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58–021 PDF 2010

HEARING TO REVIEW THE STATE OF THE 

CROP INSURANCE INDUSTRY

HEARING

BEFORE THE

SUBCOMMITTEE ON 

GENERAL FARM COMMODITIES 

AND RISK MANAGEMENT

OF THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

SECOND SESSION

JULY 22, 2010

Serial No. 111–58

(

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

COLLIN C. PETERSON, Minnesota, Chairman 

TIM HOLDEN, Pennsylvania, 

Vice Chairman 

MIKE MCINTYRE, North Carolina 

LEONARD L. BOSWELL, Iowa 

JOE BACA, California 

DENNIS A. CARDOZA, California 

DAVID SCOTT, Georgia 

JIM MARSHALL, Georgia 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

HENRY CUELLAR, Texas 

JIM COSTA, California 

BRAD ELLSWORTH, Indiana 

TIMOTHY J. WALZ, Minnesota 

STEVE KAGEN, Wisconsin 

KURT SCHRADER, Oregon 

DEBORAH L. HALVORSON, Illinois 

KATHLEEN A. DAHLKEMPER, 

Pennsylvania 

BOBBY BRIGHT, Alabama 

BETSY MARKEY, Colorado 

FRANK KRATOVIL, JR., Maryland 

MARK H. SCHAUER, Michigan 

LARRY KISSELL, North Carolina 

JOHN A. BOCCIERI, Ohio 

SCOTT MURPHY, New York 

WILLIAM L. OWENS, New York 

EARL POMEROY, North Dakota 

TRAVIS W. CHILDERS, Mississippi 

WALT MINNICK, Idaho 

FRANK D. LUCAS, Oklahoma, Ranking 

Minority Member 

BOB GOODLATTE, Virginia 

JERRY MORAN, Kansas 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

MIKE ROGERS, Alabama 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

K. MICHAEL CONAWAY, Texas 

JEFF FORTENBERRY, Nebraska 

JEAN SCHMIDT, Ohio 

ADRIAN SMITH, Nebraska 

DAVID P. ROE, Tennessee 

BLAINE LUETKEMEYER, Missouri 

GLENN THOMPSON, Pennsylvania 

BILL CASSIDY, Louisiana 

CYNTHIA M. LUMMIS, Wyoming 

THOMAS J. ROONEY, Florida 

PROFESSIONAL STAFF

ROBERT L. LAREW, Chief of Staff 

ANDREW W. BAKER, Chief Counsel 

APRIL SLAYTON, Communications Director 

NICOLE SCOTT, Minority Staff Director 

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

LEONARD L. BOSWELL, Iowa, Chairman 

JIM MARSHALL, Georgia 

BRAD ELLSWORTH, Indiana 

TIMOTHY J. WALZ, Minnesota 

KURT SCHRADER, Oregon 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

BETSY MARKEY, Colorado 

LARRY KISSELL, North Carolina 

DEBORAH L. HALVORSON, Illinois 

EARL POMEROY, North Dakota 

TRAVIS W. CHILDERS, Mississippi 

JERRY MORAN, Kansas, Ranking Minority 

Member 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

STEVE KING, Iowa 

K. MICHAEL CONAWAY, Texas 

BLAINE LUETKEMEYER, Missouri 

THOMAS J. ROONEY, Florida 

ALETA BOTTS, Subcommittee Staff Director

(II) 

(III)

C O N T E N T S 

Page 

Boswell, Hon. Leonard L., a Representative in Congress from Iowa, opening 

statement .............................................................................................................. 1

Prepared statement .......................................................................................... 3

Graves, Hon. Sam, a Representative in Congress from Missouri, opening 

statement .............................................................................................................. 3

Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, opening 

statement .............................................................................................................. 4

Moran, Hon. Jerry, a Representative in Congress from Kansas, prepared 

statement .............................................................................................................. 6

Peterson, Hon. Collin C., a Representative in Congress from Minnesota, prepared statement ................................................................................................... 5

WITNESSES

Murphy, William J. ‘‘Bill’’, Administrator, Risk Management Agency, U.S. 

Department of Agriculture, Washington, D.C. .................................................. 7

Prepared statement .......................................................................................... 8

Rutledge, Steven C., President, CEO, and Chairman of the Board, Farmers 

Mutual Hail Insurance Company of Iowa, West Des Moines, IA; on behalf 

of Crop Insurance Research Bureau, Inc. .......................................................... 31

Prepared statement .......................................................................................... 33

Parkerson, Robert W., President, National Crop Insurance Services, Inc., 

Overland Park, KS ............................................................................................... 37

Prepared statement .......................................................................................... 38

Frerichs, Stephen, President, AgVantage, LLC;; Legislative Consultant, Rain 

and Hail, L.L.C., Alexandria, VA; on behalf of American Association of 

Crop Insurers ....................................................................................................... 42

Prepared statement .......................................................................................... 44

Deal, James D., Chairman of the Board, NAU Country Insurance Company, 

Andover, MN ........................................................................................................ 48

Prepared statement .......................................................................................... 51

Dalton, John F., President, Midwest Insurance Associates LLC and AgriLand Insurance Agency, Council Bluffs, IA; on behalf of Independent Insurance Agents & Brokers of America ..................................................................... 63

Prepared statement .......................................................................................... 65

Fowler, Kathy, President, National Association of Crop Insurance Agents, 

Memphis, TX ........................................................................................................ 68

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

Roach, Jordan A., Vice Chairman, Crop Insurance Professionals Association 

LLC, Fresno, CA .................................................................................................. 72

Prepared statement .......................................................................................... 74

SUBMITTED QUESTIONS

Submitted questions ................................................................................................ 97

(1)

HEARING TO REVIEW THE STATE OF THE 

CROP INSURANCE INDUSTRY 

THURSDAY, JULY 22, 2010

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND

RISK MANAGEMENT, COMMITTEE ON AGRICULTURE, Washington, D.C. 

The Subcommittee met, pursuant to call, at 9:30 a.m., in Room 

1300, Longworth House Office Building, Hon. Leonard L. Boswell 

[Chairman of the Subcommittee] presiding. 

Members present: Representatives Boswell, Walz, Schrader, 

Herseth Sandlin, Kissell, Pomeroy, Peterson (ex officio), Costa, 

Moran, Graves, Conaway, and Lucas (ex officio). 

Staff present: Aleta Botts, Liz Friedlander, Craig Jagger, John 

Konya, Clark Ogilvie, James Ryder, April Slayton, Rebekah Solem, 

Tamara Hinton, Kevin Kramp, Nicole Scott, Pelham Straughn, 

Pete Thomson, Jamie Mitchell, and Sangina Wright. 

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A 

REPRESENTATIVE IN CONGRESS FROM IOWA 

The CHAIRMAN. I would like to call the meeting to order. 

Welcome, everybody. I say in the beginning that my friend, 

Ranking Member, Jerry has had a death in the family and may 

show up late. I am not sure just yet. 

I also have my next door neighbor, Mr. Sam Graves, here. A 

state line divides us, I guess, but we have known each other a long 

time. We both like to talk about airplanes. In fact, we have already 

done it this morning, haven’t we Sam? 

Mr. GRAVES. Yes, we have. 

The CHAIRMAN. Anyway we will come to order, and I would like 

to thank you for being here as we review the state of the crop insurance industry. 

I would like to thank the witnesses. Of course, when we have 

somebody from the home state here, we are always kind of pleased 

about that. We all look forward to these opportunities; and I want 

to give a welcome to the two Iowans who will be on the second 

panel, Mr. Rutledge and Mr. Dalton, for making the trip. Being 

from Iowa, the state with over 92,000 farms and over 30 million 

acres in production, we understand the challenges that farmers in 

that agriculture business face. 

You probably heard this too many times, but it has been quite 

an impact on me, so I will keep telling it. When I returned to Iowa 

after spending a period of time in the Army—I was drafted and 

2

thought I’d be gone a couple of years. I was gone a little over 20 

years—I came back to do something I wanted to do very badly and 

that was to farm. My, my, how it had changed, big time. 

I already knew—I always knew that, at least the size of the operation that I was involved in, and all sizes, actually, there are a couple of things you have to have. It is so capital intensive, you have 

to have a good banker you can work with; and, of course, you have 

to have the farmer store to buy and sell your product. You just 

have to have both. 

Then we went through the farm crisis in the late 1970s, early 

1980s. Down in our part of the country we had banks closing, and 

it was tough. It was a tough time, and a lot didn’t survive it. A lot 

of the neighbors I had did not survive. 

I had moved into the Iowa Legislature, and I had—Sam, I had 

five banks in my Senate district that went down. It was like a 

death in the family when that happens in a community. Throughout all that something else emerged, and that was the realization 

that you had to have a third element that had not been pursued 

too much and that was a good insurance program with a good insurance agent to help you manage your risk. So I and many others 

utilized that and didn’t want to go back to what we just went 

through. 

So I share that story because I understand the importance of the 

crop insurance industry, not just in our state but across the country. Last year alone, 265 million acres were enrolled in crop insurance. Sign-up and buy-up levels for crop insurance levels are at an 

all-time high, understandably so, proving that farmers appreciate 

having additional options to help them manage risk. However, certain regions and certain crops are under-represented. So, trying to 

look ahead, we need to see how we can make this program work 

for more producers. 

Initially, I have to say cutting funding for the program makes 

the task a lot more difficult. Budgets are tight, but tight budgets 

do not mean we must jeopardize the risk management tools that 

we have today, or put in question what improvements we can make 

in the future. 

We have been very concerned at the level of cuts proposed by 

RMA through the standard renegotiation agreement, the SRA process. While I believe the national deficit is one of the most pressing 

issues facing our nation, we must not pull the rug out from under 

our farmers and ranchers to address the issue. 

Over $5 billion taken out of the crop insurance program in the 

2008 Farm Bill and now an additional $6 billion removed through 

this SRA, I ask is there enough left to ensure farmers have access 

to affordable coverage, while trying to expand the program for 

crops for which it currently is not a viable option. 

We must also acknowledge that the crop insurance industry is a 

business, and both the companies and agents need to make a profit 

in order to stay in the market and to stay in business. We can’t 

begrudge them that. However, it is also the Committee’s job to 

guarantee that every cent of taxpayer money spent in the program 

is spent wisely, and truly goes to provide a safety net for our producers. 

3

We are making strides to help the American farmer, and I look 

forward to hearing more about the crop insurance program from 

our witnesses today. So I thank you again. Your testimony will be 

an essential means to us for the Committee to move toward the 

2012 Farm Bill. 

[The prepared statement of Mr. Boswell follows:]

PREPARED STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE IN

CONGRESS FROM IOWA

I would like to thank everyone for joining us here today as we review the state 

of the crop insurance industry. I would especially like to thank our witnesses. A 

very warm welcome to the two Iowans on the panel, Mr. Rutledge and Mr. Dalton, 

for making the trip to D.C. This Committee looks forward to hearing your valuable 

insight. 

Being from Iowa—a state with over 92,000 farms and over 30 million acres in production—I understand the challenges that farmers and those in the agriculture 

business face today. 

When I retired from the Army and returned home to Iowa and to farm, I quickly 

realized that farming had greatly changed during the 20 years I was away. Back 

then, I had always said that in order to farm, producers needed to have access to 

a bank and a place to sell their product. After surviving the farm crisis in the 

1980’s, I also realized the importance of a good crop insurance agent to help me to 

manage my risk. I worked with an agent in my area to ensure that I was never 

put in the position that I was in during the 1980’s farm crisis again. 

I shared that story because I understand the importance of the crop insurance industry not only in my State of Iowa but across the country. Last year alone 265 

million acres were enrolled in crop insurance. 

Sign-up and buy-up levels for crop insurance products are at an all-time high, 

proving that farmers appreciate having additional options to help them manage 

risk. However, certain regions and certain crops are under-represented. Looking 

ahead, we need to see how we can make this program work for more producers. Additionally, I have to say that cutting funding of the program makes that task much 

more difficult. Budgets are tight, but tight budgets do not mean we must jeopardize 

the risk management tools that we have today or put in question what improvements we can make in the future. 

I have been very concerned with the level of cuts proposed by the RMA through 

the Standard Renegotiation Agreement (SRA) process. While I believe the national 

deficit is one of the most pressing issues facing our nation, we must not pull the 

rug out from under our farmers and ranchers to address that issue. 

With over $5 billion taken out of the crop insurance program in the 2008 Farm 

Bill and now an additional $6 billion removed through the SRA, I ask—is there 

enough left to ensure farmers have access to affordable coverage while trying to expand the program to crops for which it is currently not a viable option? 

We also must acknowledge that the crop insurance industry is a business, and 

both the companies and agents need to make a profit in order to stay in the market. 

We can’t begrudge them that; however, it is also this Committee’s job to guarantee 

that every cent of taxpayer money which is spent in the program is spent wisely 

and truly goes to provide a safety net for our producers. 

We are making great strides to help the American farmer and I look forward to 

hearing more about the crop insurance program from our witnesses today. Thank 

you again, your testimony will be an essential means for us as we continue to move 

towards the 2012 Farm Bill. 

I would now like to turn to my good friend, Sam Graves, for any opening statements he would like to make.

The CHAIRMAN. I would like to turn to my friend and neighbor, 

Sam Graves, for any opening statements he would like to make. 

OPENING STATEMENT OF HON. SAM GRAVES, A 

REPRESENTATIVE IN CONGRESS FROM MISSOURI 

Mr. GRAVES. Thank you, Mr. Chairman. I want to thank you for 

calling this hearing to review the state of the crop insurance industry. 

4

Despite the creation of new commodities support and disaster assistance programs in the 2008 Farm Bill, agriculture producers in 

my district and in many other Congressional districts continue to 

rely on traditional farm programs and crop insurance to meet their 

risk management needs. 

Agriculture producers need options to take into account the various and unique characteristics of their individual operations. The 

crop insurance industry has often been a source of innovation in 

developing products to meet these needs. Unfortunately, the recently enacted SRA reduces the farm safety net by some $6 billion. 

I think many on this Committee would agree that the run-up in 

A&O in 2008 was a problem that needed to be addressed, but there 

were other strategies available that would not have so deeply impacted the farm safety net baseline. 

Mr. Chairman, I think you summed things up pretty well; and, 

with that, I, too, am looking forward to hearing the testimony 

today and look forward to hearing what the witnesses have to say. 

The CHAIRMAN. Well, thank you very much. 

I see we have been joined by Mr. Lucas from Oklahoma, the 

Ranking Member of the full Committee, and would recognize Frank 

for any statements you might want to make. 

OPENING STATEMENT OF HON. FRANK D. LUCAS, A 

REPRESENTATIVE IN CONGRESS FROM OKLAHOMA 

Mr. LUCAS. Thank you, Mr. Chairman. I appreciate that. And I 

want to thank Administrator Murphy and all the panelists for 

being here today. 

I do wonder why we are having a hearing a week after companies basically have had a take-it-or-leave-it scenario thrust before 

them. The airing of some of these concerns would have been much 

more productive if they were not happening after the fact. 

As the Department likes to point out, all 16 companies did sign 

the new SRA, but the signing of the agreement should not imply 

that the companies agree with the terms. If a company did not sign 

the document, the company would simply cease to exist, and thousands of people would be out of jobs. 

A number of troubling items have arisen out of this Standard Renegotiation Agreement, and I think this Committee needs to take 

a serious look at the precedent that this renegotiation has set, and 

whether Congress needs to set stronger parameters of what 

changes can be made in future agreements. 

As the Administrator will tell us, Congress gave the Department 

discretion to renegotiate this agreement, but I am not sure that 

these wholesale changes were envisioned when that discretion was 

given in the 2008 Farm Bill. As one of our witnesses points out 

today, this power of the purse is and should be reserved to Congress. This duty was usurped by the Department in this case. 

In the field hearing the Chairman held this spring, the importance of the crop insurance program to producers was reiterated 

time and time again. I worry that these huge cuts might imperil 

the delivery system that our producers depend upon. 

In the 2008 Farm Bill, Congress made cuts to the program totaling around $6 billion. I don’t think anyone involved in those negotiations thought that less than 2 years later the Department would 

5

again cut such a massive sum of money out of a program our producers depend on with such intensity. 

I also worry that the Department, in response to a letter from 

one of our producer groups, said, ‘‘USDA remains open and willing 

to engage with the relevant Congressional committees to achieve 

crop insurance reform in a way that addresses the baseline concerns.’’ Simply put, the Department failed in that regard as a vast 

majority, if not all, of the cuts in the program have vanished from 

the baseline. Yes, they are gone from the baseline. 

In addition, I worry about some of the last-minute provisions to 

the agreement, including the hard cap on agent commissions, limiting the ability of companies to sue, and a change in the A&O formula that generally affects my great State of Oklahoma. 

I do, though, commend Administrator Murphy, though, as he has 

consistently been up front and engaging in this process. I appreciate the open lines of communication that he and his office have 

shown to the Members of this Committee. I believe you were given 

an almost impossible job, sir, and you performed it admirably, considering everything. 

With that, Mr. Chairman, I yield back. 

The CHAIRMAN. Thank you, Mr. Lucas; and I appreciate what 

you just said. 

Mr. Moran and I work very close together on trying to set these 

timetables, and your point is well taken about the timing. However, both Jerry and myself and probably you, since I know you 

pretty well, have been in contact with Mr. Murphy, so your point 

is well taken. I do remind us all that we do have some say in this 

before it is all said and done, so that is what we are trying to go 

through as we have this hearing today. 

With that, I would ask that the rest of the Members present 

would follow standard procedure and request that they submit 

their opening statements for the record so we can begin the testimony and have ample time for questions. 

[The prepared statements of Mr. Peterson and Mr. Moran follow:]

PREPARED STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN

CONGRESS FROM MINNESOTA

Thank you, Chairman Boswell, for holding this hearing today to take a look at 

where things stand in terms of the crop insurance industry. 

This hearing is particularly timely as the U.S. Department of Agriculture has just 

finished the process of renegotiating the Standard Reinsurance Agreement (SRA) 

with the companies that provide crop insurance coverage to farmers and ranchers. 

Many people have a lot of opinions about how that process was carried out and what 

the outcome will be for farmers. 

As a result of the SRA renegotiation, $4 billion will go to reducing the Federal 

deficit and $2 billion will go into improving risk management and conservation programs. As everyone knows, I am a strong supporter of reducing the Federal budget 

deficit because we are simply on an unsustainable path right now. And I want it 

to be noted that agriculture was first in line to contribute savings to the deficit, and 

the contribution of $4 billion was significant. If every other part of government followed this example and found a proportionate amount of savings in their programs, 

we could make some serious headway against the debt crisis we are facing in this 

country. 

In the 2008 Farm Bill, we asked USDA to renegotiate the SRA, and that’s what 

they have done. Many of us did not expect that as a result of those negotiations, 

there would be $6 billion in savings. I understand that there are concerns about 

how such a large change in the SRA could impact the delivery of crop insurance 

to farmers. We have some time between now and when we write the 2012 Farm 

6

Bill, and if we see that the SRA is having an adverse effect on farmers, we could 

make some modifications at that time to address any problems that come up. 

Again, thank you Chairman Boswell for holding this timely hearing today, and 

I look forward to the testimony. 

PREPARED STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS

FROM KANSAS

Thank you, Mr. Chairman, for holding this hearing. Given the recent events in 

the crop insurance industry, chiefly the signing of the 2011 Standard Reinsurance 

Agreement (SRA), it is important that we hold this hearing. While I am disappointed that we did not hold this hearing before the SRA was completed, which 

would have enabled Members of the Committee to publicly put their concerns and 

objections on record before RMA arrived at the final agreement terms, I am glad 

we have that opportunity now. Congress must exercise its oversight authority and 

doing so now will give us an idea about what parts of the SRA we must closely monitor as it is implemented. 

Compared to the first draft of the SRA released by the Risk Management Agency 

(RMA) in December of 2009, I believe the final draft is much improved. However, 

I do not want this to be misconstrued as me giving the 2011 SRA my stamp of approval. In fact, I continue to have significant concerns about the substance of the 

agreement. I am worried not only how it could adversely impact service to the agricultural producer, but also how it will affect the vitality of the existing crop insurance industry. 

While I plan to discuss my concerns further during the question period, I would 

like to highlight some initial issues. First, despite promises from Secretary of Agriculture Tom Vilsack that he would work with the Committee to protect the budget 

baseline for the next Farm Bill, it appears there was no real attempt made by the 

Department to fulfill this promise. While the Department reduced its program cuts 

from $8.4 billion to $6 billion, it appears none of that funding will remain available 

to the Committee to assist it in writing the 2012 Farm Bill. Furthermore, the Department has set a dangerous precedent of taking funds from a commodity program 

to support two mandatory conservation programs in the Conservation Reserve Program (CRP) and the Conservation Stewardship Program (CSP). When the last farm 

bill was written, the Congressional Budget Office (CBO) made assumptions about 

the cost of these programs, and in regard to CRP, assumed the program would be 

operated at near capacity for the life of the farm bill. This included the reenrollment 

of new and expiring CRP acres. It is perplexing why the Department now thinks 

it necessary to find additional offsets to run the program as Congress intended. If 

this example is followed, every time a CRP general signup is held, the Department 

is going to look for another way to reduce the producer safety net. Let me be clear, 

this is not what Congress intended. 

Second, while Congress directed RMA to examine different methods of calculating 

the Administrative and Operating (A&O) subsidy, it did not direct RMA to restrict 

agent commissions. Agent commissions are an internal business decision of private 

companies. Often these agreements are made with independent agent contractors. 

RMA’s decision to interfere with agent commissions is an unnecessary and unauthorized intrusion of government into a private business model. While crop insurance is a construct of the Federal Government, it was purposefully setup to operate 

through the use of a private delivery system. I worry that restrictions on agent commissions will eventually lead to a decrease in service to farmers and ranchers. 

Third, I have significant concerns that subparagraph III(a)(2)(K) of the 2011 SRA 

is an unauthorized restriction of the legal rights of not only companies who are participants in the SRA, but also agents who are not party to the agreement. I suspect 

that most courts would find such a provision to constitute a contract of adhesion 

and the provisions stricken upon legal challenge. It is troublesome that an Administration that advertises its commitment to transparency and equity would unilaterally try to cut off the legal rights of insurance companies and agents. It is especially 

troublesome that this provision was added at the last minute with little open debate 

or negotiation. The addition of such a provision begs the question: ‘‘What is the Department trying to hide?’’

Finally, I am concerned about the overall shifting of risk in this SRA from the 

private insurance and reinsurance industry to the government and ultimately the 

taxpayer. If RMA is concerned that profits in the crop insurance industry were getting excessive, why not move the program toward a more market oriented model. 

For example, rather than the government taking a greater share of the more profitable policies from the companies through realignment of the commercial funds, why 

7

not simply transfer a greater share of the riskier policies to the companies, while 

allowing the companies to retain the more profitable polices. This would enable the 

companies greater upside potential, while also allowing the companies, through reinsurance, to spread risk across the industry. 

I hope these topics will be addressed by RMA in its testimony and I look forward 

to further discussion throughout the hearing today.

The CHAIRMAN. I would like to welcome the first panel which, of 

course, is, as you see, Mr. Murphy, Administrator, Risk Management Agency, U.S. Department of Agriculture. 

Mr. Murphy, welcome and please begin. 

STATEMENT OF WILLIAM J. ‘‘BILL’’ MURPHY, ADMINISTRATOR, 

RISK MANAGEMENT AGENCY, U.S. DEPARTMENT OF

AGRICULTURE, WASHINGTON, D.C. 

Mr. MURPHY. Chairman Boswell, Congressman Graves, Members 

of the Subcommittee, as Administrator of the Risk Management 

Agency I am pleased to meet with you today to discuss progress, 

challenges, and successes of the Federal Crop Insurance Program, 

and in particular the recently negotiated Standard Reinsurance 

Agreement. 

Secretary Vilsack asked me to administer the Federal Crop Insurance Program in a manner that provides effective risk management services necessary for American farmers and ranchers, and 

one that offers such services to producers in all geographical areas, 

regardless of the size of their operation. 

Further, the Secretary and I are aware that in today’s economy 

it is important that the program be cost effective and give a fair 

value for the taxpayers’ dollar. 

The crop insurance program has grown in coverage and in value 

to producers over the last decade. In 1999, just 73 percent of insured acres for the ten major commodities had buy-up coverage. 

Today, that has risen to 92 percent. Not only are coverage levels 

increasing, but the type of coverage farmers are purchasing is shifting to the more complex, comprehensive revenue coverages. 

Many banks now require crop insurance coverage before making 

operating loans. Federal crop insurance has become an indispensable fact in the life of the American farmers. 

Negotiations for the 2011 SRA began in 2009, and were completed on July 13th, 2010, when the USDA announced that all 16 

of the approved crop insurance companies had signed the new SRA. 

During the negotiation, RMA held many meetings with the companies to hear their concerns, their suggestions and to exchange 

ideas. Elements of many of the provisions in the final agreement 

were based on recommendations from the companies toward these 

negotiations. 

RMA and the companies negotiated in good faith and with respectful dialogue. The resulting agreement provides a reasonable 

rate of return to the companies for delivering the program, and will 

achieve $6 billion in savings over the next 10 years. 

The new SRA will have no adverse impact on farmers’ premium 

costs. In fact, certain farmers are likely to see a reduced insurance 

cost with the performance-based discount program resulting from 

the savings generated by this agreement. 

The new SRA allows Administrative and Operating expense subsidies to fluctuate within a range, but removes the potential for the 

8

type of excess windfalls experienced during the 2007 to 2009 price 

bubble. 

The new SRA also for the first time provides the companies and 

their agents with financial protection from declines in the A&O 

subsidy should crop prices fall sharply. 

RMA also took steps in the new agreement to limit compensation 

to crop insurance agents. Companies have been unable to contain 

a disturbing escalation in agent commissions. In 2009, companies 

reported to RMA that the average agent commission in the Corn 

Belt States—Iowa, Illinois, Indiana, Minnesota, and Nebraska—

was 18.6 percent, a premium, whereas the A&O subsidy paid to the 

companies was only 17.1 percent. 

Companies have been increasingly relying on expected underwriting gains which may or may not be realized to pay generous 

compensation arrangement to agents, while trying to meet their 

other program delivery costs. RMA is particularly sensitive to this 

issue because of the failure of American Growers due to similar circumstances in 2002, which cost taxpayers millions of dollars, disrupted program delivery, and still today is requiring government 

resources to close out this book of business. 

To help ensure that does not reoccur, the new agreement limits 

company expenditures on base agent commissions to 80 percent of 

the A&O subsidy at the state level. This is the so-called ‘‘soft cap.’’

In addition, if companies are in an underwriting profit, they may 

share this profit with agents, but total compensation will be limited 

to 100 percent of the annual subsidy at the state level. This is 

known as the ‘‘hard cap.’’

RMA believes that the amount companies can pay for their 

agents under the new SRA is reasonable and adequate to maintain 

producer servicing levels we see today. I, along with members of 

the Federal Crop Insurance Corporation Board of Directors, all the 

RMA staff across the country, recognize that the program is dependant on a reliable delivery system. The approved insurance 

companies who deliver this program with their network of agents 

and RMA rely heavily on each other to operate the program efficiently and effectively to meet the needs of Americans producers. 

At the same time, we are aware of our responsibility to be good 

stewards of taxpayer money. RMA is pleased to have a new and 

solid SRA in place. 

Again, thank you for the opportunity to participate in this important hearing. I look forward to responding to any questions. 

[The prepared statement of Mr. Murphy follows:]

PREPARED STATEMENT OF WILLIAM J. ‘‘BILL’’ MURPHY, ADMINISTRATOR, RISK

MANAGEMENT AGENCY, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C. 

Chairman Boswell, Ranking Member Moran, and Members of the Subcommittee, 

as Administrator of the Risk Management Agency (RMA), I am pleased to meet with 

you today to discuss the latest developments in RMA, the progress and challenges 

of the Federal Crop Insurance Program, and, in particular, to provide an update on 

the recently negotiated Standard Reinsurance Agreement (SRA) and its benefits to 

the agricultural community and the American taxpayer. My staff and I work daily 

to validate the utility of current insurance products—making certain we have the 

best protection possible for all of America’s farmers and ranchers. We work to ensure outreach to small and limited resource farmers, to promote equity in risk sharing and to guard against fraud, waste and abuse within the program. In our role 

9

as regulators, we must also ensure the continued integrity and actuarial soundness 

of the Federal Crop Insurance Program. 

Secretary Vilsack asked me to administer the Federal Crop Insurance Program 

in a manner that provides effective risk management services necessary for American farmers and ranchers; and that offers such services and opportunities to participate in the program to farmers and ranchers in all geographical areas regardless 

of the size of their operation. The Secretary and I are aware that in today’s economy 

it is important that the program be cost effective and give a fair value for the taxpayers’ dollar. 

The crop insurance program has grown in coverage and in value to producers over 

the last decade. In 1999, just 73 percent of insured acres for the ten staple crops 

had buy up coverage, compared to 92 percent in 2009. Not only are coverage levels 

increasing, but the type of coverage farmers are purchasing is shifting to the more 

comprehensive revenue coverage. Many banks require crop insurance coverage in 

order to make operating loans to crop producers. Federal crop insurance has become 

a fact of life for many farmers—and one in which American farmers would find it 

difficult to continue providing America and the world with an abundant supply of 

food, fiber and fuel without the program. 

This growth has been accomplished in an actuarially sound manner as required 

by Congress, and the program is working well. Over the last 2 decades, premiums 

(producer premiums added to premium subsidies) have been sufficient to cover the 

indemnities paid to producers plus a reasonable reserve, as directed by the Federal 

Crop Insurance Act. 

The 2011 Standard Reinsurance Agreement 

The Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) allowed the renegotiation of the Standard Reinsurance Agreement (SRA), which is the agreement 

between USDA and the approved private insurance companies who deliver the program through a network of insurance agents. Negotiations began late in 2009, and 

on July 13, 2010, USDA announced that all of the approved crop insurance companies had signed the new SRA. At the beginning of the negotiations, Secretary 

Vilsack and I established six objectives for the new SRA that would build on the 

strengths of the program. The objectives were designed to align with RMA’s primary 

mission to help producers manage the significant risks associated with agriculture. 

We maintained our focus on those objectives throughout the process and they have 

served us and America’s farmers well. They are:

(1) Maintain producer access to critical risk management tools;

(2) Align the Administrative and Operating (A&O) subsidy paid to insurance 

companies closer to actual delivery costs;

(3) Provide a reasonable rate of return to insurance companies;

(4) Protect producers from higher costs while equalizing reinsurance performance across states to more effectively reach under-served producers, commodities, and areas;

(5) Simplify provisions to make the SRA more understandable and transparent; 

and

(6) Enhance program integrity.

During the negotiations RMA held many meetings with the companies to hear 

their concerns and suggestions. Elements of several provisions in the final agreement were suggested by the companies during the negotiation. RMA and the companies negotiated in good faith and with respectful dialogue resulting in an agreement 

that provides a reasonable rate of return to the companies for delivering the program, and will achieve $6 billion in savings over the next 10 years. Two-thirds of 

the savings from the new SRA, $4 billion, will go toward paying down the Federal 

deficit. The $4 billion in budget savings USDA achieved is one of the first and most 

significant steps that a Federal agency has achieved in reducing mandatory spending from the long term Federal deficit. The President has laid out an aggressive 

plan for reducing the deficit and we are pleased to take a leadership role in that 

effort. 

The remaining 1⁄3 will support high priority risk management and conservation 

programs. This $2 billion invested in farm programs will be used, in part, to improve and expand several RMA risk management products. In fact, the Pasture, 

Rangeland, and Forage (PRF) program has already been expanded as a result of the 

savings obtained through the SRA. Under the Rainfall Index (RI)-PRF plan of insurance, RMA will expand coverage for the 2011 crop year to specific counties in Colorado, and all counties in the states of California, Florida, Georgia, New York, North 

Dakota, Oklahoma, Pennsylvania, South Carolina, and Texas, bringing the total 

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number of states where the program is available to 16. The Vegetation Index (VI)-

PRF will be expanded to the balance of counties in Idaho, Oregon, and South Dakota, and all counties in the states of Arizona, New Mexico, and Utah for 2011, 

bringing the state total where VI–PRF is available to nine. 

RMA has also received requests for further expansion of PRF in Nevada, Arkansas, Maryland, and Minnesota. RMA will take the expansion request for the 2012 

crop year to the Federal Crop Insurance Corporation Board of Directors later this 

year for their consideration and potential approval. 

As a result of these savings, RMA also plans to provide a performance based discount or refund, which will reduce the cost of crop insurance for certain producers. 

Additionally, USDA has used this opportunity to increase Conservation Reserve Program (CRP) acreage to the maximum authorized level; investing in new and amended Conservation Reserve Enhancement Program initiatives; and investing in CRP 

monitoring. 

The new SRA will have no adverse impact on farmers’ premium costs. In fact, 

some farmers may even see reduced insurance costs with a performance-based discount or refund that result from the savings generated by this agreement. 

SRA Structure 

The 2011 SRA was structured to reflect the realities of today’s agriculture economy. Since government payments to crop insurance companies are tied to crop 

prices and price volatility, the unprecedented spike in commodity prices in recent 

years caused government payments to companies to more than double, from $1.8 billion in 2006 to $3.8 billion in 2009. The new SRA allows A&O payments to fluctuate 

within a range that removes the extremes. This will prevent windfall profits created 

by price spikes, like those we have seen in recent years, but will also ensure an adequate A&O subsidy is provided to companies. The new agreement provides a maximum A&O amount of $1.3 billion in 2011, and increases it yearly with inflation 

to $1.37 billion in 2015. This is almost 40 percent more than the $935 million the 

crop insurance companies received in A&O payments in 2006 (the last year before 

the price spikes) and 35 percent less than the $2 billion the industry received in 

2008 (the height of the price spikes). Companies will be protected against extremely 

low crop prices by a minimum A&O reimbursement. This provision will ensure that 

the crop insurance companies receive at minimum about $1 billion in A&O payments, or slightly more than what it received in 2006 to deliver the program. This 

added protection will ensure that the companies have enough money to deliver the 

program, even if prices or price volatilities fall sharply. 

Agents’ Compensation 

To ensure the viability and integrity of the crop insurance delivery program, RMA 

took steps in the new agreement to limit compensation to crop insurance agents. 

Even in the face of cuts in A&O imposed by Congress, companies were unable to 

contain the escalation in agent commissions. A recent analysis showed that about 

20 percent of A&O is needed to pay expenses related to loss adjustment, information 

technology, employees, and other operations (excluding agent commissions), yet 

many companies were paying agents far above the entire A&O subsidy amount in 

certain parts of the country. In 2009, average agent commission rates in the Corn 

Belt States (Iowa, Illinois, Indiana, Minnesota and Nebraska) were 18.6 percent of 

premium and the A&O paid to the companies was 17.1 percent. Therefore, these 

companies were relying on underwriting gains (which may or may not be realized) 

to pay for costs other than agent commissions. Companies were also moving A&O 

payments and bidding up agent commissions in the Corn Belt, which generally includes the most profitable states. 

The new SRA includes a cap on agent commissions to ensure that companies have 

sufficient funds to pay the other operating expenses in years in which there may 

not be an underwriting gain. As the regulator for the Federal Crop Insurance Program, RMA saw a clear need to ensure that companies have sufficient funds to pay 

operating expenses (including agent commissions) without resorting to the reliance 

on uncertain underwriting gains. 

History has shown us that this step is necessary. In 2002, the largest crop insurance company in the program, American Growers Insurance Company, failed in 

large part because of high commissions paid to retain and acquire agents. American 

Growers’ expenses exceeded the amount of A&O received so they were forced to rely 

on underwriting gains to remain solvent. Since 2002 was a moderately bad crop 

year, many crop insurance companies did not receive underwriting gains. American 

Growers actually ended the year with a small underwriting gain. However, its failure to receive an underwriting gain large enough to cover its commitments caused 

the company to collapse. This major failure caused widespread confusion and uncerVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
11

tainty in the crop insurance program, and the remnants of this failure still are 

being felt by the program today. 

Eight years later, in 2010, companies are still relying on large underwriting gains 

to operate the program and have been fortunate to have seen an unprecedented run 

of profitable underwriting years. The real possibility of even a modest loss year, 

such as 2002, however, creates a situation where several companies could be at risk 

for failure and thus jeopardize the entire delivery system. 

The new agreement limits companies’ expenditures on base agent commissions to 

80 percent (soft cap) of the A&O subsidy at a state level. Companies may still use 

profit sharing, but total agent compensation will be limited to 100 percent (hard 

cap) of the A&O subsidy at a state level to ensure fair and equitable competition 

among all companies in all states. 

While the second draft proposal included only a ‘‘soft cap’’ on agent commissions 

equal to 80% of the A&O subsidy, the final agreement added a ‘‘hard cap’’ on total 

agent compensation at 100% of A&O subsidy on a state basis. This was done after 

considering concerns expressed by many companies and others that a soft cap alone 

would create equity issues between the states and provide an incentive for some 

companies to only write business in the most profitable states. Companies writing 

in these most profitable states would attract agents by claiming a potential for more 

consistent and higher rates of return and, consequently, greater availability of funding to provide for agent profit sharing. Providing a hard cap on profit sharing will 

limit the potential for companies to engage in such market-disrupting activities. 

Federal crop insurance is a nationwide program and the SRA should ensure that 

the companies and their agents have the incentives to provide service to all producers. 

Even with the hard cap, the expected amount of compensation potentially available to agents will be about $1.3 billion annually, given the expected A&O subsidy 

and average expected underwriting gain amounts provided by the agreement. On 

average, for the 2011 to 2015 life of the SRA, agent commissions will be limited to 

about $1.1 billion annually, while profit sharing will be limited annually to about 

$270 million. On average, the 100 percent cap allows around 1⁄3 of total underwriting gains to be shared with agents, as determined by the companies. 

RMA analysis shows that the cap will primarily affect the Corn Belt states where 

companies generally have been paying average agent commissions above the total 

A&O subsidy. All other states have seen average commissions paid below the total 

A&O subsidy and are not likely to be affected. 

For this year—2010—under the current SRA, agent commissions are already expected to decrease due to lower commodity prices and price volatilities not due to 

the new SRA. For example, Iowa agent commissions are expected to fall from about 

$140 million in 2009 to about $110 million in 2010, under the current SRA. The 

new SRA hard cap will be placed at about $105 million in 2011. Therefore, the provisions of the new SRA will result in an average 5.7 percent decline from 2010 in 

dollar terms in Iowa. 

However, this is 72% greater than the dollars Iowa agents received in 2006, even 

though the number of policies serviced is virtually unchanged. In effect, expected 

2011 agent compensation reflects the equivalent of compounded annual income increases of 12% over this 5 year period, an impressive record that can be matched 

by very few others in the recent, sluggish economy. In an environment where the 

number of Iowa policies is stagnant, therefore, RMA believes compensation to 

agents through the new SRA is more than reasonable for 2011 and, with the builtin inflation adjustment factor, the compensation cap is guaranteed to increase with 

expected inflation. 

Risk Sharing 

The previous agreement’s risk sharing terms were structured in such a way that 

some states in the Corn Belt experienced much greater profitability for companies 

and agents than in other states. Analysis by Milliman, Inc. also indicates that the 

industry as a whole has been making far above a reasonable rate of return. This 

analysis shows that over the last 21 years a reasonable rate of return for the companies averaged 12.7 percent, while the companies actually received an average rate 

of return of 17.0 percent. The new agreement provides an expected return to companies of about 14.5 percent, almost two percentage points above the reasonable rate 

of return. 

The new SRA rebalances the risk sharing terms to better equalize expected returns throughout the different states, including terms that are more profitable for 

states outside the Corn Belt. The new SRA also maintains the Assigned Risk Fund, 

which provides companies with stop loss protection at a state level. 

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The new agreement sets the Net Book Quota Share at 6.5 percent, with 1.5 percentage points of underwriting gain to be distributed to those companies that sell 

and service policyholders in 17 underserved or less-served states (Group 3 states). 

This provides an additional financial incentive for companies to continue doing business in these underserved or less-served states. 

Together, the changes we have made in the new SRA, through negotiations with 

the private companies, will create a more sustainable Federal Crop Insurance Program, and the expansion of key risk management and conservation programs will 

improve the safety net for America’s farmers and ranchers. The new SRA represents 

a fair deal for farmers and the government, the companies, the agents, and the taxpayers. 

Status of the Federal Crop Insurance Program 

The Federal Crop Insurance Program is helping the men and women who produce 

America’s agricultural products to manage risk in an inherently risky business. For 

crop year 2009 with 1.2 million policies on 265 million acres, the program provided 

coverage for $79.6 billion in crop value. Of the $8.9 billion in total premium, USDA 

subsidized $5.4 billion for farmers, and paid out over $5 billion in claims for lost 

or damaged crops. In addition, RMA awarded $8.6 million in Partnership Agreements to assist small and underserved producers across the country. 

Producers generally have a choice of crop or livestock policies, with coverage they 

can tailor to best fit their risk management needs. In many cases, producers can 

buy insurance coverage for a yield loss, or revenue protection to provide coverage 

for a decline in yield or price. Today, most producers ‘‘buy up’’ to higher levels of 

coverage ranging up to 85 percent (smallest deductible), although a low level of catastrophic coverage (CAT) is still available for a nominal fee with the premium fully 

subsidized. Indemnity payments are usually made within 30 days after the producer 

signs the claim form. 

The crop insurance program has seen sustained growth as demonstrated by the 

increasing proportion of acres insured at buy up levels over the last decade (see Attachment 3). In 2009, 92 percent of insured acres for the ten staple crops had buyup coverage, compared to just 73 percent in 1999. Not only are buy up levels increasing, but the type of coverage being purchased is shifting to the more comprehensive revenue coverage (see Attachment 4). In 2009, revenue coverage accounted for 57 percent of the insured acres, compared to just 27 percent in 1999. 

In addition, the average coverage level (percent of the total crop covered) for buy 

up insurance has increased. In 2009, the average coverage level rose to a recordhigh of 73 percent. In 1999, the average was 67 percent. 

Program Integrity 

In conjunction with the improved quality control requirements in the new SRA, 

RMA Compliance has revised its work plans to reflect a more balanced approach 

between quality assurance and investigating program abuses. In a time of declining 

resources and increased responsibilities, effective internal controls provide a significant cost-benefit compared to identifying and prosecuting program abuse alone. 

RMA is currently reviewing company operations and internal controls to determine 

the success of their efforts to address crop insurance program vulnerability concerns. 

RMA continues to make significant progress in preempting fraud, waste and 

abuse through the expanded use of data mining. We have preempted millions of dollars’ worth of projected payments, and RMA continues to use data mining to identify 

anomalous producer, adjuster, and agent program results. With the assistance of the 

Farm Service Agency (FSA) offices, RMA and companies conduct growing season 

spot checks to ensure that claims for losses are legitimate. These spot checks based 

on data mining have resulted in a significant reduction in anomalous claims for 

those situations. 

We are improving the timing and quality of our sanctions requests as well. RMA 

continues to work with USDA’s Office of General Counsel (OGC) to limit the number of cases declined due to insufficient evidence. This improvement is attributable 

to Compliance personnel becoming more proficient at identifying evidence and establishing cases that will pass legal sufficiency requirements. The Administrative Sanctions regulations that were identified by the Government Accountability Office 

(GAO) as requiring publication were published and were effective on January 20, 

2009. Although RMA was using the statutory authority to impose sanctions before 

the regulations were published, RMA agreed with GAO that the publication should 

be prioritized to ensure that program participants and other interested parties were 

given appropriate constructive notice of the rules. 

13

RMA is continually seeking new and more effective ways to work with the other 

regulatory bodies and government agencies as well as insurance companies, agents 

and producers to ensure the integrity of the Federal Crop Insurance Program. RMA 

compliance reviews continue to reveal that there are only a small number of producers who have been involved in fraud or illicit activity. While no level of criminal 

or abusive behavior is acceptable, RMA continues to believe the number of persons 

involved in criminal activity is relatively small. 

While RMA, FSA and the insurance providers have preempted tens of millions of 

dollars of improper payments through quality controls, data mining, and other 

measures, RMA is constantly identifying ways to balance competing needs to make 

our products less susceptible to fraud 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 program waste, fraud and abuse. 

In the recent past, there have been some concerns expressed about unresolved Office of Inspector General (OIG) Audit recommendations. In particular, RMA was 

cited as having 70 OIG audit recommendations pending for a year or more after 

agencies agreed to implement them. However, according to RMA’s records, there are 

only 14 audit recommendations that now meet this criterion. RMA believes that 

both OIG and GAO audits have resulted in program improvements over the years 

and continues to commit significant resources to resolving and implementing audit 

recommendations that can reasonably be expected to achieve greater efficiency or 

effectiveness for the program and the taxpayer. 

Organics 

In January 2010, RMA submitted a report to Congress entitled Organic Crops and 

the Federal Crop Insurance Program, as required by the 2008 Farm Bill. The report 

included information on the numbers and varieties of organic crops insured; the status of the development of new insurance approaches to organic crops and the 

progress of implementing organic initiatives required by the 2008 Farm Bill. The 

2008 Farm Bill also required that RMA contract for research into whether or not 

sufficient data exists upon which RMA could determine a price election for organic 

crops; if such data does exist to pursue further development of a pricing methodology using that data; and that RMA contract for research into underwriting, risk 

and loss experience of organic crops as compared with the same crops produced in 

the same counties during the same crop years using nonorganic methods. Three 

studies that resulted from this research, Organic Crops: Report on Research of Additional Price Elections; Organic Crops: Final Development of Additional Price Elections and Organic Crops: Revised Written Rating Report are expected to be released 

shortly. 

Review of Rating Methodology 

RMA contracted with Sumaria Systems Inc. for a thorough actuarial review of the 

methodology and procedures used to determine the Actual Production History (yield) 

target rates and the rating process for the new Common Crop Insurance Policy 

Basic Provisions (often referred to as COMBO policy) under the Federal Crop Insurance Program. The draft report was received in November 2009 and was made 

available for public comment. A final version of the review is now available at http:/

/www.rma.usda.gov/pubs/2009/comprehensivereview.pdf on the RMA website. 

The review found that RMA’s general premium rating methodology (based on historical losses) is appropriate and should continue to be used. However, the study 

identified several areas for potential improvement, the most significant of which is 

to determine if all historical losses should be given the same weight in determining 

premium rates. In addition, key aspects of today’s crop insurance program along 

with crop production technology would also be considered and evaluated for potential effects on past experience. This would provide a basis for evaluating the degree 

to which past catastrophic events may affect the historical loss data used in establishing current premium rates, and as appropriate, allow for adjustments to those 

rates. This could potentially result in lower premium rates in several parts of the 

country, especially the Corn Belt. RMA is currently in the process of soliciting bids 

for this review of its historical loss data so that work can commence later this year. 

In the near term, premium rates for the most popular revenue products, Crop Revenue Coverage (CRC) and Revenue Assurance (RA), are expected to be generally 

lower for the 2010 crop year as a result of decreasing price volatilities. 

New Common Crop Insurance Policy (COMBO Policy) 

The new Common Crop Insurance Policy, frequently referred to as the COMBO 

policy, is an initiative by RMA to combine and simplify the crop insurance program. 

RMA has combined CRC, RA, Income Protection (IP), and Indexed Income Protection (IIP) into a single uniform policy. RMA kept and combined the principle feaVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
14

tures of the five plans that producers bought most often and developed a single rating and pricing component so all insurance coverage is consistent in insurance protection and cost to producers. The new Basic Provisions are effective for the 2011 

crop year for crops with a contract change date of April 30, 2010 or later (effective 

for most 2011 crops) and for the 2012 crop year for crops with a 2011 crop year contract change date prior to April 30, 2010. 

Comprehensive Information Management System 

The Comprehensive Information Management System, referred to as CIMS, is designed to provide approved users timely access to 2006 thru 2010 RMA and Farm 

Service Agency (FSA) producer information and data. The system has improved operations between RMA and FSA and has the potential to continue improving information transfer. At this time, FSA employees have access to CIMS, which has led 

to a 56% reduction in entity differences for producers participating in the programs 

of the two agencies, including support for the SURE program. Crop insurance companies have made over 18 million CIMS inquiries or requests for information, reducing resources and costs to obtain electronically data similar to the hard copy information that normally resides at the FSA County office. Companies are also incorporating the use of Common Land Unit reporting into their systems to enhance reconciliation efforts for acreage reporting and other applications for administering programs for prevented planting and cause of loss verification. RMA also is actively 

participating in the USDA Acreage/Crop Reporting Streamlining initiative to establish common USDA producer commodity reporting standards to facilitate greater 

use of CIMS and Agency sharing and reconciliation of data, along with potential incorporation of data obtained through the use of precision-ag technology. 

Information Technology Modernization 

RMA’s Information Technology Modernization (ITM) program is a multi-year, 

phased-implementation reengineering initiative to support COMBO and new insurance programs and products, increase actuarial capabilities, and provide efficient 

policy and financial processing for producers and insurance companies. The first 

phase, successfully operational in April 2010, focused on actuarial processes, policy 

processing, premium calculations, and other functions needed to administer various 

2011 crop year insurance offers, and implement the new COMBO policy. The next 

phases of the ITM program, corporate business reporting and financial accounting, 

are in development with final completion scheduled for the end of 2011. 

I, along with members of the Federal Crop Insurance Corporation Board of Directors, all the RMA staff across the country, recognize that the program is dependent 

on a reliable delivery system. The approved insurance companies, who deliver this 

program with their network of agents, and RMA, are mutually dependent on each 

other to operate the program efficiently and effectively to meet the needs of producers. We are very aware of our responsibility to be good stewards of taxpayer 

money. By creating a new standard reinsurance agreement that maintains excellent 

service to farmers and ranchers, provides incentives for companies to operate in underserved and less served areas, provides a reasonable return for the companies and 

removes windfall government payments that were an unintended consequence of the 

past SRA structure, RMA is pleased to have met the goals set at the beginning of 

this negotiation. Again, thank you for the opportunity to participate in this important hearing. I look forward to responding to your questions.

15

ATTACHMENTS

Attachment 1

AIP Revenue from FCIC


11158001
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Attachment 2

2009 Total Liability All Crops

Attachment 3

2009 Proportion of Planted Acres Insured 

Crops Included: Barley. Grain Corn, Grain Sorghum, Peanuts, Pima Cotton, Potatoes, Rice, Soybeans, Tobacco, Upland Cotton and Wheat

NASS as of: 03/17/2010. 

Produced: 10JUN10:03: 10:50 p.m.


11158002 11158003
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Attachment 4

Proportion of Insured Acres with Buy Up Coverage in the Federal Crop Insurance Program

Attachment 5

Acres by Plan Category


11158004 11158005
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Attachment 6

FCIC Program Growth for Specialty Crops

Attachment 7

2008 Comparison of A&O to Agent Commissions by State Group

Attachment 8

2008 Comparison of A&O to Agent Commissions by State Group 

2008 Group 1 Group 2 Group 3

A&O 20.2% 20.6% 20.8%

Avg. Comm. Rates 19.3% 15.7% 14.1%

Comm. % of A&O 95.5% 76.2% 67.8%

Residual to cover costs 0.9% 4.9% 6.7%


11158006 11158007
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Attachment 9

2009 Comparison of A&O to Agent Commissions by State Group

Attachment 10

2009 Group 1 Group 2 Group 3

A&O 17.1% 18.6% 18.6%

Avg. Comm. Rates 18.6% 15.2% 13.2%

Comm. % of A&O 108.8% 81.7% 71.0%

Residual to cover costs ¥1.5% 3.4% 5.4%


11158008
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Attachment 11

Iowa

Attachment 12

Iowa Agent Compensation Analysis 

Year No. of 

policies 

Premium 

($) 

A&O

(% of

premium) 

A&O and 

CAT LAE 

($) 

Agent 

Comp.

(% of

premium) 

Agent

Compensation ($) 

2004 130,286 354,511,745 21.5% 76,087,416 17.9% 63,457,602

2005 127,423 310,529,453 20.8% 64,719,502 17.2% 53,411,066

2006 125,543 366,833,451 20.0% 73,507,061 16.7% 61,261,186

2007 121,633 600,208,831 20.1% 120,463,261 20.9% 125,443,646

2008 123,948 914,548,177 20.3% 185,687,109 19.6% 179,251,443

2009 127,402 743,726,271 17.2% 127,663,700 18.9% 140,564,265

2010 (est.) 127,402 622,151,163 17.2% 107,010,000 17.8% 110,742,907

2011 (est. for new SRA) 105,122,000 105,122,000


11158009
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The CHAIRMAN. Well, thank you very much. 

I am going to ask you a couple of questions. We have several 

here, so I will be short, and we may have a second or third round. 

I am aware of a letter that was sent to the Congress Members 

regarding the SRA. Secretary Vilsack, he argues that the commission caps are needed to protect crop insurance companies, and to 

ensure they remain solvent. So if that is a concern of the RMA, 

why would the not consider other protective measures for the companies? For example, include reserve requirements or solvency status of the companies? And I am curious why were agent caps not 

in the first or second draft of the SRA, if this was needed? 

Mr. MURPHY. Okay. Yes, I understand the concerns with the 

caps. Like I said in my opening statement, we basically have two. 

There are other ways, and we certainly have employed new methods to ensure that the companies have financial standards since 

the failure of American Growers. But, still, whenever you are working with information supplied for taxes, or supplied to current insurance requirements at the state level, you are looking in the 

past. That does not prevent something from occurring in the current year, and that was our greatest concern. 

The soft cap basically was developed—and that is 80 percent—

the total compensation a company can pay is 80 percent of the projected A&O. That is all they can guarantee up front. We are seeing 

a disturbing trend in the increasing amount, and the only way the 

companies will be able to make this is relying on underwriting 

gains. 

This is exactly what happened to American Growers. In fact, in 

2002, American Growers was the only AIP that had a profit. Yet 

they were the only company that went out of business. The reason 

that that happened is that they over-committed on agent commissions. We thought this was probably the only way we can ensure 

that this will not occur in the future. 

We have new companies coming on, there is going to be significant competition, and I just think the reliance on using agent commissions as a way to get market share is very problematic for the 

stability of those companies. I think it was very important to do the 

soft caps. 

When we get into the hard cap, another issue that came up is 

that we have reduced the A&O significantly in this program. There 

was a lot of concern over equity in the program, equity from a company standpoint. We all imagine that in the future, under this new 

SRA, the most profitable states will be the Midwest. And so there 

was concern that the companies would get in, feel the need to move 

up into those areas, expand their businesses, maybe leave areas 

with less profit in order to guarantee an ever-increasing profit 

share with the companies. In order to avoid that from happening, 

we put the hard cap in. 

I think there is also a question of equity to the agents. We are 

finding that agent commissions in Iowa are three times agent commissions in Texas. 

The CHAIRMAN. Explain that. 

Mr. MURPHY. Agent commissions—this is a study from the GAO. 

If you take a look at the GAO report, they went out and took a look 

22

at agent commissions, and they found that there is a significant 

difference. 

I have had agents come up and talk to me within the last year 

from Iowa who said they have been offered commission schedules 

of 30 percent. And I know of agents in Texas whose commission 

schedules are ten percent. Yet, it requires the same amount of 

work. I think there is an equity issue here, also, for the program. 

Allowing these unabated agent commissions to continue also 

causes marketing problems. We have had a real problem over the 

last couple of years with rebating. This rebating has been occurring 

in Iowa and the other ‘‘I’’ States. I received many calls from insurance commissioners in those areas last year who were very concerned about the rebating; and they said, ‘‘I realize it is a Federal 

program, but if these agents think they can rebate on crop insurance they will start doing this in other lines of insurance, and we 

will have a real problem here.’’ There was much concern about 

that. 

Another big concern is entry of companies into the program. Having these high insurance commissions out there is a barrier for a 

company coming in and starting in the program, because they 

would have to immediately try to compete with these rates. 

In my talking with your staffs, with the companies themselves, 

with the commodity groups, one of the big issues is competition in 

the program. The feeling is we still have to have strong competition 

with a number of companies. I thought this also was a way to help 

address that. 

The CHAIRMAN. I appreciate that. We will come back to it, I 

think. 

You know, Mr. Murphy, I want to ask when this panel is finished, if you have time, if you could stay and listen at least to the 

next panel. I am not going to call you back to the table without 

having given you forewarning, but I still have some concerns. 

I have met a lot of agents out there, too, and I haven’t heard that 

yet, so maybe you will need to share with me this 30 percent figure. I have heard some high figures, but I haven’t heard that. And 

we have talked about this, so I will stop. It just seems like we are 

trying to tell them how to conduct business to the point it is just 

stepping too far. So we will explore that some more, as we go along, 

but at this point I want to yield to my Ranking Member, my friend, 

Sam. 

Mr. GRAVES. Thank you, Mr. Chairman. 

Mr. Murphy, as far as the Corn Belt or the big states, what is 

the percentage of farmers that are participating in crop insurance, 

corn growers. 

Mr. MURPHY. Some of the highest participation, in my testimony 

I have a map in the back that lays out by state participation, but 

the ‘‘I’’ States certainly have some of the highest participation, 85, 

90 percent. 

Mr. GRAVES. Is it that high. 

Mr. MURPHY. Oh, yes. 

Mr. GRAVES. Last month, the corn growers testified. They, obviously, emphasized the importance of crop insurance as a risk management tool. But they were arguing the loss ratio experience 

across crops and regions, that it should converge over time. And we 

23

have a pretty big gap right now in loss ratio for corn as compared 

to other programs. And I know there has been a study that endorsed the current rating systems, but I would like you to address 

that for just a little bit. 

Because it seems to me like we are going have to see some fundamental changes in that. When farmers are out there deciding if 

they are going to do it or not, that has to be a factor. 

Mr. MURPHY. I have talked to growers from the ‘‘I’’ States that 

have—both corn and soybean growers—have raised this concern 

about the rate. Especially if you look at the history over the last 

10 years, there have been incredible yields, new technology in seed, 

just a number of things. And when they look at the premium they 

are paying, which is substantial, even with the subsidies, they have 

a growing concern whether the program is working for them. 

But, it is dangerous only to look at the last 10 years. If we were 

having this conversation at the end of the 1980s, it would be totally 

different. The question would be, what is happening to corn production in this country? It is on the decline yield-wise. So in order to 

do insurance you cannot just look at the last 10 years. You have 

to look long term. 

Our experience in Iowa, Indiana, Illinois, is that you really have 

high severity of loss, but it doesn’t occur that often, which is low 

frequency. When you look at other states, perhaps Texas, they have 

high frequency of loss, but they have low severity when they have 

them. And these play into the whole rating method. Because if you 

look at Iowa you have to look over long term, and you will find 

from the mid-1970s that those rates are accurate, and that is what 

the study found. 

Also, for Texas, if you look at it, they have frequent losses but 

low severity over time. Their loss ratios come up to the mandated 

$1 loss ratio that we are working on. 

And so you have those sort of things that are playing into it. 

We did have a study. We were very happy with the group that 

came in and did this. It involved some of the best ag economists 

in the country. We had an excellent actuary take a look at those. 

And, basically, they came back and said our rating method is sound 

and you can’t look at just 10 years, you have to look long term. 

So, I think, over all, they did identify some things we need to 

take a look at. For instance, the losses, the two losses in the 1980s 

and 1993, is that expected to repeat over time and how should we 

treat that in a rating? We have a study about to be started on that 

very issue. 

I think we can take a look and expect some changes as a result 

of the rating. But we have to be careful and be sound as we look 

at regs, especially in the ‘‘I’’ States which contribute so much to the 

program. 

Mr. GRAVES. As far as participation goes—this is just for my information—in your heavily irrigated areas, what is the participation, just roughly. 

Mr. MURPHY. I am very familiar with California. Prior to coming 

into D.C. In 2005, I was the regional director for the Davis region, 

which was located in California. 

Producers out there tend to take lower levels of coverage as a 

rule. They invest in their risk management through a number of 

24

other things such as irrigation. Many of them participate with private weather companies so they can invest in that. My experience 

has been what they will normally do is keep low levels of coverage. 

If they have a loss, they will start buying up higher levels until 

their financial stability returns. Then they will drop. 

I think that is also an issue with the rice growers in the South. 

What we have seen is that there has been heavy investment. They 

have the water systems and the way to get the water to the rice, 

and to them that is the major concern. 

I think that does impact the level of coverage farmers buy, but 

I think that is to be expected. There are different ways to address 

risk. We encourage that a farmer look at all different ways. 

Mr. GRAVES. Thanks, Mr. Chairman. 

The CHAIRMAN. Well, thank you, Mr. Graves. 

I now recognize the gentleman from Minnesota, Mr. Walz. 

Mr. WALZ. Well, thank you, Mr. Chairman. 

And, Mr. Murphy, thank you for the work you do. Thank you for 

being concerned about the safety net for our producers as well as 

you are in a very tough position watching out for taxpayer dollars. 

So I appreciate you tackling this. It is a very difficult one. I think 

all of us up here see it, too, from the need to make sure that those 

products are out there protecting them, and also watching out for 

those agents who are working hard and doing what they need to 

do. 

I have just a couple of questions here. The one I wanted to get 

at, just slightly different here, on the current policy on the APHs 

and the transfer to new lands, an area of deep concern for me is 

new and beginning farmers and ranchers. And I am wondering if 

you could explain how the current policy of transfer impacts them. 

A secondary one—and maybe my colleague from South Dakota 

will talk about this. She has been a champion and a leader for 

many years on both these and sod buster in new land. So if you 

could address that on APHs. 

Mr. MURPHY. Sure, Congressman. 

There have been concerns raised from both the aspect of a new 

farmer coming into our program, needing the risk management, 

and issues have developed, also some of the conservation groups 

have been wondering if crop insurance is somehow an incentive to 

break out new lands. 

Both of these come under what we call added land provisions of 

the program. You know, with the way farming is going with bigger 

farms, this is constantly happening. New farm land is being 

brought into an existing operation, so we have to have rules to address it. 

Now, land that has been farmed within the last 3 years, has different rules than the land that is being broken now, which I think 

makes sense when you give it some thought. If land has been 

farmed in the last 3 years and is coming to an existing operation, 

if it is less than 640 acres, the companies basically handle those 

requirements. Ensuring that it has similar potential as the current 

acreage. The management is shown on the existing acreage. You 

know that certain expectations can come from this, to look at the 

yields from the acreage that came on. And so they do that, and 

they make any adjustments. 

25

Anything over 640 acres has to go to the regional office, and the 

regional office basically works with the company and the farmer to 

come up with anything that needs to be done, as far as rating or 

guarantees or that sort of thing. 

We do not allow additions of greater than 2,000 acres to an existing unit. These are becoming more and more prevalent, as you can 

imagine, today. Where this becomes an issue with a farmer entering the program is that if he doesn’t have any acreage he is basically using the county yield. He is competing with a farmer that 

has an APH, perhaps 6 to 10 years, a very good APH. And with 

that kind of protection, can that existing farmer outbid the beginning farmer? And, definitely, there is a potential for that occurring, 

so I think that is a potential issue. 

Mr. WALZ. What is the solution, in your mind. 

Mr. MURPHY. I would like sometime to discuss that sort of thing 

and maybe even bring in some other people who have been looking 

at these issues. 

Beginning farmers definitely are facing a challenge. You know, 

you get a new guy who has only 3 years of record, and he gets a 

loss. I mean, that is a tremendous impact. 

Mr. WALZ. Well, I would look forward to working with you on 

that one. It is one of the concerns I have, and it is an area we have 

taken up that I think it is a concern and a growing concern as we 

age out in farm country. 

The last question I had, I wanted to come back to you and try 

and get this right. You pointed out American Growers failure in 

2002. It is your assessment that high agent commissions were the 

sole failure in that company? 

Mr. MURPHY. No, certainly not the sole, but it was a major contributor to it. 

Basically, the company was relying on a 10 to 15 percent underwriting gain in order to make up all——

Mr. WALZ. And you said you brought actuarial folks in to take 

a look at that? 

Mr. MURPHY. Oh, yes, we have studied that body. 

Mr. WALZ. That is the canary in the coal mine, that you think 

that model could replicate down the line. 

Mr. MURPHY. Yes, I am concerned, and there are some other 

things. 

One of the things we did after the failure of that company is that 

we actually went ahead and paid all agent commissions that year. 

We were roundly criticized by the audit agencies and some Members of Congress for doing that, but we thought that was the best 

way to get the agent cooperation and get this business moved off 

to the companies, and they did a fantastic job of it. 

I am afraid if this happened again I don’t know if I would be able 

to make that commitment. I am wondering what impact that will 

have on ability of that business, of growers being stuck out there 

with no coverage? 

Mr. WALZ. Very good. 

I yield back. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Mr. Walz. 

26

I am having trouble keeping track of our panel here. I see Ms. 

Herseth Sandlin stepped out. I will now recognize the gentleman 

from Oregon. 

Mr. SCHRADER. Just a few simple questions, I guess. 

You have testified a little bit about the increased competition you 

hope to see in the marketplace. And with the renegotiated SRA, 

how many companies are in the—for my benefit, anyway, how 

many companies are in the mix right now, and how many more do 

you see coming in as a result of the renegotiation? 

Mr. MURPHY. Currently, we have 16 companies. Our most recent 

entry was right in the middle of the negotiations. We had a new 

company come on. They actually got involved with spring sales for 

2010. They will do the full year in 2011. It is very difficult to foresee how many companies are going to come in, in the future. We 

will have to see. 

It is interesting the companies that have been coming in, sort of 

different companies than traditional insurance companies. We have 

John Deere involved in the program. AEM has some involvement 

in the program. So it is interesting, the mix that we are seeing in 

it. But I don’t think I can say how many we will have. 

Why companies leave, that is interesting as well. The last time 

we had a company leave was basically in the middle of the best 

year the industry ever had. Okay? And then we have a company 

come in when we are right in the middle of a negotiation of the 

SRA. So it is very difficult to see what draws companies in or 

draws companies out. It is a mix of factors, certainly not just the 

underwriting gain potential of the agreement. 

Mr. SCHRADER. What is reasonable agent compensation? This is 

a pretty Byzantine system, from my standpoint, that, obviously, 

there is a goal, that you consider some reasonable rate of return 

for an individual agent or for a company, frankly, both those. 

Mr. MURPHY. The company we did a study with, Milliman—take 

a look at that. It is on our website. It has been part of the negotiations and a source of a lot of discussion. 

But why we are especially happy with this individual who did 

the study is he actually does this for the private insurance industry 

at the state level. He argues on behalf of the companies. He uses 

the same methodology for this study of what the companies could 

get. 

Basically, what his study came back with is that they should 

over—historically, it should have been—about 12.7 percent would 

have been an adequate return. Historically, the companies have received about 17 percent. But although he was very careful to say, 

I am not saying that you should make it 12.7. I am just saying if 

you look at different methodologies that is where it comes up to. 

You have to take other things into consideration. 

In the final agreement we ended up at 14.5 percent long term. 

Certainly there will be years when the companies make much more 

than that, and there will be years when they make much less. You 

are looking at an average over time. 

In today’s economy, I think a 14.5 percent return is pretty good. 

I wish I was getting a 14.5 percent return. 

So, agents, it is trickier, definitely. We don’t really have a lot of 

good data. Like I said, GAO did a study. You can look at it a numVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
27

ber of different ways. I think it would be considered a mono-line 

in the normal insurance world. That sees ten percent, a little bit 

more than that, commission. Definitely, the agent has the more difficult role in our program. 

You know, I often tell the story that I have property in Pennsylvania: I live here in D.C; I insure cars; have rental insurance; my 

property up in PA; I have never met my agent. Yet, a crop insurance agent, is visiting with the insured two to three times. So, I 

think additional compensation is certainly justified. 

Why I am generally pleased with where we are today in the 

agreement is that, in 2010, under the current SRA, we are going 

to pay the companies about $1.3 billion in A&O. That basically is 

what will occur in 2007 without—or 2011 with the new SRA if 

there are not a lot of changes in price or volatility. So if the companies can operate today and the agents can operate today at the current amount, I don’t see where there would be a major problem in 

the future. 

Mr. SCHRADER. Thank you very much. I yield back. 

The CHAIRMAN. Well, thank you. 

Well, on that very subject you just finished on we are going to 

have to discuss it some more. You just said a very significant statement that I was getting ready to say to you. You said it, so I want 

to appreciate that. 

A lot of agents for other things I insure for, I never see them. 

But my crop insurance agent, I not only see him, he would walk 

the fields. In some cases, I spend a lot of time with him. 

So it is very critical that you do the best you can, and it is capital 

intensive for that producer out there. And you want what you need, 

but you don’t want something you don’t need. And so they spend 

a lot of time. 

I am very sincere when I say the three elements that that producer has to have today is not only the capital intensive, the banker, he has to be able to work with, and they have a cash flow. They 

have to show they have this protection. 

And then of course they have to have a place to buy and sell 

product. And I think it is right up there, same level, they have to 

have a good insurance agent. In every community we have insurance agents, and they are very much a part of the community. And 

Mr. Graves and I, all of us, travel back and forth. We have a lot 

of contact. And I want to you appreciate that, too, and I think you 

do. 

I thought we were going to let you go, but I see Mr. Pomeroy has 

arrived, so better late than never. You were here for a while. Then 

you were called out. We are happy to recognize the gentleman. 

Mr. POMEROY. Thank you, Mr. Chairman. 

Crop insurance has been an issue I have long been deeply interested in, and it is such a critical risk management element of 

North Dakota ag production that I did want to participate in the 

hearing. I am trying to have two meetings at once, and that never 

works all that well, so thank you very much. 

The CHAIRMAN. I am supposed to be in Armed Services right 

now, but, anyway, go ahead. 

Mr. POMEROY. We have had some activity here with the crop insurance. This isn’t your run of the mill, what is up with RMA. 

28

They have absolutely worked through the most substantial and 

substantive process relative to the SRA renegotiation that we could 

have imagined. 

I want to put a little history on the effort. Because if you just 

look at—let’s take the crop insurance industry’s perspective. If you 

look at the losses taken, are these changes made which will result 

in savings to the Federal Government; therefore, checks not written to private insurance companies and agents? There may be just 

enormous concern. 

But, on the other hand, we had a very, very dangerous stretch 

during the last farm bill where others wanted to take apart this 

program. In fact, it was to our great surprise that the Government 

Oversight Committee, without notice to the Agriculture Committee, 

held a hearing on crop insurance. They had a GAO report written 

by a disgruntled GAO employee, in my view, that didn’t know very 

much about crop insurance, but had long held a view that there 

was unjust payment to the private sector within crop insurance. 

They wrote a report that was precisely what every enemy of farm 

programs wanted. 

We worked so long and hard to build a crop insurance program 

that was getting adequate coverage out to farmers, the 1993 reforms, the ARPA legislation. And we saw the market response in 

terms of national spread of risk, at buy up levels, a tool that really 

is beginning to function like it never has in terms of meeting risk 

protection needs of farmers. 

And to have our city friends in another Committee without so 

much as giving us the dignity of acknowledging their investigation 

was a bit much. We had some very angry words with some of our 

city friends, including down on the House floor as the farm bill was 

being pushed forward. There was more than one occasion where we 

came within an eyelash of devastating, mindless cuts, imposed by 

those that don’t know the first thing about risk management for 

farming. 

The lesson I drew from that is we needed to take a look at this 

program, sensitive to the concerns of the program’s critics, and 

make an evaluation. Were they right? Were they wrong? If changes 

needed to be made, we are the architects that needed to make 

them. And I believe that basically the farm bill gave us the opportunity with the SRA to have that take place. 

I would contrast this SRA with the preceding SRA renegotiation 

in very important ways, most notably an element that you capture 

in your testimony, Mr. Murphy. RMA and the companies negotiated in good faith with respectful dialogue. You know, even that 

alone was missing in the last go-around. 

The target was handed down by OMB. It was not reached in consultation with the crop insurance companies, I will tell you that. 

Some green-eyeshade guy put a number on a page, and RMA was 

given the assignment of jamming it into the program. 

From the beginning, it wasn’t as though I didn’t have some substantial concern about the directions of RMA, but in meeting with 

you, Mr. Murphy, as well as Mr. Miller I felt that there was an earnest effort to proceed in a very rational, substantive way, using, 

among other things, the consulting assessment that we have done 

on the program. 

29

I believe that the end result, the SRA, will reflect the most substantial entitlement savings generated by anybody relative to addressing Federal budget deficit. We will be able to hold our heads 

high when we next go into a farm bill with a crop insurance program structured basically as the SRA has provided. 

I certainly don’t want to minimize our private-sector partners 

looking at this kind of savings and feeling not all that great about 

it. That was a very substantial change. But I would tell them this 

was a case where change was going to be made, we were going to 

make it, others were going to make it, it was going to be made substantively, it was going to be made with a meat ax. I believe the 

process that came out represents a very serious and fair effort. 

The fact that we have universal participation in the SRA by the 

16 companies that are our private-sector partners reflects, in the 

end, an acceptance of the product. I commend the industry for coming to the table, for providing the counsel, in the end for taking the 

tough medicine. 

You know, like a lot of things, this may not be everything people 

hope for, but it could have been a lot worse. I am quite confident 

that this will work, that our farmers at the end of the day, bottom 

line, will be able to continue to have quality risk-management 

products. So I thank you for leading this effort, Mr. Murphy. It is 

one I admire. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Mr. Murphy, we are going to stop here. I do invite you to stay 

and listen, if you possibly can. I am not going to call you back to 

the table, but I might call you. And I do want to close this. You 

have been very open, and I appreciate that. We want to do the 

same with you, and continue this dialogue, and we want to do the 

best we can for the responsibility that we all have. So thank you 

very much and appreciate your witness today. 

Mr. MURPHY. Thank you, Mr. Chairman and the Committee. 

The CHAIRMAN. You bet. 

I would like to call the second panel to the table. 

Mr. Murphy, first change of the day, sit back down, please. 

Second panel will just hold momentarily. Mr. Peterson has joined 

us, and we would like to recognize him before we dismiss you—before we finally dismiss you. 

Mr. Chairman. 

Mr. PETERSON. Thank you, Mr. Chairman. Thank you for your 

leadership. 

I wanted to pursue this what they call administrative PAYGO, 

I guess, and exactly how this is working. So, as far as you know, 

they are definitely going to take $2 billion of this and put some of 

it into rangeland and some into CRP, is that the case? 

Mr. MURPHY. That is my understanding, Mr. Chairman. 

Mr. PETERSON. So we will be able to get those programs up to 

where—the question is—I still don’t understand. That stuff was in 

the farm bill. We found the money to pay for it. So I don’t understand why the money is not there. Do you know why it is not 

there? 

Mr. MURPHY. Unfortunately, I am not aware of the specifics. I 

have heard you raise this concern before. I believe you were going 

30

to have some conversations with folks, with OMB and the Administration. I think they would be better suited to address your concerns. I believe that is in the budgeting process, as you know, that 

I am not that strongly familiar with. 

Mr. PETERSON. So nobody ever told you anything about this? 

Were there discussions about when you were finalizing——

Mr. MURPHY. No, no. Basically, my discussions were when they 

denoted some of the money for crop insurance work for expanding 

a PRF, asked us to take a look at what other expansions were on 

the books that could be done and how much money we would need 

for them. I took a look at that to develop a good performance discount, which hopefully we will be able to make public soon. 

But I am not aware of the specifics on why so much money was 

put into one. I believe it has something to do with mandatory—you 

can only take crop insurance savings that you would take out of 

crop insurance. It could only be used for other programs. You can’t 

do it across the board, only certain things. That is the extent. Because some ideas came up to do some other things with the savings, and the decision was you couldn’t legally do certain things. 

Mr. PETERSON. So they could do it to restore mandatory money 

but not discretionary money? 

Mr. MURPHY. Apparently. There may be more in-depth budget 

rules that apply, but I would not be aware of them. 

Mr. PETERSON. It is still a mystery to me why we paid for 32 million acres of CRP in the baseline and why there wasn’t money to 

do that. And we haven’t gotten any answers from anybody of what 

happened to that money. It disappeared someplace, I guess, but—

so you didn’t—you don’t know anything about that. 

Mr. MURPHY. No, no, no. Just basically what I told you before. 

So my understanding is that the decision was made a few years 

ago to do this. I think it evolved in anticipation of how much acreage would be enrolled in CRP. 

Mr. PETERSON. Well, if they didn’t have a sign-up, there wasn’t 

going to be acres enrolled. It doesn’t take a rocket scientist to figure that out. 

Mr. MURPHY. I was very happy that some of the funding out of 

negotiation——

Mr. PETERSON. Well, we are glad they are getting these programs 

up to where they are supposed to be, but it is very troubling. We 

have the appropriators over—on our mandatory programs. Now we 

have OMB apparently doing something similar. And, we struggle 

to find the money to be able to do this stuff, and then somebody 

else diverts it. 

Well, if you ever find out anything, we haven’t gotten any information back from OMB yet. 

Mr. MURPHY. I would be happy to bring the questions back and 

your concern and see if they can get something up to you. 

Mr. PETERSON. All right, thank you. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Mr. Murphy, we are going to excuse you again. Thank you again 

for your testimony and I hope you appreciate that a lot of us share 

the same concerns that you just heard from Chairman Peterson, 

and maybe you can shed some light on that. 

31

We would like to welcome the second panel to the table. Just as 

a matter of short introduction, we have Mr. Rutledge, President of 

Farmers Mutual Hail Insurance of Iowa, on behalf of Crop Insurance Research Bureau; Mr. Robert Parkerson, President of National Crop Insurance Services of Overland Park, Kansas; Mr. Steven Frerichs, the Legislative Consultant at Rain and Hail, on behalf of the American Association of Crop Insurers. 

I am going to skip over Mr. Deal and let Mr. Walz introduce him 

in just a moment. 

Mr. John Dalton, President of Midwest Insurance Associates, 

President, Agri-Land Insurance Agency, on behalf of Independent 

Insurance Agents & Brokers of America; Ms. Kathy Fowler, President of National Association of Crop Insurance Agents, Memphis, 

Texas; and Mr. Jordan Roach, Vice Chairman, Crop Insurance Professional Association of Fresno, California. 

Mr. Walz, would you like to introduce——

Mr. WALZ. Well, thank you, Mr. Chairman. 

It is an honor for me to introduce another Minnesotan, but I 

think somebody here probably needs less than me. Jim Deal has 

been involved in this crop insurance business for the past 50 years, 

and was instrumental during the Carter Administration of moving 

this from a government-run program to the private sector. He has 

done everything from Manager of the Federal Crop Insurance Corporation, Executive Director of National Association of Crop Insurance Agents, CEO and Chairman of National Ag Underwriters, currently CEO and Chairman of NAU Country Insurance Company. 

But I think it is important to note, with all of us in this room, he 

was instrumental in providing the tools necessary to make rural 

America thrive, and is somebody who has been heavily engaged in 

resources from veterans’ issues to others in building our strong 

communities. 

So it is a real honor for me to introduce Jim Deal, lives with his 

wife Pam in Ramsey, Minnesota, and countless grandchildren that 

are always there. 

So thank you. 

The CHAIRMAN. Thank you, Mr. Walz. I appreciate that. 

With that, we will begin with Mr. Rutledge who brings—hello 

again—vast experience from an agent up through the industry. We 

appreciate having you here. Would you start, and share your testimony? 

STATEMENT OF STEVEN C. RUTLEDGE, PRESIDENT, CEO, AND 

CHAIRMAN OF THE BOARD, FARMERS MUTUAL HAIL

INSURANCE COMPANY OF IOWA, WEST DES MOINES, IA; ON 

BEHALF OF CROP INSURANCE RESEARCH BUREAU, INC. 

Mr. RUTLEDGE. Chairman Boswell, Mr. Graves, Chairman Peterson, Members of the Committee, good morning. 

My name is Steve Rutledge, and I am the President and CEO of 

Farmers Mutual Hail located in West Des Moines, Iowa. Farmers 

Mutual Hail has been in the business of offering risk management 

tools to agricultural producers for over 117 years. I believe we were 

the first company to successfully write crop insurance in the 

United States. 

32

In addition, I am also the past Chairman of CIRB, Crop Insurance Research Bureau. CIRB is a national trade association composed of insurance companies, reinsurance companies and brokers 

and others involved in the crop insurance business. I appear before 

you today on behalf of CIRB and thank you for the opportunity. 

As it turns out—and you just mentioned it, Mr. Chairman—when 

we had the opportunity to speak a couple of weeks ago back home 

in Iowa I had asked if there were any specific issues that you 

might like me to address, and you suggested that I just say what 

I think, and so I will. 

At the time the 1980 Crop Insurance Act was passed, Farmers 

Mutual Hail was one of several who declined to participate and remained just a private crop hail insurance writer. That decision 

made 30 years ago seemed reasonable until the mid to late 1990s. 

During that time, private industry developed revenue insurance 

and government greatly increased subsidies to the producers. 

Those were excellent products, and we quickly realized that times 

had changed and we would no longer survive unless we chose to 

participate in the Federal Crop Insurance Program. So we joined 

the program in 1999. 

Since then, there have been three SRA negotiations, two farm 

bills, and each one reduced the industry’s potential profit margin, 

while further increasing the workload. Like many others in the 

business, I feel like I have spent virtually all of those 11 years either trying to figure out how to survive and compete after the most 

recent round of cuts, or working to minimize the pain of the inevitable next round. In fact, much has changed just since I last testified before this Committee in the 2007. 

Given the cuts in the last farm bill and the new SRA, the industry has finally reached the point where many companies are considering leaving the business and are selling their ownerships to 

larger, more diversified and more well-capitalized companies. It 

seems the days of crop-only insurance companies are rapidly passing, and that fact should probably worry us all. Since the last SRA 

was negotiated in 2005, nearly 2⁄3 of the 16 companies which still 

remain in crop insurance have altered their original ownership and 

structure. Many agents are now also beginning to search for opportunities to sell or restructure their agencies, and many commercial 

reinsurers are questioning the viability of crop insurance in their 

business plans. It seems inevitable that more jobs will be lost and 

the face of the industry will change. 

The result of the changes made during the past couple of years, 

particularly for the Midwest, will likely be fewer companies, fewer 

agents, fewer reinsurers, and fewer jobs, all likely leading to a decline in the quality of service to the producers. And I don’t think 

the industry is crying wolf here, because this time the sheep are 

already running away. 

Yes, we all signed the SRA, but, to paraphrase Secretary Clinton, 

how do you get tough with your regulator? Nonetheless, I imagine 

the industry and the program will survive, but we are diminished. 

We won’t be as good as we could be. 

And this program has been extremely successful. The private-sector involvement in the crop insurance program has given our nation’s farmers and ranchers, on whom this country so depends, the 

33

best possible tools to ensure their continued survival. Now it seems 

that we should turn our attention to the survival of the crop insurance industry. 

As we begin discussions on the next farm bill, it is my sincere 

hope that we can all work together to improve the health of the industry, thereby securing the integrity of the program. The Federal 

Crop Insurance Program is the envy of the agricultural world and 

is the core of our own country’s agricultural safety net. How can 

we not protect the program that has served the country so well? 

Thank you for your time and attention. 

[The prepared statement of Mr. Rutledge follows:]

PREPARED STATEMENT OF STEVEN C. RUTLEDGE, PRESIDENT, CEO, AND CHAIRMAN

OF THE BOARD, FARMERS MUTUAL HAIL INSURANCE COMPANY OF IOWA, WEST DES

MOINES, IA; ON BEHALF OF CROP INSURANCE RESEARCH BUREAU, INC. 

Chairman Boswell, Ranking Member Moran, Members of the Committee, good 

morning. My name is Steve Rutledge. I am President and CEO of Farmers Mutual 

Hail Insurance Company of Iowa located in West Des Moines, IA. Farmers Mutual 

Hail has been in the business of offering risk management tools to the agricultural 

producers of the Midwest for over 117 years, and today writes both private hail insurance and federally reinsured Multiple Peril coverage in 15 states. Additionally, 

I am the past Chairman of the Crop Insurance Research Bureau (‘‘CIRB’’), 

headquartered in Washington, D.C., and currently serve on the Executive Committee of that organization. CIRB is a national trade association composed of insurance companies that write Federal crop insurance as well as private crop-hail insurance, commercial reinsurance companies, reinsurance brokers, and other organizations with an interest in the crop insurance program. A list of CIRB members is 

attached to my testimony. I appear before you today on behalf of CIRB, and thank 

you for the opportunity to offer testimony to the Committee on its behalf. 

By way of background, CIRB members are, for the most part, small to mediumsized crop insurance companies. Our members write in nearly every state and provide billions of dollars in federally reinsured multiple peril crop insurance protection, or ‘‘MPCI.’’ These insurance company members bring to the Federal partnership a wealth of knowledge about the MPCI program and are committed to providing risk management support to the farmers and ranchers of this nation. Our 

membership also includes some of the most significant members of the private commercial reinsurance community in terms of their involvement in the crop insurance 

program. These members are vital to both crop hail and Federal crop insurance, and 

we are proud to be a leading voice within the industry for the reinsurance community. 

In my testimony I will attempt to illustrate the importance of the public-private 

partnership in the delivery of the Federal Crop Insurance Program, the necessity 

of continued support by private reinsurance companies in managing the program 

risk of Approved Insurance Providers or ‘‘AIPs,’’ and finally the expected impact of 

recent changes to the Federal Crop Insurance Program on those segments of the industry, as well as to the agents who comprise a significant part of the delivery system. 

Perspective 

Much has changed since we last appeared before this Committee in 2007. The 

spike in commodity prices that occurred during the 2008 reinsurance year put the 

crop insurance program on tenuous grounds, with regulators becoming concerned 

that companies and agents were too profitable. Although both initially benefited 

from the increase in prices, the landscape has since changed. Crop prices have declined significantly, as have the rates charged to producers. The largest reductions 

in rates took effect in the 2010 reinsurance year, with additional cuts expected for 

the 2011 reinsurance year. This combination of price and rate decline will cause the 

Federal Crop Insurance Program premium to shrink from over $9.8 billion in 2008 

to an estimated $7.0 to $7.5 billion in 2011. The savings in A&O paid to AIPs due 

to this decline has contributed greatly to the savings achieved by RMA. 

In this context, the industry took a substantial financial hit in the 2008 Farm 

Bill, with cuts totaling $6 billion over 10 years. While some of these cuts came in 

the form of timing shifts, their impact cannot be underestimated. Furthermore, as 

the industry worked to absorb and adjust to these reductions, the U.S. Department 

34

of Agriculture embarked on a renegotiation of the Standard Reinsurance Agreement, 

or ‘‘SRA.’’ While I will go into more detail on that in a moment, the end result of 

the renegotiation was another $6 billion cut to the program that in part sought to 

address ‘‘yesterday’s’’ problem. 

The reduction in funding does not mean that the crop insurance program has become less complex. Just the opposite is true. Regulatory compliance requirements 

of the program, especially with the advent of the 2011 SRA, have intensified thereby 

compelling AIPs to spend more of the fewer dollars available to assure conformity 

with the program. The financial cuts and added compliance costs come at a time 

when the industry is struggling to manage many large and complicated system 

changes, while at the same time managing an ever increasing number of pilot programs, plans, coverage levels, and additional training requirements. The additive 

nature of these stresses combine to put the industry at risk. 

It is important to emphasize that the Federal Crop Insurance Program as it exists 

today is the cornerstone of our agricultural safety net and the envy of the rest of 

the world as other nations attempt to replicate our success. The clearest illustration 

of the value of the program is that roughly 80% of our nation’s farmers recognize 

the importance of the program by investing premium dollars in MPCI products. 

Subtract so called ‘‘hobby farms’’ and it is not inaccurate to say that virtually every 

farmer in this country buys MPCI. Crop insurance has played a vital role in maintaining the availability of credit for farmers who need ever larger loans to cover rapidly escalating input costs. Ag lenders have made it clear to their borrowers that 

without this income security, credit will not be forthcoming. This was true before 

the credit crunch; it is even more focused since the onset of the current crisis. 

The Federal Crop Insurance Program currently provides a level of security and 

flexibility for American agriculture that likely exceeds the expectations when the 

public-private partnership was first legislated into existence 30 years ago. The program, which initially offered only yield protection for mostly row crops, has expanded into a national insurance system that allows farmers and ranchers to manage both weather and price risks. Our success has been rooted in significant government investment and a robust private sector delivery and risk-sharing system. The 

products offered by crop insurance have proliferated so that companies and agents 

can tailor coverage to the individual farmer’s needs. Additionally, crop insurance 

providers have introduced greater efficiency into the program, relying on greater 

volumes to repay costs and ultimately dipping into profits to preserve a viable system. 

Today, in addition to providing protection for yield losses, crop insurance companies also offer price protection with the revenue plans of coverage that comprise 

about 80% of the total insurance sold. The majority of these revenue products were 

initially developed by the private sector. This type of insurance coverage not only 

provides considerable protection for producers, but also provides yet another level 

of security for lenders, thus increasing the ability of farmers to access the operating 

loans necessary to get crops in the ground. Today’s farmers are excellent business 

managers and everyday more and more recognize the value of proactive marketing. 

Revenue insurance plans have also greatly increased the motivation and flexibility 

of producers to develop professional plans to market their crops by reducing the risk 

involved in this process to a much more manageable level. Clearly, the contribution 

to the growth and improvement of today’s crop insurance program by the private 

companies who cooperate with government to deliver the coverage has been substantial. 

We also believe that access to commercial reinsurance is a critical component of 

this public-private partnership. From the perspective of our members, private reinsurance provides an invaluable benefit to the program by enhancing the capacity of 

AIPs. Without this benefit, less well-capitalized companies could be forced to sharply 

reduce their volumes of business in order to maintain adequate levels of capitalization relative to premium. The availability of commercial reinsurance also enhances 

competition, reducing the risk to the government that could arise if only a few insurers were able and willing to deliver the program. Not only does commercial reinsurance make it possible for new companies to enter the market, but also it allows 

for AIPs to gain experience in new markets without risking significant portions of 

their own capital. Against this backdrop, it is counterintuitive that USDA has chosen, once again, to transfer more risk to the taxpayers and away from AIPs and 

their reinsurers in the new SRA. 

We believe that a strong, viable crop insurance program is critical to the future 

of American agriculture. I doubt that our younger farmers who have struggled to 

acquire the resources necessary to begin a successful operation could even contemplate a career in farming without the Federal Crop Insurance Program, and I 

believe we all agree that we need more youth in agriculture. Simply put, the value 

35

of the Federal Crop Insurance Program to American agriculture cannot be overstated. 

2011 Standard Reinsurance Agreement 

The 2008 Farm Bill authorized USDA, through the Risk Management Agency, to 

renegotiate the Standard Reinsurance Agreement for the 2011 reinsurance year, 

which began on July 1. We have just completed that task, and all 16 Approved Insurance Providers have signed the 2011 SRA. While we appreciate the willingness 

of RMA to consider the views of the industry throughout the months-long process, 

we remain concerned about the implications of the final product for the future of 

crop insurance. 

Generally, we believe that the roughly $6 billion in cuts to the program will jeopardize the viability of several AIPs and agents in their ability to provide critical risk 

management support to producers. In addition, we were also troubled during the 

process by the introduction of various changes in the three different drafts of the 

agreement that did not appear to result from the negotiations. But, to paraphrase 

Secretary of State Hillary Clinton, ‘‘how do you get tough with your regulator?’’

For example, we question the provision that was included for the first time in the 

third draft of the SRA that penalized AIPs who sued the Department of Agriculture, 

even if the suit was not filed directly by the AIP. While the provision was converted 

into a covenant not to sue through negotiation, we question the late addition of the 

issue and the insistence that agents be included in the covenant, especially given 

that agents are not a party to the SRA contract. 

We also note that the issue of capping compensation to agents was not introduced 

until the second draft and even more worrisome, the introduction of an even more 

stringent ‘‘hard cap’’ on commissions was not included until the third draft, which 

was presented to the industry as ‘‘final’’ thus affording industry no opportunity to 

discuss this issue. We believe that had there been genuine concern regarding company insolvency, which seems to relate to the 2002 year, this should have been addressed in the 2005 SRA or in an earlier draft of the 2011 rewrite. 

We are also disappointed that RMA chose not to phase in the changes to the gain/

loss formula in the Group 1 states. Doing so would have provided AIPs with the 

financial flexibility and additional time needed to geographically expand their operations, a strategy which RMA seems to provide incentive for in the new SRA. Further, since the rationale for reducing potential underwriting gains in Group 1 states 

was predicated partly on the premise that these states were more prone to infrequent but very catastrophic events, the decision to greatly increase risk to AIPs in 

these states compared to all others seems a bit contradictory and also disappointing. 

RMA’s approach instead hinders the opportunity for AIPs to adjust their business 

plans to account for the changes in the new SRA, in particular the likelihood that 

their commercial reinsurance costs will increase for business written in Group 1 

states due to the reduced profit margins and increased risk. 

Along those lines and given our substantial reinsurance membership, we also emphasize that this SRA could have significant ramifications for the private reinsurance market as it shifts risk away from the market and to the government. For instance, under the new SRA, quota share reinsurers may see reduced profit-sharing 

opportunities and will therefore have less of an incentive to participate in the market. The reinsurance community is well prepared to manage risk within crop insurance but with this SRA, as previously mentioned, RMA is effectively removing risk 

from a market that has worked successfully for years and instead placing a burden 

on the American taxpayer. 

Moving Forward 

The 2008 Farm Bill and the 2011 SRA have exacted their toll on crop insurance. 

The industry is now holding its breath as Congress begins to consider the 2012 

Farm Bill. As we start that process, we must emphasize that crop insurance has 

already borne the brunt of the fiscal pressures facing Washington multiple times. 

We have found ourselves under the scalpel, and we fear that further mandated reductions that may be considered in the 2012 legislation will place the program in 

an even more precarious position. 

We remain confident that a viable farm safety net starts and ends with a successful crop insurance program. We understand that a number of proposals that affect 

crop insurance have been floated for the farm bill rewrite. We will review each of 

them carefully. From the recent hearings held here in Washington and across the 

country, however, one key area of agreement is obvious: the Federal Crop Insurance 

Program is an essential tool for American farmers. 

The crop insurance industry has continued to perform reasonably well over the 

past several years. To that extent, the industry may well be a victim of its own sucVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
36

cess. In reality, though, it has been the unprecedented run of profitable years, occasioned by generally favorable weather patterns, that has allowed the industry to 

survive without a major upheaval of the marketplace. Nonetheless, many AIPs were 

forced to make operational changes during this period, including selling to larger, 

more well-capitalized companies in order to secure their survival. Since the last SRA 

went into effect in 2005, less than 1⁄3 of the AIPs have maintained their original 

ownership and organizational structure. 

With the changes that I have discussed, however, USDA has gone too far. Virtually every AIP has had discussions regarding new sales, mergers, or acquisitions. 

In addition, many agents have already expressed the desire to move some of their 

work back to the AIPs or are attempting to negotiate the outright sale of their agencies. The new reality is that AIPs and agents seriously question the future in the 

crop insurance business and many are choosing to search for a way out. Jobs will 

be lost, service to producers will suffer, and the face of the industry will change. 

Those who remain simply hope that their faith in the eventual recognition of the 

value of the private sector in crop insurance has not been misplaced. 

We look forward to working with you in the coming months and years as you continue to fashion our farm policy. We thank you for the opportunity to testify, and 

we stand ready to answer any questions you may have. 

EXHIBIT A 

CIRB Full Members 

• ADM Crop Risk Services

• American Agricultural Insurance Company

» Arkansas Farm Bureau

» Idaho Farm Bureau Insurance

» Indiana Farm Bureau Insurance

» North Carolina Farm Bureau Insurance

» Oklahoma Farm Bureau Insurance Company

» Virginia Farm Bureau Mutual Insurance Company

• ARMtech Insurance Services

• BMS Intermediaries, Inc.

• COUNTRY Insurance & Financial Services

• Farmers Mutual Hail Insurance Company of Iowa

• Guy Carpenter & Company, LLC

• James River Insurance Company

• Partner Re Insurance Company of the U.S.

• Totsch Enterprises

• Western Agricultural Insurance Company 

CIRB Associate Members 

• Aon Re

• Endurance Reinsurance Corporation of America

• MAPFRE Re Insurance Corporation

• Max Re Europe Limited

• Munich Reinsurance Company

• National Association of Mutual Insurance Companies

• State Farm Fire & Casualty Insurance Company

• Sirius International

• Swiss Reinsurance

The CHAIRMAN. Thank you for your testimony. 

We will move on and hear from all of the panelists, and then we 

will go back for questions. 

At this time, I recognize Mr. Parkerson, President of National 

Crop Insurance Services, Overland Park, Kansas. Welcome. 

37

STATEMENT OF ROBERT W. PARKERSON, PRESIDENT,

NATIONAL CROP INSURANCE SERVICES, INC., OVERLAND 

PARK, KS 

Mr. PARKERSON. Thank you, Mr. Chairman. 

Mr. Chairman, Mr. Moran, and Members of the Committee, 

thank you for inviting the National Crop Insurance Services to today’s hearing. 

NCIS is a nonprofit trade association consisting of all 16 SRA 

holders. In 2009, the insured Federal crop and hail liability of our 

members totaled $150 billion. Starting over a year ago, NCIS coordinated the industry’s participation in the SRA negotiation. The 

companies carried out their activity transparently and in good 

faith. We sought a new agreement that would be ensuring effective 

service to the producers, safeguarding taxpayers’ interest, and providing the companies an opportunity to earn a reasonable return. 

Unfortunately, this final agreement may have put some of those 

objectives at risk. 

The first SRA draft released in December set an ominous tone 

to the negotiations. With $8.4 billion in cuts, the Administration 

staked out an extreme position well beyond, we believe, their targeted cuts. They knew from the outset that the companies would 

have no choice but to accept the final outcome. 

This outcome remains fraught with problems. For example, the 

overall cap on A&O reduced the effect on price spikes on A&O payments, as we all required and hoped for. But the reality is A&O 

is cutting in on top of the farm bill. These cuts are large. The 

agents’ compensation is capped. 

Those changes were made without adequate study of delivery 

costs at a request by GAO. The hard cap on agent income was first 

revealed in the final SRA without any opportunity to comment. The 

A&O provisions will cause competitive issues and operational problems, as noted in my written statement. 

Had the new SRA been in effect in 2009, A&O and underwriting 

gains would have been 25 percent lower in the Group 1 states and 

six percent lower in other states. We fail to see how such cuts could 

stabilize the industry and raise incentives to improve service, as 

the Administration has claimed. 

Looking ahead, we find little security in the development of the 

past 2 years and the prospects that lay before us. Regulatory burdens continue to rise, including IT, data reporting, quality control, 

and training. 

One of the stacks of paper before me is the procedures for 2005, 

the smaller one. The higher stack is the new SRA and its requirements. Clearly, the workload is not declining. 

In short, Mr. Chairman, the companies must do more. They will 

be under a strain to do it, as they are going to get paid less and 

get paid less often. 

The SRA raises issues also for Congress. We ask this Committee 

to help us ensure that the SRA receives recognition for this deficit 

reduction, hopefully preventing any further reduction in production 

agriculture. 

Congress also should be considering the SRA process. Companies 

have very little leverage to negotiate any equal partnership with 

RMA. The final SRA introduced a new process, non-negotiable conVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00041 Fmt 6633 Sfmt 6601 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
38

cepts without industry comment, including the agent’s hard cap 

and the requirement to forego legal recourse. We are concerned 

that a multi-billion dollar change in the legislative program can be 

made through unilateral discretion. 

The crop insurance companies are committed to the public-private partnership. Together, we have built a program that now provides $80 billion in protection, up $31 billion from a decade ago. 

Insurance is now available for over 100 crops and most livestock 

types. It is unthinkable today that the farmer could plan, secure 

credit, invest in forward market, as they do, without individual 

crop insurance coverage tailored to each producer’s unique need. 

With your help, we will strive to keep this enormously successful 

program as the producer’s best defense against future risks that 

are inherent in farming. 

Thank you, Mr. Chairman. That completes my oral statement. 

[The prepared statement of Mr. Parkerson follows:]

PREPARED STATEMENT OF ROBERT W. PARKERSON, PRESIDENT, NATIONAL CROP

INSURANCE SERVICES, INC., OVERLAND PARK, KS 

Mr. Chairman, Mr. Ranking Member and other Members of the Subcommittee, 

thank you for inviting the National Crop Insurance Services to appear at today’s 

hearing to discuss the Standard Reinsurance Agreement (SRA) and its implications 

for the future of the crop insurance industry. I will briefly describe the role of NCIS 

and the approved insurance providers (the companies) in the negotiations of the 

2011 SRA, identify some key issues of agreement and controversy, and conclude 

with an assessment of why the new SRA, combined with other factors, raise serious 

concerns for the crop insurance industry as it moves ahead, striving to provide the 

best in risk management service to America’s agricultural producers. 

The Function of NCIS in the Crop Insurance Industry 

NCIS is a not-for-profit trade association whose members include every crop insurance company that participates in the Federal Crop Insurance Program. NCIS 

and its predecessor organizations have provided members support in their crop insurance businesses since 1915. NCIS has worked actively with the Risk Management Agency (RMA) as an approved contractor and with the Board of the Federal 

Crop Insurance Corporation (FCIC) as an expert reviewer. 

NCIS is also a licensed advisory organization and statistical agent for private 

Crop-Hail insurance in forty-nine of the fifty states, and it assists the crop insurance industry in meeting the regulatory requirements of these states. This is accomplished by filing the appropriate policy forms and statistical information with state 

insurance departments. Further, NCIS serves as a liaison with individual state insurance departments through active participation with the National Association of 

Insurance Commissioners (NAIC). 

In 2009, NCIS member companies wrote nearly $9 billion in Federal multiple 

peril crop insurance and related revenue products premium and $620 million in private Crop-Hail insurance products premium. The potential liability between both 

programs was approximately $105 billion. NCIS member companies service policies 

that encompass all farmers participating in the Federal and private programs, including limited resource and socially disadvantaged farmers. In partnership with 

the Federal Government, our participating member companies comprise the safety 

net that equitably provides the preeminent risk management program to America’s 

farmers. 

Role of NCIS and the Companies in the SRA Negotiations 

NCIS began preparations for the new SRA early in 2008 by engaging company 

leaders on the future of the industry. By early 2009, after being advised by the Administration that the 2005 SRA was unlikely to be renewed for the 2011 reinsurance year, NCIS and all 16 companies that deliver the Federal Crop Insurance Program to America’s farmers met and initiated a specific plan for negotiating the new 

SRA. NCIS organized five working groups, chaired by and consisting of representatives from all 16 crop insurance companies. The working groups addressed five subject areas: financial provisions, the Plan of Operations, information technology and 

data, quality standards and controls and education and training. The working 

39

groups met beginning last spring, reviewing the performance of the 2005 SRA and 

developing recommendations for the 2011 SRA. 

In September 2009, RMA notified Congress that the 2005 SRA would not be renewed. In October 2009, in response to RMA’s request for SRA proposals from the 

industry, NCIS submitted formal recommendations for the 2011 SRA on behalf of 

its member companies and reflecting the efforts of the working groups. Since December 2009 when RMA released the first SRA draft until mid-July 2010, when the 

2011 SRA went into effect, NCIS and the companies held frequent meetings with 

RMA and provided substantial written comments to RMA on the first and second 

drafts. NCIS also organized a technical, legal review of the final SRA conducted by 

NCIS and company attorneys. Throughout the process, NCIS was very aware of 

antitrust issues and worked closely with USDA’s Office of General Counsel, RMA 

leadership, industry leadership and third party legal counsel to ensure the negotiations were conducted properly. On behalf of the industry, we thank Members of Congress for including language in the 2008 Farm Bill that ensured the companies 

could confer with one another and with RMA in developing the new SRA. 

NCIS and its member companies organized and carried out their activities with 

the primary objective of negotiating transparently and in good faith. Among our objectives was a new agreement that ensures effective service to producers, safeguards 

taxpayers’ interests, and provides an opportunity for the insurance companies to 

earn a reasonable return relative to other lines of insurance, accounting for their 

relative risks. Unfortunately, the final agreement may put all these objectives at 

risk. 

The Negotiations: Substantive Issues but a Predetermined Outcome 

The first draft of the SRA released in December 2009 set an ominous tone for the 

negotiations. The first draft was a significant overreach by the Administration. The 

Administration proposed an unprecedented and potentially very damaging reduction 

of $8.4 billion over 10 years in program funding. They proposed an inflexible formula for calculating administrative and operating (A&O) expense payments to the 

companies that would have used a proxy measure of premiums based on fixed ‘‘reference prices.’’ These reference prices were sharply below policy prices and would 

never change. The first draft replaced the Assigned Risk Fund with a ‘‘Residual 

Fund’’ that would have enabled companies writing bad business to shift their risks 

to other companies. The first draft’s reinsurance terms created separate gain and 

loss provisions for four different groups of states; groupings that had little apparent 

rationalization. The reinsurance terms sharply reduced potential gains while also 

reducing potential losses, in effect shifting risk to taxpayers and crowding out private reinsurance. Moreover, the Administration proposed increasing the net book 

quota share—its tax on underwriting gains—from 5% to 10%. Crop insurance companies are in the business of taking on and managing risks, but the Administration 

wanted to take over risks and the potential for gains as well, moving away from 

the Federal Crop Insurance Act’s reliance on private industry and exposing the taxpayer to greater losses in bad years. 

I will not belabor the industry’s position at the beginning of the process, beyond 

saying that the Administration’s first-draft overreach was so great that subsequent 

concessions by them would still leave the companies at a serious disadvantage. 

Clearly, the 2011 SRA was a budget-driven process that took full advantage of the 

companies’ short-term inability to exit the program. Congress authorized a negotiation in the 2008 Farm Bill presumably with the idea that it be open and balanced. 

But, the Administration had a budget cutting target and simply staked out an extreme position to the right of it, knowing full well that, in the end, the companies 

had no choice but to accept the final outcome. 

In the second and third drafts of the 2011 SRA, the gap between the Administration’s proposals and the companies’ proposals narrowed. The reference price concept 

was thrown out, the Residual Fund concept was dropped, the number of state 

groups for reinsurance terms was reduced from four to two (the first group includes 

the Corn Belt states of Iowa, Illinois, Indiana, Minnesota, and Nebraska and the 

second comprises all other states), and the reinsurance terms were improved for the 

companies. There were a number of concepts that companies and the Administration 

could agree upon. Both sides wanted to address the concern that A&O payments 

could unnecessarily shoot up when there are market price spikes, such as occurred 

in 2008. Both sides agreed that reinsurance gain and loss provisions should be made 

more profitable for the lowest return states and reduced for the highest return 

states. This ‘‘rebalancing’’ of returns would help companies cover costs and hopefully 

earn a small underwriting profit in the low return states. 

Unfortunately, the final 2011 SRA fails to achieve a fair balance among these 

shared concepts. The final draft has been signed by the 16 companies, but that 

40

hardly means the companies think things are satisfactory. Here are a few of the 

glaring issues with the 2011 SRA:

• The size of the overall funding cut remains unsupported and represents a decided risk to the companies. The Administration premised its budget-cutting objective on two RMA-funded studies (contracted to Milliman, Inc.) on the companies’ rate of return on equity. The flaws in this approach are legion. First, the 

Administration never provided an explanation of how the Milliman results were 

utilized to determine the final gain and loss provisions for reinsurance. Second, 

the Milliman studies are rebuttable on numerous grounds. Milliman estimated 

the equity of crop insurance firms using a model that did not take account actual firm equity and crop insurance regulatory requirements for equity, thus 

producing unverifiable estimates of industry equity; they failed to consider reinsurance and actual A&O costs; and they did not include a long enough period 

of time to adequately account for the potential for catastrophic loss. The Administration repeatedly defended its proposals in public based on the returns to 

companies since 2006, a period that included an unusually rare spike in crop 

prices and the two lowest loss ratio years in the history of the program dating 

to 1981. Arguing for steep budget cuts based on unusual circumstances clearly 

is not a sound actuarial basis for determining expected future returns and establishing sound policy. The Administration appears to be betting that the program’s good performance in recent years will continue. The insurance companies have to go along for the ride, but they may have no seat belt on.

• The A&O cap used by the Administration in the final SRA is preferable to the 

use of fixed reference prices; however, RMA’s change in approach does not mask 

the reality that the A&O cuts remain large coming on top of the A&O funding 

reductions of the 2008 Farm Bill. RMA’s own assessment shows A&O cuts of 

$220 million per year during 2011–2015. These A&O cuts are being imposed oblivious to the payment delays that will occur in 2012. As a result of a 2008 

Farm Bill budget mechanism, companies will have to wait up to 9 months to 

receive payments from RMA to fund their businesses. Operating costs must be 

paid and companies will have to borrow in difficult credit markets to meet payrolls. Moreover the new A&O reductions were determined before RMA has completed its study of agent costs of delivery. RMA agreed with recent GAO findings that a study of agent business costs was necessary to fully understand total 

delivery expenses and to judge the appropriate level of delivery payments to 

companies and agents. In this case, there were insufficient facts to influence a 

predetermined budget cut.

• The 2011 SRA implements soft and hard caps on the companies’ compensation 

of agents. These caps were not proposed by NCIS in its initial recommendations 

to RMA last October and were not proposed in any comments submitted to 

RMA on the SRA drafts. The soft cap, which restricts agent compensation to 

80% of the A&O a company receives in a state, first appeared in the second 

draft SRA. However, the hard cap, which restricts agent compensation plus 

profit sharing to 100% of the A&O a company receives in a state, was presented 

in the final SRA—without the opportunity to comment by the companies. These 

A&O provisions are fraught with competitive issues and administrative problems.

» A major problem is that RMA will not know the overall limit on A&O payments until the year is over. Companies must pay their agents for their work 

before the year is over. How will companies know what 80% of their A&O 

payments are when they won’t know what their total payments will be until 

the year is over?

» Another critical issue is the definition of compensation. NCIS has agreed to 

work with RMA to define agent compensation in a clear way so that companies will be able to implement the caps without being out of compliance. It 

is obvious at this point that the caps on agent compensation could easily be 

violated quite unintentionally by companies that are assiduously trying to 

stay within the caps. Penalties for noncompliance may be severe. We recommend that Congress keep abreast of this issue and help ensure that RMA 

shows forbearance for unintentional violations.

» Finally, many of our member companies have raised concerns over the impact of the caps on agents. They fear that agents may shift from one company 

to another to chase the prospect of better profit sharing. They fear that the 

compensation caps could lead to consolidation and reduced service, especially 

for smaller farm operations that have lower premium volume. We recommend 

that Congress monitor closely the structural changes that may take place 

41

among agents and companies as a result of the change in A&O payments and 

agent commission caps.

• The final gain/loss provisions and A&O reductions combined are expected to reduce returns well below historical levels in the Corn Belt states. In addition, 

the changes in prospective net returns in other states do not reflect their loss 

experiences. The Administration rejected the industry’s recommendation that 

higher return states that were not put into Group 1 (Corn Belt) be given less 

favorable reinsurance terms than the underserved states. Preliminary NCIS 

analysis indicates that had the 2011 SRA been in effect for 2009, the Group 1 

states would have had a combined reduction in A&O payments and underwriting gains of nearly 25%. The remaining states, while seeing an increase in 

underwriting gains, would still have faced a collective decline of around 6% in 

A&O payments and underwriting gains combined. It is unclear how such a decline in returns is going to increase incentives for companies to operate and improve service in low return states, as the Administration claims.

In addition to the problems just identified with the key financial terms of the 

2011 SRA, the SRA imposes a range of administrative requirements on the companies. Many people do not realize that the SRA encompasses hundreds of pages of 

IT, data reporting (such as common land units and FSA data reconciliation), training and quality control requirements (such as large claim reviews). These regulatory 

burdens continue to escalate. For example, the Crop Insurance Handbook for the 

2011 SRA, which specifies the requirements to write crop insurance, is now 834 

pages long, compared with 525 for the 2005 SRA. Appendix III of the 2011 SRA, 

which specifies information and reporting requirements, is 826 pages, compared 

with 205 pages for the 2005 SRA. In addition to these SRA requirements, FCIC continues to approve new products and revise and expand existing products, all of 

which demand increased servicing by the companies. For example, between 2000 

and 2009, there have been 37 introductions of new crop or insurance plans. 

The 2011 SRA: A Yellow Flag That Augurs for Policy Caution Over the Next 

Several Years 

As the industry looks ahead, we can find little security in the developments of 

the past 2 years and the economic prospects before us. Congress and others need 

to know that the combination of the $6.4 billion in 2008 Farm Bill reductions, the 

$6 billion in SRA reductions, the delay in payments to companies in 2012 and the 

increase in workload and investments needed to adequately deliver this program 

and meet its regulatory requirements are going to strain this industry, even with 

normal weather over the next several years. The companies must do more and are 

going to get paid less, and get paid less frequently, to do it. 

The 2011 SRA outcome raises several issues relevant to future actions by Congress. First, the Federal Crop Insurance Program, the safety net for American farmers and ranchers, has now contributed greatly towards deficit reduction. We believe 

we have done so for this industry as well as for production agriculture in general. 

We ask that this Committee work to ensure that these funding cuts receive appropriate recognition and prevent further cuts for production agriculture, such as in the 

2012 Farm Bill. 

Second, while the industry would hope to be able to move forward with no further 

financial shocks, we emphasize that, unlike private property casualty companies, 

crop insurance companies do not set premium rates and cannot compete using rate 

changes. Nor are the companies able to adjust rates to recoup losses in previous 

years. Premium rate changes can have major impacts on industry profitability, and 

the companies are handicapped by not knowing what will happen with respect to 

premium rates. Historically, the companies have not been part of the rate setting 

process. 

Third, Congress should assess the concept of a periodically negotiated SRA. The 

companies have little leverage to conduct such a negotiation as an equal partner 

with RMA. RMA conducted the negotiations in a mutually respectful fashion but 

with far less than full transparency. Requests for key data and analyses were not 

satisfied. Even today, as we testify, we do not have the details of the baseline USDA 

used to score the 2011 SRA. In the final SRA draft, which was not negotiable, RMA 

introduced major new concepts that had not received public or industry comment. 

These concepts included the hard cap on agent commissions and the requirement 

that companies forgo legal recourse in the event that the Administration has acted 

illegally with its A&O provisions. Finally, should multi-billion dollar changes in legislated programs be made through unilateral discretionary actions? 

The crop insurance companies are committed to the public-private partnership. 

We are committed to the efficient functioning of competition and markets. We beVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00045 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
42

lieve the private sector, not the government, is the best way to provide the individual risk management information and tools that are indispensable for farmers 

today. We believe that is the way farmers want the program to operate. We believe 

this program can be expanded and improved to provide even better protection for 

farmers and ranchers. We ask that Congress pay careful attention to the impacts 

of the 2008 Farm Bill and the 2011 SRA and work with the crop insurance industry 

to strengthen this valued program. 

Thank you Mr. Chairman, that completes my statement.

The CHAIRMAN. Thank you. 

We will move on to Mr. Stephen Frerichs, Legislative Consultant, 

Rain and Hail, on behalf of the American Association of Crop Insurers from Alexandria, Virginia. Please proceed. 

STATEMENT OF STEPHEN FRERICHS, PRESIDENT, AGVANTAGE, 

LLC; LEGISLATIVE CONSULTANT, RAIN AND HAIL, L.L.C.,

ALEXANDRIA, VA; ON BEHALF OF AMERICAN ASSOCIATION 

OF CROP INSURERS 

Mr. FRERICHS. Thank you, Chairman Boswell. 

Chairman Boswell, Ranking Member Moran, and Members of the 

Committee, thank you for holding this hearing today. I believe this 

is the first opportunity that the crop insurance industry has had 

to comment before Congress on the process and content of the SRA. 

I am Stephen Frerichs, a member of Rain and Hail’s crop insurance team, and I am speaking today on behalf of the American Association of Crop Insurers. Rain and Hail is a member of AACI. 

I am going to make five points today. My written testimony 

makes additional points. 

My first point, signing the SRA does not imply a consensus 

agreement, nor success for the industry, a point that Ranking 

Member Lucas made. 

USDA says on its website a successful conclusion of the SRA negotiation has occurred, in part because all companies signed. However, we want you to know that companies did not have a choice. 

There is absolutely no latitude in this partnership: Sign and you 

are in business, at least for the short term; don’t sign, and you are 

out of business immediately. To suggest that the 2011 agreement 

is a success because crop insurance companies signed is misleading. 

Never before has any Administration made this level of reductions in an SRA. We believe the reduction greatly exceeds the intent of Congress. The power of the purse is and should be reserved 

to Congress. Therefore, we recommend the renegotiation authority 

be reviewed. Perhaps it should be repealed or, at a minimum, 

modified to include safeguards, especially for maintaining the integrity of the agriculture budget baseline. 

My second point, $12 billion in cuts is significant and will impact 

the industry. 

Mr. Chairman, I am not hear today to cry the sky is falling, but 

I will make a prediction similar to Mr. Rutledge. You can’t cut over 

$12 billion out of a program and not expect to see changes. The industry will consolidate, both at the company and at the agency 

level. Clearly, no one will survive without making significant 

changes to their business operations. These changes may impact 

farmer service and availability. 

43

My third point, the financial impact from the cuts is not uniform 

across the states. States in so-called Group 1 will be by far hit the 

hardest. Group 1 states include Iowa, Illinois, Indiana, Minnesota, 

and Nebraska. 

Appendix tables 1 and 2 in my written testimony illustrate the 

enormous disparities of the cuts under the agreement. Over 80 percent of the expected 2011 cut is taken by these five states. These 

states represented about 34 percent of the program premium. 

Additionally, the combined impact of the A&O cap and the commission cap will be felt hardest in State Group 1. Our initial estimate for 2011 is that the A&O proration will be 83 percent. That 

means the maximum agency payment rate for revenue policies on 

average will be in the 11.8 to 12.6 percent range. As you know, 

over 80 percent of the business is now in revenue policy. For State 

Group 1, this compares to average compensation in the 23 percent 

range in 2009 for those states. Can you imagine taking a 50 percent cut in pay? 

Mr. Chairman, the bottom line is that five states take the brunt 

of these cuts, disproportionately so. 

My fourth point, last minute changes. RMA released three drafts 

for comment over a 7 month period. Each draft contained new and 

befuddling provisions. The third and final draft was no different. 

We object to compensation caps that result in no savings and do 

little to protect a company’s financial stability. 

We object strongly to Section III(a)(2)(K) appearing for the first 

time in the final agreement. It is one thing to ask companies who 

are party to the agreement to waive legal rights; it is quite another 

concept to force companies to ask agents who are not part of the 

agreement to waive their rights. 

We entered this process in good faith. We were up front about 

our doubts regarding USDA’s legal authority. Rather than responding to our doubts, USDA decided to strip our rights. 

My fifth and final point, is the need for stability and contract 

sanctity. Crop insurance companies, as is the case for any company 

in today’s economy, need an extended period of stability. In short, 

the companies need contract sanctity. In the authorization language, Congress limited the Administration to one renegotiation of 

the SRA every 5 years. We urge Congress to abide by that same 

time interval. 

As Chairman Peterson has said, with these cuts, agriculture is 

the first sector to do its part towards deficit reduction. With the 

2008 Farm Bill and the 2011 SRA cuts, the crop insurance program 

has been reduced by over $12 billion. These cuts to the program 

are deep and significant. Collectively, they will have an impact on 

rural businesses and jobs. Therefore, we urge Congress to fully recognize these reductions and leave the crop insurance program out 

of any initiatives to cut Federal spending for 5 years. 

On a personal note, Mr. Moran, I would like to offer my condolences to you on the loss of your mother. My mother passed away 

over 10 years ago, and I think I have some understanding of what 

you are going through. 

[The prepared statement of Mr. Frerichs follows:]

44

PREPARED STATEMENT OF STEPHEN FRERICHS, PRESIDENT, AGVANTAGE, LLC;

LEGISLATIVE CONSULTANT, RAIN AND HAIL, L.L.C., ALEXANDRIA, VA; ON BEHALF

OF AMERICAN ASSOCIATION OF CROP INSURERS

Good morning, Mr. Chairman, and Members of the House Agriculture Subcommittee on General Farm Commodities and Risk Management. My name is Stephen Frerichs and I am a member of the Rain and Hail L.L.C. national crop insurance team. Rain and Hail is an employee owned company and one of the U.S. Department of Agriculture (USDA) Risk Management Agency’s (RMA) largest Approved Insurance Providers (AIP), writing nearly $2 billion of policies in 49 states. 

Furthermore, Rain and Hail has marketed and serviced Federal crop insurance policies throughout the history of the public-private partnership, which was authorized 

by the Federal Crop Insurance Act of 1980. 

Today, I am testifying as a representative of the American Association of Crop Insurers (AACI), a trade association with membership from all areas of the Federal 

crop insurance private sector delivery industry. On behalf of the Board of Directors 

and members of AACI, I want to thank you for scheduling this hearing. With development of the 2011 Standard Reinsurance Agreement (SRA), as authorized by Congress and managed by RMA, now complete, AACI appreciates the opportunity to 

comment on both the development process as well as the final product. 

Signing the SRA Does Not Imply a Consensus Agreement 

As USDA commented on several occasions, all of the AIPs signed the 2011 SRA. 

However, we want Members of this Subcommittee and Congress generally to fully 

recognize companies did not have a choice. Why? Because the companies are crop 

insurance companies built for the purpose of delivering the program to the nation’s 

farmers. Not signing the SRA means the companies are immediately out of the crop 

insurance business, eliminating all income and jobs related to crop insurance line 

of business and reducing the value of those assets significantly. Therefore, the idea 

promoted by USDA that by signing the agreement companies willingly agreed to the 

SRA changes is not accurate. There is absolutely no latitude in this partnership. 

Sign and you’re in business, at least for the short term. Don’t sign and you’re out 

of business immediately. 

Mr. Chairman and Members of the Subcommittee, millions and millions of dollars 

and years and years of time have been devoted to organizing and building crop insurance companies in order to be an effective and efficient partner with USDA in 

the public-private partnership. This partnership has been so successful in offering 

to the nation’s farmers a top quality risk management program that it is the envy 

of the world, which other nations are seeking to copy. It is a misrepresentation of 

the simple facts of the partnership for anyone to suggest that the 2011 SRA, which 

unilaterally makes $6 billion of cuts in the program after Congress already made 

over $6 billion in cuts in the 2008 Farm Bill, is acceptable because the crop insurance companies have signed. 

It will take time to document the consequences of the necessary crop insurance 

company adjustments and changes made necessary by the terms and conditions, 

both financial and regulatory, incorporated in the 2011 SRA by RMA. In the process 

of implementing the 2011 SRA, we want this Subcommittee and Congress generally 

to know the paramount goal of the crop insurance companies will be to continue 

service to the nation’s farmers, to the maximum extent possible. It will take some 

time to know whether all companies who sign the agreement can withstand the dual 

challenges of a lower income and more regulations instituted by the 2011 SRA. 

Financial Terms Take Another $6 Billion Cut 

Despite repeated pleas for caution from across the agriculture sector as well as 

Members of Congress, including some who serve on this Subcommittee, RMA was 

unyielding in its quest to cut an additional $6 billion from the crop insurance program over the next 10 years. As a result, many farmers who depend on crop insurance to help manage the risks associated with their farming enterprises could suffer 

changes in service as companies and agencies contract or consolidate as they respond naturally to a reduction in income. 

The additional $6 billion in cuts are being imposed by the Administration before 

the full implementation of the more than $6 billion in cuts imposed by the 2008 

Farm Bill. Furthermore, this second $6 billion cut will be imposed during a period 

of time when RMA is implementing major administrative changes to the management of the program. The RMA should have completed these administrative changes 

and fully implemented the cuts mandated by the 2008 Farm Bill before placing additional financial and regulatory pressure on the delivery system. Instead, the Administration is abandoning caution and moving ahead with a second round of huge 

45

reductions in financial support and implementation of concepts not provided for review in the months and months of negotiations on the 2011 SRA. 

Another alarming aspect of these cuts is that they are based on a remarkable 

string of good weather and consistently high yields over the past several years. A 

long term view of weather trends would indicate that we are past due for a weather 

disaster that would cause large losses by the crop insurers. All of the RMA examples used to justify their cuts do not include the last year of a major drought in 

the Corn Belt, 1988. Most of their examples show a trend of program cost going almost straight up, a trend that cannot be sustained. However, curiously, these trend 

lines stop at 2008, a year of record high commodity prices and before the $6 billion 

of farm bill cuts have been implemented. They do not reflect the sharp downturn 

in prices since 2008. By cutting the funding of the private sector delivery system 

so severely based on the best yield and price data ever, the RMA may seriously undermine the ability of the companies to sustain one or more significant loss years. 

Never before in SRA negotiations has any Administration made anything that 

even approached this level of reductions in the financial terms of the agreement. We 

believe the reduction greatly exceeds the intent of Congress in granting the renegotiation authority. The ‘‘power of the purse’’ is and should be reserved to the Congress. In our view, the Administration exceeded its legislative mandate. Therefore, 

we recommend the renegotiation authority be carefully reviewed by Congress as to 

whether it should be repealed altogether or whether it can be modified to include 

appropriate safeguards, especially for maintaining the integrity of the agriculture 

budget baseline. 

Financial Impact Not Uniform Across States 

The distribution of the financial impact of the 2011 SRA is by no means uniform. 

States in the so-called ‘‘Group 1’’ will be by far the hardest hit. Group 1 states include Iowa, Illinois, Indiana, Minnesota and Nebraska. Appendix Tables 1 and 2 illustrate the enormous disparity of the cuts under this agreement. As you can see 

from Appendix Table 1, over 80 percent of the expected 2011 cut is taken by the 

five states in State Group 1. These states represented only 34 percent of the program premium in 2009. Both the Underwriting Gain and A&O Cap fall heaviest on 

these five states. State Group 3 actually ends up a net ‘‘winner’’ as the Quota Share 

incentive payment is expected to overcome the A&O Cap impact in these 17 states. 

Additionally, the combined impact of the A&O Cap and the commission cap will 

be felt hardest in State Group 1. Appendix Table 2 details the impact of the A&O 

Cap on expected A&O payment rates. The A&O cap kicks in when A&O payments 

on buy-up policies exceed $1.221 billion. A&O on buy-up policies is then pro-rated 

so that it cannot exceed $1.221 billion. If A&O is pro-rated, the A&O payment rate 

is factored down by the pro-rated amount. Further, a new 80 percent compensation 

cap (80 percent of A&O payment rate) now applies to agency agreements on a state 

average basis. If a company has an underwriting gain (net of reinsurance costs) 

then the company can pay up to 100 percent of the A&O payment rate. However, 

initial compensation levels will have to be at the 80 percent compensation cap because a company will not know if it will incur an underwriting gain until the year 

is over. 

Our initial estimate for 2011 is that the A&O pro-ration will be 83 percent. That 

means the maximum agency payment rate, on average, for Actual Production History policies will be in the area of 14 to 14.9 percent under the 80 percent compensation cap and for Revenue policies, on average, it will be in the 11.8 to 12.6 percent 

range. For State Group 1, this compares to average compensation (commission plus 

profit share) in the 23 percent range (all policies combined) in 2009. Obviously, this 

is a significant cut by any stretch of the imagination. On the other hand, State 

Group 3, where average compensation in 2009 is in the 14 percent range, may see 

only a marginal impact if the pro-rata estimate for 2011 bears out. 

Mr. Chairman, the bottom-line is that five states take the brunt of these cuts—

Iowa, Illinois, Indiana, Minnesota and Nebraska. We submit that is unfair and a 

mistake that will unduly burden these five states. 

Last Minute Changes With No Industry Input 

The companies are alarmed about the number of new changes that were unilaterally inserted into the final draft of the SRA without prior consultation with the industry and no chance to comment. While RMA conducted a number of meetings 

with companies and their trade associations throughout the negotiating period of 

time, they appear to have been orchestrated primarily to facilitate the objective of 

imposing a predetermined level of cuts and certain policy changes on the program 

at the industry’s expense. 

46

For example, RMA repeatedly cited its goal of improving service for producers and 

the Secretary of Agriculture has focused on programs to help smaller farmers, but 

the final draft of the SRA goes in a completely opposite direction. Many of our companies expressed concerns about putting undue limitations on agent commissions, 

and then the final draft abruptly changed from an individual policy commission

limit to a compensation limit per state. Instead of rejecting a bad idea, they made 

it more perverse. Now it is possible for some agents to be reimbursed more than 

others in a state, but with a state-wide cap it becomes a zero-sum game. Companies 

will be able to pay some agents more than the percentage limit if overall in the state 

they stay within the limit. Agents will be incentivized to drop their smaller clients 

and produce a portfolio of larger policies with which they can negotiate a larger 

commission. This provision could leave smaller agents to face greatly reduced commissions and smaller producers hoping that someone will be interested in servicing 

their policies. AACI objects to this perverse method of dealing with agents’ commissions that jeopardizes service to small and medium-sized producers. 

More generally, this agreement includes precedent setting requirements that have 

not been even contemplated in previous SRAs and, equally important, are unheard 

of in normal, private insurance agreements. RMA’s argument that these particular 

provisions are necessary to protect the financial soundness of the companies is puzzling. The annual Plan of Operation (PO) requirement provides RMA considerable 

latitude in its company financial oversight responsibility. A company’s capital adequacy provisions can be adjusted annually by RMA in the required PO submissions, 

which must be approved by RMA prior to the company engaging in activities for the 

new reinsurance year. 

Stripping Companies of Fundamental Legal Rights in Order To Protect the 

RMA’s Own Weak Legal Position 

On another front, we object to the last minute insertion of Section III(a)(2)(K) in 

the final agreement, even in its revised form of a covenant to not sue. Obviously, 

this Section is an attempt to protect the FCIC from litigation that they fear because 

the industry earlier brought to FCIC’s attention that they did not have the authority to make some of the cuts they were proposing in the SRA. Rather than provide 

an adequate response to the third-party legal opinion submitted to them, RMA imposed a provision to strip the companies and the agents of their legal rights. Companies and agencies should not be forced to agree to this gross overreaching and unprecedented regulation that takes away private rights. 

The Current Trend of Huge Cuts Will Destroy Many Rural Enterprises, 

Cost Thousands of Jobs and Undermine our Stable and Abundant Food 

Supply 

The current pattern of using the crop insurance program as a bank to fund other 

priorities, as demonstrated by the 2008 Farm Bill cuts of $6 billion and the SRA 

cuts of an additional $6 billion, cannot continue. Continuing to cut Federal support 

for the crop insurance program will mean destruction of the primary risk protection 

program for commercial American farmers. This outcome would be a terrible development for the nation’s farmers, rural economies and the national economy, specifically including the consumer-taxpayer, since all taxpayers are consumers. 

In fact, farmers from around the nation testifying at the recently completed House 

Agriculture Committee’s 2012 Farm Bill hearings indicated they want to, at a minimum, continue the current level of crop insurance program benefits and would like 

to have the benefits improved for all crops around the nation. It would be ironic, 

indeed, if our government were to destroy a successful crop insurance program at 

the very moment U.S. farmers want to expand it and other nations all over the 

world are trying to replicate it and make it a part of their farm safety net. 

Without an effective risk management program like the current Federal Crop Insurance Program, many farmers would not be able to withstand the weather-related 

risks of producing crops, and they would not be able to secure adequate financing, 

especially in the tighter credit environment of today, to properly finance the capital 

intensive production of crops that agriculture has become today. These farmers 

would not be farming. When farmers don’t farm, the nation’s economy not only loses 

farm jobs, it also loses jobs in sectors directly related to the production of crops, including a wide array of production input products and services. Moreover, subsequently lost revenue and commercial activities from production agriculture input 

sales and services as well as related services, together with the related lost tax revenue, adversely impact jobs in indirect sectors, including auto and home building 

industries. 

Moreover, when farmers don’t farm, it destabilizes America’s stable supply of low 

cost food for all of the nation’s consumers. Reduced supplies of agricultural commodVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
47

ities raise food costs, which today represent, on average, only about 9–10 percent 

of disposable income in the U.S. Higher food prices increase the cost of food to all 

consumer-taxpayers as well as for the government’s food assistance programs, 

meaning more funding would be needed for the Supplemental Nutrition Assistance 

Program (SNAP) and all other related programs. 

Time for Intellectually Honest Program Accounting and Analysis 

RMA constantly invokes the Milliman studies it commissioned on ‘‘reasonable’’ 

and ‘‘historical’’ rates of return as the analytical basis for its decision to make additional cuts in crop insurance company income. From our understanding of fair and 

balanced research methodology, we conclude these studies are flawed because of key 

assumptions imposed by RMA. 

The ‘‘reasonable’’ rate of return study produced a result that is biased to the high 

side because it does not accurately account for the true level of risk associated with 

production agriculture. This bias was introduced to the analysis through the RMA 

requirement that the study not include the disaster experience of 1988 and other 

disasters in the earlier 1980s. Milliman, to its credit, makes note of that fact. In 

all economic settings, higher levels of risk demand and earn higher rates of return. 

We wonder if the risk factor in the study was intentionally biased downward by excluding a high loss year to show a lower rate of ‘‘reasonable’’ return. 

The ‘‘historical’’ rate of return study also produced a result that is biased to the 

high side because it does not accurately account for the true costs associated with 

delivering the modern Federal Crop Insurance Program, especially given the required capital amounts, compliance rules and massive set of regulations. This bias 

was introduced to the analysis through the RMA requirement that the study make 

the assumption that total cost of delivery exactly equals the A&O payment amount, 

a totally arbitrary assumption, with the result of biasing cost of delivery to the low 

side. Several industry studies over the last 10 to 15 years have all shown total cost 

of delivery to exceed A&O payments by four to six percent of premium. RMA has 

not commissioned a study to analyze the true and total cost of delivering the modern crop insurance program. Although, RMA recently indicated it would conduct the 

study in the next year or so. 

Collectively, these RMA assumptions have created a biased public view of the rate 

of return to crop insurance companies over time. If RMA is truly interested in the 

financial health of the companies, as it has publicly stated and given as justification 

for key new 2011 SRA regulations, specifically including the agent payment cap, it 

is time to produce an intellectually honest analysis of the profitability of delivering 

the program. We urge this Subcommittee to make such a study the highest priority. 

Need for Stability, Clear Vision and Confidence 

It has taken not only years, but decades to have the Federal Crop Insurance Program attain the current levels of participation and benefit for our nation’s farmers. 

Only in America could this public-private partnership have been so successful. 

While certainly there is opportunity to continue improving the program, today it 

stands second to none as a world-class agriculture risk protection and management 

tool. 

A lot of people have contributed to the development and evolution of the modern 

crop insurance program, however, no effort has been greater than that made by 

Congress and Members of this Subcommittee. On behalf of the AACI membership 

and the farmers we serve, I want to take this opportunity to thank you for your 

support of a quality risk protection and management program. Given the natural 

and global market elements they work and live with every day that are beyond their 

control, our farmers deserve the certainty and predictability of the risk management 

program you have provided. 

But an important and critical point must be made here and that is private sector 

ingenuity, creativity and capital have contributed significantly to the building of the 

crop insurance program in operation today, especially the farmer service component. 

We believe private sector participation is an irreplaceable factor in assuring maximum farmer satisfaction with the program. 

However, crop insurance companies, as is the case for companies in other sectors 

of the nation’s economy today, need an extended period of stability, both financial 

and regulatory, to develop greater confidence in the partnership with the government as regulator. The companies need a clearer vision of the financial future, a 

coherent and consistent plan for understanding and managing the massive set of 

new regulations and an effective plan to deal with a lower income. It is important 

to make these points because we are concerned that the potential for unintended 

consequences inherent with some of the changes included in the 2011 SRA is not 

recognized nor understood by the regulator. 

48

In the authorization language, Congress limited the Administration to one renegotiation of the SRA every 5 years. We urge Congress to abide by the same time interval and set the crop insurance program aside for 5 years regarding further budget 

cuts. As Chairman Peterson has said, with these cuts in the crop insurance program, agriculture is the first sector in government to do its part in deficit reduction. 

With the 2008 Farm Bill cuts and the 2011 SRA cuts, support for the crop insurance 

program has been reduced by over $12 billion. These cuts to the program are deep 

and significant and, regardless of comments to the contrary, collectively they will 

have an impact on rural businesses and jobs. Therefore, we urge Congress to fully 

recognize these reductions and leave the crop insurance program out of any initiatives to cut Federal spending for 5 years, including budget reconciliation bills and 

farm bills. 

APPENDIX

Table 1. Estimated Distribution of 2011 Cut by State Groups 

Percent of Cut 

State Group 1 83.8%

State Group 2 22.0%

State Group 3 ¥5.8%

Group 1 States: Illinois, Indiana, Iowa, Minnesota, and Nebraska. 

Group 2 States: Alabama, Arizona, Arkansas, California, Colorado, Florida, 

Georgia, Idaho, Kansas, Kentucky, Louisiana, Michigan, Missouri, Mississippi, Montana, North Carolina, North Dakota, New Mexico, Ohio, Oklahoma, Oregon, South 

Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, and Wisconsin. 

Group 3 States: Alaska, Connecticut, Delaware, Hawaii, Maine, Massachusetts, 

Maryland, Nevada, New Hampshire, New Jersey, New York, Pennsylvania, Rhode 

Island, Utah, Vermont, West Virginia, and Wyoming. 

Table 2. Impact of Compensation Cap under Varying A&O Cap Scenarios 

A&O 

Payment 

Rate 

A&O Cap Impact at Selected Pro-Rata Levels on A&O Pay Rate 

No Cap 90% 85% 80% 70% 65%

Actual Production 

History 

21.9% 21.9% 19.7% 18.5% 17.5% 15.3% 14.2%

Revenue 18.5% 18.5% 16.7% 15.7% 14.8% 13.0% 12%

Maximum Agency Pay Rates @ 80% Compensation Cap @ Selected ProRata Levels

Actual Production 

History 

17.5% 15.8% 14.9% 14% 12.3% 11.4%

Revenue 14.8% 13.3% 12.6% 11.8% 10.4% 9.6%

2008 A&O Pro-rata would have been 64%

2009 A&O Pro-rata would have been 72%

2011 A&O Pro-rata expected 83%

State Group 1 Average Compensation 2009 23%

State Group 2 Average Compensation 2009 16%

State Group 3 Average Compensation 2009 14%

Mr. MORAN. Thank you. 

The CHAIRMAN. Thank you for your testimony. 

I would like to move to Mr. Deal, Chairman of the Board, NAU 

Country Insurance Company in Andover, Minnesota. 

STATEMENT OF JAMES D. DEAL, CHAIRMAN OF THE BOARD, 

NAU COUNTRY INSURANCE COMPANY, ANDOVER, MN 

Mr. DEAL. Thank you, Mr. Chairman and the Members of the 

Committee on General Farm Commodities and Risk Management. 

49

I am Jim Deal; and I come to you as a retired Federal employee, 

a former manager of a corporation, a former CEO and owner of National Ag and NAU Country. However, as of July 1, I am retired 

and no longer have any vested interest in any MPCI, so I come to 

you as an individual. This program started back in 1938, I started 

in 1956, so maybe my biggest contribution is as a historian more 

than anything else. 

The high point in my life, obviously, was when President Jimmy 

Carter selected me as manager of FCIC; and he definitely had 

ideas. Through the numerous conversations I had with him, he did 

not like the ad hoc free disaster programs. They had to be eliminated. 

Along with Secretary Bob Bergland, we worked hard to shore up 

the credit side for the farmers because of the tight credit even then. 

So we worked on that. So our thrust was to develop a program, and 

we selected crop insurance as the vehicle that we felt could best address it. 

The other thing that the Administration, and particularly the 

President wanted, he said he wanted the farmers to pay part of the 

premium. He wanted the government to control and put the program out, but he felt that we needed the private sector for the delivery to get the participation we wanted. That was the grounds we 

worked on. 

We got the Crop Insurance Act passed in 1980, and it was designed to make it more affordable and accessible to all farmers in 

all areas, and that marked the birth of the present crop insurance 

program. With the passage of the Act and its many amendments, 

and I talk about the history in my written testimony. I make a few 

comments on the SRA in the program. 

I first would like to compliment Bill Murphy and his willingness 

to work with the private sector, and get what I consider a good reinsurance agreement out. I am sure both sides are going to tell you 

they are not 100 percent happy with the results, and I have said 

many times that sometimes good deals come out when both parties 

feel they have lost something. We will see. Certainly this is the 

case with the SRA. There were many things on both sides that had 

to give and take. 

In my testimony, I talk about the risk, the underwriting gains, 

and in my estimation I believe the companies will walk away with 

a 15 percent reduction in gains. As in the previous testimony, those 

hardest hit in the Group 1 group, which you are aware of. 

However, I also talk in my testimony about how I support the 

principles applied to the A&O side. Because, back in the beginning, 

one of the issues we were to address was to get a subsidy that established way back in the conception of the program that would 

cover the cost. One of the major roles in that is the role the agent 

plays in educating and assisting farmers and making their management decisions, and they are many more fold now than they 

were when we passed the legislation. 

As they previously said, probably the most controversial issue is 

the hard and soft caps that are put in there. However, I believe 

these do give discipline to the program. Some will question what 

I say when I say that. I am not questioning as far as the amount. 

As I understand, there is a study that has been, or is going to be, 

50

conducted relative to the cost of administering this program. I 

think you have to realize in the crop insurance program, both the 

agents and the companies, it is much more intense and there is a 

lot more service work that is required in this in relationship to a 

private policy. So, sometimes this has not been addressed enough 

to really do that. 

I think this study, if they get it done and truly look at what is 

the cost of service, it is one of the issues we had when we passed 

the original legislation where we dealt strictly with commission to 

agents. I think that will help in this matter. I think the crop insurance program is the envy of the world. 

If I might make a couple statements, I think the CAT program 

is wrong. This is a program covering nurseries and big corporations. The imputed premium on that that the taxpayer is paying 

is $308 million. I think they ought to be paying the same as the 

rest of the producers. You are offering them about $8 billion in protection at the taxpayers’ expense. I think it is something that needs 

to be looked at and corrected. 

The COMBO policy is a good move. I commend the RMA on combining this and simplifying the program. 

Another one that I have a dislike for is the seed company discount reductions. I think this simply is hurting the integrity and 

increasing complexity of producers. This program, in my judgment, 

should be eliminated. 

Revenue pricing: the base period when they used the 5 days out 

of the base period to pick the price can shoot a policy over or under 

dramatically. I think there should be a longer period of time to look 

at that. 

And APH, as was mentioned earlier, I think with the technology 

and things we have now, the period of that ought to be shortened 

to improve the administration of the program. 

And probably one of my most important points is the administrative changes that go on. Crop insurance has gone through a lot of 

turmoil in the last few years. I believe we need stability in the requirements to operate under the program, and stability in the financial terms of the agreement, to settle it down and stay with 

what we have. 

The future: The effect of the crop insurance program as it relates 

to the producers is an absolutely needed requirement. It really 

helps financially, especially in tight credit times that we are having 

now. This is so essential for the banking and lending institutions 

to have to shore up the loans so the farmer can produce it. 

The passing of the amendment and the major Act change in 

1980, and the future changes that have been made since then, the 

success of this program is nothing short of amazing. This program 

is the foundation of ag credit out there right now for the farmers 

so they will be able to come back the next years and produce. 

Last, I hope you really consider what has happened with the 

farm bill, with crop insurance, and the new SRA. As previously 

said, the farm bill took $6.5 billion out, which was moved towards 

nutrition programs, as I understand it. Now the new SRA takes $6 

billion, of which $2 billion is going to conservation programs which 

we talked about. This represents, the two of them, about a 40 percent cut in the revenues for the companies. 

51

My last point, if $4 billion is going for debt reduction—and it is 

Minnesota math so I don’t know how close I am—but if you apply 

that to all of the Federal budget, that reduction should equate to 

somewhere between $2 to $2.4 trillion in debt reduction. So I hope 

you consider that crop insurance, we have done our part. I hope we 

get consideration on that. 

And so, with that, I would like to thank you for the opportunity 

to testify. I am happy to answer any questions. Or later on, like 

I said, I am retired, so if staff needs me, I am available. Thank 

you. 

[The prepared statement of Mr. Deal follows:]

PREPARED STATEMENT OF JAMES D. DEAL, CHAIRMAN OF THE BOARD, NAU COUNTRY

INSURANCE COMPANY, ANDOVER, MN 

Introduction 

Good morning, Mr. Chairman, and Members of the House Agriculture Subcommittee on General Farm Commodities and Risk Management. My name is 

James Deal and I am testifying as a retired government employee and former Manager of the Federal Crop Insurance Corporation (‘‘FCIC’’). In my later years I was 

CEO and owner of National Ag Underwriters and NAU Country Insurance Company but have since retired and I currently have no vested interest in any MPCI 

crop insurance company. I welcome this opportunity to address the Committee on 

crop insurance as you prepare your work on the next farm bill. 

I will submit my full statement for the record; however, I would like to highlight 

some of the high points. 

My major role throughout my career with the government was when President 

Carter appointed me as Manager of the Federal Crop Insurance Corporation. I had 

two conversations with President Carter when he was running for President and 

also working closely with the Secretary of Agriculture, Bob Bergland whom I have 

known most of my adult life. Bob Bergland was the Chairman of the House Committee of Conservation and Credit before he became Secretary of Agriculture. Both 

the President and the Secretary had very definite opinions on what they wanted. 

President Carter had said he did not like the free disaster programs and wanted 

a more meaningful insurance program that was a three way partnership between 

the farmer, the government and the private sector. In the process of developing legislation, I received two personal notes from the President regarding what he wanted 

for the farmers. After Bob Bergland became Secretary of Agriculture, I worked closely with Congressman Ed Jones of Tennessee, who took over as Chairman and continued the development of the legislation. As Mr. Bergland has often said in reference to the disaster programs ‘‘they are too little, delivered too late and of no 

meaningful value.’’

It seems like old times testifying here. Back in the 1970’s I spent a great deal 

of time testifying before the Committees on the revitalization of the crop insurance 

program. In fact, I spent lots of time with staff back in Chambers and various meeting rooms shaping and developing the new legislation to make crop insurance a 

major program for farmers to help stabilize their credit needs. 

Historical 

From the historical side, developing an all risk insurance program by the private 

sector has been tried well over the past 100 years, all of which failed. The reason 

for this failure was the risk of drought. Usually drought is wide spread and devastating and the government decided in 1937 to develop an insurance program to 

cover the risk the private section had failed at. The history of Federal Crop Insurance Program dates back to 1938 and I started working for Federal Crop Insurance 

program in 1956 so I guess I am mainly a historian now days! The program has 

gone through many changes from the beginning through today and the basic risk 

of drought was the challenge for the government to develop an actuarially sound 

program. Some highlights of the development of the program are as follows:

Few sectors of the economy are as susceptible to the influence of nature as is 

agriculture. While science and technical knowledge have enabled the farmer to 

avoid or eliminate some dangers which menace harvest, the farmer remains 

powerless to avert damaging or total loss from weather hazards, insects and 

other forms of natural disaster.

52

Crop insurance is the most important part for the American farmers’ safety net. 

Input costs have risen substantially and farmers must borrow money to complete planting. Weather risks are greater than ever and price volatility has 

made ag production riskier than ever. Banks and lending partners require farmers to have a way to repay loans if crops don’t come through. Both large and 

small producers need a reasonable way to guarantee production and revenue to 

stay in business. The health of rural America is dependent on the farmer and 

crop insurance.

Original legislation was introduced in 1937 and passed in February 1938. The 

original legislation was for wheat insurance only and coverage began with the 

1939 wheat crop. The coverage was a ‘‘premium in kind’’ which meant a farmer’s premium was to deliver a bushel of wheat to the Evernormal Granary and 

if he had a loss on his crop he was permitted to pickup his guarantee from the 

same granary. However, this plan was never implemented but was administered by monetary exchange rate.

In 1938 Congress formed the Federal Crop Insurance Corporation (FCIC) with 

three objective in mind, (a) to protect the income of farmers against crop failure 

or price collapse; (b) to protect consumers against shortage of food supplies and 

extreme of prices; and (c) to assist business and employment by providing an 

even flow of farm supplies and establish stable farm buying power.

Crop insurance was suspended at the end of 1943 with no insurance offered for 

the 1944 crop year because of actuarial and loss adjustment control were not 

following sound insurance principles.

An amendment to the Federal Crop Insurance Act in December 1944 reinstated 

the insurance program effective for the spring planted crops in 1945. The 1945 

program provided for insurance on cotton, flax, and wheat on a national basis 

and corn and tobacco on an experimental basis not to exceed 20 counties.

An amendment to the Federal Crop Insurance Act, August 1, 1947 effective for 

the 1948 crop year provided for reorganization on a sound actuarial basis. The 

amendment limited insurance to not more than seven crops (including wheat, 

cotton, flax, corn and tobacco) 200 wheat counties, 56 cotton counties, 50 counties each for corn and flax and 35 tobacco counties. The amendment also continued the provision for the addition of not more than three additional crops and 

20 additional counties each year thereafter.

The Act was further amended on August 25, 1949 (63 Stat. 663) to expand the 

program to additional counties following the favorable experience in 1947 with 

premiums exceeding losses paid by nearly $8,500,000 and again in 1948 with 

premiums exceeding indemnities by over $5,900,000. This amendment authorized a maximum expansion each year from 1950 through 1953 equal to half the 

number of counties in which the Corporation was authorized to offer crop insurance in 1948 on each commodity. In addition, the Multiple Crop Insurance plan 

under which the investment in several crops is insured under one policy could 

be expanded to 75 counties in 1950 and to 25 additional counties in each of the 

next 3 years.

Effective beginning in 1954 the maximum number of new counties was increased from 20 counties per year to 100 counties per year in addition to the 

number of counties in which insurance was offered the preceding year. On September 12, 1964, the Act was amended to raise the limit from 100 to 150 counties that could be added each year.

The Act was further amended on August 3, 1956 (70 Stat. 1031) to authorize 

the charging of the direct cost of loss adjustments and a portion of the administrative expenses against premium income. These costs are not taken into consideration when premium rates are computed.

On July 23, 1957, the Act was further amended (71 Stat. 309) to authorize the 

corporation to provided reinsurance on any crop or plantation insurance provided in Puerto Rico by a duly-authorized agency of the Commonwealth provided such reinsurance is not available from a recognized private sources at a 

reasonable cost.

On August 4, 1959, the Act was further amended (73 Stat. 278) to eliminate 

the minimum participation requirement. This provision made it necessary to 

have the smaller of the 200 farms or 1–3 of the farms producing insured crop 

in a county covered by insurance in order for the program to operate in a county.

On September 12, 1964, the Act was further amended (78 Stat. 931 or 934) to 

raise the yearly addition of new counties to the program from 100 to 150.

53

Federal Crop Insurance, the only widespread all-risk crop investment protection 

available to farmers, is a voluntary program offered on an individual basis on 

basic and specialty crops (including wheat, corn, cotton, tobacco and citrus) in 

39 states. Insuring crops against natural hazards over which farmers have not 

control. Federal Crop Insurance is intended to help maintain a stable rural 

economy by spreading the impact of crop loss and damage over a period of many 

years.

Indemnities paid to farmers are paid from premiums collected each year from 

participating farmers. Some administrative costs are paid by Congressional appropriation.

In the 1971 crop year, 3,536 individual crop programs were operated in 1,452(?) 

counties. Over $800 million of production and nearly 400,000 individual crops 

were insured in 1971.

The limited expansion to new crops and new counties on a sound actuarial basis 

has brought Federal Crop Insurance to its present status. For 1977 Federal 

Crop Insurance offered insurance protection for 26 crops with 4,063 individual 

crop programs operating in 1,526 counties. Federal Crop Insurance has now assumed more than $2 billion ($2,101,673,535.00) liability for crop production investments and has a premium income in excess of $100 million 

($102,206,227.00).

In 1980, Congress passed legislation that was designed to increase participation 

in the Federal Crop Insurance Program and make it more affordable and accessible. This modern era of crop insurance was marked by the introduction of a 

public-private partnership between the U.S. Government and private insurance 

companies bringing the efficiencies of a private sector delivery system together 

with the regulatory and financial support of the Federal Government.

The passage of the Federal Crop Insurance Act of 1980 marked the birth of the 

present Federal Crop Insurance Program and the start of the public-private 

partnership that has been the foundation for its success. With the passage of 

this Act, Congress for the first time embraced the goal of establishing a program that could provide protection for all farmers in all regions, with the intent 

that it replaces ad hoc disaster payments. I was Manager of FCIC and was the 

major architect for the Administration on this legislation.

The Federal Crop Insurance Reform Act of 1994 dramatically restructured the 

program. And in 1996, the Risk Management Agency (RMA) was created in the 

U.S. Department of Agriculture to administer the Federal Crop Insurance Program. Through subsidies built into the new program guidelines, participation 

increased dramatically. By 1998, more than 180 million acres of farmland were 

insured under the program, representing a three-fold increase over 1988. In 

2008, more than 272 million acres are insured through the program protecting 

a record-setting $90 billion of crop value.

Although the implementation of the 1994 Act represented a major challenge, 

private industry rose to the occasion. The new program offering catastrophic insurance coverage was implemented successfully. In the year following passage 

of the 1994 Act participation, participation rates rose to 88 percent. Since that 

time private industry has assumed exclusive responsibility for the delivery of 

catastrophic insurance coverage in fourteen states and is expected to assume 

similar responsibility in other states soon. Although participation rates have 

fallen somewhat since the repeal of the 1994 Act provisions that made crop insurance a prerequisite for receipt of agricultural program benefits, they have remained well above the 50 percent goal set by Congress in 1980.

The widespread availability and high participation rates that have recently 

been achieved with the help of the private sector have finally permitted Congress to attain its long-sought goal of turning the crop insurance program into 

a replacement for ad hoc agricultural disaster assistance.

In the 1994 Act, Congress sought to eliminate ad hoc disaster assistance, and 

enlisting the private sector to increase the participation in the program was an 

integral part of its strategy. Congress has so far not wavered in its resolve to 

rely on the crop insurance program as its sole vehicle for delivering assistance 

to farmers stricken by natural calamities.

In May of 2000, Congress approved another important piece of legislation: the 

Agricultural Risk Protection Act (ARPA). The provisions of ARPA made it easier 

for farmers to access different types of insurance products including revenue insurance and protection based on historical yields. ARPA also increased premium 

54

subsidy levels to farmers to encourage greater participation and included provisions designed to reduce fraud, waste and abuse.

In 2000, Congress enacted legislation that expanded the role of the private sector allowing entities to participate in conducting research and development of 

new insurance products and features. With the expansion of the contracting and 

partnering authority, RMA can enter into contracts or create partnerships for 

research and development of new and innovative insurance products. Private 

entities may also submit unsolicited proposals for insurance products to the 

Board for approval. If approved by the Board, these unsolicited insurance products could receive reimbursement for research, development and operating 

costs, in addition to any approved premium subsidies and reinsurance.

Even this brief examination of the history of the program’s expansion and evolution indicates clearly that both Congress and the nation’s farmers have a 

strong and continuing interest in encouraging widespread participation in the 

Multiple Peril Crop Insurance Program. Congress has clearly recognized the 

critical role played by private insurance companies and has taken steps, in all 

key pieces of legislation it has passed since 1980, to ensure their continuing involvement.

The crop insurance industry has changed significantly since its early days. Policies, procedures, and techniques have been modified over the years. The industry is constantly evaluating its insurance products in an ongoing effort to make 

sure that they are relevant and affordable for the farmer. As a result, the American farmer has more and better options to manage risks than at any time in 

history. 

The Program 

See Exhibit 1

I would first like to compliment Bill Murphy, head of Risk Management Association (‘‘RMA’’), in his willingness to work with the private sector in getting a good 

Standard Reinsurance Agreement (SRA) out. Both sides will tell you that they are 

not 100% happy with the result. I can tell you most good deals will end with both 

parties feeling like they had to give something up. This certainly was the case with 

the most recent draft of the Standard Reinsurance Agreement (‘‘SRA’’). I believe the 

new SRA brings a better balance of the risk which in turn will bring better balance 

of distribution. I have analyzed the profit and loss numbers and I believe the SRA 

is on an even keel with other private sector programs. 

Underwriting Gains—With respect to underwriting gains, the companies will 

walk away with an overall reduction of about 15% of total underwriting gains. This 

money has traditionally been used to build surplus and to create that ‘‘rainy day’’ 

fund for the time when we have a loss year and need to provide the appropriate 

payments to our producers. Keep in mind that the reduction is much higher in the 

five Group 1 states (IA, IL, IN, MN and NE) which will see reductions nearly double 

the average while the other states will see reductions less than the average. Companies will need to tighten up operating costs and bear the burden of these reductions 

as RMA strongly fees this was necessary to address criticism with the program. 

I also support the principals applied to A&O. Even larger cuts were mandated to 

the Administrative and Operating subsidies (‘‘A&O’’ subsidy) paid by the government for policy acquisition, underwriting, claims and general operating costs of the 

program. This subsidy was established at the program’s inception so the American 

farmer didn’t have to shoulder the administrative costs of the program. The role of 

the agent educating and assisting our farmers in making risk management and purchasing decisions is a critical part of the program. 

Most of the data being used to criticize RMA and the companies regarding A&O 

and agent commissions were exacerbated by the unusually high commodity prices 

in 2008. By 2010 the prices and volatility factors used for premium calculations had 

returned to normal levels. This concept was supported industry-wide and RMA 

worked on a formula that essentially caps the dollar amount of A&O even if prices 

were to escalate. This assists them in their budgeting process and answers the critics who have argued that the volatility in A&O payments is a burden the government should not have to shoulder. 

Probably the most controversial of these changes relates to the government’s hard 

and soft caps on total agent commissions. The most effected agents are those in the 

Group 1 states who RMA has been criticized heavily by the GAO and other oversight bodies in the last 5 years. Many of these agents received substantially more 

than all of the A&O leaving the company with nothing left to provide underwriting 

and claims service to the farmer . . . a major intent of the subsidy. Many other 

Group 2 and 3 agents may actually see commissions rise as a result of the new SRA 

55

as they were used to receiving a 10–14% rate of commission. However, I believe this 

will give good discipline to the expenditure side and will add to the service of the 

American farmer. Some would question when I say that but I truly believe this will 

stop companies from trying to outbid each other on commissions. If the companies 

all start out with the same base line it will enhance the one element which is competition on service. Service is the name of the game with 89% of the farmers in the 

program. A company’s major thrust would no longer be marketing but service to 

maintain their customer base. As to whether the A&O number is correct in relation 

to the services rendered, my understanding is that a study is or has been scheduled 

to be conducted. I do believe there is more service required on the part of the agents 

and the company with crop insurance over other lines of insurance. The study 

should result in determining the proper compensation. 

The Crop Insurance Contract—A crop insurance contract is a commitment between insured farmers and their insurance providers. Either party has the right to 

cancel or terminate the contract at the end of each crop year. Unless the contract 

is canceled, it is normally automatically renewed the next year. 

Under the contract, the insured farmer agrees to insure all the eligible acreage 

of a crop planted in a particular county. This choice is made county by county and 

crop by crop. All eligible acreage must be insured to reduce the potential for adverse 

selection against the insurance provider. Adverse selection generally exists whenever the insured person has better knowledge of the relative riskiness of a particular situation than the insurance provider does. 

The insurance provider agrees to indemnify (that is, to protect) the insured farmer 

against losses that occur during the crop year. In most cases, the insurance covers 

loss of yield exceeding a deductible amount. Losses must be due to unavoidable perils beyond the farmer’s control. 

Over the last few years, products that combine yield and price coverage have been 

introduced. These products cover loss in value due to a change in market price during the insurance period, in addition to the perils covered by the standard loss of 

yield coverage. 

Crop insurance policies also typically indemnify the insured person for other adverse events, such as the inability to plant or excessive loss of quality due to adverse 

weather. The nature and scope of this ‘‘helper’’ coverage vary depending on the crop. 

This is because of the differences in crops individual natures. 

Government and Private Sector Roles—FCIC’s mission is to encourage the 

sale of crop insurance—through licensed private agents and brokers—to the maximum extent possible. FCIC also provides reinsurance (subsidy) to approved commercial insurers which insure agricultural commodities using FCIC-approved acceptable plans. The private insurance companies reinsured by FCIC have sold and 

serviced all Multiple Peril Crop Insurance authorized under the Federal Crop Insurance Act. 

Since there is both public and private sector involvement in the crop insurance 

program, these relationships result: 

A contract of insurance exists between insured farmers and their commercial insurance providers. 

Premium rates and insurance terms and conditions are established by FCIC for 

the products it develops, or established with FCIC approval for products developed 

by insurance providers. 

Reinsurance agreements (cooperative financial assistance arrangements) exist between FCIC and the commercial insurance providers. 

The Federal Crop Insurance Program is the Envy of the World—It has 

taken not only years, but decades to have the Federal Crop Insurance Program attain the current levels of participation and benefit for American farmers. And, while 

certainly there is room and opportunity to continue improving the program, today 

it stands second to none as a world-class agriculture risk protection and management tool. In fact, other countries such as France have begun to research the program and are even starting their own crop insurance program. 

A lot of people have contributed to the development and evolution of the modern 

crop insurance program, however, no effort has been greater than that made by 

Congress and Members of this Committee. I want to take this opportunity to thank 

you for your support of a quality risk protection and management program. Given 

the natural and global market elements they work and live with every day that are 

beyond their control, America’s farmers, ranchers and growers deserve the certainty 

and predictability of the risk management program you have provided. 

Changing Demographics—Growing global populations, demographic changes, 

and economic growth will substantially increase the demand for agricultural products and create new markets for American products while increased agricultural efficiency in other countries will force U.S. agriculture to be more competitive. 

56

Changing Structure of Agriculture—The structure of the food and fiber system—from farm to market—changed dramatically in the last decades of the twentieth century. Continued change is likely. An increasing share of U.S. food and fiber 

is being produced on fewer, larger, and more specialized farms. Similar change can 

be seen across the food and agriculture sector. Firms are larger, and production 

methods are more specialized. Production and marketing are more vertically and 

horizontally integrated. Concentration—characterized by sharp declines in the number of buyers or sellers of a product—is greater. Consumer preferences, new technology, and global markets drive continuing change, affecting farmers, processors, 

marketers, and consumers. Developing commercially feasible renewable resources 

and manufacturing products creates new demand for agricultural products and 

helps reduce U.S. dependence on foreign sources of nonrenewable resources. 

Congressional Funding—The ability of RMA to respond to the needs of its 

beneficiaries, customers, and producers is determined largely by the level of funding 

provided by Congress. Due to the widespread concern about managing the Federal 

deficit, maintaining the long-term viability of the Social Security Trust Funds, and 

other mandatory programs, future discretionary budgets are expected to remain relatively tight. 

Global Climate Change—Growing concern about the impact of emissions of 

greenhouse gases on the Earth’s surface and atmosphere has prompted policy discussions and international negotiations. Specific concerns have been raised about 

the effects of global climate change on agriculture and the effects of agriculture on 

global climate change. 

Globalization—The globalization of all aspects of the food and fiber system is 

having a major impact on American agriculture. From competitive markets around 

the world, to diseases without national boundaries, to population growth and evolving diets, we are seeing profound changes worldwide. These changes have led to a 

dramatically new trade environment, threats of exotic diseases and pests to domestic production, and international controversies over the use of biotechnology. To remain competitive, the food and agriculture sector needs to take these developments 

into consideration. 

Needed Program Improvements 

CAT Coverage—(See Exhibit 2)—Many forms of CAT coverage offer large cor- porate producers millions of dollars of liability coverage for a flat fee of $300 per 

policy. ‘‘Imputed’’ premium is 100% subsidized by the taxpayer. The ‘‘imputed’’ premium should be charged and that would put every producer on the same level. In 

2009, ‘‘imputed’’ premium was $308 million annually with significant portions covering nurseries and other large commercial interest. The liability totaled more than 

$7.9 billion. 

COMBO Policy—COMBO policies has simplified programs that combine different types of revenue and production plans into a ‘‘COMBO’’ policy for 2011 and 

is a long awaited move that will help simplify the program for producers and for 

the companies. We commend RMA for this. Keep in mind that companies had to 

bear the burdens of this substantial rewrite with less money under the program. 

Congress needs to encourage RMA to continue to move forward with simplification. 

Information—The government needs to continue working with the industry to 

develop a Comprehensive Information Management System (‘‘CIMS’’). This is a positive enhancement for producers reporting information to companies and improves 

loss adjustment integrity and accuracy. 

Seed Company Discounts—The government has allowed producers a premium 

discount if the producers use their seed. This is accomplished through 508(h) filings. 

Once this opened up, other seed companies are filing for similar discounts. The 

issues are as follows:

• The new programs place the burden of additional verification, underwriting, 

mandated spot checks and loss adjustment procedures on companies while actually paying them less (discounted premiums mean less A&O). The software programming alone is a major expenditure for these programs.

• The additional production capabilities of the hybrids will naturally increase coverages by improving producers APH over time. Once these take effect, the discount is no longer appropriate yet there is no plan to ever end the discounts. 

This will throw off policy ratings in the future. This is flawed.

• These programs are hurting program integrity and increasing complexity to the 

producers and this program should be eliminated.

Revenue Pricing—Price and volatility discovery periods for revenue plans are 

too short and have an artificial impact on policy pricing. For example, volatility factors are determined based on statistics from only 5 trading days at the end of price 

57

discovery period. With substantial volatility in the markets, this can lead to some 

odd results causing producers to get policies that are substantially under/overpriced. 

The companies and taxpayers are hurt by this in the end. This base premium period 

should be extended to a longer period of time. 

APH—With the rapid technological changes in production agriculture, the government needs to change its method of calculation producers’ APH. By reducing the 

APH reporting periods, the program will better capture production yield data increasing coverages and better rating premiums. This will greatly improve the program while reducing record keeping burdens on the producer. 

Administration Changes—This is probably one of the most important points I 

can make. Crop insurance has been through a very turbulent time. The 2008 Farm 

Bill and now the new SRA has caused a lot of uncertainty for companies, our agents 

and reinsurance partners. New operating standards and program initiatives keep 

adding to the costs of delivering the program yet reimbursements are continually 

in jeopardy or going down. We need stability in the requirements to operate under 

the program and stability in the financial terms of the agreement. Further change 

will place stress on these long term plans and chase capital away from the program. 

The American farmer cannot afford this. 

Future 

I would like to conclude with a few general comments relating to the future of 

the crop insurance program:

(1) Without an effective risk management program like the current Federal 

Crop Insurance Program, many farmers would not be able to withstand the 

weather-related risk of producing crops and they would not be able to secure 

adequate financing, especially in the tighter credit environment of today, to 

properly finance the capital intensive production of crops that agriculture has 

become today. These farmers would not be farming, When farmers don’t farm, 

the nation’s economy not only loses farm jobs, it also loses jobs in sectors directly related to the production of crops, including a wide array of production 

input products and services.

(2) Since passing the Crop Insurance Act of 1980 and the major amendments 

done since the passing of the Act, the success of the Program is nothing short 

of amazing. The crop insurance programs is now the foundation for Ag Credit 

and renders the farmers a comeback after a bad crop year and continue his 

farming operation in the future.

(3) Last, I hope you take into consideration the reduction this program has 

taken not only in the farm bill but also in the latest SRA. The 2008 Farm Bill 

provided a $6.5 billion in savings from crop insurance to fund nutrition and 

other programs over a 10 year period. The 2011 SRA has taken another $6 billion out of crop insurance with $2 million for Conservation Programs and $4 

million for debt reduction. These changes cumulatively represent a $12.5 billion 

reduction to crop insurance over a 10 year period. This represents a 40% reduction in the amounts companies receive to administer and take risk under the 

program. If this percentage of debt reduction ($4 million) was applied to the 

Federal budget it would result in $2.3–$2.4 trillion of debt reduction. I hope you 

remember that we have done our part already; however, it goes without saying—no program is perfect and we need to continue to refine the program and 

hopefully are able to adapt to the ever-changing agriculture.

Thank you once again for this opportunity and I want you to know that I am 

available to you and staff if anyone has any questions either now or in the future. 

References 

Burger, Greg. ‘‘General Farm Commodities and Risk Management.’’ Testimony to 

House of Representatives Agriculture Subcommittee. May 5, 2005. 

Harms, Steven C. ‘‘History of Crop Insurance in the United States.’’ Online posting. www.rainhail.com/pdf-files/rainhailcom/usc/history.pdf.

‘‘Crop Insurance Keeps America Growing.’’ Online posting. 

www.cropinsuranceinamerica.org/about-crop-insurance/history.php.

United States Department of Agriculture, Risk Management Agency. ‘‘History of 

the Crop Insurance Program.’’ Online posting. www.rma.usda.gov/aboutrma/what/

history.html.

58

Exhibit 1

• There are 16 private sector insurance companies that currently sell and service 

policies through the Federal Crop Insurance Program. Altogether, these companies issued more than 1.1 million policies in 2008.

• According to Dr. Bert Little, Tarleton State University, the rate of fraud in the 

Federal Crop Insurance Program is estimated to be less than 1⁄2 of 1 percent. 

By insurance industry standards, this is an extremely low rate of fraud.

• More than 80 percent of insurable farmland in the United States is now protected through the Federal Crop Insurance Program. In 1985, that number 

stood at less than 18 percent.


11158010 11158011
59

Exhibit 2


11158015
60


11158013
61


11158014
62


11158012
63

The CHAIRMAN. Thank you. That was a walk through history, 

and we appreciate your testimony. 

We would like now to move on to Mr. Dalton, President, Midwest 

Insurance Associates, Agri-Land Insurance Agency, on behalf of the 

Independent Insurance Agents & Brokers of America. 

STATEMENT OF JOHN F. DALTON, PRESIDENT, MIDWEST

INSURANCE ASSOCIATES LLC AND AGRI-LAND INSURANCE 

AGENCY, COUNCIL BLUFFS, IA; ON BEHALF OF

INDEPENDENT INSURANCE AGENTS & BROKERS OF

AMERICA 

Mr. DALTON. Good morning, Chairman Boswell, Ranking Member Moran, and the rest of the Subcommittee. 

My name is John Dalton, and I am pleased to be here today on 

behalf of the Independent Insurance Agents & Brokers of America. 

I am the President of Midwest Insurance Associates, LLC, and 

Agri-Land Insurance Agency located in Council Bluffs, Iowa, and I 

am a member of the Big ‘‘I’’ Crop Insurance Task Force. 

As you know, for the 2008 crop year, the Federal Crop Insurance 

Program provided coverage on more than 272 million acres across 

all 50 states. This is more than 80 percent of the insurable acreage, 

with liability protection totaling almost $90 billion. 

Crop insurance agents are proud to be part of the successful expansion of this invaluable program to farmers, and I would like to 

thank you for the opportunity to provide our association’s perspective on the state of the crop insurance industry. 

I would like to begin today by expressing our concern as independent agents regarding components of the 2011 SRA. The Big ‘‘I’’ 

strongly opposes the new SRA’s commission cap provisions. The 

current SRA represents the first time that RMA or any government 

agency has attempted to regulate crop insurance commissions rather than allow the marketplace to determine the appropriate commission rate. This also represents the first time that the Federal 

Government has intervened in the agent-company relationship. 

For more than 20 years, insurance agents have worked side by 

side with the crop insurance companies, and the Federal Government, to increase the use of crop insurance across America. Crop 

insurance is a proven risk management tool that protects farmers 

against unforeseen calamities, and protects the Federal Government from even more disaster aid than it already hands out. 

The Big ‘‘I’’ is deeply disappointed that the RMA has chosen to 

reward the success of insurance agents by thrusting itself into the 

agent-company relationship and instituting a cap on agent earnings. RMA has set out to determine agents’ earning ability, earnings that agents use to raise their families, stimulate rural economies, and hire and pay workers in an agreement which the agents 

have no voice or legal ability to represent themselves. 

In a time of great economic strain where rural economies are 

struggling and our best and brightest are migrating to more urban 

centers looking for better job opportunities, this proposal seeks to 

protect the interest of big business and impose caps on the Main 

Street workers. It is difficult for agents to understand how an Administration that has built its platform on supporting small busiVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00067 Fmt 6633 Sfmt 6601 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
64

nesses and regenerating rural economies has chosen now to turn 

their backs on Main Street America. 

The proposed 80 percent commission cap does not save the government any money, not one red cent; and it only serves to further 

compromise the crop insurance program and its intended beneficiaries, farmers and ranchers. The $6 billion cut to the program, 

on top of the cuts already made to the 2008 Farm Bill, coupled 

with the controlling commission cap proposal, greatly undermine 

crop insurance agents. 

The proposed changes to the delivery cost system concern us because these changes have a disproportionate effect on the Corn Belt 

States. Our large agricultural economy employs thousands of workers and creates thousands of sustainable jobs. In Iowa alone, there 

are over 7,000 workers who are tied to the crop insurance program. 

As a result, jeopardizing the solid structure of the Federal Crop Insurance Program may have far-reaching and unintended consequences for a state like Iowa, because its economy depends so 

heavily on agriculture. 

The RMA’s stated reason for instituting this commission cap is 

to protect companies from themselves, and they specifically cite the 

2002 failure of the American Growers Insurance Company as a justification for the agent commission cap. However, common sense 

would suggest that there may be additional factors associated with 

the failure of this company. 

It is widely known that American Growers was overly reliant on 

risky insurance products, specifically, the Crop Revenue Coverage 

Plus policy when they became insolvent. CRC PLUS, developed by 

American Growers, allowed farmers to buy up the spring price for 

their crops. In most cases, the farmer could buy more revenue coverage at the 75 percent level, and at a lesser premium, than buying 

an increased level of coverage at the lower spring price. For this 

reason, farmers in the Midwest lined up to buy corn and soybeans 

at the increased price, and farmers in the South bought up the 

CRC PLUS policies for cotton and rice. 

American Growers soon lost track of the added liability generated by the additional price option that had been purchased on 

the commodities. When all of the paperwork for all of the new policies was finally received by the company, it was too late to purchase reinsurance for the additional coverage, and American Growers had no choice but to accept the additional liability. The poor 

crop year, combined with the failure of the new CRC PLUS policy, 

caused the company to collapse. American Growers received no 

more or no less A&O than any other crop companies at that time, 

yet they were the only company to fail. 

Furthermore, even if RMA is truly concerned about the long-term 

viability of the crop insurance companies, there are less intrusive 

methods. RMA could have easily raised capital reserve requirements and solvency standards to ensure that companies had 

enough reserves to handle bad insurance years. Instead of taking 

this logical step, the RMA chose a far more controversial and more 

damaging path. Quite simply, instead of protecting companies by 

forcing them to be responsible and ready to protect themselves, 

RMA chose to protect the crop insurance companies by directly 

harming the agents. This is why the Big ‘‘I’’ firmly believes that 

65

RMA has clearly chosen the interest of the insurance companies 

over that of small business. 

I would also like to voice the strong opposition of the Big ‘‘I’’ to 

the ‘‘covenant not to sue’’ provision in the new SRA. This new provision, which is meant to apply both to insurance companies and 

to agents, would prohibit agents and companies from filing a lawsuit against the RMA over the A&O cuts to the program. Insurance 

agents are not parties to the SRA and should not be forced by such 

an agreement to waive their legal rights. The practical effect of this 

covenant not to sue is that agents cannot negotiate with RMA on 

the A&O cuts during the drafting of the SRA, and the agents are 

now going to be denied their legal right to challenge these cuts in 

court. 

RMA is essentially saying that agents are not allowed to have 

any voice whatsoever on an issue that directly affects their livelihood, and are unable to seek legal redress if unfairly harmed. 

Finally, we believe that the RMA may have overstepped its legal 

authority by instituting both the agent commission cap and the 

covenant not to sue. Insurance agents by law are not allowed to be 

parties to the SRA negotiations, and are, therefore, unable to formally negotiate these provisions even though they apply directly to 

insurance agents. 

Additionally, we have found no explicit authority which gives 

RMA the authority to regulate commissions. 

The Big ‘‘I’’ thanks the Committee for allowing us to present this 

testimony at today’s hearing, and we would like to work with Congress on a legislative fix of the damaging provisions in this new 

agreement. Thank you. 

[The prepared statement of Mr. Dalton follows:]

PREPARED STATEMENT OF JOHN F. DALTON, PRESIDENT, MIDWEST INSURANCE

ASSOCIATES LLC AND AGRI-LAND INSURANCE AGENCY, COUNCIL BLUFFS, IA; ON

BEHALF OF INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA

Good morning, Chairman Boswell, Ranking Member Moran, and Members of the 

Subcommittee. My name is John Dalton and I am pleased to be here today on behalf 

of the Independent Insurance Agents & Brokers of America (IIABA). Thank you for 

the opportunity to provide our association’s perspective on the state of the crop insurance industry. I am the President of Midwest Insurance Associates LLC and the 

Agri-Land Insurance Agency in Council Bluffs, Iowa and a member of the Big ‘‘I’’ 

Crop Insurance Task Force. 

The Big ‘‘I’’ 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. Independent agents offer all lines of insurance—

property, casualty, life, health, employee benefit plans, retirement products, and 

crop insurance. Our agents serve the needs of their communities not only by offering 

important insurance products to their neighbors, but also by serving as key community leaders—we have agents who serve as volunteer firefighters, youth leaders, 

school board and city council members. 

The typical agency employs licensed support-staff, who help in servicing the products as well as the writing agent. They have considerable overhead—computers with 

high-speed Internet connections, office space leases, advertising costs, auto expenses, payroll, their own insurance (liability, workers’ compensation, health) taxes, 

and other expenses that are drawn directly from the agent’s commissions collected 

from selling insurance products. 

Today an agent does more work per crop policy than ever before. Agents do all 

the data entry, and they keep the yield records per unit—not per policy. The reality 

is that agents require an extraordinary amount of expertise in servicing this insurance product per acre. Crop insurance agents are proud to be partners in the successful expansion of this invaluable program for farmers, and we appreciate the opVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00069 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
66

portunity to provide our perspective today on the important role independent agent’s 

play in the sale and delivery of the Federal Crop Insurance Program (FCIP). 

Standard Reinsurance Agreement 

I would like to begin by thanking you for your leadership during this difficult economic time, and I would like to take this opportunity to express our concerns, as 

independent agents, regarding components of the 2011 SRA renegotiation as outlined in the third draft released on June 30, 2010. According to the new SRA, there 

will be a hard cap of $1.35 billion (or 18%) for Administrative and Operating (A&O) 

reimbursements to crop insurance companies. Companies will be further forced to 

cap agent commissions at 80% of the total A&O, per state. A total of 100% of the 

A&O will be available to agents if the company chooses to offer profit sharing. 

The Big ‘‘I’’ strongly opposes the new SRA’s commission cap provisions. The current SRA represents the first time that RMA, or any Federal agency, has attempted 

to regulate crop insurance commissions rather than allow the marketplace to determine the appropriate commission rate. This also represents the first time that the 

Federal Government has intervened in the agent-company relationship. For more 

than 20 years, insurance agents have worked side by side with crop insurance companies and the Federal Government to increase the use of crop insurance across 

America. Crop insurance is a proven risk management tool that protects farmers 

against unforeseen calamities—and protects the Federal Government from even 

more disaster aid than it already hands out. Because of the work of insurance 

agents, the crop insurance program has grown from relative obscurity to the widely 

used and successful program we are discussing today. 

Statistics for the 2008 crop year, as reported by the Risk Management Agency 

(RMA), show how widely the program is accepted and utilized by farmers and how 

effectively and efficiently it serves their risk management and cash flow needs. For 

the 2008 crop year, the program provided coverage on more than 272 million acres 

across all 50 states, which is more than 80% of the insurable acreage, with liability 

protection totaling almost $90 billion. The Big ‘‘I’’ is deeply disappointed that the 

RMA has chosen to reward the success of insurance agents by thrusting itself into 

the agent-company relationship and instituting an unreasonable cap on agents’ 

earnings. 

RMA has set out to determine agents’ earning ability—earnings that agents use 

to raise their families, stimulate rural economies, and hire and pay workers—in an 

agreement in which the agents have no voice or legal ability to represent themselves. In a time of great economic strain, where rural economies are struggling and 

our best and brightest are migrating to more urban centers looking for better job 

opportunities, this proposal seeks to protect the interests of big businesses and impose caps on main street workers. It is difficult for agents to understand how an 

Administration, that has repeatedly professed support to small businesses and the 

regeneration rural economies, has chosen to now turn their backs on main street 

America. 

The proposed 80% commission cap does not save the government any money and 

only serves to further compromise the crop insurance program and its intended 

beneficiaries—farmers and ranchers. The $6 billion cut to the program—on top of 

the cuts already made to the 2008 Farm Bill—coupled with the controlling commission cap proposal greatly undermine crop insurance agents. These agents are the 

very people who have worked so hard to build the success of this program, revitalize 

rural communities, and build strong foundations for new and existing farmers. 

In addition, we all know that commodity prices are cyclical, and commodities have 

a long and uninterrupted history of moving both up and down. The A&O subsidy 

for 2010 in Iowa will be significantly down compared to 2009 because of lower commodity prices and lower commodity volatilities. The proposed changes to the delivery cost system concern us because these changes have a disproportionate effect on 

the Corn Belt states. Our large agriculture economy employs thousands of workers 

and creates thousands of sustainable jobs. The number of agents and companies 

writing in the Midwest make this program highly competitive. 

According to the National Crop Insurance Services (NCIS), ‘‘agent commissions 

were cut more substantially in the Corn Belt areas, specifically the Midwest, than 

in other areas.’’ Furthermore, NCIS noted that ‘‘they are rebalancing the program 

by making is less profitable in the Corn Belt, and more profitable in other areas.’’ 

As a result, jeopardizing the solid structure of the FCIP may have far reaching and 

unintended consequences for a state like Iowa because its economy depends so heavily on agriculture. This rebalancing will most likely have little effect on economies 

that do not rely as heavily on the crop insurance business. Agents have acted in 

a responsible and prudent manner by working to enhance and deliver the crop proVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00070 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
67

gram to farmers and ranchers all across the country, especially in places where demand is the highest. 

The RMA’s stated reason for instituting this commission cap is to protect companies from themselves, and they specifically cite the 2002 failure of the American 

Growers Insurance Company (American Growers) as a justification for the agent 

commission cap. However, common sense would suggest that there may be additional factors associated with the failure of this company. It is widely known that 

American Growers was overly reliant on risky insurance products, specifically the 

Crop Revenue Coverage Plus policy (CRC PLUS) when they became insolvent. CRC 

PLUS, developed by American Growers, allowed farmers to ‘‘buy up’’ the spring 

price for their crops. In most cases, the farmer could buy more revenue coverage 

at the 75% level and at a lesser premium than buying an increased level of coverage 

at the lower spring price. For this reason, farmers in the Midwest lined up to buy 

corn and soybeans at the increased price, and farmers in the South bought up CRC 

PLUS policies for cotton and rice. American Growers soon lost track of the added 

liability generated by the additional price option that had been purchased on the 

commodities. When all of the paperwork for all of the new polices was finally received by the company, it was too late to purchase reinsurance for the additional 

coverage and American Growers had no choice but to accept the additional liability. 

The poor crop year, combined with the failure of the new CRC PLUS policy program 

caused the company to collapse. American Growers received no more or no less A&O 

than the other crop companies at this time, yet they were the only company to fail. 

Furthermore, even if the RMA truly is concerned about the long term viability of 

crop insurance companies, there are other less intrusive methods that RMA could 

have taken short of these unprecedented commission caps that are very damaging 

to small businesses in an extremely difficult economy. For example, the RMA could 

have easily raised capital reserve requirements and solvency standards to ensure 

that companies had enough available reserves to handle bad insurance years. Instead of taking this logical step, the RMA instead chose a far more controversial 

and more damaging path. Quite simply, instead of protecting companies by forcing 

them to be responsible and ready to protect themselves, RMA chose to protect insurance companies by directly harming agents. This is why the Big ‘‘I’’ firmly believes 

that RMA has clearly chosen the interests of large insurance companies over those 

of small business owners. 

I would also like to voice the Big ‘‘I’s’’ strong objection to the ‘‘covenant not to sue’’ 

provision in the new SRA. This new provision, which is meant to apply to both insurance companies and agents, would prohibit agents and companies from filing a 

lawsuit against the RMA over the A&O cuts to the program. Insurance agents are 

not parties to the SRA and should not be forced by such an agreement to waive 

their legal rights. The practical effect of this covenant not to sue is that agents cannot negotiate with RMA on the A&O cuts during the drafting of the SRA, and 

agents are now going to be denied their legal right to challenge these cuts in court. 

RMA is essentially saying that agents are not allowed to have any voice whatsoever 

on an issue that directly affects their livelihood, and are unable to seek legal redress 

if unfairly harmed. 

Finally, we believe that the RMA may have overstepped its legal authority by instituting both the agent commission cap and the ‘‘covenant not to sue.’’ Insurance 

agents, by law, are not allowed to be parties to the SRA negotiations and are therefore unable to formally negotiate these provisions, even though they apply directly 

to insurance agents. Additionally, we have found no explicit authority which gives 

RMA the ability to regulate commissions. The Big ‘‘I’’ is strongly opposed to the 

RMA’s overreaching and will pursue any and all avenues to fighting these provisions. 

Agent Workload and Program Complexity 

Unlike other lines of insurance sales, a crop agent’s responsibilities require a 

much more hands-on approach, which invariably increases the threshold for errors 

and omissions (E&O) exposure (Professional Liability). 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 typically begins with 

the agent quoting the wide variety of different plans of insurance available, then 

explaining production reporting and supporting record requirements to the farmer. 

The agent explains different date requirements by crop and coverage for application, 

the actual production history (APH), the acreage report, and 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 must also review approved APH 

68

from the company to ensure accuracy, explain approved APH yields to the farmer, 

and provide him with a copy. 

Additionally, the agent is responsible for implementing procedures for Preventive 

Planting, Yield Adjustment, Unit Division changes, Power of Attorney requirements, 

or any of the other technical policy provisions. All of preceding goes into writing the 

policy—and does not even factor in the consequences of a potential loss, which occurs more often than any other line of insurance. Compared to the sale of life, 

farmowners, homeowner’s, or auto insurance, the sale of crop insurance is indeed 

extremely complex and challenging. 

Crop Insurance—an Indispensable Financing Tool 

The Federal Crop Insurance Program is an indispensable financing tool. Without 

crop insurance, many farmers would be unable to obtain financing. Crop insurance 

makes the process of farmers obtaining annual operating loans much easier and 

more efficient. In the case of farmers who have purchased crop insurance, banks 

usually require less collateral because they consider these farmers to be better protected. Many younger farmers with less collateral would be unable to obtain financing without crop insurance. 

Farmers understand more and more that crop insurance is another cost of doing 

business. However, the purchasing cost of crop insurance provides certain benefits 

for the farming operation, including greater ability to finance land purchases, enter 

into land rental contracts, and arrange production input purchases. Protection provided by the program gives a lender much more confidence in extending credit. 

Conclusion 

The Big ‘‘I’’ thanks the Committee for allowing us to present this written testimony at today’s hearing, and we would be happy to work with this Committee at 

any time to further explain the vital role that crop insurance agents play in the 

FCIP. The Big ‘‘I’’ strongly opposes the new SRA and would like to work with Congress on a legislative fix to the damaging provisions in this new agreement.

The CHAIRMAN. Thank you, Mr. Dalton. 

I would now like to recognize Ms. Kathy Fowler, President, National Association of Crop Insurance Agents, Memphis, Texas. 

STATEMENT OF KATHY FOWLER, PRESIDENT, NATIONAL 

ASSOCIATION OF CROP INSURANCE AGENTS, MEMPHIS, TX 

Ms. FOWLER. Good morning, Chairman Boswell, Ranking Member Moran, and Members of the Committee. 

As previously mentioned, I am Kathy Fowler from Memphis, 

Texas, and I am President of the National Association of Crop Insurance Agents, NACIA. I thank you for this opportunity to testify 

before this Committee. 

As you may know, while crop insurance agents are an integral 

part of this crop insurance program, we are not one of the parties 

privy to the standard reinsurance agreement negotiations. So, we 

truly appreciate this opportunity to contribute to the discussions 

surrounding the crop insurance program. 

As we take a look at the impact of the new SRA, it is yet to be 

seen what will come out of this agreement. That will be decided 

with agents and companies on the ground. As small business owners, we have to determine how to move forward on continuing to 

provide products to our farmers, and continuing our support of 

rural America. As agents, we have a unique position of interacting 

with farmers on a daily basis. We get to know their families, their 

farming operations, and their risk-management needs. 

What we have found is that crop insurance is the preferred safety net. It is not only understood by farmers, but it is the most dependable form of risk management available. Of all of the programs, crop insurance is the only program that has proven itself. 

With crop insurance, a farmer knows exactly what will happen 

69

when misfortune hits. And, more than that, a farmer knows his 

crop insurance agent is going to be there to answer any questions. 

Agents provide extended business hours, schedule meetings at 

night and weekends to accommodate the farmers when a natural 

disaster strikes. Farmers prefer crop insurance to other safety net 

programs, and have developed a real trust for this program. With 

other programs, assistance is too uncertain for farmers and lenders 

to waste time and money. 

We do believe there are a good number of pilot and expansion 

programs that provide risk management. We would like to thank 

RMA for using the savings from the SRA for the needed expansion 

of the Pasture, Rangeland, and Forage Rainfall Index Program, especially in Texas. This program was approved 2 years ago, but 

funding was not provided until now. We are eager for good pilot 

programs to work, but if they are not funded, farmers are unable 

to benefit. 

We would like to point out that the vegetative part of this program, PRF, has no traction. Producers do not fully understand or 

trust the vegetative program. Participation lags well behind the 

rainfall program. 

Because crop insurance works, it is critical to maintain and support this program. The 2008 Farm Bill shifted the premium billing 

date of October 1 to August 15, with a payment due date of September 15. This is the most difficult financial time for producers. 

If premium payments are due on September 15, starting in crop 

year 2012, farmers with spring crops will struggle to make timely 

payment. Those who have to delay payment will face a 15 percent 

simple interest penalty payment at the time with the least amount 

of cash flow. We urge this Committee to postpone this date change 

to prevent putting unnecessary pressure on producers. 

While we understand that the SRA has been signed and agreed 

to, certain provisions bring concern to agents. We question the legality of the SRA provisions, such as imposing a limit on the ability 

of agents to negotiate the amount of their compensation with crop 

insurance companies even though we are not a party to the SRA 

negotiations. 

It is our role to live and work with the agreement made by the 

companies and the government. We may find that the new agreement works smoothly and it is business as usual; or we may find 

that we need to make adjustments, cuts, and diversify our business. While we understand that the $6 billion cut will affect the 

2012 Farm Bill baseline and could affect program funding, we 

would like to recommend to this Committee that any additional 

cuts in the 2012 Farm Bill will jeopardize the service delivered to 

producers that they have come to rely on. 

Producers do not solely rely on our knowledge of the program 

and their farming operation, but on the fact that we are a conduit 

between the insurance companies and the insurance recipients, the 

farmers. Unlike typical casualty insurance, we have a lot more customer interaction. It doesn’t stop with the purchase of the product 

or filing the claim. We may interact with a producer anywhere 

from 15 to 20 times per farming operation, and this job is something that cannot be accomplished from Washington or regional offices or online. An agent’s job requires personal relationships, 

70

knowledge, expertise of not only the crop insurance program and 

lending procedures, but actual knowledge of the growing crop. We 

truly set the liability structure for their policy that allows them the 

collateral for their livelihood. 

As Congressman Walz mentioned earlier, the added land provisions I do agree need some updating. As we move forward, we need 

to ensure any decision or changes improve our present crop insurance program and serve our farmers’ risk management needs, as 

opposed to simply making cuts because funding is needed for new 

initiatives or will benefit other non-related programs. 

I thank you again for this opportunity to testify, and I will be 

glad to answer any of your questions. 

[The prepared statement of Ms. Fowler follows:]

PREPARED STATEMENT OF KATHY FOWLER, PRESIDENT, NATIONAL ASSOCIATION OF

CROP INSURANCE AGENTS, MEMPHIS, TX 

Good morning, Chairman Boswell, Ranking Member Moran, and Members of the 

Committee. As previously mentioned, my name is Kathy Fowler, and I am president 

of the National Association of Crop Insurance Agents (NACIA). I thank you for the 

opportunity to testify before this Committee. As you may know, while crop insurance agents are an integral part of the crop insurance program, we are not one of 

the parties privy to the Standard Reinsurance Agreement (SRA) negotiations. We 

appreciate the opportunity to contribute to the discussion surrounding the crop insurance program. For my part, I would like to explain the productivity of the program under new or upcoming regulations and legislation from the agent’s view. 

We are here today to discuss the potential impact of a decision made between 

companies and the government during the last SRA negotiations. It has yet to be 

seen what will come out of this agreement, as that will be decided with the agents 

and the companies on the ground. As small business owners, we have to determine 

how to move forward while continuing to provide products to our farmers and continuing our support of rural America. 

As agents, we have the unique position of interacting with farmers on a daily 

basis. We get to know their families, their farming operations, and their risk management needs. What we have found is that crop insurance is their preferred safety 

net. It is not only understood by farmers, but it is the most dependable form of risk 

management available. Of all the programs, crop insurance is the only program that 

has proven itself. Since 1938, farmers have relied on crop insurance to provide the 

best policy to fit each distinctive farming operation. 

With crop insurance a farmer knows exactly what will happen when misfortune 

hits, and more than that, a farmer knows his agent will be there to answer any 

questions. Agents provide extended business hours, nights, and weekends to accommodate the farmers when a natural disaster strikes. Farmers prefer crop insurance 

to other safety net programs and have developed a trust for those programs. With 

other programs, assistance is too uncertain for farmers or lenders to waste their 

time and money. 

We do believe there are a number of good pilot and expansion programs that provide risk mitigation. And we would like to thank the RMA for using some of the 

savings from the SRA for the needed expansion of the Pasture, Rangeland, and Forage Rainfall Index Program (PRF–RI), especially in Texas. This program was approved 2 years ago, but funding has not been provided until now. We are eager for 

good pilot programs to work, but if they are not funded, farmers are unable to benefit. We would also like to point out that the vegetative part of the Pasture, Rangeland, and Forage policy has no traction. Producers do not fully understand or trust 

the vegetative program, and participation lags well behind the rainfall program. 

Because the crop insurance program works, it is crucial to maintain and support 

the program. However, various provisions in the 2008 Farm Bill and the SRA have 

or will significantly impact the crop insurance industry. The 2008 Farm Bill shifted 

the premium billing date to August 15, with a payment due date of September 15, 

the most difficult financial time for producers. If premium payments are due on September 15 starting in 2012, farmers with spring crops will struggle to make timely 

payment. Those who have to delay payment, will face a 15 percent simple interest 

penalty payment at a time when the least amount of cash flow is available. We urge 

71

the Committee to postpone this date change to prevent putting unnecessary pressure on producers. 

While we understand that the SRA has been signed and agreed to, there are certain provisions that bring concern to agents. We question the legality of the SRA 

provisions, such as imposing a limit on the ability of agents to negotiate the amount 

of their compensation with crop insurance companies even though we are not parties to the SRA and had no direct role in its negotiation. These provisions have the 

potential to reduce the productivity of rural communities, from the agents to the 

farmers. 

It is our role to live and work with the agreement made by the companies and 

the government. We may find that the new agreement works smoothly, and business can continue as usual; or we may find that we have to make adjustments, such 

as diversifying our business. While we understand that a $6 billion cut will affect 

the 2012 Farm Bill baseline, and subsequently affect program funding, we would 

like to remind this Committee that any additional cuts in the 2012 Farm Bill will 

jeopardize crop insurance services producers have come to rely on. This could also 

affect thousands of small businesses in rural America and would be devastating. 

Producers do not rely solely on our knowledge of the program or our knowledge 

of their farming operation, but on the unique position we hold as a conduit between 

insurance companies and the insurance recipients—the farmers. By combining our 

knowledge of the insurance industry and our understanding of the distinctive attributes and needs of each farming operation, we are exclusively positioned to provide producers with the crop insurance that best fits each operation. Unlike typical 

casualty insurance, our interaction with the customer does not stop with the purchase of the product or the filing of a claim. We may interact with the farmer 15–

25 times for every farming operation. This job is not something that can be accomplished directly from Washington, regional government offices, or online. An agent’s 

job requires personal relationships, personal knowledge, and personal expertise of 

not only crop insurance and lending procedures, but also knowledge of the growing 

crops. We set the liability structure for their policy that allows them collateral to 

maintain their livelihoods. 

As members of farming communities, we are intricately linked with the economical development of rural America. Many crop insurance agent companies are small 

businesses with ten or fewer employees. During an era where rural communities are 

shrinking and urban cities are growing, increasing jobs in small towns is crucial to 

keeping the heart of rural America pumping. The values embedded in small towns 

are a significant part of the American lifestyle. Maintaining and even increasing 

crop insurance agent jobs will contribute to the development of rural communities 

by reinvesting money and manpower in local businesses, school systems, and local 

governments. My agency is just one example of the entrepreneurial and hard-working spirit that pulses through rural communities. Crop insurance agents not only 

provide a direct service to producers, but provide services to the community at large. 

According to RMA, in 2009, the crop insurance program distributed approximately 

1.17 million policies, covering nearly 264 million acres with $79.2 billion in protection. Many levels of crop insurance reach 70 to 85 percent of potential crop value 

and 80 percent of major program crop acreage are insured. This program has proven 

to be the fundamental safety net for farmers year in and year out. It is relied upon 

by producers to ensure them access to credit that allows them cash flow to fund 

their businesses. 

Going forward, we need to ensure that any decisions or changes improve our 

present crop insurance program and serve our farmers’ risk management needs, as 

opposed to simply making changes because funding is needed for new initiatives or 

to benefit other non-related entities. 

In conclusion, I would like say how proud we are to be a supportive part of America’s agricultural safety net for farmers who provide low-cost food and fiber to our 

nation’s consumers. We look forward to continuing our support of farmers, with the 

help of Congress, the RMA, and crop insurance agencies. 

Thank you again for the opportunity to testify, and we appreciate your continued 

support of this program. I would be happy to answer any questions you may have.

The CHAIRMAN. Thank you. 

I call to Members’ attention that Mr. Costa, the gentleman from 

California, has joined us. He is not a Member of the Subcommittee, 

but he is a Member of the full Committee. I have conferred with 

my Ranking Member, and we would like to welcome you to join us 

and, in fact, invite you to introduce our next witness. 

72

Mr. COSTA. Thank you very much, Mr. Chairman, Ranking Member Moran, and the Members of the Committee, for the good work 

that you do on these very important issues. 

I am very pleased and honored to have a constituent, Mr. Jordan 

Roach, who is our last witness to testify on the second panel. I urge 

Members to pay close attention, as you have with the other witnesses, to his testimony, the Tale of Two Cities, as he refers to it. 

It reminds us once again that American agriculture is diverse 

throughout our nation, and one size does not fit all, and crop insurance, as it is applied to the different regions of America, have very 

important aspects when farmers, ranchers, and dairymen are balancing risk assessment versus the risk management, and the limited tools they have available to them to balance that risk assessment with that risk management. 

Mr. Roach, we welcome you here, as all the witnesses, for the 

good work you are doing on behalf of American agriculture. 

The CHAIRMAN. Thank you, Mr. Costa. 

With that, Mr. Roach, you may begin. 

STATEMENT OF JORDAN A. ROACH, VICE CHAIRMAN, CROP 

INSURANCE PROFESSIONALS ASSOCIATION LLC, FRESNO, CA 

Mr. ROACH. Thank you very much. 

Mr. Chairman, Congressman Moran, and Members of the Subcommittee, thank you for this opportunity. My name is Jordan 

Roach. I am from Fresno, California, and I am Vice President of 

Mary Roach Insurance Agency, which has provided farmers with 

professional and trustworthy crop insurance for 18 years. 

Like many of the producers that we serve, our company is a family business. My mom started it, and I grew up around it in the 

vineyards and orchards of the farmers that we serve. And I must 

add that I hope one day my newborn daughter, Madeleine, will 

have the chance to follow in her grandmother’s footsteps. 

I am honored to appear before you as Vice Chairman of the Crop 

Insurance Professionals Association, or CIPA, an organization that 

is comprised of veteran agents dedicated to making crop insurance 

the best it can be for all farmers. For CIPA agents, crop insurance 

is not just a business, it is a way to serve farmers and ranchers 

who are also our friends and neighbors, and whose success is important to our communities. 

Before going into substance, I would ask for three letters from 

CIPA to the USDA concerning the SRA might be included in the 

record. 

The CHAIRMAN. Without objection, so ordered. 

[The documents referred to are located on p. 78.] 

Mr. ROACH. The letters articulate our best hopes and deepest 

concerns over the SRA, and I believe they will have lasting relevance as you enter the farm bill debate. 

The theme of the letters, of my testimony, and of CIPA as an organization is this: Crop insurance is a model for public-private 

partnership that has accomplished much. It can accomplish more; 

and, given the challenges facing U.S. producers and fiscal constraints facing the government, it should be built upon. 

73

In my written testimony, I do use the Tale of Two Cities metaphor to describe the state of crop insurance. These times are at 

once very exciting and troubling. 

First the good news: Crop insurance is better and more vital to 

producers today than ever before. Crop insurance provides farmers 

with relevant and bankable protection, a contrast to ACRE and 

SURE, and especially critical to beginning farmers. Crop insurance 

is a safety net available to almost all producers where alternatives 

leave out specialty crop producers. 

Farmers also appreciate the business-oriented contractual nature 

of insurance, paying for the coverage that they need, knowing it 

will be there timely and in full if disaster strikes, and that their 

privacy will be protected. 

Finally, a private, competitive, and accountable agent force, 

along with the companies, have continually worked to improve 

products and services to producers. We would not have the successful program we have without private delivery. 

For these reasons and other considerations relevant to lawmakers, including cost effectiveness, public acceptance, and WTO 

legality, one would hope that Washington would be celebrating the 

achievements of crop insurance. 

But now the bad news. The SRA confirms that no good deed goes 

unpunished. USDA’s PR spin machine worked overtime to justify 

deep cuts to private-sector delivery, rather than finding ways to 

better the program for the farmers it serves. CIPA’s position on the 

SRA was simple: Rather than taking money from the industry and 

from the important baseline for agriculture, savings should be reinvested to address producer needs. If the goal of the Administration 

was to reduce overhead and delivery, this goal could be achieved 

by simply lowering the premium rates for all producers and, thus, 

A&O and premium for the government. 

CIPA also encouraged the USDA to improve the APH to better 

reflect what farmers expect to produce, and to improve and expand 

policy options for underserved regions, crops, and practices. Sadly, 

with the exception of the PRF expansion, this did not happen. The 

SRA was therefore a missed opportunity to help farmers and was 

a blow to the agriculture budget, but it also means real pain and 

uncertainty for the industry. 

Agents are impacted by the cuts to A&O, which at 15 to 20 percent on top of the 12 percent sustained in 2008, are severe. This 

cut is especially noxious because it contradicts a certainty that was 

written into the last farm bill, and comes at the same time that 

the COMBO policy and other new regulations and requirements 

are being foisted upon the industry. Total A&O will now be capped 

at roughly $1.3 billion, 15 percent less than the 2010 estimate and 

25 percent below the 3 year average, even while the workload is 

increasing. This will cause a real problem. 

But the commission caps in the SRA are the coup de graˆ ce, an 

unprecedented intrusion by the government into private contracts 

between companies and agents. The caps are unnecessary to ensuring the financial health of companies, and save absolutely no taxpayer dollars. But we fear that they will undermine competition, 

service to underserved producers, and rural jobs. Hardest hit will 

be agents in states like Iowa and California. In the ‘‘I’’ States, 

74

where the market has pushed standard commission rates higher, 

the cut could be anywhere from 30 to 50 percent for 2011. 

In my State of California, where CAT coverage is the only economical option for many producers, commissions will be reduced to 

4.8 percent. Combined with rate reductions which are on the horizon in the next couple of years, we expect a 50 percent reduction 

in commissions for CAT. This cap will impose serious hardships on 

the delivery of CAT, particularly to smaller farmers who are more 

likely to use it. 

So where do we go from here? Fortunately, our industry is dynamic. While there will be economic and job ramifications, when 

we get through it, we will continue to provide a quality service to 

growers. As we head into the farm bill, I would ask you to consider 

what has and has not worked for the American farmer. We believe 

that crop insurance must be protected. No other program can deliver the same tailored risk management protection to all growers 

for such a low cost to the taxpayer. 

We would also ask that the Subcommittee consider ways to spur 

USDA to use its existing authorities to expand quality coverage to 

all areas, and improve the existing policies, so that all producers 

have access to 85 percent revenue coverage. This goal was set by 

Chairman Lincoln at the Senate Agriculture Committee’s first farm 

bill hearing, and we think that it represents wise and forward 

thinking, and it would certainly hedge the political and budgetary 

risks that are certain to come in the next farm bill. 

Thank you once again for the opportunity to testify. 

[The prepared statement of Mr. Roach follows:]

PREPARED STATEMENT OF JORDAN A. ROACH, VICE CHAIRMAN, CROP INSURANCE

PROFESSIONALS ASSOCIATION LLC, FRESNO, CA 

Mr. Chairman, Congressman Moran, Members of the Subcommittee, thank you 

for providing me with this opportunity to testify before the Subcommittee. 

My name is Jordan Roach. I am a crop insurance agent from Fresno, California 

and I serve as Vice Chairman of the Crop Insurance Professionals Association, or 

CIPA. 

CIPA is an agent organization comprised of veteran agents from across the country, from South Carolina to California, from Texas to Minnesota. 

For CIPA agents, selling and servicing crop insurance is not just a business. It 

is a way to serve farmers and ranchers who also happen to be our friends and our 

neighbors and whose success is important to our whole community. 

The purpose of this hearing is to review the state of the crop insurance industry. 

Mr. Chairman, this review is a ‘‘Tale of Two Cities.’’ 

In the first place, on the ground, Federal crop insurance is better and more vital 

today than ever before. 

Everybody from lawmakers in Washington to local lenders are increasingly emphasizing that as budgets for farm bills get slimmer and slimmer, farmers and 

ranchers must increasingly manage their own price and production risks through 

tools such as crop insurance. 

Producers who have traditionally benefited directly under farm bills will today 

point to (1) the near irrelevance of the Marketing Assistance Loan and Loan Deficiency Payments and Countercyclical Payments; (2) the great uncertainty of the new 

SURE program; and (3) the inability to take ACRE to the bank in order to obtain 

operating loans; and these producers conclude, more often than not, that the only 

safety net that they really have that is tailored to the risks unique to their individual operations is Federal crop insurance. And, in the case of most of my growers 

in California—who do not receive any direct benefit under the farm bill—this is absolutely the case. 

Giving further witness to the centrality of Federal crop insurance to the American 

farmer and rancher is the $80 billion in liability covered just last year, which is up 

from $47 billion 5 years earlier and just $31 billion 10 years ago. All told, producers 

75

received about $9 billion in indemnities in 2008 and another $5.2 billion in 2009. 

And, in stark contrast to ad hoc disaster assistance and SURE, crop insurance indemnities were paid to farmers and ranchers in the same timely manner in which 

one might reasonably expect to receive an indemnity on their car or home or other 

property and casualty line of insurance. 

There are also other signs pointing to the emergence of Federal crop insurance 

as a core component of the farm safety net. As the Federal Government grapples 

with how to address budget deficits and debt, some taxpayers may not understand 

the importance of a farm bill but they do appreciate the need for insurance. 

As the Doha Round continues to falter and we see increased potential for trade 

litigation, Federal crop insurance provides an unassailable source of protection. 

As forces unfamiliar with the realities of farming and ranching today attempt to 

ratchet down allowable levels of support to producers and attempt to publicly embarrass producers for any support they do receive, Federal crop insurance works to 

address the real risk management needs of the farm while protecting producer privacy. 

And, as farmers and ranchers seek some sense of certainty as they make longterm plans and investments, Federal crop insurance, which is enshrined in permanent law, offers at least some safe harbor from the rocky financial waters all 

around. 

For these reasons and a host of others, one would think that Washington would 

be working to build upon the incredible success of Federal crop insurance since passage of the Agricultural Risk Protection Act of 2000. After all, as the Chairman of 

the Senate Agriculture, Nutrition, and Forestry Committee noted in that Committee’s first farm bill hearing, there is existing authority under the Federal Crop Insurance Act to aggressively meet the risk management needs of all producers from 

all regions and of all crops. All that is required is a will to use that authority to 

help all producers obtain 85% revenue protection. We wholeheartedly agree with 

Chairman Lincoln: this is the right thing to do. 

Unfortunately, in recent years, Washington has not only failed to move quickly 

down the road of expanding the quality and affordability of crop insurance coverage 

to the American farmer and rancher, but it seems to have actually hit the brakes 

and thrown us in reverse. While producers on the ground are clamoring for risk protection that is tailor-made to their operations, some in Washington appear headed 

in an opposite direction. This is the second part of the Tale.

Recent Presidential budget submissions; the slow pace of new policy development 

and approval; failure to address some systemic program issues, such as Actual Production History; the imprudent push for group risk and whole farm revenue approaches; as well as the recent renegotiation of the Standard Reinsurance Agreement are all very troubling omens for producers, especially beginning farmers, who 

depend on narrowly tailored risk management tools to weather Mother Nature and 

volatile markets and to obtain credit. I will touch on each. 

First, I would like to thank this Committee for rejecting the Administration’s agriculture budgets—which have included suggestions like eliminating CAT policies—

year in and year out. I know this Committee appreciates that the farm safety net 

accounts for less than 1⁄4 of 1 percent of the total Federal budget and only about 

16% of the USDA budget and that even if we were to eliminate the farm safety net 

entirely, it would take 100 years of savings to eliminate just a single year of the 

U.S. deficit. 

Second, regarding the renegotiation of the Standard Reinsurance Agreement, 

allow me to first direct your attention to the testimony of CIPA Chairman Ronnie 

Holt who appeared before the full Committee in Lubbock, Texas on May 17 and to 

three letters of correspondence from CIPA to Secretary Vilsack, dated February 12, 

April 22, and June 16, in which we outlined our grave concerns. I would respectfully 

request that these letters be made a part of the record so that I might avoid repeating the points in the context of this testimony. 

CIPA’s position on the SRA renegotiation was pretty simple. We argued that, if 

the goal of the Administration was to reduce overhead in the delivery of crop insurance, the goal could be better achieved by lowering premium rates for all producers. 

Lower premium rates for producers would not only help farmers but it would also 

lower administrative and operating expense payments, underwriting gains for companies, and the premium costs paid by the Federal Government. 

Alternatively, CIPA encouraged the Administration to avoid deep cuts to Federal 

crop insurance that would undermine the all-important budget baseline for agriculture as Congress heads into the 2012 Farm Bill; service to farmers and ranchers; 

and good jobs in states like Iowa, Kansas, and my home State of California. We argued that the savings should not go deeper than the level of cuts resoundingly rejected by both the House and the Senate during consideration of the 2008 Farm Bill 

76

and that any savings, whatever the level, ought to be reinvested back into Federal 

crop insurance to help producers obtain higher coverage at more affordable prices. 

Among other things, we also argued for improvements to Actual Production History to eliminate the ‘‘double deductible’’ that many farmers must now pay; for improvements to the rating of certain crops and practices in order to lower producerpaid premiums commensurate with the lower risks; for improvements to policies for 

underserved crops and regions of the country to get all producers to 85% revenue 

protection, as Chairman Lincoln has called for; and for an aggressive expansion of 

policy options for producers to choose from to best protect their operations. We, as 

agents, were prepared to take cuts to our own commissions to pay for these important priorities that would greatly help our customer farmers and ranchers because 

we believe Federal crop insurance is about the producer. Yet, sadly, this problem 

has also been ignored. 

Instead, the Administration elected to cut the companies and agents who deliver Federal crop insurance to the tune of $6 billion, on top of the $6 billion in cuts already sustained in the farm bill, many of the effects of which are still to be felt, 

such as the delay in payments to companies and the requirement of early payment 

of premiums by producers. Of the $6 billion, $4 billion in budget baseline was forever lost, thanks to the SRA. Moreover, even a good portion of the $2 billion in 

budget baseline said to have been ‘‘saved’’ under the SRA has, in fact, been lost from 

the farm safety net, having been dedicated to other mission areas within the Department of Agriculture. 

While we appreciate the need to address our nation’s staggering debt, and earnestly hope that this contribution toward deficit reduction will somehow shield the 

whole farm safety net from future cuts, we fear that, if past is prologue, this Committee will be invited to the next budget reconciliation event, nevertheless. Thus, 

with the farm safety net provided under the farm bill and Federal crop insurance 

already threadbare, we fear that future cuts are going to cause even more serious 

economic pain in the countryside, especially if there is an unexpected downturn in 

crop prices. 

To the credit of this Committee and to the Congress, this was surely not what 

was intended in the farm bill. In fact, as I alluded to earlier, both chambers of the 

Congress decisively rejected cuts that measured just a small fraction of the total 

cuts ultimately sustained in the recently concluded SRA. Moreover, the SRA authorized by the Congress in the farm bill was about two things: (1) rebalancing the sharing of risk between companies and the Federal Government; and (2) avoiding sharp 

spikes in administrative and operating expense payments as experienced in 2008. 

Unfortunately, however, the SRA devolved into a treasure hunt to pay for other programs and, only when that hunt failed, eventually into an effort to cut the budget. 

Thanks to the efforts of many Members of this Committee and other Members of 

the House and Senate who recognize the importance of Federal crop insurance to 

our farmers and ranchers and to our rural communities and jobs, some ground was 

made up between the first and the third USDA drafts of the SRA, not only in terms 

of the aggregate level of cuts but also in regards to substantive policy. For example, 

administrative and operating expense payment levels were brought within the 

realm of reason and total cuts were reduced from $8.4 billion down to $6 billion. 

We certainly want to acknowledge and thank you for your efforts. 

But, frankly, speaking directly to the point of this hearing, the state of the crop 

insurance industry has been severely battered after what amounts to a 3 year political storm that culminated in an SRA that gambles dangerously with the future 

strength and viability of Federal crop insurance. For instance, the cuts to administrative and operating expense payments will come at the very same time that the 

COMBO policy is being introduced; at the same time that complex discounts like 

‘‘BYE’’ are churned out; at the same time that cuts made in the 2008 Farm Bill are 

realized; as common land unit requirements are added; as greater interaction occurs 

between farm bill programs (i.e., SURE, ACRE) and crop insurance policies; and as 

the financial stakes grow bigger and bigger and, consequently, more and more is 

being asked by producers of their agents—agents whose commissions are about to 

be cut under the SRA by as much as 50% when commission caps are factored in. 

For agents, the commission caps contained in the SRA are a gratuitous punch. 

First, the caps save no taxpayer money. Second, the caps are wholly unnecessary 

to the goal of ensuring the financial health of companies. In USDA’s own words: ‘‘As 

a regulator, RMA performs a rigorous financial analysis each year on each company 

to ensure that it has the financial capacity to withstand 2 consecutive years of significant losses.’’ These review procedures, which were revamped and strengthened 

in the wake of a 2002 company failure, which actually had absolutely nothing to 

do with agency commissions, provided appropriate means to ensure that a company’s commission expenses are not out of line. But, while we may never know the 

77

real motive behind the commission caps, we can know the following about the commission caps: (1) that they represent an unprecedented intrusion by the Federal 

Government into private contracts between companies and agents; (2) that they will 

undermine service competition and service to underserved producers; (3) that they 

will mean a 4.8% commission on CAT policies (an end-around on specialty crop producers in states like California and Florida after Congress has repeatedly rejected 

OMB attempts to eliminate CAT coverage altogether); and (4) that they will cut 

some agents, including those in Iowa, by as much as 50%, meaning lost economic 

activity and jobs in rural communities. 

For the record, I am not an agent with a commission higher than the percentage 

of administrative and operating expense payment. But I do not resent those who 

do receive higher commissions—in fact I aspire to be one of those guys and I believe 

the signals that I process from this free and open market are healthy in that they 

make me want to do the things I need to do to be a better agent. But moving from 

the philosophical to the practical, I also know that cutting someone’s income stream 

by as much as 50% from one year to the next is not a responsible thing to do to 

anyone, much less in an economy like ours. It requires little imagination on the part 

of anybody who runs a business or meets a payroll to tell you what happens in the 

wake of cuts of this magnitude. 

In fact, the commission caps, the cut in the administrative and operating expense 

payment, and the covenant not to sue that was entered into by the government and 

the companies but which also presumes to bind agents were enough for CIPA to 

seek outside legal counsel from a prominent law firm on the legality of the SRA, 

something that is evidently very much in doubt given the excessive efforts to insulate the contract from any legal challenge. To date, CIPA has declined to seek redress in Federal court mainly because the organization did not wish to put in jeopardy the contracts of our agent members. 

In this vein, it is appropriate to observe that the agents are increasingly regulated 

by the Risk Management Agency not only in terms of how we sell and service policies but now how we are compensated financially despite the fact that there has 

been no privity of contract between RMA and agent, and agents have no seat at the 

table when the SRA that they are no less bound to is negotiated. 

The bottom line is that the recently concluded SRA process marked a missed opportunity to strengthen Federal crop insurance for producers while saving on delivery costs. Instead, spin and cynicism trumped aspiration—and everybody lost in the 

process. Producers lost the opportunity for better coverage at lower cost. Congress 

lost funds to write a new farm bill. And, yes, agents lost revenue needed to cover 

payrolls and sell and service policies to our farmers and ranchers. 

Fortunately, for everybody, our industry is dynamic and creative and it will find 

a way to make the most of what it has been given despite the deep cuts. In the 

coming days under this SRA, there is certainly going to be some economic upheaval 

and adjustment, just as the Administration apparently envisioned. But we will get 

through it, just as we have in the past, and we will continue to strive to provide 

the best service possible to our growers. 

And, as we head into the 2012 Farm Bill debate, it is important to consider what 

has and has not worked for the American producer. Some may want to push lawmakers in the direction of group risk protection, even though farmers cannot take 

this sort of protection to the bank, something especially hard on the beginning farmer who is the very producer Washington wishes to protect. Others may want to push 

Congress into a whole farm revenue approach although the examples of this on the 

ground have left an awful lot to be desired. Still others may wish to push lawmakers into a one-size-fits-all kind of crop insurance or a crop insurance delivered 

by the Federal Government, despite the chills each of these propositions sends down 

the backs of farmers due to their track records. 

In the swirl of these new ideas, I would simply ask that you consider what you 

have in Federal crop insurance, which works exceptionally well for so many, is the 

only game in town for so many others. And I would also ask that you consider what 

it can be—even absent legislative action—if we join together to act and press USDA 

to use its authorities to expand quality coverages for all crops in all areas and improve the existing policies so that all producers would have viable options to buyup at the 85% level. 

Next year, the 112th Congress will walk into the next farm bill in a deep budgetary hole, given the baseline that has been lost through this SRA process, and the 

expiring budget baseline associated with the SURE program. Yet, expecting to further whittle an already shaved-down farm safety net in order to pay for other things 

may well jeopardize the coalitional efforts long necessary to pass a farm bill. Moreover, offering new fangled ways to provide producers with less will not work either. 

78

While the status quo offered by the commodity title of the farm bill today offers 

some comfort to producers, I would just say we can do better. 

By encouraging USDA to aggressively use its authority under the Federal Crop 

Insurance Act to expand and improve the quality of coverage and address some of 

the problems producers face under the program, we can at least lower the very high 

stakes of what is bound to be a tough and contentious farm bill process. 

Thank you once again for the opportunity to testify before this Subcommittee. I 

look forward to answering any questions Members may have. 

ATTACHMENT 1

February 12, 2010

Hon. THOMAS J. VILSACK,

Secretary,

U.S. Department of Agriculture, 

Washington, D.C.

Dear Secretary Vilsack:

On behalf of the Crop Insurance Professionals Association (CIPA), an organization 

comprised of veteran crop insurance agents from across the nation, I write to express our grave concern regarding the provisions of the first draft of the new Standard Reinsurance Agreement (SRA), issued December 4, 2009. 

We strongly support efforts to improve and expand the access to quality coverage 

for producers under Federal Crop Insurance and to build upon its accelerated record 

of success since passage of the Agricultural Risk Protection Act (ARPA) of 2000. To 

this end, we are persuaded that the Federal Crop Insurance Corporation should set 

an ambitious goal of ensuring that, within 5 years, all U.S. producers have the same 

affordable access to quality coverage as enjoyed by producers best served under Federal Crop Insurance today. 

Unfortunately, we are equally persuaded that that goal will never be achieved 

under the terms of the draft SRA. Instead, the SRA regrettably represents the single greatest retreat of Federal Crop Insurance in its 72 year history and a sharp 

reversal of ARPA, tabling deep and destabilizing cuts to private sector delivery that 

will, in the end, result in fewer companies, less access, lower coverage, and lost jobs. 

The President, in his State of the Union address, stated that, ‘‘Jobs must be our 

number one focus in 2010.’’ We wholeheartedly agree and respectfully submit that 

the private sector delivery system of Federal Crop Insurance is already the source 

of thousands of good-paying jobs and economic stability in rural communities across 

this nation. 

Beyond its inestimable value to farmers—i.e., allowing them to obtain credit, manage their price and production risks, and ultimately recover from a loss—the private 

sector delivery system of Federal Crop Insurance has added thousands of jobs in the 

last 10 years as sales have roughly tripled, covering $80 billion in liability with $3.5 

billion in producer-paid premiums in 2009. 

Mr. Secretary, in your remarks to the U.S. Conference of Mayors, you observed 

that the Supplemental Nutrition Assistance Program (SNAP), formerly known as 

Food Stamps, is an economy-driver, helping truckers, grocery stores, and farmers. 

In the same manner, but to a far greater extent, the two or four agents leasing office space and adding staff to compete in small towns, the adjuster in his or her 

vehicle travelling at all hours to adjust claims, and the company actuaries, computer 

programmers, and clerical staff in mid-sized communities all help drive the economy 

in the heartland—and all are tied directly to Federal Crop Insurance. At the end 

of the day, everyone can agree that moms and dads will measure an economic recovery not by whether they are eligible for SNAP but by whether they have a job. 

Yet, notwithstanding the importance of Federal Crop Insurance, the draft SRA 

proposes to cut investment in private sector delivery by fully 1⁄3, imperiling this 

economy-driver and thousands of jobs that depend on it. Even as jobs legislation to 

incentivize hiring of new employees is under active consideration in Congress, including tax incentives for small businesses that hire new employees, the mere unveiling of the draft SRA has already had the opposite effect on jobs, chilling the hiring of new employees, putting into question the maintenance of current workers, 

and putting off computer upgrades and other kinds of investments that create economic activity and jobs throughout rural communities. It is only reasonable to conclude that the actual imposition of these cuts would prove far more detrimental 

than the mere prospect of them. 

79

Crop Insurance Successes 

Federal crop insurance increasingly represents the single most relevant and reliable personal business risk management tool available to farm and ranch families, 

wherever the region and whatever the commodity. We believe that private sector delivery is integrally responsible for this, allowing Federal Crop Insurance to offer 

narrowly tailored risk protection that is based on actual price and production while 

fully protecting producer privacy, being wholly compliant with our nation’s trade 

commitments, and being understandable to the taxpayer. 

This is certainly true in the case of fruit and vegetable production and the production of other specialty crops that policymakers in Washington increasingly seek to 

promote in combating childhood obesity and, more generally, in promoting healthier 

diets. It is also more and more the case with respect to livestock producers who have 

not, until more recently, participated in standing Federal policies designed to indemnify losses. And, finally, it is most certainly true for producers of many staple 

crops that are able to utilize tailored yield and revenue coverage to stay in business, 

relying on quality service and products and a timely adjustment and indemnification 

in the event of a loss. 

As such, the negotiation of the SRA—which may very well decide whether Federal 

Crop Insurance continues to expand access to quality coverage, contracts in its services to producers or otherwise just treads water—must be a careful process neither 

driven by extraneous budget demands nor a convulsive response to a 1 year anomaly. 

Critics of the current method of determining administrative and operating (A&O) 

payments make considerable issue about the increase of such payments from just 

under $1 billion in 2006 to $1.3 billion in 2007 and $2 billion in 2008, before receding to $1.58 billion in 2009. But what is truly remarkable in this set of facts is the 

tremendous positive growth in sales of insurance behind that A&O increase. Between 2006 and 2008, farmer-paid premiums (based on prices set by RMA) increased at an even faster pace than A&O, rising from $1.9 billion to $4.2 billion. 

This more than doubling of sales certainly speaks to the value and importance of 

crop insurance to producers, but it is also a testament to the quality of the sales 

force and the service that is currently provided by our competitive private sector delivery system. 

Equally impressive is the nearly $8.7 billion in claims in 2008 that were timely 

assessed by adjusters and paid by companies and the $4.5 billion in claims from the 

2009 crop that are also already adjusted and paid. As you know from your own experience in delivering benefits to millions of Americans who are served by the policies carried out by the Department of Agriculture, the labor, capital, and time involved in the timely processing of benefits should not be underestimated. For instance, despite a great deal of hard work and diligence, the Department is just now 

assessing losses and issues relative to the 2008 crop with respect to the benefits it 

delivers, and will only begin examining 2009 crop losses months from now. Only 

those who have never delivered benefits on the ground would dismiss the extraordinary cost and effort involved. 

In sum, Federal Crop Insurance is relied upon by producers facing extraordinary 

risks precisely because protection can be tailored to individual risk management 

needs, with the guidance of a quality sales force, and it is reliable when disaster 

strikes, providing timely adjustment and indemnification. Unfortunately, by proposing to slash private sector delivery by fully 1⁄3, the draft SRA strikes at the very 

heart of Federal Crop Insurance. 

Needed Improvements 

Notwithstanding the substantial gains made in the quality of service and products 

to producers under Federal Crop Insurance since 2000, CIPA believes there is room 

for improvement. As such, we wholeheartedly agree with the nation’s leading farm 

organizations that to the extent any savings can be generated from the SRA renegotiation without doing violence to private sector delivery such savings ought to be reinvested into Federal Crop Insurance. Specifically, we support the following:

➢ Improvements to Actual Production History (APH) so producers that have seen 

rapid technological advances and producers in areas that have experienced multiple year losses can insure more of the crop they expect to make in any given 

year. Existing APH requirements that often rely on outdated or artificially low 

yields have left many farmers with a ‘‘double-deductible’’ (i.e., a deductible reflected in the difference between what the producer reasonably expects to yield 

and his or her APH, and the additional minimum 15% deductible required 

under a policy). Producers ought to be able to insure 85% of what they can reasonably expect to produce based on actuarially reliable data.

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➢ Coupled with the APH issue, improvements to the rating of certain crops or 

practices should be pursued. For instance, advanced varieties now dominate 

planted acreage in the United States. As such, would not lowering rates generally for these crops be a more efficient means to recognizing lower risk than 

the current piecemeal approach of approving endorsements?

➢ Improvements to policies for crops that are relatively underserved, whether in 

the context of improved access to higher coverage levels, greater access to revenue products, or through new policies that better address the unique nature 

of the perils faced by such crops. In the past 10 years, there has been a significant increase in the quality of coverage for producers of many crops. In the next 

5 years, the goal of the Federal Crop Insurance Corporation should be to ensure 

a similar increase for crops still underserved.

➢ Expansion of policies that are working, including the Pasture Rangeland and 

Forage policy, but which have been withheld from certain areas due to obstacles 

that are not imposed by statute.

➢ Development of new products to support the growth of advanced fuels under 

the new RFS2 regulation just released (e.g., EPA projects over 11 billion gallons 

of biodiesel from corn stover and switchgrass will help meet the 36 billion gallon 

mandate for renewable fuels by 2022).

➢ Finally, the streamlining of compliance mechanisms so that integrity is ensured without placing undue burdens on the delivery system or producers.

As agents serving our farmer customers on a day to day basis, we believe these 

issues should be addressed and we would be pleased to work with the Risk Management Agency, producer groups, and companies in this regard. 

Problems With the Draft SRA 

Unfortunately, the cuts proposed under the draft SRA would not only do great violence to private sector delivery but, based on the Administration’s proposed budget, 

the money taken from crop insurance would be channeled to government programs 

rather than toward better meeting the risk management needs of producers under 

Federal Crop Insurance. 

The obvious jaw-dropping issue from an agent’s point of view is the sheer magnitude of the cuts to A&O that appear wholly untethered to reality. It does not require an especially trained eye to discern that the crop reference prices used to calculate A&O discriminate against certain crops, are outdated and artificially depressed, are capped but not cupped, and bear no relationship whatsoever to either 

crop prices today or those forecast for the effective period of the next SRA. Based 

on industry analysis, we understand the draft would effectuate a 32% cut to companies and agents in the most recent crop year, atop the 12% cut sustained a little 

more than a year ago. 

That a product or benefit can be effectively delivered at a certain cost in 2011 and 

beyond simply because it was delivered at that level 4 years ago is, we would contend, a rationale that ignores the realities of managing a competitive business. This 

is true even if one overlooks the virtual doubling of sales of Federal Crop Insurance 

since 2006. 

Moreover, with respect, the assertion that, ‘‘these changes will result in more stability for agents, loss adjusters, company employees and others in rural America 

that are affiliated with and dependent upon the crop insurance industry’’ is a fantastically Orwellian description of the kind of devastation common sense dictates 

anyone to expect from a 32% cut, especially when stacked on top of a 12% cut sustained a little over a year ago. 

As is usually the case, the more candid assessment is also the more accurate one. 

In its assessment, NCIS observed: ‘‘[the proposed funding reductions] would dramatically reduce the companies’ returns on premium and invested assets and put 

current business at risk, force sharp reductions in payments to agents, expenditures 

on offices and other inputs, and reduce service to producers.’’ More candid yet, the 

draft SRA will put more Americans out of work. 

Yet another issue of serious concern under the draft SRA is the upfront denial 

of potential underwriting gains to companies despite the ostensible purpose of the 

SRA renegotiation which was to rebalance the sharing of risk. The draft SRA at 

least appears to take a private sector delivery system in a decidedly public direction, 

with all of its adverse implications to producers. We agree with farm organizations 

that contend that adjusting rates is the more logical approach to any perceived excess in underwriting gains. We would note that such an approach would also result 

in reduced A&O and lower premiums for both the producer and the Federal Government. 

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The Realities of A&O 

While we understand the concern RMA and others have expressed with regard 

to the way A&O is currently structured, we submit that a solution that is designed 

to solve the problem of a 1 year anomaly in the past by creating more serious problems in every year thereafter is no solution at all. 

While the current practice used to calculate A&O as a percent of premium may 

not avoid a 2008, it works cost-effectively in the other years and over time and beats 

every alternative floated to date. 

The decoupling of A&O from crop prices or premiums, as proposed under the draft 

SRA, would militate against the most fundamental objective of Federal Crop Insurance: encouraging high sales of high coverage. 

Because the Federal Crop Insurance Corporation establishes the rates of each policy for each crop based on a 1:1 loss ratio (such that producers are not charged for 

delivery costs), some method has to be used in order for companies to recoup the 

cost of selling and servicing policies. In the business of insurance, the denominator 

for allocating delivery costs has always been the premium. 

Other factors fluctuate too wildly (e.g., commodity prices) or can be manipulated 

too easily (e.g., the number of policies sold), but premium is the one constant. Premium is ultimately what we are selling and it is the only figure that reflects both 

the value of what is covered and the probability that a loss may occur. 

If the policy is properly rated, more premium is always a good thing for the business of insurance. This is why commissions for the sale of insurance have always, 

across all lines of insurance, been based on premium—to incentivize the sale of 

more premium. By the same token, if the public policy goal of Federal Crop Insurance is still to encourage more producers to insure their risks and to do so at higher 

levels of protection, then it still makes eminent sense to compensate for the sale of 

premium in the same way—as a percentage of premium. 

Citing statistics that show A&O costs per policy increasing over the past 5 or 10 

years as a basis for cutting A&O is neither probative nor helpful to the process because this statistic bears no relation to actual workload. The reality is that all policies are different and, thus, the notion of a per policy commission or A&O reimbursement is simply divorced from what is actually happening on the ground. One 

policy may cover thousands of acres with multiple tracts and multiple practices, all 

carrying their own set of data and needs, while another may cover a very simple 

tract of 40 acres planted to the same crop every year. 

While it is true that the overall number of policies sold has decreased over the 

past several years, reflecting a trend of consolidation, this can hardly be translated 

to mean less workload on the delivery system. To the contrary, total acres covered 

under Federal Crop Insurance have actually increased significantly (by 30 million 

acres from 2006 to 2008), and given that every tract of additional acreage carries 

its own set of data and needs, this translates into to greater workload and cost of 

delivery. 

While actual costs vary and are as difficult to quantify as a crop’s cost of production, what we know from actual experience is that the time and expenses involved 

in providing a quality service to customers have in fact increased significantly in 

recent years; in part due to the increased needs and expectations associated with 

the higher costs to the farmers who rightly expect a commensurate level of service, 

and in part due to the added requirements, regulations and other changes to Federal Crop Insurance initiated by RMA. 

Page 17 of the NCIS response to the first draft contains an important list of 

changes and developments that have added to the cost delivering a quality service 

to producers. To this list, we would add the following:

➢ Increased training time for agents and staff relative to:

✓ New policies and pilot programs.

✓ Computer programming and quoting software changes.

✓ Changes and new wrinkles to existing policies.

✓ The new ‘‘COMBO policy’’ or common crop policy.

✓ New endorsements and complex discounts, including BYE.

✓ Compliance directives.

✓ Changes in FSA-delivered farm programs that are connected to crop insurance.

✓ The use of the Comprehensive Information Management System.

✓ The use of Common Land Units.

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✓ Gaining and maintaining solid knowledge of markets and interacting Federal 

policies to provide a comprehensive service to the customer in the increasingly 

high stakes and complex business of agriculture.

➢ Increased service time per customer because of:

✓ The expectations that come with paying more for better coverage.

✓ The complexity and number of policy options, including many new policies 

or endorsements.

✓ The increased use of revenue policies that involve greater volatility.

✓ The increased market volatility and higher stakes that have increased producer demands for time, information, and counseling.

✓ The consolidation of policies with more crops and more acres added to existing policies.

✓ The increased interaction with FSA programs (i.e., ACRE and SURE) that 

inevitably lead to questions and demands on an agent’s time.

✓ The increased compliance requirements that involve more record keeping, authorizations, etc.

➢ Increased direct costs to agencies in the form of:

✓ Investments made in staff and office space to meet increased demands associated with increased sales.

✓ Investments in computer systems and technology to quote policies and maintain records.

✓ Costs of sales and advertising in an increasingly competitive business.

✓ Costs associated with Errors & Omissions insurance for agencies as the value 

of insurance coverage written has increased and penalties for non-compliance 

have grown more severe.

In terms of both time and money, agencies have, in fact, seen a substantial increase in the cost of doing business in the last few years as sales have increased. 

As such, to arbitrarily cut and freeze the A&O reimbursement at 2006 levels or 

lower for major crops will meet with what one should reasonably expect: a freeze 

on new hiring, the lay-off of existing workers, finding ways to cut corners, and no 

new investment. 

As agents, we take a long-term view of the business, knowing there will be bad 

years but trusting these will be offset by good years. Business decisions in agriculture should not be based on a single year’s experience, nor should A&O calculations be driven by a 1 year anomaly. One needs look no further than 2009, when 

premium-based A&O and commissions retreated by 21% from the year before, to illustrate the danger in such an approach. In fact, based on lower volatility factors, 

lower commodity prices and the full implementation of farm bill cuts, we are bracing 

for yet another drop in 2010. 

In short, while it is true that, alongside our producer customers, agents experienced the high of 2008, we also shared the experience of a protracted string of lows 

in the late 1990s and the early years of the past decade when there was no intervention to help us. We accept this as a reality of doing business. It has been suggested that the A&O calculation contained in the first draft of the SRA locks in 

greater certainty. We would agree. It locks in certain failure. 

The Legality of Reference Prices 

While our chief concern regarding the A&O calculation proposed under the draft 

SRA deals with its reliance on arbitrary and inappropriately low reference prices, 

we concur with the legal analysis of NCIS that the proposed calculation violates the 

Federal Crop Insurance Act. 

We will not recite here the legal analysis already provided by NCIS. We understand that the Department believes it is on solid legal grounds. As such, we simply 

provide notice to the Federal Crop Insurance Corporation that we believe we would 

have no alternative but to seek relief in Federal court to prevent the implementation of the plan contained in the first draft of the SRA. 

Conclusion 

To ensure all America’s farmers and ranchers have the risk management tools 

they need, to create and save jobs, and to spur economic growth in rural communities, the Administration should build upon Federal Crop Insurance’s record of accomplishment since 2002. 

Any savings that can be achieved in the SRA renegotiation without doing violence 

to Federal Crop Insurance or its private sector delivery system should be reinvested 

83

into Federal Crop Insurance to provide greater access to higher coverage, rather 

than diverted from the budget baseline of the farm safety net. 

The proposal to decouple A&O from the value of policies (premiums and liability) 

runs counter to the goals of Federal Crop Insurance and violates the law. The specific A&O proposal tabled in the first draft of the SRA would result in fewer companies, fewer agents, less access, lower coverage, and lost jobs. 

In sum, the magnitude of the cuts and the means to achieving such cuts are unnecessarily destructive when more sensible, nondestructive means of achieving efficiencies while fully protecting Federal Crop Insurance are clearly available. 

Sincerely,

RONNIE HOLT, Chairman, 

Crop Insurance Professionals Association.

CC:

Hon. JAMES W. MILLER;

Hon. WILLIAM J. MURPHY;

Hon. BLANCHE L. LINCOLN;

Hon. SAXBY CHAMBLISS;

Hon. COLLIN C. PETERSON;

Hon. FRANK D. LUCAS;

Members of the Senate Committee on Agriculture, Nutrition, and Forestry; and 

Members of the House Committee on Agriculture. 

ATTACHMENT 2

April 22, 2010

WILLIAM J. ‘‘BILL’’ MURPHY, Administrator,

Risk Management Agency, U.S. Department of Agriculture, 

Washington, D.C.

Dear Administrator Murphy:

Please accept this letter as a supplement to our letter, dated February 12, which 

fully sets forth the views of CIPA with respect to the First and Second SRA drafts, 

generally. 

We are compelled to make a statement relative to a provision contained in the 

February 23 draft SRA referred to as the ‘‘soft cap’’ on agent commissions. 

First, we are deeply concerned that the ‘‘soft cap’’ on commissions represents an 

unprecedented interference by the agency into what are currently wholly private 

contracts—sometimes multi-year contracts—between companies and agents. We believe the combined effects of the imposition of a ‘‘soft cap’’ and reference prices used 

to calculate A&O would have severe practical as well as legal implications. 

Second, the government imposed cap runs against the principle of service competition that is vital to the success of this public-private partnership. Commissions are 

a critical way for companies to reward agents who do an exceptional job in servicing 

their farmer customers. 

To eliminate this point of competition will reduce the incentives for agents which 

will in turn and over time reduce the quantity and quality of competition. While 

this effect is somewhat mitigated by a company’s ability to profit share, the ‘‘soft 

cap’’ still presents great uncertainties for small businesses that will have a negative 

impact upon jobs in rural communities across the nation. 

On this note, we have read the RMA’s argument that a soft cap is needed to prevent another company failure like the one seen in 2002. However, on p. 13 of the 

RMA’s FAQ piece respecting the 2nd draft, you also state, ‘‘As a regulator, RMA 

performs a rigorous financial analysis each year on each company to ensure that 

it has the financial capacity to withstand 2 consecutive years of significant losses.’’ 

These review procedures—which were revamped and strengthened in the wake of 

the 2002 failure—seem very appropriate, and provide a means by which RMA can 

ensure that a company’s commission expenses are not excessive. We believe this 

proven method is far preferable to the commission cap, which we see as tantamount 

to an elementary school teacher penalizing the whole class because the teacher fears 

the possible misbehavior of one student. 

Finally, believing the cap is more about taking money out of the private delivery 

system than anything, we must note that the 80% cap on commissions, when comVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00087 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN

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bined with other cuts to A&O for companies, would effectuate a deep and 

unsustainable cut for many agents in many regions, and make the sale and servicing of certain policies that are already unprofitable even less so. 

Based on the NCIS’s April 9 comment, A&O for the 2010 crop year in the State 

of Iowa under provisions of the 2nd Draft SRA will be down 45% from the 2009 

A&O, which is already down 25% from 2008. This, of course, is before the cap is 

applied. If, one assumes that average commissions in Iowa are around 20%, one 

would be looking at an additional 30% cut generally just to come into compliance 

with the cap. To put numbers on this, in 2008 Iowa received $185 million in A&O, in 2009 it received $128 million and in 2010 it is expected to receive $105 million; and based 

on current commissions all of this money or perhaps even more would have stayed 

in the state, and gone to people and businesses in rural communities to sustain jobs. 

Under the combined provisions of the 2nd Draft (applying the 80% cap on commis- sions to the expected $70 million in A&O payments, going forward), those same 

Iowa communities would be limited to roughly $56 million. In short, this cut is simply too deep and we respectfully warn that the economic repercussions will be real, 

painful and directly tied to this SRA. 

Another area that highlights the problem with the 80% cap is with respect to the 

sales and servicing of CAT policies, which currently provide LAE equal to 6% of the 

imputed premium. 

The cap would make the maximum commission on a CAT policy equal to 4.8% 

of imputed premium, which is simply too low to justify the work associated with the 

sale to many specialty crop producers or smaller growers of crops where buy-up is 

simply not viable. 

Generally, we applaud and encourage efforts to move growers away from CAT toward higher coverage, and if buy-up were a viable option for growers of all crops, 

we would not be as concerned. 

But CAT remains the only viable option for some crops, and the growers of these 

crops should not be further penalized by a commission structure that makes it unprofitable for any agent to provide them service. 

For these reasons, CIPA strongly recommends that the cap on agent commissions 

contained in the 2nd Draft be eliminated. 

Sincerely,

RONNIE HOLT, Chairman, 

Crop Insurance Professionals Association. 

ATTACHMENT 3

June 16, 2010

Hon. THOMAS J. VILSACK, Secretary,

U.S. Department of Agriculture, 

Washington, D.C.

Dear Secretary Vilsack:

On behalf of the Crop Insurance Professionals Association (CIPA), I write to convey our grave concern over the third draft of the Standard Reinsurance Agreement 

(SRA) and respectfully request that the Administration address these concerns in 

a fourth draft. 

First, we reiterate our sincere hope that you will reinvest the savings resulting 

from the SRA negotiations into Federal crop insurance in order to help farmers and 

ranchers by expanding access to quality coverage. For examples, developing and approving quality policies for all crops and regions and addressing certain problems, 

such as lagging actual production histories, are vitally important. 

Unfortunately, the third draft redeploys only a small fraction of the total savings 

from the SRA negotiations for this purpose. As a consequence, farm and ranch families are seriously shortchanged in this process, Congress is left in a fiscal lurch as 

reauthorization of the farm bill approaches, and Federal crop insurance is left to 

somehow deal with combined cuts of more than $12 billion in a matter of just 2 

years. 

The emergence of Federal crop insurance as a primary and essential safety net 

for producers began in earnest in 2000 and the public private partnership has 

proved a remarkable success. Unfortunately, innovation in aggressively meeting proVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00088 Fmt 6633 Sfmt 6621 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN

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ducer risk management needs seems to have taken a back seat to seemingly endless 

rounds of cuts that show no signs of letting up until the cuts reach the bone and 

irreparable damage is done. If this occurs, Washington will have cut through the 

one thread of policy that, to date, has not generally been politicized and which has 

offered producers a semblance of stability in these uncertain economic and policy 

times. 

For the sake of producers, we hope that this does not occur. As you know, it certainly does not have to. The Administration’s stated objectives of deficit reduction 

and reducing the cost of delivery can be achieved in another way that is not harmful. As we have observed many times, simply bringing down premiums that producers pay in lieu of an SRA renegotiation would achieve both objectives without 

injury to Federal crop insurance. 

Second, we wish to strongly caution the Department that the unprecedented introduction of caps on agent commissions will, in point of fact, work to undermine the 

Administration’s stated objective of better serving underserved producers. We also 

strongly caution that as much as a 50% cut on commissions anticipated in some 

states, including Iowa, is going to expand unemployment lines in many mid-sized 

and small towns. 

There are other unsettling parts to the third draft. One example is a provision 

that actually states that if a company or even a third party litigates a provision of 

the SRA because they believe that it violates the law and they prevail in a court 

that the costs to the Department stemming from the lawsuit be borne by the companies signing the SRA. The provision raises a serious question about the SRA’s compliance with the law and the Department’s confidence in its answer to that question. 

We sincerely hope that the Department and other parties to the SRA will look 

before they leap and address these and other serious concerns in a fourth draft. 

Sincerely,

RONNIE HOLT,

Chairman, 

Crop Insurance Professionals Association.

The CHAIRMAN. Thank you. It has been an interesting presentation here this morning. 

I will start off with a couple of questions. We have votes coming 

up. If they come too quick, we will just recess and come back. 

I am concerned—and Mr. Murphy knew this; we have talked 

about this—about the caps, getting into the business between the 

company and the agent and so on. I am also concerned about the 

legal aspect of it. 

Some of you have heard me tell this story. I was just sharing it 

with Ms. Botts just a moment ago. We are going to look into this 

a little further. 

My last overseas assignment, I was in a NATO headquarters in 

Iberian Command Atlantic. I had a senior position. At our mess 

table, we had a big round table, and we had quite an international 

meeting at noon every day, and I was in the hot seat quite a bit. 

I discovered after some time—and it kind of set me back a little 

because I have sort of been a critic—that other nations around the 

world envy our judicial system. They envy it very much. I thought 

that was kind of unique. It made an impression on me at that time, 

that many years ago. 

Back when we were developing the last farm bill and we got into 

the mandatory arbitration, some of you remember that, that 

sparked me to think that fair is fair. I am not comfortable with 

that. So so much for that for this moment. 

I would like to address maybe a question to Mr. Frerichs of Rain 

and Hail. Last weekend, I flew my little puddle-jumper around 

southern and central Iowa. I saw a lot of water everywhere. The 


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floods are going down. The dikes and levees didn’t break, we sweated that out. But I saw a lot of standing water in a lot of spots in 

corn fields and bean fields that are not going to grow a thing. Of 

course, there are so many acres overall, I am not saying we are 

going to have a short crop, but there will be a lot of individuals, 

at least in those areas, that will really be impacted. 

I just wonder if you might address, a company like Rain and Hail 

in Des Moines, because I flew right over their headquarters as I 

went from Saylorville down river. I had my chief of staff with me. 

We were kind of looking things over and thinking, wow, this is 

pretty bad, but it could have been worse. 

But what would the impact be if—and I will use some years 

where Iowa experienced flooding or drought. In your written testimony, you mentioned RMA uses good weather, consistent good 

yields to base their cuts. With that point, what would be the impact if they had used years when Iowa experienced flooding or 

drought? They have been through both of them quite a little bit, 

in my experience. I have accused Jerry that those Chinook winds 

that he sends up once in a while from south, southwest Iowa, gets 

you in trouble sometimes. 

But anyway, your comments. 

Mr. FRERICHS. Chairman Boswell, thank you for the question. 

I just came back from Iowa last night on a commercial flight, and 

going in and out of Iowa I saw the same water you saw. I saw the 

rivers out of the banks. It does look pretty bad from the air. 

First and foremost, I would like to tell you that Rain and Hail 

will make sure that every one of those claims that farmers have 

this year, or in back-to-back loss years gets worked, gets worked 

quickly, and farmers get the payments that they are required to receive under the crop insurance policies. Rain and Hail prides itself 

on service, and we will make sure that happens. 

This program requires capital standards, capital requirements, 

unlike any other Federal program. We are required to have surplus 

roughly equal to two times what we write in premium. So back-toback losses obviously would affect us. We would have underwriting 

losses, presumably, on a nationwide basis. If it is just one state, 

perhaps not. Every year somewhere in the U.S. crops fail, and we 

make those payments. Say it was a drought like 1988 back to back, 

obviously, that would impact a company’s financial reserves, and it 

may impact how much over time a company can write. 

I would submit to you that is what happened to the company 

that Administrator Murphy mentioned in his testimony earlier 

today. That company did not fail because of excess expenses. Sure, 

excess expenses added to it at the tail end. That company failed 2 

or 3 years earlier because of bad risks. Insurance companies don’t 

generally fail because of excess expenses. They fail because they 

take on bad risks, and that is what happened to this company. 

The CHAIRMAN. I recognize Mr. Moran. 

Mr. MORAN. Mr. Chairman, thank you. 

Mr. Frerichs, you just addressed one of the questions, and I was 

going to address it to Mr. Dalton. I wanted to make sure that we 

got on the record that Mr. Murphy, in response to a question that 

I asked in a prior hearing about the justification for the commission caps, used the failure of an insurance company as the explaVerDate 0ct 09 2002 08:29 Sep 23, 2010 Jkt 041481 PO 00000 Frm 00090 Fmt 6633 Sfmt 6601 I:\DOCS\111-58\58021.TXT AGR1 PsN: BRIAN
87

nation for why this is important. I want to make sure that I understand if there is more to it than this issue, and if company commissions, or expenses, had anything to do with its failure. 

Mr. FRERICHS. Mr. Moran, as you may well know, I worked for 

that company for a year, the year that they went under. I would 

submit to you and to the Subcommittee that there were a lot of 

issues that resulted in that company going under. 

It looked—it actively sought for a buyer. One of the potential 

buyers was Rain and Hail, as it turns out. That deal went pretty 

far along, and then RMA put some terms on the conditions of the 

sale that Rain and Hail could not agree to, and so they walked 

away. 

Ultimately, that company failed because of bad risks that it took. 

Its capital eroded over time. It was allowed to purchase another 

company a year or 2 prior to that, so it expanded, and it did not 

adjust its expenses. So expenses were clearly an aspect of this. But 

it was at the very tail end of it. I think that is what RMA is missing. 

They put significant financial requirements on the companies. 

We provide anything and everything to them that they want to 

know about a company. That is part of the SRA. You shall provide 

whatever we ask for, and we do that. Clearly, at some point, they 

missed the capital health of that company, and agreed to let them 

write premiums that they probably should not have been writing. 

Mr. MORAN. Thank you very much. 

Mr. Parkerson, let me turn to you. You brought the graphic in 

front of you, the stack of regulations. Your testimony is that the 

handbook has grown from 309 pages and appendix 3 has grown by 

621 pages. Do you have any estimate of the additional financial 

cost to companies, given these new administrative costs? And I 

don’t know whether you know the answer to that question, but 

whatever that amount is would increase the loss or the reduction 

in support for companies by more than the $6 billion that the SRA 

agreement—that we attribute to the SRA agreement. Any comments or response to that? 

Mr. PARKERSON. Yes. Thank you, Mr. Moran. 

We did take a survey. As I said, all 16 SRA holders are members 

of our organization. We did a survey of those companies. We found 

that, according to those companies, that we would probably end up 

spending pretty close to $100 million in trying to pay for, not only 

on computers, but training and all of the aspects in supporting the 

program over the next couple of years. 

So those are not in total from any expenses. That is what those 

companies say it will cost them to put in the new computers. 

Obviously, to match, RMA is putting in their new computers and 

to match that the requirements of the new program that is coming 

out, the COMBO policy that they are doing. All of that came up 

to, as I understand, about $100 million that they estimate over the 

next couple of years to spend. 

Mr. MORAN. Thank you, Mr. Parkerson. 

And, finally, to those who represent the agents, shouldn’t there 

be a legitimate concern about the cap on agent commissions could 

lead to a decrease in the number of—I am sorry, a decrease in the 

service to those that you write policies for, your customers? Is there 

88

a concern that the commissions all become standardized, and there 

is no reason then to compete for better service among those you 

serve? 

Mr. DALTON. Thank you. 

I know in our agency that we are looking this coming year to 

about a 30 percent cut in our agency revenues, which would 

amount to about $180,000. When you talk about the service end of 

this thing, this is scary to me, because we are looking at probably 

having to close an office and lay off a couple of employees. 

We service a lot of small farmers; and, in Iowa, a small farmer 

is someone who is farming 300 or 400 acres. They are doing this 

on the weekend. Those people actually require more of my time 

than the guy that is farming 3,000 or 4,000 acres because they are 

doing it as a business. Very seldom do I spend less than 8 hours 

a year with a customer. That usually equates to four or five different visits. 

I am concerned that if I have to lay off people because of these 

cuts that I am not going to be able to service these people; and, 

consequently, the service is going to go down. And what we are trying to accomplish is better service for our people, rather than less. 

This is definitely going to have a devastating effect on my office. 

I started this agency from scratch in 1983. I had one customer, 

and it was me. We have now grown where we have four offices and 

13 employees. We have never had a layoff. We provide stable jobs. 

I think our people are well paid. Having to lay off people because 

of these substantial cuts bothers me, and we are talking about people who have been with me for 20 years and are experts in the 

field. When you start getting rid of people, your service is going to 

go down the tube, no matter what you do. 

Mr. MORAN. Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. Walz. 

Mr. WALZ. I, too, would like to address my condolences to our 

Ranking Member. I never had the opportunity to meet your mother, but I have seen the product of her work, and it is all positive. 

Mr. MORAN. I was going to say, I didn’t realize we were going 

to get so partisan so quickly. 

Mr. WALZ. I was going to say, we often use the term gentleman

around here, but the gentleman from Kansas embodies that. While 

this place can bring out the worst in people, it oftentimes brings 

out the best. And I can tell you my experience here, that is always 

true with the gentleman from Kansas. He is always dignified and 

a thoughtful Member. I am sorry for your loss. 

Thank you all for being here. I do truly appreciate you all being 

here. 

Ms. Fowler, you mentioned this is a program that farmers understand. I was thinking, I was watching a program last night on TV 

on quantum physics and time travel, and it is easier for me to understand that than this program. So I am trying to piece it all together. I think we are all here for the same reasons, trying to figure out how to make this thing work. 

I think Mr. Frerichs brought up a fair point. We are all concerned with budgets. It is important, but we have a lot of folks that 

need to be honest. This idea of a budget freeze or something, that 

89

is lazy legislating. You are going to freeze bad programs and you 

are going to freeze good programs that return money. 

I think it is important to put everything in perspective. Since 

July 1 to this day, we have spent more in Iraq and Afghanistan 

than the $12.5 billion we would save on this, and it is important 

for the American public to have a open discussion on cost benefits. 

I would also like to say, we are all here trying to make this work, 

and Mr. Deal gave us the history of this as he moved this thing 

into the private sector. This is a true public-private partnership. 

We have to be careful about demonizing. 

I heard several of you say an unprecedented intrusion by the 

Federal Government. No, that was the internment of the Japanese 

in World War II. It is probably a stretch to use that rhetoric. 

I think we need to be careful. You have a great argument. You 

have points to make. We want to make it work, and we are listening. 

I want to get to the point where this works so our agents can 

deliver the kind of service I know that they do. I talk to them every 

day, I hear them out there, and I know they are doing that, and 

I know our producers want that. And we are trying to get where 

this country makes the best use of its tax dollars to protect those 

producers. We can do that here. 

I, too, am a little disappointed that this SRA did not have the 

input you needed. I want to hear from you. I am listening. The 

question I have for you is that this continues to trouble me, and 

I don’t know how we get there with all of the different programs 

we have, countercyclical direct payments, all of these things. Is this 

crop insurance—is this a model for where we can get? 

And the thing I have, the ad hoc disaster assistance, we keep 

trying, and Mr. Deal talked about Jimmy Carter trying to get away 

from that. Well, we are still here with the ad hoc disaster assistance. Is there a way that we strengthen this program that can pull 

in and make up for some of that, and we start to use a marketbased approached to solving that? 

I really want to make this thing work. I know producers love this 

program, and you have all been part of making this work. Let’s 

make it better now. Let’s figure out how to make it better. Is there 

a way to do that? 

I know that question is pretty broad, but it is helping me understand my role of where we should ask the questions. 

Mr. RUTLEDGE. Thank you for the question. 

To begin with, if you were to ask the farmers of our nation if 

they had to give up everything but keep one agricultural program, 

I think they would say crop insurance. As far as a way to strengthen that, RMA, along with the industry, has worked to increase the 

available coverage to the producers and that would be one way that 

you could go about that. 

I will pass the mike on to the next person. 

Mr. PARKERSON. I would echo what Mr. Rutledge said, but I 

would also like to throw in the fact that, because we do represent 

all of the companies and oftentimes we are in Kansas City and foreign delegations come in to talk to the RMA group, they often come 

by NCIS and ask us about this partnership that you have mentioned. It is obviously very envious of what we have here. We have 

90

had German delegations, Chinese, all the Europeans, and they 

want to know how this works. We are definitely trying to help 

them understand that. But it is a truly enviable program from 

around the world, and it needs to be protected for our producers 

now. 

Mr. WALZ. That is my point on this. I think we all come in this 

together. I know there is a frustration on this. It certainly isn’t a 

sinister takeover by the government to try and get involved in this 

or anything. But if there is an overstep, we need to know where 

it was, and we need to figure out how to step back from that. Because I hear this from people. I think, Mr. Rutledge, your statement was dead on. I hear that from people: Well, I don’t know 

what is going to happen, but don’t take away crop insurance. I do 

hear that. 

Anyone else? 

Mr. Dalton. 

Mr. DALTON. Congressman, I would like to give you my firsthand 

experience on this disaster program. We own some farm ground in 

southern Iowa, 2008 was not a good year. Obviously, I am involved 

in the crop insurance business, and I carry that for my own risk 

management. I was pretty well made whole by the crop insurance 

in 2008. We have a land manager that takes care of the ground for 

us, and the county we are in was declared a disaster area in 2008. 

This spring I get a call from him; and he says, I have a rather 

substantial check here for you. 

And I said, For what? 

Disaster money. 

I said, I don’t have any disaster. I have already received my 

money back from the insurance company for my claim. 

So why are we paying this twice? It seems to me if we have our 

growers putting money into an insurance pool, if all of them are 

involved in that and we focus our efforts toward that, you have 

money to pay the claims without this ad hoc disaster thing which 

seems to keep popping up. 

Mr. WALZ. Mr. Roach. 

Mr. ROACH. Crop insurance in California is the only safety net 

available. There are no direct payments or countercyclical or loan 

deficiency. But we don’t even have 85 percent coverage available in 

California either on crop insurance. Still looking for improvements, 

I would say push towards 85 percent revenue coverage for all producers, regardless of what type of crops that they have. 

Mr. DEAL. May I make a comment, Congressman. 

Mr. WALZ. Yes. I’m sorry to run over. 

Mr. DEAL. I would give the same answer I gave in 1978. The 

courage has to come from you in Congress to eliminate the ad hoc

disaster program. 

Mr. FRERICHS. Mr. Walz, as a St. Olaf graduate, I appreciate the 

question. Built on a hill and run on a bluff, right. 

Are there model aspects to there program? Absolutely. To use 

Chairman Boswell’s terms, did RMA step too far, did USDA step 

too far in this agreement? Absolutely. That is the nature of the 

beast, though. We give and take, and we go back and forth. And, 

hopefully, over time, we have a successful partnership; and clearly 

that has been the case over the last 30+ years. 

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So, yes, there are aspects of this program. I am a firm believer 

in the private delivery of this program. I believe it results in competition. And, yes, it results in competition at the agent level, not 

at the farmer level. 

We take what we are given from USDA in terms of rates. We 

cannot change them. That is unlike any other insurance program 

in the world, but that is the way this works. So, yes, there are aspects that are very, very successful, and there are awards, too. It 

is a process. 

Mr. WALZ. Well, I appreciate all your candidness and help. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Good discussion. 

Mr. Schrader. 

Mr. SCHRADER. Thank you, Mr. Chairman. 

Mr. Rutledge, you indicate in your testimony some concern over 

changing business models as the SRAs renegotiated, why this 

wasn’t phased in over time. I guess I would ask you why aren’t the 

changes phased in over a period of time to allow the insurance 

companies to adjust their business models. 

Mr. RUTLEDGE. Well, I expressed in my oral testimony that this 

would lead to fewer companies, fewer agents, et cetera. I think if 

it was phased in over a 2 year period, especially some of the 

changes in the Group 1 states, it might give companies more of a 

time frame to prepare for the changes. It might give them a few 

more opportunities to continue to stay in business. 

Mr. SCHRADER. So why aren’t the changes phased in, from your 

understanding. 

Mr. RUTLEDGE. It was discussed during the negotiations with 

RMA, and it was initially viewed favorably. At the end of the day, 

they felt that, given the other changes—I can’t speak for RMA, of 

course, but I think they just felt it wasn’t needed, maybe. So I don’t 

really have an answer for why it wasn’t. 

Mr. SCHRADER. Maybe Mr. Murphy will get to me later on that 

when he gets a chance. 

Mr. FRERICHS. Congressman Schrader, $6 billion in savings, that 

was the target. If you phase it in, you don’t hit it, simple as that. 

Mr. SCHRADER. Very good. 

Mr. Parkerson, you and others have indicated that the Milliman 

study is flawed in a number of areas in some of the assumptions 

made. Can you elaborate on that.

Mr. PARKERSON. Yes. We had in the process—first of all, I will 

say this and, quite candidly, RMA, Bill Murphy and his people, we 

had a respectful negotiation. But I truly believe that there was a 

number set, and we even asked this in this negotiation. There was 

a number set. They knew what they wanted, and we went about 

trying to answer those, but they got what they wanted. 

And I will say that in some of the respects that were mentioned 

to the studies, we had asked for background information, we had 

asked for data and information and have not received exactly what 

we have asked for. We still were not able to run some of the models. Nor were we able to get the baseline that RMA used. And that 

would be key to fully understanding the cuts and the process. 

Mr. SCHRADER. Okay, very good. 

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I guess the question to Ms. Fowler or anyone on the panel, my 

home State of Oregon, particularly western Oregon, doesn’t really 

participate, at least to my knowledge, in a great degree to a lot of 

these programs. What is the rationale behind that? You pointed out 

the vegetative program is not going to be working. That is probably 

more the eastern side of my state. 

Ms. FOWLER. It totally depends on the program in that particular 

area, depending on what the rates may be, the price elections, different things that are in your particular area. 

Mr. SCHRADER. Why is the vegetative program not being picked 

up on in the——

Ms. FOWLER. Oh, I am sorry. 

On the vegetative program, it is very difficult to understand the 

infrared data that comes; and, also, it appears there is somewhat 

of a lag time, and a lack of trust and understanding that program. 

There is just very little participation in that program. Much easier 

are the rainfall, the NOAA records. If it rains in your 12 x 12 grid, 

you are going to know. 

Mr. SCHRADER. Mr. Frerichs, the testimony from Mr. Murphy indicated that the agents in ‘‘I’’ States are paid significantly higher 

than, say, Texas or some other states. Is there a reason that that 

should be the case? And I assume that is the reason the ‘‘I’’ States 

take a bigger hit, obviously, under the new SRA. 

Mr. FRERICHS. Yes, there is a reason for that. The underwriting—the expected underwriting gains in the ‘‘I’’ States have 

traditionally been higher than other parts of the country. 

Traditionally, when Iowa goes, it goes big, like the drought of 

1988. But the frequency of it, even though it is very severe, the frequency of it is much lower than a state like Texas, or a state like 

North Dakota, or any of the states in the Great Plains where the 

risk of farming is greater. You have more frequent loss events and, 

therefore, more indemnity payments and, as a result, lower expected underwriting gains over time. 

In theory, if the program—if all the crops were rated correctly, 

you would have equal expected underwriting gains, in theory. But 

it doesn’t quite work out that way because once you take frequency 

into account—and this was one of the goals of the negotiation, was 

to take that under consideration, and we think that RMA did that 

but went a little bit too far. But once you start taking frequency 

into account, then your expected underwriting gains are not equal. 

And so the business in Iowa is expected to return more to an insurance company than, say, the business in Texas. Is that an equity 

issue? No, that is a Mother Nature issue. 

Mr. SCHRADER. Very good. 

Thank you. I yield back. 

The CHAIRMAN. Thank you. 

Mr. Pomeroy. 

Mr. POMEROY. Thank you. 

The CHAIRMAN. About 10 minutes to vote, so we are going to try 

to wrap up. I wouldn’t want to cut you off. 

Mr. POMEROY. What are you telling me, Mr. Chairman. 

The CHAIRMAN. I am telling you I want to yield the gavel. 

Mr. POMEROY. Okay. I got the message. Let me be quick. 

93

I find this panel very interesting, and I am not surprised by the 

thrust of the comment. Adjustment in what we are paying our private partner to crop insurance has been changed significantly with 

this SRA renegotiation. 

The reason for my remarks on the prior panel were to try to put 

into the record the very real threat to crop insurance posed by others in this Congress. This bill does not begin and end in this Committee room. We are part of the process. And so I believe that some 

adjustment had to be made. 

As an old insurance commissioner, I can’t understand how we 

don’t weaken our arguments completely when we look at commissions paid over and above A&O expenses for example. It would 

seem to me that you, on the one hand, are having a threat to company solvency or, on the other hand, you are acknowledging that 

you are overpaying for the actuarial portion of the program; because companies can casually cut into it to pay agent commission 

for purposes of bidding for a given agent for purposes of expanding 

market share. 

When confronted with those arguments by GAO and the oversight committee—these are tough questions. So my own opinion is 

companies shouldn’t pay more than A&O; and, if they are, something is wrong with that. 

Mr. Deal, your long time experience in the program might be 

helpful on offering some perspective on that question. Is it ever justified for a company to pay more than 100 percent of A&O on agent 

commission. 

Mr. DEAL. I think the issue gets back to what is the true amount 

that is needed for service. I don’t argue that the amount that they 

are doing is right. I think a study has to be done to really define 

the service that the companies are rendering and the service that 

the agents are rendering, and that there is ample compensation for 

that. 

You are right. The publicity out in the company is not good on 

the path of some of these agents. It isn’t kept quiet. It is in the 

community. 

So I agree with you. The new SRA gives good discipline to the 

issues that you are talking about. I think the study will determine 

what the numbers are and what the numbers should be. I think 

the new SRA goes a long ways to squelching some of the negative 

terms you are hearing out there. And I grant you have a big job 

ahead of you, because there is much of Congress that does not look 

at whole agriculture as an expenditure and say maybe this ought 

to be. So I don’t envy your job of moving ahead with this deficit 

that we have and where do you pull numbers from and how you 

do that. I mean, we are just a little piece of that. 

Mr. POMEROY. On the cuts that were in the farm bill, many of 

them are related to timing of payments. Because you can gain basically a scoring window, and the Chairman put those in for purposes of protecting just as much of this program as he possibly 

could under what we were given. 

Was there a $6 billion marching order, Mr. Parkerson? I think 

that is an important point. I asked it in the privacy of my office 

of RMA. Did OMB give you a figure? And they have told me no. 

94

And I see Keith Collins in the audience. We remember when he 

was here as head of FCIC. 

And we know that there had been a number given from the Office of Management and Budget, and it was wrong. That is not 

what this SRA was ever supposed to be about. They indicated this 

is a bottom-up process looking at program review. Believe it or not, 

but that is the information they told me. And I actually don’t believe this one came from the Office of Management and Budget. 

Relative to the role played by agents—so I don’t want to just 

sound like I am not sympathetic to what is going on out there—

the products are more complicated than ever before and more essential to the survival of the family farm than ever before. I believe 

it reflects the success of the program. But, on the other hand, there 

is a good bit of work. 

I call our insurance agents risk counselors. Because, basically, 

they help understand where is the exposure, how do we protect it. 

And we have to be cognizant there is an awful lot of terrific work 

done in the delivery of the product by our private-sector partners. 

It comes around and around. Maybe we just ought to deliver this 

product in the FSA office. I have heard it many times during my 

years in Congress. 

Clearly, the product is much more complicated than can be competently delivered, in my opinion, in a crammed session of an already overworked FSA office, supported by bad computers. If we 

are going to rely on private-sector partners, we have to treat them 

fairly. 

I cannot conclude that the ultimate result of the SRA is an unfair result. It is a dramatic result. You have not convinced me it 

is an unfair result in light of the external pressures of the program 

that could have produced much more horrific results. 

I have found what you said very interesting and understand 

where you are coming from. 

Thank you. I yield back, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

That concludes our—we have had a very good discussion. I say 

this to my Ranking Member and the rest of the panel. It was a 

good discussion. I think we are going to have to have more. So, Mr. 

Murphy, Mr. Moran and I have decided we want to invite you up 

for a visit. We will do that, and we hope it will happen soon. So 

our schedulers will work on that. 

With that, I would like to recognize Mr. Moran for any closing 

comments he might want to make. 

Mr. MORAN. Mr. Chairman, thank you very much for the hearing 

you conducted today. 

I appreciate the witnesses. I look forward to having additional 

conversations with the witnesses, the people they represent, as well 

as Mr. Murphy at the Risk Management Agency. 

The only thing that I would add is that Mr. Frerichs has indicated at some point in time maybe we ought to look at the process 

and the outline by which the SRA renegotiations proceed, with the 

desire of making certain that there are better checks and balances 

than maybe exist today. 

And Mr. Pomeroy’s comment, in my view, somehow we have to 

get the OMB out of this, where the goal of SRA negotiations is not 

95

some set dollar amount of savings. Because that then drives the 

process as compared to a lot of other factors that are very important. So I look forward to working with you and others to see that 

we reach that in the long term. 

The CHAIRMAN. I certainly concur with your comments, and we 

will do that. We are all in this for the same reason. We want to 

make this safety net as good as we can make it and available and 

affordable, and that is our common goal. 

So, with that, under the rules of the Committee, the record of today’s hearing will remain open for 10 calendar days to receive additional material and supplements, as well as written responses from 

the witnesses to any questions posed by Members. 

This hearing is about to adjourn. I would like to thank every one 

of you for taking the time. Thank you very much for coming and 

spending this time and sharing your concerns, your expertise. And 

I also want to thank Administrator Murphy for the time you spent 

with us today. I think this has been a good hearing. I appreciate 

it, and we will continue to work together. Thank you very much. 

[Whereupon, at 11:50 a.m., the Subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

96

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SUBMITTED QUESTIONS

Questions Submitted by Hon. Leonard L. Boswell, a Representative in Congress from Iowa?? 

Response from William J. ‘‘Bill’’ Murphy, Administrator, Risk Management Agency, 

U.S. Department of Agriculture 

Question 1. You mention in your testimony that RMA plans to provide a performance-based discount, or refund, as part of the savings from the SRA. What is the 

plan for providing this discount? 

Answer. The Federal Crop Insurance Act contains a provision that allows for a 

performance-based discount to be provided to a producer who has good insurance 

or production experience relative to other producers of that agricultural commodity 

in the same area. RMA is currently evaluating producer experience and developing 

a program that places emphasis on longevity of program participation and overall 

good demonstrated loss experience within the Federal Crop Insurance Program. 

While many details are currently being worked out, RMA plans to provide some preliminary information on this program in the near future with the goal of implementing the program later this year.

Question 2. Please explain the rationale behind the insertion of the covenant not 

to sue into the final draft. 

Answer. The new SRA requires the companies to covenant against bringing legal 

action against RMA regarding the A&O subsidy structure, and to include such a 

covenant in agent contracts. This provision was included in the new SRA because 

of potential legal challenges by companies and other parties if any changes were 

made to the A&O subsidy structure. In particular, Congress included two separate 

provisions regarding how A&O can be established in the Federal Crop Insurance Act 

(Act) and there was honest disagreement over which provision had precedence. 

To ward off potential legal challenges, in the third draft of the SRA RMA elected 

to include an economic disincentive to sue but it did not prohibit such suits. Companies argued that this provision might have been too broad and too severe. On reflection, RMA agreed. The companies offered, as an alternative, a draft of the covenant 

not to sue. Such covenants are not uncommon in the private sector when parties 

wish to resolve the dispute and complete the negotiation of a deal. Because the situation was similar here, RMA was not opposed to using the covenant not to sue to 

resolve its dispute with the companies. 

With respect to the application of the covenant not to sue to the agents, RMA had 

a legitimate concern that while the companies had agreed to include a covenant not 

to sue, they could still negate the agreed-to financial provisions in the SRA by encouraging their agents to sue. Although agents do not sign the SRA, they are included in the definition of ‘‘affiliate’’ in the SRA, which is mentioned at least 20 

times, not including the Appendices. Further, their function in the crop insurance 

program is to act on behalf of the companies. As representatives of the companies, 

the agents are regulated to the same extent as the companies. Therefore, agents are 

not truly independent entities with respect to the crop insurance program and, as 

representatives of the companies, they should be bound by the same terms and conditions that bind the companies, including the covenant not to sue.

Question 3. USDA has indicated that funds saved as part of the SRA negotiations 

would be used to meet OMB’s Administrative PAYGO requirements that the costs 

of expanding crop insurance pilot programs be offset by cuts in other programs/provisions. 

Isn’t it true that under the Crop Insurance Act, FCIC has the statutory authority 

to implement new crop insurance programs (including expanding pilot programs) 

without the need to find additional funding as long as the programs fit within the 

statutory cost framework? In other words, aren’t OMB’s Administrative PAYGO requirements to offset program costs internal Administration requirements that are 

not required by law? 

Answer. Currently the annual appropriation provides ‘‘such sums as are necessary’’ for the administration and delivery of FCIC’s programs, provided the FCIC 

does so within the statutory authorization and funding provided by the Federal 

Crop Insurance Act. The Administrative PAYGO requirement is an initiative to incorporate fiscal discipline into administrative decisions that increase mandatory 

spending. Yes, FCIC has the statutory authority to implement new crop insurance 

programs or expand pilot programs. The Administrative PAYGO requirements are 

not statutory, but guidance, which are incorporated in section 31.3 OMB Circular. 

A–11, Preparation and Submission and Execution of the Budget. When FCIC is directed in statute to implement a new program or pilot, it does so without regard 

to Administrative PAYGO. However, under its general statutory authority, it is at 

98

FCIC’s discretion to implement new programs and pilots, when they are not expressly directed to carry them out in statute. The cost of implementing new programs is a reason FCIC may not exercise its discretion to implement such new programs. FCIC previously considered cost before the Administrative PAYGO requirements were in place when deciding to implement new programs. Administrative 

PAYGO only formalizes having to consider cost when deciding to implement new 

programs where the spending is mandatory, and FCIC is compliant with these requirements.

Question 3a. Did FCIC expand pilot programs before OMB introduced its internal, 

Administrative PAYGO requirements in 2005? How many crop insurance pilot programs have been expanded since Administrative PAYGO was introduced in 2005? 

Answer. Yes, prior to the Administrative PAYGO requirements, FCIC expanded 

pilot programs either by adding new or additional counties within a pilot program, 

or by expanding various features or coverage to provide additional benefits and risk 

protection. As noted before, however, cost was always a consideration when deciding 

to approve new or expansion of programs. RMA expanded the Sugar Beet Stage Removal Option pilot program, and expanded the Forage Seed pilot program while also 

converting it to a permanent program.

Question 3b. What pilot programs has FCIC wanted to expand but was prevented 

from doing so because it could not find the Administrative PAYGO offsets that OMB 

required? 

Answer. To date, RMA has not been prevented from expanding any program 

under the Administrative PAYGO requirements. Funding has been available for all 

pilot program expansions including for the Pasture, Rangeland, and Forage pilot 

program, which was recently funded and expanded for the 2011 crop year.

Question 4. How do you address the concerns raised about the Milliman study on 

the companies’ rate of return on equity, specifically the time horizon used and the 

fact that the model did not take into account actual firm equity and crop insurance 

requirements for equity? 

Answer. Regarding the time horizon used in the Milliman study, the Data Acceptance System (DAS) used by RMA to monitor policy-level crop insurance data was 

established in 1989. The time period analyzed by Milliman encompasses the entire 

DAS data set currently available at RMA. Although a longer historical time period 

may have been desirable, the Milliman analysis reflects the longest historical data 

set of all Approved Insurance Providers (AIP) the profitability studies currently 

have available. Indeed, the study sponsored by the crop insurance industry and conducted by Grant Thornton, LLP (Grant Thornton), examines data only back to 1992. 

Milliman acknowledged in its report that surveying only 20 years limits the conclusions one may draw as to the likelihood of potential catastrophic events. To fully 

consider this possibility, it performed a hypothetical analysis in which the 20 year 

span includes a second ‘‘disaster’’ year, similar to that of 1993 in place of an average 

year. The result of this hypothetical exercise is an average historical rate of return 

which still exceeds the reasonable rate of return by 2.3 percent. Regarding firm equity assumptions, Milliman correctly observes that for a multi-line insurer, policyholder surplus is shared by all lines of insurance written by the company. Consequently, being able to attribute any portion of the surplus to a particular line of 

insurance is complicated and requires a method for allocating the surplus across 

lines of insurance. Despite the difficulty, one must consider allocations of surplus 

to specific lines of insurance to solve an extensive range of financial and regulatory 

problems common to the insurance industry. Milliman employs the National Association of Insurance Commissioners (NAIC)-sanctioned method for allocating surplus 

across lines. Milliman finds that investment earnings from policyholder surplus are 

a significant element of AIP profitability. Properly accounting for these earnings is 

not possible without a credible surplus allocation method. Milliman assumes that 

investments earned from policyholder surplus are the same rate for crop insurance 

as for other property and casualty (P&C) lines of the company. Investment earnings 

are an important contributor to the profits of all insurance companies, including 

those of crop insurance companies. However, the two major sources of investment 

earnings—(a) operations and (b) policyholder surplus—should be treated differently 

between crop insurance and other lines. Milliman recognizes that crop insurance 

companies do not collect premiums upfront for investment prior to claims being 

paid, as with other lines. The resulting assumption by Milliman is that the companies do not earn any investment income from operations. On the other hand, crop 

insurance inherently shares investment earnings from policyholder surplus with the 

company’s other insurance lines. Milliman uses the guidance provided by the NAIC 

for allocating policyholder surplus across lines of insurance to properly attribute 

these investment earnings to AIPs.

99

Question 5. Where is RMA at with regard to the study of agent business costs? 

Answer. The Government Accountability Office study GAO–09–445 ‘‘CROP INSURANCE: Opportunities Exist to Reduce the Costs of Administering the Program’’ 

recommended that RMA conduct an evaluation of the costs of program delivery. 

RMA is committed to contracting for such a study. However, the 2008 Farm Bill authorized RMA and the companies to negotiate a new SRA effective for the 2011 reinsurance year, which began July 1, 2010. Given this deadline, it was not possible for 

a contracted study of program delivery costs to be completed in a timely manner 

to be relevant for the negotiation. RMA will now begin an effort to contract for a 

study of program delivery costs that would provide meaningful and timely information and analysis for future negotiations of the SRA. We anticipate that a Statement 

of Work will be completed in the fall of 2010, such that the Agency can begin to 

solicit proposals from outside parties to conduct the evaluation.

Question 6. The Adjusted Gross Revenue (AGR) insurance product has not been 

very successful in attracting farmer interest, despite the fact that farmers with diversified production enterprises have long wanted an option that works for them. 

It has also been a struggle for organic farmers to find crop insurance options that 

work for them, especially in light of higher premium charges on the front end and 

payouts at the conventional price at the back end if there has been a significant 

loss. Is the Department giving any consideration to improving AGR coverage or to 

fixing problems with insurance for organic producers as part of its strategy on using 

the portion of the $2 billion designated for RMA program improvement? If so, could 

you share with the Committee the contours of the options being discussed? If not, 

why not? 

Answer. RMA understands and appreciates the need for a product that will cover 

the multitude of specialty and organic crops that do not have conventional crop insurance programs. Both of the AGR programs insure all commodities on the farm 

on a whole farm basis. These two programs rely heavily on historic, farm, tax forms 

for underwriting purposes. 

For 2010, only 410 farms nationwide are insured with the AGR product and 540 

farms, nationwide, are insured with AGR-Lite. Organic producers are covered under 

both AGR products. 

The AGR products have not been widely popular. This is primarily due to the 

complexity of accounting, records, and reporting necessary to convert tax information into an insurance guarantee and to account for a multitude of commodities 

under one policy. 

At this time, the AGR products continue to be the only risk management product 

available for some commodities. RMA is currently evaluating the effectiveness and 

future of the AGR and AGR-Lite plans of insurance to determine if the potential 

exists for improving these products, or better specifying the target market best suited for these products to work most effectively for producers. However, the AGR program is not one of the initiatives currently being considered under the $2 billion 

designated for RMA improvements. RMA continues to move forward in improving 

crop insurance coverage for organic producers so they will have viable and effective 

risk management options like many of the conventional crop programs. Consistent 

with the 2008 Farm Bill, RMA contracted for research into whether or not sufficient 

data exists upon which RMA could determine a price election for organic crops, and 

if such data exists, to develop a pricing methodology using that data. Also included 

in the contract was research into the underwriting, risk, and loss experience of organic crops as compared with the same crops produced in the same counties during 

the same crop years using nonorganic methods. Three reports have been completed 

from this study, and RMA plans to make them available in the near future. 

RMA intends to establish dedicated price elections for organic crops that are supported by data and sound economic pricing principles. The first of these organic 

price elections may become available for the 2011 crop year. In addition, RMA will 

continue to capitalize on improved data collection and sharing of organic production 

and price data occurring throughout USDA, an initiative to better leverage the resources of all of our agencies to address this important segment of agriculture.

Question 7. Concerns have been expressed about the impact of RMA’s current policy of allowing producers to transfer their current Actual Production History or APH 

to new lands that they may acquire. These concerns range from assigning blame for 

breaking out grass and pastureland for crop production to causing an increase in 

cash rental rates and making it harder for beginning farmers to compete with established producers who have better APHs. Can you explain how the APH transfer provision works? And do you think it is exacerbating either of these two situations, increasing cash rents or incentivizing the breaking out of new land? 

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Answer. Producers customarily add land to their farming operations and RMA 

procedure allows producers to use the average of their approved APH yields for a 

crop/practice/type on land newly added to their operation (commonly referred to as 

added land), if certain criteria are met. This allows producers to use their production history to establish the approved APH yield instead of using the county transitional yield (T-Yield) on newly added land. However, if the land being added exceeds 

RMA’s established acreage limitation of 640 acres, a review by the RMA Regional 

Office is required or the approved yield for the land being added is limited to the 

county T-Yield. If the land being added exceeds 2000 acres, the approved yield for 

the added land is limited to the county T-Yield. Generally, APH yields cannot be 

transferred to a different person unless both parties share in the production of the 

crop for the current crop year, or when a farming operation is transferred and the 

transferee assisted in the establishment of the approved APH yields. The Basic Provisions stipulate acreage that has not been planted and harvested or insured in at 

least one of the three previous crop years is generally uninsurable unless a written 

agreement is authorized by RMA. For a written agreement to be approved for newly 

broken land, the crop planted on the recently broken acreage must be appraised by 

the approved insurance provider to yield 90 percent or greater of the approved yield 

used to determine the production guarantee provided by the written agreement. The 

approved yield for these written agreements for newly broken land are generally a 

percentage of the county established T-Yield for the crop with approximately 70 percent of these written agreements providing a production guarantee per acre equal 

to, or less than the county T-Yield. Additionally, over the last nine years, acreage 

with these written agreements had an average loss ratio of about half compared to 

the same crops, producers, and counties for acreage that was not subject to a need 

for a written agreement. The restrictions of the production guarantee to be based 

generally on a percentage of the county T-Yield and other requirements placed on 

newly broken land to obtain crop insurance on such land minimizes any incentive 

crop insurance may have to break out new land for a profit.

Question 8. Given the tremendous interest in revenue products for many different 

enterprises, how can we get more revenue protection for producers through the approval process at USDA? What are your constraints with regard to the pricing information necessary to have a viable revenue product? 

Answer. Section 522(e)(4) of the Federal Crop Insurance Act (Act) prohibits the 

Federal Crop Insurance Corporation (FCIC) from conducting research and development for any new policy for an agricultural commodity offered under the Act. Many 

new insurance programs are developed and submitted by private entities to the 

FCIC Board of Directors (Board) for approval under section 508(h) of the Act. If the 

Board determines that the product is actuarially appropriate, follows sound insurance principles and is in the best interests of producers and taxpayers, it will be 

approved for sale. RMA also contracts for certain development efforts, and Board approval is generally consistent with that of privately submitted products. 

Regarding constraints on pricing information, data utilized in establishing prices 

for revenue products must be credible, reliable and consistently available, as with 

all insurance products. In addition, data must be available to project a price and 

to calculate an actual price at harvest, and generally must be from independent 

sources or collected in a way that does not allow undue influence or manipulation 

that could cause program vulnerabilities. 

Existing revenue products for the major commodities utilize the futures market 

to establish the projected and harvest prices. The futures market provides extensive 

historical prices that are appropriate to use in evaluating price risk and in establishing projected and harvest prices. In the absence of data from the futures market, 

there are often very limited sources of data that can be obtained in a manner that 

provides independent, unbiased results that will accurately reflect market expectations that producers can rely upon. Research into potential sources of price data for 

new revenue products have to be conducted on an individual crop basis to assure 

a consistent and reliable source of data and methodology can be established. 

Questions Submitted by Hon. K. Michael Conaway, a Representative in 

Congress from Texas 

Question 1. The Federal Crop Insurance Corporation Board of Directors approved 

a Cottonseed Pilot Endorsement program in 2009. It was the hope of many producers that the program would be implemented for the 2010 crop year; unfortunately it was not. Can you update the Subcommittee on the status of this program 

and when it will be implemented? 

Answer. RMA intends to release the Cottonseed Pilot Endorsement program for 

sale to producers beginning with the 2011 crop year.

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Question 2. I have heard from many producers who utilized the Group Risk Income Protection or GRIP. This year GRIP was discontinued for many crops in many 

counties across the country. Why was this program discontinued and since it was 

a very popular program, what is RMA doing to possibly reinstate or revamp the program? 

Answer. The Group Risk Plan (GRP) and Group Risk Income Protection (GRIP) 

plans of insurance utilize information collected and reported by the National Agricultural Statistics Service (NASS) county estimates program. NASS implemented 

modifications to their publication standards that requires estimates for a given crop 

be supported by at least 30 reports where the respondent reported both harvested 

acreage and yield, or production from respondent reported yields must account for 

a minimum of 25 percent of the current year’s production estimate for that county 

or district. Implementation of these standards has increased the reliability of NASS’ 

published county level estimates, but has resulted in fewer publishable county estimates. 

Although RMA has used county estimates provided by NASS that have not met 

NASS’ publication criteria, doing so requires RMA to rely on information not generally available to the public. There have been two appeals in which the NAD. Director found against RMA in their review. The director of NAD held that RMA acted 

inconsistently with applicable regulations and calculating GRIP indemnity payments. 7 C.F.R. section 407.9 specifically provides that payment yield (which is the 

same as the final county yield) is the official estimated yield published by NASS. 

Thus, the applicable regulation, section 407.9, and the GRIP Coverage Insurance 

policy, require RMA to rely on published NASS figures, specifically the published

NASS figure for the payment yield (or final county yield). In addition, as the result 

of an extensive program review, NASS has determined that in some cases they will 

no longer produce county estimates for a given crop and/or state, or cropping practice within a state. In order to ensure that the GRP/GRIP programs, especially the 

determination of the final county yields upon which indemnities are based, operate 

in a manner transparent to all affected policyholders, RMA reviewed the eligibility 

of all GRP/GRIP corn, grain sorghum, cotton, and peanuts county programs. 

RMA considered several criteria in its review. These criteria include whether the 

most recent Census of Agriculture shows at least 50 farms in the counties producing 

the crop. In addition, concentration of acreage within the county, again based on the 

most recent Census of Agriculture (http://www.agcensus.usda.gov/), must score less 

than 1,000 on the Herfindahl-Hirschman Index, a measure of the concentration of 

acreage that assures that no single producer, or small group of producers, can unduly affect the county average yield and create indemnity payments. There also 

must be at least 30 of the most recent consecutive years of published NASS data 

available for the crop so that there is a sufficient basis to establish credible premium rates. 

RMA also considers a minimum 15,000 planted acres in each of the last 10 years 

to assess the likelihood of credible NASS county estimates being available on an ongoing basis. Recent significant shifts in planted acreage were also considered, as this 

can reflect changes in production practices that may not be accounted for in establishing the expected county yield, the basis of the insurance guarantee. 

Finally, RMA considered where policies have been sold and the resulting insurance experience. A significant proportion of counties have had no GRP or GRIP business in the last few years. The review resulted in RMA removing 1,062 counties, 

752 of which have had no policies earning premium for the 2009 crop year. For the 

2010 crop year, RMA deleted 469 counties for corn (137 with policies earning premium); 350 counties for soybeans (146 with policies earning premium); 75 counties 

for cotton (16 counties with policies earning premium); 125 counties for grain sorghum (11 with policies earning premium) and 43 counties for peanuts, none of 

which had policies earning premium. 

RMA is in the process of reviewing information available for the GRP/GRIP programs for the 2011 crop year to evaluate counties where the program was deleted 

and whether any new information warrants reconsideration, and if any additional 

deletions are warranted.

Question 3. Obviously we all are very concerned about the baseline implications of the recently signed SRA. Of the $2 billion that you are reinvesting do you have 

a complete list of programs that those monies will be used for that you could share 

with the Subcommittee? 

Answer. The savings from the SRA will be used to offset the cost of expanding 

several programs administered by RMA and FSA. With regard to those programs 

administered by RMA, savings from the SRA has already been used to offset the 

cost of expanding insurance coverage for pasture, rangeland, and forage (PRF) in 

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vania, South Dakota, Georgia, Utah, Florida, California, New Mexico, Arizona, and 

New York. PRF coverage will be expanded to Minnesota, Arkansas, and Nevada in 

subsequent years. 

The SRA savings will also offset the cost of providing a performance-based premium refund to those growers with exceptionally good loss experience. The SRA savings will also allow the potential expansion of crop insurance coverage to strawberries, forage seeding, sugarbeets, pistachios, honeybees, aquaculture, poultry, and 

crops grown exclusively for bioenergy. Finally, a portion of the SRA savings will be 

used to offset the cost of revising or expanding the availability of current crop insurance products. 

With regard to those programs administered by FSA, a portion of the SRA savings 

will be used to improve and enhance the availability of the Conservation Reserve 

Program (CRP) and the Conservation Reserve Enhancement Program (CREP).

Question 3a. Cotton is a very important crop in my district. It is my understanding that the cotton industry has contacted you about using some of these savings for programs such as redesigning the quality loss adjustment for cotton. This 

would come at a nominal cost and RMA has agreed in principle with the new program. Can you ensure me that RMA will carefully review this request? 

Answer. RMA has been in discussions with the cotton industry regarding potential 

changes and improvements to the cotton quality loss adjustment provisions. 

Progress has been made but additional detailed information is likely needed to fully 

implement all desired changes. RMA is actively working with the appropriate USDA 

agencies to obtain the needed data. While there may be some administrative funding issues among the agencies, RMA is working to address or resolve those issues. 

Questions Submitted by Hon. Jim Marshall, a Representative in Congress 

from Georgia 

Question 1. How much money is budgeted annually for RMA to take acreage reports? 

Answer. Insureds provide acreage reports to their agents, who in turn provide the 

reports to their companies. The acceptance and processing of acreage reports is a 

key aspect of servicing Federal crop insurance policies, and FCIC pays the companies an Administrative and Operating (A&O) subsidy to perform such required services.

Question 2. How can USDA refine the acreage reporting process so it will meet 

all the agencies’ needs within USDA and eliminate the need for producers to make 

duplicate reports within USDA? 

Answer. In July, USDA formed the Acreage/Crop Reporting Streamlining Initiative (ACRSI) as a joint effort between its offices for program administration and information technology to coordinate an effort with the vision to ‘‘have a common 

USDA framework for producer commodity reporting in support of USDA programs’’. 

The project intends to establish common USDA producer commodity reporting 

standards to meet the needs of the agencies that require the data in the administration of their programs, contribute to the elimination of duplication of information 

collection, and simplify producer reporting. The project looks to expand on the success of the Comprehensive Information Management System which compiles common producer, program, and land information collected by FSA, RMA, and approved 

insurance providers. The project has also engaged the precision agriculture industry 

in an effort to collaborate on establishing standards to enable producers to use these 

systems to meet USDA program requirements. USDA is committed to seeking greater efficiency and effectiveness in the administration of its programs through the use 

of technology and better in-house coordinated efforts among its various agencies.

Question 3. Would a separation of duties between selling insurance and processing 

claims inject more integrity into the crop insurance program and assure greater responsibility in the use of tax dollars? 

Answer. Under the SRA’s Conflict of Interest Provisions, sales agents and their 

relatives are prohibited from being involved in loss adjustment activities in the 

county or an adjoining county where the sales functions are performed. In addition, 

loss adjusters are not permitted to adjust losses for individuals with whom they 

have a business, financial or legal relationship, or for relatives. All agents and loss 

adjusters must submit annual Conflict of Interest disclosures to their companies 

which allows the companies to conduct mandatory and discretionary reviews to 

identify any activities prohibited under the SRA’s Conflict of Interest provisions. 

Therefore, such separation of duty is already mandated.

Question 4. In response to a provision in the 2008 Farm Bill, RMA made several 

recommendations regarding pecans in its recent Report to Congress. As we wait to 

see how RMA intends to act on the report’s finding, I would like RMA’s comments 

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on the possible benefits of implementing the following changes for the 2011 crop 

cycle: 

Changing the current 10 year history RMA uses in determining pecan coverage 

to 6 years. 

Answer. This recommendation was put forth for perennial crops for which alternate bearing and downward trending yield adjustments are applicable. The pecan 

revenue policy is a 2 year coverage module, which negates the need for alternate 

bearing yield adjustments. RMA is evaluating the feasibility of using a shorter base 

period. However, this will require a legislative change and the use of a shorter base 

period may expose pecan producers to more variable insurance guarantees in any 

given year.

Question 4a. Allowing growers to obtain insurance once trees in a new grove 

produce 600 pounds or more of pecans rather than waiting 12 years prior to obtaining insurance on a new grove. 

Answer. The current 12 year growing season requirement is an eligibility requirement before pecan acreage is insurable. RMA plans to propose removing the 12 year 

growing season requirement and to make pecan acreage insurable once a certain 

level of production is met. The production levels may vary from one region to another. Any change to the eligibility requirements must go through the regulatory 

process subject to public comment.

Question 4b. Establishing a 60 percent ‘‘catastrophic cup,’’ which will ensure that 

producers will not have to report less than 60 percent of their actual production history average for the purposes of calculating losses. 

Answer. The 60 percent ‘‘catastrophic cup’’ mentioned by Mr. Marshall is in regards to the yield substitution generally available to crops insured under the APH 

plan of insurance that provides individual yield coverage. Under APH, when the 

producer’s recorded or appraised yield for the commodity was less than 60 percent 

of the applicable T-yield, the producer can exclude and replace such yield with a 

yield equal to 60 percent of the applicable T-yield. The Pecan Revenue policy is not 

under the APH plan of insurance. However, RMA is currently evaluating the feasibility of providing a similar adjustment for pecans.

Question 4c. Allowing growers to increase their covered acres by up to 25 percent 

with no production history rather than restrict it to 12.5 percent of their current 

coverage. 

Answer. RMA requires approved average revenue per acre to be recalculated when 

a producer’s acreage increases by more than 12.5 percent to ensure the correct revenue guarantee is established. Allowing producers to keep the same average revenue per acre when the insured acreage is increased by more than 12.5 percent may 

create program vulnerabilities. RMA has no plans to change this requirement.

Question 4d. Allowing growers to insure groves by farm number rather than their 

county average. 

Answer. Currently producers can insure their acreage by enterprise or basic units. 

It has been requested that producers be allowed to insure optional units by farm 

serial number. RMA will review this optional unit recommendation as we work on 

revisions to the Pecan Revenue Policy. Any change to unit structure would likely 

require an adjustment in premium rates and must go through the regulatory process subject to public comment.

Question 4e. Raising the maximum production dollars per acre for growers from 

$1,350 to $1,800 per irrigated acre when determining premium payments. 

Answer. Under RMA’s current rating methodology for pecans, all pecan producers 

with an approved average revenue per acre of $1,350 or greater pay the same premium rate. RMA is researching alternative rating methodologies for calculating premium rates for pecans. One method under consideration is very similar to the methodology used for the APH plan of insurance. Under this rating methodology, each 

pecan producer’s premium rate would be based on their own specific approved average revenue per acre and its relationship to the applicable county average revenue 

per acre. Producers with approved average revenues greater than the applicable 

county revenue per acre would have premium rates lower than the county average 

premium rate. In essence, the greater the individual pecan producer’s approved average revenue per acre in relation to county average revenue per acre the lower the 

individual’s premium rate. And, the lower the individual pecan producer’s approved 

average revenue per acre is in relation to the country average revenue per acre the 

higher the individual’s premium rate will be. 

Based on its preliminary findings, RMA believes this rating methodology may provide more fair and equitable premium rates to pecan producers. However, RMA 

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must complete additional producer impact analyses before reaching a final decision. 

Any potential rate changes would not likely be applicable until the 2012 crop year.

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