Application Kit: RFA for Outreach Partnerships

STATEMENT OF ROSS DAVIDSON, JR.
before the Subcommittee on
Agriculture, Rural Development and Related Agencies
Mar 5, 2003

Mr. Chairman and members of the Subcommittee, it is a pleasure to appear before you to testify in support of the President's fiscal year (FY) 2004 budget for the Risk Management Agency (RMA). RMA has made rapid progress in meeting its legislative mandates to provide an actuarially sound crop insurance program to America's agricultural producers. However, more needs to be done. The program is expected to provide approximately $38 billion in risk protection on about 208 million acres in 2004, representing approximately 80 percent of the Nation's planted acres for principal crops.

RMA's primary mission is to promote, support and regulate the delivery of sound risk management solutions to preserve and strengthen the economic stability of America's agricultural producers. Our key objectives in support of that mission are to:

• Provide widely available and effective risk management solutions;
• Ensure customers and stakeholders are well-informed;
• Provide a fair and effective delivery system;
• Maintain program integrity; and
• Provide excellent service

FCIC FUND

The FY 2004 budget proposes that 'such sums as may be necessary" be appropriated to the FCIC Fund. This ensures the program is fully funded to meet producers" needs. The current estimate of funding needs is based on USDA's latest projections of planted acreage and expected market prices. The FY 2004 budget requests an increase of $389.2 million from $2.9 billion in FY 2003 to $3.3 billion in FY 2004. The budget request includes increases of $69.9 million for Premium Subsidy, $30.3 million for Delivery Expenses, $10.0 million for mandated Agricultural Risk Protection Act of 2000 (ARPA) activities, and $346.8 million for reimbursement to the Insurance Fund for U.S. Treasury transfer for excess 2002 crop year losses. The legislative proposal is expected to save approximately $67.8 million in 2004 by reducing the administrative expense reimbursement rate paid to the insured companies from 24.5 percent to 20 percent. These savings are achievable principally because there has been a substantial growth in premium dollars and reimbursements have increased proportionally -- in essence, insuring the same number of acres at higher levels of coverage.

ADMINISTRATIVE AND OPERATING EXPENSES(A&O)

RMA's FY 2004 request of $78.5 million for Administrative and Operating Expenses represents an increase of about $8 million from FY 2003. This budget will support increases for information technology (IT) initiatives in the amount of $5.5 million. These IT funds are targeted towards the continual maintenance and enhancement of the corporate operating systems necessary to run the program. Included in the total request is $1.0 million to expand the monitoring and evaluation of reinsured companies, and $1.3 million for pay cost for a staffing level of 568 employees.

Finally, this budget also includes a funding request of about $8.7 million for information technology for the RMA under the Common Computing Environment (CCE) in the budget of the Chief Information Officer. This amount is in addition to the funding requested above the administrative and operating expenses of RMA. Historically, funding under the CCE has been reserved for the service center agencies. The Department is working aggressively to coordinate its information technology resources to ensure greater efficiency in software development, hardware acquisition and maintenance and in sharing common data among its various agencies. The best way to ensure the level of coordination required is to provide funding under the controls of the CCE.

In addition, RMA has an aging information technology system, the last major overhaul occurred about 10 years ago. Since that time the crop insurance program has expanded tremendously. Catastrophic coverage and revenue insurance products have been initiated and coverage for new commodities has been added including many specialty crops and more recently livestock. In short, RMA's information technology system has not kept pace with the changes in the program. The funding requested under the CCE will provide for improvements to RMA's existing information technology system to improve coordination and data sharing with the insurance companies and FSA. The funding will also provide for the development of a new information technology architecture to support the way RMA will need to do business in the future.

PROGRAM HIGHLIGHTS

A new FCIC Board of Directors (Board) was appointed in 2002. This Board and I have set an aggressive agenda to address producers" issues and challenges in the crop insurance program. This agenda increases participation in the program, ensures outreach to small and limited resource farmers, expands programs where appropriate, affirms program compliance and integrity and ensures equity in risk sharing. Nine Board meetings were held during 2002. The Board approved 26 programs in FY 2002 and is considering another 18 programs. Private companies submitted five of the approved programs. Two of these were livestock programs. RMA is efficiently contracting for and reviewing new products, and promoting new risk management strategies.

In 2002, RMA provided approximately $37 billion of protection to farmers, and expects indemnity payments for 2002 losses of approximately $4.2 billion. The expected loss ratio for 2002 is 1.42 compared to 1.0 for 2001. In 2002, much of the agriculture region across the United States suffered from severe drought conditions. The increase in the loss ratio reflects this. As a result, the amount of claim payments made under the crop insurance program increases significantly. This shows that the agriculture community is successfully benefiting from the risk management tools the government provides. RMA continues to evaluate the crop insurance program to identify areas for improvement and to create new products for commodities that are not offered coverage under the current crop insurance programs so that the government can eliminate or at least substantially reduce the need for ad-hoc disaster assistance payments to the agriculture community. The participation rate was approximately 80 percent. While participation in the program is voluntary, subsidizing the premium paid by farmers for coverage encourages participation. Increases in subsidies resulting from the passage of ARPA had a positive affect on participation. Since 2000, farmers have shown a trend of choosing to purchase higher levels of buy-up protection and revenue coverage policies. In 2002, over 50 percent of the insured acreage was insured at 70 percent or higher level of coverage compared to only 9 percent in 1998. The high participation rate and the higher levels of coverage purchases by participants have added to the ability for Crop Insurance to become the main risk management tool for America's farmers. We have made additional improvements recently that will continue this trend. In addition, the increased number of farmers buying up higher levels of coverage has generated the efficiencies reflected in the proposal to lower the administrative expense reimbursement rate.

RMA, with the assistance of the Farm Service Agency (FSA) and private sector insurance providers, works to improve program compliance and maintain the integrity of the Federal Crop Insurance Program. In order to complete ARPA requirements, RMA executed procedures for the FSA to refer potential crop insurance abusers. RMA established a fraud case management system and improved the sanction process. In addition, RMA implemented data mining projects and fine-tuned the data reconciliation process. Last year RMA achieved a 700 percent increase in referrals on possible instances of fraud through data mining and analysis, a formalized alliance with FSA, and collaboration with approved insurance providers. These results demonstrated the direct impact of RMA's public effort to prevent fraud and saw an estimated $94 million reduction in program costs by preventing potential fraudulent claims during October 2000 through December 2001. This strategy and its effects are discussed further in the RMA's Program Compliance and Integrity Annual Report to Congress.

The FCIC Board approved two pilot insurance programs for Iowa swine producers to protect them from declining hog prices. The two approved programs are the Livestock Gross Margin Pilot and the Livestock Risk Protection Pilot. Both policies are available from private insurance agents. Authorized under ARPA, these types of livestock insurance programs provide livestock producers with effective price risk management tools. RMA is providing $19 million in coverage on approximately 304,000 hogs for the 2003 reinsurance year. Pilot program length will be determined by farmer participation and financial performance of the program.

The Livestock Gross Margin (LGM) pilot protects swine producers from price risks for six months and up to 15,000 hogs per period. The policy protects the gross margin between the value of the hogs and the cost of corn and soybean meal. Prices are based on hog futures contracts and feed futures contracts. LGM protects producers if feed costs increase and/or hog prices decline, depending on the coverage level selected by the producer. Coverage levels range from 85-100 percent. LGM sales began in July 2002. There are two sale periods each year -- January and July.

The Livestock Risk Protection (LRP) pilot protects producers against declining hog prices if the price index specified in the policy drops below the producer's selected coverage price. Swine can be insured for 90, 120, 150, or 180 days, up to a total of 32,000 animals per year. Unlike traditional crop insurance policies which have a single sales closing date each year, LRP is priced daily and available for sale throughout the year. Coverage levels range from approximately 70-95 percent of the daily hog prices. In addition, the FCIC Board recently approved LRP for both fed and feeder cattle beginning in 2003. We expect these programs to be available in late spring.

The FCIC Board approved the Adjusted Gross Revenue-Lite (AGR-Lite) insurance plan in late 2002 and began sales for 2003. This product was submitted to FCIC through Section 508(h) of the Federal Crop Insurance Act. AGR-Lite is available in most of Pennsylvania and covers whole farm revenue up to $100,000, including revenue from animals and animal products. RMA encourages other states to develop similar programs.

Adjusted Gross Revenue (AGR) Cost-Share Program

ARPA authorized cost-sharing to assist producers in reducing financial risk through product diversification. To meet this directive, FCIC announced a cost-share program for AGR insurance that was made available in 11 underserved Northeastern States: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, New Jersey, Pennsylvania, Rhode Island, and Vermont. Under this program, FCIC paid 50 percent of the producer-paid premium and the full $30 administrative fee.

In 2001, RMA contracted for research and development of a Cost of Production (COP) insurance pilot program for 12 crops (soybeans, corn, cotton, wheat, rice, almonds, peaches, cranberries, apricot, nectarines, onions, and sugarcane). The FCIC Board considered an initial COP program for cotton this past fall. Expert reviewers and the Board indicated several significant issues for further review. As a result, the Board concluded that more work is needed to successfully bring producers a COP policy to meet their needs. Currently, RMA and the contractor are working diligently to find solutions to these issues. Should the issues be resolved and a cotton pilot program is successful, RMA plans to expand COP coverage to other crops.

RMA currently offers the Group Risk Plan (GRP) Rangeland Pilot in twelve Montana Counties. GRP is an alternative risk management tool based on the experience of the county rather than individual farms. It indemnifies the insured in the event the county average per-acre yield (the "payment yield") falls below the insured's "trigger yield." We are doing everything possible to ensure payment yields accurately and fairly represent the production experience of Montana's rangeland producers. RMA is diligently working with the Montana Agricultural Statistics Service as well as the Farm Service Agency (FSA) to obtain the best data needed to develop appropriate payment yields. While considerable interest has been generated in the program, we recognize specific problems need solutions. RMA contracted for an evaluation of the GRP program and is looking forward to potential solutions for making this product more effective. RMA also contracted for a feasibility study specifically for pasture and rangeland. This study suggested a risk management program could be developed for these individual crops, and RMA is proceeding with the development in FY 2003.

RMA recently completed work on many significant changes to the nursery program. RMA will be contracting for a cost benefit analysis leading to a proposed rule in the Federal Register. The nursery industry will have the opportunity to comment on the rule, which is expected to be announced as a proposed rule during the 2003 calendar year. These changes were in response to producers" requests to modify the program to align it more closely with production practices and producer needs, balanced with the need to maintain program integrity.

During FY 2002, over $19 million was obligated to qualified public and private organizations for research, feasibility studies, and development of risk management products. This represents approximately 45 contracts and partnership agreements. Examples include Florida fruit trees; Hawaii tropical fruit and tree research and development; livestock disease research and a sorghum pilot program; risk reduction for specialty crops in the southeast; direct marketing of perishable agricultural crops; and an apiculture insurance product, among others.

During FY 2002, RMA focused its outreach and education program on underserved states, specialty crop producers, the Dairy Options Pilot Program, grants through the Cooperative State Research, Education, and Extension Service, and the Adjusted Gross Revenue (AGR) Cost Share Program. In 2002, RMA established cooperative agreements in historically underserved states with respect to crop insurance; 13 cooperative agreements totaling $1.8 million were established to deliver crop insurance education to producers in Connecticut, Maine, New Hampshire, Pennsylvania, Vermont, West Virginia, Delaware, Maryland, New Jersey, New York, Utah, and Nevada. These cooperative agreements expand the amount of risk management information available to producers and promote risk management education opportunities. The agreements will also inform agribusiness leaders of increased emphasis on risk management and deliver risk management training to producers emphasizing outreach to small farms.

In addition, RMA awarded 72 partnership agreements to specialty crop producers at a total cost of $3.7 million. RMA is in partnership to deliver risk management education to specialty crop producers with state departments of agriculture, universities, grower groups, and private agribusinesses. In conjunction with the Future Farmers of America, RMA also promotes youth participation and education in agriculture.

RMA has implemented several initiatives to increase awareness and service to small and limited resource farmers, ranchers, and other underserved groups. During 2002, customized regional and local workshops were held in several regions to deliver proven survival strategies directly to the producers. Forty-five competitively awarded partnership, with community-based, educational and nonprofit organizations will use $3.2 million to educate women, limited-resource, and other traditionally underserved farmers and ranchers. For example, an agreement with the Agricultural and Land Based Training Association will provide risk management training to beginning Latino farmers on the central coast of California. RMA is sponsoring and participating in approximately 15 Farm Bill briefings nationwide, targeting small and limited resource farmers and ranchers. In addition, the second national Survival Strategies for Small and Limited Resource Farmers and Ranchers is currently scheduled for November 2003 in California.

PROGRAM ISSUES/CONCERNS

RMA received notice in November of the business failure of one of its larger reinsured companies, American Growers Insurance Company (AGIC). The Nebraska Department of Insurance took action under state law to place AGIC under regulatory supervision and later moved to place the company under a rehabilitation order. RMA has devoted significant resources to ensure that producers insured by AGIC are paid in full and on time. Our primary objectives are to protect policyholders, taxpayers and the integrity of the program. RMA is working with the Nebraska Department of Insurance to meet these objectives. RMA has established procedures for policyholders to transfer from AGIC to other approved providers. The transfer of fall 2003 policies is essentially complete. Spring policy transfers are being processed. RMA will continue to provide the necessary oversight, regulatory collaboration, and resources until the 2002 crop year claims are complete and existing 2003 policies have been transferred to another insurance provider.

PROGRAM STRATEGIES/OVERSIGHT

The President's FY 2004 budget includes $1.0 million for monitoring and evaluating the reinsured companies. RMA is increasing oversight of the reinsured companies to promote a fair and effective delivery system. The actions being taken by RMA are:

(1) Closer and more frequent monitoring of the current and emerging financial condition of each reinsured company;
(2) Greater disclosure and transparency of specific operating expenses, including distribution system costs, and enhanced assessment of potential financial and operating exposures;
(3) Comprehensive reviews of the Federal Crop Insurance Corporation's product portfolio and all manuals, handbooks and basic policies to identify process and product efficiencies;
(4) Comprehensive evaluations of the current regulatory structure and dispute resolution procedures to identify any changes that would enable RMA to more proactively and cost-effectively ensure program integrity, service to the policyholder and protection of the taxpayers" interests;
(5) Working with the reinsured companies and other delivery participants to review the current cost structure of the industry, to identify and pursue real cost savings, explore opportunities that may allow more effective risk diversification consistent with the market orientation of the program, and explore resource sharing where appropriate and effective; and
(6) Increased monitoring and oversight of the insured companies" financial condition to protect program integrity. If FCIC determines that a reinsured company is (a) incurring expenses that jeopardize the financial stability of the company; (b) accepting business beyond its capacity to service or financially support that business; or (c) otherwise operating in a manner that adversely affects its financial condition or continued participation in the Federal Crop Insurance Program, then RMA will use all remedies available to protect the program.

We will also pursue actions necessary to enhance the safety and soundness of the product delivery system.

CONCLUSION

As shown by my testimony today, the RMA crop insurance plan is working; higher participation and higher levels of coverage substantiate that Crop Insurance is becoming the main risk management tool for America's producers. Over $4 billion in coverage will go directly to producers this year. Buy-up coverage has dramatically increased. Insurance coverage has expanded to forage, fruits and vegetables, nursery products and livestock. Thousands of producers have participated in education and outreach activities. Cooperative agreements with state universities and department of agriculture have been established. New enforcement and sanction authority has been implemented as provided by ARPA. I ask that you approve this budget so RMA, under the direction of the USDA, can continue to provide an actuarially sound crop insurance program to America's agricultural producers. Thank you, Mr. Chairman and members of this committee. This concludes my statement. I will be happy to respond to any questions.