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2004 News Archive

PREMIUM REDUCTIONS, COOPERATIVE SELLING, AND REBATING
Michael Hand, 202-690-2499

April 2003

Preface

Rebating is prohibited in the Federal crop insurance program. However, certain premium reductions are authorized by Congress under the Federal Crop Insurance Act (Act). As a general matter, the authority to control rebating is left to the Risk Management Agency (RMA), which takes this prohibition seriously and enforces it stringently. In some instances, state law is applicable and RMA coordinates with the States to discover whether violations of state law have occurred. Even where rebating is governed by Federal law, the States still have an interest to ensure that agents licensed in the State act in accordance with the law.

Federal Law

Section 506(l) of the Act states:

"The [Federal Crop Insurance] Corporation may enter into and carry out contracts or agreements, and issue regulations, necessary in the conduct of its business, as determined by the Board. State and local laws or rules shall not apply to contracts, agreements, or regulations of the Corporation or the parties thereto to the extent that such contracts, agreements, or regulations provide that such laws or rules shall not apply, or to the extent that such laws or rules are inconsistent with such contracts, agreements, or regulations."

Section II.A.6.of the Standard Reinsurance Agreement states:

"No portion of the net book premium or the A&O subsidy may be rebated in any form to policyholders, except as authorized by the Act and approved in writing by the FCIC."

RMA Definition of Rebate

A rebate is a direct or indirect benefit provided to a producer that is contingent upon the purchase of crop insurance, that is not available to producers who do not purchase insurance, and that provides an inducement to purchase insurance from a particular person or entity.

The following table discusses different sections of the Act and the SRA that are applicable to premium reductions, cooperative selling, and rebating.

Authority Regulator Interpretation and Examples Sanctions and Administrative Actions for Violations of Statutory or SRA Provisions, or the Implementing Regulations or Procedures
Section II.A.6of the SRA RMA

This provision applies whenever an agent or approved insurance provider (AIP) provides something of value to an insured as an inducement to purchase insurance. If the thing of value is provided to all producers, regardless of whether or not they purchase insurance, there is no impermissible rebate. This provision applies to all other situations that are not otherwise covered by sections 508(e)(3) and 508(b)(5)(B) of the Act.

Example: A coop bank sells crop insurance and returns commissions earned to members as a patronage refund. If the bank provides patronage refunds only to members who purchase insurance, it would be is an impermissible rebate because it would be an inducement to purchase insurance.

A crop insurance agency offers 50 gallons of RoundUp to producers who purchase insurance from it. The agency's offer of a free gift to induce producers to purchase insurance with the agency would constitute an impermissible rebate.
  1. Denial of reinsurance on all crop insurance policies involved;
  2. Administrative sanctions, including disqualification and debarment;
  3. Referral to State insurance departments for further investigation and action.
Section 508(e)(3) of the Act RMA

Permits the amount of premium charged to the insured to be reduced by the amount by which the AIP can deliver the crop insurance program for less than the administrative reimbursement paid by FCIC. The total premium paid under the policy does not change. The insurance company just pays a portion of the insured's premium from its cost savings.

Example: An AIP showed that it could reduce expenses by selling crop insurance over the Internet and changing the way in which it processes business such that the edit checks are applied at data entry. Insureds had the option of using the Internet or agents, but agent commissions on this business were reduced. The savings were passed on to insureds through a reduction in farmer-paid premium.
  1. Denial of reinsurance on all crop insurance policies involved;
  2. Administrative sanctions including disqualification and debarment;
  3. Referral to State insurance departments for further investigation and action.
  4. Possible non-renewal of the SRA.
Section 508(b)(5)(B) of the Act State Insurance Department

When permitted by State law, allows AIPs to make payments to cooperatives or trade associations, which may return a portion of those payments to insureds in the form of a patronage dividend or other payment. The AIP must obtain approval of the activity from each State where the activity will occur and file its plans and those approvals with RMA as part of its SRA Plan of Operations. Payments to cooperatives or trade associations may not be made until the Plan of Operations is approved by RMA.

Example: An AIP enters into an arrangement with a cooperative whereby it pays a licensing fee to the coop, which returns all or a portion of that fee to its members. Also, the coop is licensed to sell insurance and receive commissions from the AIP, which it may return to its members as a patronage refund or a general dividend.
  1. Referral to State insurance departments for further investigation and action;
  2. Denial of reinsurance on all crop insurance policies involved;
  3. Administrative sanctions, including disqualification and debarment.

Complaints

RMA will coordinate necessary investigative activities with applicable State insurance departments. RMA and the State insurance departments will share information necessary to support all warranted Federal and State administrative sanctions against violators.

If you have evidence of that an approved insurance provider (AIP), managing general agent or agent is violating section II.A.6 of the SRA or section 508(e)(3) of the Act you should contact RMA immediately.

If you have evidence that a an AIP, managing general agent or agent is violating section 508(b)(5)(B) of the Act , you should first contact your State insurance department and then RMA.

At a minimum, any referral to RMA or the State should contain:

  1. The Incident - A description of what kind of rebating is believed to have taken place, including any documentation such as brochures, newsletters, or other communications that suggest that rebating is occurring.

  2. The Persons Involved - The name, address, and phone number of the persons (insured and agent) and AIPs involved. Partial information can be useful.

  3. The Complainant - Your name, address, day-time phone and e-mail address (if any). This information allows the investigators to follow-up with you if they have questions. (Confidentiality will be maintained to the extent permitted by law).

RMA can be reached at the following addresses:

Telephone: (202) 720-0642

E-mail: rebate.reporting@rma.usda.gov

Postal Mail: Deputy Administrator
RMA/Risk Compliance/Stop 0806
United States Department of Agriculture
1400 Independence Avenue, S.W.
Washington, D.C. 20250-0806

USDA Hot Line: 1-800-424-9121

If you suspect any cooperative or trade association is violating Section 508(b)(5)(B), you may wish to contact the State Insurance Department.