FCIC Deputy Manager's Report

FCIC Deputy Manager's Report

1. Overview

The Manager's report summarized some of the highlights of this Administration and your efforts in overseeing the Federal Crop Insurance Corporation (FCIC). Growth of the program has been tremendous, and with the passage of new legislation, further growth is projected. Achieving this growth will pose challenging operational difficulties for the Risk Management Agency (RMA). The purpose of this report is to discuss several critical operational issues. Our Government Performance and Results Act (GPRA) strategic plan will provide the framework for this discussion. These priorities were outlined in the September 15, 1998, Deputy Manager's report.

2. Strategic Goals

RMA has three strategic goals:

• Enhance Products and Delivery,
• Increase Awareness & Use of Risk Management Tools, and
• Improve Program Integrity and Protect Taxpayer Funds.

Significant progress has been made toward some of these goals. Others require additional effort. Product Development is a critical area which will be discussed first.

Enhance Products and Delivery

Issue: New product development is delayed. No new commitments for products scheduled for completion in 2002, or thereafter, are being made.

Background: In both the September 1998 and February 1999 Deputy Manager's report, it was noted that RMA did not have the resources to continue its current product strategy. A new strategy was identified, but implementing the new strategy given the momentum of the old strategy proved difficult as RMA attempted to fulfill prior commitments. Unfortunately, RMA ran out of resources to implement all of the products that had been approved by the Board. Computer programming changes necessary to implement the clam, adjusted gross revenue, and Florida fruit tree policies have just been completed for the most part in the last few weeks--nearly 5 months after these products were approved. A moratorium was thus placed on new product development for products promised for completion after 2001. RMA is attempting to reschedule products anticipated for completion prior to 2001 at present. A proposed priority list will be discussed at this board meeting.

As policies were developed for specialty crops, the number of policies purchased by fewer than 100 people grew. Currently, roughly 20% of our policies are purchased by fewer than 100 people. Ten percent serve fewer than 50 customers. Developing policies for very small numbers of customers is inefficient both for RMA and for the delivery system.

There are an estimated 2 million farmers. RMA sells policies to approximately 770,000 of these individuals, leaving 1.23 million potential new customers. If RMA develops even 10 policies per year at 1000 customers per policy, it will take 123 years to provide a policy for these individuals. This is not a workable approach. Contracting for someone else to develop policies for 100 people is also not workable.

Current Strategy: The current product development strategy is to attempt to serve farmers by developing crop specific policies for the larger crop segments and aggregated policies for the smaller crop segments. The major crops (e.g., corn, wheat, hay, soybeans, etc.) account for 80% of the economic value of American production agriculture. RMA's goal in this sector was to increase the economic value of these crops covered by crop insurance. This goal has been achieved through three primary means: 1) premium discounts, 2) new policies, and 3) offering of additional coverage levels.

In 1999 and 2000, $400 million was appropriated by Congress for crop insurance assistance. RMA chose to deliver this assistance via a premium discount to encourage people to buy higher levels of coverage. The Manager's report highlights the success of this effort.

RMA also developed a coverage enhancement option (CEO) to provide a disappearing deductible type of policy. Sales of this product have been small so far. Finally, RMA increased the coverage levels up to 85% for several of the major crops. With the premium discount, these high coverage levels became affordable for many farmers.

Last, hay or forage is the third largest crop in the U.S. and one in which roughly 1% of the economic value is covered by insurance. A specific policy for this crop is being developed as a means to serve livestock producers. RMA is attempting to develop a rainfall insurance policy for forage. Dr. Sonja Sandberg, a Fellow from the American Academy for the Advancement of Science, is working with RMA for six months on such a product. Canada is testing a similar policy for its producers.

The second part of RMA's strategy for products is to develop products for different sizes of farms. This effort has not been as successful, partly because it is more difficult and partly because of limitations on access to data (the Privacy Act). Unfortunately, without additional resources, it is the only means RMA can continue to cover more of the economic value of agriculture in a reasonable time frame.

Performance Standards: RMA uses participation as a measure of program scope and success. The number of eligible acres insured under the program is used as a measure of success. The goal of risk management, however, is to reduce variability in revenue at minimum cost. The economic value of the crop should be included as a performance measure.

Obstacles to Success: RMA's impression is that farmers want policies specific to their crops. Thus, success is measured by whether or not a crop specific policy exists. Unfortunately, as noted above, it would take a very long time to develop a policy for each crop in each area. Aggregated policies, those which can be applied to many crops at once, offer the best means to reach more farmers quickly. The internal and external standard of success, however, must change to reduce the focus from specific crops to numbers of farmers served and the value of the crops covered by risk management. Changing this perception could prove a substantial obstacle to success.

Other New Policy Development Improvements: The rapid growth of the program has severely strained resources and exceeded the capacity of RMA to properly maintain existing policies. Several instances of policy vulnerabilities have occurred costing the Corporation millions of dollars. RMA now maintains roughly 36,000 county crop programs. If there are vulnerabilities in only 0.1% of these programs, that represents a potential for 360 programs that could be abused. If the vulnerabilities are systemic, then the potential impact is even greater.

Thus, RMA has modified the process used to develop policies to include a review by RMA's compliance division prior to submission to the Board for approval. In addition, additional information will be provided to the Board during the process. An example summary sheet of the information to be provided to Board members is included with the one action item.

The FCIC Act authorizes FCIC to conduct research, surveys, pilot programs, and investigations relating to crop insurance and agriculture-related risks and losses. The number of new programs developed under this authority in recent years has increased significantly, yet crop insurance is still not available for producers of a number of commodities. RMA's new program development process is a deliberate and strategic process that includes a planning stage in which new program candidates are identified and prioritized for development. Increased emphasis on the importance of risk management has created additional pressure for programs to be developed for commodities and areas which are currently not insured. RMA has responded to this pressure by implementing some programs ahead of their projected introduction at the expense of other planned program introductions, projects, or tasks.

From 1993 to 1999 the size of the crop insurance program has tripled while the Federal staff to maintain and continue to improve existing programs and develop new programs has been reduced about 40 percent during the same period. Competing resources for new program development and other critical activities taxes the ability of RMA and its private and public partners to change plans and priorities (without jeopardizing other critical plans and priorities). Formalizing the new program development priorities should allow appropriate parties to establish their priorities and direct their workload accordingly. While it is anticipated that unforeseen circumstances may require FCIC to occasionally revise priorities, it is expected that such revisions will be kept to a minimum. (See attached New Program Development and Delivery Priorities for 2001 and 2002 crop year implementation and for 2003 through 2005 crop year implementation).

A major focus of the Board meeting is to review our current plans for new products.

Fundamental to designing an effective risk management program is knowledge about the customer base. RMA has initiated several marketing efforts to identify customer attitudes and preferences. Results from some of these efforts are beginning to become available.

Mississippi State Survey: One of the Risk Management Education grants funded by RMA during 1998 was a survey project lead by Mississippi State University in cooperation with Texas A&M, Purdue University and the University of Nebraska. Initial findings in the survey were recently reported. The survey gauged risk management attitudes and practices of producers in Mississippi, Texas, Indiana, and Nebraska. Among the key findings were:

• Price risk and yield risk continue to dominate as areas of greatest concern.
• Significant regional differences persist.
• Crop Insurance Preferences, Message: Premium subsidy can significantly influence behavior (upgrade from CAT to revenue products in 1999).
• How having crop insurance affects the forward pricing decision - significantly increased education effort is needed to demonstrate benefits of combining crop insurance coverage with forward pricing.
• Producers dramatically underestimate their chance of collecting BUY-UP coverage.
• Lack of written marketing plans reveals a serious educational challenge across all regions.
• Producers are uncomfortable using futures and options and crop insurance. Training interest is strongest in areas emphasized in RMA's curriculum.
• Education is needed to change producers' perceptions of the payoffs of purchasing buy-up crop insurance coverage.
• Producers are accustomed to free information and training C reinforces government educational role.

Economic Research Study: Last summer, RMA partnered with the Economic Research Service (ERS) to conduct an economic study of farmers' participation in crop insurance and how their choice of products changes over time. In addition, we are planning to expand the project by having a market research firm find out more about who our customers are. Specifically, we want to know who is (and is not) buying our products, and why; what they are buying, and why; what do they know, believe, or perceive about our products; what other products and practices are competing with our products; what are the implications of emerging commercial risk management products and practices for our products in the future; and what opportunities exist for us to expand our offering of 'safety net' products.

Because of the cost, it is not feasible for us to fund the needed market research for all crops nationwide. Instead, we plan to have a firm develop a case study consisting of a few crops in a limited area, and then use this case study to teach our personnel to replicate the process. We would then use this knowledge to conduct additional research on more crops in more areas. This information would be shared with ERS to expand the base of data with which to conduct their economic analysis. We want to develop our staff to be able to develop price sensitivity analyses, conjoint analyses, perceptual maps, and use other pertinent technical market research tools to better define and penetrate our potential markets.

Dairy Options Pilot Program: Round I of the Dairy Options Pilot Program (DOPP) was operated in 37 counties during 1999. In spite of low milk prices during the months of operation, many dairy producers participated in the pilot program. From the Round I experience, changes were made in the program and DOPP was expanded to 61 counties for Round II during 2000. The current plan for continuing DOPP includes revisiting Round I counties during 2001. Current legislation before Congress would expand DOPP to 200 new counties during 2002 through 2004 or 2005. Also, the legislation would allow RMA to expand the number of counties in each state from 6 to 25. The implementation of DOPP expansion will depend on the level of funding authorized by Congress.

Public Affairs Efforts/External Affairs: External Affairs does not have an operational budget (no project money). As a result, public affairs staff have focused on making the front page of the RMA website more user friendly, arranging opportunities for the Administrator to talk about USDA's crop insurance reform initiative and acquiring the capability to promote crop insurance reform on a national scale.

RMA Website Usage Has Exploded: Compared with May 1999, all monitored areas have experienced record growth: monthly user sessions (the total number of users) are up 1,100 percent, monthly page views (the total number of pages viewed) are up 1,802 percent, and monthly hits (the total number of elements viewed) are up 6,471 percent (see attached chart).

Other surprising information centers around our farmer stories and new Weather Watch feature. Our farmer stories were accessed 100-200 times each in March and April 2000. Weather Watch is founded on the same weather report the Secretary reads each morning from the World Agriculture Outlook Board (WAOB). The feature spotlights a different region each day, focusing in on the most active weather outbreaks or drought, with a special weekend outlook on Fridays. The feature also links to the complete daily weather report. Early numbers from WAOB indicate that over 600 users downloaded this file in its first month of availability (April 2000).

• Encourage risk management educational opportunities/products/services
• Highlight new elements of enhanced crop insurance program
• Inform producers of changes in existing program
• Build confidence in program integrity/oversight

• Limited Resource
• Farmers (primary occupation) with less than $100,000 sales
• Farmers (primary occupation) with less than $100,000-$250,000 sales

• Determine areas of low participation (Secretary)
• Spend $10 million 2001-2004;
• Provide information, education and insurance provider recruitment

• Diversifying the Delivery System: Two to three regional training sessions are being planned to provide interested agents and companies with information on the Agency and its programs.
• Modifying existing products and/or developing new products that meet the needs of small and limited resource farmers and ranchers.

• develop employee leadership and managerial skills specifically to enhance RMA's abilities to meet future challenges,
• build participant's confidence in seeking new goals and meeting objectives toward career enhancement and personal development, and
• provide training in all program areas, and provide a series of unique and broad-based experiences.

• Insurance Essentials: designed for employees at any level who are new to the insurance industry and existing employees who need a better basic knowledge of the insurance mechanism and the insurance industry.
• Introduction to Risk Management: six-assignment course designed for people who need a basic understanding of what risk managers do, how they do it, and why risk management is important.
• Focus Series: Risk Management for Insurance Professionals: Teaches how to apply the risk management process to your day-to-day handling of personal and commercial risks.

• An Introduction to Risk Management for Agricultural Producers: developed by Risk Management Education as basic training in risk management as related to agricultural risks.
• Coverage Enhancement Option: explains the CEO for internal training of field office staff.

• Utilization of the GSA Millenia contract for all system integration and IT contracting. Once the transfer to this contract is complete later this year, RMA will have a single contractor that integrates all of its IT services under a single contract. This will give RMA better control and oversight over its contracted IT functions.
• Development of a contracting vehicle to outsource development of crop insurance programs. The result of this partnership between Program Support Staff and Research and Development, will allow for the contracting out of new product development and program evaluation activities to the private sector. The contract will be used for currently funded program development, and is broad enough to be used for any amount of additional outsourcing of product development required by proposed legislation.
• Development of a Risk Management Education contract. Delivery of the recently developed Standardized RME Curriculum will be accomplish nationwide using educators acquired through a multiple award contract.

• Technical Assistance: To educate farmers about the basic risks of agriculture so that they can more easily understand their individual financial situations and subsequently recognize the benefits of agricultural risk management insurance products . . . with a goal of building on farmers' individual credit worthiness as they subscribe to insurance, resulting in better protections in times of crop failure and easier access to credit; and
• Business Linkages: To foster the development of a strong SA-based agricultural risk insurance provider system that has appropriate insurance products developed for the unique needs of the SA agricultural sector.

• Completion of a government sanctioned competitive bidding process to choose a private sector contractor to assist in the project. On September 30, 1999, National Crop Insurance Services (NCIS) was awarded the contract. Since then, NCIS representatives have worked directly on the project, both in South Africa and with the international reinsurance community.
• Completion of a workshop (in Pretoria) on the general goals of the project, including briefings to SA provincial officials, farm organization leaders, and banking and insurance professionals.
• Completion of an initial evaluation of South African agriculture, resulting in organizational meetings with the SA insurance industry and first level recommendations for types of farms and crops to be evaluated for insurance pilot design technical assistance for the SA government.
• Identification of stakeholders.
• Development of a proposal for initial insurance pilot concepts.
• Completion of a second workshop (in Pretoria) attended by SA National Department of Agriculture officials, SA private insurance representatives and Land Bank officials.
• Agreement on framework for initial insurance pilot concepts and general categories for producer participation. SA NDA officials have asked for assistance in writing program authorizing legislation.