General Crop Insurance Regulations; Reinsurance Agreement Standards for Approval

DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Part 400

General Crop Insurance Regulations; Reinsurance Agreement--

Standards for Approval

AGENCY: Federal Crop Insurance Corporation, USDA.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Federal Crop Insurance Corporation (FCIC) proposes to

amend the General Crop Insurance Regulations, effective for the 1995

and succeeding reinsurance years to revise the general qualifications

for being awarded a Standard Reinsurance Agreement. This rule intends

to provide additional information so that FCIC can more accurately

identify those insurance companies at risk of bankruptcy.

DATES: Written comments pursuant to this rule must be received by June

29, 1994.

ADDRESSES: Comments pursuant to this proposal should be sent to Mari

Dunleavy. Regulatory and Procedural Development Staff, Federal Crop

Insurance Corporation, U.S. Department of Agriculture, Washington, DC,

20250. Hand messenger delivery may be made to, Suite 500, 2101 L

Street, NW., Washington, DC. Comments received may be viewed and copied

at Suite 503, 2101 L Street, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Mari Dunleavy, Regulatory and Procedural Development Staff, Federal

Crop Insurance Corporation, U.S. Department of Agriculture, Washington,

DC, 20250, telephone (202) 254-8450.

SUPPLEMENTARY INFORMATION: This action has been reviewed under USDA

procedures established by Departmental Regulation 1512-1. This action

does not constitute a review as to the need, currency, clarity, and

effectiveness of this regulation under those procedures. The sunset

review date established for these regulations is March 31, 1999.

This rule has been determined not significant for purposes of

Executive Order 12866 and, therefore, has not been reviewed by the

Office of Management and Budget.

This action will not have a significant economic effect 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 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 requires 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.

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.

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 located at 7 CFR 400.169, must be exhausted before

judicial action may be brought.

Since reinsured companies must already provide the additional

information required by the proposed rule to the state which licenses

them, this proposed rule does not contain information collections that

require clearance by the Office of Management and Budget under the

provisions of 44 U.S.C. chapter 35, the Paperwork Reduction Act.

It has been determined under section 6(a) of Executive Order 12612,

Federalism, that this proposed rule does not have sufficient federalism

implications to warrant the preparation of a Federalism Assessment. The

policies and procedures contained in this rule will not have

substantial direct effects on states or their political subdivisions,

or on the distribution of power and responsibilities among the various

levels of government.

Background

The standard requirements for being eligible to obtain a Standard

Reinsurance Agreement (Agreement) with FCIC are found in 7 CFR 400,

subpart L, and currently require that a reinsured company pass eight

out of eleven National Association of Insurance Commissioners (NAIC)

Insurance Regulatory Information System (IRIS) ratios. These ratios are

meant to be an early warning device, alerting state regulators to

insurance companies that may be in financial distress. These ratios are

indicators that evaluate changes in an insurance company's financial

condition. This rule proposes that FCIC add six additional radios to

the current eleven IRIS ratios to improve the overall evaluation of a

reinsured company's financial condition, to require the reinsured

company to explain discrepancies in all ratios, and to provide a

financial plan to overcome each discrepancy. The additional ratios

include one new IRIS ratio, Gross Premium to Surplus, three ratios used

by A.M. Best (Combined Ratio After Policyholder Dividends, Quick

Liquidity, and Return on Surplus) found in Best's Key Rating Guide, a

Two-Year Change to Surplus Ratio developed by FCIC which calculates the

same as the One-Year Change to Surplus IRIS ratio but for a two-year

period; and a Net Change in Cash and Short-Term Investments ratio also

developed by FCIC to measure net cash flow development.

Thirty-three profitability, leverage, liquidity, and loss reserve

ratios were calculated by FCIC for each current reinsured company.

These calculations include both (NAIC), (IRIS), and A.M. Best ratios

representing the current industry standard with which the reinsured

company should be familiar. While it is proposed that only selected

ratios will be used to determine eligibility, all ratios are available

for financial analysis. The data required to complete the ratio

calculations are derived from the Statutory Annual Financial Statement

submitted by the reinsured company to the state insurance departments

and FCIC. However, FCIC may supplement financial information contained

in the Statutory Annual Financial Statement with information obtained

from other audited or unaudited financial statements prepared in

accordance with Generally Accepted Accounting Principles.

The ratios were evaluated to determine which ratios within each

category best represent Multiple Peril Crop Insurance (MPCI) liability

and its impact on insurance companies. The selection criteria included

factors such as the short-term nature and annual cash flow cycle of

MPCI insurance, and the varying size and business mix of the insurance

company. For each ratio an acceptable range was established to

determine whether a company passed or failed the ratio.

The current surplus requirement utilizes a Minimum Surplus Factor

which limits a reinsured company's liability under the MPCI program

based on the surplus available to the reinsured company. The

liabilities of other lines of business written by the reinsured company

are generally not considered. However, if a reinsured company

underwrites only MPCI and crop-hail insurance, both liabilities will be

considered. Since much of FCIC's MPCI insurance is delivered by

insurers that write considerable premium and policies in the crop-hail

market, increased evaluation using additional ratios for evaluating and

comparing each company's financial integrity is necessary.

Seventeen ratios were selected for the general qualifications,

including the eleven present NAIC IRIS ratios. Company profitability is

measured by the following six ratios: Combined Ratio After Policyholder

Dividends, Two-Year Overall Operating, One-Year Change in Surplus, Two-

Year Change in Surplus, Return on Surplus, and Investment Yield. The

profitability on an MPCI reinsured company is dependent on company

underwriting practices, catastrophic loss experience and recovery, and

its ability to generate an adequate return on investments.

A reinsured company's liquidity and cash management are measured by

the following four ratios: Agents' Balances to Surplus, Quick

Liquidity, Liabilities to Liquid Assets, and Net Change in Cash and

Short-Term Investments. The combination of varying annual loss

experience, loss payout to premium collection time frame, and MPCI

accounting procedures, require the company maintain sufficient

liquidity. Cash and short-term investment management is a key factor in

maintaining sufficient liquidity and meeting current obligations.

The four leverage ratios used are: Gross Premium to Surplus, Net

Written Premium to Surplus, Change in Net Writings, and Surplus Aid to

Surplus. These measures will indicate if a reinsured company may be

overexposing their surplus to risk variation and reinsurance

dependency. The three loss reserve ratios used are: One-Year Reserve

Development to Surplus, Two-Year Reserve Development to Surplus, and

Estimated Current Reserve Deficiency to Surplus. These ratios determine

if reserves have been understated to increase surplus and to estimate

current reserve adequacy.

Section 400.173 is removed as it is not necessary after revising

Subpart L to determine if the insurer is otherwise financially sound.

If an insurer does not pass the required ratios and submits a financial

plan that does not alleviate discrepancies in the required ratios, the

reinsured company will be considered not financially sound and will not

be awarded a Standard Reinsurance Agreement.

All participating insurance companies in the crop insurance

industry have been fully advised of the content of this proposed rule

during the preparation stage and in fact have participated in

developing this rule. Since the rule must be effective prior to the

effective date of the Standard Reinsurance Agreement (July 1, 1994), it

has been determined that for good cause, a 15 day comment period is

sufficient. In May, FCIC held a meeting for the express purpose to

introduce and discuss the SRA and its standards for approval prior to

its publication. All parties interested in the SRA were invited. Prior

to its publication, a copy of this rule was sent to all persons

interested in the crop insurance program.

List of Subjects in 7 CFR Part 400

Crop Insurance.

Proposed 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 proposes to amend 7 CFR part 400, subpart

L of the General Administrative Regulations effective for the 1995 and

succeeding reinsurance years as follows:

1. The authority citation for 7 CFR part 400, subpart L is revised

to read as follows:

Authority: 7 U.S.C. 1501-1520.

2. The heading for subpart L is revised to read as follows:

Subpart L--Reinsurance Agreement--Standards for Approval

3. Section 400.161 is amended by removing paragraph (f),

redesignating paragraphs (a) through (e) as paragraphs (b) through (f),

and adding a new paragraph (a) 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 does business, and the

subsequent Audited Financial Report filed with the state insurance

department as prescribed in the National Association of Insurance

Commissioners Property and Casualty Annual State Instructions. These

statement are to be audited by an independent Certified Public

Accountant.

* * * * *

4. Section 400.162 is revised to read as follows:

Sec. 400.162 Qualification ratios.

The seventeen qualification ratios include:

(a) Twelve National Association of Insurance Commissioner's (NAIC)

Insurance Regulatory Information System (IRIS) ratios found in

Sec. 400.170(d)(1) (i) and (ii) and Sec. 400.170(d)(2) (i), (ii),

(iii), (vi), (vii), (ix), (xi), (xiii), (xiv), and (xv) 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)(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; and

(d) One ratio found in Sec. 400.170(d)(2)(xii) which is also

formulated by FCIC by dividing the net change in cash and short-term

investments by the cash and short-term investment balance for the prior

year.

5. 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 a licensed or admitted insurer 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 Statutory

Financial Statement, that is at least equal to the MPUL for the gross

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 (2.50%) of all its

reinsured gross premium is written in that state;

(d) Have and meet the ratio requirement of Gross Premium to Surplus

and Net Written Premium to Surplus and at least ten of the fifteen

optional ratios in this section based on the most recent Annual

Statutory Financial Statement, and comply with Sec. 400.172:

------------------------------------------------------------------------

Ratio Ratio requirement

------------------------------------------------------------------------

(1) Required:

(i) Gross Premium to Surplus.......... Less than 900%.

(ii) Net Written Premium to Surplus... Less than 300%.

(2) Optional:

(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 Writings............... 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 Assets..... Less than 105%.

(x) Return on Surplus................. Greater than -5%.

(xi) Investment Yield................. Greater than 4.5%.

and less than 10%.

(xii) Net Change in Cash/Short-Term Greater than -20%.

Investments.

(xiii) One-Year Reserve Development to Less than 20%.

Surplus.

(xiv) Two-Year Reserve Development to Less than 20%.

Surplus.

(xv) Estimated Current Reserve Less than 25%.

Deficiency to Surplus.

------------------------------------------------------------------------

(e) Submit to FCIC all of the following statements:

(1) Annual Statutory Financial Statements;

(2) Statutory Management Discussion & Analysis;

(3) Most recent State Insurance Department Examination Report;

(4) Actuarial Opinion of Reserves;

(5) Annual GAAP Statement or Form 10K (does not apply to Mutual

Insurance Companies);

(6) Audited Annual Report to Shareholders; and

(7) Any other appropriate financial information or explanation of

IRIS ratio discrepancies as determined by the company or as requested

by FCIC.

6. Section 400.171 is revised to read as follows:

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 state from

submitting an Annual Statutory Financial Statement must, in addition to

the requirements of Sec. 400.170(a),(b),(c),(d), and (e), submit an

Annual Statutory Financial Statement certified by a Certified Public

Accountant, which if not exempted, would have been filed with the

insurance department of any state in which it does business.

7. Section 400.172 is revised to read as follows.

Sec. 400.172 Qualifying with less than twelve ratios meeting the

specified requirements.

An insurer with less than twelve ratios meeting the requirements

contained in Sec. 400.170 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 provide an

acceptable explanation if any failed ratio is not relevant to 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 [Removed]

8. Section 400.173 is removed and reserved.

Sec. 400.174 [Amended]

9. In Section 400.174, the words ``financial statement'' are

removed and the words ``Annual Statutory Financial Statement'' are

added in their place.

Sec. 400.175 [Amended]

10. In Section 400.175(a), the words ``financial statement'' are

removed and the words ``Annual Statutory Financial Statement or

Financial Statement'' are added in their place.

Done in Washington, DC on June 2, 1994.

Kenneth D. Ackerman,

Manager, Federal Crop Insurance Corporation.

[FR Doc. 94-14296 Filed 6-13-94; 8:45 am]

BILLING CODE 3410-08-M