STATEMENT OF KENNETH D. ACKERMAN BEFORE THE SENATE COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
April 21, 1999

Thank you for this opportunity to testify concerning the integrity of the Federal crop insurance program. Mr. Chairman, I appreciate the effort that you and the Committee have made to keep the improvement of the farm safety net high on the priority list for action this year through hearings such as this one and the Roundtable discussion scheduled for April 28.

The Risk Management Agency (RMA) has reviewed the Report to the Secretary on Federal Crop Insurance Reform (the Report) recently issued by the Office of the Inspector General (OIG).

The Report raises a number of important policy issues such as the appropriate standards and review levels of complex new products, providing compliance oversight to the program, and the appropriate gain and loss payments to participating reinsured companies. Though the Report raises issues that may deserve discussion, RMA believes there are serious flaws in the Report that undercut its validity.

At a time when crop insurance loss ratios and error rates are both at historic lows, the message of this report fails to acknowledge achievements that should give the public a strong basis for confidence in the integrity and management of the crop insurance program.

The program is financially sound. Since 1994, RMA has consistently met its underwriting goals, which has saved taxpayers millions of dollars of excess losses that plagued the program in prior years. From 1983 to 1993, the average loss ratio was 1.56. The loss ratio from 1994 to 1998 was 0.78. The consequences of this reduction are enormous. For example, in 1998, RMA would have paid-out an additional $1.4 billion in losses if the 1.56 loss ratio were still the norm. While loss ratios are dependent on many factors, some manageable and some not, the savings are real (chart 1).

Program integrity is high. Error rates for Federal crop insurance are at historical lows and are well below average error rates in the commercial casualty and loss insurance industry (chart 2). An OIG review of claims in the 1991 crop year indicated an indemnity overpayment of 9.8 percent in the sample reviewed. A similar RMA review of claims in 1997 estimates that the error rate had fallen to 4.83 percent. While differences in sample size and methodology cannot be overlooked, the trend appears positive, especially in light of enormous program growth. To keep the trend moving in the right direction, RMA and the insurance industry have formed a task force to improve the effectiveness of program oversight. It should be noted that RMA throughly reviews all large claims and spot checks claims where there appears to be a conflict of interest.

Risk sharing has increased. During 1997, RMA re-negotiated the Standard Reinsurance Agreement (SRA) with insurance companies. This effort resulted in a significant increase in the amount of company-borne risk by: (1) increasing overall risk of loss, (2) reducing gain potential on catastrophic policies, (3) lowering administrative and operating (A&O) payments, and (4) enhancing compliance tools. Further, since 1993, the A&O payments to companies have been reduced from 31 percent of premium to 24.5 percent--a step that saves taxpayers over $100 million per year based on current premium values (chart 3). According to an independent analysis conducted by USDA's Office of the Chief Economist, should a 1988- type drought occur today under the new SRA, net underwriting losses for participating companies could reach $450 million in a single year. Private reinsurers play an increasingly important role in the program as more risk is transferred to crop insurance companies. Beyond their risk sharing role, insurance companies have developed many new private and federally backed products while an estimated 15,000 crop insurance agents have helped boost participation by providing farmers efficient and professional service.

Virtually every specific program flaw identified by OIG has been addressed properly. Cases of potential abuse have been followed up, and RMA has been consistently successful in collecting overpayments from reinsured companies. While preventing program abuse is vital to maintaining program credibility, we must balance the costs and benefits of program oversight in the Federal crop insurance system. If we design our programs and practices with the sole purpose of catching the very small number of abusers, we could easily end up with a system that is so complex, costly and burdensome that the vast majority of law-abiding farmers would find the system unworkable. As our error rate and loss ratios indicate, a good balance has been achieved.

Given slumping exports, low prices and the ever present threat of natural disasters, we believe the most important challenges facing the crop insurance program today are to strengthen the farmer safety net itself. USDA has advanced a detailed package of proposals to provide better coverage, information, and service to farmers. The fact that we need to protect the integrity of the program now and in the future is a constant. Because crop insurance protection costs farmers cold, hard cash, maintaining their confidence in the program is critical to the entire agricultural economy. Our commitment to consciously pursue this goal is reflected in our strategic plan, which identifies protecting program integrity as one of RMA's top three priorities.

Mr. Chairman, while we disagree with many of the conclusions reached in this report, we consider the OIG a valuable ally in our efforts to maintain producer confidence in the program. We have a long and constructive history with OIG that has led to the identification and correction of flaws. These joint efforts have prevented expenditures of or recovered millions of tax dollars that would otherwise have been wasted. I can assure you that following today's debate we plan to continue our joint efforts with OIG to safeguard the integrity of the crop insurance program. Mr. Chairman, thank you for this opportunity to address this Report before your Committee.