March 10, 1998

Roger Swartz
American Farm Bureau Insurance Services, Inc.
Vice Chairman, Crop Insurance Research Bureau

Introduction

Hello, my name is Roger Swartz, I am vice president and general manager of  the American Farm Bureau Insurance Services, Inc.  Speaking on behalf of CIRB, we wish to thank the Subcommittee for calling this hearing as a first step to identifying the issues, problems, and potential solutions to ensure the success of the Crop Insurance program in the coming years, especially considering agriculture's increasing risk based environment.

CIRB is a national trade organization of crop insurers, whose members provide billions of dollars in crop insurance protection to American agricultural producers in nearly every state in the union.  CIRB's membership covers all spectrums of the crop insurance industry, as it includes large nationwide multi-line insurers, Crop-Hail providers, regional and local crop insurance providers, as well as major producer driven organizations.  CIRB's mission is to continually improve crop insurance and supports efforts to strengthen and increase the efficiency of the crop insurance program.

Agriculture's Primary Risk Management Tool

Crop insurance is the agricultural producer's only protection against crop loss.  USDA officials call it the primary remaining safety net for the American farmer.  Passage of the 1996 Freedom To Farm Act  gave individual farmers the responsibility to manage their own risks.  This, combined with the elimination of ad hoc disaster payments has made crop insurance the primary remaining safety net for the American farmer.

As agriculture's main risk management tool, producer participation in the crop insurance program has grown dramatically in the past years, doubling in farm policy protection in the years 1994-1996. While the program is no longer required for eligibility for other USDA programs, participation remains high.  In 1997, crop insurance provided $24.3 billion in agricultural protection on more than 181 million farm acres.  More than 600,000 farmers holding more than 1.3 million crop insurance policies are currently participating in the program.  Roughly 70% of all insurable acres are protected by crop insurance.

 Budgetary Savings Achieved

The Crop Insurance Reform Act has saved roughly $2.4 billion since enactment over combined historical spending from disaster payments, a savings of $800 per year according to USDA, while at the same time providing farmers affordable risk management protection.  A return to ad hoc disaster payments would be costly.   USDA officials recently noted that "crop insurance reform has produced budgetary savings that have greatly exceeded expectations, and far below the cost of disaster assistance"
Long Term Funding Stability Necessary for Continued Program Viability

The crop insurance program faces serious budget issues in 1998.  The 1994 reform legislation did not fully fund the enhanced crop insurance program. This funding short fall of approximately $200 million per year poses is a serious risk to the future stability of the program, and could significantly impede producers access to this safety net tool.  The House Committee on Agriculture recently emphasized this issue in a March 6 letter to congressional budget makers noting:

   "Congress has given assurances that a basic safety net would continue to be available in part through federal crop insurance."  "Recent pressures on discretionary spending, however, have placed in jeopardy continued full funding of a crop insurance delivery system." " In terms of the overall federal budget, shifting the costs associated with the crop insurance program from discretionary to mandatory spending does not represent an increase in spending to this program."

It is vitally important that all program participants including the crop insurance industry, farm groups, Congress and the Administration work together in a constructive fashion to ensure long term stability of the program.

Any permanent funding or program reforms must have as its ultimate goal that of serving the risk management needs of today's agricultural producers. The funding mechanism must enhance industry and farmers participation in program decisions and streamline the program structure for maximum effectiveness.  The crop insurance program must be a true public- private partnership which encourages responsiveness to the needs of American agricultural producers.

To ensure the future viability and strength of the program, the following operating principles must be central to any crop insurance program reform and funding mechanism.

Operating Principles

     1. Achievement of long-term stability and continued program viability through a permanent funding mechanism.  Development of a common sense permanent funding mechanism is necessary to insure the continued viability of the program, and the security of our nation's agricultural producers.

     2. Protection and enhancement of producer participation in the crop insurance program, both at the CAT and Buy-up levels.  Achievement of maximum producer participation in the program which provides access to critical risk management tools is essential. The regulatory burden on agricultural producers and crop insurance providers must also be reduced as mandated by the 1994 Crop Insurance Reform Act in order to improve efficiency and program participation. (Attachment B)

3. Creation of a productive and efficient public/private partnership to deliver and service crop insurance products that ensures the financial security of our nation's agricultural producers.  This partnership must provide flexibility for, and encourage the development of innovative crop insurance products to address the varied needs of today's agricultural producers. .

     4. Involvement in program decisions and investment by all participants - All parties involved in the crop insurance program, including crop insurance providers, agricultural producers, and the federal government must have a voice in program decisions as well as contribute and invest in the long term continuity of the program.  We must encourage greater private industry participation, including a more substantive role in the implementation and administration of the program.  All funding and reform initiatives can not be successful with out greater private industry and producer  access to program decisions.

Using these principles as a guide, CIRB has worked with others in the industry to develop a set of alternatives which we believe could achieve maximum program goals.  This proposal serves only as a basic framework from which we may reach long-term program funding stability.  It is vitally important that all program participants including the crop insurance industry, farm groups, Congress and the Administration work together in a constructive fashion to ensure long term stability of the program.

Industry Proposal Components

   Discretionary CAP Adjustment -The crop insurance funding problem is a concern of all Congress, not one single committee.  A joint effort is needed by the Authorizing, Appropriations and Budget Committees to fund crop insurance out of mandatory spending accounts.  Following the Crop Insurance Reform Act of 1994, when the program was funded totally out of mandatory accounts, the Appropriations Committee absorbed approximately $200 million annually which was previously used for crop insurance funding.  Under the proposed option, the Budget Committee will provide additional spending authority to the Authorizing Committee with a concurrent reduction from the Appropriations Committee.  ($100 million annually)

Tobacco Settlement/Assessments - Tobacco trust fund reserves or a tobacco industry assessment increase would be used to pay for tobacco related crop insurance programs.  Hence the federal government will no longer be supporting tobacco related programs what-so-ever, as all programs will be self-funded by the tobacco industry.  In the past years, congressional pressure has increased to cease all government sponsored tobacco assistance program, including crop insurance.  This option would address this question. ($50 million)

Catastrophic Program Modifications - CAT policy owners would be charged an additional $10- $50 beyond the $50 current administrative fee. ($5-20 million)  (CAT provides liability protection up to 50% of loss).  A  graduated fee would be placed on CAT policies over $100,000 in liability. ( $10 million)  The Noninsured Assistance Program would reduce NAP payments by 10%. ($9 Million).  (TOTAL -  $24-39)

Buy-up Insurance Proposals - Reduce loss ratio to 1.0 from 1.065.  Increase fee charged on buy- up policies from $10 to $20 per policy. ($ 30 million)  Insurance Provider Proposals - Reduce loss adjustment expense payment on CAT from 14% to 13% of premium. ($ 4 million) Reduce administrative expense reimbursement from 27% to 26 % for buy-up polices. ($8 million).  Eliminate and privatize functions of USDA/RMA Research & Development from FCIC Fund. ($10 million) (TOTAL - $22 million)

TOTAL Crop Insurance Program Savings - $67-81 million annually
TOTAL PACKAGE - $230-245 million annually
 

We would be glad to answer any questions that the Committee may have.  We  welcome the opportunity to continue to work with all program participants and legislators in this effort in the weeks to come.

Lugar Proposal

We commend the Chairman of this Committee, Senator Richard Lugar, for his recently introduced conceptual outline for the future of the program.  The Chairman's proposal has some valuable features which warrant further consideration and study.  However, there are several overarching factors which call for serious consideration as to their potential affect on program participation as well as the program's ability to provide a continued safety net to the American farmer.

Congress made the policy decision during the 1996 Farm Bill to make crop insurance available as a federal safety net to agricultural producers, thereby eliminating the need for ad hoc disaster assistance.  Optimum producer participation can not be achieved however if premiums on crop insurance are priced out of the reach of most farmers, which would be an inevitable result if such  proposal were to go into effect. Crop insurers have long called for a rating system which was actuarially sound.  However, if such pricing system were to be put into effect as envisioned in the proposal, one must consider the significant potential affect on producer participation.  In many areas of the country it would simply be prohibitively expensive for the private sector to offer insurance coverage.   With out federal assistance, there is a large likelihood that a substantial sector would be left vulnerable.  Congress must consider if this is in the best interest of American agriculture.

In addition, large crop insurance providers would inevitably have an advantage over smaller regional carriers.  Farmers would have fewer and fewer choices among crop insurance carriers, particularly local, regional and some producer driven provider groups would be priced out of the business, leaving fewer choices and less service for the farmer.   The crop insurance industry
competes now on service to producers, and welcomes competition which is based on the ability to control program decisions.  However, one must consider the ultimate result of a competitive structure as described in the Lugar proposal on program participation, quality of service, choices of provider and the overall viability of the program.

Another area which warrants further concern includes the granting of "exclusive marketing rights" to the sponsors of privately developed insurance products.   Adequate access by other companies to market similar type products must be ensured or market competition will not be achieved.  Because these privately developed products receive public funding, one  privately developed product should be allowed to be marketed to the exclusion of similar products.  In addition, while the RMA should not investment resources in product development on products for which there is no market, or where there would be direct competition from privately developed products, there may be a segmented market for which RMA product development may be necessary.  Finally, modifications to the make-up of the Federal Crop Insurance Corporation Board (FCIC) to increase representation by federal bureaucrats, while limiting seats with knowledge of crop insurance to one of seven of the Board members, can not be in the best interest of the program.

The Chairman's proposal as announced does contain several meritorious aspects, as well as funding options which must be considered as we work toward long-term funding and program stability.  We look forward to working with the Chairman and his staff in the weeks and months to come on this effort.
 
The Administration also recently announced a permanent funding proposal in the President's budget earlier this year. We applaud the Administration for taking the first step to achieving program goals.  However, serious concerns exist regarding the impact of this proposal on farmer participation.  Substantial reductions were proposed from farm programs, as well as cuts from within the crop insurance program.  We believe program reductions of this magnitude would severely reduce farmer participation and the ability of the private sector to deliver crop insurance protection to producers.

Conclusion

Program participants must work together in order to achieve any viable funding package.  We would like to take this opportunity to formally invite all participants to sit down together and discuss common program goals and funding alternatives.  It is time to refocus on the original aim of the crop insurance program - that is to provide quality crop insurance protection to American agricultural producers, and reassess the best means to fulfill the program's goals.  We must assure maximum producer participation, achieve a true public private partnership with increased opportunity for involvement by the private sector, and reduce the regulatory burden of the program to allow us to achieve these goals.  As risk management becomes increasingly more important to our nation's agricultural producers, we must work together to ensure the continued strength of the program.  Thank you for your consideration of this issue and we will be glad to assist the Committee in any manner necessary.
 


Attachment A

 Regulatory Reform

Essential to the continued strength of the crop insurance program and achievement of  program goals is regulatory reform program as mandated by Congress in the 1994 Federal Crop Insurance Reform Act.  The Act ordered the Risk Management Agency to reduce the regulatory costs to both deliverers and farmers to a targeted percentage commensurate with reductions in administrative reimbursements.  To date, program regulations are as burdensome as ever on both Industry and producers.

Congress' intent in the 1994 Law was made clear in a statement by Rep. Bill Barrett during bill passage. (Congressional Record 149, Aug. 5, 1994, p. H6999):

     "My amendment, which is incorporated in the bill before us, directs the Federal Crop Insurance Corporation to reduce the amount of paperwork burden to private insurance companies, and lower the cost of each policy held by farmers.  Further, the Corporation after reporting to Congress, must develop new procedures to reduce the cost of each crop insurance policy by a targeted percentage.  Not only will these provisions allow the private sector to more efficiently deliver crop insurance, but the excess administrative costs of the Federal Crop Insurance Corporation will be reduced."

While the mandate under the law is simplification and efficiency in the last years, it appears the program has become more complex and is working contrary to the original goals of the program.
This issue has become critical as excessive program regulations are making it increasingly more difficult for crop insurance companies to deliver quality risk management products to agricultural producers.  For instance, the current crop insurance manual is over 800 pages in length and there have been over 365 changes since 1995.  Furthermore, RMA has not quantified simplification measures to a targeted percentage commensurate with reductions in reimbursement rates, as dictated by Congress.  This was indicated in RMA's April 17, 1997 Report to Congress which stated that their simplification measures had fallen short of the mandated targets.

And certainly, over-regulation is working at cross purposes with the goals of the program, as farmers themselves are declining to secure crop insurance protection.  Many farmers have declined  catastrophic coverage costing producer's only $50, due to the extensive and complicated record keeping requirements.  Producers must have adequate risk management tools available to them.

Simplification measures asserted by RMA do not reduce expenses to companies nor reduce farmers' crop insurance policies.  In many instances RMA measures actually increase costs to companies and farmers by shifting the administrative burden from RMA/FCIC to the private sector.  For example, FCIC shifted extensive reporting requirements from its office to  companies and producers.  It has required companies to adopt substantial and expensive modifications in computer systems, an increased burden on smaller companies.

Analysis performed by the independent auditing firm of Price Waterhouse concurred noting that:
   1.  "FCIC efforts to simply the program have caused companies to incur additional costs in their administrative of the program.  Systems improvements and new computer applications provided by FCIC do not consider companies expenses in implementing the new systems."

   2. "Some simplification efforts merely combined program dates and do not actually reduce workload  This FCIC simplification effort does not necessarily contribute to the reduction in insurance company or agent expenses."

3  "Some simplification projects were supposed to reduce workloads, but the solutions implemented by FCIC never worked properly. Some simplification efforts were intended to facilitate the transfer of information and work during the transition of catastrophic coverage to a single delivery system.  From companies' perspectives, the automation is not completed, and the ineffectiveness of certain projects is contributing to higher expenses for some companies."