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
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.