Arguments for Terminating the Premium Reduction Plan (PRP)

PRP Requires Resources and Expertise that RMA Does Not Have

RMA does not have a history of regulating market or price-based competition. The RMA Administrator testified to this experience condition. He further stated that resources may have to be transferred from other activities. No analysis has been conducted regarding resource demands of an industry wide PRP program nor the type of resources required to effectively regulate market competition among the private sector participants in the delivery of the federal crop insurance program, which contains many objectives not totally consistent with the normal and usual functioning of a market.

PRP Can Not Assure Universal Availability

The statue states that for an approved insurance provider (AIP) to be authorized to reduce or discount crop insurance premiums, the AIP must “provide insurance more efficiently than the expense reimbursement amount…”  A business efficiency is about improving the input / output ratio. For the federal crop insurance program, simply cutting agent commissions, as the one PRP approved company is doing, will not improve a company’s input / output ratio. The act of cutting agent commissions simply reduces the insurance company’s expenses and the result is reduced service to farmers—some farmers somewhere—because the insurance agency does not have as much money for selling and servicing expenses.  Thus, PRP does not meet a fundamental and historical objective of the program and requirement of the law—universal availability.

PRP Will Change the Crop Insurance Agent Structure

The administrative and operating (A&O) reimbursement amount provided to the private sector delivery industry has already been reduced from more than 32 percent when the law authorizing discounts was enacted in 1994 to about 21 percent today. The current A&O reimbursement level eliminates any realistic and broad based opportunity for insurance companies to effectively and continuously implement a crop insurance delivery strategy designed to reach all farmers in a state at a total cost that is significantly less. Small family farms pay premiums that are, in many if not most cases, below the total sales and servicing cost. In the crop insurance industry it is a well known fact that, within a reasonable margin, total selling and servicing cost is the same for small and large farmers or, in other words, small and large policies. Without the PRP program, agencies have been able to remain in business, while continuing to serve small farmers, by maintaining a mix of customers, where the larger and more profitable accounts more than offset the losses from small accounts. With a PRP program in operation where there are no true business efficiencies in practice and RMA does not force service to all farmers in a state, there will be cherry-picking of the larger farmers who pay premiums with commissions above total selling and servicing cost. In this market environment, agencies not following the business practice of excluding at least some small accounts will not be economically competitive and will go out of business. Additionally, some companies will simply leave certain high risk, high loss states in a move to protect profitability and, thereby, reduce competition for the crop insurance business in these states.

PRP As Currently Regulated By RMA Is Discriminatory

The current implementation of a premium discounting plan by one small company that is new to the industry is not forcing the company to market with equal resources and effort to all farmers in the approved trade territory.  As a result, the company is being allowed to discriminate against small farmers, especially farmers in higher risk areas and farmers who are not in the market for policies that carry large premiums.  Although the historical practice and program requirement has been to serve all farmers equally, the approved company for discounting premiums is being allowed to discriminate against small farmers by targeting farmers who are lower risk and make high premium payments. In fact, targeting large farmers was an objective included in their plan of work.

PRP Termination Does Not Put a Company Out of the Crop Insurance Business

To be an approved insurance provider (AIP) for the federal crop insurance program, a company must apply to and be approved by the Federal Crop Insurance Corporation (FCIC). Gaining AIP approval requires a company to satisfy and accept a number of terms and conditions that are specified in the Standard Reinsurance Agreement (SRA). None of these terms and conditions is associated with the Premium Reduction Plan (PRP). Therefore, terminating PRP does not put a company out of the crop insurance business.

AIPs earn the right to market PRP by demonstrating “the provider may provide insurance more efficiently than the expense reimbursement amount established by the Corporation.” With this level of demonstrated efficiency, a company should be among the most competitive AIPs in the industry. Termination of PRP has zero potential to impact adversely the efficiency of a provider to provide insurance. Therefore, a company should be of the same efficiency in providing insurance whether it has the right to market PRP or not since PRP is only concerned with the premium level or product price.

On the other hand, the loss of a monopoly position in providing insurance associated with the right to market PRP can impact the competitiveness of an insurance provider. However, any change in competitiveness is directly associated with the actual comparative efficiencies in providing insurance. Since monopoly positions can not be sustained, even with respect to PRP, a company that depends on this type of market protection runs the risk of being put out of business by competitors when the monopoly position is lost. But this outcome would have nothing to do with the loss of PRP. The result would be an effect of the loss of the monopoly position.

Conclusion

In conclusion, the effect of the deficiencies described in the proposed rule relative to establishing an ability and means of protecting the integrity of the federal crop insurance program and its mission to serve all farmers, together with RMA’s inability or lack of interest in enforcing the simple set of current premium discounting guidelines, combine to justify the indefinite extension or termination of the comment period and rule making procedure for the proposed rule relative to implementing and administering the so-called PRP program.