General Administrative Regulations; Nonstandard Underwriting Classification System

DEPARTMENT OF AGRICULTURE

Federal Crop Insurance Corporation

7 CFR Chapter IV

General Administrative Regulations; Nonstandard Underwriting

Classification System

AGENCY: Federal Crop Insurance Corporation, USDA.

ACTION: Advanced Notice of Proposed Rulemaking; Request for Comments.

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SUMMARY: This notice announces a public comment period on the

Nonstandard Underwriting Classification System (NCS) which is

administered by the Federal Crop Insurance Corporation (FCIC) in

conjunction with the Federal crop insurance program. The NCS program

compares an individual producer's crop loss history with the losses for

the producer's county. If the producer exceeds the level of loss

frequency and severity set by FCIC, the producer's rates and coverages

are adjusted to bring the policy into line with FCIC's statutory

mandate to implement an actuarially sound crop insurance program.

Concurrently, the loss histories for these NCS producers are removed

from the accumulated program statistics which are used to set the

insurance rates for the remainder of the policyholder population. This

has the effect of moderating rate increases for the majority of

producers by making high loss producers responsible for paying more

premium based on their individual risk.

A number of interested parties, including producer groups and

insurance agent associations, have indicated that NCS does not treat

producers fairly and that it does not correctly identify those

producers who represent greater risk to the crop insurance program

based on their individual loss histories. These comments have come at a

time when FCIC is seeking ways to improve the NCS process relative to

reducing the administrative burden of the program. In its current form,

NCS creates a significant amount of work to review individual producers

who are selected under the current NCS regulations.

FCIC is soliciting comments concerning improving NCS in a manner

consistent with the administration of an actuarially sound crop

insurance program.

DATES: Submit comments on or before October 17, 1997.

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 during regular business hours (7:00 a.m. to 4:30

p.m., Eastern Time, at the above address).

FOR FURTHER INFORMATION 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:

Title: Nonstandard Underwriting Classification System. 7 CFR part

400, subpart O.

Respondents/Affected Entities: Parties affected by the NCS process

and any changes which may occur as a result of this review include

producers, insurance companies reinsured by FCIC, and insurance agents.

Abstract: FCIC is conducting a review of the NCS program to address

reported and identified problems with the process as it currently

exists. FCIC had previously identified a need to change the system

consistent with a need to simplify the crop insurance program in

general and reduce the time and resources needed to administer NCS each

year. The goal was to identify advances in the availability of crop

insurance program data and computer processing capabilities and use

these improvements to automate the NCS process.

Subsequent to the start of the automation improvement effort, FCIC

began to receive comments regarding perceived problems with the NCS

selection process. For many producers in the Upper Midwest and

Southwest, 1997 was the third year of consecutive flooding or drought

respectively. Producers who had received crop insurance payments in

1995 and 1996 were concerned that the 1997 losses in conjunction with

any other loss history they had would result in their being placed on

NCS. Combined with the increasing emphasis being placed on crop

insurance by lending institutions, some producers worried that a sharp

increase in premium rates or adjustment to their coverage could

adversely impact their ability to obtain financing. Additional comments

received reflected concerns about the impact of NCS on new producers

and other situations which might be viewed as being unfair relative to

the NCS selection process.

FCIC is seeking public comment on a range of options being

considered to address the above stated issues. These options include

but are not limited to: (a) Eliminate the NCS program altogether; (b)

amend the current NCS program regulations as needed in order to address

identified issues (to include moderation of premium increases and

changes to recognize and exclude widespread disasters.); (c) implement

an entirely new NCS process that would segregate producers with

excessive crop insurance losses and rate their policies separate from

the mainstream producer population (proposals include the use of

premium adjustment tables to identify excessive ratios, using Actual

Production History (APH) yield floors to trigger higher premium rates,

or other means of identifying the frequency and severity of losses);

(d) maintain the current NCS program and adjust the process to achieve

administrative efficiencies and assure fair and equitable

determinations; and (e) place a two year moratorium on the current

regulation to delay adding any new NCS selections until acceptable

program changes can be implemented. If sufficient consensus exists,

FCIC would consider implementing the revised NCS process for the 1999

crop year.

Background: The NCS program was implemented in 1991 in response to

data analysis which showed that a relatively small number of crop

insurance policyholders were receiving as much as twenty-eight (28)

percent of the indemnities for the period reviewed. The purpose of NCS

was to isolate producers with adverse loss experience

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exceeding established limits and rate them separately from the rest of

the policyholder population. This concept is consistent with other

private and public insurance programs which have the means to identify

participants with high losses and separately rate them for the risk

associated with the losses they have incurred. In 1997 25,126 NCS

listings appeared on county crop actuarial documents. This number,

which is less than two percent of the policyholders with active crop

policies in 1996, includes producers no longer actively engaged in

farming, as well as duplicate names for those producers who farm

multiple crops or farm in more than one county. The list does not

include other persons who share in the crop with a NCS producer, but

who are required to pay the same NCS rates as the listed producer. The

primary benefit of the NCS program is that by individually rating high

loss producers under this process, FCIC is able to exclude their loss

histories from the premium rating formulas. It has been estimated that

on a crop policy basis, this saves non-NCS producers from five to nine

percent on the cost of their crop insurance coverage. It has also been

estimated that if NCS were eliminated, the reintroduction of the loss

history into the rating pool would result in across the board premium

increases for all non-NCS producers of $50 to $90 per crop policy

annually.

Under the current NCS regulations, producers are selected for NCS

adjustment if they meet the following criteria:

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

(The base period generally means ten consecutive crop years. The base

period for 1998 NCS selections is 1987-1996 for most crops.)

(2) Cumulative indemnities exceed same period cumulative premiums

by at least $1,000.

(3) A premium has been earned in at least one of the most recent 4

crop years in the base period.

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

the base period by the number of years premium is earned is equal to,

or greater than, .60.

(5) Either of the following apply:

(a) The ``Z'' score (a reference loss ratio used to ensure

comparability between producers) equals 2.00 or greater; or

(b) Five or more indemnified losses have occurred during the NCS

base period and the cumulative loss ratio equals 1.50 or greater.

The consecutive occurrence of widespread adverse weather conditions

in the Upper Midwest and Southwest, at the same time when changing U.S.

farm policy has increased producer's reliance on crop insurance, has

resulted in a greater awareness of the NCS program. Some producers are

concerned that their recent losses will be followed by selection for

NCS rate or coverage adjustments. This concern has also been echoed by

producer organizations and elected representatives. FCIC had formulated

a two tiered strategy to deal with these concerns. The short-term plan

was to thoroughly review the 1998 NCS selections to ensure that

producers who had been impacted by widespread disasters were not placed

on NCS based primarily on losses associated with the disasters. For the

longer term, FCIC was to survey interested parties about NCS and form a

work group to recommend changes to the NCS program for the 1999 crop

year. The survey was completed and the responses received reviewed. The

work group was not formed because of concerns relating to the Federal

Advisory Committee Act. Instead, FCIC has determined to seek public

comment regarding the NCS process through the Federal Register and this

notice. Comments received in response to the original survey will be

considered in conjunction with any comments received in response to

this notice.

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, this rule has not been reviewed by OMB.

Signed in Washington, D.C., on September 12, 1997.

Kenneth D. Ackerman,

Manager, Federal Crop Insurance Corporation.

[FR Doc. 97-24770 Filed 9-16-97; 8:45 am]

BILLING CODE 3410-08-P