[Federal Register Volume 63, Number 170 (Wednesday, September 2, 1998)]
[Proposed Rules]
[Pages 46703-46705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23523]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 63, No. 170 / Wednesday, September 2, 1998 /
Proposed Rules
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DEPARTMENT OF AGRICULTURE
Federal Crop Insurance Corporation
7 CFR Part 400
RIN 0563-AB66
General Administrative Regulations; Nonstandard Underwriting
Classification System
AGENCY: Federal Crop Insurance Corporation, USDA.
ACTION: Proposed rule.
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SUMMARY: The Federal Crop Insurance Corporation (FCIC) proposes to
remove and reserve Subpart O of the General Administrative Regulations,
effective for the 2000 (2001 for Texas and Arizona and California
Citrus) and succeeding crop years. This proposed action is intended to
eliminate the unintended adverse effects of the Nonstandard
Underwriting Classification System (NCS), simplify and update program
underwriting rules consistent with the program's current and future
anticipated experience, and to ensure that crop insurance premiums are
applied to all producers in a fair and consistent manner.
DATES: Written comments and opinions on this proposed rule and related
preliminary cost-benefit analysis will be accepted until close of
business October 19, 1998 and will be considered when the rule and
cost-benefit analysis are to be made final.
ADDRESSES: Interested persons are invited to submit written comments to
the Director, Claims and Underwriting Services Division, Risk
Management Agency, United States Department of Agriculture, 1400
Independence Avenue, S.W., STOP 0803, room 6749-S, Washington, D.C.,
20250-0803. A copy of each response will be available for public
inspection and copying from 7:00 a.m. to 4:30 p.m., EDT, Monday through
Friday, except holidays, at the above address.
FOR FURTHER INFORMATION CONTACT: For further information and a copy of
the preliminary cost-benefit analysis to the General Administrative
Regulations; Nonstandard Underwriting Classification System, contact
Michael F. Hand, Director, Claims and Underwriting Services Division,
Risk Management Agency, at the Washington, D.C. address listed above,
telephone (202) 720-3439.
SUPPLEMENTARY INFORMATION:
Executive Order 12866
The Office of Management and Budget (OMB) has determined this rule
to be economically significant and, therefore, this rule has been
reviewed by OMB.
Cost-Benefit Analysis
A preliminary cost-benefit analysis has been completed and is
available to interested persons at the address listed above. The
preliminary cost-benefit analysis summarizes the impact of the rule in
the following manner:
(1) NCS first was established in 1991 as an effort to control
losses attributed to persons whose insurance experience differed
materially from the norm for an area. For a number of reasons, it has
come under criticism;
(2) A review of the current NCS process determined that it cannot
meet desired performance goals under any circumstances. Therefore, a
replacement is needed;
(3) Recent actuarial research and premium rate models developed for
other products indicate that the current actuarial processes used by
FCIC do not produce an adequate premium rate for yields lower than the
county average in many situations, especially when the county average
premium rate is relatively low. A simulation of the effects of higher
premium rates at the lower yields indicates that the NCS-rated premiums
paid by the few NCS individuals who chose to insure can be replaced. In
addition, additional premiums will be collected from persons who have
not yet been detected by the NCS, thereby reducing the number of
persons who might qualify even if NCS were continued;
(4) This analysis concludes that the benefits of the current NCS
are extremely small in terms of recovering accrued losses paid by
individuals who are selected under it. It is a labor-intensive system
that requires substantial resources, both computer and human, to
operate. It adds complexity to the delivery of the crop insurance
product. In the aggregate, the benefits are small compared to the
resources expended for its operation; and
(5) The proposed alternative process is consistent with the
mandates of the Federal Crop Insurance Act that require simplification
of the program to the maximum extent while assuring actuarial
soundness. More producers will be affected in any year under the
alternative, but many of these producers ultimately may have been
selected under the NCS after 3 or more losses had occurred. The
alternative targets specific units that may be the primary cause of
losses rather than affecting the entire operation of individuals. It
does not create the stigma currently associated with the NCS. The
alternative is demonstrated to be actuarially sound, with the effect of
reducing excess losses currently carried in the baseline. This
reduction in excess losses offsets additional subsidies to producers
and insurance providers that result from the change. The additional
cost to producers occurs solely because those persons selected for the
NCS now overwhelmingly elect to cancel insurance coverage rather than
pay the sharply higher premiums that are imposed under it.
FCIC encourages and welcomes any comments you may have with respect
to the preliminary cost-benefit analysis findings. Before publishing
the final rule, FCIC will complete a final cost-benefit analysis and
your comments will be taken into consideration in developing that final
cost-benefit analysis.
Paperwork Reduction Act of 1995
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).
Unfunded Mandates Reform Act of 1995
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public
Law 104-4, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments or the private sector. This rule contains no Federal
mandates (under the regulatory provisions of title II of the UMRA) for
State, local, and tribal governments or
[[Page 46704]]
the private sector. Therefore, this rule is not subject to the
requirements of sections 202 and 205 of the UMRA.
Executive Order 12612
It has been determined under section 6(a) of Executive Order 12612,
Federalism, that this rule does not have sufficient federalism
implications to warrant the preparation of a Federalism Assessment. The
provisions 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 levels of
government.
Regulatory Flexibility Act
This regulation will not have a significant economic impact on a
substantial number of small entities. NCS program determinations are
applied equally to all producers on a county basis and affect only a
small number of policyholders (approximately 1-2 percent of all
policyholders nationwide). Further, since this rule proposes to
eliminate the NCS program, the burden on the insurance providers will
be significantly reduced. 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.
Federal Assistance Program
This program is listed in the Catalog of Federal Domestic
Assistance under No. 10.450.
Executive Order 12372
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.
Executive Order 12988
This rule has been reviewed in accordance with Executive Order
12988 on civil justice reform. The provisions of this rule will not
have a retroactive effect. The provisions of this rule will preempt
State and local laws to the extent such State and local laws are
inconsistent herewith. The administrative appeal provisions published
at 7 CFR part 11 must be exhausted before any action against FCIC for
judicial review may be brought.
Environmental Evaluation
This action is not expected to have a 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
FCIC proposes to remove and reserve the General Administrative
Regulations (7 CFR part 400, subpart O; Nonstandard Underwriting
Classification System) effective for the 2000 (2001 for Texas and
Arizona and California Citrus) and succeeding crop years.
NCS began as an underwriting process in 1991 to identify those
insureds who were collecting a disproportionate percentage of all crop
insurance indemnities and individually adjust their coverages and rates
to offset their higher risk. NCS has been used to avoid inequitable,
across-the-board rate increases which would otherwise be required to
achieve actuarial sufficiency.
Under NCS, rate increases can be substantial, and coverage
reductions severe, depending upon an insured's loss experience.
Insureds selected may request a reconsideration, followed by two levels
of appeal. The insured also retains recourse to formal litigation.
Insureds are selected for NCS based on loss frequency and loss
severity as compared with general crop insurance experience in the
area. An insured must have at least three years of insurance experience
in which indemnities exceed the annual premiums paid by the producer.
Loss years also must represent 60 percent or more of the years the
person was insured during the 10-year base period. To meet the loss
severity requirement, the insured generally must have an ``adjusted
loss ratio'' (a loss ratio adjusted to account for different premium
rate levels) of 2.0 or greater. Loss severity requirements are
established by crop and region to recognize different premium rate
levels between different crops and regions.
The NCS process is standardized to ensure equitable treatment of
all insureds. Disaster adjustment procedures have been developed to
recognize catastrophic conditions affecting crop production. Under this
process, the loss history of the insured is adjusted when area-wide
disasters affect crop production. For years in which the county yield
deviates greatly from the long-term county average, a factor is
determined to reduce the amount of indemnity which is used for NCS
purposes for that crop year, thus mitigating the effect of widespread
crop disasters.
NCS has been criticized by producers and their representatives for
several years and became a major issue with the repetitive floods in
the Upper Midwest and multi-year droughts in the Southwest. Complaints
have included claims that the current NCS procedures: (1) do not
adequately exclude widespread causes of loss (disaster adjustment) as
intended; (2) fail to recognize diverse conditions within a county; (3)
unfairly impact new or marginally profitable insureds caught by
repetitive disasters; (4) set too high a premium for those insureds
listed; and (5) are applied unfairly to non-NCS insureds through share
arrangements with insureds selected for NCS. Additionally, the current
NCS process can be complicated to explain to the insureds and their
agents who service crop insurance policies. The NCS process is also
labor intensive for RMA and insurance providers at a time of
increasingly smaller budgets and reduced resources. Reducing or
eliminating program regulations that provide little benefit or can be
accomplished through other more appropriate or cost efficient means is
consistent with the Federal Crop Insurance Act requirement for
simplification and the Administration's emphasis for regulatory
reduction.
On Wednesday, September 17, 1997, FCIC published an Advanced Notice
of Proposed Rulemaking (ANPR) in the Federal Register at 62 FR 48798 to
announce a public comment period and to seek comments from the public
on options to improve NCS. Following publication of the ANPR, the
public was afforded 30 days to submit written comments and opinions.
Twenty-two comments were received from crop insurance agents,
producers, insurance providers, and producer associations in response
to the ANPR.
Three comments received from a crop insurance agent and insurance
provider were substantive and contained proposals that were considered
in the review process. The proposals included using a yield floor
surcharge as a means of increasing rates for producers with below
average production histories and a recommendation to reinstate
experience tables, which had been used in the past to surcharge
insurance premiums on the basis of the producer's loss ratio.
Additionally, nine comments recommended that NCS be eliminated
altogether, six suggested that a moratorium be imposed while further
study was conducted, four noted that the current actual production
history (APH) program sufficiently addresses adverse crop insurance
loss experience, and one did not address NCS specifically, advocating a
production expense insurance plan in place of the current crop
insurance program.
[[Page 46705]]
FCIC stated in the advanced notice that if NCS were eliminated,
with no additional action taken for adverse loss experience, the
average policy premium would have to increase by $78 to offset NCS
losses not currently used to calculate premium rates. FCIC's objective
has been to derive an alternative that would result in an equitable
process to charge appropriate premiums for insureds with adverse
experience, but not to the extent of the premium increases that can
result under the current NCS program.
The current APH process assesses higher premiums on insureds with
lower than average yields. Three comments suggested that the APH
process could be used to offset the increased rates that would be
necessary if NCS were abolished. RMA analyses conducted during the
development of the Revenue Assurance crop insurance program, and
separately in a study conducted by Millman and Robertson (a consulting
actuarial firm), indicate a need to raise the rates for insureds with
lower than average yields. RMA has reviewed its current APH program and
developed an alternative rating methodology to adjust premium rates for
below average yields to compensate for the additional risk associated
with adverse loss experience. RMA recognizes that further analysis and
study had to be completed of NCS producers and their adverse experience
to determine the impact on the crop insurance program.
A recommendation from the ANPR relating to yield floor surcharges
suggested that rates should be increased based on the number of times
producers fall below the yield floor. For the major crops, premium
rates are calculated on the actual APH yield, recognizing the risk for
that yield (for other crops, there are procedures that apply a 5
percent surcharge to the applicable rates found on the actuarial table
in order to accomplish the same result). The comment to the ANPR
suggested that for every succeeding year a producer falls below the
floor, the premium surcharge would be raised to recognize the increased
risk associated with lower actual yields.
RMA examined increasing premium rates based on the producer's lower
APH yields and using a yield floor surcharge to determine if this
process would adequately address the need for increased premiums to
account for adverse loss histories based on the frequency and severity
of losses. Surcharges based on the frequency with which floor yields
apply are not effective because they would not serve to simplify
administration of the crop insurance program and could penalize
insureds under prolonged and unfavorable growing conditions. The
administrative complexities of this suggestion outweighed the expected
program benefits.
By February 1998, RMA had completed the final review of the NCS
program. The results indicated that modifying the existing NCS
regulations would not address most of the criticism. The review also
confirmed that the overall impact of NCS was relatively small. For the
1997 crop year, NCS was applied to approximately 50,000 crop policies,
equaling 1-2 percent of the total crop policies nationwide. NCS
included approximately $2.2 billion (about 2 percent of the total) in
liability and $0.9 billion (nearly 10 percent of the total ) in losses
during the life of the program.
The review indicated that NCS had been applied to only a small
percentage of the total number of insureds who had collected at least
three losses, had adverse loss ratios, and were responsible for a
significant share of the losses paid. The analysis also indicated that
the number of active NCS policies had declined 52 percent from 1996 to
1997 (4,800 to 2,300) and that the liability associated with NCS
policies declined from $37 million in 1996 to only $20 million in 1997.
The results indicated that many insureds selected for NCS canceled
their insurance policies because, in general, NCS was applied after
losses had reached a point where the cost was too high for these
insureds to continue to participate in the program. The conclusion was
that any replacement to NCS must intervene more quickly before losses
are too great to expect recovery.
The Federal Crop Insurance Act, as amended, directs the premium
rate to be adequate to cover anticipated losses and a reasonable
reserve. Program improvements, including revised APH procedures,
improved policy underwriting, updated T-yields, other actuarial
modifications, and improved producer tracking implemented since 1991
have corrected many of the problem areas that created the need for NCS.
In order to correct the identified NCS deficiencies, RMA determined
that any rate adjustment must fit the existing actuarial structure,
avoid excessive operational changes, and promote simplification, as
mandated by the Federal Crop Insurance Act.
When the existing NCS regulation is removed, RMA will replace NCS
with an alternative rating system that increases the rate for insureds
with lower than average yields in recognition of the additional risk
associated with these insureds. This change in the rating process will
be more proactive in recognizing situations which may result in adverse
loss experience and determining a rate appropriate for these
situations.
By using an alternative that simply requires adjustment to the
current rating methodology as a replacement for NCS, the proposed
removal of the NCS regulation can be implemented beginning with crops
planted in the fall of 1998. The general financial impact on insureds
will be variable (but generally moderate) rate increases for those
units with lower than average yields. More specific details on the
financial impact of this action can be found in the ``cost-benefit
analysis'.
By implementing this alternative rating process, RMA will: (1)
eliminate the ``lag'' year currently included in the process; (2) make
adjustments automatic, thereby improving the process for insureds,
agents, and RMA; (3) incorporate the adjustments into the actuarial
tables, which will eliminate the currently maintained lists and
required notification requirements; (4) calculate adjustments on a unit
rather than policyholder basis; and (5) increase premiums less abruptly
once adjustments are triggered.
List of Subjects in 7 CFR Part 400
Crop insurance, Nonstandard Underwriting Classification System.
Proposed Rule
Accordingly, for the reasons set forth in the preamble, the Federal
Crop Insurance Corporation hereby proposes to amend 7 CFR part 400,
subpart O, as follows:
PART 400--GENERAL ADMINISTRATIVE REGULATIONS
Subpart O--Nonstandard Underwriting Classification System;
Regulations for the 1991 and Succeeding Crop Years
1. The authority citation for 7 CFR part 400, subpart O, is revised
to read as follows:
Authority: 7 U.S.C. 1506(1), 1506(p).
Secs. 400.301-400.309 (Subpart D) [Removed and Reserved]
2. In part 400, subpart O is removed and reserved.
John Zirschky,
Acting Manager, Federal Crop Insurance Corporation.
[FR Doc. 98-23523 Filed 9-1-98; 8:45 am]
BILLING CODE 3410-08-P Department
