[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Rules and Regulations]
[Pages 57900-57904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28558]
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[[Page 57901]]
DEPARTMENT OF AGRICULTURE
Federal Crop Insurance Corporation
7 CFR Part 400
RIN 0563-AB08
General Administrative Regulations; Reinsurance Agreement--
Standards for Approval
AGENCY: Federal Crop Insurance Corporation.
ACTION: Final rule.
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SUMMARY: The Federal Crop Insurance Corporation (``FCIC'') hereby
amends its General Administrative Regulations, effective for the 1997
and succeeding reinsurance years, by revising the general
qualifications for being awarded a Standard Reinsurance Agreement. The
intended effect of this rule is to provide additional information and
amended procedures so that FCIC can more accurately identify those
insurance companies experiencing a significant weakening in financial
conditions.
EFFECTIVE DATE: November 24, 1995.
FOR FURTHER INFORMATION CONTACT: Diana Moslak, Regulatory and
Procedural Development Staff, Federal Crop Insurance Corporation, U.S.
Department of Agriculture, Washington, D.C. 20250. Telephone (202) 254-
8314.
SUPPLEMENTARY INFORMATION: This action has been reviewed under United
States Department of Agriculture (``USDA'') procedures established by
Executive Order 12866 and Departmental Regulation 1512-1. This action
does not constitute a review as to the need, currency, clarity, and
effectiveness of these regulations under those procedures. The sunset
review date established for these regulations is March 31, 1999.
This rule has been determined to be ``exempt'' for the purposes of
Executive Order 12866 and, therefore, has not been reviewed by the
Office of Management and Budget (``OMB'').
This rule does not contain information collection requirements that
require approval by OMB under the Paperwork Reduction Act of 1995 (44
U.S.C. chapter 35).
It has been determined under section 6(a) of Executive Order 12612,
Federalism, that this rule does not have sufficient federalism
implication to warrant the preparation of a Federalism Assessment. The
provisions and procedures contained in this rule will not have a
substantial direct effect on states or their political subdivisions, or
on the distribution of power and responsibilities among the various
level of government.
This regulation will not have a significant impact on a substantial
number of small entities. This action does not increase the paperwork
burden on the reinsured company because the reinsured company must
already provide the additional information required by this regulation
to the state in which it is licensed. Therefore, this action is
determined to be exempt from the provisions of the Regulatory
Flexibility Act (5 U.S.C. 605) and no Regulatory Flexibility Analysis
was prepared.
This program is listed in the Catalog of Federal Domestic
Assistance under No. 10.450.
This program is not subject to the provisions of Executive Order
12372 which require intergovernmental consultation with state and local
officials. See the Notice related to 7 CFR part 3015, subpart V,
published at 48 FR 29115, June 24, 1983.
The Office of the General Counsel has determined that these
regulations meet the applicable standards provided in subsections 2(a)
and 2(b)(2) of Executive Order 12778. The provisions of this rule are
not retroactive and will preempt state and local laws to the extent
such state and local laws are inconsistent herewith. The administrative
appeal provisions contained in the Standard Reinsurance Agreement must
be exhausted before judicial action may be brought.
This action is not expected to have any significant impact on the
quality of the human environment, health, and safety. Therefore,
neither an Environmental Assessment nor an Environmental Impact
Statement is needed.
Background
On Tuesday, June 14, 1994, FCIC published a proposed rule in the
Federal Register at 59 FR 30533 proposing to amend the General Crop
Insurance Regulations, subpart L, Reinsurance Agreement; Standards for
Approval by revising the general qualification requirements for being
awarded a Standard Reinsurance Agreement (Agreement).
Following publication of the proposed rule, the public was afforded
15 days to submit written comments, data, and opinions. The comments
received and FCIC responses are as follows:
Comment: Two comments, one from an insurance company and one from a
legal firm, stated that the proposed regulations would greatly increase
the insurance company's paperwork burden and would have a significant
adverse economic effect on a substantial number of small entities and
should, therefore, require a Regulatory Flexibility Analysis and be
subject to the provisions of the Regulatory Flexibility Act.
Response: The information required by these regulations is
currently required by and filed with the state insurance departments
where a company is licensed. With the exception of the requirements
contained in Sec. 400.171, financial reports not currently prepared by
an insurance company will not be requested unless determined to be
critical to the qualification process. This action will not have a
significant economic impact on small entities and their ability to
compete. These regulations are the basis of company financial condition
evaluation to ensure that the obligations to both the policyholder and
FCIC are met, regardless of the company's size.
Comment: Two comments, one from an insurance company and one from
the parent company of an insurance company, objected to the required
submission of an annual Generally Accepted Accounting Principles (GAAP)
financial statement stating that this would be an additional burden and
cost if the insurance company does not prepare financial statements in
accordance with GAAP.
Response: FCIC agrees with the comment and has removed
Sec. 400.170(e) (5) and (6). As a result of this change,
Sec. 400.170(e)(7) is redesignated as Sec. 400.170(e)(6). However,
these and other statements may be requested by FCIC under
Sec. 400.170(e)(6).
Comment: One comment from a professional association stated that
the definition of Annual Statutory Financial Statement in
Sec. 400.161(a) should be clarified as it appears that a new audit is
required. They also stated that the term ``certified'' in Sec. 400.171
should be replaced by ``audited'' and that ``in accordance with
generally accepted auditing standards'' should be included when making
reference to a Certified Public Accountant audit.
Response: FCIC has revised the definition of ``Annual Statutory
Financial Statement'' and added Sec. 400.170(e)(5) the ``Annual Audited
Financial Report'' prepared by an independent Certified Public
Accountant and filed with the state insurance department as prescribed
in the National Association of Insurance Commissioners Property and
Casualty Annual Statement Instructions. The other recommended revisions
have also been made.
Comment: One comment from a professional association stated that
the requirement proposed in Sec. 400.170(e)(6) for an ``Audited Annual
Report to Shareholders'' should be restated as
[[Page 57902]]
``Annual Report to Shareholders'' because the report itself is not
audited but rather the financial statements included in the report.
Response: FCIC agrees with the comment and the requirement
contained in Sec. 400.170(e)(6) has been removed.
Comment: Four comments, two from insurance companies, one from a
legal firm and one from the parent company of an insurance company,
stated that proposed regulations favor large multiple line companies
when there is no valid correlation between a company's size and its
financial soundness. The ratio results for a company writing primarily
crop insurance business may be adversely impacted due to the unique
nature of crop insurance, compared to a company writing standard
property and casualty lines for which these ratios were developed.
Response: FCIC disagrees with the comment. The proposed regulations
incorporate the use of financial ratios which are calculated from the
Annual Statutory Financial Statement. The ratios are a quantitative
measure of potential financial weakness regardless of company size.
FCIC is aware that the insurance lines of business a company writes may
impact the ratio results and gives a company the opportunity to address
this impact under Sec. 400.172(a).
Comment: Two comments, one from an insurance company and one from a
legal firm stated that the statement in Sec. 400.170(d), ``and comply
with Sec. 400.172.'' was illogical.
Response: The proposed language in Sec. 400.170(d) contained a
typographical error and has been changed to read ``or comply with
Sec. 400.172.''
Comment: Four comments, two from insurance companies, one from a
legal firm and one from the parent company of an insurance company,
questioned requiring the Gross Premium to Surplus ratio when the
reinsured company does not have the option of rejecting MPCI business,
and FCIC as a reinsurer is not considered a collection risk.
Response: FCIC agrees with the comment and has defined ``Gross
Premium'' in the Gross Premium to Surplus ratio in Sec. 400.162(c) as
the company's gross premium adjusted to exclude MPCI premium assumed by
FCIC. The reduction in a company's gross premium by the amount assumed
by FCIC will give a more accurate measure of a company's reliance on
commercial reinsurance.
Comment: Two comments, one from an insurance company and one from a
legal firm, objected to requiring the two ratios--Gross Premium to
Surplus of less than 900% and Net Premium to Surplus of less than
300%--stating that no single ratio should be weighted more than
another.
Response: FCIC disagrees with the comment. The MPUL calculation
determines the amount of MPCI premium and associated liability a
company may retain based on policyholder surplus. The Gross Premium to
Surplus and Net Premium to Surplus ratios measure the adequacy of
surplus to absorb above-average losses considering the company's total
book of business, exclusive and inclusive of the effects of
reinsurance. A company's surplus exposure must be addressed considering
its use in ratio and MPUL calculations.
Comment: Two comments, one from an insurance company and one from a
legal firm, objected to the requirement that a company satisfy at least
10 of the 15 optional ratios, stating that a company ``should have the
opportunity to explain non-compliance and should not be automatically
eliminated for failure to meet ten of the ratios.''
Response: FCIC disagrees with the comment. Failure to meet the
requirements of Sec. 400.170(d) does not automatically eliminate a
company from participating in the MPCI program. Section 400.172 allows
a company the opportunity to address the ratios failed in
Sec. 400.170(d). If a company meets the requirements of Sec. 400.172,
the company may continue to participate in the MPCI program.
Comment: Three comments, one from an insurance company, one from a
legal firm and one from the parent company of an insurance company,
objected to the Maximum Possible Underwriting Loss (MPUL) calculation
provided in Sec. 400.170(c) and its interpretation by FCIC. They stated
that using MPUL to determine adequate surplus level was inconsistent
with basic insurance underwriting principles, and that revising the
MPUL to maximum probable underwriting loss would be more reasonable.
Response: FCIC disagrees with the comment. The proposed MPUL
calculation adequately considers MPCI loss potential, over-lapping of
reinsurance years, and a company's geographic spread of risk.
Comment: Two comments, one from an insurance company and one from a
legal firm, addressed FCIC's statement in the background section of the
proposed rule referencing the current surplus requirement that, if a
reinsured company underwrites only MPCI and crop hail insurance, both
liabilities would be considered in calculating the minimum required
surplus. They stated there was no rational basis for including crop
hail liabilities in the MPUL calculation when a company writes only
crop hail and MPCI business, while using only MPCI liabilities for
companies writing multiple lines.
Response: FCIC agrees with the comment and will not consider crop-
hail, or any other lines of business in the MPUL calculation. All other
lines of business written by a company will be analyzed to determine
their impact on the ratio results of Sec. 400.170(d), and the company's
overall financial condition.
In addition to the changes indicated in the responses to comments,
FCIC has made the following changes:
l. The definition of ``financial statement'' contained in
Sec. 400.161 was not removed as proposed but revised to mean ``any
documentation submitted by a company as required by this subpart''.
2. A definition for ``Quarterly Statutory Financial Statement'' was
added to Sec. 400.161 to facilitate its use in Sec. 400.170(c).
3. The definitions of ``Current Assets'', ``Current Liabilities'',
and ``Non-affiliated Company'' were removed from Sec. 400.161 because
these terms are no longer used in this subpart.
4. Section 400.163 has been revised to reflect that these
regulations are ``effective for the 1997 and subsequent reinsurance
years''.
5. In Sec. 400.170(c) ``MPUL for the gross premium'' was replaced
with ``MPUL for the company's estimated retained premium'' to be
consistent with the MPUL definition.
6. In Sec. 400.170(c) ``all its reinsured gross premium'' was
replaced with ``all its reinsured retained premium'' to accurately
represent geographic spread of risk.
7. The proposed Secs. 400.162(d) and 400.170(d)(xii) were deleted
after determining them to be non-essential.
Accordingly, the rule, ``General Crop Insurance Regulations;
Reinsurance Agreement--Standards for Approval'' published at 59 FR
30533 as revised and set out below is hereby adopted as final rule.
List of Subjects in 7 CFR Part 400
Crop insurance.
Final Rule
Accordingly, pursuant to the authority contained in the Federal
Crop Insurance Act, as amended (7 U.S.C. 1501 et seq.) the Federal Crop
Insurance Corporation hereby amends 7 CFR part 400, subpart L of the
General Administrative Regulations, effective for the 1997 and
succeeding reinsurance years, as follows:
[[Page 57903]]
PART 400--GENERAL ADMINISTRATIVE REGULATIONS
Subpart L--Reinsurance Agreement--Standards for Approval;
Regulations for the 1997 and Subsequent Reinsurance Years
1. The authority citation for 7 CFR part 400, subpart L is revised
to read as follows:
Authority: 7 U.S.C. 1506(l).
2. The heading for part 400, subpart L is revised as set forth
above.
3. Section 400.161 is amended by removing paragraphs (c), (d) and
(j); redesignating paragraphs (a) and (b), (e) through (i), (k) and
(l), and (m) through (o), as paragraphs (b) and (c), (d) through (h),
(i) and (j), and (l) through (n), respectively; and revising
redesignated paragraph (e) and adding new paragraphs (a) and (k) to
read as follows:
Sec. 400.161 Definitions.
* * * * *
(a) Annual Statutory Financial Statement means the annual financial
statement of an insurer prepared in accordance with Statutory
Accounting Principles and submitted to the state insurance department
if required by any state in which the insurer is licensed.
* * * * *
(e) Financial statement means any documentation submitted by a
company as required by this subpart.
* * * * *
(k) Quarterly Statutory Financial Statement means the quarterly
financial statement of an insurer prepared in accordance with Statutory
Accounting Principles and submitted to the state insurance department
if required by any state in which the insurer is licensed.
* * * * *
4. Section 400.162 is revised to read as follows:
Sec. 400.162 Qualification ratios.
The sixteen qualification ratios include:
(a) Eleven National Association of Insurance Commissioner's
(NAIC's) Insurance Regulatory Information System (IRIS) ratios found in
Secs. 400.170(d)(1)(ii) and 400.170(d)(2) (i), (ii), (iii), (vi),
(vii), (ix), (xi), (xii), (xiii), and (xiv) and referenced in ``Using
the NAIC Insurance Regulatory Information System'' distributed by NAIC,
120 West 12th St., Kansas City, MO 64105-1925;
(b) Three ratios used by A.M. Best Company found in
Sec. 400.170(d)(2) (v), (viii), and (x) and referenced in Best's Key
Rating Guide, A.M. Best, Ambest Road, Oldwick, N.J. 08858-0700;
(c) One ratio found in Sec. 400.170(d)(1)(i) is calculated the same
as the Gross Premium to Surplus IRIS ratio, with Gross Premium adjusted
to exclude the MPCI premium assumed by FCIC; and
(d) One ratio found in Sec. 400.170(d)(2)(iv) which is formulated
by FCIC and is calculated the same as the One-Year Change to Surplus
IRIS ratio but for a two-year period.
5. Section 400.163 is revised to read as follows:
Sec. 400.163 Applicability.
The standards contained herein shall be applicable to insurers who
apply for or enter into a Standard Reinsurance Agreement effective for
the 1997 and subsequent reinsurance years or who continue with a prior
years Standard Reinsurance Agreement into the 1997 and subsequent
reinsurance years.
6. Section 400.170 is revised to read as follows:
Sec. 400.170 General qualifications.
To qualify initially or thereafter for a Standard Reinsurance
Agreement with FCIC, an insurer must:
(a) Be licensed or admitted in any state, territory, or possession
of the United States;
(b) Be licensed or admitted, or use as a policy-issuing Company an
insurer that is licensed or admitted, in each state from which the
insurer will cede policies to FCIC for reinsurance;
(c) Have surplus, as reported in its most recent Annual or
Quarterly Statutory Financial Statement, that is at least equal to the
MPUL for the company's estimated retained premium proposed to be
reinsured, multiplied by the appropriate Minimum Surplus Factor found
in the Minimum Surplus Table. For the purposes of the Minimum Surplus
Table, an insurer is considered to issue policies in a state if at
least two and one-half percent (2.5%) of all its reinsured retained
premium is written in that state;
Minimum Surplus Table
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Minimum
surplus
Number of states in which a company issues FCIC-reinsured factor
policies (multiplied
by MPUL)
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1 through 10............................................... 2.5
11 or more................................................. 2.0
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(d) Have and meet the ratio requirements of the Gross Premium to
Surplus and Net Premium to Surplus required ratios and at least ten of
the fourteen analytical ratios in this section based on the most recent
Annual Statutory Financial Statement, or comply with Sec. 400.172:
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Ratio Ratio requirement
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(1) Required:
(i) Gross Premium to Surplus.......... Less than 900%.
(ii) Net Premium to Surplus........... Less than 300%.
(2) Analytical:
(i) Two-Year Overall Operating Ratio.. Less than 100%.
(ii) Agents' Balances to Surplus...... Less than 40%.
(iii) One-Year Change in Surplus...... Greater than -10% and less
than 50%.
(iv) Two-Year Change in Surplus....... Greater than -10%.
(v) Combined Ratio After Policyholder Less than 115%.
Dividends.
(vi) Change in Writing................ Greater than -33% and less
than 33%.
(vii) Surplus Aid to Surplus.......... Less than 15%.
(viii) Quick Liquidity................ Greater than 20%.
(ix) Liabilities to Liquid Asset...... Less than 105%.
(x) Return on Surplus................. Greater than -5%.
(xi) Investment Yield................. Greater than 4.5% and less
than 10%.
(xii) One-Year Reserve Development to Less than 20%.
Surplus.
(xiii) Two-Year Reserve Development to Less than 20%.
Surplus.
(xiv) Estimated Current Reserve Less than 25%.
Deficiency to Surplus.
------------------------------------------------------------------------
(e) Submit to FCIC all of the following statements:
(1) Annual and Quarterly Statutory Financial Statements;
(2) Statutory Management Discussion & Analysis;
(3) Most recent State Insurance Department Examination Report;
(4) Actuarial Opinion of Reserves;
(5) Annual Audited Financial Report; and
(6) Any other appropriate financial information or explanation of
IRIS ratio discrepancies as determined by the company or as requested
by FCIC.
7. Section 400.171 is revised to read as follows:
[[Page 57904]]
Sec. 400.171 Qualifying when a state does not require that an Annual
Statutory Financial Statement be filed.
An insurer exempt by the insurance department of the states where
they are licensed from filing an Annual Statutory Financial Statement
must, in addition to the requirements of Sec. 400.170 (a), (b), (c) and
(d), submit an Annual Statutory Financial Statement audited by a
Certified Public Accountant in accordance with generally accepted
auditing standards, which if not exempted, would have been filed with
the insurance department of any state in which it is licensed.
8. Section 400.172 is revised to read as follows:
Sec. 400.172 Qualifying with less than two of the required ratios or
ten of the analytical ratios meeting the specified requirements.
An insurer with less than two of the required ratios or ten of the
analytical ratios meeting the specified requirements in Sec. 400.170(d)
may qualify if, in addition to the requirements of Sec. 400.170 (a),
(b), (c) and (e), the insurer:
(a) Submits a financial management plan acceptable to FCIC to
eliminate each deficiency indicated by the ratios, or an acceptable
explanation why a failed ratio does not accurately represent the
insurer's insurance operations; or
(b) Has a binding agreement with another insurer that qualifies
such insurer under this subpart to assume financial responsibility in
the event of the reinsured company's failure to meet its obligations on
FCIC reinsured policies.
Sec. 400.173 [Reserved]
9. Section 400.173 is removed and reserved.
Sec. 400.174 [Amended]
10. In Sec. 400.174, the words ``financial statement'' are revised
to the plural form ``financial statements''.
Sec. 400.175 [Amended]
11. In Sec. 400.175(a), the words ``financial statement'' are
revised to the plural form ``financial statements''.
Sec. 400.177 [Reserved]
12. Section 400.177 is removed and reserved.
Done in Washington, D.C., on November 9, 1995.
Kenneth D. Ackerman,
Manager, Federal Crop Insurance Corporation.
[FR Doc. 95-28558 Filed 11-22-95; 8:45 am]
BILLING CODE 3410-FA-P
