SRA CLAIMS AND FACTS

WASHINGTON, Apr 16, 2004 - Various claims are being made that the Risk Management Agency's (RMA) proposed Standard Reinsurance Agreement (SRA) would undermine the federal crop insurance delivery system safety net for farmers and ranchers. The recent SRA draft is generally viewed as a viable proposal and justifies a good faith effort by all parties to resolve remaining issues in a third and final draft.

RMA believes the proposed SRA will enhance the Federal crop insurance program by:

• Encouraging greater availability and access to crop insurance for our nation's farmers;
• Providing a safer and more reliable and effective delivery system; and
• Continuing efforts at strengthening measures to reduce fraud, waste, and abuse; while
• Achieving a better balance of risks and cost efficiencies for taxpayers.

Proposed changes to the SRA will not affect premiums or other direct benefits to farmers, but will result in enhanced service and continued insurance coverage.

RMA provides the following to ensure that farmers and other stakeholders are completely and accurately informed regarding the SRA. By having the facts, those who rely on crop insurance as an essential risk management tool can be assured that the crop insurance delivery system is, and will continue to be safe, sound and effective.

Claims vs. Facts

Claim 1: The cuts proposed in the second draft of the SRA will put rural America's soundest risk management tool at risk. The proposed magnitude of cuts threatens the national delivery system, leaving farmers without an effective delivery risk management program.

Facts: The proposed savings will have no adverse effect on the delivery of crop insurance to rural America. In fact, the proposed SRA will support and strengthen the availability and reliability of crop insurance to America's farmers in a fiscally responsible and efficient manner. In recent years, insurance companies that deliver crop insurance have experienced substantial increases in administrative and operating expense reimbursements.

The SRA proposes a small reduction in expense reimbursement to the insurance companies and shifts a modest amount of profit potential from the insurance companies to the taxpayer through a "quota share" adjustment. These small, manageable savings are focused to take into account various issues such as workload at higher coverage levels, while recognizing advancements in the crop insurance program. Well-managed insurance companies will be able to make appropriate adjustments and continue to earn a reasonable profit on their crop insurance business. As a balance, RMA will be willing to assume a larger share of the non-profitable business in pilot programs and in many states with recent high loss experience.

These adjustments represent a modest amount of savings of the total and per policy gross income (expense reimbursements plus aggregate underwriting gains). For example, based on the most recent estimate of year end accounting, in 2003, crop insurance companies received a total gross income of about $1.1 billion, on approximately 1.2 million policies, or an average of $898 per policy. With the proposed expense and underwriting adjustments, average gross income for 2003 would have been reduced to $865 per policy, an overall 4 percent reduction.

The gross income of the insurance companies averaged 32 cents for every dollar of premium they collected for the period 1998 to 2003. The proposed changes in the SRA to company expense reimbursements and underwriting gains would reduce company gross income approximately one cent per premium dollar in both cases - hardly a system threatening reduction. It is true that insurance companies have to deduct their actual expenses from their underwriting gain and expense reimbursement before they determine their net profits. However, company net profits may also include the commissions and profit sharing payments paid to companies by reinsurance companies as compensation for sharing in company profits through reinsurance. It is believed that such commissions and profit sharing may amount to between 3 and 4 cents per premium dollar.

Expense reimbursement payments have grown over time in total and on a per policy basis. For example, the number of policies serviced by companies in 1998 and 2003 remained at 1.2 million, but RMA paid the companies a total of $444 million in expense reimbursement in 1998 and $734 million in 2003. On a per policy basis, expense reimbursements increased from $358 per policy in 1998 to $592 per policy in 2003. This is a 65 percent increase over 5 years --an average compound increase of over 10% per year. For 2004, its is estimated that premium income will be substantially higher reflecting generally higher commodity prices and that the related total and per policy expense reimbursement will rise dramatically without a significant increase in the cost of selling or servicing the policies.

The proposed SRA implements expense reimbursements rate reductions in a manner that reflects higher premium and related workload as insurance coverage levels increase. Under the current SRA, premiums and expense reimbursement increase dramatically at higher coverage levels. For example, the premium (and current expense reimbursement) for an 85% policy is 60% greater than that for a 75% policy, yet actual costs to service the policy are estimated to be only 25% higher given relative loss frequencies. For this reason, RMA focused on the 80% and 85% coverage levels for much of the expense reimbursement reduction (see Appendix 1 for more detail).

It should also be noted that, through the proposed SRA, RMA will assume an even larger share of the non-profitable business in many states and several high-risk areas. Traditionally, the federal government takes on the bulk of non-profitable business in all areas and allows insurance companies to retain more of the profitable business. For example, during the term of the existing SRA (from 1998 through 2003), RMA paid the companies a total of $1.5 billion in underwriting gains, while RMA itself absorbed $2.4 billion in underwriting losses. From 1998 through 2003, the companies' gross income, totaled $5.0 billion ($ 3.5 billion of expense reimbursement and $1.5 billion of underwriting gains).

In the proposed SRA, the federal government will allow companies to shift the risk of a greater number of policies to the federal government in many areas that have experienced recent higher losses.

Facts: There is no dispute that from 1992 to 2003, RMA paid the insurance companies aggregate underwriting gains (premiums minus claims payments) totaling $2.3 billion, and that the RMA sustained an aggregate underwriting loss of $2.9 billion over the same period. What is not mentioned in this claim is that, over the same period, RMA paid $5.5 billion in total expense reimbursements to federal crop insurance companies, making total RMA payments to the companies equal to $7.8 billion.

Claim 3: The proposal will increase pressure on Congress to provide billions of dollars in ad-hoc disaster assistance.

Facts: In actuality, the proposed SRA provides a safe and reliable foundation for stability and future growth of the federal crop insurance delivery system. The proposed SRA establishes additional reporting to RMA of critical business information needed to anticipate and address company financial weaknesses (see Claim 5 & Facts). RMA has also proposed changes allowing for future growth of the delivery system, such as permitting greater flexibility for companies to shift more risks to RMA on policies that are in high-risk areas as well as the risk of new products in their pilot phase.

Claim 4: Companies are being driven out of crop insurance under the existing SRA. Inadequate expense reimbursement in the current SRA resulted in the loss of five companies. The government wants fewer companies and agents in the market.

Facts: The government's commitment to a viable crop insurance delivery system based on private sector involvement is demonstrated by the $7.8 billion of underwriting gains and expense reimbursement that it has provided in the past twelve years

Private sector insurance companies operate in a competitive environment. Like any business, their fortunes depend on many factors, including the expertise of their management in dealing with costs and risk.

The "loss" of three insurance companies and two reinsurers was not the "result" of the current SRA.

1. American Growers - failed because it pursued an aggressive growth strategy and did not manage its expenses consistent with the risk of a drought year, and did this even when it was in a weakened financial condition that resulted from prior costly product mistakes and acquisitions.
2. Fireman's Fund - moved its business to be administered by Rural Community Insurance Services. Fireman's Fund remains in the program as a significant, long-term reinsurer of the largest insurance provider in the program.
3. Alliance - Alliance and Farmers Alliance Mutual are two companies owned by the same parent company. Each was an SRA holder. The parent company decided to operate its crop insurance business under the Farmers Alliance Mutual SRA to achieve greater efficiencies.
4. Two Commercial Reinsurers - reinsurance companies enter and exit crop insurance (and other lines of business) each year for different reasons, often not specifically tied to crop insurance. In addition, during the first round of negotiations the insurance companies advised RMA that adequate reinsurance capacity was available in the private market as companies argued against RMA assuming any larger role as a reinsurer.

Companies approach RMA each year seeking to participate in the Federal crop insurance program. Companies and their applications are discussed confidentially until the company publicly announces its intent to enter the program.

Claim 5: The proposed SRA will subject the crop insurance delivery system to massive new regulatory burdens, driving up company and agent costs of doing business.

Facts: RMA requires the necessary tools to ensure the accountability and prudent use of taxpayer dollars, and protect the delivery system for farmers. In the proposed SRA, RMA is fairly and equitably exercising its given authority and responsibility to oversee the financial and operational safety, soundness and effectiveness of the Federal crop insurance program. This is good for farmers, companies, agents and all others concerned and will not impose "massive" new burdens or costs.

The failure of American Growers cost taxpayers approximately $40 million to date above and beyond indemnities paid for farmer losses. The proposed SRA establishes additional reporting to RMA of critical business information needed to anticipate company financial weaknesses such as those that caused the failure of American Growers. The companies are already preparing much of the requested information for other purposes. This information includes financial statements, statement of earnings and cash flow, commission and other expense details, reinsurance agreements and management evaluations of major financial and operating risks facing a company. Any well-run, fiscally responsible company will already be developing and using this kind of information and should be willing to provide to its regulator.

In farmer listening sessions throughout the country, RMA has received an overwhelming number of requests to ensure that agents and loss adjusters are knowledgeable and well trained. The proposed SRA requires insurance companies to verify that agents and loss adjusters are trained in accordance with RMA standards and are delivering the best and most complete and accurate information possible to farmers. The proposed SRA also strengthens the companies' focus on training agents and loss adjusters to better serve limited resource, minority and women farmers.

Any concern over the cost associated with agent and loss adjuster oversight and training fails to recognize the benefits and efficiencies of well-trained agents and loss adjusters. Farmers benefit from making informed sound risk management decisions, while agents, loss adjusters and insurance companies benefit from increased customer satisfaction and customer retention, and reduced exposure to fraud waste and abuse and litigation risks and costs.

The proposed SRA provides for disclosure of information to allow RMA to assess the financial strength and performance of insurers and their service providers. RMA is asking that companies disclose more leading indicators of their insurer and service provider operational and financial soundness and risks. Many of these disclosures were requested informally last year in the wake of the failure of American Growers. Current insurance companies serving farmers should have this information and be willing to share it with their regulators. Companies conducting good business practices and assessing their risks should incur no additional cost. Companies that are not already using this information should begin to develop it to ensure their soundness and safety.

For further information, please contact James Callan (202-720-8812) or Raegan Weber (202-720-6200).