Testimony of


John H. Joyce
Chairman, National Crop Insurance Services
Member of the Board, American Association of Crop Insurers

on behalf of

National Crop Insurance Services American Association of Crop Insurers

Before the Committee on Agriculture, Nutrition and Forestry
United States Senate

Regarding the Federal Crop Insurance Program

April 17, 1997

I am John Joyce, President and Chairman of the Board of Rain and Hail L.L.C., the largest volume writer of Federally reinsured multiple peril crop insurance (MPCI) in the country. I am here today in my role as Chairman of the Board of National Crop Insurance Services (NCIS), a service organization of which all private companies involved in the Federal program are members and in my role as a member of the American Association Of Crop Insurers (AACI), a trade association which represents companies who write over 80% of the private MPCI premium.

Mr. Chairman, I am pleased to have the opportunity to appear before you to discuss the multiple peril crop insurance program. I am pleased to discuss a program that we have built through a public-private partnership into the primary safety net for American agriculture, with more than 75% of the eligible acres in the U.S. insured.

My understanding of the importance of the Federal program is not only as an insurance provider and a member of the crop insurance industry who worked as a loss adjuster for many years. I was raised on a farm, I still have immediate family members who live and work on a farm, and I fully appreciate the critical need for risk protection for the American farmer. I am now concerned that the extensive progress that has been achieved through the public-private partnership in agriculture is at risk, which in the end, only puts at risk the American farmer.

Although this public-private partnership preceded the Clinton Administration, it embodies the concepts that have been popularized by Vice President Gore in his "Reinventing Government" initiative. It puts the customer the American farmer first. It empowers the private sector delivery system to get results. It encourages the system to maximize service and product development to give America's farmers more and better options for protection against the increasingly risky agricultural risk environment..

However, I regret that I must spend the bulk of my time responding to a GAO report that, while violating the principles of "Reinventing Government" and ignoring fundamental business economics, has already been embraced by the Risk Management Agency. Someone should give you a more complete review of the tremendous success of the reformed crop insurance program and hopefully we will look at that at a future hearing. The recommendations of the GAO report would entail more government regulation, would focus on procedure rather than results, and would create huge disincentives for the crop insurance industry to serve our farmer customers.

Crop Insurance Industry Takes Action Based on Scope of GAO Audit

When NCIS members who were among the subjects of the GAO audit that served as the basis for the report before the Committee today reported concerns with the apparent nature and scope of the GAO review of companies, the NCIS board of directors visited with counsel to determine a course of action that would present a more accurate picture of the issues on which GAO was focusing. There was deep concern with both the narrow focus on cost only and the one-to-two year time period used for analysis upon which GAO appeared it would, and in fact has, made projections.

Putnam, Hayes & Bartlett, Inc. and Price Waterhouse were engaged to do professional analyses of the same issues. These firms have the experience of doing professional analysis for the government and have extensive knowledge and expertise on evaluating insurance programs and operations. I would refer you to the biographies of the professionals who conducted the analysis for these organizations contained in the reports which we have furnished the Committee. My main purpose here today is to apprize the Committee of the findings of these two independent studies and contrast those findings to those of GAO.

Findings of Price Waterhouse & Putnam Hayes

. We were disappointed with the narrow focus of the GAO review which addressed only cost issues with flawed methodology and incomplete industry information. This is in sharp contrast to the review required in the statute, which includes the quality of service and the simplification of the program. (Putnam, Hayes & Barlett Report (hereinafter Putnam), pps. 2 & 9.)

2. The FCIC fixed rate reimbursement (percentage of premium) is the only income that the private sector receives from administering and delivering the MPCI program to America's farmers. Fixed rate compensation is generally preferred because it rewards efficiency.

. The expenses reported by private industry and criticized by GAO, had no impact on the amount that FCIC reimbursed the private sector. I want to emphasize that all of the costs that GAO has chosen to disagree with did not cost the taxpayers one dime. The companies were paid a set fee and they were free to spend it as saw fit to get results and meet the requirements imposed upon them by the Standard Reinsurance Agreement by FCIC. They had no economic incentive to inflate costs in fact, they had a strong incentive to reduce their expenses and therefore increase their profits. (Putnam at p. 15)

The only question raised by the GAO report is the question of proper classification of expenses. On this question of classification of expenses, the accounting firm of Price Waterhouse disagrees with 98% of the costs that GAO says were improperly classified. (Price Waterhouse Report (hereinafter PW) at p. 37.)

4. Price Waterhouse reported that the companies operated at a cumulative delivery expense deficit over the eight year period from 1988-95. This is in contrast to the GAO report of claiming excessive reimbursement using only a two year snapshot that included a period of unusually high crop prices and unusually good loss experience, which, of course, results in reduced adjusting and claims-handling costs. (PW at p.4.)

The law requires FCIC to reduce regulatory costs as well as simplify the program. Steps taken by FCIC to date have had limited impact on reducing costs. (PW at pp. 27-31.) Therefore, without real cost reductions pursuant to law, companies will struggle to provide the necessary services to maintain the private sector standard of quality of producer protection at the 1999 maximum statutory rate of reimbursement of 27.5%.

. Price Waterhouse reported that the private sector delivered CAT policies for about 68% of the cost of FSA delivery (15.4% of premium vs. 22.6%). The GAO combined private delivery cost and underwriting gain for risk bearing for one abnormally good year to allege that the private sector delivery cost the government more. (PW at p. 22.) However, even if private delivery was as expensive as FSA delivery, the quality of service and risk management counseling seems to meet Congressional intent and to outweigh the cost.

. Price Waterhouse reported that companies realized returns of 7.5% of the mean earned premium 1988-95 which is well within the range of 7 to 10% targeted range of FCIC as reported by GAO. (PW at pps. 4, 6.)

. Price Waterhouse reported that MPCI underwriting risk is much more volatile; that MPCI sales, service and claims process is more labor intensive; and that MPCI provides less underwriting return to companies and less financial return for delivery (for both companies and agents) than the property and casualty line of insurance (1988-95). (PW at pps. 4, 25-6.)

. Price Waterhouse reported that when MPCI delivery costs were properly compared with the cost of private insurance lines, both retail lines and property and casualty lines, the cost of MPCI delivery is about one-half the cost of private insurance lines. In addition, when the work of delivering generic property and casualty insurance is compared with the work of delivering MPCI, there is at least three times as much work in delivering MPCI. In other words, we are paid half the amount to do three times the work when we deliver MPCI insurance. Charts taken from the Price Waterhouse Report are attached to my statement.

Summary

The government is getting a good value from the private sector. One example is the outstanding marketing efforts for 1996 that held farmer participation at about 75% of the eligible acres -- almost as high as in 1995 when enrollment was mandatory. The high participation rate provides evidence that companies and agents contracted with the companies are doing the job of providing the level of service farmers expect from their insurance provider. Another example is the number of innovative insurance products which are meeting the changing needs of growers and which have been developed by the private sector.

High farmer participation in the crop insurance program is fragile and any significant changes should error on the side of things that are working. Several serious students of farm policy believe that Freedom to Farm will not succeed unless the crop insurance program is successful.

Therefore, any changes in the program should be made with surgical precision. Congress recognized this when it wrestled with the budget issues in the 1994 Act. It mandated carefully thought out expense reimbursement reductions. The same approach is necessary in the current negotiations of the 1998 Standard Reinsurance Agreement between private industry and RMA. (Putnam at p. 12.) Certainly, any program changes should not be based on the highly speculative criteria upon which the GAO recommendation is based: (1) the expectation that crop prices will remain at relatively high levels; (2) that crop losses will remain at the historically low levels of 1994 and 1995; and (3) that the RMA will undertake program changes resulting in real regulatory cost reductions. Mr. Chairman, for the future, the Risk Management Agency and USDA should be moving aggressively to make much broader use of the private sector expertise and efficiencies that could make the program more responsive to the needs of farmers and taxpayers.

This program has been a leading success story in the government's efforts to leverage Federal resources and achieve goals of "Reinventing government" to a more efficient and workable program. The private sector delivery system is already adhering to these goals. It is time the agency itself got on board.

For crop insurance, RMA should be retooled to: (1) perform the functions of general program administration; (2) conduct oversight of the private sector by following the business approach of regular financial audits; and (3) provide catastrophic reinsurance to risk bearing companies. The private sector can do the rest!