RMA ADDRESSES KEY ISSUES
Apr 28, 2004
1. Question: Why is RMA negotiating the SRA with individual companies rather than negotiating with the insurance companies and trade associations as a group?
Answer: After the last negotiation of the SRA in 1998, the Department of Justice (DOJ) and the Office of Inspector General requested RMA to seek DOJ counsel on how to conduct subsequent negotiations within the bounds of anti-trust law. The current process reflects that counsel provided by DOJ.
Under this process, companies are not unduly restrained from negotiating their individual positions. This process has allowed each company full flexibility to negotiate with RMA and each trade association broad ability to provide industry impact analyses and recommendations on the SRA. The issues identified in individual negotiations have been very helpful in evaluating the impact of specific provisions on each company. RMA believes that many of these issues may not have been specifically identified if a group negotiation had been conducted, even if that were allowed under anti-trust guidelines. The individual negotiating process is working well and has produced substantial progress in identifying and resolving issues.
2. Question: Will the savings RMA is seeking in the program endanger insurance companies that are delivering crop insurance?
Answer: The cost efficiencies proposed by RMA are small and manageable. Some companies in the industry are currently living within or well below the government expense reimbursement. Others choose not to. RMA stands ready at any time to engage in evaluations of the true cost to deliver crop insurance and is ready to work with companies to seek ways to mutually reduce program administration costs within RMA's responsibility to ensure that the delivery system is safe, sound and effective. In the first draft, RMA offered to work with the companies to identify operational efficiencies that would reduce the cost of the program, but based on company reaction RMA removed this from the second draft.
The crop insurance industry has experienced five profitable years and one marginally unprofitable year (2002) since the institution of the current SRA (1998). During that time the companies have received massive increases in the total dollar and per policy administrative and operating expense reimbursements. For example, since 1998 the companies have received $2.3 billion in underwriting gains (premium in excess of losses). 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 percent per year.
Insurance companies cannot continue to increase their costs faster than the increase in expense reimbursement without exacerbating the risk of another failure like American Growers.
3. Question: Why is RMA strengthening its regulatory oversight of the delivery system through this SRA?
Answer: RMA requires the necessary tools to ensure 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. The SRA is one tool available to RMA to fulfill the mandates of overseeing the safety and soundness and effectiveness of the delivery system and the program as a whole. Others include statutes, regulations (including insurance policies), handbooks and procedures, managers' bulletins, etc.
The SRA incorporates many of the standards by which insurance companies are required to deliver service to farmers and validate their compliance with program requirements, including financial and operational standards. 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. That failure brought to light risks and exposures that crop insurance companies can present to the entire system. The changes are designed to obtain the necessary information to anticipate emerging problems in the delivery system including a potential company failure, program weaknesses, fraud exposures, or problems with service to farmers.
4. Question: Why is RMA seeking a $20.6 million increase in its own budget while it is seeking savings in the delivery system?
RMA's 2005 budget request includes an increase of $20.6 million to fund essential revisions of the Agency's crop insurance operating systems required to administer new products mandated by ARPA and to fund additional staff to effectively address fraud waste and abuse, oversee the private sector development of new products and to maintain program integrity. RMA's systems are based on technology architecture that is approaching fifteen years old. The cost of maintaining the system has increased. The investment in a new system will reduce costs over time and allow RMA to support the new products mandated by ARPA.
5. Question: How can crop insurance companies manage the savings that are being sought in the SRA? Is this impact as large as some say?
Answer: Crop insurance companies have considerable flexibility to adjust their operations to accommodate the proposed savings. There are many areas of cost and revenue (marketing and selling, loss adjustment, underwriting, information systems, reinsurance arrangements to name a few) that can be adjusted to mitigate or eliminate the impact.
RMA is not only seeking savings but is also reducing company exposure to losses through the changes being proposed. For example, RMA is increasing the assigned risk limits in states that have had recent extended loss experience. It is allowing companies to allocate policies on all pilot programs to the assigned risk fund where the government takes the bulk of the risk. RMA is taking on the cost of litigation to defend large dollar claims for which it participates in the claims process. In addition, RMA allows and has allowed companies to pursue simplified claims processing that would significantly reduce the cost of processing small claims. Even the 5 percent share of all business that RMA is seeking will lessen the exposure to high-loss years and will reduce losses in states that have had a string of poor growing conditions.