going

into the writing of the next farm bill about what kind of dollars we

are talking about, the best we can start preparing and trying to reserve resources to do that.

Mr. COLLINS. Yes, sir. We will do our best to help.

The CHAIRMAN. Thank you.

Thank you, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Chairman, for joining us.

The Chair recognizes the gentleman from North Carolina, Mr.

Etheridge.

Mr. ETHERIDGE. Thank you, Mr. Chairman.

First, let me give you a couple thank yous. Sometimes it kind of

helps to start out on a positive note. I want to thank you, Dr. Collins and Administrator Davidson, for the assistance you have given

us in fixing, to some extent, the sweet potato crop insurance pilot

that we have in place. And I know we are still learning from it,

because the growers in our area are quite pleased, at least where

we are to date. And the fact that the changes that you made, I am

even more pleased that you expanded the number to cover those

adjacent counties where there were, I think, a lot of problems. But

15

I would ask that once this crop year has passed and you have time

to review the pilot’s performance, that you please keep us updated

on what your findings are so that we can continue to fine-tune

that.

I also understand that your office in Kansas City and in Raleigh

have been working on an issue that we have discussed frequently,

and that is the allowing of our peanut growers to insure their crops

at a contractual price. And I appreciate your hard work on this

issue and your cooperation with the Peanut Growers’ Association in

trying to reach some common consensus that will, I think, benefit

all parties. And I appreciate that very much.

Now I also want to reiterate how important it is for our growers,

because as they start moving toward this, and I know you are trying to get to a position on implementing this in the, I believe, 2006

crop year, because these changes really need to be effective November 1 so we can make that happen, so I hope you will keep in mind

that so we can make that timetable fit.

Dr. Collins, let me ask a question of you. Last week, our friends

in the majority passed a budget resolution that calls for the Agriculture Committee to make $3 billion in cuts in farm programs.

This is quite a bit less than the $10 billion that the CBO estimated

that the administration was proposing that we cut in the fiscal

year 2006 budget. And it includes a great deal of interest, I think,

of the people sitting behind you and a lot of people across this

country, because it was about recommended changes in the Federal

Crop Insurance Program. Now that we have a new target of roughly $3 billion, can you share with us which of the agricultural proposals in the 2006 budget that the President has proposed or the

administration preferred Congress to enact to achieve these $3 billion in savings? And if you can’t do that right now, can you tell us

when the committee can expect to receive recommendations so that

we can hopefully meet these things up and do the least amount of

damage?

Mr. COLLINS. This morning, I can’t tell you which of the various

cuts the administration has in their budget. That would be highest

to lowest priority. The best I can do for you is take your question

back to the Department and ask the policy officials of the Department, tell them of your interest in this issue, and hopefully you

will get some response from them.

Mr. ETHERIDGE. If you will do that, I would appreciate it.

Mr. COLLINS. I will do that.

Mr. ETHERIDGE. Because you know as well as I do, if you push

in at one point, it is going to pop out somewhere else. We would

just sort of like to know what we are talking about popping out.

Mr. COLLINS. Yes, sir.

Mr. ETHERIDGE. OK. Thank you, sir.

The administration’s proposal for 2006 includes some that do not

have a lot of detail. For example, the President’s budget includes

this statement, and let me share it with you: ‘‘The administration

includes changes to the crop insurance program that will reduce

the premium subsidies to the farmers as well as the subsidies in

total through the participating insurance companies. These

changes will allow farmers to become more efficient in their risk

management and companies to deliver crop insurance in a more efVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
16

fective manner.’’ I guess my question is what exactly are the proposals behind these statements in the President’s budget? And to

the extent that his budget attempts to achieve savings by reducing

administrative and operating payments to crop insurance providers, how can that be done without violating the contractual provisions of the SRAs?

Mr. COLLINS. I will do my best to answer part of that. The first

part, the——

Mr. ETHERIDGE. And the part that we don’t get answered, can I

get something back later on?

Mr. COLLINS. Yes, sir. And perhaps Mr. Davidson can help and

answer that as well.

Mr. ETHERIDGE. Thank you, sir.

Mr. COLLINS. What I would say regarding the proposals for savings, there are a number of parts of the President’s budget proposal

for crop insurance, two that you referred to. One would be a reduction in premium subsidies for producers. The proposal is to reduce

the premium subsidy by 5 percentage points for policies of 65 percent coverage or less and 2 percentage points for policies of greater

than 65 percent coverage, the idea being, then, hopefully, that the

difference would provide some incentive to continue buy-up coverage. Overall, if you look at the level of subsidies in crop insurance, the Government is now subsidizing policies at a rate of about

59 percent, and the farmer is paying about 41 percent. So 2 percentage points and 5 percentage points, that is a moderate portion

of the subsidy that is currently paid by the Federal Government.

With regard to the administrative and operating expense reimbursement subsidy, I believe the proposal was for a 2 percentage

point reduction in the administrative and operating expense reimbursement subsidy.

I have forgotten the last part of your question, Mr. Etheridge.

Mr. ETHERIDGE. Well, the last part was how does this keep us

from violating the contractual provisions of the SRAs?

Mr. COLLINS. Well, Mr. Davidson, perhaps, knows the answer to

that.

Mr. DAVIDSON. I am not a lawyer, but my understanding is that

once Congress would pass this, that it would have to be implemented at a date where we would start the next year’s Standard

Reinsurance Agreement.

Mr. COLLINS. Sir, it is my understanding that Congress has enacted laws in the past that have changed the SRA and those have

been implemented with the subsequent reinsurance year. These

proposals in the President’s budget wouldn’t go into effect until the

2007 reinsurance year.

Mr. ETHERIDGE. Mr. Chairman, I see my time has expired.

Maybe we can have a second round and we can get a little more

detail on that. If not, I would like to have a follow-up in writing.

Thank you, sir.

Mr. MORAN. The gentleman from Alabama, Mr. Everett.

Mr. EVERETT. Thank you, Mr. Chairman, and thank you for calling this hearing. This is a subject that this committee has spent

considerable time on in the past years, and it is extremely important to our producers.

17

And Dr. Collins and Mr. Davidson, thank you for your service to

agriculture, and thank you for being here today.

Dr. Collins, I have written you in the past concerning my interest

in having an analysis done in the Risk Management Account. I

think such a count might be useful to our producers. As a matter

of fact, it was a producer of mine who brought up this idea, Mr.

Ricky Wiggins of Covington County, Alabama.

The producer would place some pre-tax income in an account,

and that would be matched using a crop insurance premium and

administrative subsidies. The account funds could be used to self

insure in the event of natural disaster. Can you tell me what you

have done to evaluate this idea?

Mr. COLLINS. Yes, sir. First let me say, you were kind not to

mention the tardiness of my response to your letter, and so I will

publicly tell you that I apologize for not getting back to you sooner.

That is the bad news. The good news is that we actually did

something about your request when you wrote to me. You asked if

we would analyze one particular version of a farm savings account

plan. And I would say that this is a broad interest to RMA, because

these are non-insurance tools, and non-insurance tools are part of

their mandate, developing such tools. This concept has also been in

public debate since the 1996 farm bill when Farm and Ranch Risk

Management Accounts first surfaced. Because of the general public

interest in this, your interest in this, and our own interest in this,

we did contract with the Economic Research Service to conduct an

evaluation of farm savings accounts.

What we are doing in that analysis is to look at the Canadian

experience. Canada started something called the Net Income Stabilization Account in 1991. They terminated it in 2003 for a variety

of reasons. The study is going to look at their experience, and then

it is going to look at the Farm and Ranch Risk Management Account concept. And then it is going to look at a farm program savings account concept where farm program payments, instead of

going to the farmer, would go into an account. And then it is going

to look at your proposal, which is to look at pre-tax dollars going

into an account, matched to a certain level by the Federal Government, and then a payment triggered out under certain conditions.

That study is virtually complete. The contractor, ERS, is going

to brief the Kansas City staff on May 10 on that study. Subsequent

to that, they will deliver it to RMA, and then RMA will evaluate

whether the contract has been fulfilled or not. We expect within a

couple of months to be able to have that study public. So, within

a couple of months, hopefully, I can deliver that to you and you will

be able to see the kind of effects and analysis people think are related to those alternative farm savings accounts.

Mr. EVERETT. Of course I would certainly like to have a copy of

that, and I am sure the committee would, also.

Mr. Davidson, do you have any comments on that?

Mr. DAVIDSON. I wouldn’t have anything to add to Dr. Collins.

We await the study and are anxiously looking forward to this.

Mr. EVERETT. Well, thank you very much for going forward with

the study, and it is something of most interest to me and to some

of my producers and, I am sure, to perhaps some other members.

Thank you very much.

18

Mr. MORAN. Thank you, Mr. Everett.

The Chair recognizes the gentleman from Georgia, Mr. Marshall,

for 5 minutes.

Mr. MARSHALL. Thank you, Mr. Chairman. Thank you for holding this hearing.

I have got a couple of quick observations, and perhaps you could

respond in writing to those observations, because I principally want

to talk about something else.

You see the guy on TV who is pushing State Farm right now,

and one of the commercials has him saying that State Farm is very

aggressive about finding people who are committing insurance

fraud and that that keeps down costs for policyholders. And that

is State Farm’s promise to you.

I have had a couple of farmers come up to me in different meetings that I have had in my District after the meeting and quietly

tell me that fraud is relatively rampant where crop insurance is

concerned. And one guy said this, ‘‘You know, if you want to find

out who is doing it, just go to the ones who are making claims year

after year after year after year. They are the ones that are doing

this.’’ And he also said that it is almost a cultural thing. There are

farmers who wouldn’t dream of engaging in fraud and are really

frustrated that others are, because it increases their costs. And

then there are farmers who just kind of live on it.

So I found myself wondering, ‘‘Are we State Farm, in the sense

that do we have a private financial interest that motivates us, that

incentivizes us to get out there and find the fraud that is being

committed? Are we structured in a way where there are true incentives, sort of private sector incentives, to find fraud and stop it? I

have a number of pecan growers say that they need a product that

is going to cover multi-year damage done as a result of windstorms

like we had in Georgia this past year. They are concerned that they

are going to get a payment for no crop as a result of the damage

done last year, but they will probably not have a crop this year and

then maybe 10 percent or 20 percent. I mean, it is going to take

about 10 years to overcome the damage it has actually done to the

tree and that there really isn’t a product out there that will cover

that kind of problem. And I would be delighted in having comments

about that, if you could, in writing afterwards.

And there are probably others. Like peach trees probably have

a similar kind of thing, so it would be nice to have a product that

addresses that.

I am mostly interested today in comments about this PRP business and the rule making and Crop1. And I haven’t heard all sides

of the story here, but I do understand a few things. And if I am

wrong in my understanding, I would like to be corrected. One, the

statute contemplates that we will make every effort to make crop

insurance universally available to the small producer as well as the

large producer. We have set up our premium regulations with that

in mind. We know that those who are currently selling take a loss

when they are selling to the small folks, make a gain when they

are selling to the big folks, and maybe some efficiencies can be introduced into the system, but basically the system does contemplate that there would be proper service given to smaller farmers. I almost feel like rural areas are under attack nowadays with

19

the Universal Service Fund, Medicare and Medicaid cutbacks,

DRGs. I mean, you can go through any number of lists of initiatives that really damage rural areas, because they are not WalMart. I mean, we don’t have, because of the sparseness of the population and smaller producers and et cetera, you just can’t inject

into that kind of environment Wal-Mart type efficiencies and not

expect that there is going to be an awful lot of pain.

Now what I understood was that Crop1 was permitted to do the

PRP on the assertion that it would be selling online, and that was

the efficiency that it was introducing into the system. I also understand, and I may be wrong about this, that that really didn’t work

and that they are out there competing now by, essentially, ‘‘cherry

picking’’, going after the big producers, which then limits the

amount of premium profit that is available to agents to meet the

needs of the smaller producers. And their argument is that they

have got all kinds of efficiencies that are unique, and yet I understand that there are some big nationwide sellers that have been in

business for a long time that arguably have similar or greater efficiencies, more experience, et cetera.

So I am not sure why, with the rule-making process still pending, that you would have anybody out there as a PRP at the moment, why you wouldn’t say, ‘‘OK. No PRP, no premium reduction

until we finish with this rule-making process and we take into account all of these different things that we would like to accomplish.’’ And I would just like comments about that.

Mr. COLLINS. I think both of us ought to respond to this.

First of all, I want just to address the question of why Crop1 is

out there. We are required by law to approve PRPs. It is not the

choice of the Department of Agriculture. Approving a PRP does not

require regulation. There is no regulatory requirement in the statute. The statute contemplates regulations or procedures or other

vehicles for providing guidance to companies. As to why there are

not other companies out there even though they have efficiencies,

Crop1 was the only company that came in for the 2003 crop year

and asked for a PRP. Crop1 was the only company who came in

for the 2004 crop year and requested a PRP. So clearly, that is why

they were the only company out there. And because they were already out there, they submitted their plan of operations early for

2005, and they were approved early, before we realized the difficulty that was going to result from all of the other submissions

we got and the possible consequences, potential consequences, some

of which you mentioned. It was only at that point then, because of

the numerous issues that were raised by everybody in the crop insurance community, that we went to rule making. So the company

is out there now because of the evolutionary process by which we

entertained the submissions for PRP and the process that we went

through to approve PRP.

I will ask Mr. Davidson if he would like to comment further on

this.

Mr. DAVIDSON. Well, I would like to address the concerns that

you have expressed over small and limited-resource farmers, because that is a very important part of what we do to try to make

sure that this program works for everybody. And our concerns are

not only with Crop1 as an individual party, but also with every

20

other company to make sure that the natural tendency to go to the

higher value policy doesn’t pertain here, that people are still serving smaller farmers. What we are willing to do always is, if we get

a complaint that a farmer has approached an insurance company

through their agents and has been denied the opportunity to get

coverage, of course we are on that, as they say in Texas, like white

on rice. We will make sure that farmer can get policies. I am aware

of companies generally in the industry who will pay a premium to

their agents, a bit higher commission, to serve smaller farmers.

That practice exists.

With regard specifically to Crop1, we have been very concerned

to make sure that this program is delivered to everybody. For that

reason, we told Crop1 at the beginning, ‘‘You have to offer the discount to every single one of your policyholders.’’ The proposed rule

also includes that notion that anybody, any company that would

provide this, once they provide a discount to one, they have to provide it to all so that there would not be the opportunity. However,

we need to also monitor the actual performance of those companies.

We require in the proposed rule that a marketing plan be submitted, demonstrating how the company will, in fact, serve the small

and limited-resource farmer. And we also require a follow-up to

that to see if the actual results are consistent with that plan. Specifically, we have monitored the size of policies that Crop1 sells.

And I can’t get into confidential business information in a public

setting, but I would report about two-thirds of the policies that

Crop1 sold in 2004 were 250 acres or less. So that gives you an indication.

Now how does that compare to all of the other companies? You

can’t really look at the average of all of the other companies. You

have to look at every company individually. But we are looking at

those kinds of measures. Does Crop1 sell high-dollar policies? Yes,

they do. Is their average higher than the industry average? Yes,

they are. But they are not the only company that has premium per

policy higher than the industry average.

Mr. MARSHALL. I see my time is up.

Thank you, Mr. Chairman. I will wait until the next round, and

maybe we can continue.

Mr. MORAN. Sure.

The Chair does not anticipate a second round, but it seems to be

growing demand for additional questions.

The gentleman from Nebraska, Mr. Osborne, is not a member of

the subcommittee, but I would ask unanimous consent that he be

seated at the dais and be allowed to ask questions of the witness.

If there is no objection, the gentleman from Nebraska is recognized

for 5 minutes.

Mr. OSBORNE. Well, thank you, Mr. Chairman. Thank you for

your tolerance in having an outsider sit down with you.

And thank you, gentlemen, for being here this morning.

And as you know, and particularly Mr. Davidson knows, we have

been really concerned about multi-year drought in the upper Midwest. And Mr. Moran and myself in 2002 beat our heads against

the wall for several months trying to figure out what we could do,

because the administration was saying, ‘‘Well, whatever you get

has got to come out of the farm bill,’’ and we couldn’t find anything.

21

And finally, the Conservation Security Program appeared to be

miscalculated, or at least there was some extra money. And so in

both 2002 and 2004, we have been able to get a substantial amount

of drought relief. However, we are still in the grips of the drought,

and we don’t know if this is a 5-year drought or a 30-year drought.

And I would have to say that the drought protection that we got

probably saved a fair number of people from going under. And so

my understanding is that you are working on it, and you have got

a couple of products in process, but you are maybe 2 years out.

Mr. DAVIDSON. At least.

Mr. OSBORNE. And the problem we have is that, you know, the

Conservation Security Program may not keep on being the gift that

keeps on giving. And so, we are in a bind, and I know you can’t

rush the process, but I just wanted you to be aware that this is

really an ongoing concern, because we don’t see any tremendous

let-up in the drought at the present time. And so anything that we

can do would be appreciated.

The other item I just wanted to bring up that maybe Dr. Collins

could comment on is that I went over to the European Union, oh,

6 weeks ago or something like that, and their commissioner of agriculture was patting herself on the back for the fact that they are

going entirely decoupled payments. And so it led me to believe in

our new farm bill, $19 billion may be in trouble. And I wondered

what your speculation would be of some type of total farm income

revenue insurance. Would it bear scrutiny in the new farm bill? I

mean, this is way out. It is kind of off the charts in terms of speculation, but I wondered if that would be one way that we could satisfy some of the W–2 regulations and being in compliance.

Mr. COLLINS. I don’t think it is that far out. I think you are right

that the world is expecting a substantial reduction in domestic support commitments for production and trade distorting subsidies.

Our $19.1 billion cap could well be half that when this round is

over. Currently, our crop insurance premium subsidies are considered in the amber box. They are not commodity-specific, though.

They don’t count against the $19.1 billion. They count against the

$10 billion cap for non-commodity-specific support. Whole farm insurance, presumably, at least some of those subsidies would be

amber box. The WTO disciplines for insurance limit the coverage

level. When the coverage level gets too high, then the subsidies are

considered amber box support. When the coverage levels are really

low, such that they are not amber box support, then they don’t do

farmers much good. So you sort of have that tension.

But I think that if we continue to have these multiple boxes, an

amber box, the so-called blue box, which is on the table, a non-commodity-specific amber box, then the production distorting support,

like loan rates, can go into the $19.1 billion capped box. And then

the crop insurance, or whole farm insurance or whatever, could fall

into the non-commodity-specific box for which there is room. There

is room there now. The problem with that box right now is that is

where all of the counter-cyclical payments go. And the theoretical

maximum of counter-cyclical payments is almost $8 billion. And

that box is capped at about $10 billion. So if we could do something

with counter-cyclical payments and make some room in that box

22

for crop insurance subsidies, then I think you could accommodate

this expanded insurance.

Now as you say, this is all down the road. You are juggling about

eight balls in the air here when you are trying to do deal with domestic support and what you are going to do with the WTO boxes.

I am encouraged that there ought to be something we can do in

this area, and I am enthusiastic. Mr. Davidson and I talk a lot

about Adjusted Gross Revenue Lite as a very important tool for the

future. I mean, that is what we think is going to emerge, over time,

as our premier whole farm policy. So I am encouraged hopefully

that we can do something in this area.

I would also go back to your first comment about drought, and

you focused on the multi-year disasters. We had two projects in the

drought area that we have been working on the last 2 years. One

is the multi-year disaster, and the other is to develop new insurance products for rangeland, pasture land, forage, and hay. And we

are making more rapid progress on those. We expect to have two

of those products before the Board of Directors, I think, this fall.

And it is very possible that we could have such products for sale

in 2006. Those are precipitation index products, rainfall index products. They work off of satellite vegetation measures. They work off

of proxy crops. They are combinations of a whole bunch of different

approaches, but we have got 400 or 500 million acres of pasture

and rangeland, and I think last year we had 15 million acres of it

in our rangeland pilot. So there is a tremendous opportunity there

to deal with drought on grazing lands. And I think we are moving

along faster in that area than we are on the multi-year disasters.

Mr. OSBORNE. Well, thank you for all of the work you are doing.

And I yield back, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Osborne.

And the Chair recognizes the gentlewoman from South Dakota,

Ms. Herseth.

Ms. HERSETH. Thank you, Mr. Chairman.

And just to follow-up there, Dr. Collins, I am glad Mr. Osborne

asked that question, because we have the same problem in western

South Dakota. And I am just wondering if you are saying that it

is possible that two products to deal with the drought, to deal with

rain land issues, for ranchers, because we know that for our ranchers it is their need for water and their need for grass. So if it is

possible that two products will be before the Board for consideration and actually make them available by 2006, do you see that

then, based on the work of the pilot program, of being ahead of the

game as to where you are with your thoughts on the AGR-Lite with

the diversification factor, with dealing with the caps on liability, et

cetera?

Mr. COLLINS. I don’t know if we are ahead of the game on that.

We are probably neck and neck. I think both of those products

would be helpful for livestock producers. We now have AGR-Lite in

17 States for 2005. I think it goes to 18 States next year. And as

I indicated earlier, that is a product that still needs a lot of work

to get it more appealing to producers. I think we sold 92 policies

in 2004. I think for 2005, it is like 160 or something like that. Percentage-wise, that is a big increase, but the number is still microscopic. They will serve different needs. They will both help fortify

23

farm income for the producer, but one will kick in when the whole

farm income goes down, and the other will kick in when you lose

your forage. You are not selling your forage; you are selling your

livestock. So when the value of your sales goes down, that is when

AGR-Lite could kick in, but when you lose your forage, then you

could get a payment to help yourself go out and buy more input

and more forage to feed your animals.

Those forage products will be pilots, and we have not looked at

all of the potential pilot area yet. And we haven’t even approved

those. We have a contract, and the contractors are ahead of schedule. They have indicated that they thought they could bring a product to the Board in the fall of 2005. If the Board were to act, it

is possible it could go into place for 2006. And depending on where

the pilot area is, that would then help producers.

Mr. DAVIDSON. Just for one of those products though.

Mr. COLLINS. Just for one of them.

Mr. DAVIDSON. We can get four, and we think the gestation of

these products, it looks like one may be possible to implement for

2006.

Ms. HERSETH. Well, I appreciate that, and I would just like to

reiterate the comments of Mr. Goodlatte that as we lay the groundwork here for 2007 and the farm bill that not only do we have

products available, other information that can inform our efforts

based on the resources that you anticipate.

And if I could just move now to Dr. Davidson. On your written

statement here for the committee as it relates to Asian soybean

rust and where we are with the crop insurance products here, you

state on page 4: ‘‘RMA’s communications encourage insured producers concerned about the impact of Asian soybean rust use good

farming practices by seeking and following recommendations of agricultural experts to control soybean rust.’’ Can you elaborate on

what kind of guidance you are giving producers on what are good

farm practices as it relates to treatment and preventing the spread

of the disease, what occupations constitute a local expert, and also,

in areas where, perhaps, the producer doesn’t have available the

certain chemicals, what is the guidance there for the policyholder

and the companies?

Mr. DAVIDSON. We have tried to be very careful with this one,

because the introduction of this disease is not a small issue. It is

a very large issue primarily because it changes the management

dynamics of the crop. Soybeans have heretofore not been a totally

simple crop to grow and to manage, but they are not the most complex, either. The introduction of this disease introduces requirements for careful monitoring that have not been required before. It

requires application, very quick application of curative, sometimes

preventive measures. And so this is a new management situation.

We have always had the requirement that a farmer do the right

thing by their crop to be able to get the full measure of a claim

when they have a loss. And so good farming practices are not a

new item to crop insurance. But because of the introduction of this

heavier management requirement, we have felt to emphasize that

responsibility here in our communications, we will not be the determiners of a good farming practice at the outset. The farmer needs

to look to local experts, the extension services, certified agriculture

24

consultants, crop consultants, et cetera to be able to do that, universities. And we have listed those in our communications. And we

will have further guidance coming out shortly when we issue our

good farming practices procedures as well.

And so when there is a dispute between the insurance company

that adjusts the loss and the farmer as to whether or not that

farmer pursued good farming practices, the guidelines that we will

set forth will allow a due process to be able to have the farmer appeal that adverse determination up to the agency. And so we hope

that that will address the issue.

I don’t know if I have answered all of your question.

Ms. HERSETH. I think you have. And my time is up, but I am

glad to hear the due process component here, because I think it is

such a new disease, because there is going to be a time of, I think,

2 to 3 years for there to be more consensus about what the good

farming practices are here and those that you have just identified

as local experts to share this information as part of a network that

you are a part of that we have that opportunity for the producers.

Mr. DAVIDSON. Absolutely.

Mr. MORAN. The gentleman from Texas, Mr. Conaway.

Mr. CONAWAY. Thank you, Mr. Chairman.

Mr. Davidson, in a former life, I am a CPA, but I was also an

auditor. I am particularly interested in the data mining comments

that you have made, and I have got some information about that.

I have got one of those datamining sites right near my district. Can

you speak to us about any conflicts between FSA and RMA that

make that program less effective, and also, RMA’s position on continuing that program beyond 2005, given what appears to be a

really good dollar return versus what we spent on datamining and

the other collection processes? And do you have enough enforcement investigator types to take advantage of all of the data that

you are getting out of the datamining?

Mr. DAVIDSON. Sure. Let me just first say that our experience

with datamining has been very positive. It helps us to identify general trends of losses. For example, the year after year after year

claims that Mr. Marshall, I believe it was, identified, we actually

have a way of identifying farmers, through datamining, that are

actually filing claims on a regular basis. And that is one of the

groups that we target for further spot checks and investigation. We

believe that we have deterred hundreds of millions of dollars of

what would have been claims through the datamining and the related spot checks that FSA personnel handle.

I am not aware of conflicts between FSA and RMA. Can we work

better together? Yes. And as soon as we get feedback that something is falling through the cracks or maybe we are not keeping

each other up-to-date, we make those adjustments. And so Mr. Little and I are very close together, and we talk, and we are very

agreeable on those kinds of things.

As to the continuation of datamining, as you know, this has been

funded through a separate funding mechanism, and we are running out of money on that. We have identified that in the President’s budget for 2006 and have requested another $3.6 million for

that funding. Beyond that, to continue it, we would require additional funding. We don’t have the funds within our salaries and exVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
25

pense budget to continue that. We need to have that additional

funding.

So we think it is valuable. There is a high return. It leverages

our investigatory staff. Mr. Mike Hand is here today sitting behind

me who heads that investigatory staff. We have about 100 people

that directly are involved in that. And we are leveraged even further by all of the county offices by FSA that go out and do these

spot checks and follow up on these things and the county committees.

So I think the system is working well, but the funding requested

in the President’s budget is important to continue it.

Mr. CONAWAY. Are you aware of any artificial or legal barriers

between sharing of information within the RMA system and FSA

and whatever else that the datamining folks need to get data to

continue the work or expand the work? Are there any legal issues

that we need to be aware of?

Mr. DAVIDSON. Mr. Little probably needs to address that, and I

would be happy to pass along to him and ask him that, but he has

indicated to me that there are some constraints in terms of how

much they can share.

Mr. CONAWAY. OK.

Mr. DAVIDSON. It is more contractually related and, to some extent, possibly even limitations in the detail that they can share.

Mr. CONAWAY. All right. Well, to the extent that those would improve the process and reduce fraud and abuse, I think I would be

interested in knowing if there is something that can be done, given

privacy concerns and those types of things, to make sure this continues.

You have got an estimate of what you have deterred of $300-plus

billion.

Mr. DAVIDSON. Yes.

Mr. CONAWAY. Any sense of what the actual recoveries have been

from false claims, so we can compare to the hard dollars? We are

spending hard dollars on the data mining. Are we getting hard dollars back that are in excess of that?

Mr. DAVIDSON. We recovered $24 million last year.

Mr. CONAWAY. And we have got $7 or $8 million in it now? So

a 3 to 1 return at this time in hard dollars?

Mr. DAVIDSON. Well, last year’s contract was about $3.6 million.

Mr. CONAWAY. OK. But this is the third year of the program?

Mr. DAVIDSON. Yes.

Mr. CONAWAY. OK. So, in effect, this investigatory program is

paying for itself on a dollar for dollar basis in addition to the deterrent factor that you get for folks just not filing false claims?

Mr. DAVIDSON. Yes. When you include the deterrent factor, it is

a 7-plus to 1 return.

Mr. CONAWAY. OK. I have been in business before. That is not

a bad return.

Mr. DAVIDSON. If I could get that day in and day out, I would

love it. Yes.

Mr. CONAWAY. All right.

Thank you, Mr. Chairman. I yield back.

Mr. MORAN. Thank you.

The gentleman from North Dakota, Mr. Pomeroy.

26

Mr. POMEROY. I thank the chairman.

Mr. Collins, it has been my pleasure to work with you over many

years now on crop insurance. I think we started this journey looking at the need to expand coverage. The more components of agriculture you have in the pool, the broader the spread of risks, and

the more likely you can diminish the cost to the Treasury. You indicate that substantial improvements have been made since the

1994 reforms. I believe you said we went from 34 percent participation in crop insurance to what was it today?

Mr. COLLINS. I think it was 38 percent in 1994 to about 80 percent today. That is participating acreage as a percent of eligible

acreage.

Mr. POMEROY. That is a substantial improvement. The second

goal of ours was to make certain that we had reasonable risk coverage for the financial exposure to the farmer. Now that means

they have to have a coverage level they can afford that reasonably

protects the investment they have got in their crop. You sited some

statistics on buy-up achieved under ARPA that also show we have

made some real headway on that one. What were those statistics

again?

Mr. COLLINS. In 1998, 8 percent of acreage was ensured above

65, and in 2004, it was 58 percent.

Mr. POMEROY. These changes in these programs, both of the 1994

reforms, the ARPA legislation, painstakingly put together over

many years, and therefore I am concerned that we have an administration budget recommendation that proposes such a significant

reduction in the Government’s support for crop insurance. I am

wondering if the RMA Board was consulted when the Office of

Management and Budget was doing its work on the President’s

2006 budget recommendation.

Mr. COLLINS. The answer to that, Mr. Pomeroy, is no.

Mr. POMEROY. So for all of the work done to build the plan in

Congress, we certainly weren’t consulted on those cuts. For all of

the work you have done to administer the program, interesting

that somebody over at OMB figures they could just know more

than all of the rest of us and impose such dramatic budget reductions. I certainly hope that we contemplate carefully your comment,

Mr. Collins, as we look at consideration to the administration’s

budget requests.

Mr. COLLINS. I would say one thing about that. After the proposals did surface, they were discussed by the Board. The Board, of

course, has four producer members. One member is experienced in

the insurance industry, and one member has been a regulator. And

they have provided feedback to RMA on how they thought the effects, the repercussions would be of these proposals.

Mr. POMEROY. Well, I am a member of the Agriculture Committee. I have put my notions forward, too. I think that they will do

harm.

Mr. COLLINS. Yes.

Mr. POMEROY. I think they will do harm to the crop insurance

program we have built. Now the cost to private partners, in other

words this is a public/private partnership. We pay the private partners. Their own expense reimbursements have been declining significantly from, again, my own experience with this began in ’93.

27

I think the reduction has been something like they were compensated something like over 30 percent and now what is it?

Mr. COLLINS. Well, the percentage reduction has gone down, but

the reimbursement per policy has gone way up. The total dollars

have gone way up. The percentage of total premium has gone

down, but what has happened over time is as people have bought

up to these higher coverage levels, the premiums have gone up for

those policies. That is no more work, in particular, for an agent,

and yet the dollar value has increased because the total——

Mr. POMEROY. No, I understand how that works. I am not sure

I agree with you on the no more work part.

Mr. COLLINS. Well, it depends on the policy.

Mr. POMEROY. I think appropriate risk counseling to a more sophisticated policy is a lot more work than CAT coverage.

Mr. COLLINS. I grant you that. There could be some more work,

but I don’t think, in many cases, it is exorbitant.

Mr. POMEROY. The question I have is you indicated risks in adding competition into a previously regulated environment. You indicated that this new competitive market could dislocate the agents

to some degree and it could possibly result in under-served subsets

within agriculture, most likely small farmers. You also indicate

there might be very selective underwriting with high-risk areas or

smaller producers left aside. I am wondering how RMA proposes to

oversee a competitive environment. Do you have additional staff?

What kind of research are you doing to make certain that the challenges you yourself site in your testimony do not result.

Mr. COLLINS. Well, I would like to be sure that it is clear that

I said those things in response to the question of what are the

issues that you ought to be concerned about. Those are not necessarily predicted outcomes. Those are the kinds——

Mr. POMEROY. You indicated that they are potential challenges.

Mr. COLLINS. OK. Right.

Mr. POMEROY. I didn’t say that you said that they were predictive or likely outcomes but you acknowledge that they are possible.

Mr. COLLINS. Yes.

Mr. POMEROY. Now in the event that you are leading the charge

into the competitive environment what are you doing to oversee

this to make certain that these possibilities do not result?

Mr. COLLINS. I will mention a couple of things, and then I will

let Mr. Davidson mention a couple.

This was much of the discussion we had in crafting the proposed

rule. And in one of the provisions in the proposed rule is that when

a Premium Reduction Plan is approved for an approved insurance

provider, they have to automatically offer that premium reduction

to every one of their customers. We had a debate about whether

customers could sign a waiver and opt out of it or whatever, but

no, we decided in the end that it automatically had to be made

available to every single customer. So we think that that is one

step that will help in this issue of discrimination.

A second issue was that in the proposed rule we require the premium reduction to be the same for every plan of insurance, every

policy, every commodity, every State. And we think that that is anVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
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other issue that would help in preventing some playing one producer against another.

Perhaps another important thing that is in the proposed rule is

that when the plan of operations is submitted by the company, they

have to have a specific marketing plan that details the promotion

efforts they are going to undertake to make the premium reduction

known to small farmers, minority farmers, women farmers, and

limited resource farmers. And then we require an annual report

from the company back to RMA telling us exactly how they fulfilled

that plan and giving us specific empirical data on their sales to

those four groups of producers that I mentioned.

Regarding the adequacy of RMA’s workforce to oversee this, I

would ask Mr. Davidson if he would want to comment on that or

make further comments.

Mr. DAVIDSON. You have been an insurance regulator, and so you

know some of the things that we would have to deal with here.

Market conduct has not necessarily been a major part of our regulatory activity to date except that now that Crop1 has been offering

this, we have increased our evaluation of their market conduct,

how they sell, how they represent the product and their marketing

plan.

We have always, as I said earlier, been very concerned in overseeing how all companies make our products available to everybody. And so we respond quickly to complaints. But under this new

system where everybody, or a large number of these companies, are

delivering discounts under possibly varying plans, likely, we would

have to increase the market conduct aspect of our oversight, look

at how companies are representing, look at how accurately they are

presenting to policyholders the options available to them, et cetera.

So it would represent a change in how we do things in the agency. Do we have the resources to do that? We would have to shift

those resources from other uses and modify how we do things.

Mr. POMEROY. Mr. Chairman, yielding back, I would just say

that I thank you for your testimony. I think that it is absolutely

candid and on point. You have a competitive environment, and you

need to oversee the competitive environment. RMA has not had

that kind of resource allocation to market policing, because they

haven’t done this before. Obviously without giving them resources

to do it, some real questions of internal capacity, even the reallocation of resources within the agency raise questions in terms of it

is not like they have got fleets of people just sitting around now

that could take on new assignments.

I think that we need to look at this very carefully. Chairman

Grassley on the Senate side has called for a GAO investigation. I

think maybe a third-party look would be appropriate. And in saying that, I am not implying anything about Crop1, whether they

have done it right or whether they have done it wrong. I don’t

know what they have done, but I think a third-party look would

be helpful.

I also think that perhaps we will want to consider with this subcommittee further exploration of this. This committee’s charge is

not to protect the fattest agent commissions possible. That is not

what this is about. What Dr. Collins indicated, though, is as we

move from a regulated environment into a competitive environVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
29

ment, there are a host of issues raised ultimately getting to whether or not farmers are comprehensively served and served in the

manner that we hope they are in delivering this risk protection

product. I think we really want to know what is going on even

while RMA seems to be moving, in my opinion, with endue speed

at this new rule.

Thank you, Chairman.

Mr. MORAN. I thank the gentleman for his comments.

The response of Dr. Collins was responding to my question, because I do think there are issues that affect the overall industry

related to this issue of PRP. I look forward to working with the

gentleman to see that the right resources and the right answers

are found in these questions.

I also will smile at the gentleman for his offer to yield back the

balance of his time. Not once, in my experience with you, Mr. Pomeroy, has that ever been the case, although you have said it each

and every time.

The gentleman from Alabama, Mr. Bonner.

Mr. BONNER. Thank you, Mr. Chairman, and I have to apologize

that I have been in and out of the committee room so much today

I feel like a ping pong ball. And I hope that in asking these questions of our panelists that they have not already been raised, and

if they have, I would invite them to tell me that it has already been

submitted for the record.

My district in much of the Gulf Coast recently went through a

storm called Hurricane Ivan. And many of the timber growers in

Alabama and Florida and Mississippi as well as many of the nurserymen, which is a growing industry in my District and throughout

the Southeast, felt very disappointed after the hurricane came and

left and after FEMA and all of the other Federal agencies that

came in to provide assistance that there had been seemingly little

effort given to the issue of crop insurance, either for nursery growers or for the timber growers, not only in the South, but throughout

the country. And I would ask either one of you who would be comfortable in answering this, what, to your knowledge, effort has been

undertaken in the past to look at either timber or nursery products

as a possible add-on to this issue?

Mr. COLLINS. I can start with the timber part, and maybe Mr.

Davidson would handle the nursery. And I divide it that way, because a couple of years ago, we did have a private company submit

for approval by the Board a timber insurance product. The Board

did not approve that product. The reason we didn’t, the primary

reason we didn’t, was that private sector timber insurance was

available. And we are prohibited, by law from approving a product

for which there is a private sector product available for sale. And

I believe that is still the case. I believe that company started selling timber insurance, including for plantation stands, in 2001. And

that is available today. And that does have hurricane as a covered

peril under that product. Wind damage is a covered peril. So based

on that, we made the determination a couple of years ago that it

was not in our legal authority to cover timber.

On nursery, that is a different issue. And Mr. Davidson, maybe,

would cover nursery.

30

Mr. DAVIDSON. RMA has had a nursery product for quite a while.

In fact, there has not been a high level of buy-up by nursery owners in that product, and most insure themselves at the catastrophic

level. And not all nursery owners buy crop insurance. In fact, a

small portion of them do.

With that having been said, a nursery represents the fourth largest product that we have in our program, even with the small participation, and so there is tremendous potential that indicates that

there are probably many more that could buy insurance and more

that can buy up. We toured the hurricane-affected areas and met

with nursery growers to identify what we could do better to have

a better coverage for them and identified several items. And the

Board actually took action on one of those items, a pilot to allow

nursery owners to buy an endorsement or an enhancement of the

price of elections in our product, the price that would be ascribed

to lost nursery production.

We have $3.6 billion of liability in nursery products right now,

but if nursery growers buy nursery coverage on the same level that

wheat growers buy wheat coverage, that would be the No. 1 product in our business. We are in the process of enhancing the nursery

product itself, and we will shortly be coming out with the necessary

regulations to begin doing that. We have been working with the

Nursery Growers Association for a number of years and enhancing

that. So we hope that ultimately we will have a product that will

be very attractive and very useful and very used as well.

Mr. BONNER. Thank you.

Thank you very much, Mr. Chairman.

Mr. MORAN. Thank you, Mr. Bonner.

The gentleman from Louisiana, Mr. Melancon.

Mr. MELANCON. I was just curious. I have not seen to date, and

I have not heard of any demonstration proposals for sugar cane. Is

there a problem there, or that no one wants to deal with it or——

Mr. COLLINS. Well, you have stumped me. Sugar cane is not in

my brain, so I am not sure. I don’t think it is one of our pilots.

Mr. MELANCON. On several occasions a year, we have——

Mr. DAVIDSON. We have sugar cane coverage.

Mr. MELANCON. Yes, the policy that I saw a number of years

back was such that you could never get to the threshold, and I

think that was the problem. You had started with basically a

standard form for crop insurance where you had to have, what, a

50 percent threshold of loss before you could make claims.

Mr. DAVIDSON. It depends upon what level of coverage a producer

will buy. If they buy up to the 75 percent, I am not sure if we go

higher than that for sugar cane, or 80, we go up to 85 percent for

some of our products, but if they only buy the 50 percent, the catastrophic level, it takes a true catastrophe to get to that level.

Mr. MELANCON. It does, and part of the problem, if I recall correctly, was that the only people that were actually buying up were

those whose lenders were requiring it. And usually those were the

poorer farmers who the lenders wanted to make sure that they

were going to get their money out. And so the better farmers, the

policy just didn’t perform for them in any way, shape, or form costwise or otherwise. And I was just wondering of maybe you could

31

revisit that and see if anything can be done to make it a better policy.

Mr. DAVIDSON. We would be very happy to receive any suggestions from the producers on how we might be able to improve the

product. We regularly work with commodity groups to improve our

products. I will say, though, that if a person just chooses not to buy

enough coverage, that is a choice that they would make.

Mr. MELANCON. Here is an illustration, because sugar cane is not

an annual. We will plant sugar cane this year for next year’s crop

and then successively harvested, 3, hopefully 4 years. In the incidents with Isabel and Isador came in, we had 40, 50, 60 inches of

rain in the harvest season plus the storms that knocked the cane

down. We never got to the 50 percent threshold that year. The next

year, the crop dropped off some. The next year, it dropped off dramatically. And because of the returning nature of the plant, the

policy just doesn’t take care of the future losses. So when you are

making the heavy investment of making that plant this year for

successive harvesting 2 and 3 years out in the future, a policy that

addresses annual crops just doesn’t work for sugar cane in many

ways.

And so I think that if there is all possible to put together a task

force to try and sit down. And I have asked this when I was with

the sugar industry, and of course it was, ‘‘Yes, we will try and take

a look at it.’’ Maybe now that I am in a position where I can actually help have people to keep that moving and to maybe explore it

a little deeper, I would sure like to pursue it, if I could.

Mr. DAVIDSON. Well, we would be very happy to work with your

office and those of your constituents that have an interest in that.

Mr. MELANCON. Thank you, sir.

Mr. Chairman, if I have any time to yield back, I would be happy

to.

Mr. MORAN. Thank you, Mr. Melancon.

The gentleman from North Dakota has never determined that.

Just saying it does not make it so. You, sir, have been a real gentleman, and I appreciate your willingness to yield back your time.

The gentleman from Texas, Mr. Neugebauer.

Mr. NEUGEBAUER. Thank you, Mr. Chairman. And I certainly appreciated your comments about avoiding ad hoc disaster programs

in the future. I think we have to figure out a way to do that, and

one of the things that I have introduced a piece of legislation that

would allow to take two existing products that we have, a multiperil and putting the GRP on top of that, increasing the amount

of coverage. And the GRP is triggered much like a disaster policy

is, a disaster program, that if the county is declared a disaster, if

the producer’s average yield is below the county yield, it triggers

that. We have sent that over, Mr. Davidson, for you and Dr. Collins

to look over. And we anxiously await your response on that.

Mr. DAVIDSON. Yes, and I know I have reviewed that and given

comments, and it is going up through the Department. Like I said

in the last hearing that we were in, I thought that that was a very

good idea to try to address the issue of multiple year declining

yields. I wish Mr. Osborne were here to hear that. So we are encouraged by that structure. We don’t see any administrative challenges with it. Typically a concern is that if you have higher than,

32

say, an 80-plus percent coverage by a farmer, it might reduce their

incentive to do good things on their farm. But since this is an additional coverage that is not directly related to their production but

related to a group, we think that it mitigates that concern. So I

don’t know how it will come out from the Department, but we have

made our comments through the process, and I assume that you

will be receiving that soon.

Mr. COLLINS. Before Mr. Davidson gets too optimistic about this,

I must say that could result in two indemnity payments on the

same crop on the same acre, which of course we can’t do. We don’t

have legal authority for it now. But what it reminded me of, and

of course this won’t influence us in our review of our product, was

the old movie ‘‘Double Indemnity’’ starring Edward G. Robinson

and Barbara Stanwyck, you may recall, where bad things happened

with the double indemnity insurance agent.

Mr. NEUGEBAUER. Well, and I appreciate that, but as you know,

this is just a layering of the coverage, and there is not double payments going on. We certainly don’t want to do that. But it does

allow the producer to have higher coverage. You can’t farm to this

program.

I want to move forward to——

Mr. DAVIDSON. Could I just add, if you don’t mind, that this is

one of those examples where it would probably take more money

and more authority than we currently have to be able to do something?

Mr. COLLINS. Yes. And my comment was strictly a joke.

Mr. NEUGEBAUER. I understand. And we have had scoring, and

we understand. That is the reason we have introduced the legislation, because you and I had the conversation that you think you

had administrative authority to do that, and you thought that you

did not.

I want to move forward to another one of my favorite subjects,

and I am sure that you don’t have to guess what that is going to

be, but I want to talk again, and it is additionally about where we

are. I have had some conversations last week with Mr. Hatch on

the deferred appraisal. And I am kind of getting mixed signals of

where we are going in that. It was earlier thought, with some

meetings that were held with cotton growers, that we were heading

to a reduced deferred price-hold period because you weren’t receptive to reducing the late planting period. My conversation with Mr.

Hatch then last week is we are now talking about shrinking the

late planting period and leaving the appraisal period in place. And

so I am kind of curious as to which way we are headed on that.

Mr. DAVIDSON. I haven’t yet seen the staff recommendation on

this. The groundwork is being laid, and we appreciate you spending

the time with our staff to make some creative suggestions on how

we might deal with this. I am awaiting that, and we will look at

it, but the fundamental question that we have is that once seed is

placed in the ground, obviously you have to wait until it has had

a chance to germinate. If there is no moisture, but there might be

moisture within a reasonable period, then, of course, we have the

obligation, as the farmer does, to make sure that that crop has a

chance to germinate and to come to full fruition.

33

So it is a challenging issue. We do have this deferral period in

all of our crops. Argonomically, it takes time, once you put it in the

ground to go up. So if you are at the end of the planting period and

you put the seed in the ground, you still need to give it a chance

to come up before you pay an indemnity.

Mr. NEUGEBAUER. And I agree with you. I think one of the things

that concerns a lot of the producers in our area is that because of

the levels of coverage that many of them are able to do, that the

crop insurance program is really not the incentive there for the

producers in my area. The crop incentive there is they have got to

produce a crop. And so if the first crop fails, they have got to make

some very crucial planting decisions as to what that second crop is

going to be and when they can get that second crop in the ground.

And particularly our dry land guys are very sensitive to—if this

crop is failed and then getting something back in the ground to obviously capture some moisture to plant that, then it really becomes

two issues there. One is what about a crop that is planted prior to

the late planting period and then one that is planted during the

late planting period, because the one that is planted before, you

know, would not only be stretching it out 21 days for that producer,

now we are stretching it out for a much longer period of time there.

And so hopefully, and one of the things that you know our goal was

to try to do something for the 2005 crop year, and I thought we

were headed in that direction, but we are very close to the 2005

crop year.

Mr. DAVIDSON. We are getting close, aren’t we?

Mr. NEUGEBAUER. Yes, we are. And I am hopeful to hear soon.

Mr. DAVIDSON. Well, thank you. And like I said, I expect that to

be on my desk in the very near future, and to be able to respond.

Mr. NEUGEBAUER. Thank you.

Thank you, Mr. Chairman.

Mr. MORAN. You are welcome. Mr. Neugebauer, I am very familiar with the first part of your first question. That has been a theme

of yours. I would like to have you and I discuss the second part of

your question and see if I can be of help.

Mr. NEUGEBAUER. Thank you very much.

Mr. MORAN. The gentleman from Georgia, Mr. Scott.

Mr. SCOTT. Yes, Mr. Chairman. Thank you very much. I am

sorry for my tardiness, but we had another committee hearing, but

I did want to get over to this one.

I wanted to ask both of you or either of you about ARPA. And

in the act, it explicitly prohibits ARPA from conducting any of its

own research into the development of new products. Has this been

a positive change, in your opinion, or should ARPA have the ability

to do research?

Mr. DAVIDSON. The act is very clear that we are prohibited from

conducting research and development. There are some aspects of

research and development and under certain conditions that we

can still be involved directly, but they are very, very limited in

their scope. ARPA, as you know, requires us to hire third-party

contractors. And it imposes on the product development process a

very deliberative process. As we have thought about this, and we

have worked with this a lot and deal with it a lot to make sure

that we are in compliance with the requirements, we believe that

34

there are quite a few positives but some challenges also that have

come out of this. The positives are that the deliberative process and

the involvement of the Board of the Directors and the engaging of

third-party experts, which has actually kind of produced a group of

experts that we rely upon on a regular basis, is a positive thing.

It has helped us. It has augmented the RMA staff. And so that is

good. And there is a considerable amount of funding that is available for new product development.

Some of the challenges that we experience are in the uncertainty

about what we can and can’t do, and we are always watching very

carefully with regard to that. But the funding mechanisms that are

provided are very compartmentalized, and there is only a certain

amount of money that can be used for this feature, for that feature,

and for the other feature, and what we find is that at the end of

the day when we have a new product implemented and operating,

that there is no additional money for us to actually maintain that

product and keep it going or to pay for the additional infrastructure required to support that product after a year or two. And so

that has put pressure on our operating budget to try to support

those products.

So the fractionalization of the funding mechanisms, if there were

just one pool and we had authority to use that pool for all of these

different activities, that would be a heck of a lot better than it currently is, as well as the fact that we don’t have continued funding

to support the products. Those are two major issues that I deal

with all of the time in trying to manage the affairs of the agency.

Mr. COLLINS. If I might say on the other side of that, when

ARPA was enacted, I think one of the motivations behind some of

the provisions Mr. Davidson just talked about was that the public,

insurance companies, agents, and producers felt that the system,

No. 1 took too long to get new products out for sale, and No. 2, was

not as transparent as it could be. And so what ARPA did was create this time-limited process, and it requires the Board of Directors

now to do things that RMA used to do before 2000 and which nobody really saw, and now it tends to be a more public process. The

expert reviews that Mr. Davidson mentioned are now required.

When we approve a new product, we have to send it out and contract with five private sector expert reviewers. That is a much

more transparent process. And the information that they have

brought into the system, external people outside of RMA doing the

research, that new and creative and different information, I think,

has been helpful. And so I think some of the transparency and

third-party opinions have been useful to the system, and you have

to balance that against this compartmentalization and inflexibility

that it has imposed on RMA.

Mr. DAVIDSON. I think one thing is clear, though. It hasn’t necessarily shortened the time frame for introducing and getting new

products completely to market. It is about the same, or maybe even

a little bit longer.

Mr. SCOTT. Thank you.

Mr. MORAN. Mr. Scott, thank you.

I believe that the last member of the committee has asked questions. I think there is interest in additional questions, but I don’t

intend to have a second round. But I would expect, Mr. Davidson

35

and Dr. Collins, that you will receive written questions from the

subcommittee members as we would expect an answer within the

normal time frame. I thank both of you for your testimony and appreciate you being here this morning.

Mr. DAVIDSON. Thank you.

Mr. COLLINS. Thank you, Mr. Chairman.

Mr. MORAN. The Chair calls the second panel to the table: Mr.

Greg Burger, president of Farmers Crop Insurance Alliance, Eau

Claire, WI, on behalf of the American Association of Crop Insurers;

Mr. Mike Sieben, president, Farm Bureau Mutual Insurance Company, and vice chairman, Crop Insurance Research Bureau, Manhattan, KS, on behalf of the Crop Insurance Research Bureau; Mr.

Norman A. Nielsen, president, Associated Insurance Counselors,

Inc., Preston, IA, on behalf of the Independent Insurance Agents &

Brokers of America; and Mr. Billy Rose, chief executive officer,

Crop1 Insurance, Des Moines, Iowa.

Mr. Burger, you may proceed when you are ready.

STATEMENT OF GREG BURGER, PRESIDENT, FARMERS CROP

INSURANCE ALLIANCE, EAU CLAIRE, WI, ON BEHALF OF THE

AMERICAN ASSOCIATION OF CROP INSURERS

Mr. BURGER. Good morning, Mr. Chairman and members of the

subcommittee. My name is Greg Burger. I am president of Farmers

Crop Insurance Alliance located in Eau Claire, WI. I appear here

today in my capacity as vice-chairman of the American Association

of Crop Insurers. On behalf of the Board of Directors and members

of AACI, I want to thank you for scheduling this hearing.

Let me first say the Federal Crop Insurance Program is a huge

success. While congressional support for the Federal Crop Insurance Program historically has been strong and consistent, the committee is especially to be commended for the development and

adoption of the Agricultural Risk Protection Act of 2000. ARPA provisions were designed to encourage farmers to buy higher coverage

in decisions regarding risk protection and management. For the

first time, total premium was reported to have reached $4 billion

in premium. Net acres insured in 2005 reported to have exceeded

221 million.

We want the committee, however, to be aware of any polices that

would detract from such success. With that regard, the RMA’s efforts to force a Premium Reduction Program upon the crop insurance industry are inherently discriminatory against small family

farmers. RMA is used in the outdated section of the crop insurance

law enacted in 1994 when reimbursement for delivery crop insurance was almost 32 percent to impose premium discounting on that

industry that is now reimbursed at a rate of only 21 percent. All

of the established companies that deliver the program are strongly

opposed to the PRP.

To demonstrate why a premium discounting program will force

crop insurance agencies to discriminate against small farmers or go

out of business, we have attached, as appendix B, from the Sherry

Wegner Agency in Glasscock, TX, it shows that the agent’s average

cost of servicing a Federal crop insurance policy is approximately

$300. The Wegner Agency has provided a printout of the actual

policies sold by the agency with the names of policyholders deleted

36

for privacy reasons. If you will focus on the next to the last column

of the page, you will find the actual commission paid to the agency.

This data demonstrates that many of the commissions paid from

the policyholders are substantially below $300. In fact, 58 percent

of them are less than $300. The Wegner Agency remains profitable

because it has some larger policies.

Clearly, if a premium discounter is allowed to ‘‘cherry pick’’ the

larger and more profitable policy of the Wegner Agency, the agency

will no longer be able to serve small farmers. It would just plain

go out of business.

But we also believe that companies will migrate from the highloss ratio States to the low-loss ratio States where they can make

a profit from underwriting results. And we believe RMA does not

have the staff to do financial audits, audits of small farm discrimination, and do audits on service standards.

For these reasons, we believe the PRP program should be discontinued permanently.

The new concern for 2005 is soybean rust. To address this concern, companies are conducting a variety of educational opportunities, including agent training sessions, customer meetings, and customer direct mail communications to help assure farmers have a

full and complete understanding of approved and required practices

concerning soybean rust management.

I want to assure the committee that insurance companies are

doing everything we know to do to eliminate confusion on the part

of farmers and agents regarding the interface of soybean rust and

the crop insurance policy.

Fraud identification and control continues to improve. No one in

the crop insurance industry condones fraud. We do have a concern,

however, in that RMA has instituted so many rules and regulations

because of the fraudulent acts of a few that the honest producer is

overwhelmed with paper and procedures and are vulnerable to very

severe penalties from honest mistakes. There are so many rules

that RMA has difficulty in timely distribution of clarification of all

of their policies and procedures.

A final thought, over the 25 years of this program, we have had

to overcome serious obstacles and setbacks to achieve the current

program. However, during this time, RMA management generally

worked with the industry to improve the program. Now we in the

private sector feel that we are always trying to react to new RMA

program changes that would seriously undermine the program.

In the policy and regulatory complexities required to have a Crop

Insurance Program that offers good value and risk management

and farm income protection for all farmers, the private sector delivery industry should be able to depend on a public and private partnership with RMA whose dominant characteristics are cooperation

and understanding. Toward that objective, be assured the industry

looks forward to working with this committee in helping the Crop

Insurance Program to always satisfy its public policy goals.

Mr. Chairman, this completes my statement, and I will be happy

to answer questions at the appropriate time.

[The prepared statement of Mr. Burger appears at the conclusion

of the hearing; the appendix to the statement is on file with the

committee.]

37

Mr. MORAN. Mr. Burger, thank you very much.

Mr. Sieben, welcome from Kansas to the subcommittee. We are

glad to have you here, and we are interested in hearing your testimony.

STATEMENT OF MIKE SIEBEN, PRESIDENT, FARM BUREAU

MUTUAL INSURANCE COMPANY, AND VICE CHAIRMAN,

CROP INSURANCE RESEARCH BUREAU, MANHATTAN, KS, ON

BEHALF OF THE CROP INSURANCE RESEARCH BUREAU

Mr. SIEBEN. I appreciate the opportunity to be here. Thank you.

My name is Mike Sieben. I do live in Manhattan, KS. I currently

serve as vice chairman of the Crop Insurance Research Bureau,

otherwise known as CIRB, and I am full-time employed as the crop

insurance vice president for Farm Bureau Mutual Insurance Company.

Farm Bureau Mutual is involved in the delivery of multiple peril

crop insurance and has been since 1982. We provide coverage to

farmers in eight States: Iowa, Minnesota, Kansas, Nebraska, South

Dakota, Utah, Arizona, and New Mexico.

Today, I represent the Crop Insurance Research Bureau, which

is a national trade association, whose members are involved in the

delivery of MPCI to the farmers of this Nation. CIRB’s 23-member

and associate member organizations represent a broad cross-section

of the crop insurance industry, including companies who hold a

standard reinsurance agreement, multi-State writers, single State

writers, property-only writers, and our partners in the reinsurance

business, brokers and reinsurers together.

Since the complete text of my testimony will be included in the

official record, I will touch on the highlights of my comments regarding the Premium Reduction Plan and the Asian soybean rust.

The concept of a premium discount to farmers who utilize crop

insurance is, on the face, appealing. As a matter of fact, we had

a good producer discount back in the 1990’s that many people utilized. There is a potential for unintended consequences under the

proposed rule that could jeopardize the delivery mechanism of the

federally reinsured Crop Insurance Program of MPCI. For that reason, CIRB opposes implementation of the proposed rule and recommends suspension of any further approvals for the Premium Reduction Plan until a comprehensive study of the impact of the plan

can be made. We are concerned that PRP will create a competitive

imbalance, promote industry insolvency and will lead to discrimination against smaller producers, smaller agents, and States that

have historically poor underwriting performances. These factors

will threaten the basic premise of the federally reinsured program

universal access.

CIRB believes that RMA does not have adequate resources or expertise to evaluate the proposed PRP submissions in a timely and

appropriate fashion. In that regard, CIRB feels that an independent CPA or auditing firm should be retained to provide comprehensive and objective evaluation of the PRP plans that are submitted

to assure that such plans meet or exceed the requirements outlined

in the regulations.

The recommendations of that firm should then be submitted to

the FCIC Board of Directors for an ultimate decision. Additionally,

38

all approved plans should likewise be evaluated by the same CPA

or accounting firm at the end of each crop year to assure compliance with the established criteria for offering PRP.

CIRB notes 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 or sanctions

for misrepresentation of a provider’s ability to provide PRP according to the established criteria.

CIRB also believes that the proposed rule is not clear as it relates to ceding commissions and contingency commissions. To clarify, the rules should explicitly not allow reinsurance ceding commissions to offset expenses because this discriminates against those

companies who do not rely heavily on outside reinsurance. Contingency commissions should be included as expenses.

CIRB does not recommend further implementation of the PRP

plan until a comprehensive study has been completed showing the

likely, long-term PRP effects on the program as a whole. This study

should evaluate the potential impact of PRP to universal accessibility, the implications to the delivery system, and most importantly,

the impact on the farmer.

In regard to the Asian soybean rust, first of all, let me say that

RMA has been quite clear that soybean rust is a covered peril so

long as the farmer utilizes good farming practices in the management of his crop.

From an insurance perspective, we are as proactive as possible

and providing producers with as much information as we can on

how their insurance coverage will work. Rust will be treated in

much the same manner as any other covered peril where control

measures are used. Farmers will be expected to take appropriate

measures to mitigate losses from the disease.

One frustration that we do have that we feel as companies is

that the manager’s memos are released later than promised and

often are clarified or updated mid-policy. This places a tremendous

strain on companies because if a manager’s memo is late, we have

missed training meetings with agents and adjusters and any updates to our computer systems or mailings is an additional expense

to our companies.

We have some guidance from RMA in place on Asian soybean

rust, but if past history is any indication, we will see other changes

and updates to policies throughout the crop season.

Just recently, Mr. Chairman, we have received a bulletin with

regard to a change we made in regard to over-reporting and underreporting acreage. We have programmed this. We have trained people on this, and we have recently received a bulletin stating that

that is incorrect; we are going to have to go back in, reprogram,

and reeducate our producers and our farmers. Many of the bulletins we receive are quite late, and we feel like they could do a

better job in getting this information out to us in a more timely

manner.

Mr. Chairman, that concludes my remarks.

[The prepared statement of Mr. Sieben appears at the conclusion

of the hearing.]

Mr. MORAN. Thank you, Mr. Sieben.

Mr. Nielsen.

39

STATEMENT OF NORMAN A. NIELSEN, PRESIDENT, ASSOCIATED INSURANCE COUNSELORS, INC., PRESTON, IA, ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA

Mr. NIELSEN. Good afternoon.

Thank you, Chairman Moran and members of the subcommittee,

for the opportunity to present the views and recommendations of

the Independent Insurance Agents & Brokers of America on the

Premium Reduction Plan and soybean rust.

My name is Norm Nielsen. I am a crop insurance agent in eastern Iowa. I am also the chairman of the IIABA’s Crop Insurance

Task Force. IIABA, known as, ‘‘The Big I’’, is the Nation’s oldest

and largest national trade association of independent insurance

agents, representing a network of more than 300,000 members nationwide.

‘‘The Big I’’ is a staunch opponent of PRPs. This does not mean

we are against competition. To the contrary, we believe competition

is healthy and provides an important checks-and-balance for our

industry. However, PRPs actually undermine the competitive playing field by putting cost of service over quality of service. We also

question the motives behind the Risk Management Agency’s decision to allow one company to continue to offer PRPs after the Federal Crop Insurance Corporation Board passed a resolution suspending PRPs until the rule-making process can be completed. This

lack of foresight created what can easily be classified as a Government-sponsored monopoly for the 2005 reinsurance year. If this is

RMA’s idea of promoting competition in the industry, then the future looks very bleak for anyone involved in the delivery of risk

management programs.

‘‘The Big I’’ believes that PRPs have no role in the industry that

relies on the expertise of the agent network, that the proliferation

of this program will result in serious, unintentional consequences

for our Nation’s farmers. Moreover, we believe that PRPs promote

discrimination against limited-resource farmers as well as farmers

in high-risk areas, which flies in the face of Congress’s intent when

they created the program to provide all eligible farmers in the

United States with crop insurance.

In order to understand why PRPs are bad for the program, we

need to understand the role of the agent in the delivery system.

Unlike property and casualty, the crop insurance agent is responsible for a more hands-on approach. For a standard policy, I must

gather production, compute APH, determine optional units, review

plans of insurance, and in my area of the State, there are 247

choices to present to the farmer, do risk management, enter information into the computer systems. All of this done by March 15.

I charge RMA to show me a delivery system that reduces the role

of the agent without reducing the quality of service to our American farmers.

PRPs call for the providers to demonstrate that a true efficiency

be achieved, not merely the cost has been cut below the expense

reimbursement. Mr. Chairman, agents are not expendable efficiencies. As a result, PRPs undermine the quality of the crop insurance delivery system, contrary to the standards established by Congress.

40

‘‘The Big I’’ has also voiced concerns regarding discrimination

against small, limited-resource and minority producers. Now it is

easy for RMA to admonish all forms of discrimination, however,

condemning discrimination and actually having the means to control it are completely different issues. RMA has no enforcement

mechanism to prevent such abuses. It is unrealistic to expect

RMA’s current compliance office to effectively monitor and relegate

discriminatory practices. There are also forms of covert discrimination available for companies to employ. For example, agents used

to deliver PRP will undoubtedly be driven by the size of the agency’s book of business. If your book of business is full of lucrative

accounts, they will want you. If it is full of small and high-risk accounts, they pass over you.

There is a term for this, and we call it ‘‘cherry picking’’. Therefore, if only the best and most profitable customers are skimmed

off the top, the result undermines the intent of the law which governs the programs. Companies have realized significant reduction

in Federal reimbursement over the last 11 years without implementing PRPs. Therefore, the empirical evidence exists that the

program burden on the American taxpayer has continued to decline

while the quality of service to our Nation’s agricultural producers

has remained static.

Regarding soybean rust, good farming practices are the hallmark

of any successful agricultural enterprise. If the farmer fails to follow them, he should be subjected to reduce indemnity. Since soybean rust is a fairly new problem for the farmers, most have taken

advantage of the resources made available from Secretary Johanns.

However, as an agent, how can I promote good farming practice

if RMA redefines the policy after the sales closing date? This is a

recipe for failure. Everyone involved in the delivery of crop insurance makes good farming practices a priority and want to continue

to do so.

In conclusion, Mr. Chairman, PRP is a wrong policy at the wrong

time. Under PRPs, our Nation’s farmers are in the losing end, and

the quality of risk management will suffer. The access to available

plans will be greatly reduced, and the knowledge and the understanding of the system will be limited to those farmers who are

able to educate themselves on the complexity of crop insurance. In

addition to servicing their farm needs, the insurance industry is too

complex to speak in generalities.

I implore Congress to repeal section 508(e)(3) before it dismantles the most successful private/public partnership our country has

had in over 25 years.

Thank you very much.

[The prepared statement of Mr. Nielsen appears at the conclusion of the hearing.]

Mr. MORAN. Mr. Nielsen, thank you very much.

Mr. Rose.

STATEMENT OF BILLY ROSE, CHIEF EXECUTIVE OFFICER,

CROP1 INSURANCE, DES MOINES, IA

Mr. ROSE. Good afternoon. My name is Billy Rose. I am the

president of Crop1 Insurance. Joining me in the room are Kelly

Deitering, senior vice president of Citibank Texas and Windmark

41

Insurance, a Crop1 representative based in Lubbock, TX, and Ray

Grabanski, president of Progressive Ag Systems, Fargo, ND, who

represents Crop1 in the Dakotas, Minnesota, and Wisconsin. They

are representing the more than 400 agents who write for Crop1

today.

As you are aware, Occidental Fire and Casualty Insurance of

North Carolina, with its MGA Crop1, is the first crop insurance

provider approved by the USDA to provide PRP. We hope other

companies will join us in offering PRP as we understand the RMA

has received several applications.

Some have claimed that if PRP expands, agents will stop selling

insurance and service levels will decline. Based on our experience,

that will not occur. For example, this last year, we trained 30 new

agents in one agency alone. I believe PRP has already been a success. Further, we are confident that we will continue to develop

new agents and new technology to enhance the service levels.

For example, Bruce Larsen, a farmer and now Crop1 agent,

wrote us: ‘‘I farmed southwest Minnesota with my farmer. I also

hold three off-the-farm jobs to help support our farm. I am very

pleased to become part of the Crop1 family. I liked the company

so much that I decided to start selling it. Our farm saved over

$3,000. I wish I could do that with every aspect of farming. Maybe

I could give up a job or two and just survive on the income of the

farm. I am also impressed with Crop1’s Internet access. I have

been told by customers that it is nice for those who work off the

farm to be able to have access to information when it is convenient

for them. It also makes my job as an agent faster and easier, allowing me to spend less time on each account by still giving each one

excellent care.’’

Mr. Chairman, in addition to new agents like Bruce, the PRP appeals to many established agencies. There are many others like our

agent in Kansas who has been an independent crop insurance

agent since 1987. He states: ‘‘Crop1 insurance is providing my clients a better value for their crop insurance. Many of my producers

have moved their level of coverage from the 65 percent level to the

70 or 75 percent level of coverage with very total outlay in premium. The new Internet technology offered by Crop1 helps me in

providing accurate and up-to-date information on crop reporting.’’

Mr. Chairman, this is what our company is all about, providing

technology that enables our agents to provide high-quality, efficient

service. Before starting Crop1, I managed a general agency. I was

a crop insurance agent. I remember how many time farmers would

come in, and they would want to buy higher levels of coverage, but

they could not afford it. Then I thought, ‘‘What if? What if we could

develop a program that would make higher levels of coverage more

affordable? What if we could develop software that would make it

easier for our agents to identify and advise the farmers in the best

effective way?’’ At Crop1, we have met both of those goals.

Our PDP helps farmers buy higher coverage levels. Our software

has made the agent’s life easier. Already, PDP has saved policyholders millions and millions of dollars with no added risk to the

insurers, to the FCIC, or the American taxpayer.

And yet the question before us today: ‘‘Is it a good idea to allow

farmers a premium discount?’’ Crop1 and Occidental say yes. Our

42

agents, some who are representing us today, say yes, and our customers agree. We believe in competition. Competition spawns innovation. It increases the quality, improves service, and lowers price.

Mr. Chairman, that is good for American farmers.

There will always be those who resist innovation and change.

Today, some argue that a farmer’s purchasing decision will be too

complicated if we introduce price. We all know farmers negotiate

price every day. Some who resist change say that price competition

is not necessary. I guess they feel farmers don’t need the money.

I can assure you that that is not what farmers believe.

Mr. Chairman, in conclusion, David Frangan, a Kansas farmer,

recently told us: ‘‘I am well satisfied with Crop1. There must be

some special interest group that is not aware that with higher

prices for fertilizer and fuel et cetera, farmers have to look for an

opportunity to save cost, and Crop1 Insurance Premium Discount

Program is working for the farmer.’’

Mr. Chairman, anyone who doesn’t believe a discount is needed

should talk with the American farmer first.

Thank you for your time and attention.

[The prepared statement of Mr. Rose appears at the conclusion

of the hearing; the appendix to the statement is on file with the

committee.]

Mr. MORAN. Thank you, Mr. Rose.

Those of you who were around, in the industry in 1996, what was

the purpose, what was the theory behind 508(e)(3)? Did anybody

participate in those discussions?

Mr. BURGER. If I remember correctly, it was to increase participation and increase the levels of coverage for the farmer.

Mr. MORAN. And the evidence, Mr. Rose, of increasing the participation, the level of coverage, based upon Crop1’s experience, is

what?

Mr. ROSE. Yes. We have found that many farmers are taking the

savings that we provide and buying up in their level of coverage,

especially with the soybean rust looming and scaring us right now.

We have been advising our farmers, ‘‘Take the savings and buy additional coverage.’’ It is great that we have great penetration of 80

percent of the marketplace buying these policies, but are they buying the right policies? Our software shows them all of the what-if

situations that they could encounter on yield and price, and then

they can take the savings, and it is like, ‘‘I am glad that I came

here for the savings, but I am really appreciating the advice you

are giving me,’’ through the Crop1 agents.

Mr. MORAN. Do you have any numbers to quantify that experience?

Mr. ROSE. Yes. Over 70 percent of our policies, totaling over

16,000 policies sold this last spring, buy revenue insurance and buy

a high level of insurance. They are still calculating the 2005 numbers.

Mr. MORAN. What is it that a customer of Crop1 receives in regard to service different from any other agent? I assume that the

farmer gives up something for a reduced premium. What is that?

Mr. ROSE. The farmer is not giving up anything. In fact, when

I was running a crop insurance agency, we have a very seasonal

business. And I used to have to run down the gravel roads and get

43

the signatures and ask about how the family was. And I often

asked myself, as an agent, was I really doing a good job of advising

that farmer. Well, at Crop1, we saw this need to develop software

so that we could help our agents advise their customers on what

is the best insurance for them. Take price out of the equation.

Every farmer’s balance sheet is different. His marketing style is

different. And we just developed this in order to advise properly.

So we are providing a savings, and through our agents, providing

better service. And additionally, farmers that have Internet access,

they can view their policy and any of their information at the convenience of going through the Internet portal.

Mr. MORAN. So where does Crop1 get their efficiencies that they

are required by regulation to have in order to qualify to provide

this product?

Mr. ROSE. Very good question, Mr. Chairman.

We have to operate within the A&O. That is approximately 22

percent. Our efficiencies are derived from our software and our IT

platform that allows our agents to do a better job of servicing at

a lot less time. It used to take me 10 hours to sit down with a

farmer and run all of the what-if scenarios. I can sit down with our

software in 10 minutes, and I can tell you exactly how much money

you are going to make under any situation with your crop insurance policy and your P&L and your cost. And at the end of the day,

you show them their options and how it impacts the bottom line.

Mr. MORAN. Has your business plan at Crop1 changed? As I became aware of this story, it was insurance provided, it seemed to

me, over the Internet. And I assume now that you are now talking

about providing this business by using agents in the field?

Mr. ROSE. There has been a lot of misrepresentations about

Crop1. OK. We have been pigeonholed as Internet only. We have

been told we don’t have claims. We have been told this. I can assure you what we did is we took the technology of Internet today

and we host the agent’s site, and we host the ability for the farmer

to go to that agent’s site, log in on a secure access, and view their

policy information at any time. But we sell this through our channel of agents. We have over 400 agents. Some are with me today

that represent North Dakota and Texas. I have heard earlier today

that we are not going to go into high-loss ratio States. We have

been in North Dakota since day one. We entered into Texas, which

historically is a high-loss ratio State, and because the beauty of

this plan is we operate within the A&O, we don’t rely on speculative underwriting gains, this allows us to go into under-served

areas or high-loss ratio areas and actually help those farmers out.

Mr. MORAN. Mr. Rose, may I assume that any agent in Kansas

or any other State is licensed by the State law, and the State law,

in our case, by the Kansas Insurance Commissioner, and that your

agents all would have taken the necessary RMA education?

Mr. ROSE. Yes, continued education and comply with State law.

Mr. MORAN. So your agents are licensed insurance agents in the

State of Kansas, for example?

Mr. ROSE. ONe-hundred percent.

Mr. MORAN. Let me ask the rest of the industry. Is there a range

of costs in providing crop insurance for farmers? One of the things

that concerns me about this topic is the so-called phrase ‘‘cherry

44

picking’’. And those of us who live and represent rural America

have to have lots of concern that we are left behind, that there is

more money to be made in larger quantities in bulk buying or selling, that it is cheaper for providing services where there is lots of

volume. How does that work with the regular agent, a non-Crop1

agent, in Kansas or elsewhere? Mr. Sieben, maybe you can answer

that for me as a Kansas Farm Bureau person.

Mr. SIEBEN. Well, Mr. Chairman, we have expenses that are out

there all of the time. Basically, you start with commission or underwriting expenses in house, our adjusting expenses on the various crops that we have. We have legal expenses. We have auditing

expenses. All of these types of expenses go into our overall expense

factor for the Kansas Farm Bureau, or any of the farm bureaus.

When we have looked at this and we analyzed it two or three times

to see if we could qualify, under the current provisions, and Farm

Bureau Mutual was not qualified to be able to offer the Premium

Reduction Plan based on the current guidelines that are out there.

These expenses are going to be there every year. We have looked

at a few, offered it on various plans, such as GRP or GRIP. There

are no adjusting expenses on that. We do not have those programs.

They are not widely used in the Midwest currently. So when we

look at a revenue insurance policy or crop revenue coverage policies, we are looking at all of these expenses that we have on a yearly basis no matter what. As I mentioned to you, our IT costs and

the changes that have been made recently are additional expenses

we have that we have to incur every year. We have to keep updated with these changes that are made. So therefore, Mr. Chairman, these expenses are going to be there for us every year.

Mr. MORAN. Mr. Rose, does your company offer the full array of

all insurance products, crop insurance products to whatever a

farmer would be eligible for? Do you provide them or do you pick

and choose what policies would be available?

Mr. ROSE. No, we put the farmer first. Our software analyzes all

options and actually opens the eyes up for the farmer as to a couple

choices that he maybe hasn’t thought about. Mr. Sieben just commented about GRIP. Actually, we are seeing a tremendous increase

in GRIP when the farmer understands the product over in the Indiana and Illinois area.

Mr. MORAN. Let me turn to Mr. Pomeroy. My time has expired,

but now he has the opportunity. I will probably allow the same

thing to happen for him.

Mr. POMEROY. I thank the chairman and appreciate your line of

inquiry. It kind of covers my own thinking.

Twenty years ago, I was the new insurance commissioner in

North Dakota, and much of this morning’s discussion reminds me

of things I have heard before, not just in, certainly, the crop insurance field, but all lines of coverage. You will have stalwart, conservative leaders in the insurance industry extol competition, do

everything that they can to keep it from applying to them. On the

other hand, I have heard ‘‘new and improved’’ so many times where

the sizzle didn’t have much steak to it. And so I am trying to sort

this one out. I think the most important thing said about moving

from a regulated environment to a competitive environment was

said by the preceding panel. It is consequential. There is a lot inVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
45

volved. In the end, it raises issues. I seriously wonder whether

these issues have been thoroughly considered by RMA. And they

didn’t give me confidence that they had necessarily put in place

what they need to have in place before making a change like this

one.

These are very capable advocates, however, of the different viewpoints to this question. I commend the panel, each and every one

of you. I think your testimony has been extremely interesting. I

would like to let Mr. Nielsen give his response to some of the

things Mr. Rose has said. And Mr. Rose, you are going to have a

chance to respond to what he has said. I would like to hear the

interplay of your ideas as we sort this one out.

Mr. NIELSEN. Thank you. And I do want to respond.

For 13 years, I was an agricultural lender in my area of the

State and went through the debt crunch and the non-survival of

many farmers. And I can tell you if this product, as it has been

sold in the last, oh, say 8 years, was available or would have been

available then, we would not have had the failures. So the program, at its heart, is a good program. But what Mr. Rose is missing, to some degree, in my opinion, is the risk management part

of this. Risk management is sitting down face-to-face, understanding where that farmer farms. You can’t see that on the Internet.

You can’t see that he has got flood ground. You can’t see that he

has got risk ground. You can’t see that he is trying to get into organic farming, where he is doing it, how he is doing it. The soybean

issue right now, we have three full-time staff out of 12 doing nothing but talk to our farmers about the soybean issue. ‘‘What are you

going to do? We have not another RMA. Oh, now we have got to

do it different. What do we have to do?’’ We are on the phone, we

are in their face, we are the coffee shop. Risk management is so

important to do this right, and that would be my general comment

on this.

Mr. POMEROY. Mr. Nielsen, Mr. Rose seems to be saying they

have been able to advance risk management through software and

their IT platforming. He quotes their producer as saying now he is

able to ‘‘spend less time on each account while giving each one excellent care’’. It is your view, apparently, that if you spend less

time on each account, you are giving each one less risk management.

Mr. NIELSEN. Well, let me clarify one thing that probably needs

to be said. I represent two companies. As an independent agent, I

always continue to always have choices. And with that, the technology of the two vendors I have will do everything that Mr. Rose’s

company says he can do. With that said, that even gives access to

the farmer directly to his policy. That gives mapping services that

even our local farm service office doesn’t even have. We are ahead

of the Government in this issue. Again, we are in an area of Iowa

that doesn’t have square fields. We have got strip cropping. We

have got all kinds of things going on. And this is readily available

to our farmers.

Mr. POMEROY. Mr. Rose, I think that innovation and new ideas,

competition, in an abstract sense, is very helpful in an industry,

and I salute you for the energy and innovations you have advanced.

But when you say that your software and IT platform have taken

46

10 hours of work you used to have to do as an agent and reduced

it to 10 minutes, I mean, frankly, it seems to me a bit of overselling.

Mr. ROSE. I welcome you, sir, to sit down in closed chambers,

and we can walk you through our program. Remember, I was an

agent. I ran an agency. I know exactly what the agents were faced

with. Then there was a light bulb that went off one day. ‘‘Can’t we

make this better?’’ And you know what? The analysis that we do,

because I don’t think that Mr. Nielsen has ever looked at our program. I welcome you to come look at our program. We pull 10 years

worth of history. Do you pull 10 years worth of history and do

what-ifs on GRIP on every one of your policyholders? Do you go

down and mind the P&L, profit and loss, for his operation, his cost,

and then throw in a marketing plan and then do a what-if on what

if prices go up 20 cents and yields go down by 20 percent? We have

provided all of this to our customers, and the customers are now

looking at it. Because they don’t have to stay with us. ‘‘I will come

for the savings. If you don’t give me a good job on my service, I

am gone.’’ We had a 90 percent retention rate last year. Those customers would have left if it was just a sham, Internet only. And

when you say that we don’t have a touchy-feely, we can be as hightech Internet as we want to be or as high-touch. These agents right

here are my touch factor, all 400-plus going strong. We will be

hopefully 500 by the time I get back. We are firmly committed. Occidental is a strong financial company. Crop1 is committee. RMA,

I commend them for the oversight. We have been audited by our

reinsurers, our policy-issuing company, our outside auditors, by

RMA, weekly reports. I think my job some days is only providing

reports. I am killing too many trees instead of helping farmers.

That is my vision here. OK. The farming is tough. Where are the

farmers in this room?

Mr. POMEROY. Mr. Chairman, with your lead, before I yield back

the balance of my time, on that, Mr. Rose, you indicate that farmers negotiate price. They negotiate price for lots of things. Do you

think they ought to be able to negotiate price for their insurance,

too?

Mr. ROSE. One hundred percent. They should be able to shop

what is best for them and be advised as to what is best for them

and make a choice. It is the free market.

Mr. POMEROY. Do you believe that the anti-rebate provision that

RMA has is something that should not be in place?

Mr. ROSE. No, rebates should not be allowed.

Mr. POMEROY. Well, what is the difference between a rebate and

what you are doing?

Mr. ROSE. We have demonstrated our efficiencies. The farmer

knows exactly what savings they are going to get compared to the

other players. This isn’t under the money table. This isn’t promises

for ‘‘if you give me your PNC insurance I will give you a savings

on your crop insurance’’. Everything is on the table. They know

what they get. We are very transparent, and we stand behind. And

we have proven our savings, not only to the Federal Government,

but also to the farmer.

Mr. POMEROY. Do you think this premium discount is broadly approved? How do you respond to the notion that while if you pay

47

less to the private partner in the delivery of the product in the end

it is highly likely that you will have some consequence relative to

service and risk management provided?

Mr. ROSE. Well, let us look at the industry at 100,000 feet. Most

current approved insurance providers are exceeding dramatically

probably their A&O reimbursement. We operate within the A&O

reimbursement. North Dakota on hail insurance, a lot of providers

have pulled out. Crop1 has been in North Dakota and expanding

since day one. Because we operate within the A&O, we are fiscally

responsible to the Federal Government. We are not going to go out

of business. We can weather 10 years of bad losses. We are not

speculating on a gain. So that is good that there is stability within

the company that is committed to this program.

Could you repeat the second part of your question?

Mr. POMEROY. If, on a competitive basis going forward, you have

more and more filings, you indicated you welcome that relative to

this kind of discount, it would seem to me that it would be likely

the competitive environment relative to the compensation of agents

is going to lead to greater risk selectivity as well as reduced risk

management services in servicing the client.

Mr. ROSE. One of the things that we require is that all of our

appointed agents sign a PDP special waiver that says that they are

going to make the premium discount available to all of their customers so that there is no discrimination about big, small, and medium-sized farmers and who is going to get offered it.

Mr. POMEROY. Not to interrupt, but that is a fine policy statement, but that does nothing about selective marketing. Surely you

offer it to everyone you talk to, but you only talk to big players.

Mr. ROSE. Yes. Very good question. What we do, unlike the other

companies, is we promote our agents. We have an agent locator

Web site. We send out direct mail to hundreds of thousands of

farmers announcing who is the locally-appointed agent. We do

newspaper and industry ads of maps, like if there would be 20

counties in North Dakota and we show the agents and where they

are located and how to contact them directly. And what we do is

we try to put a face on Crop1 through our agents. So that farmer

who hears about the savings, and a funny thing last night, going

up to my room, a gentleman from Minnesota, and he was here at

the rural electric co-op, and I said hi, and we started talking. And

he said he is a farmer. I said, ‘‘Oh, how is the spring planting

going?’’ He said, ‘‘Great.’’ I said, ‘‘Have you ever heard of a company called Crop1?’’ He says, ‘‘Yes, the Internet only, right?’’ And

I said, ‘‘Would you buy the same policy and save up to 7 to 8 percent if you could get the same service and even maybe more advice?’’ He said, ‘‘Sure. I thought you guys were Internet only.’’

And what I am saying is that there is a misperception that we

are fighting. Maybe that was intentionally misled out there. But

what we are doing is we are advertising tooth and nail. I personally have been on a road show talking about our software, talking

about our company, getting editorials out there in all newspapers

in our 15 States trying to make farmers aware that they have a

choice. They can save, and they can get great advice, too.

Mr. POMEROY. Mr. Chairman, I thank you for your indulgence.

Any other panel members care to respond?

48

Mr. MORAN. Mr. Burger?

Mr. BURGER. I would like to respond.

Mr. POMEROY. And then I am done. I yield back.

Mr. BURGER. I would like to respond to the idea of the IT technology. Just about all companies have quoting programs and marketing plans that have been around forever. That is not an innovation at saving money. The savings come strictly from reduced agency commissions. That is where the savings are. It is not a new way

to do it. Most companies have facilities where farmers can look up

on the Internet what their policies are and so on and so forth.

The thing that keeps coming across from our agents is Crop1

only contacts the large producer, and that is a big difference. And

you can build a lot of efficiencies if your average premium is higher. We take a look before the insurance commissioner of the State

of Iowa, this is back in October 2003, one of the findings that is

quoted here is ‘‘Crop1’s direct target market is 62,000 large customers in the central Corn Belt.’’ I guarantee you all of us companies, if we would select large producers in the Central Corn Belt,

we could provide all kinds of efficiencies and make lots of money.

That is the difference. And we hear that time and time again from

our agents and our field staff out in the field as to who they are

marketing to.

Mr. MORAN. Mr. Burger, thank you. It really is kind of the follow-up to from what I have heard is what you just said. And it is

incredible for me to believe that you can have better service, lower

premiums, and all as a consequence of information technology. I assume in today’s world that in the business world, anybody who has

information technology, if there is a new breakthrough, new efficiencies, you are all going to find ways to make your computer system work like everybody else’s. So a part of the story that is troublesome to me is that the efficiencies come from information technology. I just think that would be available for anybody in the business. And I will ask Mr. Rose to respond, maybe the answer is to

my question to Mr. Rose about where are the efficiencies, is Mr.

Burger right? Is it in the lower commissions paid to your agents?

Mr. ROSE. I am sure we don’t pay the highest or the lowest commission out there. But over 50 percent of our A&O reimbursement

that we are paid goes out in the form of commissions. And our

agents feel that that is fair compensation, because we are reducing

their time and effort and enhancing their advice to the farmer.

Mr. MORAN. And the other part of this story that bothers me is

what I assume Mr. Pomeroy and I hear all of the time. You hear

one set of facts and another set of facts, and you are in the same

room. You are all having the same conversation. But this story

about ‘‘cherry picking’’, which still troubles me, in that I think we

need to make certain that the Crop Insurance Program works for

all farmers and the end result of this program, in my mind, can

not be that large farmers are going to have insurance and small

farmers are not. Is there some way that we can get to the qualitative analysis that answers this question as to who is buying a

Crop1 policy, who it is marketed to? Who is paying the premiums?

Is that information something that we can garner by asking someone the right question?

49

Mr. NIELSEN. Mr. Chairman, we have been asking RMA over the

last 3 years for that direct information. And the thing they say is,

‘‘Under confidentiality, we can not share that.’’ I think we need to

all step back a little bit from the issue, have independent people

analyze this that is this really the truth. Is there ‘‘cherry picking’’?

Are there under-served farmers? Are there minority farmers that

aren’t being served? We both have our opinions. Mr. Rose, I admire

him for his opinion, but I differ with him. And with that, we need

an unbiased. I don’t think presently RMA is willing to give us the

real dope on this, excuse my language.

Mr. MORAN. I always think that sometimes we have the panels

turned around. It would be maybe better to have heard from all of

you and then have the Risk Management Agency testify. But to

me, these two kinds of issues, where do the efficiencies really come

from and what is the marketing plan? Who benefits from a Premium Discount Plan, Crop1’s or anybody else’s? As I understand it,

six other companies have applied to be able to offer a Premium

Discount Plan. And it would be interesting to me to know from

those companies what their marketing plan is. Is it going to model

something that suggests that only the largest farmers are going to

be served? So others are thinking this out. Mr. Burger?

Mr. BURGER. We were one of those six that applied for the PRP

plan for this last year, and I have been looking at our financials.

I have been part of the part of the Crop Insurance Program from

the beginning, so I study them closely. I know what it takes to

process and service this business. It is a complex business. We

don’t maintain fat in our expenses. And so at the end of the day,

when you take a look at all of it, the biggest expense by far is the

agent’s commission, and to operate under the A&O, the only way

to do it is to reduce the agents’ commissions. That is it. Period.

Mr. SIEBEN. Mr. Chairman, if I could comment.

Mr. MORAN. Yes, sir.

Mr. SIEBEN. In reading the comments that were presented to

RMA in regard to the PRP, there were several comments from producers and also companies that made reference that they had applied for the PRP but only on certain plans and only in certain

States. So the comment that was made by Mr. Davidson that 80

percent of the companies or the liability was applied for for a PRP

is basically incorrect. They were applied for certain plans in certain

States, not all States and not all plans and not all coverages. So

that needs to be clarified a little bit, also, sir.

Mr. MORAN. So in addition to my question about who are you

marketing to, when you, as one of those six companies, are looking

at whether or not to offer PRP, my question was about who are

they planning on marketing the product to, what you are also telling me is what product are they planning on marketing?

Mr. SIEBEN. Correct. Yes, sir. And in what States, also, because——

Mr. MORAN. And what States?

Mr. SIEBEN. Because one of the comments that was also made

referenced the fact that if they had to offer it in all States and all

plans and all coverages, that they would remove themselves from

certain States, and that is where we come with the comments we

50

made earlier about not being in all States at all times. So this is

the comment that came through the comment period.

Mr. MORAN. Mr. Rose, my guess is that your answer to my question about the commissions paid to agents is that you don’t pay the

most and you don’t pay the least. I don’t know what range that is

in or what the answer to that question might be, but my guess is

that your agents are more part-time agents than full-time agents?

And this is another source of income for them but they have other

income? Is that an accurate description of people who are agents

for Crop1?

Mr. ROSE. We have part-time, and we have full-time. I would say

a majority of our people are dedicated to selling the crop insurance

on a full-time basis. Right behind me are two individuals that are

full-time. That is what they do for a living, advise and sell crop insurance.

Mr. MORAN. Let me ask the panel. What do we need to do about

the ever-changing rust and your manual in the time frame? Let me

get to that topic. What do we need to ask RMA to do that they are

not doing in regard to timeliness?

Mr. NIELSEN. May I answer first, because we, as agents, are on

the front lines? First of all, we have got to get RMA to tell us that

we now can get involved in the claim. Just recently, we received

a bulletin and a $10,000 fine if we are involved in the claim process. That is ridiculous.

Mr. MORAN. This is the result of the SRA negotiations?

Mr. NIELSEN. Yes.

Mr. MORAN. Yes, sir.

Mr. NIELSEN. But it is ludicrous to say that we can not tell the

farmer, ‘‘You have got to get these records.’’ Legally, I feel I am

breaking the rules right now by advising him how to take care of

good farming practice issues.

Mr. MORAN. These manuals that you are talking about come to

you as an agent or an insurance company that describe what best

farming practices, good farming practices are, to which I assume

the reason you would need to know that is to communicate to your

customer?

Mr. NIELSEN. Yes.

Mr. MORAN. But then what you are telling me is on the other

hand, under the SRA, it is inappropriate for you to assist your customer in filing a claim?

Mr. NIELSEN. We can do the paper filing, but we can not advise.

Period.

Mr. MORAN. Now does that seem to be as inconsistent to you as

it does to me?

Mr. NIELSEN. Totally inconsistent with the industry.

Mr. MORAN. OK.

Mr. NIELSEN. To take this a step further then is the issue that

we are not as we probably 30 years ago did in the industry. We

were schoolteachers. We sold crop insurance in the spring. In the

summer, we did crop hail adjustments. That doesn’t exist in this

industry. We have got professional adjusters handling the issue.

The agent is not involved in adjusting. But we need to be the advocate for the farmer, the producer of saying, ’’Hey, you need to have

these records ready for this guy when he shows up to do your adVerDate 11-SEP-98 13:33 Jun 20, 2005 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 F:\DOCS\109-7 HAGRI PsN: HAGRI
51

justment. We have got to be involved, because they are farmers.

They are not understanding day-in and day-out what they have to

have, so they need to come and talk to us. Well, now agents are

sitting with a $10,000 fine in their face. What would you do?

Mr. MORAN. Let me ask, I think, my final question. Any questions that you would like for us to raise on this topic of a Premium

Discount Plan to all of you, a question that we have not asked you.

You are down to Mr. Pomeroy and me with regard to these questions, so if we have missed something, what would you like for us

to ask you? And then secondly, are there questions that you would

like for us to direct at RMA on any of these topics? You heard the

testimony today from Dr. Collins and the Administrator. Is there

something that we missed that we should be raising with them as

we submit written questions to them?

Mr. SIEBEN. Mr. Chairman, if I could speak. In regard to the

RMA and the timeliness of information, back to your previous question on the soybean rust, soybean rust, a lady with the Soybean Association spoke about this 2 to 3 years ago. And in fact, it was moving into the United States. So it is not something that was brand

new that just hit. RMA could have been a lot more timely in their

information to us prior to us training our agents or even our adjuster schools in providing information to us at that point in time.

We feel that RMA presently delays everything to a point where it

puts us in kind of a bind as to being able to tell them the correct

information on what to do, how to farm their program, how to farm

their farm, I should say.

So I think the question we would have, two-fold and I will leave

it to the rest of the panel.

First of all, all we are asking for right now on the PRP is that

they have an outside accounting firm or auditing firm look at the

financials, and if it is so, it is so. We will live with that. But we

would like to have an outside source to look at that.

In regard to the timeliness of information, we would appreciate

all of that information being out way in advance.

And with regard to the conflict of interest that has been spoken

about with agents, three different times we have been told by RMA

and Ross Davidson that he would have a memo out to us within

the next week, and that started in February. And to this day, we

still do not have a memorandum with examples on how the conflict

of interest statement would pertain to agents, adjusters, and such.

We are still waiting on that memorandum to come out.

Mr. BURGER. If I could concur mostly with what Mike has said

here. Confusion of policies and we are chasing the fraudulent individual so much that there are so many rules and regulations that

it starts making it so burdensome for the honest producer and

agent. That is a real concern for us as we proceed further.

The other thing on the Premium Reduction Plan, we agree with

Mike that it would be nice to get an outside view of the savings,

because we can’t find anywhere where it says that we have to have

this by July 1 or any date. We all need to be satisfied that the efficiencies are there from other ways. And if the report shows that,

then we will go forward. And we look forward to competing with

any company on a rate basis or commission-based or whatever it

takes or service. We pride ourselves in the service aspect first. But

52

why not wait? Let us make sure that we are on the right course

with this Premium Reduction Plan because it has the potential to

disrupt the marketing.

Mr. NIELSEN. I would like to kind of say, ‘‘Yes, I agree with the

two gentlemen here,’’ but since PRP is such a volatile thing right

now, there were 600 comments to a process that normally doesn’t

have anything. Maybe there should be a second comment period

after the facts are on the table from an outside entity, so we really

do see what is really going on. And as Mike has said here, if the

facts are the facts, we will live with it. There is not a problem with

that.

I will also say I am very vested in my association. My people are

very much in this game. We are making income, but we are making income in every small community in every agricultural end of

the United States here. So yes, we do make money out of this product, but we also pay taxes, and we throw everything back.

So I think there needs to be some analysis here of what we add

to the value to the communities, et cetera, to make some sense out

of this when you do the analysis.

Mr. MORAN. Mr. Nielsen, when you say if the facts are the facts,

you will move on, that comment, what facts lead you to believe one

thing or another? What facts would you see that would cause you

to think that PRP is OK or PRP is a terrible development?

Mr. NIELSEN. First of all, the fact that you are following the

rules, OK, that the financial soundness is there, that you truly,

truly are not ‘‘cherry picking’’, that you are not misserving the organic farmer or all of the loose ends here that we are all obligated

to serve. Competition is good, and I don’t have a problem with it,

and I don’t think our members do, because we compete ourselves

every day.

Mr. MORAN. Mr. Pomeroy.

Mr. POMEROY. Mr. Chairman, there has been mention made

about a third-party review. I am wondering what form. Are you

talking about RMA hiring an audit firm to look at the filing for or

are you talking about Chairman Grassley’s call for a GAO audit?

Do you have specific suggestions?

Mr. SIEBEN. I guess my comment is just we are looking at a third

party to look at this that would not be associated with RMA that

might have a tilted view of what they are looking at. We would like

somebody that looks at numbers to be able to justify the expenses

as such. There are many expenses all of us have. Sometimes we

forget about them, but an outside accounting firm would have that

information available. And that is what we are looking at. It is just

an outside, third-party verification. Whoever it might be, so be it.

Mr. NIELSEN. I would make the comment just the GAO is fine

with us.

Mr. MORAN. Anything else, Mr. Pomeroy?

Gentlemen, thank you for your testimony, for your time. What I

thought was an hour and a half hearing is now about 3 hours later.

I was pleased with the committee’s attendance and participation

and the quality of the questions, and I think this suggests that

there is a real interest in crop insurance issues and perhaps particularly the ones that we have addressed here with this panel.

53

And it suggests that there is more work for us to do in regard to

this topic.

Without objection, the record of today’s hearing will remain open

for 10 days to receive additional material and supplementary written responses to witnesses to any question posed by a member of

the panel. The hearing of the Subcommittee on General Farm Commodities and Risk Management is adjourned.

[Whereupon, at 1:00 p.m., the subcommittee was adjourned.]

[Material submitted for inclusion in the record follows:]

STATEMENT OF KEITH COLLINS

Mr. Chairman and members of the Committee, thank you for the invitation to

participate in today’s hearing. I appreciate the opportunity to discuss developments

of the Board of Directors (Board) of the Federal Crop Insurance Corporation (FCIC)

since last year’s oversight hearing. This morning, I will briefly review some of the

Board’s major activities, including approval of new products and pilot programs,

changes in existing products and key issues addressed by the Board.

Mr. Chairman, the Federal Crop Insurance Program is growing and improving

and serving the public well. In just the past 5 years, the number of acres insured

through the program grew by 14.7 million, as more farmers saw the value of the

crop insurance safety net and as more products were developed and approved for

more crops in more locations. The program now offers 22 insurance plans on over

350 agricultural commodities in all 50 States plus Puerto Rico. The FCIC Board has

focused this past year in evaluating the product portfolio, considering new products

offered to the program and expanding existing products into additional States.

The Board has benefited greatly from the experience and broad knowledge of its

members. They have been, and are, persons of accomplishment in the worlds of agriculture, insurance, agribusiness and other areas. This past year saw a change in

the Board as three members left the Board due to expiring terms or other reasons,

and three new members joined the Board. We thank those leaving for their excellent

public service: Susan Fitzsimmons, Roger Swartz, and Christopher Watt. New members include: William (Bill) Classen, who fulfills the requirement for a member with

experience in the crop insurance business; Luis Monterde, a specialty crop producer

from Mississippi; and Mike Pickens, experienced in regulation of insurance. Other

members include: John Askew, a producer from Iowa; Frank Jones, a producer from

Texas; Tim Kelleher, a producer from California; Ross Davison, administrator of the

Risk Management Agency (RMA); JB Penn, Under Secretary for Farm and Foreign

Agricultural Services, and myself.

The Board is charged with general management of FCIC and takes that responsibility very seriously. We could not succeed without very close interaction with the

employees of RMA and the Office of the General Counsel, who work tirelessly to

provide us the information and analysis we need for our deliberations, and we thank

them for these continuing efforts.

ACTIONS ON NEW PRODUCTS, IMPROVED PRODUCTS

This past year, the Board has taken significant actions affecting the Federal crop

insurance program. We have received proposals for many new products, directed expert reviews for the appropriate offerings, approved new products, approved modified pilot programs with improvements, and terminated some products that were not

serving the needs of producers. I will review a few of these actions which have had

a positive impact on the crop insurance program as a whole.

Two actions taken by the Board this year involved resolving issues of concern related to outstanding livestock products. The Livestock Risk Protection (LRP) pilot

plan of insurance for fed and feeder cattle and the Livestock Gross Margin (LGM)

pilot policy for hogs were approved by the Board under section 508(h) of the Federal

Crop Insurance Act (Act) which authorized the submission of private policies. In

early 2004, the Board withdrew these livestock products, pending review and modification, following cessation of sales of LRP cattle as a result of the discovery of a

BSE infected cow in Washington State in December 2003 and due to other issues

related to LGM. RMA successfully worked with the owners of both of these products

to identify modifications requested by the Board, making it possible for the Board

to re-open sales of the improved plans of insurance beginning September 30, 2004.

The modifications made to the livestock insurance plans included procedures for the

suspension of sales of the product in cases of catastrophic events or highly volatile

54

futures market prices and other procedures to minimize adverse selection by insureds.

The Board remains concerned over the marketability and the appropriateness of

these products as a long-term offering of FCIC. Consequently, the Board has required a thorough evaluation of the performance of the livestock pilots after one

year of operation is completed on September 30, 2005.

During the past year, the Board also approved the significant expansion of a relatively new product, Adjusted Gross Income-Lite (AGR-Lite). AGR-Lite was developed by the Pennsylvania Department of Agriculture and first offered in 2003 in

Pennsylvania. In the two years following its introduction, AGR-Lite was expanded

to 16 States (including Pennsylvania), and for 2006 will be available in a total of

18 States. There appear to be additional States currently working with Pennsylvania to request that AGR-Lite be expanded into their States.

AGR-Lite covers the adjusted gross revenue from the whole farm based on five

years of Federal tax return data and expected farm income for the current year. It

is a simplified version of the Adjusted Gross Revenue (AGR) pilot plan of insurance

and uses the AGR Handbook and rating methodology. AGR-Lite can potentially fill

an important void in FCIC’s product line by appealing to small-to-medium size producers of livestock and specialty crops. AGR-Lite, as a new plan of insurance, has

had limited participation and continues to undergo revisions for improvement. In

2004, there were 96 policies sold, and for 2005, there are 148 policies earning premium with an average of three agricultural commodities covered per policy. Those

sales compare to an average of 444 traditional MPCI policies for one agricultural

commodity.

AGR-Lite has a $250,000 liability limit and that is most likely one reason for the

somewhat limited participation, including participation by producers with livestock.

The liability limitation exists as an eligibility requirement because of the relationship between the cyclical nature of livestock prices and the AGR/AGR-Lite rating

method. RMA currently has a contractor working to determine the most effective

and actuarially sound methods to use in rating various types of livestock under the

AGR plan of insurance. Other reasons the participation level is low may be related

to the learning curve of a financial product as compared to a production agriculture

type of insurance product, as well as the cost of delivery. On April 28, 2005, the

Board sent for expert review a series of potential modifications of AGR-Lite designed to improve the product and increase participation.

Answers to some of the questions surrounding the limited participation may also

be forthcoming soon, as RMA entered into a contract for a formal evaluation of the

AGR pilot program last summer. This in-depth evaluation will review all aspects of

the AGR pilot program including a review of program, listening sessions with both

producers and approved insurance providers, underwriting, actuarial analysis, tax

issues, and reinsurance. The evaluation is scheduled to be completed in early December 2005 after which the Board will place AGR under consideration for continuation, continuation with modifications, or termination.

At our most recent Board meeting, held last week on April 28, the Pennsylvania

Department of Agriculture presented proposed revisions for the AGR-Lite program.

The Board acted to send the proposed revisions for expert review. We continue to

believe that the growing pains of this program can be overcome with time and diligence, and that it will prove to be a very useful product for small-to-medium size,

diversified farmers and ranchers.

The Board continues to look for ways to improve the risk management capacity

of farmers and ranchers. In May 2004, the Board, responding to the needs and requests of producers, authorized the implementation of a Silage Sorghum Pilot plan

of insurance for 2 counties in Colorado and 37 counties in Kansas. The maximum

coverage level for this pilot program is limited to 75 percent and the price election

is limited to 80 percent of the price election for corn silage. Sorghum varieties grown

for harvest as silage are eligible for coverage under the new program beginning with

the 2005 crop year, with the pilot continuing through the 2008 crop year. Non-silage

varieties of grain sorghum are not covered under this pilot program.

In addition, growers of grain sorghum felt that they had fewer risk management

options than did corn and soybean growers. In October 2004, the Board approved

the Group Risk Income Protection (GRIP) plan of insurance for grain sorghum, beginning with the 2005 crop year, for all States and counties currently approved for

the Group Risk Plan (GRP) giving grain sorghum growers an additional insurance

choice. GRIP was initially submitted and approved under section 508(h) but it is

now owned and maintained by RMA. Since GRIP for grain sorghum will only be offered in areas where GRP is offered, sufficient actuarial information was available

for this implementation.

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DEALING WITH EXISTING PILOT PROGRAMS

In addition to approving new crop insurance programs, improving the existing

portfolio of products remains a high priority for the Board. As part of a broad portfolio review conducted last year, the Board contracted for the development of an analytical tool to help measure the performance of existing products and identify

changes that would improve their usefulness. That analysis tool, which encompasses

over 70 questions, is now being integrated into the business processes of RMA. It

will be used by RMA to assess existing policies and can be used by new product

developers and contracted evaluators.

The Board has responsibility for eliminating those programs that have not proven

to be in the interests of producers or cannot be demonstrated to be actuarially

sound. In 2004, the pilot program for crambe was terminated by the Board and the

Pilot Coverage Enhancement Option, or CEO, was terminated following the 2005

crop year in most States.

Pilot programs for mustard, mint, wild rice, and cabbage were evaluated by the

Board and the Board determined them to be successful and voted to convert them

to permanent programs. This vote culminates years of extensive scrutiny that the

programs went through to achieve final approval.

The value of pilot programs was demonstrated through two significant actions this

past year. The Board terminated the existing Pilot Group Risk Plan Rangeland Program and replaced it with a new Pilot Group Risk Plan Rangeland Program, which

has a more accurate index for the 2005 and succeeding crop years. Similarly, the

Board dealt with the Sweet Potato Pilot program this year. This pilot program, introduced in 1998 for Alabama, Louisiana, and South Carolina, had high loss ratios

and program integrity vulnerabilities. The Board asked RMA to perform a comprehensive review of the program and upon its review of the findings, decided to

continue the existing Sweet Potato Pilot Program for the 2004 crop year, subject to

changes to ameliorate the worst problems, while a new Sweet Potato Pilot Program

was developed for the 2005 year. After contracted experts reviewed the new proposed program, the Board cancelled the previous flawed program and approved the

new one in October 2004.

IMPROVING BOARD PROCESSES

The Board regularly reviews its processes through its Governance Committee and

through the Board as a whole. This past year, the Board determined that it was

necessary to clarify its expectations, and the standards it uses, with respect to marketability of new products and reimbursement of research and development and

maintenance costs in order to improve decision making regarding the approval of

private products submitted under section 508(h) and 7 C.F.R. part 400, subpart V.

The Board must determine that the interests of producers are protected before it

can approve a submission by RMA or a private entity and, thus, the marketability

of a submission should be considered when determining whether the interests of

producers are protected. Therefore, the Board has requested applicants to submit

additional information to substantiate the marketability of their submission. Such

information includes focus group results, market research studies, qualitative market estimates, effects upon the delivery system or ancillary participants, correspondence from producers expressing the need for such product or plan, responses from

a reasonable representative cross-section of producers to be affected by the product

or plan, and correspondence from approved insurance providers and reinsurers expressing willingness to sell and support such a plan. If the producer does not see

it as attractive and the approved insurance provider is not in favor, the wisdom of

approving a new submission would be in question.

The Board also now asks that a submitter fully disclose and document requests

for reimbursement of contracted expenses and professional fees associated with a

submission. We find that certain information is sometimes ambiguous or fails to

fully articulate business relationships, and that such information is needed in order

to determine the reasonableness of these expenses. To remedy this situation, the

Board now asks applicants to include the relationship, if any, between the applicant

and any contractor or professional, such as parent company, subsidiary, etc. Further, the Board examines contracted expenses and professional fees broken out by

line item to include individual names, rate of pay, hours allocated to the submission,

benefit rate and overhead for the professionals and all persons who make up the

contracted party who had substantive involvement in the development of the product for which reimbursement was sought.

In evaluating whether the interests of producers are protected, the Board also believes that due to the finite nature of resources available to FCIC, the level of expected future maintenance costs must also be considered, including costs associated

56

with changes to automated systems, and the impact to the delivery system to assure

the ability to adequately and appropriately inform, service and timely meet all obligations for eligible producers. Therefore, the Board now asks applicants to provide

a comprehensive estimate of future maintenance costs for each of the next four

years for the submission and the basis for which such maintenance costs will be incurred, including, but not limited to, any anticipated expansion, the generation of

rates, the determination of prices, automated systems impact, delivery costs, contracted costs and any other costs that the applicant anticipates will be requested

for reimbursement.

PRP—A MAJOR ISSUE

A major issue that the Board addressed during the past year and an interest expressed for this hearing is section 508(e)(3) of the Act, which provides for the possibility of a premium reduction for producers. The issue of a Premium Reduction Plan

(PRP) has led to considerable debate, divergent opinions, and much deliberation by

the Board. Issues regarding the legality and equity of such a plan have arisen. To

address all the issues, in November 2004, the Board directed the FCIC to proceed

with the notice and comment rulemaking process in this matter as expeditiously as

possible. Let me briefly provide the context in which the issue arose for the Board.

Section 508(e)(3) requires the FCIC to allow approved insurance providers to offer

a premium reduction plan if they meet the requirements of the law. In 2002, one

company, Crop 1, requested Board approval to offer a PRP. By Board resolution in

December 2002, the Board established certain standards that such a PRP should

meet. The Board also directed RMA to develop more detailed procedures by which

that particular company could operate a PRP and by which others could also apply

to operate such plans. Since then, several other approved insurance providers, representing over 80 percent of the crop insurance business have requested approval

to offer a PRP of their own particular design, including substantial variations from

the single plan approved in accordance with Board-established procedures. However,

those plans have presented significant implementation and regulatory issues for

RMA that were not contemplated by the existing procedures. The Board decided

that all stakeholders, including the producers who stand to benefit from such plans,

should have an opportunity to present their views. Accordingly, RMA is proceeding

with notice and comment rulemaking to establish a comprehensive framework by

which such plans will be evaluated, approved, regulated and operated. The comment

period for the proposed rule ended on April 25, 2005. RMA will consider all comments received so that the final rule will allow them to administer section 508(e)(3)

of the Act equitably and to the benefit of all producers, large and small, while maintaining the integrity of the Federal crop insurance program.

During this rulemaking process, the Board has provided its counsel to RMA on

a range of PRP-related issues. The Board created an ad hoc committee that reviewed the proposed rule and will continue to serve as a sounding board for RMA

during the development of the final rule. After the rule is issued, the Board will

review with the manager of FCIC all submission for approval of a PRP.

The Board is fulfilling and will continue to fulfill, its statutory responsibilities, including the provision of oversight, guidance and direction to FCIC and RMA. At

each meeting, the Board reviews different aspects for RMA’s activities in the discharge of the Board’s general management responsibilities. Each Board member is

pleased to have the opportunity to serve and we all work diligently to ensure the

effectiveness and efficiency of the Nation’s crop insurance program.

STATEMENT BY ROSS J. DAVIDSON, JR.

Mr. Chairman and members of the subcommittee, I am pleased to appear before

you today to report on the progress and challenges of the Federal crop insurance

program. Under the direction of the Federal Crop Insurance Corporation (FCIC)

Board of Directors (Board), the Risk Management Agency (RMA) continues to promote an agenda to bring new and innovative insurance products to the agricultural

community, to validate the utility of current insurance products, to ensure outreach

to small and limited resource farmers, to promote equity in risk sharing and to

guard against waste, fraud and abuse within the program.

This year we mark a major milestone for the crop insurance program. Twentyfive years ago, the Federal Crop Insurance Act of 1980 became law, creating the

unique partnership between private insurance companies and the Federal Government within the crop insurance program.

57

The program has experienced extraordinary growth in the last quarter century.

Through the private sector delivery system in crop year 2004, RMA provided approximately $46.7 billion of protection to farmers on over 358 commodities covering

over 80 percent of planted acreage in the United States. This coverage was offered

through 22 plans of insurance and approximately one and a quarter million policies

that insured about 221 million acres. Attached to my testimony are several charts

that provide further background and highlight the growth of the Federal crop insurance program. In 2004, crop insurance provided approximately $3.1 billion in indemnity pay- ments to farmers and ranchers, including approximately $218 million for the four

hurricanes in the Southeast and approximately $337 million for upper Midwest

freezes.

The roles of crop insurance and the Risk Management Agency have evolved over

the years, but our mission remains the same—to promote, support and regulate

sound risk management solutions to preserve and strengthen the economic stability

of America’s agriculture producers. RMA continues to improve and update the terms

and conditions of existing crop insurance policies to improve coverage and efficacy

of the policies, as well as to clarify and define insurance protection and the duties

and responsibilities of the policyholder and approved insurance providers.

The new Standard Reinsurance Agreement (SRA) is now in place, effective for the

2005 crop year. Key changes included a lowering of the percentage rate of Administrative & Operating (A&O) expense reimbursement, which will be implemented over

the 2005 and 2006 reinsurance years. In addition, RMA enhanced the reporting and

monitoring of SRA holders with respect to financial solvency. To complement that

enhancement, RMA has strengthened formal ties with state insurance regulators

and the National Association of Insurance Commissioners (NAIC).

We now have 16 approved insurance providers selling and servicing crop insurance, compared to 14 when the 2005 SRA was signed. Most of these companies have

requested authorization to increase the amount of premium they write and the number of states they intend to serve.

Since the SRA was signed, three new insurance companies have been approved.

They are Austin Mutual and its Managing General Agent (MGA), Crop USA; the

Westfield Insurance Company with its MGA, John Deere Risk Protection, Inc.; and

Stonington Insurance Company with its MGA, Agro National LLC.

The 2004 reinsurance year was exceptionally profitable for the companies and their commercial reinsurers, with an estimated $700 million in underwriting gain

and a return on retained premium of approximately 22 percent. In 2003, companies

had an underwriting gain of $380 million, with a return on retained premium of

about 15 percent. In 2002, companies had an underwriting loss of $46 million, with

a -2 percent return on retained premium. A&O reimbursement has also risen from

$626 million in 2002 to $734 million in 2003, with an estimated $889 million in

2004.

Now I would like to provide an update to the Subcommittee on the following key

issues.

RMA PROGRAM ISSUES

• Premium Reduction Plans

• Soybean Rust

• Multi-year Disasters/Declining Yields

• Misreporting and Penalties

• Program Integrity

• Conflict of Interest

• Pasture, Rangeland, Forage and Hay Initiatives

PREMIUM REDUCTION PLANS (PRP)

In 1994, Congress added section 508(e)(3) of the Federal Crop Insurance Act,

which allows approved insurance providers to offer reduced premiums to farmers

corresponding to demonstrated efficiencies in delivering crop insurance below the

A&O expense reimbursement. The Act requires that the efficiency be subject to the

rules, limitations and procedures established by the FCIC.

Under the Act, this premium reduction is not considered a rebate. Under a rebate,

the insured pays the full premium and a portion of that premium is later returned

to the insured. Under a premium reduction plan, the insured receives a discount on

his/her premium. In essence, the approved insurance provider is paying an additional premium subsidy on behalf of the producer from savings achieved though efficiencies in the approved insurance provider’s operation.

58

The Board approved standards for allowing all insurers to be approved to offer

PRP in early 2003 in response to the application made by Converium Insurance

Companies (Converium) and its Managing General Agency, Crop1. Converium was

approved to offer a PRP under those procedures, which were available to all companies. RMA then closely monitored Converium and Crop 1’s implementation of their

approved PRP, including investigating complaints received from other agents and

competing approved insurance providers.

In the few instances that it was found an adjustment was needed, RMA required

Converium and Crop1 to adjust their approach in the marketplace to ensure compliance with the rules, limitations and procedures of the crop insurance program in

general and those specific PRP procedures established by the Board. This includes

the requirement that Converium and Crop1 make insurance available to all farmers

in the states in which the company sells and services crop insurance. Farmers who

have purchased insurance using the PRP plan expressed appreciation for the lower

premiums and consistently reported good service. In addition, Crop1 has a very good

record of compliance with the administrative requirements of reporting policy information, remitting payments to FCIC and resolving discrepancies.

A number of additional approved insurance providers have now requested RMA’s

approval to offer their own PRP. Implementation issues have been raised by these

new submissions that were not contemplated when the procedures were drafted. In

light of this and other issues that have been raised regarding the effect of PRP on

the crop insurance delivery system, the Board adopted a resolution on November 19,

2004 to publish a proposed and final rule to address this issue.

The proposed rule for PRP was published in the Federal Register on February 24,

2005, with a 60-day comment period. The comment period ended on April 25, 2005.

RMA has received approximately 600 separate mailings pertaining to the PRP proposed rule. After RMA evaluates and considers all comments received, it will then

decide whether any changes need to be made to the proposed rule. The last step

in the process will be to publish a final rule, reflecting any changes that may have

been made to the proposed rule in response to comments.

Generally, the comments received have expressed concerns about the potential for

PRP to reduce agents’ commissions and the effect this would have on the agent force

and service to producers, particularly small, minority and limited resource producers. Several comments have expressed concerns that PRP will result in larger,

lower-risk producers being targeted for the discount, while smaller producers would

not be offered the discount. However, RMA has also received comments supporting

PRP, stating that Crop1’s Premium Discount Plan has allowed producers to purchase higher coverage levels. Briefings on PRP for both the Senate and House Agriculture Committee staffs were also held recently to provide a summary of the comments and answer questions about the process.

The process continues to move along in a timely manner on this issue.

SOYBEAN RUST

Asian soybean rust (Phakopsora pachyrhizi) is a fungal disease that can quickly

defoliate plants and reduce pod set, pod fill, seed quality and yield.

To ensure that farmers know their rights and responsibilities under the soybean

policy, RMA has augmented the information that approved insurance providers are

required to provide to farmers through their agents. RMA’s communications encourage insured producers concerned about the impact of Asian soybean rust to use good

farming practices by seeking and following recommendations of agricultural experts

to control soybean rust. Further, RMA recommends that insured producers document the advice received and actions taken to combat this disease and contact their

agents on matters related to their insurance policies. Approved insurance providers

have been asked to distribute this information to all soybean policyholders.

Additionally, RMA is continually gathering up-to-date information and data regarding the spread and appropriate management of soybean rust. RMA participates

in the National Soybean Rust Working Group’s bimonthly teleconference and U.S.

Department of Agriculture Soybean Rust Working Group. In addition, RMA monitors and participates as necessary in discussions among State and Federal agriculture agencies regarding preventative and control measures. RMA holds a biweekly conference call with all RMA Regional Office Directors to discuss their direct

contact with local State and Federal agriculture officials to obtain any updated information or developments in the spread and control of the disease.

MULTI-YEAR DISASTERS/DECLINING YIELDS

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erage of 4 to 10 years of actual yields. Producers and others, including you Mr.

Chairman, have suggested that insureds are underserved when guarantees decline

following successive years of poor growing conditions. The reduction in guarantee

can adversely affect the viability of future crop insurance coverage and discourage

continued participation in the program.

Multi-year crop losses can create a problem that ought to have a solution and yet,

the problem is complex. Last spring, RMA solicited proposals for Alternative Methods for Mitigating Declines in Approved Yields Due to Successive Years of Low

Yields. RMA goals were to seek proposals for new or modified approaches to establishing approved APH yields that are 1) less subject to decreases during successive

years of low yields as compared to current procedures; 2) equitable across policyholders with differing average yields; 3) broadly applicable to all crops and regions;

4) affordable to policyholders; 5) feasible and cost-effective for RMA and approved

insurance providers; and 5) actuarially sound.

Contract proposals have been received and evaluated and RMA recently entered

negotiations for two contracts to begin the necessary research and development of

alternative methods. The details of those proposals are not publicly releasable at

this time, but we will release them as soon as contract negotiations are complete.

Any proposal to effectively address this issue will require additional funding and

possibly new statutory authority. We appreciate the subcommittee’s continued interest and willingness to assist in addressing this structural challenge to the program.

MISREPORTING AND PENALTIES

A recently publicized dispute between some Nebraska producers and the Federal

crop insurance program highlights the potential problems associated with certifications and correcting multiple years of discrepancies in reported information. The

RMA Central Regional Compliance Office is assisting the Office of Inspector General

(OIG) in a criminal/civil investigation of a crop insurance agency. The OIG initiated

the investigation as a result of RMA reviews that identified the appearance of

waste, fraud and abuse in the crop insurance policies serviced by the agency. Currently, the U.S. Attorney’s office and OIG are in charge of the matter, with RMA

and the impacted insurance providers assisting to bring this matter to a close as

soon as possible.

The agency serviced a large book of business of over 400 crop insurance policies

in Nebraska and South Dakota. Based on complaints received from the Farm Service Agency (FSA), RMA began investigating the appearance of fraudulent activities

of the agency for the 2000, 2001 and 2002 crop years.

RMA found significant misrepresentations of the production and acreages covering

several years in crop policies serviced by the agency. The misrepresentations included several cases where producers certified having planted crops they never grew

or had not grown in several years and producers certified having an insurable interest in crops in which they had no such interest. There were also instances of inflation or deletion of production histories involving multiple crop units and years,

which had the effect of inflating the producers’ guarantees. As a result, the producers had inflated APH databases, incorrect insurance premiums and received overpaid indemnities, many occurring over a period of several years.

In November 2002, the approved insurance provider that the agency was affiliated

with, American Growers Insurance Company (Growers),was placed under supervision by the State of Nebraska. The policies written by the agency for Growers

were then assumed by various companies beginning with the 2003 crop year. By the

time OIG released RMA to begin corrective action relative to the incorrect policy

certifications, the former agency policies had been placed with 14 different approved

insurance providers.

In August of 2004, RMA sent letters to the approved insurance providers notifying

them that the RMA reviews had found significant errors in former agency policies

and that they needed to have the producers recertify their APH records and make

corrections to the 2003 and 2004 data as appropriate. The intent was to provide information to the insurance companies to begin correcting policies, even though the

OIG investigation was ongoing.

Some producers who believe the insurance provider’s corrections were unfair have

filed suit against USDA and RMA. This current legal action is the result of program

insurance providers correcting yields that producers could not support with their

records. RMA has received enough feedback to recognize that the instructions given

in August may need to be revisited to ensure consistent treatment of these producers. Accordingly, RMA has placed a hold on the approved insurance providers implementing those previous instructions so that RMA can clarify the instructions to ensure producers are not adversely impacted because the procedures may have been

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misunderstood. These producers will be eligible for 2005 crop insurance. However,

their coverage may be affected by their ability to prove their yields once the revised

guidelines are issued. This in turn may result in corrected premium and indemnities

from prior years and may require repayment of amounts to which they were not entitled. Part of the revised procedures will be to provide the specific due process procedures for producers in the event they wish to contest the findings.

PROGRAM INTEGRITY

RMA Compliance managers have been concentrating on the mission-critical tasks

of evaluating and improving new processes to prevent and deter waste, fraud and

abuse in the crop insurance program. Significant effort is dedicated to building and

adapting, reporting and tracking feedback systems to complement and integrate the

oversight mandates established by the Agricultural Risk Protection Act (ARPA).

During 2004, Compliance initiated operation reviews of approved insurance providers to capture a program error rate and to assess approved insurance provider activities under the SRA. The Office of Management and Budget and the USDA Office

of Chief Financial Officer are in agreement that a quantifiable program error rate

is a key measure in assessing program compliance and integrity.

Additional efforts have been dedicated to integrating data mining projects; exploring avenues to expedite the increase in sanction requests; and continuing to improve

the Compliance case management and tracking system. Our Compliance function

workload has increased substantially due to the expansion of the Federal crop insurance program and the implementation of ARPA. In order to deal with the increased

referral activity, RMA has sought to manage the increase in workload by emphasizing the use of data mining, remote sensing, Geospatial Information technologies and

other computer-based resources.

RMA is making significant progress in preempting fraud, waste and abuse

through the use of data mining, remote sensing and other advanced technologies.

We have preempted millions of dollars’ worth of improper payments and RMA continues to identify ways to reduce fraud and provide responsive, useful risk protection to farmers. RMA has used data mining to identify anomalous results in the

crop insurance program and, with the assistance of FSA offices, conducts growing

season spot checks to ascertain the cause of the results. These spot checks based

on data mining have resulted in significant reduction in anomalous claims for certain situations.

RMA saved approximately $125 million in 2002 by deterring or preventing potentially fraudulent claims through data mining and other related activities. Additional

savings of approximately $93 million were realized for 2003. We are optimistic about

the long-term benefits of data mining in our compliance efforts and elsewhere

should Congress continue funding beyond 2005.

A recent activity in this area identified policies where a comparison of past claims

and APH data indicated that claim production data was not used to establish the

APH as required by procedure. The Compliance Offices have completed their assessment of the accuracy and validation of this information. On October 10, 2004, Compliance notified the approved insurance providers that as a result of data mining,

RMA had identified potential debt on approximately 14,000 policy units. The notification also contained a request to hold policy records for these units beyond the

three-year record retention requirement, if applicable. Although the request did not

immediately require the approved insurance providers to review these policies, several approved insurance providers have initiated reviews to determine the extent of

the problem and preclude potentially incorrect payments on crop year 2004 claims.

Some of these providers have already notified RMA of certain procedures that account for the discrepancies, confirming the fact that data mining results identify

anomalous data, but still require review to determine whether an error exists for

the policy.

The return on investment using data mining is significant. For example, RMA be- lieves that over $320 million dollars in estimated savings for the last 4 years is attributable to the data mining spot-check process. While RMA and FSA have preempted tens of millions of dollars of improper payments through these and other

measures, RMA is constantly identifying ways to balance competing needs to make

our products fraud proof while seeking to provide responsive, useful risk protection

to farmers. We still have work to do and improvements to make, but we are making

good progress in our fight against fraud.

CONFLICT OF INTEREST

RMA has recently issued a Manager’s Bulletin and Informational Memorandum

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ment changes to the SRA regarding conflict of interest reporting and prohibited conduct. RMA reiterated the new requirements and issued supplemental guidance to

promote program integrity and ensure adequate internal controls, based on the

identification of certain problems in past audits and investigations of fraud, waste

and abuse in the program. RMA briefed congressional staff on this issue prior to

issuing the Bulletin. We appreciate the feedback and assistance in addressing these

compliance issues while maintaining the agent’s important role in advising policyholders on matters related to their policies.

PASTURE, RANGELAND, FORAGE AND HAY INITIATIVES

RMA recently awarded four contracts for research and development of new and

potentially innovative crop insurance programs for pasture, rangeland, forage and

hay. We are pleased to report that positive progress continues on each of these four

contracts. RMA expects that at least one proposal may be ready for the Board to

consider for independent expert review as early as July 2005. If approved by the

Board, pilot testing could begin in 2006.

RMA continues to evaluate and provide new products and to promote the adoption

of crop insurance as a risk management tool so that the government can further

reduce the need for ad-hoc disaster payments to the agriculture community

The growth and effectiveness of the crop insurance program is dependent on a reliable delivery system, insurance products that meet the needs of producers, investment in information technology to ensure the delivery system is timely, accurate

and dependable, and adequate funding to support compliance and program integrity,

product evaluation, maintenance and administration, and new product development.

Again, thank you for the opportunity to participate in this important oversight

hearing. I look forward to responding to questions on these issues.

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STATEMENT OF NORMAN A. NIELSEN

Good morning. Thank you Chairman Moran and members of the committee for

the opportunity to present the views and recommendations of the Independent Insurance Agents & Brokers of America (IIABA) on the Premium Reduction Plan and

soybean rust. We appreciate the interest you have shown in these issues, and the

initiative you have taken by calling this very important hearing.

My name is Norman (Norm) Nielsen, and I am president of Associated Insurance

Counselors, Inc. in Preston, Iowa. I am also the national chairman of IIABA’s Crop

Insurance Task Force. IIABA is the Nation’s oldest and largest national trade association of independent insurance agents, and represents a network of more than

300,000 agents and agency employees nationwide. IIABA members are small businesses that offer customers a choice of policies from a variety of insurance companies. Independent agents offer all lines of insurance—property, casualty, life, health,

employee benefit plans and retirement products.

PREMIUM REDUCTION PLANS

IIABA is a staunch opponent of the Premium Reduction Plan (PRP). This is not

to say that we are against competition; to the contrary, we believe competition is

healthy and provides an important checks-and-balance for our industry. However,

PRPs actually undermine the competitive playing field by putting cost of service

over quality of service. We also call into question the motives of the Risk Management Agency (RMA) when they approved one company to continue to offer a PRP

after the Federal Crop Insurance Corporation (FCIC) Board passed a resolution suspending PRPs until a rulemaking process can be completed. The lack of foresight

demonstrated by this decision created what is easily classified as a Government

sponsored monopoly for the 2005 reinsurance year. If this is RMA’s idea of promoting competition in the industry, then the future looks very bleak for anyone involved

in the delivery of this important risk management program, and I shutter to think

of the impact it will have on America’s agriculture producers.

Mr. Chairman, IIABA believes that PRPs have absolutely no role in an industry

that relies so heavily on the expertise of its agent network, and that the proliferation of this program will result in serious unintended consequences for our Nation’s

farmers. Moreover, we believe that PRPs promote discrimination against limited resource farmers, as well as farmers in areas traditionally classified as high risk,

which flies in the face of Congress’s intent when they created the Federal Crop Insurance Program to provide all eligible farmers in the United States with crop insurance. In order to understand why PRPs are bad for the Federal Crop Insurance

Program, you need to understand the role the agent plays in the delivery system.

Unlike the property-casualty industry, a crop agent’s responsibilities require a

much more hands-on approach, which invariably increases the threshold for errors

and omissions (E&O) exposure. On average, with advance meeting preparation,

travel, and meeting time, an agent spends approximately 7 hours on a policy during

the sales window alone. A transaction begins with the agent explaining production

reporting and supporting record requirements to the farmer. He explains different

date requirements by crop and by coverage for application, the actual production

history (APH), the acreage report, the farmer’s options and claims. He completes

APH-related forms for the farmer, calculates preliminary yields, reviews production

early to determine if there is a revenue loss, reviews the APH form for completeness

and accuracy, and forwards the signed form and any applicable worksheets to the

company. The agent then must review approved APH from the company to ensure

accuracy, explain approved APH yields to the farmer, and provide him with a copy.

This is just the beginning. I haven’t even discussed procedures for Preventive Planting, Yield Adjustment, Unit Division changes, Power of Attorney requirements, or

any of the other technical policy provisions. Everything I have just listed goes into

writing the policy I haven’t factored in what transpires should the farmer experience a loss. I charge RMA to show me a delivery system that reduces the role of

the crop insurance agent without reducing the quality of service our Nation’s farmers have grown to expect for the last 25 years.

The Federal Crop Insurance Act, as amended, authorizes the FCIC to establish

rules, limitations, and procedures for approving applications by insurance providers

to reduce crop insurance premiums. To be eligible for the reduction, however, the

Act requires that provider demonstrate that a true ′′efficiency′′ will be achieved, not

merely that a cost has been cut below the expense reimbursement amounts established by the FCIC. Unfortunately, the most realistic ‘‘efficiency’’ a company can realize is a reduction in the role of the agent in the delivery process, thereby confusing

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sult, PRPs undermine the quality of the crop insurance delivery system, contrary

to the standards established by Congress.

In 1980, Congress transitioned the Federal crop insurance program from a program administered solely by Federal employees to a private-sector/government partnership project. In mandating this transition, Congress recognized that ‘‘the sales

talents and experience of the private sector commissioned agents . . . are essential

to fulfilling the goal of nationwide, generally accepted all-risk insurance protection.’’

As a result of this demonstrated talent, Congress rested upon the agents’ shoulders

the ‘‘large burden of program delivery’’ and ‘‘providing full service to the client’’ including, but not limited to, sales. Independent agents, including IIABA members,

have proved instrumental in achieving the program’s goal of helping farmers make

well-informed risk assessments and choices about the coverage that they purchase.

These agents are knowledgeable about the technicalities of the crop insurance program and skilled at assisting farmers with concerns that directly impact their coverage, such as unit structures and yield guarantee weaknesses. They also have the

training and experience necessary to encourage participation of small, limited resource and minority producers, as required under the Standard Reinsurance Agreement (SRA).

DISCRIMINATION

Since approval of a pilot PRP in 2003, IIABA and its members have been concerned about the effect of such programs on the delivery system and preventing discrimination against small, limited resource and minority producers. In fact, The

Board of Directors of the FCIC also cited these concerns in November 2004 when

it denied all pending PRP applications for the 2005 Reinsurance Year and directed

the RMA to proceed with notice and comment rulemaking on the adoption of procedures for approving PRPs. It is easy for RMA to admonish all forms of discrimination; in fact, there are a number of areas in the preamble of RMA’s proposed rules

where the Agency goes to great lengths to illustrate the prohibition against such behavior. However, condemning discrimination and actually having the means to police it are completely different issues. Although the proposed rules provide that

RMA may not approve PRPs that result in a reduction of services to policyholders

or PRPs that are unfairly discriminatory, the rules contain no enforcement mechanism to prevent disruption to the balance of agents and services to policyholders in

the current crop insurance delivery system or to detect and prevent covert discrimination against small, limited resource and minority producers. As mentioned previously, there remains one company that continues to offer a PRP in 2005. Unfortunately, we have seen and heard of wide-spread patterns of abuse and discrimination

being practiced by this company, all happening under the watchful eye of RMA’s Office of Compliance. If this is occurring with only one company offering a PRP, it is

simply unrealistic to expect RMA’s current oversight infrastructure to properly monitor and regulate discriminatory practices, especially if the number of companies offering a PRP grows in the 2006 reinsurance year.

There are also forms of covert discrimination available for companies to employ.

For example, the agent network for the delivery of PRP will undoubtedly be driven

by the size of an agency’s book of business. While an agent is required to offer all

products offered by the company(s) for whom they write, the companies have the

opportunity to decide which agents they wish to employ. Conventional wisdom dictates that the obvious litmus test for this decision-making process will be the size

of the agency’s book of business. Therefore, those whose book is comprised of accounts from smaller farming enterprises will be passed over for those with the larger, more profitable accounts. If RMA allows this to proceed, the end result will be

cherry-picking by the companies to the detriment of small farmers. No agency can

survive by servicing only small farmers. Therefore, if only the best and most profitable customers are skimmed off the top, the result will undermine the intent of the

law that governs the crop insurance program, a program that is based on serving

all farmers of all sizes, without discrimination against smaller farms.

In keeping with Congress’s intent, independent agents currently assist producers,

particularly small, limited resource and minority producers, with deadlines for reporting, screening information, quality control, risk assessment and determining the

necessary amount of coverage. By doing so, agents then make up the difference by

writing coverage for larger farming enterprises. If the proposed rules are implemented and additional PRPs are approved, many independent agents, who receive

at most only fair compensation under the current delivery system, would likely stop

delivering crop insurance. Companies would likely consolidate their business among

a smaller workforce of agents. The smaller delivery system resulting from PRPs

would be unable to provide the same amount of individualized service. As a result,

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Congress’s goal of providing producer education through the crop insurance delivery

system would be defeated and farmers would likely experience negative financial

consequences from ill-informed risk assessment and coverage decisions.

ADDITIONAL PRP OBSERVATIONS

When section 508(e)3 of the Federal Crop Insurance Act was established, its purpose was to create a vehicle for reducing the Federal subsidy paid to the companies

which offset policy costs to the farmer while at the same time, mandating that quality of service to the policyholder is not compromised. When RMA renegotiated the

SRA in 2004, among other provisions was a reduction in Federal subsidies paid to

the companies. Therefore, there is a degree to which RMA has already created the

savings anticipated in 1994 when Congress passed section 508(e)3. Moreover, crop

insurance companies have realized significant reductions in Federal reimbursement

over the last 11 years in addition to the cost-cutting provision in the new SRA.

Therefore, the empirical evidence exists that the FCIP burden on the American taxpayer has continued to decline, while the quality of service to our Nation’s agriculture producers has remained static. This will not be the case under a PRP scenario. Proliferation of PRPs will be the equivalent of throwing the baby out with

the bathwater, and will create numerous draconian consequences for an agriculture

system our nation depends on.

SOYBEAN RUST

Good farming practices are the hallmark of any successful agriculture enterprise.

Farmers must demonstrate good farming practices to make certain that in the event

of any natural occurrence such as soybean rust, they will be eligible for a payment

based on the full amount of the loss. If the farmer fails to follow good farming practices, the farmer could be subject to a reduction in the indemnity due to him. Since

soybean rust is an agriculture epidemic that very few farmers had previous knowledge of, several have taken advantage of the resources made available to them by

Secretary Johanns, such as USDA’s interactive soybean rust web site and the overall national soybean rust plant disease surveillance and monitoring network.

Some circumstances, however, prohibit the farmer from exercising preventive

measures regardless of how much forward-thinking he does, which ultimately places

unnecessary burden on an already stressful situation. For example, in my home

state of Iowa, a number of farmers are being told by the fungicide manufacturers

that obtaining supply will not be a problem. However, given the seriousness of the

soybean rust situation, supply does not always meet demand. To illustrate my point,

when I have recommended to my clients that they should order and apply some preventive fungicide to their crops, often times the amount received is only a fraction

of the amount they ordered. The most logical explanation is that the distributors

are trying to curb any attempts by the farmers to stockpile unneeded chemicals for

potential use in the future. Therefore, even if farmers follow developments as to the

identification and spread of soybean rust disease and stay informed concerning appropriate treatments that may apply to their situation, that is not always enough.

As an agent I will take the appropriate steps to ensure that my clients are given

the most up-to-date information from the companies, but ultimately, similar to the

FDA’s handling of the influenza outbreak in 2004, it is incumbent upon the USDA

to work in concert with the chemical manufacturers to guarantee availability.

Premium Reduction Plans are the wrong policy at the wrong time. Under PRPs,

our Nation’s farmers are on the losing end, and the level and quality of service of

their risk management will suffer. The access to available plans will be greatly reduced, and the knowledge and understanding of the system will be limited to those

farmers who are willing and have the time to educate themselves on the complexities of crop insurance, while all the while servicing their farm on a full time basis.

There are people at RMA who seem to think that ‘‘direct’’ insurance, similar to the

delivery system employed by companies like USAA—the United Services Automobile

Association—is a realistic scenario that can be applied to the crop insurance delivery system. I can assure you that after two decades on the front lines as a Main

Street agent, that is an irrational and irresponsible conclusion and therefore lacks

any merit whatsoever.

The insurance industry is too complex to speak in generalities, and I implore the

Congress to repeal section 508(e)3 before it effectively dismantles the most successful public/private partnership our country has had in over 25 years. I thank the

committee for the opportunity to testify before you today, and I would be pleased

to entertain any questions you may have.

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