Testimony of the

Crop Insurance Research Bureau

before the

Senate Agriculture, Nutrition and Forestry Committee

__________________________________

Introduction

Good morning, my name is Roger Swartz, vice-president and general manager of American Farm Bureau Insurance Services, Inc. headquarters in Park Ridge, IL. I am also chairman of the board of the Crop Insurance Research Bureau (CIRB). I have the privilege of speaking on behalf of the membership of CIRB, a not-for-profit industry trade association, whose mission it is to promote and work for the improvement of crop insurance in the United States. CIRB was established in 1964 and its members include some of the giants in the insurance industry as well as a host of smaller regional and single state insurance organizations engaged in the writing of private crop-hail insurance and/or multiple peril crop insurance.

First of all CIRB wishes to express its thanks to Senator Lugar for the opportunity to testify on this most important of agricultural issues. We know that you and other members of both the Senate and House are looking for ways in which the crop insurance program can better meet the needs of more agricultural producers. Private crop insurers share your concerns for program improvement and pledge to work with you in positive ways to make this happen.

CIRB has consistently stood for the following principles - encouragement of initiatives which foster strong program participation, attainment of affordable actuarially-sound rates, choice in coverage levels, program integrity and program simplification.

We agree with Secretary Glickman who stated, during the USDA's Working Group on Improving the Farm Safety Net meeting, that "crop insurance should provide the foundation for risk management, and the program should operate more like traditional insurance products." The program CAN and MUST work more like true insurance for its long-term viability.

The challenges that face crop insurance are well documented - the solutions are yet to be realized. However, if one looks back and traces the evolution of the program from the inception of the public-private partnership in 1981, the changes that have occurred to strengthen the program have been great. We have, in 1999, a solid core of insurance organizations delivering the program. These are organizations are obviously "in it for the long haul" as is evidenced by their considerable commitment to infrastructure, technology, human resources and program integrity.

For Your Consideration

At this time, I would like to share with you some of CIRB's thoughts on improving this vital element of the Safety Net.

Program Participation

A high degree of participation in the program especially in the buy-up program is essential. This has been and continues to be a vital tenant of a successful program. Although, not where we'd like it to be, participation has remained high over the past several years even in years when crop insurance was not mandatory. There are places in the country where program participation is strong; however, there are still places where participation remains a challenge. We need to thoroughly analyze why and take whatever steps might be necessary to remedy low participation.

However, it should be noted that participation may never reach the high levels in some places or on some crops not because of a lack of a good program but because other methods of risk management are being utilized. For example, many California producers use geographic and/or crop diversification as their foremost risk management tool. Yield variations are minimal in many areas on many crops. Additionally, some commodities also have a generally stable price component. For those reasons crop insurance participation may never reach the levels in California it does in some other areas. We must understand and recognize these elements to fully understand program participation.

Actuarial Soundness

To the greatest extent possible, the goal of actuarial soundness should be maintained. Certainly we have achieved a degree of actuarial soundness over the past few years in part due to better rating methods, but also because of a string of unusually good weather and market conditions. Actuaries remind us that in order to achieve a level of actuarial soundness in any insurance program, that accumulating a great deal of data is extremely important. To do this, requires time. We are getting there, but probably not fully there yet.

From an actuarial point of view, there are real challenges ahead on the price side if that component is to be brought into the mix. We caution Congress and RMA that developing good products to address the price side must be done carefully because the potential negative impacts are potentially very serious.

Crop Insurance & Disaster Assistance

A crop insurance program as strong and as vital as we'd like is difficult to realize in an environment where large-scale disaster assistance is a possibility. We understand the pressures that came to bear on you in 1998 because plunging prices; however, it was unrealistic and unfair to expect the current program to react to such a situation. Therefore the constant criticism of the program for not being able to predict or react to what happened in 1998, is not useful.

For the most part, the program is doing what it has been designed to do thus far. Should it

incorporate more price protection? Yes, but as I mentioned, it should be done carefully with

thorough study and examination.

The private sector crop insurance industry appreciates the opportunity to participate in the dialogue that will shape an improved crop insurance program. We also appreciate the support for the crop insurance program in the past. However; Congress deviated from its previous commitment to not make disaster payments. To producers who took proactive measures to protect themselves with crop insurance because they believed that disaster assistance would no longer be forthcoming, a credibility gap has been created because of 1998. What you do in 1999 must close that gap? Disaster assistance and a viable crop insurance program do not coexist comfortably. In fact many would say they cannot coexist at all.

Catastrophic Coverage

The CAT program has come under considerable criticism especially from the southern parts of the country where the perception is that the coverage is so low as to not even be worth the small administrative fee charged. These same producers consider buy-up coverage too expensive. This perception, accurate or not, has obviously damaged the credibility of the program there and in some other areas of the country. Most producers understand that CAT was designed to be just what it is, the most basic of all coverage - a substitute for disaster payments. Certainly it is not the wisest coverage for those who are required to secure operating loans with crop insurance. We must make sure that the rates charged are accurate and affordable.

Should CAT be made more attractive? Some say that it should. However, by increasing what CAT covers, we could run the risk of creating a disincentive for producers to buy-up? It is our opinion that some upside adjustment in CAT may be in order. But what is the best way to do that?

You may want to consider changing CAT to a basic 50/60 revenue product. We believe that such a product would be simpler and address producers' primary concern. We also believe that it should be offered on a single unit basis in order to simplify it. As a yield product, it simply will not react appropriately when we experience a 1998 scenario. We do believe that such a basic revenue product could coexist well with additional insurance coverage available such as MPCI, CRC, RA and the like.

Buy-Up

CIRB recommends that consideration be given to equalizing the subsidy for buy-up coverage to 50% for all levels. This recommendation was made by several in field hearings, sponsored by the House Agriculture Committee's Risk Management & Specialty Crop Subcommittee, in Sioux Falls, SD. This would certainly serve as a real incentive for producers to get into a kind of coverage that will provide real risk management and make these products more affordable. Affordability translates into flexibility for farmers.

Program Simplification

CIRB supports the ongoing initiative of the industry and RMA in providing real program simplification. Simplification has been given a great deal of lip service over the years, but the fact is the program has become more complex. A classic example of the program becoming more complex is CAT. For an agent and a farmer, CAT is no simpler than buy-up. All that is required to obtain a CAT policy is required of buy-up. Companies, their agents and insureds still must work their way through a minefield of rules regulations and requirements.

Delivery Mechanism

CIRB strongly supports the private sector deliver of all crop insurance products. CIRB knows that there are still those who believe that the government should either deliver the program in its entirety or have a shared role in delivery as was the case in the past. We do not believe that this approach is called for. The history of exclusive private sector delivery would indicate that the private sector can or does deliver the program in the most efficient and timely manner.

New Product Development

The notion that private sector insurance companies are somehow insensitive to the needs of farmers is not born out in fact. In fact the private sector through the development of products such as Crop Revenue Coverage and Revenue Assurance has demonstrated that it is accomplished at meeting farmer needs. Both programs resulted from an extensive amount of farmer input and we believe that given more incentive to develop these types of innovative products, the private industry will respond.

At this time, there remain some significant impediments to product development in the private sector. One of those is coming up with a fair and equitable way of compensating a company for development costs. Another impediment has been the rather lengthy and ill-defined process imposed on the developing company by RMA regulations. Although RMA is making strides at addressing these issues, much is left to be done.

Multi-Year Disasters

The unfortunate experience, best represented by the Dakotas, of multiple disasters has certainly brought this problem to a sharp focus. While the problem is clearly evident, the solution or solutions are not. The very definition of Actual Production History would indicate that ALL yield data must be factored in or else the APH isn't really an APH at all and the resultant rates based upon the APH cannot be actuarially sound.

We encourage Congress, RMA and the Industry to thoroughly study the impact of

increasing the APH or artificially reducing rates.

We are not suggesting that some type of creative approach to the problem may not be warranted, but the approach should be well thought out and considered with an eye toward maintaining, to the greatest extent possible, a level of actuarial soundness.

One idea, which might be considered, would be to continue to utilize the current method of calculating APHs but provide enhanced coverage in areas with multi-year disasters through increased subsidy levels. CIRB is open to other suggestions and would be anxious to work with others to make sure that this issue is addressed soon.

Livestock Coverage

There is considerable interest both in Congress and from the Administration in revising the crop insurance program so that RMA can extend coverage to livestock. USDA has indicated that private sector programs routinely insure only for livestock mortality. It should be noted that private sector farmowner policies provide coverage for livestock for wind, fire and other perils.

CIRB feels strongly that the federal government should not compete with the private sector or expand into areas where the private sector already serves the market. If authorization is given to USDA to offer livestock coverage, care must be taken that it does not in any way duplicate the efforts of the private sector.

Conclusion

There's an old saying, "Where there's a will there's a way." It is obvious that Congress, private sector insurance providers, RMA, producer groups, lenders, etc. have "the will". Will we find the way in 1999? Not completely, but we can certainly make sure that we stay on the right track by working together.

When we look back over the nearly two decades of the current crop insurance program, the progress that has been made is immense. Hundreds of thousands of farmers are still in business today, in part because this program has given them a meaningful way to manage much of their own risk. We know what this program has cost over this length of time, but what would have been the cost without it?

Thank you for allowing me to speak to you this morning. I will be happy to entertain any questions you may have.

Attachments:

CIRB Member & Associate Member Organizations 1998

Premium, Liability & Loss Ratio Information for Selected States

I. Attachment

CIRB MEMBERS

AgForce Insurance Services

Fargo, ND

American Agricultural Insurance Company

Park Ridge, IL

American Farm Bureau Insurance Services

Park Ridge, IL

Carthage Mutual Insurance Company

Carthage, IL

Country Mutual Insurance Company

Bloomington, IL

Farm Bureau Mutual Insurance Company

West Des Moines, IA

Farmers Mutual Hail Insurance Company

Des Moines, IA

Grinnell Mutual Reinsurance Company

Grinnell, IA

Kansas Farm Bureau Mutual Insurance Company

Manhattan, KS

Nodak Mutual Insurance Company

Fargo, ND

North Carolina Farm Bureau Insurance Company

Raleigh, NC

Oklahoma Farm Bureau Insurance Company

Oklahoma City, OK

Rural Mutual Insurance Company

Madison, WI

Square Deal Insurance Division of Allied Mutual

Des Moines, IA

State Farm Fire & Casualty Insurance Company

Bloomington, IL

United Farm Family Insurance Company

Indianapolis, IN

Virginia Farm Bureau Mutual Insurance Company

Richmond, VA

ASSOCIATE MEMBER COMPANIES

Agricultural Conservation Innovation Center

American Reinsurance Company

Agricultural Risk Management North America

Baldwin Mutual Insurance Company

Benfield, Greig, Ellinger Inc.

CIGNA Insurance Company

John B. Collins & Associates, Inc.

Guy Carpenter & Company, Inc.

Insurance Fund for Natural Risks in Agriculture (ISRAEL)

Liberty Mutual Insurance Company (UK) LTD

National Association of Mutual Insurance Companies

National Crop Insurance Services, Inc.

Pioneer Hi-Bred International Insurance Services, Inc.

Partner Insurance Corporation of the U.S.

Totsch Enterprises, Inc.

Tyser & Company (ENGLAND)

II.

Attachment

MPCI PREMIUM & LIABILITY OF 10 STATES WITH

LIABILITY OF MORE THAN $1 BILLION - 1998

State Liability Premium Loss Ratio Loss Ratio ($ million) ($ million) 1998 1981-98

California $ 2,172 $ 114 32% 72%

Florida $ 1,083 $ 42 39% 92%

Illinois $ 2,049 $ 98 15% 72%

Indiana $ 1,005 $ 50 22% 88%

Iowa $ 3,387 $ 153 12% 70%

Kansas $ 1,231 $ 96 18% 100%

Nebraska $ 1,982 $ 110 13% 74%

North Dakota $ 1,337 $ 124 47% 118%

South Dakota $ 1,019 $ 89 44% 105%

Texas $ 1,901 $ 250 170% 153%

TOTAL US $27,932 $1,878 48% 108%