BULLETIN NO.: MGR-97-022 TO: All Reinsured Companies All Risk Management Field Offices FSA Headquarters, Program Delivery and Field Operations FROM: Kenneth D. Ackerman Administrator SUBJECT: Secretary Dan Glickman's Letter on NCS ISSUE: Many producers, commodity groups, and Congressional offices have raised concerns about the impact of recent disasters on policies to be included in the Nonstandard Underwriting Classification System (NCS). BACKGROUND: The recent flooding in the States of Minnesota, North Dakota, and South Dakota as well as prior year drought conditions in the Southern Plains have raised concerns among commodity groups, individual producers and Congressional offices about NCS. This apprehension with NCS has been heightened by fears that producers in the Upper Great Plains, or anywhere in the U.S., who have sustained continuing disasters over a number of years will be adversely impacted by the process because 1997 will be the third consecutive loss year for many of the farmers in these States. In response to this issue, Congressman Earl Pomeroy offered legislation that would have limited the NCS process based on Federal disaster declarations. Secretary of Agriculture Dan Glickman as provided a response to Congressman Pomeroy which explains USDA's position on this matter, a copy of which is attached for your information. ACTION: Please use Secretary Glickman's letter to convey information about the current USDA position on NCS. Attachment May 14, 1997 Honorable Earl Pomeroy U.S. House of Representatives 1533 Longworth House Office Building Washington, D.C. 20515-3401 Dear Earl: The recent flooding in the States of Minnesota, North Dakota, and South Dakota has raised concerns by you, other Congressional offices, commodity groups, and individual producers about the Federal Crop Insurance Corporation's Nonstandard Underwriting Classification System (NCS). This apprehension with NCS comes from a presumption that producers in the Upper Great Plains, or anywhere in the U.S., who sustain continuing disasters over a number of years will be adversely impacted by the process because 1997 will be the third consecutive loss year for many of the farmers in these States. In response to this issue, you offered H.R. 790 on February 13, 1997, that would have limited the NCS process based on Federal disaster declarations. Let me assure you that the Department of Agriculture shares your concerns and has monitored this issue closely over the last several months. NCS is designed to separate extremely poor loss experience from the rest of the insured population for the purpose of establishing crop insurance rates. This provides the opportunity to individually rate those producers whose loss experience would otherwise be absorbed and rated with the mainstream policyholder population. Instead of all producers' premiums rising, the extreme adverse experience is isolated and excluded from the general rating pool. This allows for lower rate adjustments for the majority of producers when needed to achieve congressionally mandated program loss ratios. This approach has proven to be a useful method of dealing with adverse experience outside the normal range of losses paid by the crop insurance program. NCS is not intended to penalize producers who have suffered losses from widespread natural disasters beyond their control, even when they occur in recurring years. In managing that program, it is our firm intention to avoid that outcome. As a practical matter, the number of policies affected by NCS is small, 24,554 listings in crop year 1996 or 1.52% of all policies sold. In crop year 1997, this number increased slightly to 25,126 listings. However, the Risk Management Agency (RMA) has developed an action plan to improve and revise the NCS selection process and to ensure that producers who have experienced widespread flood or drought losses are not selected unfairly. For the current NCS selection cycle, which takes into consideration insurance losses through the 1996 crop year to individually adjust producer rates and coverages for 1998 and, thus, excludes losses due to the current flood conditions in the Northern Plains area, the RMA Administrator has directed the Regional Service Offices to use existing administrative remedies that can be implemented under current regulations, including (1) modifying the disaster adjustment procedure when the existing procedure does not sufficiently limit the effect of widespread disasters, (2) adjusting the threshold for selecting producers for NCS from a loss of at least 1.5 to one of 2.5 (five or more losses would still be required), and (3) closer monitoring of the entire NCS process by RMA headquarters personnel. For the longer term, RMA will conduct a systematic review of the underlying NCS regulations and process. RMA will solicit comment from private sector and producer representation in this process and will survey a cross section of parties impacted by NCS. The goals of this overhaul will be to (1) modify and improve the program to assure that it does not penalize farmers suffering losses from widespread natural disasters, (2) moderate the rate impact on new listings to spread the financial burden for NCS producers over a longer period of time and avoid disruptions of farming operations, and (3) reduce the administrative burden of the process. RMA is committed to accomplishing the long range goals prior to assigning NCS listings for the 1999 crop year. I will also ensure that RMA considers the broader issues associated with NCS, such as the effect of the last farm bill on producers in general and the new role of crop insurance as the primary safety net for the U.S. agricultural sector. I look forward to providing you and your colleagues with progress reports on the findings of the NCS workgroup as their work proceeds and I am confident that RMA can address your concerns and the concerns of producers nationwide who have been impacted by NCS. Thank you for your continued support of the Federal crop insurance program. Sincerely, /s/ DAN GLICKMAN Secretary