STATEMENT OF ROSS DAVIDSON, JR
before the House Agriculture Subcommittee
on General Farm Commodities and Risk Management
May 22, 2003
Mr. Chairman and members of the subcommittee, it is a pleasure to appear before you
to discuss the progress and challenges of the federal crop insurance program. The primary
mission of the Risk Management Agency (RMA) is to promote, support and regulate the
delivery of sound risk management solutions to preserve and strengthen the economic
stability of America's agricultural producers. In fulfilling this mission, RMA is
also responsible for implementing decisions made by the Federal
Crop Insurance Corporation (FCIC) Board of Directors (Board).
RMA has made significant progress in implementing the letter and intent of the
Agriculture Risk Protection Act of 2000 (ARPA). ARPA charged the U.S. Department
of Agriculture (USDA) and RMA to enhance the federal crop insurance program to
better serve our nation's agricultural producers. Specifically, these enhancements
- Improving program integrity, compliance and regulation
- Expanding crop insurance to include livestock, rangeland and forage
- Expanding agriculture assistance programs to include additional underserved states
- Increasing risk management education and outreach to help more producers better
mitigate their risks
- Expanding specialty crop programs to reach more producers
The federal crop insurance program, administered by RMA, is a government-private
sector partnership in which RMA oversees the sale and service of crop insurance by
18 private insurance companies,
reinsured by FCIC, through licensed private agents
and brokers. This system includes over 25,000 professionals consisting of RMA, the
reinsurance companies, insurance agents and loss adjusters. Reinsured companies are
responsible for marketing the policies, collecting premiums, and resolving producers"
RMA has demonstrated its continued service to producers during drought stricken years
by in good faith paying all legitimate indemnity claims. For CY 2002 this amounted to
over $4 billion in indemnities compared to $3 billion for CY 2001.
A variety of insurance products are available to producers, including yield-based plans,
revenue insurance plans, dollar plans, and pilot programs for livestock, rangeland and
forage, and specialty crops. RMA has nearly 30 feasibility studies and product
developments currently underway. Significant demands are placed on RMA to monitor,
update and keep up with technology advances, changing and growing farm practices, and
new, uncovered risks. RMA's 10 regional offices
serve all 50 states and Puerto Rico,
keeping in close contact with local producers, grower groups, universities, and
government agencies. These offices provide information on local pilot programs, growing
conditions, participating crops, reinsurance companies and agents, events, and training.
AGRICULTURE RISK PROTECTION ACT OF 2000 (ARPA)
Program integrity, compliance & regulation
As directed by ARPA, RMA instituted new provisions strengthening program integrity and
compliance, which have shown positive results. While RMA believes that most producers use
good farming practices and comply with federal regulations, there are some instances of
waste, fraud and abuse. As a result, RMA has launched several oversight efforts, which
have proven successful in deterring and detecting fraud.
To combat fraudulent claims, RMA provided crop insurance oversight training to FSA
personnel in 2,500 FSA service center offices. This training helps RMA and insurance
providers monitor crop conditions and producer behavior during the growing season through
on-site FSA inspections. USDA's 2001 Compliance
Report to Congress noted that RMA has
reduced program costs an estimated $94 million by preventing payments on potential
fraudulent claims. Although prevention efforts and implementation of the Act have been
major priorities for RMA, traditional investigation and criminal, civil, and
administrative processes are continually ongoing and have generated recoveries of
approximately $35 million in overpaid indemnities.
ARPA also required the use of data mining and data warehousing "to administer and
enforce" the crop insurance program. The Center for Agribusiness Excellence (CAE)
contract requires an annual spot check list be extracted from the data warehouse
through data mining. The purpose of the spot check list is to identify producers
who should have growing season inspections performed. The spot check list is then
forwarded to FSA after RMA's six Regional Compliance
Offices review and revise the
list. Producers on this list were identified through data mining utilizing five
- Triplets - Agents, adjusters, and producers linked anomalous behavior suggestive
of collusion (as required by ARPA)
- Frequent Filers - Anomalous producers with consecutive multi-year losses
- Added Land/New Producer - Anomalous producers who appear to abuse the added land
and new producers provisions
- Cotton Yield Switchers - Producers identified by Illinois Institute of Technology
Research Institute (IITRI)
- Frequent Losers - Anomalous producers identified using criteria developed by a
Regional Compliance Office Director.
The indemnities of the producers on the spot check list reduced substantially from 2001
to 2002, from over $210 million to just over $100 million. This translates into
approximately $110 million in cost avoidance.
In addition, RMA is upgrading its Geographic Information System (GIS), using current
mapping and imagery technology, and infrared data to assist in making compliance
determinations. For example, RMA began monitoring the lay down of raisins from the air
using aerial infrared images in combination with field visits by RMA personnel to deter
potential crop insurance abuse due to low prices and other market conditions. In
combination with favorable weather conditions, these efforts resulted in maintaining a
very low loss ratio on approximately 400, 000 acres of raisins. Now, RMA is looking at
further integrating imagery technology into its data mining effort to reduce and prevent
GIS provides timely and historical imagery analysis of individual fields and tracts.
A GIS workstation has been established in every regional and compliance office using
Environmental Systems Research Institute (ESRI) software. RMA is also working with
business partners, private industry and other government agencies to enhance our GIS
technology. These combined efforts provide additional help in preventing, deterring and
prosecuting crop insurance fraud through information technology.
Livestock, Rangeland & Forage
ARPA authorized RMA to insure several types of animals and animal products, including
dairy. RMA recently announced a
Livestock Risk Protection (LRP) pilot program for fed
and feeder cattle. Both risk protection plans protect cattle producers from declining
cattle prices. Sales open for both products on June 9, 2003. Additionally, RMA is
entering its second year of insuring slaughter hogs in Iowa under two different pilot
insurance plans. The LRP pilot program provides swine producers with protection from
declining prices. The Livestock Gross
Margin (LGM) pilot program protects swine producers
from increasing prices in corn and soybean meal and/or declining slaughter hog prices.
Several other livestock initiatives are currently underway, including two contracts: a
feasibility study for various livestock related insurance plans and another contract to
study possibilities for insuring against catastrophic livestock diseases, both of which
RMA has received interest from many states in the expansion of the Adjusted Gross Revenue-Lite (AGR-Lite) program.
Recently the Pennsylvania Department of Agriculture submitted certain changes and requested
the expansion of the AGR-Lite program. On May 7, 2003, the Board of Directors sent the
submission out for review by five external
RMA is also testing pasture and forage products in order to fulfill ARPA requirements.
The Group Risk Protection (GRP)
rangeland pilot is currently offered in twelve Montana
counties. While this product is not working as well as RMA or producers would like, RMA
is doing everything possible to ensure that the discovery and determination of yields used
to make loss payments are accurate and fairly represent the crop year's production
experience of Montana's rangeland producers. RMA has contracted for an evaluation of
the GRP program and a feasibility study specifically for pasture and rangeland to
determine if an individual risk management program can be developed rather than the
The performance of the Actual Production History (APH) forage
program is being reviewed and a contract has been awarded to improve the loss adjustment
methodology and determine the feasibility of a forage quality adjustment endorsement.
In response to subsidies provided by ARPA and an aggressive education program, farmers
have actually purchased higher levels of protection and revenue crop insurance coverage
policies. In 2002, over 50 percent of the insurable acreage was insured at 70 percent
coverage or higher compared to only 9 percent in 1998. The high participation rate and
the higher levels of coverage purchased have enhanced the ability of crop insurance to
become the main risk management tool for America. In addition, the increased number of
farmers buying up higher levels of coverage has generated increased efficiencies.
However, the traditionally underserved states still lag in participation. The main
reason given for this lower participation has been unavailability of appropriate
coverage and the perceived high cost of buy-up coverage. RMA is working assiduously to
promote and facilitate the development of revenue and specialty crop insurance to
address availability questions and affordability concerns.
Secretary Veneman asked the Risk Management Agency to undertake a major initiative in
2003 to identify the underserved producers and closely examine the regions, commodities
and the risks. ARPA provided funding for the Agriculture Management Assistance program,
and then was modified to include additional funding by the 2002 Farm Bill. In February,
the Department announced an effort to better serve the 15 historically underserved states
targeted under the Agricultural Management Assistance program by providing up to $18
million in additional subsidy for higher levels of coverage through the Targeted States
Financial Assistance program.
This program, which is designed to increase participation in the crop insurance program
and help producers manage production, price and revenue risk, has been very successful.
Providing this additional financial assistance has encouraged many producers to purchase
crop insurance for the first time and has allowed producers to purchase the maximum
coverage level available. RMA has received many positive letters from producers,
producer groups and insurance agents in many states who are pleased with the program.
We expect to have more definitive participation data later in the summer, after acreage
reporting dates have passed, and we will be pleased to share that with you.
Education & Outreach
RMA targets risk management education activities to states that have been underserved by
crop insurance. The Secretary selected 15 states for this program: Maine, New Hampshire,
Vermont, New York, Connecticut, Massachusetts, Rhode Island, New Jersey, Delaware,
Pennsylvania, Maryland, West Virginia, Wyoming, Utah, and Nevada. These states have a
disproportionately large share of small farms. In 2002, RMA established
13 cooperative agreements
totaling $1.8 million to deliver crop insurance education and information to
producers in the 15 underserved states.
In addition, RMA awarded 72 partnership
agreements to conduct producer training in risk
management, with a priority to producers of specialty crops. These agreements were
awarded to universities, grower groups, private agribusiness organizations, and state
departments of agriculture across the country.
In fiscal year 2002, RMA's Civil Rights and Community Outreach division entered into
46 outreach partnerships totaling over $3
million dollars, covering approximately 34 states
serving women, Asians, African Americans, Native Americans and Hispanic farmers and
ranchers. Through these partnerships, women, limited resource and other traditionally
under served agricultural producers will receive program technical assistance and
training on the availability and use of risk management tools to improve their economic
RMA has also participated in 14 public educational briefings across the country on the
2002 Farm Bill and USDA programs and services.
RECENT ACTIVITIES & UPDATES
As you are aware, excessive drought has plagued and continues to affect many producers in
the U.S. RMA recognizes this challenge and has several programs that address the needs
of drought-stricken producers. Prevented planting provisions cover producers in times of
excessive and multi-year drought. Recently, RMA provided
supplementary information explaining prevented planting policies to producers. Most
producers have found that they are covered better than they originally thought. Additionally,
RMA is holding a series of prevented planting forums consisting of RMA, insurance industry
representatives and commodity group representatives to improve RMA's prevented planting
coverage for the future.
To mitigate the effects of drought on Actual Production History (APH) yields and
insurance coverage, yield substitutions authorized by ARPA are in place. This allows
producers who have suffered catastrophic losses to receive a yield equal to 60 percent of
the transitioned yield for the county. RMA is also evaluating the possibility of
requesting revisions to the yield substitutions to determine if more assistance can be
provided to address long-term production declines such as those induced by extended
Information Technology & Common Computing Environment
RMA's FY 2004 request of $78.5 million for Administrative and Operating Expenses
represents an increase of about $8 million from FY 2003. This budget will support
increases for information technology (IT) initiatives in the amount of $5.5 million.
These IT funds are targeted towards the continual maintenance and enhancement of the
corporate operating systems necessary to run the program.
This budget also includes a funding request of about $8.7 million for information
technology for RMA under the Common Computing Environment (CCE) in the budget of the
Chief Information Officer. In addition, RMA has an aging information technology system,
of which the last major overhaul occurred about 10 years ago. The funding requested
under the CCE will provide for improvements to RMA's existing information technology
system to improve coordination and data sharing with the insurance companies and FSA.
The funding will also provide for the development of a new information technology
American Growers Insurance Corporation
RMA continues to work with the Nebraska Department of Insurance, the rehabilitator of
American Growers, in assuring the timely service and payment of claims. As of last week,
fewer than 275 open claims of the 28,611 were pending and an additional 24 new claims
were added. The transfer of 2003 crop year policies to other active companies is
proceeding. All fall 2003 policies have been transferred to other companies and RMA is
in the process of transferring the rest of the spring 2003 policies. Substantial work
remains in areas such as completing claims processing, safeguarding crop insurance
records and disposing of company property.
RMA's oversight and advisory team of four senior managers rotate their time onsite in
Council Bluffs. In addition, many other RMA employees are involved in supporting this
on-going effort. Although most of American Grower's employees have been separated from
employment at this time, RMA acknowledges that without their assistance and dedication to
getting the 2002 claims paid, this project would not have been as successful as it was.
RMA also recognizes that the remainder of the crop insurance industry has assumed the
American Growers producer policy business. We believe this has been a very good example
of federal-state regulatory cooperation.
Although the final accounting analysis of American Growers remains incomplete, it appears
the company may have made management and/or operational decisions prior to 2002 that
caused its continued survival to be dependent on earning sizeable underwriting profits
for the 2002 reinsurance year. With a greater than normal loss year, the underwriting
gains did not materialize, leaving the company unable to meet expenses. As a result,
RMA recognizes the need for closer scrutiny of company expenses in the future is
Secretary Veneman recently charged RMA to "examine its own authorities and processes to
ensure effective oversight of the industry." RMA has determined that additional
reporting and review is necessary to anticipate insurance company problems in advance.
RMA is considering several changes in its authorities and organizational structure to
increase oversight of the companies participating in the Federal crop insurance program.
Premium Discount Plan
Converium and Crop1 Insurance companies, under section 508 (e) (3) of the Federal Crop
Insurance Act, submitted the Premium Discount Plan (PDP) to the FCIC Board. The Board
recommended approval of PDP if RMA determined that Crop1 and Converium met the
requirements of the Act and the other procedures created by the Board. After rigorous
review and approval by the Board, RMA authorized the PDP in seven states for five crops in
each state for the 2003 Crop Year.
Under PDP, the premium paid by producers to purchase crop insurance was reduced
commensurate with cost savings achieved by Converium and Crop1 primarily through the use
of their enhanced computer operating system and use of affiliates to make insurance more
accessible to producers. Converium, the SRA holder, has recently discontinued its
relationship with Crop1. RMA is working closely with these entities to ensure that
services to producers are completed correctly and in a timely manner for all 2003 policies
purchased through Crop1.
Because approval was based in part on the relationship between Crop1 and Converium, the
existing PDP program has not been approved for Crop Year 2004. However, PDP can be
resubmitted for approval for the 2004 crop year. RMA recently published procedures by
which any reinsured company may apply to offer a premium reduction plan, under strict
standards for approval and operation. These procedures were reviewed and commented on
by independent insurance companies. RMA has and will continue to exert careful
regulatory oversight of these types of programs to ensure compliance with federal law
and the provisions of the Standard Reinsurance Agreement,
particularly with respect to the proper use of licensed agents, producer service, and
illegal rebating and tying prohibitions.
In fulfilling ARPA requirements, Secretary Veneman recently asked RMA to review its
products, commodities, risks and areas covered to better serve producers. RMA is
undergoing an extensive product portfolio review, conducting listening sessions with
producers across the U.S. and identifying crop insurance priorities of local and
national producer groups, lenders and state departments of agriculture to identify ways
in which it can improve and fine-tune its products. For example, RMA, in conjunction
with U.S. Apple Association, has been working to make improvements to the current apple
policy. While several options are being considered, it is important that meeting the
needs of producers is first and foremost. Members of U.S. Apple and producers have been
pleased with the discussions thus far. We hope to reach a consensus soon and will do
everything within our authority to expedite the appropriate changes.
RMA has incorporated the final requirements as mandated by ARPA into its Common Crop
Insurance Policy for Basic Provisions, which is currently in departmental clearance.
We recognize that there are several questions surrounding these changes and hope to
publish the Basic Provisions in the near future.
Cost of Production
Cost of Production (COP) is a new and untested insurance concept and approach. Many
issues, including program design, rating, delivery and administration, still must be
addressed. RMA and the contractor on this product are currently addressing the issues
raised by independent expert reviewers, RMA staff, the Office of General Counsel, and
Board members during the Board's consideration and approval process. We expect to
revisit these issues by mid-summer when the product is resubmitted for the Board's
re-consideration. Pending resolution of these issues to the Board's satisfaction, a
policy for cotton may be available for the spring 2004 Crop Year. Any decision to expand
this program to other crops would be decided by the FCIC Board of Directors, taking into
consideration the experience of any initial pilot program.
Standard Reinsurance Agreement
The Standard Reinsurance Agreement (SRA), the
Livestock Price Reinsurance Agreement, and the Aquatic Crop
Reinsurance Agreement are considered cooperative financial assistance agreements between the
FCIC and the insurance company named on the agreement. Each reinsurance agreement establishes the terms and conditions
under which the FCIC, with delegated authority to RMA, will provide subsidies and
reinsurance on eligible crop insurance contracts. The current SRA has been in effect
since 1998 and includes a provision for renegotiations on an annual basis (from July 1 to June 30)
provided the Department gives notice at least 180 days in advance. ARPA authorizes the
Department to renegotiate the SRA once before 2005. In December 2002, USDA announced that the
RMA's Standard Reinsurance Agreement and Aquatic Crop Reinsurance Agreement would remain
in effect for the 2004 reinsurance year. RMA plans to announce renegotiation of the SRA
and the ACRA effective with the 2005 reinsurance year in the coming weeks.
Since the passage of ARPA, RMA has been very active in accommodating the needs of
American producers through additional products. RMA has reduced program costs by
preventing payments on potential fraudulent claims. Data mining efforts successfully
reduced indemnities by approximately $110 million. Improvements and enhancements are
being made to GIS, infrared, and other information technologies as well as the Common
Computing Environment. New specialty crop and livestock pilot programs are currently
underway. Education and outreach programs have been enhanced and expanded to help more
producers learn how to better mitigate their risks. RMA continues to service producers
that have been plagued by excessive drought. As demonstrated by my testimony today,
RMA is proactively striving to fulfill Secretary Veneman's continued commitment to
better serve our nation's producers.
Thank you, Mr. Chairman and members of the subcommittee. At this time, I will respond to