MAD CROP INSURANCE

Rough Notes, Apr 2004 by Hennosy, Kevin P

The continuing saga of RMA and its war on crop insurance agents

Our friends at the Risk Management Agency (RMA) of the U.S. Department of Agriculture have done the impossible once more. The RMA has made the staid story of crop insurance interesting again.

The actions of the RMA call to mind a John F. Kennedy quotation. "There are three things that are real: God, human folly and laughter-the first two are beyond our comprehension, so we must do what we can with the third."

It is hard to see the hidden hand of God at the RMA today. Human folly is all too easy to see, so all we can do is laugh.

As readers may remember, the RMA tried to hand a sweetheart deal to a single managing general agent in December 2002. In a closed meeting, the RMA presented a Premium Discount Plan (PDP) to the crop insurance program board. The RMA designed the PDP in a way that drove business away from licensed crop insurance agents and funneled it through a single managing general agency at the head of an amateur distribution network.

In 2003, the Independent Insurance Agents and Brokers of America (IIABA) flexed its considerable political muscle. The IIABA pointed out that the RMA-implemented PDP violated the Standard Reinsurance Agreement (SRA), which governs the crop insurance program.

In the face of IIABA opposition, the managing general agent withdrew from the PDP. The RMA backed down. Beaten in round one, the RMA withdrew to its corner but did not throw in the towel.

States on board

The RMA looked for some assistance from the nation's state insurance commissioners and they got it. In September 2003, RMA Administrator Ross Davidson appeared before the National Association of Insurance Commissioners' (NAIC) Crop Insurance Working Group.

The Crop Insurance Working Group is one of the sleepier of the NAIC's lethargic committee system. At the September 2003 NAIC national meeting, the working group convened and heard a painfully dull dissertation on the need for "weather derivatives." The working group decided to write a white paper on how weather derivatives may transfer the risk of weather-related financial loss to capital markets-otherwise known as widows, orphans and retirement plans.

After the weather derivative part of the program drew to a close, Administrator Davidson spoke to the working group about the RMA's plan to expand the crop insurance program into all things agricultural. In particular, Davidson pointed to the RMA's intention to write coverage on livestock.

Davidson did not explain what drove this move to expand the program. He never pointed to examples of protest cattle drives down Pennsylvania Avenue to demand livestock coverage through the crop insurance program.

Red ink

One can only assume that the RMA simply targeted the expansion of coverage as a means to increase premium revenue. If no one has noticed, the banks of the Potomac have run full of red ink in recent years. The RMA may simply be looking for an infusion of revenue to make the books look better.

Insurance regulators know that a quick infusion of premium income does not come cheap. That premium brings risk of loss. A rapid expansion of coverage usually means a shoddy job of underwriting. In the long term, this type of growth can be the precursor of financial problems.

Now if an insurance company takes a similar step, the action will probably draw the attention of an insurance regulator. An influx of new business will trigger alarms when the company undergoes financial analysis through the NAIC Insurance Regulatory Information System (IRIS). That will result in a report to the insurer's domiciliary state. In many cases, that home state regulator will call the company management and ask what is going on. If he or she does not like management's answers, the insurance department will launch a financial examination. If the home state does not act, the NAIC's Financial Analysis Working Group (FAWG) will convene in secret session to question the domiciliary regulator. If the regulator still does not act, the FAWG can coordinate a multistate financial exam.

Of course, the RMA does not have to comply with the insurance regulatory framework.

Oversight of the RMA ranges from the detached to the captive. The Department of Agriculture and oversight committees in each house of Congress are supposed to provide oversight, but they rarely act until trouble hits the newspapers. The Federal Crop Insurance Corporation (FCIC) board of directors hold jurisdiction over the crop program but, like so many boards, this one seems management driven.

State insurance regulators do have a secondary level of oversight authority through licensing and financial reporting. The financial reporting rules brought Davidson to the NAIC Crop Insurance Working Group in September 2003. He asked the working group to expand the definition of crop insurance for financial reporting purposes.

The working group did not have jurisdiction over the definition that the RMA sought to expand. To amend that definition the NAIC had to amend the Annual Financial Statement (or Blank) Instructions.