General Administrative Regulations; Nonstandard Underwriting Classification System

DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Part 400

RIN 0563-AB05

General Administrative Regulations; Nonstandard Underwriting

Classification System

AGENCY: Federal Crop Insurance Corporation, USDA.

ACTION: Final rule.

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SUMMARY: Federal Crop Insurance Corporation (FCIC) finalizes amendments

to subpart O of the General Administrative Regulations, effective with

the 1998 (1999 for Texas and Arizona/California Production Citrus) and

succeeding crop years. This amendment is intended to clarify the effect

of the nonstandard underwriting classification system (NCS) and to

ensure that NCS is applied to all producers in a fair and consistent

manner.

EFFECTIVE DATE: May 28, 1997.

FOR FURTHER INFORMATION CONTACT: Bill Smith, Supervisory Insurance

Management Specialist, Research and Development, Product Development

Division, Federal Crop Insurance Corporation, United States Department

of Agriculture, 9435 Holmes Road, Kansas City, MO 64131, telephone

(816) 926-7743.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

The Office of Management and Budget (OMB) has determined this rule

to be not significant for the purposes of Executive Order 12866 and,

therefore, has not been reviewed OMB.

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).

[[Page 22874]]

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 and 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 the private sector. Thus, 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

policies 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

levels of Government.

Regulatory Flexibility Act

This regulation will not have a significant impact on a substantial

number of small entities. New provisions in the rule will not impact

small entities to a greater extent than larger entities. NCS program

determinations are applied to all producers on a county basis and

affect only a small number of producers (approximately 1 percent of all

insureds). 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

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 judicial action may be brought.

Environmental Evaluation

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.

National Performance Review

The regulatory action is being taken as part of the National

Performance Review Program to eliminate unnecessary regulations and

improve those that remain in force.

Background

On Thursday, November 7, 1996, FCIC published a proposed rule in

the Federal Register at 61 FR 57595-57597 to amend the General

Administrative Regulations (7 CFR part 400, subpart O) to be effective

for the 1998 (1999 for Texas and Arizona/California Production Citrus)

and succeeding crop years. Following publication of that proposed rule,

the public was afforded 60 days to submit written comments and

opinions. A total of 22 comments were received from the crop insurance

industry and FCIC. The comments received and FCIC responses are as

follows:

Comment: One comment received from FCIC recommended that the

Summary, Background, and List of Subjects statements be clarified by

changing references to ``Texas and Arizona/California Citrus'' to

``Texas and Arizona/California Production Citrus'' and adding

``sugarcane'' to the list of crops for which this subpart applies for

the 1999 crop year. These changes would correspond with the usage of

``production'' and ``sugarcane'' in the definition of ``NCS base

period.''

Response: The referenced statements specify the crop year this

subpart is to be effective based on the crop year and contract change

date contained in the applicable crop provisions. Since citrus trees

and citrus production have different crop year definitions and contract

change dates, FCIC will add ``production'' to eliminate any possible

confusion regarding the crops affected by these statements. Under the

policy provisions for sugarcane, this rule is applicable to the 1998

crop year which is consistent with the applicable effective dates

specified in this rule as currently written. The exceptions made for

crops such as sugarcane in the definition of the ``NCS base period''

are necessary due to the availability of insurance experience data and

are not related to the effective date of this subpart. Therefore, no

change will be made regarding the addition of ``sugarcane'' to these

statements.

Comment: One comment received from FCIC questioned if insurance

experience under the Group Risk Protection plan of coverage should be

specifically excluded in this subpart from insurance experience based

on the individual producer.

Response: FCIC agrees with the comment and will amend Sec. 400.301

to limit this subpart's effect to producers whose insurance coverage or

indemnities are based on determinations applicable to the individual

insured rather than determinations made on a county or area basis.

Comment: One comment received from the crop insurance industry

inquired how FCIC considered certain types of indemnities in making NCS

determinations.

Response: FCIC provided language in its definition of ``insurance

experience'' that permits adjustment for certain types of indemnities

and for the exclusion of replant payments for purposes of NCS

selection, as applicable. Limiting the effect of certain losses, which

do not clearly establish nonstandard risks, produce more accurate NCS

determinations consistent with the purpose for which NCS was developed.

Comment: One comment received from the crop insurance industry

recommended that the reference to ``a significant contribution'' in the

definition of ``actively engaged in farming'' was too broad and

subjective.

Response: FCIC agrees and will change the definition from ``a

significant contribution'' to ``a contribution,'' reflecting the

current definition before the term ``significant'' was added.

Comment: One comment received from the crop insurance industry

recommended ``applicable adjustments'' contained in the definition of

``insurance experience'' be specified.

Response: FCIC believes it is better to reference experience

adjustments in broad terms as stated in the proposed definition to

maintain flexibility in managing the effects of different loss

conditions on insurance experience. Adjustments are made to limit the

effect of losses caused by wide-spread crop failures caused by one or

more perils affecting a large number of producers or other similar

situations determined by FCIC to not reflect nonstandard risks. The

impact of such adjustments is to improve identification of persons who

represent nonstandard risks. Therefore, no change will be made.

[[Page 22875]]

Comment: One comment received from FCIC recommended the definition

of ``insurance experience'' be revised to remove the language which

excludes replant payments from consideration in determining insurance

experience.

Response: FCIC believes that replant payments should not be

considered in determining insurance experience for NCS selection

purposes. FCIC provides replant payments to defray costs incurred by

insureds replanting an insured crop damaged by insured causes,

necessary to keep insurance in force or to reduce any future

indemnities. Considering such payments when identifying insureds with

nonstandard risks would be inequitable when FCIC requires or encourages

replanting as a means to promote a sounder insurance program.

Therefore, no change will be made.

Comment: One comment received from FCIC recommended that the

definition of ``NCS base period'' be changed to establish the base

period for raisins as the 10 crop year period ending immediately

preceding the crop year the NCS classification becomes effective.

Response: The NCS base period ends 2 or 3 crop years (depending on

the crop) prior to the effective NCS crop year to assure that all

insurance experience records are available to meet NCS determination

and notification requirements prior to the contract change date for

each crop. The NCS base period, as defined, meets this requirement.

Therefore, no change will be made.

Comment: One comment received from the crop insurance industry

recommended the definition of ``NCS base period'' not specify

individual crops by base period. Changes in the crops listed would

cause the definition to be inaccurate.

Response: FCIC agrees with this comment and will revise the

definition to provide crop exceptions on the Special Provisions.

Comment: One comment received from FCIC suggested that the

definition of ``NCS base period'' did not agree with the example

contained in the definition.

Response: FCIC agrees and has amended the provisions accordingly.

Comment: One comment received from FCIC suggested that section

400.303(a) (1) and (4) were mathematically redundant.

Response: The selection criteria contained in Sec. 400.303(a) (1)

and (4) would provide the same effect if, for example, the number of

indemnified losses in the NCS base period equals three and the loss

frequency is set at 30 percent. However, other frequency percentages

are permitted under this subpart. FCIC currently uses 60 percent. The

number of indemnified losses will also vary. In either case, each

criteria impacts the NCS selection process differently. Therefore, no

change will be made.

Comment: Two comments received from FCIC recommended the reference

to ``cumulative indemnities'' and ``cumulative loss ratio'' contained

in Secs. 400.303 (a)(2) and (b)(5) be changed to ``cumulative adjusted

indemnities'' and ``cumulative adjusted loss ratio'' to reflect

adjustments to indemnities FCIC may make under certain circumstances.

Response: Section 400.303(a) states that nonstandard classification

procedures apply when all of the insurance experience criteria,

including any adjustments to insurance experience which may be made

under Sec. 400.300(c), have been met. However, since the insurance

experience for individual producers or individual crop years may not

qualify for insurance experience adjustment, it would be incorrect to

add the term ``adjusted'' as recommended by the respondent. Therefore,

no change will be made.

Comment: One comment received from FCIC recommended deleting

Sec. 400.303(a)(3) due to its inconsistency with Sec. 400.307,

Discontinuance of participation which, other than as excepted, requires

continued insurance experience to be eligible for removal from NCS.

Response: FCIC agrees and will delete paragraph (a)(3) and

redesignate paragraphs (a)(4) and (5) as (a)(3) and (4) and correct

other section references accordingly.

Comment: Two comments received from FCIC concerning

Sec. 400.303(a)(5)(ii) questioned the necessity and advisability of

providing notification in the Special Provisions of changes increasing

the minimum standards for certain selection criteria contained in this

section.

Response: Sec. 400.303 establishes minimum NCS selection criteria

which the public is notified through the rule making process. Certain

criteria are allowed to increase above the minimum standards, reducing

the probability of selection for NCS adjustments. However, such

increases can only be applicable if the criteria stated in

Sec. 400.303(a) are met and such decisions will be made on a county by

county basis. The Special Provisions, which are part of the insurance

contract and contain those terms and conditions specific to the county,

are the appropriate documents to contain such increases which reduce

the probability of selection for NCS. All increases will apply to all

producers in the county. For any change in the selection criteria

contained in this section that may result in an increased probability

of selection for NCS, FCIC will make such changes through the

rulemaking process. Therefore, no change will be made.

Comment: One comment received from FCIC recommended Sec. 400.303(c)

describe how indemnities are adjusted and reference the procedures and

methods used by FCIC in its determinations and their availability to

the public.

Response: FCIC believes Sec. 400.303(c) adequately describes

indemnity adjustments. Complete details are contained in procedures

FCIC develops and publishes. This information is available for public

inspection on request. FCIC will amend the rule to determine where such

procedures will be available.

Comment: One comment received from FCIC recommended the last

sentence of Sec. 400.303(c) be changed to use a means other than the

Special Provisions to provide for alternate methodologies of

establishing crop disaster adjustments to insurance experience.

Response: FCIC believes the Special Provisions, which are part of

the insurance contract and contain those terms and conditions specific

to the county, are the appropriate documents to provide for such

alternatives. Therefore, no change will be made.

Comment: Two comments received from the crop insurance industry

regarding Sec. 400.305 suggested that FCIC implement measures using

social security (SSN) or employer identification numbers (EIN) to

correctly identify persons affected by NCS and to assure applicable

coverage or rate classifications were used to establish liability and

premium. Limiting the availability of optional units was also suggested

as another way to improve insurance experience.

Response: FCIC currently identifies persons listed on NCS through

the use of SSN and EIN's. Changing the availability of optional units

would represent a significant change and require an additional comment

period to allow interested parties to consider the effects of this

change. Therefore, no change will be made to the present rule. However,

consideration will be given to this recommendation in any future change

to this subpart.

Comment: One comment received from the crop insurance industry

recommended NCS classifications under Sec. 400.305(c) should not be

assigned to identified insurable acreage or to specific crop practices,

types, varieties, options, or amendments.

[[Page 22876]]

Response: FCIC believes that assigning NCS classifications to

identified insurable acreage or by practice, type, variety, option, or

amendment rather than to a person only or to all crop production

alternatives for the crop is fair and equitable. Where adverse

insurance experience can be attributed to a specific land location or

crop production choice, appropriate coverage or rating actions should

be targeted at those conditions. Therefore, no change will be made.

Comment: One comment received from FCIC recommended Sec. 400.307 be

changed to eliminate the reinstatement requirement for persons who are

removed from the NCS listing after stopping all farm operations and

then begin farming again at some later time. Such determinations would

be difficult to make and there was uncertainty about when the

reinstatement would be effective.

Response: FCIC agrees that reinstatements may be difficult to

administer timely. FCIC will amend Sec. 400.307 to state that the

person will continue to be listed on the NCS list in the county until

the producer has ceased participation in the crop insurance program as

a policyholder or person with a substantial beneficial interest in a

policyholder for as least 10 consecutive crop years. NCS adjustments

applicable to such persons will remain in effect in accordance with

Sec. 400.307.

Comment: One comment received from FCIC recommended language be

added to Sec. 400.309 referencing applicable appeals regulations issued

or being developed by the National Appeals Division or FCIC.

Response: Producers are notified of their selection for NCS

adjustments and of their rights to reconsideration under Sec. 400.309

(a) through (d). Once FCIC has completed its appeals procedures,

producers will be provided with a right to appeal under such

regulations. Until such time, FCIC will amend Sec. 400.309 to add

paragraph (e) stating that the producer's rights to appeal will be

provided under 7 CFR part 11.

In addition to the changes described above, FCIC has made the

following changes to this subpart:

1. Clarified the definition of ``indemnified loss'' by changing

``total adjusted indemnity'' to ``total indemnity''. Any applicable

adjustments to indemnities for purposes of this definition are provided

in the definition of insurance experience.

2. Clarified the definition of ``insurance experience'' by

rearranging ``(applicable adjustments)'' and ``(but not including

replant payments).'' This change will clarify that adjustments may be

made in premiums, indemnities, and other data but that replant payments

are not included in indemnities used for NCS selection purposes.

3. Corrected Sec. 400.305(b) to replace the reference to subpart J

with 7 CFR part 11.

List of Subjects in 7 CFR Part 400

Crop insurance, Nonstandard Underwriting Classification System.

Final Rule

Accordingly, for the reasons set forth in the preamble, the Federal

Crop Insurance Corporation hereby amends 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).

2. Section 400.301 is revised to read as follows:

Sec. 400.301 Basis, purpose, and applicability.

The regulations contained in this subpart are issued pursuant to

the Federal Crop Insurance Act, as amended (7 U.S.C. 1501 et seq.), to

prescribe the procedures for nonstandard determinations and the

assignment of assigned yields or premium rates in conformance with the

intent of section 508 of the Act (7 U.S.C. 1508). These regulations are

applicable to all policies of insurance insured or reinsured by the

Corporation under the Act and on those policies where the insurance

coverage or indemnities are based on determinations applicable to the

individual insured. These regulations will not be applicable to any

policy where the amount of coverage or indemnities are based on the

experience of the area.

3. Section 400.302 is amended to remove all paragraph designations

and the definition of ``base period;'' definitions of ``actively

engaged in farming'' and ``insurance experience'' are revised; and

definitions of ``earned premium,'' ``indemnified loss,'' ``NCS,'' and

``NCS base period'' are added to read as follows:

Sec. 400.302 Definitions.

* * * * *

Actively engaged in farming means a person who, in return for a

share of profits and losses, makes a contribution to the production of

an insurable crop in the form of capital, equipment, land, personal

labor, or personal management.

* * * * *

Earned premium means premium earned (both the amount subsidized and

the amount paid by the producer, but excluding any amount of the

subsidy attributed to the operating and administrative expenses of the

insurance provider) for a crop under a policy insured or reinsured by

the Corporation.

* * * * *

Indemnified loss means a loss applicable for the policy for any

year during the NCS base period for which the total indemnity exceeds

the total earned premium. If the person has insurance for the crop in

more than one county for any crop year, indemnities and premiums will

be accumulated for all counties for each crop year to determine an

indemnified loss.

Insurance experience means earned premiums, indemnities paid (but

not including replant payments), and other data for the crop (after

applicable adjustments), resulting from all of the insured's crop

insurance policies insured or reinsured by the Corporation for one or

more crop years and will include all information from all counties in

which the person was insured.

* * * * *

NCS means nonstandard classification system.

NCS base period means the 10 consecutive crop years (as defined in

the crop policy) ending 2 crop years prior to the crop year in which

the NCS classification becomes effective for all crops, except those

specified on the Special Provisions. For these excepted crops, the NCS

base period means the 10 consecutive crop years ending 3 crop years

prior to the crop year in which the NCS classification becomes

effective. For example: An NCS classification effective for the 1996

crop year against a producer of citrus production in Arizona,

California, and Texas, or sugarcane would have a NCS base period that

includes the 1984 through 1993 crop years. An NCS classification

effective for the 1996 crop year against a producer of all other crops

would have a NCS base period that includes the 1985 through 1994 crop

years.

* * * * *

4. Section 400.303 is amended by revising paragraph (a),

redesignating paragraph (b) as (c) and adding paragraphs (b), (d), and

(e) to read as follows:

[[Page 22877]]

Sec. 400.303 Initial selection criteria.

(a) Nonstandard classification procedures in this subpart initially

apply when all of the following insurance experience criteria

(including any applicable adjustment in Sec. 400.303(d)) for the crop

have been met:

(1) Three (3) or more indemnified losses during the NCS base

period;

(2) Cumulative indemnities in the NCS base period that exceed

cumulative premiums during the same period by at least $500;

(3) The result of dividing the number of indemnified losses during

the NCS base period by the number of years premium is earned for that

period equals .30 or greater; and

(4) Either of the following apply:

(i) The natural logarithm of the cumulative earned premium rate

multiplied by the square root of the cumulative loss ratio equals 2.00

or greater; or

(ii) Five (5) or more indemnified losses have occurred during the

NCS base period and the cumulative loss ratio equals or exceeds 1.50.

(b) The minimum standards provided in paragraphs (a) (2), (3), and

(4) of this section may be increased in a specific county if that

county's overall insurance experience for the crop is substantially

different from the insurance experience for which the criteria was

determined. The increased standard will apply until the conditions

requiring the increase no longer apply. Any change in the standards

will be contained in the Special Provisions for the crop.

* * * * *

(d) Insurance experience for the crop will be adjusted, by county

and crop year, to discount the effect of indemnities caused by

widespread adverse growing conditions. Adjustments are determined as

follows:

(1) Determine the average yield for the county using the annual

county crop yields for the previous 20 crop years, unless such data is

not available;

(2) Determine the normal variability in the average yield for the

county, expressed as the standard deviation;

(3) Subtract the result of Sec. 400.303(d)(2) from

Sec. 400.303(d)(1);

(4) Divide the annual crop yield for the county for each crop year

in the NCS base period by the result of Sec. 400.303(d)(3), the result

of which may not exceed 1.0;

(5) Subtract the result of Sec. 400.303(d)(4) for each crop year

from 1.0;

(6) Multiply the result of Sec. 400.303(d)(5) by the liability for

the crop year; and

(7) Subtract the result of Sec. 400.303(d)(6) from any indemnity

for that crop year.

(e) FCIC may substitute the crop yields of a comparable crop in

determining Sec. 400.303(d) (1) and (2), or may adjust the average

yield or the measurement of normal variability for the county crop, or

any combination thereof, to account for trends or unusual variations in

production of the county crop or if the availability of yield and loss

data for the county crop is limited. Information about how these

determinations are made is available by submitting a request to the

FCIC Regional Service Office for the producer's area. Alternate methods

of determining the effects of adverse growing conditions on insurance

experience may be implemented by FCIC if allowed in the Special

Provisions.

5. Section 400.305 is amended by revising paragraph (b) and the

introductory text of paragraph (c) to read as follows:

Sec. 400.305 Assignment of Nonstandard Classification.

* * * * *

(b) Nonstandard classification assignment will be made each year,

for the year identified on the assignment forms, and are not subject to

change under the provisions of this subpart by the Corporation for that

year when included in the actuarial tables for the county, except as a

result of a request for reconsideration as provided in section 400.309,

or as the result of appeals under 7 CFR part 11.

(c) A nonstandard classification may be assigned to identified

insurable acreage; a person; or to a combination of person and

identified acreage for a crop or crop practice, type, variety, or crop

option or amendment whereby:

* * * * *

6. Section 400.307 is revised to read as follows:

Sec. 400.307 Discontinuance of participation.

If the person has discontinued participation in the crop insurance

program, the person will still be included on the NCS list in the

county until the person has discontinued participation as a

policyholder or a person with a substantial beneficial interest in a

policyholder for at least 10 consecutive crop years. The most recent

nonstandard classification assigned will be continued from year to year

until participation has been renewed for at least one crop year and at

least three years of insurance experience have occurred in the current

base period. A nonstandard classification will no longer be applicable

to the person or the person on identified acreage if the Corporation

determines the person is deceased.

7. Section 400.309 is amended by revising paragraph (a), removing

paragraph (e), and redesignating paragraph (f) as (e) and revising

newly redesignated paragraph (e) to read as follows:

Sec. 400.309 Requests for reconsideration.

(a) Any person to be assigned a nonstandard classification under

this subpart will be notified of and allowed not less that 30 days from

the date notice is received to request reconsideration before the

nonstandard classification becomes effective. The request will be

considered to have been made when received, in writing, by the

Corporation.

* * * * *

(e) Any person not satisfied by a determination of the Corporation

upon reconsideration may further appeal under the provisions of 7 CFR

part 11.

Signed in Washington, DC, on April 23, 1997.

Suzette M. Dittrich,

Deputy Manager, Federal Crop Insurance Corporation.

[FR Doc. 97-10890 Filed 4-25-97; 8:45 am]

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