[Federal Register: February 24, 2005 (Volume 70, Number 36)]
[Proposed Rules]
[Page 9001-9013]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24fe05-16]
[[Page 9001]]
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DEPARTMENT OF AGRICULTURE
Federal Crop Insurance Corporation
7 CFR Part 400
RIN 0563-AB95
General Administrative Regulations, Subpart V--Submission of
Policies, Provisions of Policies, Rates of Premium, and Premium
Reduction Plans
AGENCY: Federal Crop Insurance Corporation, USDA.
ACTION: Proposed rule with request for comments.
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SUMMARY: The Federal Crop Insurance Corporation (FCIC) proposes to
amend the General Administrative Regulations (7 CFR part 400, subpart
V--Submission of Policies, Provisions of Policies, and Rates of
Premium), to include provisions regarding the necessary revisions to
the Plan of Operations and administration of the premium reduction
plans authorized under section 508(e)(3) of the Federal Crop Insurance
Act (Act).
DATES: Written comments and opinions on this proposed rule will be
accepted until close of business April 25, 2005, and will be considered
when the rule is to be made final. Comments on the information
collection requirements must be received on or before April 25, 2005.
ADDRESSES: Interested persons are invited to submit written comments to
the Director, Reinsurance Services Division, Risk Management Agency,
United States Department of Agriculture, 1400 Independence Avenue, Ag
Stop 0805, Washington, DC 20250. Comments titled ``Premium Reduction
Plan'' may be sent via the Internet to RMA.PRP@rma.usda.gov, or the
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
online instructions for submitting comments. Faxed comments may be
faxed to (202) 690-2095, Attn: PRP Rule comments. If you are planning
on submitting by mail, please be advised to submit your comments not
later than 30 days after the date of publication of the rule to be
assured of consideration when the rule is made final. A copy of each
response will be available for public inspection and copying from 7
a.m. to 4:30 p.m., CDT, Monday through Friday except holidays, at the
above address.
FOR FURTHER INFORMATION CONTACT: For further information, contact Lee
Ziegler, Economist, Reinsurance Services Division, Risk Management
Agency, United States Department of Agriculture, 1400 Independence
Avenue, Room 6739-S, Washington, DC 20250; telephone number (202) 720-
0191, e-mail address: lee.ziegler@rma.usda.gov.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
This rule has been determined to be not significant for the
purposes of Executive Order 12866, and, therefore, it has not been
formally reviewed by the Office of Management and Budget (OMB).
Independent Review
The Risk Management Agency (RMA) provided five independent
reviewers with a copy of the Federal Crop Insurance Act (Act), the
current procedures, the Board of Directors' Memorandum, the submissions
received from the approved insurance providers and a series of
questions regarding the premium reduction plans, including: (1) An
estimation of the effects of producer use of insurance as a risk
management tool; (2) the impact on the delivery system such as agents,
claims adjustment, approved insurance providers, and service; (3) the
impact on small, minority and limited resource farmers; (4) whether
phase-in should be required; (5) cost allocation for complex plans; (6)
the affect of the use of affiliated entities; and (7) the impact on
agent compensation plans.
In summary, the reviewers stated that implementation of a premium
reduction plan could result in a modest increase in participation in
the crop insurance program, although increases in coverage levels are
more likely. Depending on how the premium reduction plans are
structured, there could be significant changes in the delivery system
through possible consolidation among agents or approved insurance
providers, fewer part-time agents, and an increase in highly
knowledgeable agents. The impact on small producers, limited resource
farmers, women and minority producers is expected to be small. In
proportion to the complexity of the premium reduction plans,
verification of costs could have a significant impact on the workloads
of the approved insurance providers and RMA and accounting guidelines
may have to be developed that would increase the workload.
Complete copies of the reports of the independent reviewers is
available to the public on RMA's Web site at http://www.rma.usda.gov.
However, confidential business information has been redacted from such
reports.
Paperwork Reduction Act of 1995
In accordance with section 3507(j) of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501), the information collection and record keeping
requirements included in this rule have been submitted for approval to
OMB. Please submit written comments to the Desk Officer for
Agriculture, Office of Information and Regulatory Affairs, Office of
Management and Budget (OMB), Washington, DC 20503. A comment to OMB is
best assured of having its full effect if OMB receives it within 30
days of publication of this rule.
Comments are being solicited from the public concerning this
proposed information collection and record keeping requirements. This
outside input will help:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information has practical utility;
(2) Evaluate the accuracy of our estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumption used;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond (such as through the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology, e.g., permitting electronic
submission responses).
Title: General Administrative Regulation; Submission of Policies,
Provisions of Policies, Rates of Premium, and Premium Reduction Plans.
Abstract: FCIC proposes to amend the General Administrative
Regulations (7 CFR part 400, subpart V--Submission of Policies,
Provisions of Policies, and Rates of Premium), to include provisions
regarding the necessary procedures that are applicable to revised Plans
of Operations submitted by approved insurance providers for the purpose
of obtaining approval of premium reduction plans as authorized under
section 508(e)(3) of the Act.
Purpose: To amend 7 CFR part 400 by revising subpart V, to include
specific information that must be submitted by approved insurance
providers for the purpose of obtaining approval of premium reduction
plans. This rule will have a separate paperwork package submitted to
OMB to ensure that all the burden hours are accounted for.
[[Page 9002]]
Burden statement: This rule is necessary to ensure that RMA
receives complete revised Plans of Operations from approved insurance
providers for the purpose of obtaining approval of premium reduction
plans.
The burden associated with this rule, with the exception of reading
the rule, is in the modification to the Plans of Operations. FCIC
estimates that annually 15 people (excluding Federal employees) will
spend 2 hours reading this document for a total of 30 hours (15 x 2 =
30). FCIC estimates people in 6 positions (financial manager,
accountant, computer programmer, underwriter, manager, and office
assistant) will respond for a total of 90 respondents (6 positions x 15
submissions = 90). FCIC estimates 180 annual responses (15 x 12 = 180)
due to 15 approved insurance providers submitting revised Plans of
Operations complying with twelve requirements. To determine approximate
annual burden hours, FCIC estimates 15 entities will prepare a revised
Plan of Operations and will spend the following amount of time for each
of the twelve requirements: (a) Identifying the approved insurance
provider, naming the person who may be contacted for further
information regarding the revised Plan of Operations, and naming the
person who will be responsible for administration of the premium
reduction plan--1.25 hours (15 approved insurance providers x 5 minutes
= 1.25 hours); (b) preparing a detailed description of any and all
terms and conditions that affect its availability--15 hours (15
approved insurance providers x 1 hour = 15); (c) preparing a detailed
statement as to the amount of the premium reduction that is proposed to
be offered to each eligible producer, how it will be calculated, and
how it will be reported to RMA--60 hours (15 approved insurance
providers x 4 hours = 60); (d) preparing a detailed proposal of how the
approved insurance provider intends to deliver the premium reduction
plan to producers--60 hours (15 approved insurance providers x 60 hours
= 60); (e) preparing a detailed marketing plan focused solely on how
the premium reduction will be promoted to small producers, limited
resources farmers as defined in section 1 of the Basic Provisions, 7
CFR, 457.8, women and minority producers--30 hours (15 approved
insurance providers x 2 hours = 30); (f) preparing a detailed statement
explaining how the approved insurance provider proposes to revise its
procedures for the delivery, operation or administration of the Federal
crop insurance program in order to achieve the specified efficiency and
how the premium reduction will correspond to the efficiency--45 hours
(15 approved insurance providers x 3 hours = 45); (g) revision of
applicable expense exhibits required by the Standard Reinsurance
Agreement, or the applicable regulations if required by RMA, that are
revised to reflect the implementation of the premium reduction plan and
any documentation necessary to support the revisions--240 hours (15
approved insurance providers x 16 hours = 240); (h) A statement, based
on the applicable expense exhibits, that summarizes the A&O costs
before implementation of the efficiency, the cost savings associated
with the efficiency, the administrative and operating (A&O) costs after
implementation of the efficiency, the expected A&O subsidy and the
projected total dollar amount of premium reduction to be provided to
producers--30 hours (15 approved insurance providers x 2 hours = 30);
(i) a financial reserve plan--60 hours (15 approved insurance providers
x 4 hours = 60); (j) preparing a detailed description of all profit
sharing arrangements paid by the approved insurance provider--45 hours
(15 approved insurance providers x 3 hours = 45); (k) certification by
approved insurance providers of the reasonableness, accuracy, and
completeness of all cost projections relating to the efficiencies and
the total dollar in premium reduction for the reinsurance year the
premium reduction plan will be offered = 30 hours (15 approved
insurance providers x 2 hours = 30); (l) certification that a copy of
its marketing strategy under subsection (d) has been provided to the
State Department of Insurance for all states where the premium
reduction plan will be offered for its review to determine whether the
licensing of agents and the conduct of agents in the solicitation and
sale of insurance under the proposed premium reduction plan is in
accordance with applicable state insurance laws--15 hours (15 approved
insurance providers x 1 hour = 15).
Estimate of Burden: The public reporting burden for this collection
of information is estimated to average 42 hours per response.
Respondents: Approved insurance providers who wish to revise their
Plans of Operations for the purpose of obtaining approval of a premium
reduction plan.
Estimated Annual Number of Respondents: 90.
Estimated Annual Number of Responses Per Respondent: 2.
Estimated Annual Number of Responses: 180.
Estimated Total Annual Burden of Respondents: The total public
burden for this rule is estimated at 7,560 hours. Record keeping
requirements: FCIC requires records to be kept for three years, and all
records required by FCIC are retained as part of the normal business
practice. Therefore, FCIC is not estimating additional burden related
to record keeping.
Government Paperwork Elimination Act (GPEA) Compliance
In its efforts to comply with GPEA, FCIC requires all approved
insurance providers delivering the crop insurance program to make all
insurance documents available electronically and to permit producers to
transact business electronically. Further, to the maximum extent
practicable, FCIC transacts its business with approved insurance
providers electronically.
Unfunded Mandates Reform Act of 1995
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA)
establishes requirements for Federal agencies to assess the effects of
their regulatory actions on State, local, and tribal governments and
the private sector. This rule contains no Federal mandates (under the
regulatory provisions of title II of the UMRA) for State, local, and
tribal governments or the private sector. Therefore, this rule is not
subject to the requirements of sections 202 and 205 of UMRA.
Executive Order 13132
It has been determined under section 1(a) of Executive Order 13132,
Federalism, that this rule does not have sufficient implications to
warrant consultation with the states. The provisions contained in this
rule will not have a substantial direct effect on states, on the
relationship between the national government and the states, or on the
distribution of power and responsibilities among the various levels of
government.
Regulatory Flexibility Act
FCIC certifies that this regulation will not have a significant
economic impact on a substantial number of small entities. This action
does not increase the burden on any entity because it merely clarifies
the process to submit premium reduction plans of insurance to the FCIC
Board of Directors for approval. The current requirements of the
Standard Reinsurance Agreement and procedures for premium reduction
plans approved by the Board contain provisions to ensure that small
entities have access to policies and plans of
[[Page 9003]]
insurance, including premium reduction plans. The requirement to apply
for a premium reduction plan is the same for small entities as it is
for large entities. A Regulatory Flexibility Analysis has not been
prepared since this regulation does not have an impact on small
entities, and, therefore, this regulation is exempt from the provisions
of the Regulatory Flexibility Act (5 U.S.C. 605).
Federal Assistance Program
This program is listed in the Catalog of Federal Domestic
Assistance under No. 10.450.
Executive Order 12372
This program is not subject to the provisions of Executive Order
12372, which require intergovernmental consultation with State and
local officials. See the Notice related to 7 CFR part 3015, subpart V,
published at 48 FR 29115, June 24, 1983.
Executive Order 12988
This rule has been reviewed in accordance with Executive Order
12988 on civil justice reform. The provisions of this rule will not
have a retroactive effect. The provisions of this rule will preempt
State and local laws to the extent such State and local laws are
inconsistent herewith, unless otherwise specified in the rule. The
appeals procedures at 7 CFR 400.169 and 7 CFR part 24 must be exhausted
before any action against FCIC for judicial review may be brought.
Environmental Evaluation
This action is not expected to have a significant economic impact
on the quality of the human environment, health, and safety. Therefore,
neither an Environmental Assessment nor an Environmental Impact
Statement is needed.
Background
Under the Act, authority over the Federal crop insurance program is
provided to FCIC, which is managed by the Board. However, section 226A
of the Department of Agriculture Reorganization Act of 1994, gave the
RMA supervision of FCIC and the administration and oversight over the
programs authorized under the Act. The Board delegated certain
functions to the Manager of FCIC, which are carried out through RMA.
The Board also retained certain authorities or requires briefing by the
Manager to the Board prior to the Manager taking certain actions. For
the purposes of the background information, FCIC and RMA are
collectively referred to as ``RMA.''
In October 1994, Congress amended the Act to add section 508(e)(3),
which states: ``If an approved insurance provider determines that the
provider may provide insurance more efficiently than the expense
reimbursement amount established by the Corporation [FCIC], the
approved insurance provider may reduce, subject to the approval of the
Corporation [FCIC], the premium charged the insured by an amount
corresponding to the efficiency. The approved insurance provider shall
apply to the Corporation [FCIC] for authority to reduce the premium
before making such a reduction, and the reduction shall be subject to
the rules, limitations, and procedures established by the Corporation
[FCIC].''
This means that an approved insurance provider can apply to RMA for
authority to reduce premiums payable by producers if the approved
insurance provider is able to provide insurance more efficiently than
the administrative and operating expense reimbursement paid by RMA. RMA
administers such reimbursements under a cooperative financial
assistance agreement between FCIC and the approved insurance providers
known as the Standard Reinsurance Agreement (SRA). The SRA contains
various requirements, limitations and procedures that approved
insurance providers must follow to sell and service Federal crop
insurance to producers in accordance with Federal law and regulations
and to qualify for Federal reinsurance, premium subsidy, and
administrative and operating expense reimbursement under the Act.
Since section 508(e)(3) involves administrative and operating
expense reimbursement, a term contained in the SRA, RMA had a choice.
The implementation of this provision could have been accomplished by
simply incorporating it into the SRA, like any other term and condition
of RMA reinsurance, or RMA could implement this provision through an
amendment to the regulations governing the Federal crop insurance
program contained in 7 CFR part 400. Initially, RMA determined to
implement the provision through the SRA. Effective for the 1997
reinsurance year, the SRA was amended to add a section III.I., which
stated, ``In the event the Company determines that it can deliver
multiple peril crop insurance policies more efficiently than the amount
of premium subsidy attributed to the administrative and operating
expenses paid under this section, it may apply to FCIC for authority to
reduce the amount of premium charges to the policyholder by an amount
commensurate with the amount of the efficiency.'' Effective for the
1998 reinsurance year, the SRA language was changed slightly to read,
``In the event the Company determines that it can deliver eligible crop
insurance contracts for less than the A&O subsidy paid under this
section, it may apply to FCIC for approval to reduce the amount of
producer premium charged to policyholders by an amount corresponding to
the value of the efficiency.''
In 1999, the Federal crop insurance program was facing numerous
issues regarding rebating, patronage refunds, and insured-owned and
record-controlling entities. It became clear that some parties, in
addition to approved insurance providers, may be directly affected and
concerned about these issues. Therefore, RMA decided to solicit
comments and address these concerns through a rulemaking process.
Because of the similarity of premium reduction plans to rebates, which
at the time were prohibited, RMA decided to clarify the situation by
including some rules and limitations on premium reduction plans in this
rulemaking activity. The proposed rule was published in May 1999.
During the rulemaking process, the Agricultural Risk Protection Act
of 2000 (ARPA) was enacted. Section 103 of ARPA amended section
508(b)(5) of the Act and authorized cooperatives and trade associations
to pay the catastrophic risk protection fee on behalf of their members
in states where rebating was permitted and in contiguous states.
Section 508(b)(5) of the Act also authorized cooperatives and trade
associations who received funds from an approved insurance provider to
pay a portion of the premium for their members if permitted by state
law. The provisions contained in section 103 of ARPA were significantly
different than what was proposed by RMA in its May 1999 proposed rule.
RMA determined that the provisions regarding rebating and patronage
refunds in the proposed rule were no longer applicable.
RMA determined the issues that remained from the proposed rule
after enactment of section 103 of ARPA should be handled
administratively. With respect to the issue of premium reduction plans,
RMA elected to continue to handle the issue through the SRA as it had
done in the past, since the SRA requires approved insurance providers
to comply with the procedures and directives of RMA. RMA determined it
could issue procedures under the SRA if necessary.
In July 2002, a revised Plan of Operation for a premium reduction
plan
[[Page 9004]]
for the 2003 crop year was received by the Board from an approved
insurance provider under section 508(h) of the Act. The approved
insurance provider claimed the authority for the submission came from
section 523(d) of the Act. Section 523(d) of the Act applies when
approved insurance providers believe the risk premium charged to
producers is too high and that the premium can still be actuarially
sound if less total premium is charged. It was not until the revised
Plan of Operations was reviewed by the Board that it was discovered the
approved insurance provider was seeking to reduce the producer paid
portion of the premium because the approved insurance provider claimed
it could deliver the crop insurance program for less money than
received for the administrative and operating expense reimbursement.
This meant it would be more appropriate to consider the revised Plan of
Operations under section 508(e)(3) of the Act than section 523(d) of
the Act.
After reviewing this approved insurance provider's revised Plan of
Operations for premium reduction plan, the Board determined that
procedures were necessary to address certain issues raised by the
revised Plan of Operations that had not previously been raised
regarding premium reduction plans, including the issue of an approved
insurance provider that was new to the crop insurance program and,
therefore, lacked a track record to assess the extent of any proposed
efficiencies. In December 2002, the Board provided guidance and
conditions for the development of such approval procedures to the
Manager of FCIC in Board Memorandum No. 694, Docket No. CI-PDP-02-1
(Board Memorandum). Under such guidance, premium reduction plans are
required to be offered initially in a limited number of states and
expanded over time as the capacity and ability of the approved
insurance provider to deliver the plan is determined. Further, the
Manager is required to report the performance of any premium reduction
plan to the Board at each meeting.
For the 2003 crop year, the approved insurance provider's proposed
premium reduction plan reduced producer paid premium by an amount equal
to 3.5 percent of net book premium for all Federally reinsured plans of
insurance for corn, grain sorghum, soybeans, sugar beets, and wheat in
Iowa, Illinois, Nebraska, Kansas, Minnesota, Indiana, and North Dakota.
The premium reduction was based on administrative efficiencies attained
by the approved insurance provider through sales of the premium
reduction plan over the Internet, through their operational and
distribution systems, and certain reductions in agent commissions. RMA
evaluated the approved insurance provider's proposed premium reduction
plan, determined that it met the conditions imposed by the Board and
approved the plan in January 2003, effective for the 2003 crop year.
Part of the Board's guidance required that the conditions of
approval contained in the Board Memorandum must apply to all subsequent
approved insurance providers. Consistent with the Board Memorandum, RMA
established procedures that were reviewed by the Board and transmitted
to the approved insurance providers through Manager's Bulletin MGR-03-
008.
Some of the substantive provisions included in the procedures and
Board Memorandum were the requirement that there not be a reduction in
service to policyholders; assurance that the premium reduction plan is
not unfairly discriminatory; requiring detailed information regarding
any efficiency, its previous costs and the costs to be incurred after
application of the efficiency; ensuring that a premium reduction plan
will not place an excessive operational or financial hardship on the
approved insurance provider; requiring descriptions and examples of how
any premium reduction will be calculated and presented to the
policyholder; requiring the determination of the number of producers
affected and the projected total amount of any reduction; and requiring
that any efficiency be subject to verification by RMA.
In addition, the procedures included accounting for startup costs
for newly approved insurance providers; ensuring the use of licensed
agents; requiring greater detail in the expense documentation,
including certification from a certified public accountant regarding
the reasonableness, accuracy and completeness of the accounting
statements; comprehensive reviews by the approved insurance provider of
the potential impact of the premium reduction plan and any steps to be
taken to address potential vulnerabilities; and requiring semi-annual
reports by the approved insurance provider to assist RMA in monitoring
the program.
The approved insurance provider's premium reduction plan was
reviewed at the end of the 2003 crop year to determine whether it met
stated efficiencies. RMA's analysis found that it was less than one
percent short of meeting its stated efficiencies on a dollar basis. The
revised Plan of Operations contained a contingency plan to allow for a
further reduction of costs to ensure it attained the efficiencies
claimed. The contingency was applied and RMA determined that the
approved insurance provider was in compliance with the procedures, the
Board's conditions, and section 508(e)(3) of the Act.
For the 2004 crop year, the approved insurance provider sought
expansion of its premium reduction plan. RMA evaluated its revised Plan
of Operations for the 2004 crop year under the procedures and reviewed
the revised Plan of Operations with the Board. To address potential
concerns regarding the possibility of unfair discrimination, the Board
required the approved insurance provider make the premium reduction
plan available to producers of all crops in the states it was approved
to offer the premium reduction plan, not just selected crops. The Board
viewed the expansion to several more states as particularly important
to test the premium discount plan in states with varying crop insurance
performance.
Once the approved insurance provider agreed to this condition, its
previously approved premium reduction plan was amended and approved to
include all crops in Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Texas,
and Wisconsin. The approved insurance provider was recently approved to
again offer a premium reduction plan for 2005 under the same terms and
conditions as the 2004 premium reduction plan but expanded the number
of states where it was offered.
The approved insurance provider's premium reduction plan is simple.
As currently approved, the same efficiencies applied to all states the
approved insurance provider does business and there is only one level
of premium reduction applicable to all such states. This made
verification of expense reductions associated with the efficiency
straightforward because all costs associated with the sale and service
of Federal crop insurance policies were considered and compared with
the amount the approved insurance provider claimed was needed to
deliver the program (e.g. 24.5 percent [2004 A&O] - 3.5 percent = 21.0
percent of the net book premium for all policies). Further, it would be
easy to determine if practices were unfairly discriminatory because the
approved insurance provider was required to offer the discount to all
producers who wanted it. It was also easy to determine whether the
reduction in premium from the efficiencies corresponded to the states
from which they were derived since the same efficiencies and same
[[Page 9005]]
reductions applied to all states in which the approved insurance
provider wrote business.
Over the last few months, RMA has received additional revised Plans
of Operations for premium reduction plans for the 2005 crop year from
other approved insurance providers. The revised Plans of Operations
received are diverse: some offering a premium reduction for select
plans of insurance, in select states; some at different premium
reduction rates; some under new and complex organizational structures;
and, finally, some at the discretion of the approved insurance provider
or agent.
These diverse plans raised issues or problems that had not been
previously considered by RMA when it developed its procedures. Requests
to offer a premium reduction plan for only select plans of insurance,
in select states or at differing premium reduction rates raised issues
regarding the requirement in the Act that the efficiencies correspond
to the amount of the premium reduction. Corresponding means that the
dollar amount of savings from the efficiencies implemented in a state
must correspond to the amount of premium reduction in that state.
Further, it means that if the premium reduction is only available for
select plans of insurance, the efficiencies must come from those plans
of insurance. It also means that when the amount of premium reduction
differs among states, the dollar amount of efficiency in each state
must be sufficient to cover the premium reduction in that state.
Savings realized from one state could not be used to finance a premium
reduction in another state without violating the corresponding
requirement in the Act. A review of the premium reduction plans with
these options revealed that RMA could not verify that efficiencies
corresponded with the premium reductions and that very complex
accounting rules would be required to allocate costs on a state or
insurance plan basis.
These plans also raised the possibility that there could be unfair
discrimination. Unfair discrimination results when producers are denied
an opportunity to participate under the premium reduction plan based on
their risk of loss or farm size. The ability to offer premium reduction
plans in certain states or plans of insurance could result in the
approved insurance provider only offering such plans in states with
good loss history or with larger than average farm sizes.
Another problem identified with these premium reduction plans is
the proposal to change the operational structure to have one or more
entities associated with the approved insurance provider offer a
premium reduction plan and another entity not, or allow agents to
decide whether or not they will offer premium reduction plans and to
whom. Again, this raises the possibility that approved insurance
providers could divide their book of business between the two or more
entities such that one entity receives the policies with a good loss
history and the others received the policies with a bad loss history.
Not only would this be unfair discrimination, such division could be
used to manipulate gains and losses under the SRA if it was based on
loss history. Further, some of the potential organizational structures
may have been in violation of the SRA, such as the use of two managing
general agents.
RMA recognizes that premium reduction plans may be controversial.
From the beginning, RMA has attempted to strike a balance between the
interests of producers in having their premiums reduced through
competition in the marketplace and the need to have a strong delivery
system. RMA has attempted to address problems and issues as they have
arisen to ensure a strong, stable program.
Throughout the consideration process of premium reduction plans,
RMA determined that there were several principles that must be met in
order to comply with the requirements of section 508(e)(3) of the Act.
The first is that the approved insurance provider must provide
sufficient documentation to demonstrate that not only can the approved
insurance provider operate within its administrative and operating
expense reimbursement, but it can also reduce its costs to a level
below the amount received from RMA for administrative and operating
expense reimbursement. The second is that the efficiencies claimed by
the approved insurance provider must be easily verifiable by RMA
through auditing and monitoring. The third is that the premium
reduction plan must comply with all requirements of the Act, the
regulations, procedures, and the SRA.
The last principle is that no premium reduction plan can be
unfairly discriminatory against producers based on their loss history,
size of operation, or the amount of premium generated within the
program. There have been concerns expressed that premium reduction
plans may lead to unfair discrimination against small producers,
limited resource farmers, women and minority producers. As stated
previously, variations in premium reductions among states or only
offering premium reduction plans in certain states or with certain
plans of insurance could result in unfair discrimination against such
producers. Even if the premium reduction is the same for all states and
plans of insurance, there is the possibility that limited resources
farmers could be excluded from the marketing of premium reduction
plans.
RMA has tried to address this issue in this rule by: (1) Requiring
that the premium reduction plan be provided to all producers insured by
the approved insurance provider; (2) requiring approved insurance
providers to provide marketing plans for how they will reach these
producers; (3) denying approval for premium reduction plans with
inadequate marketing plans; and (4) allowing for withdrawal of approval
by RMA for failure of the approved insurance provider to follow the
marketing plan. RMA is expressly seeking comments on whether these
provisions should be modified or additional provisions added to ensure
that all producers have access to all premium reduction plans offered
in their state.
RMA is also considering an alternative program structure to that
contained in this proposed rule. The main feature of this alternative
is that any premium reimbursement to the producer would be based on the
actual cost savings realized by the approved insurance provider after
the application of the efficiencies; not projected cost savings. The
approved insurance provider would apply to be able to provide a
reimbursement to producers based on the intent to implement specified
efficiencies, but the approved insurance provider would have to
validate the cost savings and receive approval of the applicable
premium reimbursement from RMA after the end of the applicable
reinsurance year before the provider could announce and remit the
reimbursement to the producer.
As a result, approved insurance providers would project what they
intend to save through efficiencies and estimate the amount of the
premium reimbursement in their revised Plan of Operations, but they
would not be able to advertise or otherwise represent the amount of the
premium reimbursement to producers in advance of the sale because they
would not know the final amount of savings or the approved
reimbursement at the time they submitted their revised Plan of
Operations. Approved insurance providers may only be able to refer to
historical reimbursements in accordance with applicable State laws.
This alternative structure is intended to avoid the uncertainty
resulting from reliance on cost projections and to
[[Page 9006]]
reduce the chance that an approved insurance provider will fail to
achieve the represented savings, thereby causing disruption in the
marketplace. Use of actual costs would preserve program integrity and
the financial stability of the approved insurance providers.
Under the alternative structure, approved insurance providers would
not be able to market the plan to producers based on a guaranteed
amount of premium reimbursement. The alternative structure would
eliminate the need for approved insurance providers to build a reserve
into the plan because the premium reimbursements would be based on
actual verified savings from applied efficiencies rather than
projections that may not be realized.
Because of the timing of the financial accounting of the approved
insurance provider, the actual costs and savings will not be known
until months after the end of the crop year and premium reimbursements
cannot occur until after such accounting. This means producers will be
required to pay the full amount of their premium before they receive
any possible reimbursement.
RMA is soliciting comments on this alternative process to determine
if such a structure should replace the proposed structure when RMA
finalizes the proposed rule. RMA is particularly interested in comments
that address issues relating to the benefits of using actual versus
projected costs, impacts on the workload of the approved insurance
providers and RMA, market conduct oversight requirements that may be
required, impacts on competition, the delay in the reimbursements to
producers, whether such reimbursements create any income tax issues, or
any other substantial adverse or positive effect of this approach in
contrast to the approach included in the proposed rule.
An analysis of the existing procedures and review of the recently
submitted revised Plans of Operations revealed that revisions to the
procedures were necessary. Following are a summary of the current
procedures and the proposed changes.
1. Fundamental Program Change
Under the existing procedures, approved insurance providers could
name the states and crops for which their premium reduction plan would
be applicable. RMA explored continuation of this practice but it has
identified significant problems in the administration of a program that
permits state or other types of variability. Problems were identified
in the selection of states. Allowing approved insurance providers to
select states may result in unfair discrimination because approved
insurance providers could elect only to offer a premium reduction plan
in states with low risks. In addition, RMA determined that state
variability would require complex accounting rules because section
508(e)(3) of the Act requires the efficiencies to correspond to the
location and amount of premium reduction. As stated above, this means
that the dollar amount of savings from the efficiencies implemented in
a state must correspond to the amount of premium reduction in that
state. Further, the workload on RMA and approved insurance providers to
identify cost allocations and determine whether the projected cost
savings from efficiencies are reasonable and correspond to the premium
reductions in the state would be enormous. This would be followed by
the workload required to verify that savings in each state were
realized and that premium reductions paid out did not exceed the amount
of such savings.
RMA considered whether it was possible to remedy all the problems
that allowing variability by state could produce and discovered it
could not. Therefore, the proposed rule requires that approved
insurance providers who submit revised Plans of Operations must offer
the premium reduction plan to all producers, in all states where the
approved insurance provider does business, and for all applicable
crops, policies and plans of insurance. The amount of the premium
reduction based on the percentage of the net book premium may not have
any variations. For example, variations by state, coverage level, etc.
are not permitted. In reaching its conclusion, RMA considered the
following principles and is soliciting comments on its analysis and
whether a premium reduction plan could be developed that allowed for a
variation of the reduction by state consistent with these principles.
a. The ability to offer such a reduction by state must not cause
competitive harm in the marketplace. Premium reductions plans are
intended to create competition in the marketplace. However, the
procedures governing such plans cannot be developed in such a manner as
to create a competitive disadvantage. Therefore, RMA is striving to
develop procedures that provide a level playing field to the maximum
extent practicable.
The ability to vary the reduction by state could represent a
substantial advantage for an approved insurance provider to be able to
target reductions to meet specific market conditions in a particular
state. As a result, RMA believes that such an advantage must be
available to all approved insurance providers, if it is to be available
to any.
One cost reduction measure that appears in nearly all proposed
premium reduction plans received by RMA where the reduction varies by
state is the varying of agent commission reductions by state. The focus
is on agents' commissions because they are relatively easy to
administer by the approved insurance provider and verify by RMA, and
agent compensation constitutes about seventy percent of the expenses
that are incurred in the delivery of the crop insurance program.
Because the crop insurance books of business of all approved insurance
providers are currently divided by state and agent commissions are
reported to RMA by state, it would be straightforward to allocate the
cost reductions by state. However, not all approved insurance providers
in the Federal crop insurance program use independent agents who are
paid on a commission basis. Some approved insurance providers use
``captive agents'' that are employees of the provider who are
compensated on a salary, not a commission, basis and may be doing
business in more than one state.
RMA believes that it would be very difficult, if not impossible,
for these approved insurance providers to allocate their agent
compensation costs in a manner that would clearly show how such agent
compensation reductions matched the associated premium reduction on a
state by state basis. If RMA were to allow premium reductions on a
state by state basis, and such reductions were generated by reductions
in agent compensation, approved insurance providers with ``captive
agents'' would likely suffer from a competitive disadvantaged simply
based on how they obtain, and compensate for, agent services.
b. A premium reduction plan where the efficiencies and reductions
vary by state must be easy for the approved insurance provider to
administer and easy for RMA to verify. The purpose behind section
508(e)(3) of the Act is to encourage approved insurance providers to
reduce administrative and operating expenses in order to provide
competitive discounts to producers. RMA believes it would be directly
against the intent of this provision to authorize premium reduction
plans that require the application of complex cost accounting rules to
ensure that the premium reductions correspond to the efficiencies, as
specifically required by the Act. Other than efficiencies tied to
reductions in agent compensation,
[[Page 9007]]
nearly all of the efficiencies that varied by state in the premium
reduction plans submitted to RMA for the 2005 reinsurance year involved
cost reductions in general operating costs of the approved insurance
provider, which are incurred in many states (e.g. information
technology costs, policy servicing costs, and basic overhead costs).
For example, the approved insurance provider proposes savings as a
result of the implementation of a new computer system that would reduce
errors by 20 percent. The computer system is applicable to all policies
in the approved insurance provider's book of crop insurance business.
If the premium reduction plan calls for different premium reductions in
each state, the approved insurance provider would have to allocate the
dollar savings associated with the new software to each state. It is
also possible that such computer software is used in the approved
insurance provider's other lines of business, which would require
additional allocations. This type of allocation would have to be done
for each type of efficiency. Therefore, to allocate these costs to each
state would require the application of very complex cost accounting
rules. Further, to the extent these costs represent activities
conducted by salaried employees, as opposed to independent contractors,
the cost accounting rules become even more difficult. Salaried
employees and some contract employees, such as loss adjusters,
frequently conduct work in more than one state. To allocate the costs
among the states would also require additional complex accounting
rules.
c. Uniform service and preventing unintended effects on the
business practices of the approved insurance providers. One of the
major principles of the crop insurance program is that approved
insurance providers must provide insurance to all eligible producers
and agents are required to perform certain services for each producer
regardless of the producer's size or loss history. By introducing state
variability in savings and premium reductions, there is a concern that
it will result in variability of service to producers. For example,
based on a review of the 2005 premium reduction plans submitted by
approved insurance providers, it was apparent that reductions in agent
compensation was the easiest way to establish efficiencies that support
state variable premium reductions. RMA is concerned that variable
reductions in agent compensation may result in reduced service to some
producers below the standards set by RMA in the SRA. The burden on RMA
and the approved insurance providers to monitor agents' conduct to
ensure that no such reduction in service occurs could be considerable
and could reduce a significant portion of the savings generated by the
efficiencies.
Further, there are numerous approved insurance providers and each
has a unique operational structure and manner of doing of business. RMA
wants to avoid implementing any rule that unnecessarily dictates the
business practices of the approved insurance providers. As stated
above, efficiencies based on the reduction of independent contractor
compensation, such as agent commissions, are easy to verify and
allocate on a state-by-state basis. Therefore, state variability
provides an economic incentive to approved insurance providers to
achieve their efficiencies through reductions in agent commissions.
This conclusion was confirmed by the independent reviewers. This
incentive could result in all approved insurance providers being driven
to use commission to compensate their agents in order to be
competitive.
In addition, as stated above, some approved insurance providers use
salaried agents instead of independent contractor agents, likely
increasing the difficulty for such approved insurance providers to
allocate the salaried agents' compensation among states. RMA believes
that the economic incentive created by state variability and the need
for easily verifiable and allocable compensation may drive these
approved insurance providers to change the way they deliver the program
or could result in competitive disadvantages. The intent of the premium
reduction plan is not to dictate the manner in which the approved
insurance provider does business. Decisions on the use of independent
versus salaried agents should be based on competitive market forces and
service considerations, not a government regulation intended to provide
a benefit to producers.
2. Revisions of Definitions
Most of the definitions from the current procedures have been
included in this proposed rule, although some have been modified to
conform to the SRA. RMA has also revised the definition of
``compensation'' to clarify that compensation includes any benefits,
including those from third parties, that are guaranteed, even though
the amount may differ year to year, regardless of the existence of an
underwriting gain for the approved insurance provider, and to clarify
when profit sharing arrangements will not be included as compensation.
The definition of ``efficiency'' is revised to clarify that cost
savings must be attributable to operational efficiencies or a reduction
in expenses but such savings cannot solely result from reductions in
compensation, and that economies of scale from increased sales due to
the offering of a premium reduction plan of insurance or projected
reductions in loss adjustment expenses, unless authorized by RMA, are
not considered an efficiency. A definition of ``procedures'' is added
for clarification. A definition of ``profit sharing'' is added to
clarify the difference between guaranteed benefits, which are
considered compensation, and contingent benefits based on underwriting
gains. A definition of ``underwriting gain'' is added to clarify that
such gains include the net gain payment made to the approved insurance
provider on its whole book of business under the SRA, less any costs it
pays from such gains, including any costs related to the delivery of
the program in excess of the amount of administrative and operating
subsidy received from RMA. The definition of ``unfair discrimination''
has been modified to clarify that approved providers cannot exclude
producers based on the loss history or the size of the policy.
3. Timing of the Submission of Revised Plans of Operations
The current procedures require revised Plans of Operations be filed
not later than 150 days prior to the first sales closing date where the
premium reduction will be applicable. In this proposed rule, for the
2006 reinsurance year, revised Plans of Operations must be received by
RMA not later than 15 days after publication of the final rule to allow
RMA time to consider such revised Plans of Operations before the fall
sales closing dates. For subsequent reinsurance years, all revised
Plans of Operations must be received by RMA not later than April 1
before the start of the reinsurance year. RMA has elected to have a
single submission window each reinsurance year to ensure that all
producers have access to the benefits under any premium reduction plan
and that the timing of the submission of the revised Plans of
Operations does not create an unfair competitive advantage. Revised
Plans of Operations that are not timely submitted will be rejected.
Approved insurance providers will have 15 days after the date a revised
Plan of Operation is received by RMA to withdraw it. If not timely
withdrawn, any approved premium reduction plan
[[Page 9008]]
must be implemented for the reinsurance year.
4. Confidentiality Requirements
The confidentiality requirements remain the same but have been
incorporated into a different section.
5. Contents of Revised Plans of Operations
The current procedures require five copies and both a hard copy and
electronic version. The provision has been revised to require an
electronic copy. Both the current and proposed procedures require the
approved insurance provider to provide the name of the person
responsible for the administration of the premium reduction plan, the
reinsurance year the plan will be in effect; a statement of the amount
of the premium reduction to be offered to producers, how it is
calculated, and reported to RMA; a list of any and all terms and
conditions that affect its availability; and the projected total dollar
amount of the premium reduction to be provided to the producers. The
requirements in the existing procedures to list the proposed crops and
states where the efficiency is being gained and the estimated number of
producers have been removed from the proposed rule because such
provisions were rendered moot by the requirement that the premium
reduction plan be offered in all states for all crops where the
approved insurance provider does business. The procedures have been
revised to more clearly specify that existing Expense Exhibits provided
with the Plan of Operations will be used in determining costs
projections to ensure such reporting is standard among approved
insurance providers and to ensure that such standards are tied to the
information reported in the SRA. The procedures are also revised to
only require the approved insurance provider to certify to the
reasonableness, accuracy, and completeness of the projected costs
relating to the claimed efficiencies and calculating the dollar amount
of premium reduction provided since this information is not reported in
the SRA. Revisions have also been made to the procedures to require the
revised Plan of Operations to include a marketing plan for small,
minority and limited resource farmers to address concerns that such
producers will not receive the benefit of the premium reduction plans.
The existing procedures are further revised to require the approved
insurance provider include a proposal of how it intends to deliver the
premium reduction plan for all producers in its revised Plan of
Operations. This plan should include whether the approved insurance
provider will use the Internet, captive agents, affiliates, etc.
Further, the approved insurance provider must certify that a copy of
such strategy is sent to all State Departments of Insurance where it
does business for a determination of whether the premium reduction plan
is in conformance with state laws with respect to the licensing and
conduct of agents and provide all responses from the states to RMA. The
proposed rule further clarifies the existing procedures by requiring
approved insurance providers to demonstrate how the premium reduction
will correspond to the efficiencies, as required by section 508(e)(3)
of the Act. This means the premium reduction must be provided in the
same state from which the efficiency is implemented. Further, the
amount of the premium reduction in a state must be commensurate with
the amount of savings obtained from the efficiencies in that state. For
example, an efficiency derived in Iowa cannot be used to fund a premium
reduction in Texas. Further, the approved insurance provider cannot
reduce costs in some states by 5 percent and in other states by 2.5
percent and give all producers the same premium discount. Such
proposals would violate the Act. Further, revisions have been made to
the procedures to require approved insurance providers to provide a
summary of all profit sharing arrangements so that RMA can determine
whether such profits should be considered as compensation and included
as an expense or is solely based on the underwriting gains of the
approved insurance provider and excluded. The procedures have also been
revised to require the premium reduction plan contain a financial
reserve plan that would contain additional actions to be implemented in
the event that actual cost savings are insufficient to cover the amount
of the premium reduction, which would generate additional
administrative and operating savings or provide access to additional
funds equal to 25 percent of the premium reduction. For example, if the
dollar amount of the proposed premium reduction is $10 million, the
approved insurance provider must implement the efficiencies to attain
such dollar amount of premium reduction as applicable during the
reinsurance year. However, prior to submitting a revised Plan of
Operation, the approved insurance provider must also determine what
other actions are necessary to guarantee that it will have access to an
additional $2.5 million (25 percent of $10 million) to cover the
premium reductions. While the implementation of such other actions
would not be necessary unless the cost savings from the original
efficiencies were insufficient to cover the premium reduction, the
ability to obtain the additional funding must be demonstrated in the
revised Plan of Operations. Such other actions could include additional
cost cutting measures, access to additional lines of credit, guaranteed
loans, etc. However, these other actions, if implemented, will not be
considered when determining the amount of premium reduction authorized
for subsequent years. The purpose of such financial reserve plans is to
ensure that any error in projections does not affect the financial
solvency of the approved insurance provider or prevent the producer
from receiving the premium reduction specified in the premium reduction
plan.
6. New Approved Insurance Providers
The existing procedures allow certain costs associated with new
approved insurance providers and with respect to expansions by existing
approved insurance providers be included in the A&O costs for the
purposes of determining the efficiency. RMA has elected to remove the
provisions regarding existing approved insurance providers because it
is impractical to track those costs associated with normal expansion
and those attributable to the premium reduction plan. Further, the Act
does not make any distinction between the types of costs against which
to measure the efficiencies. However, it is only the new entrants into
the crop insurance business that have the exceptional costs associated
with such entrance. Existing approved insurance providers may incur
some additional costs but not nearly to the extent that new entrants
would. Further, some of these costs associated with expansion may be
captured if the approved insurance provider can established a higher
expected premium volume for the year. RMA has clarified that new
entrants are limited to those that have not participated in the program
previously or are not affiliated with a managing general agent, another
approved insurance provider, or other such entity that already has the
infrastructure necessary to deliver crop insurance. The existing
procedures have also been revised to no longer allow the new entrant to
exclude the startup costs from its expenses reported under the premium
reduction plan. In the proposed rule, such startup costs must be
included as expenses but the approved insurance provider will be
[[Page 9009]]
permitted to spread such costs equally for up to three reinsurance
years.
7. RMA Review Process
The current procedures require RMA to evaluate the completeness of
a revised Plan of Operations and notify the approved insurance provider
within 30 days. This provision has been removed because of the
administrative burden it places on RMA to review the revised Plan of
Operations twice and provide two separate responses. In the proposed
rule, for the 2006 reinsurance year, RMA will notify approved insurance
providers not later than September 1, 2005. For all subsequent
reinsurance years, RMA has retained the provision that requires it to
provide a response to the revised Plan of Operations not later than 60
days prior to the first sales closing date but added a provision that
this requirement applies only if the revised Plan of Operations was
timely submitted and if the 60 day requirement is not waived by the
approved insurance provider.
8. Standards for Approval
The current procedures require that the premium reduction plan not
result in the reduction of service to producers or be harmful to the
interest of producers, not place a financial or operational hardship on
the approved insurance provider or undermine the integrity of the crop
insurance program. Further, such procedures require the approved
insurance provider have the financial and operational capacity and
expertise to deliver the crop insurance program after implementation of
the premium reduction plan, there be adequate internal controls, and
the premium reduction plan meet all other requirements of the Act and
the SRA. These requirements have been retained in this proposed rule.
RMA has added a provision that clarifies that approved insurance
providers must be able to demonstrate they are operating under the A&O
subsidy they receive from RMA, and if such information is based on
projected costs and subsidy, such amount must be reasonable, before any
revised Plans of Operation can be approved. RMA has also added
provisions requiring that the efficiencies come from reductions in A&O
costs and not underwriting gains and that they be verifiable; that the
amount and location of the premium reductions correspond to the
efficiencies; that there be enough efficiencies to cover all the
premium reductions; and that training and oversight not be compromised
to ensure the proper administration of the premium reduction plan
program. RMA added provisions that the financial reserve plan provide a
guarantee of funding. RMA has also modified the procedures relating to
unfair discrimination to ensure that there is no such discrimination
based on the size of the farm or premium, the risk of loss, or against
small, minority or limited resource farmers and that the marketing plan
and delivery system for the premium reduction be reasonable and, with
respect to the delivery system, in accordance with state law. RMA has
also added provisions regarding the process of notification of approval
and the requirement that if approved, the premium discount plan must be
implemented for the next applicable sales closing date for the
reinsurance year, unless otherwise determined by RMA. This requirement
is to ensure that all producers receive equal access to approved
premium reduction plans and that expectations created by the submission
of a revised Plan of Operations for a premium reduction are realized.
9. Disapproval
RMA has revised the existing procedures, and combined them with the
approval process, to provide the approved insurance provider with the
right to seek reconsideration of a disapproval and specify that if a
revised Plan of Operations is disapproved, the insurance provider
cannot submit another revised Plan of Operations until the following
reinsurance year.
10. Requirements After Approval of a Premium Reduction Plan
The current procedures specify that all procedural issues,
problems, etc. will be addressed by the approved insurance provider;
premium reductions must be implemented in accordance with the premium
reduction plan, the approved insurance provider is liable for all
mistakes, errors, etc. The current procedures also required the
approved insurance provider to assist RMA in any reviews conducted to
determine whether the efficiency is generated and there is compliance
with the premium reduction plan and to make any changes required by
RMA. These provisions have been basically retained in the proposed
rule. RMA has added a requirement that the approved insurance provider
immediately report in writing all operational and financial changes
that could cause a material impact upon an approved premium reduction
plan. RMA has revised the procedures regarding reporting to make them
more detailed to ensure the information provided is adequate to review
and assess the impact on program participants, including small
producers, limited resource farmers, women and minority producers and
on the crop insurance program. RMA has also revised the procedures to
clarify that producers will automatically receive the premium
reduction. RMA has added a requirement that the approved insurance
provider have an independent certified accountant certify as to the
reasonableness, accuracy, and completeness of all actual costs relating
to the efficiencies and the total dollar in premium reduction for the
reinsurance year the premium reduction plan will be offered, in a
format approved by RMA, not later than April 1 after the close of the
reinsurance year. RMA has also added provisions requiring that the cost
of such certification be included in the projected costs used to
determine whether an efficiency has been attained. RMA has also added
provisions making it clear that approval of a premium reduction plan is
only for one year and new revised Plan of Operations must be made for
subsequent years. RMA has also added provisions clarifying that if RMA
discovers that the efficiencies were insufficient to cover the premium
discount, the efficiencies are not attained or the premium reduction is
not corresponding to the efficiency, the amount of premium reduction
that can be approved for the next applicable reinsurance year will be
limited to the actual amount of savings attained, excluding any actions
taken under the financial reserve plan. Further, RMA added provisions
specifying that it will closely monitor the approved insurance
provider's efforts to market the premium reduction plan to small
producers, limited resources farmers, women and minority producers to
ensure that no unfair discrimination takes place and that if it is
discovered, RMA may withdraw approval of the premium reduction plan.
RMA has also clarified its provisions regarding when it can modify or
withdraw approval, how such modification or withdrawal will be
communicated and the effect of such action for ease of use.
11. New Provisions
Unlike the procedures, RMA has added provisions that expressly
state the limitations and prohibitions on the premium reduction plan
program in order to simplify and clarify the program. Such limitations
include a cap on the amount of premium reduction for the first two
years the premium reduction plan is offered to allow RMA to evaluate
the effect such plan may have on the crop insurance program and ensure
that approved insurance providers are not leaving themselves
[[Page 9010]]
financially vulnerable by cutting their costs too much.
List of Subjects in 7 CFR Part 400
Administrative practice and procedure, Crop insurance, Disaster
assistance, Fraud, Penalties, Reporting and recordkeeping requirements.
Proposed Rule
Accordingly, as set forth in the preamble, the Federal Crop
Insurance Corporation proposes to amend 7 CFR part 400 by revising
subpart V, effective for the 2006 and succeeding reinsurance years, to
read as follows:
PART 400--GENERAL ADMINISTRATIVE REGULATIONS
1. The authority citation for 7 CFR part 400 continues to read as
follows:
Authority: 7 U.S.C. 1506(a), 1506(p), 1508(e)(3).
Subpart V--Submission of Policies, Provisions of Policies, Rates of
Premium, and Premium Reduction Plans
2. Revise the heading for Subpart V to read as set forth above.
3. Amend Sec. 400.700 by adding two sentences to the end of the
section to read as follows:
Sec. 400.700 Basis, purpose, applicability.
* * * This subpart also provides procedures that are applicable to
revised Plan of Operations submitted by approved insurance providers
for the purpose of obtaining approval for a premium reduction plan in
accordance with section 508(e)(3) of the Act. The offering of such
premium reduction plans without RMA's prior written approval is
prohibited.
Sec. 400.701 [Amended]
4. Amend Sec. 400.701 by revising the definition of
``Administrative and operating (A&O) subsidy'' and by adding the
definitions of ``Administrative and operating (A&O) costs'', ``Agent'',
``Compensation'', ``Cost accounting'', ``Efficiency'', ``Managing
general agent'', ``Premium reduction'', ``Profit sharing
arrangements'', ``Standard reinsurance agreement'', ``Third party
administrator'', ``Underwriting gain'', and ``Unfair discrimination''
in alphabetical order to read as follows:
Sec. 400.701 Definitions.
* * * * *
Administrative and operating (A&O) costs. Costs of the approved
insurance provider and any MGA and TPA that are related to the
delivery, loss adjustment and administration of the Federal crop
insurance program.
Administrative and operating (A&O) subsidy. The subsidy for the
administrative and operating expenses authorized by the Act (including
the catastrophic risk protection loss adjustment expense reimbursement)
and paid by FCIC on behalf of the producer to the Company.
Agent. An individual licensed by the State in which an eligible
crop insurance contract is sold and serviced for the reinsurance year,
and who is under contract with the Company, or its designee, to sell
and service such eligible crop insurance contracts.
* * * * *
Compensation. Any guaranteed salary, commission, or any other
guaranteed payment or anything of value or benefit that has a
quantifiable value that is not contingent on the existence of an
underwriting gain of the approved insurance provider, including, but
not limited to, the payment of health or life insurance, deferred
compensation (including qualified and unqualified), finders fees,
retainers, trip or travel expenses, dues or other membership fees, the
use of vehicles, office space, equipment, staff or administrative
support paid by the approved insurance provider either directly or
indirectly through a third party. Profit sharing arrangements will not
be considered compensation, when:
(1) The payments under such arrangements are contractually
obligated;
(2) The total amount paid under the aggregate of all profit sharing
arrangements exceeds the total amount of the underwriting gain for the
applicable reinsurance year; or
(3) The profit sharing payment is triggered by anything other than
whether the approved insurance provider receives an underwriting gain
for its whole book of Federally reinsured crop insurance business for
the applicable reinsurance year.
* * * * *
Efficiency. Monetary savings realized when an approved insurance
provider sells and services its Federal crop insurance policies for
less than the amount of the A&O subsidy paid by FCIC, which must result
from changes to the administrative and operating procedures and
expenses that the approved insurance provider employs in delivering
Federally-reinsured policies in accordance with the Act, the SRA, and
all applicable regulations, directives, bulletins and procedures. Only
a portion of the approved insurance provider's monetary savings can
come from a reduction in compensation, the rest must come from changes
in administrative and operating procedures. Efficiency does not include
any actual or projected underwriting gain earned from the SRA,
reinsurance revenues, or the investment returns on the approved
insurance provider's reserves. Cost savings attributed to projected
increased sales due to the offering of a premium reduction plan of
insurance are not considered an efficiency, nor are proposed reductions
in loss adjustment expenses, unless such reductions in loss adjustment
expense are a result of implementing loss adjustment procedures
authorized by RMA.
* * * * *
Managing general agent (MGA). An entity that meets the definition
of managing general agent under the laws of the State in which such
entity is incorporated and in every other state in which it operates,
or in the absence of such State law or regulation, meets the definition
of a managing general agent or agency in the National Association of
Insurance Commissioners Managing General Agents Act, or successor Act.
* * * * *
Premium reduction. Reduction of the insured's premium by the
approved insurance provider in an amount approved by RMA in accordance
with section 508(e)(3) of the Act, all applicable regulations, and
these procedures.
Procedures. The applicable handbooks, manuals, memoranda, bulletins
or other directives issued by RMA or the Board.
Profit sharing arrangements. An arrangement to make a payment based
on whether the approved insurance provider receives an underwriting
gain on the total book of crop insurance business, except payments made
to commercial reinsurers, or reinsurance revenues paid to the approved
insurance provider for the reinsurance year.
* * * * *
Standard reinsurance agreement (SRA). The reinsurance agreement
between FCIC and the approved insurance provider, under which the
approved insurance provider is authorized to sell and reinsure the
policies for which the premium reduction is proposed.
* * * * *
Third party administrator (TPA). A person or entity that processes
claims or performs other administrative services and holds licenses, as
applicable, in states in which the approved insurance provider does
business for services
[[Page 9011]]
related to the delivery, loss adjustment and administration of the
Federal crop insurance program in accordance with a service contract or
an affiliate or any other type of relationship.
Underwriting gain. For the purposes of the premium reduction plan,
the amount of gains paid under section II.B.10. of the SRA less any
amounts paid from such gains, such as payments to commercial
reinsurers, taxes, licensing fees, payments to parent companies or
subsidiaries, etc., and any costs incurred by the approved insurance
provider in excess of the A&O subsidy related to the delivery, loss
adjustment and administration of the Federal crop insurance program
Unfair discrimination. A premium reduction plan will be considered
unfairly discriminatory to a producer if the availability of such
premium reduction plan, or the amount of the premium reduction, is
based on the loss history of the producer, the amount of premium earned
under the policy, or precludes in any manner producers in an approved
State from participating in the program.
* * * * *
5. Add Sec. 400.714 to read as follows:
Sec. 400.714 Revised Plans of Operations for premium reduction plans.
(a) For the 2006 reinsurance year, revised Plans of Operations must
be received by RMA not later than [date 15 days after the date of
publication of the final rule].
(b) For all subsequent reinsurance years, revised Plans of
Operations must be received by RMA not later than April 1 before the
reinsurance year, or the date RMA otherwise determines the Plan of
Operations is due.
(c) Any revised Plans of Operations that is not timely submitted
will not be considered by RMA and any other revised Plans of Operations
submitted by the approved insurance provider during the reinsurance
year will not be considered until the next reinsurance year.
(d) A revised Plan of Operations may be withdrawn no later than 15
days after the revised Plan of Operations has been received by RMA. If
a revised Plan of Operations has not been timely withdrawn, the
approved insurance provider will be required to implement an approved
premium reduction plan.
(e) Any confidential commercial or financial information submitted
with a revised Plan of Operations will be protected from disclosure to
the extent permitted by, and in accordance with, 5 U.S.C. 552(b)(4).
(f) The revised Plans of Operations under this subsection must be
sent to the Director, Reinsurance Services Division (or designee) at an
address to be announced by RMA.
6. Add Sec. 400.715 to read as follows:
Sec. 400.715 Limitations and prohibitions.
(a) For the first two reinsurance years after [effective date of
the final rule], the premium reduction plan may not offer a premium
reduction based on an efficiency less than 1.0 percent nor greater than
4.0 percent of the net book premium. For subsequent reinsurance years,
RMA will announce the minimum and maximum limitation on the premium
reduction, if applicable. Premium reductions must be offered in .5
percent increments.
(b) If a premium reduction plan is offered it must be offered in
all states where the approved insurance provider is doing business and
for all crops, coverage levels, policies.
(c) The amount of the premium reduction offered based on the
percentage of the net book premium may not vary between states, crops,
coverage levels, policies or plans of insurance, or on any other basis
(For example, if the approved insurance provider can reduce costs by
2.5 percent, such reduction must be provided to all policyholders in
all states where the approved insurance provider is doing business).
7. Add Sec. 400.716 to read as follows:
Sec. 400.716 Contents of the revised Plans of Operations for a
premium reduction plan.
A revised Plan of Operations must be submitted electronically, in a
manner determined by RMA. Each revised Plan of Operations must include
the following:
(a) The name of the approved insurance provider, the person who may
be contacted for further information regarding the revised Plan of
Operations, and the person who will be responsible for administration
of the premium reduction plan;
(b) A detailed description of any and all terms and conditions that
affect its availability;
(c) A detailed statement as to the amount of the premium reduction
that is proposed to be offered to each eligible producer, how it will
be calculated, and how it will be reported to RMA;
(d) A detailed proposal of how the approved insurance provider
intends to deliver the premium reduction plan to producers;
(e) A detailed marketing plan focused solely on how the premium
reduction will be promoted to small producers, limited resources
farmers as defined in section 1 of the Basic Provisions, 7 CFR 457.8,
women and minority producers;
(f) A detailed statement explaining how the approved insurance
provider proposes to revise its procedures for the delivery, operation
or administration of the Federal crop insurance program in order to
achieve the specified efficiency and how the premium reduction will
correspond to the efficiency;
(g) Applicable Expense Exhibits required by the SRA, or the
applicable regulations if required by RMA, that are revived to reflect
the implementation of the premium reduction plan and any documentation
necessary to support the revisions;
(h) Based on the applicable Expense Exhibits, a statement that
summarizes the A&O costs before implementation of the efficiency, the
cost savings associated with the efficiency, the A&O costs after
implementation of the efficiency (which includes the budgeted cost of
all reports and certifications required in Sec. Sec. 400.714-720), the
expected A&O subsidy, and the projected total dollar amount of premium
reduction to be provided to producers (This statement must demonstrate
that after the implementation of the premium reduction plan, the
approved insurance provider's A&O costs, including the budgeted cost of
all such reports and certifications, plus the amount of any premium
reductions will not be greater than the provider's A&O subsidy);
(i) A financial reserve plan that:
(1) Is triggered immediately upon discovery by the approved
insurance provider or RMA that the total dollar amount of the actual
efficiency is not sufficient to cover the total dollar amount of the
premium reduction provided to producers;
(2) Consists of actions to be taken by the approved insurance
provider that would produce cost savings or income that is at least 25
percent of the projected total dollar of premium reduction to be
provided to producers immediately upon discovery under paragraph (i)(1)
of this section;
(j) A detailed description of all profit sharing arrangements paid
by the approved insurance provider;
(k) A certification, in a format approved by RMA, by the person
designated by the approved insurance provider to execute the SRA, of
the reasonableness, accuracy, and completeness of all cost projections
relating to the efficiencies and the total dollar in premium reduction
for the reinsurance year the premium reduction plan will be offered;
(l) A certification from the approved insurance provider, by the
person designated by the approved insurance provider to execute the
SRA, that it has
[[Page 9012]]
provided a copy of its marketing strategy under paragraph (d) of this
section to the State Department of Insurance for all states where the
premium reduction plan will be offered for its review to determine
whether the licensing of agents and the conduct of agents in the
solicitation and sale of insurance under the proposed premium reduction
plan is in accordance with applicable state insurance laws (All
responses from the states must be provided to RMA not later than 10
days after receipt of the response by the approved insurance
provider);and
(m) Such other information as deemed necessary by RMA.
8. Add Sec. 400.717 to read as follows:
Sec. 400.717 New approved insurance providers.
There may be instances where a new approved insurance provider is
entering into the crop insurance program for the first time and such
approved insurance provider is not affiliated with a MGA, another
approved insurance provider, or any other entity that possesses the
infrastructure necessary to deliver the crop insurance program, that is
currently or has previously participated in the crop insurance program.
In such instances, the one time start-up costs that are associated with
entering the crop insurance business (e.g., creation of a claims
system, interface with RMA's data acceptance system, initial marketing
costs, set up charges) must be included in the Expense Exhibits
required by the SRA, or the applicable regulations if required by RMA,
but the costs may be amortized in equal annual amounts for a period of
up to three years for the purpose of determining the efficiency on the
documents described in Sec. 400.716, in a manner determined by RMA.
9. Add Sec. 400.718 to read as follows:
Sec. 400.718 RMA review.
(a) For the 2006 reinsurance year, RMA will notify the approved
insurance provider by September 1, 2005, of its approval or disapproval
of the revised Plan of Operations for a premium reduction plan; and
(b) For all subsequent reinsurance years, RMA will notify the
approved insurance provider at least 60 days before the applicable
sales closing date of its approval or disapproval of the submitted
premium reduction plan, unless the approved insurance provider waives
this 60 day prior notification requirement in writing.
10. Add Sec. 400.719 to read as follows:
Sec. 400.719 Standards for approval.
(a) RMA may approve the revised Plan of Operations if, in the sole
determination of RMA, the revised Plan of Operations demonstrates that
the following criteria are met:
(1) All information required in Sec. 400.716 is included in the
revised Plan of Operations, in the format required, and is reasonable
and supported by documentation;
(2) The approved insurance provider can demonstrate that its A&O
costs, or projected A&O costs, are less than the A&O subsidy received,
or projected to be received, from RMA and if based on projections, such
projections are reasonable;
(3) The approved insurance provider can reduce A&O costs by a
specific amount through identified efficiencies in the delivery of the
Federal crop insurance program;
(4) The identified efficiencies must be measurable in dollar terms
and supported by documentary evidence;
(5) RMA is able to verify the source and amount of the identified
efficiencies as provided by the approved insurance provider and all
applicable costs and savings before and after implementation of the
premium reduction plan;
(6) The efficiencies must be sufficient to cover the dollar amount
of the premium reduction, and correspond to the location where the
premium reduction is offered;
(7) The efficiency must:
(i) Be derived from activities for which the A&O subsidy is
provided and not from any expected underwriting gain; and
(ii) Not be derived from any marketing or underwriting practices
that are unfairly discriminatory;
(8) The financial reserve plan is reasonable and provides the
necessary guarantee of funding, as required by Sec. 400.716(i);
(9) The marketing plan must be reasonable and effectively reach
small producers, limited resources farmers as defined in section 1 of
the Basic Provisions, 7 CFR 457.8, women and minority producers;
(10) The proposal of how the approved insurance provider intends to
deliver the premium reduction plan must be reasonable and not violate
applicable state laws regarding the licensing and the conduct of agents
in the solicitation and sale of insurance;
(11) The premium reduction plan must not result in a reduction in
the service to policyholders required by RMA approved procedures;
(12) The premium reduction plan must not result in a reduction of
training and supervising of agents, loss adjusters, or underwriting and
quality assurance personnel required by the procedures, law, regulation
or the SRA;
(13) There must not be a reduction in the total delivery system's
ability to serve all producers, including small producers, limited
resource farmers as defined in the Basic Provisions, 7 CFR 457.8, women
and minority producers, and producers located in areas with small
volumes of crop insurance business;
(14) The premium reduction plan must not adversely impact the
financial and operational capacity and expertise of the approved
insurance provider to properly deliver the Federal crop insurance
program;
(15) The approved insurance provider's resources, procedures, and
internal controls are adequate to make the premium reduction plan
available to producers in a timely manner and to protect the integrity
of the Federal crop insurance program, including the prevention of
fraud, waste and abuse; and
(16) The premium reduction plan meets all other relevant
requirements of the Act and the SRA.
(b) If the revised Plan of Operations is approved, the approved
insurance provider:
(1) Will be notified in writing by the Director of the Reinsurance
Services Division, or a designee or successor; and
(2) Must implement the premium reduction plan beginning with the
next applicable sales closing date for the reinsurance year, unless
otherwise determined by RMA, in accordance with Sec. 400.720.
(c) If the revised Plan of Operations is disapproved, the approved
insurance provider:
(1) Will be notified in writing of the basis for disapproval by the
Director of the Reinsurance Services Division, or a designee or
successor.
(2) May request, in writing, reconsideration of the decision with
the Deputy Administrator of Insurance Services, or a designee or
successor, within 30 days of disapproval and such request must provide
a detailed narrative of the basis for reconsideration.
(3) May not submit any additional revised Plans of Operations for a
premium discount plan for the reinsurance year.
11. Add Sec. 400.720 to read as follows:
Sec. 400.720 Terms and conditions for approved premium reduction
plans.
The following terms and conditions apply to all approved insurance
providers whose revised Plans of Operations are approved:
(a) Approved revised Plans of Operations for premium reduction will
only be effective for one reinsurance year.
[[Page 9013]]
(b) The approved insurance provider must immediately report in
writing all operational and financial changes that could cause a
material adverse impact upon its approved premium reduction plan to the
Director of the Reinsurance Services Division, or a designee or
successor.
(c) All procedural issues, questions, problems or clarifications
with respect to implementation of the premium reduction plan must be
timely addressed by the approved insurance provider.
(d) The approved insurance provider must implement the premium
reduction plan in accordance with the terms and conditions of approval.
(e) All producers insured by the approved insurance provider will
automatically receive the premium reduction contained in the approved
premium reduction plan.
(f) An independent certified public accountant must certify to the
reasonableness, accuracy, and completeness of all actual costs relating
to the efficiencies and the total dollar in premium reduction for the
reinsurance year the premium reduction plan will be offered, in a
format approved by RMA, not later than April 1 after the annual
settlement for the reinsurance year (The costs associated with such
certification will be at the approved insurance provider's expense and
must be included in the approved insurance provider's projected
expenses for the purposes of determining an efficiency);
(g) The approved insurance provider must provide semi-annual
reports, or more frequently as determined by RMA, that permit RMA to
accurately evaluate the effectiveness of the premium reduction plan, in
the manner specified by RMA. At a minimum, each report must contain:
(1) The number of producers making initial application for
insurance by State;
(2) The average number of acres insured under all policies by State
before and after implementation of the premium reduction plan;
(3) The number of small producers, limited resources farmers as
defined in section 1 of the Basic Provisions, 7 CFR 457.8, women and
minority producers making application as result of the implementation
of the marketing plan;
(4) The average coverage level purchased by producers insured by
the approved insurance provider before implementation of the premium
reduction plan and after;
(5) The number of agents selling and servicing policies on behalf
of the approved insurance provider by State; and
(6) The number, substance, and final or pending resolution of
complaints from producers regarding the service received under the
premium reduction plan.
(h) If at any time RMA discovers that the cost reduction or
efficiencies contained in the premium reduction plan are not attained,
are not sufficient to cover the dollar amount of premium reduction, or
that the reduction in premium is not corresponding to the efficiency,
RMA will require that the amount of efficiency used to determine the
premium reduction for the next applicable reinsurance year be limited
to the actual cost savings obtained for the reinsurance year, excluding
any financial reserve plan measures that may have been used to make up
for the effects of the deficiency.
(i) RMA will closely monitor the approved insurance provider's
efforts to market the premium reduction plan to small producers,
limited resources farmers as defined in section 1 of the Basic
Provisions, 7 CFR 457.8, women and minority producers to ensure that no
unfair discrimination takes place and if it is discovered, RMA may
withdraw approval for the premium reduction plan, in accordance with
paragraph (n) of this section.
(j) The approved insurance provider is solely liable for all
damages caused by any mistakes, errors, misrepresentations, or flaws in
the premium reduction plan or its implementation.
(k) The approved insurance provider must fully cooperate with RMA
in its periodic review of the operations of the approved insurance
provider for the purpose of assuring that the efficiencies are
generated, that the projected cost reductions materialize, that the
premium reduction plan is administered in the manner presented in the
revised Plan of Operations, that the solvency and operational capacity
of the approved insurance provider remains unimpaired, and that the
interests of producers and taxpayers are protected.
(l) The approved insurance provider may be required by RMA to
modify its implementation of an approved premium reduction plan to
ensure compliance with 7 CFR 400.714-720, the Act, regulations, the
SRA, and any applicable policy provisions and approved procedures, and
to protect the interests of producers and taxpayers, and the integrity
of the program.
(m) At its sole discretion and upon written notice, RMA may
withdraw or modify its approval of any premium reduction plan if RMA
determines that:
(1) The approved premium reduction plan, or its implementation, no
longer satisfies all the terms and conditions in 7 CFR 400.714-720;
(2) There have been instances of unfair discrimination;
(3) The stated efficiencies have not been realized or the approved
premium reduction is not provided to all existing policyholders and
producers as required by subsection (e); or
(4) The integrity of the crop insurance program is jeopardized in
any way, as determined by RMA, by the premium reduction plan.
(n) If any condition in paragraph (m) of this section exists, RMA
will notify the approved insurance provider in writing:
(1) That approval has been withdrawn or a modification to the
premium reduction plan is required;
(2) The date such withdrawal is effective or modifications must be
made;
(3) If modified, such modification must be approved by RMA before
implementation;
(4) The basis for such withdrawal or modification; and
(5) If approval is withdrawn, the approved insurance provider must
cease offering the associated premium reduction effective for the next
sales closing date.
Signed in Washington, DC, on February 17, 2005.
Ross J. Davidson, Jr.,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 05-3435 Filed 2-23-05; 8:45 am]
BILLING CODE 3410-08-P