BULLETIN NO.: MGR-97-011 TO: All Reinsured Companies All RMA Field Offices All Other Interested Parties FROM: Kenneth D. Ackerman Acting Administrator SUBJECT: "DRAFT" 1998 Standard Reinsurance Agreement Attached for your review and comment is the "Draft" 1998 Standard Reinsurance Agreement (Draft 1998 SRA), Appendices 1 and 2, and the 1998 Plan of Operations. A list of the revisions proposed for the 1998 reinsurance year is also attached for your reference. Written comments on the Draft 1998 SRA are due by COB Friday, April 11, 1997. All written comments should be sent via overnight mail to the following address: USDA/Risk Management Agency Reinsurance Services Division E. Heyward Baker, Director 1400 Independence Ave, S.W. Rm 6727-South Building, Stop Code 0804 Washington, D.C. 20250 The SRA was revised to incorporate certain recommendations made by the crop insurance industry in its "amended and restated" SRA. Also based on two full years of crop insurance experience under the 1995 SRA, the Draft 1998 SRA updates and addresses three primary areas regarding private program delivery: 1) the financial arrangement between the Federal Crop Insurance Corporation (FCIC) and its reinsured companies, 2) program changes, and 3) compliance and program integrity. The basic structure of the risk sharing arrangement has not changed; however, revisions were made to percentages within certain loss ratio layers as well as changes to the amount of risk identified by the layer. A fixed reinsurance premium has been applied to the net book premium associated with certain plans of insurance. For setting a benchmark target for establishing a fair "return on investment" for reinsured companies, RMA has used a measure of "Return on Capital-at-Risk", or ROCR. Attached is an explanation of the ROCR method. RMA has revised the risk-sharing arrangement between FCIC and the reinsured companies to reflect several factors: 1) analysis of two full years of actual experience under the 1995 SRA and comparing this performance to other SRAs, 2) improvements to geographic dispersion of risk since 1994, 3) major procedural changes effective for the 1994 crop year for determining yields, 4) increased premium rates resulting in greater premium income, and 5) the impact of Catastrophic Risk Protection (CAT), Crop Revenue Coverage and other plans of insurance on the overall underwriting performance of the program. RMA has revised the method by which administrative expense reimbursement (AER) is paid under the SRA. Consistent with the 1998 Fiscal Year (FY) Federal budget proposal, payment of AER will be based on a flat $100 amount per policy plus a percentage of the net book premium, as determined by FCIC, not to exceed the amount allowed by law. For the 1998 reinsurance year, FCIC has determined that the percentage for limited and additional coverage policies will be 18 percent, for Crop Revenue Coverage policies, 16 percent, and for Group Risk Plan policies, 17 percent. CAT crop insurance policies will receive $50 per policy plus 4.8 percent of the CAT net book premium, i.e. 50/60. The Draft 1998 SRA contains a "Program Changes" provision based on the National Crop Insurance Services (NCIS) Law Committee's "amended and restated" SRA proposal. When new crop programs, or existing crop programs are changed after the contract change date and such changes cause a material increase or decrease in the cost of performance, an agreed upon, equitable adjustment to the reinsured company's reimbursement and compensation will be made. RMA has also agreed to adopt the language from the NCIS Law Committee "amended and restated" SRA proposal governing the payment of funds from the Reinsurance Account. AER will be paid in one installment at the time acreage is reported and validated by RMA. With respect to program integrity and compliance, the Draft 1998 SRA provides for "Liquidated Damages" as a simplified method for resolving many compliance disputes. These are agreed-upon damages associated with non-compliant activity on the part of reinsured companies, agents, loss adjusters and other employees of reinsured companies. In response to reinsured company concerns over the amount of training and quality assurance (QA) requirements, RMA has extensively revised Manual 14. The Draft Manual 14 continues to outline training requirements. Training hours for new agents are increased; however, experienced agents only need to meet continuing education requirements. A test is required for both agents and loss adjusters. Significant reductions were made in the number of QA reviews companies are required to complete. Companies will be required to report the results of QA reviews. The Draft 1998 SRA has been revised to require the collection and reporting of participation data in support of the February, 1997 report by the Civil Rights Action Team, entitled, "Civil Rights at the Unites States Department of Agriculture." A form has been developed for the purposes of collecting this information. Completing the form is voluntary on the part of the applicant, or policyholder. However, reporting the information given either voluntarily, or through observation of the applicant or policyholder, is mandatory. Other technical changes were adopted from the NCIS Law Committee "amended and restated" SRA, such as the definition of "Approved Insurance Provider." RMA included a definition of "Managing General Agent." Certain provisions were clarified, such as provisions and requirements for suspension and termination of the SRA. RMA also updated Appendix 2, Plan of Operations, to reflect changes to the following SRA Exhibits: Exhibit 20 (Listing of Allowable Costs), reflects findings of the General Accounting Office and Exhibits 12, 13, 14, and 15 will be updated for the current reinsurance year. An all industry meeting to discuss the changes to the SRA has been scheduled. This meeting will be held the week of March 31. You will be advised of the meeting date, location and time as soon as the arrangements have been finalized. Your written comments and attendance at the industry meeting are welcomed and appreciated. If you have any questions, please contact the Reinsurance Services Division at (202) 720-4232. Attachments