{"id":400,"date":"2010-07-22T15:55:20","date_gmt":"2010-07-22T15:55:20","guid":{"rendered":"http:\/\/www.ncis.staging.wpengine.com\/?p=400"},"modified":"2010-07-22T15:55:20","modified_gmt":"2010-07-22T15:55:20","slug":"statement-of-robert-parkerson-president-national-crop-insurance-services-before-the-u-s-house-of-representatives-committee-on-agriculture-subcommittee-on-general-farm-commodities-and-risk-manage","status":"publish","type":"post","link":"https:\/\/iripreviewsite.com\/cropinsuranceinamerica\/statement-of-robert-parkerson-president-national-crop-insurance-services-before-the-u-s-house-of-representatives-committee-on-agriculture-subcommittee-on-general-farm-commodities-and-risk-manage\/","title":{"rendered":"STATEMENT OF ROBERT PARKERSON, PRESIDENT, NATIONAL CROP INSURANCE SERVICES, BEFORE THE U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON AGRICULTURE, SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT"},"content":{"rendered":"


\n<\/strong><\/p>\n

FOR IMMEDIATE RELEASE<\/strong>
\nJuly 22, 2010<\/p>\n

Mr. Chairman, Mr. Ranking Member and other Members of the Subcommittee, thank you for inviting the National Crop Insurance Services to appear at today\u2019s hearing to discuss the Standard Reinsurance Agreement (SRA) and its implications for the future of the crop insurance industry.\u00a0 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\u2019s agricultural producers.<\/p>\n

The Function of NCIS in the Crop Insurance Industry<\/strong><\/p>\n

NCIS is a not-for-profit trade association whose members include every crop insurance company that participates in the Federal crop insurance program.\u00a0 NCIS and its predecessor organizations have provided members support in their crop insurance businesses since 1915.\u00a0 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.<\/p>\n

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.\u00a0 This is accomplished by filing the appropriate policy forms and statistical information with state insurance departments.\u00a0 Further, NCIS serves as a liaison with individual state insurance departments through active participation with the National Association of Insurance Commissioners (NAIC).<\/p>\n

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.\u00a0 The potential liability between both programs was approximately $105 billion.\u00a0 NCIS member companies service policies that encompass all farmers participating in the federal and private programs, including limited resource and socially disadvantaged farmers.\u00a0 In partnership with the Federal government, our participating member companies comprise the safety net that equitably provides the preeminent risk management program to America\u2019s farmers.
\nRole of NCIS and the Companies in the SRA Negotiations<\/strong><\/p>\n

NCIS began preparations for the new SRA early in 2008 by engaging company leaders on the future of the industry.\u00a0 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\u2019s farmers met and initiated a specific plan for negotiating the new SRA.\u00a0 NCIS organized five working groups, chaired by and consisting of representatives from all 16 crop insurance companies.\u00a0 The working groups addressed five subject areas:\u00a0 financial provisions, the Plan of Operations, information technology and data, quality standards and controls and education and training.\u00a0\u00a0 The working groups met beginning last spring, reviewing the performance of the 2005 SRA and developing recommendations for the 2011 SRA.<\/p>\n

In September 2009, RMA notified Congress that the 2005 SRA would not be renewed.\u00a0 In October 2009, in response to RMA\u2019s 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.\u00a0 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.\u00a0 NCIS also organized a technical, legal review of the final SRA conducted by NCIS and company attorneys.\u00a0 Throughout the process, NCIS was very aware of antitrust issues and worked closely with USDA\u2019s Office of General Counsel, RMA leadership, industry leadership and third party legal counsel to ensure the negotiations were conducted properly.\u00a0 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.<\/p>\n

NCIS and its member companies organized and carried out their activities with the primary objective of negotiating transparently and in good faith.\u00a0 Among our objectives was a new agreement that ensures effective service to producers, safeguards taxpayers\u2019 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.\u00a0 Unfortunately, the final agreement may put all these objectives at risk.<\/p>\n

The Negotiations:\u00a0 Substantive Issues but a Predetermined Outcome<\/strong><\/p>\n

The first draft of the SRA released in December 2009 set an ominous tone for the negotiations.\u00a0 The first draft was a significant overreach by the administration.\u00a0 The administration proposed an unprecedented and potentially very damaging reduction of $8.4 billion over 10 years in program funding.\u00a0 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 \u201creference prices.\u201d\u00a0 These reference prices were sharply below policy prices and would never change.\u00a0 The first draft replaced the Assigned Risk Fund with a \u201cResidual Fund\u201d that would have enabled companies writing bad business to shift their risks to other companies.\u00a0 The first draft\u2019s reinsurance terms created separate gain and loss provisions for four different groups of states; groupings that had little apparent rationalization.\u00a0 The reinsurance terms sharply reduced potential gains while also reducing potential losses, in effect shifting risk to taxpayers and crowding out private reinsurance.\u00a0 Moreover, the administration proposed increasing the net book quota share\u2014its tax on underwriting gains\u2014from 5% to 10%.\u00a0 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\u2019s reliance on private industry and exposing the taxpayer to greater losses in bad years.<\/p>\n

I will not belabor the industry\u2019s position at the beginning of the process, beyond saying that the administration\u2019s first-draft overreach was so great that subsequent concessions by them would still leave the companies at a serious disadvantage.\u00a0 Clearly, the 2011 SRA was a budget-driven process that took full advantage of the companies\u2019 short-term inability to exit the program.\u00a0 Congress authorized a negotiation in the 2008 Farm Bill presumably with the idea that it be open and balanced.\u00a0 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.<\/p>\n

In the second and third drafts of the 2011 SRA, the gap between the administration\u2019s proposals and the companies\u2019 proposals narrowed.\u00a0 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.\u00a0 There were a number of concepts that companies and the administration could agree upon.\u00a0 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.\u00a0\u00a0 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.\u00a0 This \u201crebalancing\u201d of returns would help companies cover costs and hopefully earn a small underwriting profit in the low return states.<\/p>\n

Unfortunately, the final 2011 SRA fails to achieve a fair balance among these shared concepts.\u00a0 The final draft has been signed by the 16 companies, but that hardly means the companies think things are satisfactory.\u00a0 Here are a few of the glaring issues with the 2011 SRA:<\/p>\n