[Federal Register Volume 62, Number 180 (Wednesday, September 17, 1997)]
[Proposed Rules]
[Pages 48798-48799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24770]


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Proposed Rules
                                                Federal Register
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This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 62, No. 180 / Wednesday, September 17, 1997 / 
Proposed Rules

[[Page 48798]]


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DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Chapter IV


General Administrative Regulations; Nonstandard Underwriting 
Classification System

AGENCY: Federal Crop Insurance Corporation, USDA.

ACTION: Advanced Notice of Proposed Rulemaking; Request for Comments.

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SUMMARY: This notice announces a public comment period on the 
Nonstandard Underwriting Classification System (NCS) which is 
administered by the Federal Crop Insurance Corporation (FCIC) in 
conjunction with the Federal crop insurance program. The NCS program 
compares an individual producer's crop loss history with the losses for 
the producer's county. If the producer exceeds the level of loss 
frequency and severity set by FCIC, the producer's rates and coverages 
are adjusted to bring the policy into line with FCIC's statutory 
mandate to implement an actuarially sound crop insurance program. 
Concurrently, the loss histories for these NCS producers are removed 
from the accumulated program statistics which are used to set the 
insurance rates for the remainder of the policyholder population. This 
has the effect of moderating rate increases for the majority of 
producers by making high loss producers responsible for paying more 
premium based on their individual risk.
    A number of interested parties, including producer groups and 
insurance agent associations, have indicated that NCS does not treat 
producers fairly and that it does not correctly identify those 
producers who represent greater risk to the crop insurance program 
based on their individual loss histories. These comments have come at a 
time when FCIC is seeking ways to improve the NCS process relative to 
reducing the administrative burden of the program. In its current form, 
NCS creates a significant amount of work to review individual producers 
who are selected under the current NCS regulations.
    FCIC is soliciting comments concerning improving NCS in a manner 
consistent with the administration of an actuarially sound crop 
insurance program.

DATES: Submit comments on or before October 17, 1997.

ADDRESSES: Interested persons are invited to submit written comments to 
the Director, Claims and Underwriting Services Division, Risk 
Management Agency, United States Department of Agriculture, 1400 
Independence Avenue, S.W., STOP 0803, room 6749-S, Washington, D.C. 
20250-0803. A copy of each response will be available for public 
inspection and copying during regular business hours (7:00 a.m. to 4:30 
p.m., Eastern Time, at the above address).

FOR FURTHER INFORMATION CONTACT: Michael F. Hand, Director, Claims and 
Underwriting Services Division, Risk Management Agency, at the 
Washington, D.C. address listed above, telephone (202) 720-3439.

SUPPLEMENTARY INFORMATION:

    Title: Nonstandard Underwriting Classification System. 7 CFR part 
400, subpart O.
    Respondents/Affected Entities: Parties affected by the NCS process 
and any changes which may occur as a result of this review include 
producers, insurance companies reinsured by FCIC, and insurance agents.
    Abstract: FCIC is conducting a review of the NCS program to address 
reported and identified problems with the process as it currently 
exists. FCIC had previously identified a need to change the system 
consistent with a need to simplify the crop insurance program in 
general and reduce the time and resources needed to administer NCS each 
year. The goal was to identify advances in the availability of crop 
insurance program data and computer processing capabilities and use 
these improvements to automate the NCS process.
    Subsequent to the start of the automation improvement effort, FCIC 
began to receive comments regarding perceived problems with the NCS 
selection process. For many producers in the Upper Midwest and 
Southwest, 1997 was the third year of consecutive flooding or drought 
respectively. Producers who had received crop insurance payments in 
1995 and 1996 were concerned that the 1997 losses in conjunction with 
any other loss history they had would result in their being placed on 
NCS. Combined with the increasing emphasis being placed on crop 
insurance by lending institutions, some producers worried that a sharp 
increase in premium rates or adjustment to their coverage could 
adversely impact their ability to obtain financing. Additional comments 
received reflected concerns about the impact of NCS on new producers 
and other situations which might be viewed as being unfair relative to 
the NCS selection process.
    FCIC is seeking public comment on a range of options being 
considered to address the above stated issues. These options include 
but are not limited to: (a) Eliminate the NCS program altogether; (b) 
amend the current NCS program regulations as needed in order to address 
identified issues (to include moderation of premium increases and 
changes to recognize and exclude widespread disasters.); (c) implement 
an entirely new NCS process that would segregate producers with 
excessive crop insurance losses and rate their policies separate from 
the mainstream producer population (proposals include the use of 
premium adjustment tables to identify excessive ratios, using Actual 
Production History (APH) yield floors to trigger higher premium rates, 
or other means of identifying the frequency and severity of losses); 
(d) maintain the current NCS program and adjust the process to achieve 
administrative efficiencies and assure fair and equitable 
determinations; and (e) place a two year moratorium on the current 
regulation to delay adding any new NCS selections until acceptable 
program changes can be implemented. If sufficient consensus exists, 
FCIC would consider implementing the revised NCS process for the 1999 
crop year.
    Background: The NCS program was implemented in 1991 in response to 
data analysis which showed that a relatively small number of crop 
insurance policyholders were receiving as much as twenty-eight (28) 
percent of the indemnities for the period reviewed. The purpose of NCS 
was to isolate producers with adverse loss experience

[[Page 48799]]

exceeding established limits and rate them separately from the rest of 
the policyholder population. This concept is consistent with other 
private and public insurance programs which have the means to identify 
participants with high losses and separately rate them for the risk 
associated with the losses they have incurred. In 1997 25,126 NCS 
listings appeared on county crop actuarial documents. This number, 
which is less than two percent of the policyholders with active crop 
policies in 1996, includes producers no longer actively engaged in 
farming, as well as duplicate names for those producers who farm 
multiple crops or farm in more than one county. The list does not 
include other persons who share in the crop with a NCS producer, but 
who are required to pay the same NCS rates as the listed producer. The 
primary benefit of the NCS program is that by individually rating high 
loss producers under this process, FCIC is able to exclude their loss 
histories from the premium rating formulas. It has been estimated that 
on a crop policy basis, this saves non-NCS producers from five to nine 
percent on the cost of their crop insurance coverage. It has also been 
estimated that if NCS were eliminated, the reintroduction of the loss 
history into the rating pool would result in across the board premium 
increases for all non-NCS producers of $50 to $90 per crop policy 
annually.
    Under the current NCS regulations, producers are selected for NCS 
adjustment if they meet the following criteria:
    (1) Three or more indemnified losses during the NCS base period, 
(The base period generally means ten consecutive crop years. The base 
period for 1998 NCS selections is 1987-1996 for most crops.)
    (2) Cumulative indemnities exceed same period cumulative premiums 
by at least $1,000.
    (3) A premium has been earned in at least one of the most recent 4 
crop years in the base period.
    (4) The result of dividing the number of indemnified losses during 
the base period by the number of years premium is earned is equal to, 
or greater than, .60.
    (5) Either of the following apply:
    (a) The ``Z'' score (a reference loss ratio used to ensure 
comparability between producers) equals 2.00 or greater; or
    (b) Five or more indemnified losses have occurred during the NCS 
base period and the cumulative loss ratio equals 1.50 or greater.
    The consecutive occurrence of widespread adverse weather conditions 
in the Upper Midwest and Southwest, at the same time when changing U.S. 
farm policy has increased producer's reliance on crop insurance, has 
resulted in a greater awareness of the NCS program. Some producers are 
concerned that their recent losses will be followed by selection for 
NCS rate or coverage adjustments. This concern has also been echoed by 
producer organizations and elected representatives. FCIC had formulated 
a two tiered strategy to deal with these concerns. The short-term plan 
was to thoroughly review the 1998 NCS selections to ensure that 
producers who had been impacted by widespread disasters were not placed 
on NCS based primarily on losses associated with the disasters. For the 
longer term, FCIC was to survey interested parties about NCS and form a 
work group to recommend changes to the NCS program for the 1999 crop 
year. The survey was completed and the responses received reviewed. The 
work group was not formed because of concerns relating to the Federal 
Advisory Committee Act. Instead, FCIC has determined to seek public 
comment regarding the NCS process through the Federal Register and this 
notice. Comments received in response to the original survey will be 
considered in conjunction with any comments received in response to 
this notice.

Executive Order 12866

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

    Signed in Washington, D.C., on September 12, 1997.
Kenneth D. Ackerman,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 97-24770 Filed 9-16-97; 8:45 am]
BILLING CODE 3410-08-P