SPEAKERS CONTENTS INSERTS
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REVIEW OF THE IMPLEMENTATION OF PUBLIC LAW 106224, THE AGRICULTURAL RISK PROTECTION ACT
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SEPTEMBER 27, 2000
Serial No. 10663
Printed for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
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LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska,
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH-HAGE, Idaho
JOHN N. HOSTETTLER, Indiana
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
KEN CALVERT, California
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
Page 3 PREV PAGE TOP OF DOCMICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
Page 4 PREV PAGE TOP OF DOCKEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
JOE BACA, California
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
C O N T E N T S
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, prepared statement
Clayton, Hon. Eva M., a Representative in Congress fro the State of North Carolina, submitted material
Combest, Hon. Larry, a Representative in Congress from the State of Texas, opening statement
Moran, Hon. Jerry, a Representative in Congress from the State of Kansas, letter of October 3, 2000 to Secretary Glickman
Pomeroy, Hon. Earl, a Representative in Congress from the State of North Dakota, submitted material
Page 5 PREV PAGE TOP OF DOC Stabenow, Hon. Debbie, a Representative in Congress from the State of Michigan, prepared statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, opening statement
Connealy, Michael, chief executive officer, Rural Community Insurance Services, Anoka, MN
Fulwider, Robert E., executive vice-president, Ray Wuestenberg Agency, Inc.
Glickman, Hon. Dan, Secretary, U.S. Department of Agriculture
Latham, Jess Benjamin, vice-president, Producers Lloyds, and chairman, American Association of Crop Insurers
Rutledge, Steven C., senior vice-president, Farmers Mutual Hail Insurance Co.
REVIEW OF THE IMPLEMENTATION OF PUBLIC LAW 106224, THE AGRICULTURAL RISK PROTECTION ACT
WEDNESDAY, SEPTEMBER 27, 2000
House of Representatives,
Committee on Agriculture,
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The committee met, pursuant to call, at 10:05 a.m., in room 1300, Longworth House Office Building, Hon. Larry Combest (chairman of the committee) presiding.
Present: Representatives Barrett, Boehner, Goodlatte, Smith, Lucas of Oklahoma, Hostettler, LaHood, Moran, Schaffer, Thune, Jenkins, Gutknecht, Walden, Hayes, Fletcher, Stenholm, Peterson, Clayton, Pomeroy, Holden, Bishop, Baldacci, Berry, McIntyre, Etheridge, John, Boswell, Phelps, Lucas of Kentucky, and Hill.
Staff present: Tom Sell, Jeff Harrison, David Ebersole, Alan Mackey, R. Bryan Daniel, Callista Gingrich, Wanda Worsham, clerk; Howard Conley, and John Riley.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. The hearing will come to order. I want to thank everyone and welcome all of our witnesses to the hearing today, and particularly Secretary Glickman for agreeing to testify.
Most Americans take insurance for granted, whether it be on their homes or cars or businesses. But this is not true for farmers. In fact, all private efforts to provide multi-peril crop insurance have failed due to the frequent and widespread nature of disasters. Indeed, without the Federal Crop Insurance Program, American farmers simply could not insure their crops. That is why the Federal Government plays a role in crop insurance. That is why crop insurance is a critical part of the farm safety net and that is why Congress passed the Agricultural Risk Protection Act.
Early last year, members of this committee rolled up their sleeves and began working with farmers of all crops from every region of the country to strengthen the crop loss side of the farm safety net. The fruits of this committee's labor are the most sweeping improvements to the Federal Crop Insurance Program in its 62-year history.
Page 7 PREV PAGE TOP OF DOC H.R. 2559s overwhelming and bipartisan approval, in both the House and the Senate, serves as an important reminder to all of us that American farmers win when Congress puts farmers first and partisan politics aside. As this committee sets its sights on strengthening the price side of the farm safety net, I am confident that that same kind of bipartisan cooperation can and will, once again, yield positive results for our Nation's farmers and ranchers.
However, before we move on to the challenges ahead, we must first tend to unfinished business. In passing H.R. 2559, Congress made a very substantial investment in the Federal Crop Insurance Program while at the same time providing the Department of Agriculture with the tools to protect this investment. Protecting this investment is the focus of this hearing.
During the development of H.R. 2559, farmers from all over the country expressed their deep concern that the Federal Crop Insurance Program is being abused. In response, Congress armed the Department of Agriculture with more than a dozen new and hard-hitting authorities to crack down on waste, fraud, and abuse. But none of these authorities can or will stop waste, fraud and abuse, unless and until they are effectively implemented and administered.
Today the committee will hear testimony from those who are ultimately responsible for these new antifraud provisions' degree of success. Having said that, I want to be very clear. We are not here today to pass the buck. We are here today to put our collective foot down on those who dare to rip off this program. The stakes are far too high to continue with business as usual. At best, if fraud, waste, and abuse are permitted to fuel premium inflation, our farmers stand to lose the benefit of lower insurance costs conferred on them by the legislation that we have passed. And, at worst, if fraud and waste and abuse are permitted to undermine public confidence, our farmers stand to lose a program that they can scarcely do without.
In the coming months, this committee will keep a sharp eye on the implementation and administration of the new antifraud provision contained in H.R. 2559 and even a sharper eye on the real results outlined in the Secretary's first report to Congress. I look forward to the testimony of our witnesses and to working with each of them, especially Secretary Glickman, in dealing with this issue head on. I recognize Mr. Stenholm for any comments.
Page 8 PREV PAGE TOP OF DOCOPENING STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. STENHOLM. Thank you, Mr. Chairman, and I commend you for holding the hearing today. And I want to also take this opportunity to thank the Secretary, Mr. Schumacher, and Mr. Ackerman for being here, being our first witnesses.
The Agriculture Risk Protection Act of 2000 is meant to reform the Nation's Crop Insurance Program. Specifically, it is intended to make crop insurance more affordable, while adding additional safeguards to combat fraud.
Today's hearing marks the first opportunity we have had to review the law's provisions to improve the integrity operations of the Crop Insurance Program. This includes review of the provisions to limit double insurance so that a producer cannot receive more than one indemnity on the same land in the same year. It also increases fines and penalties for those who supply false information in connection with a crop insurance policy, and requires producers to report actual acreage yields and production.
This law directs the Risk Management Agency, RMA, and the Farm Service Agency, FSA, to work together on annual basis to reconcile the accuracy of data submitted to the two agencies in connection with producer participation in crop insurance and other Federal farm programs. In addition, FSA is directed to establish a monitoring program and to assist RMA in combating abuse in the Crop Insurance Program.
And here I say, this to me is one of the most significant new provisions in the legislation that had we had this all along, I would say we would not have had near the problems we have had. But now that we have clearly in the law suggested very strongly that two Federal agencies work together, we should have an agreement on all parties that that is a step in the right direction.
Today's witnesses are here to discuss the implementation of the Agriculture Risk Protection Act and to offer their general opinions on the new law. I would like to request that the witnesses specifically address the following questions: (1) How soon will the administration and the industry be able to implement the law's requirements to reduce the opportunities for fraud and program abuse? (2) Are the administration and the insurance industry working together to develop means of complying with the new law's requirements? (3) Will the provisions designed to limit the payment of multiple indemnities in a single crop year be effective in reducing abuse? (4) Has the RMA taken the necessary procedures to make effective us the new role created by the law for the FSA? (5) Developing and promoting new and useful risk management tools is a key focus of the Agriculture Risk Protection Act. Is this goal consistent with the goal of improving program integrity, or will added program features provided added opportunities for program abuse?
Page 9 PREV PAGE TOP OF DOC Once again, Mr. Chairman, I am grateful that you have convened this hearing and look forward to the testimony of our witnesses.
I would add one more addendum on a related subject, not part of the insurance, but since we do have multiple crop losses, disasters, all over the country, Congress will be considering a disaster program in the waning moments of the 106th Congress. It is my hope, Mr. Secretary, that your department, you and your department, will serious look at what I would like to call a three-tier disaster proposal. I am assuming we will have one because the need is so great. But I also would like to see that some of the problems associated with the current insurance program be somewhat corrected with the disaster program and we will be proposing, for your consideration, a three-tier disaster proposal.
For those who planted only, destroyed the crop prior to final release date, disaster payment less the harvest factor. In other words, where producers will plant only, but that was it. Drought took it out or what have you. That we would have a disaster payment less the harvest factor, whatever that might be for the crop concerned. A second tier wherein a producer carries the crop to the insurance release date, whatever that is for whichever crop in whatever State. If the producer carried it to the release date and then destroyed the crop, there would be a insurance rebate and a disaster payment less the harvest factor for that person. And for the farmers that carries his crop all the way to harvest, would have a 100-percent insurance premium rebate and 100-percent of disaster payment taken out of the disaster program.
And we also strongly suggest a diminimus yield and/or some kind of economic loss mechanism, and LDP, for producers that are in a designated disaster county. Now, I mention that so that everyone will take a look at this proposal that has been developed by a large number of producer groups around the country in which you have had disasters to make sure that we recognizecotton, for examplewhere there has been a temptation to shred cotton that should be brought to harvest. The effect that has on the gins, the oil wells and the other industries now are beginning to have a terrific negative effect, particularly where you have had 3 of the last 4 years in this condition. And we are going to have a lot of cotton gins, in this case, saying, if you have a disaster program, look at us too.
Page 10 PREV PAGE TOP OF DOC Therefore, harvesting the crop is something that we think would make some good sense if it is economically feasible. Obviously, if it will not pay the cost of the harvest, then you destroy the crop. But I ask you to take a look at this. This is not the subject for hearing today. I put it out today so that we might seriously continue these discussions and allow my colleagues on the committee and others from other States and other reasons that also have disaster, to look at this proposal and see if they, too, would join in recommending this to you, Mr. Secretary, or some version thereof. Mr. Chairman, thank you.
The CHAIRMAN. Thank you.
Any other statements for the record may be entered at this time.
[The prepared statements of Mr. Barrett and Ms. Stabenow follow:]
PREPARED STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. Chairman, thank you for holding this hearing to review the implementation of the Agriculture Risk Protection Act. I also would like to thank our witness panel for their participation in this hearing. As you know, this subject is very important to each sector of agriculture
At the beginning of this session of Congress this Agriculture Committee made it clear that a crop insurance reform bill would be a success. In a full committee hearing in Grand Island, NE, one witness explained how important risk management is to a successful farming operation. He mentioned that by providing producers with better risk management tools, Congress could do its part by breaking this vicious cycle of boom-or-bust in the agriculture industry.
After months and months of examining the program, we have approved a reform package and our farmers will experience the benefits with the upcoming crop year. The Agriculture Risk Protection Act will provide additional subsidy payments, which will make it possible for producers to buy up higher levels of protection.
Crop insurance has also become very important as producers visit with their lending institutions. During this time of low commodity prices, many farmers are experiencing difficulty with cash flow. I commend this program for allowing a number of producers to be approved for loans that would otherwise be declined.
Page 11 PREV PAGE TOP OF DOC Another very important aspect of this bill is the livestock portion. This portion of the bill will allow livestock producers a chance to participate in the insurance program in the future.
Mr. Chairman, this program is very important to my producers in Nebraska. It is essential that we continue after this hearing to keep a close eye on the Risk Management Agency within USDA as they implement the improved program. With that, I look forward to hearing testimony from the witness panel.
PREPARED STATEMENT OF HON. DEBBIE STABENOW, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
Chairman Combest and Ranking Member Stenholm, thank you for convening today's hearing on the implementation of the Agricultural Risk Protection Act. I appreciate the opportunity to review this important issue. I would like to commend Chairman Combest and Congressman Stenholm for leading this committee on an issue of great importance to farmers in my district and farmers across the Nationcrop insurance reform. Due to your diligence and the hard work of this committee, we were able to pass H.R. 2559, the Agricultural Risk Protection Act in both the House and the Senate and have the President sign it into law. This landmark legislation dramatically improved the Crop Insurance Program, most notably by making coverage more affordable, and increased the safety net for American farmers.
Today's hearing will focus on the implementation of the reformed Crop Insurance Program, with an emphasis on efforts to reduce fraud, waste and abuse in the program. The legislation we crafted in this committee provided the U.S. Department of Agriculture with numerous new authorities to crack down on waste, fraud and abuse in the Crop Insurance Program. These are critical new tools that will protect the taxpayer dollars. I look forward to hearing testimony from our witnesses and from the Department as I know they will provide important updates on the status of the implementation of these new authorities.
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The CHAIRMAN. The Honorable Dan Glickman, Secretary of Agriculture, is our first witness today and is at the table and joined by gentlemen who may or may not be answering questions, Mr. Gus Schumacher, Mr. Ken Ackerman. Mr. Secretary, please proceed.
STATEMENT OF HON. DAN GLICKMAN, SECRETARY, U.S. DEPARTMENT OF AGRICULTURE
Secretary GLICKMAN. Thank you. Mr. Chairman, thank you. Mr. Stenholm, members of the committee, it is an honor and pleasure to be here. This may be my last appearance before the committee. I don't know if you will call me up again before you adjourn, but it is always a pleasure and a privilege.
The CHAIRMAN. We could probably arrange that if you would like.
Secretary GLICKMAN. Thank you. Actually, it scares me. But I remember I was sitting over where Mr. Bishop was sitting and Mr. Keith Sebelius, who was, of course, a member of this committee for many years, he and I were the key votes in approving the crop insurance reform in the late 1970's. This is kind of deja vu all over again. As we said, this was the program forever to end all ad hoc disaster payments. And we have seen that was not entirely true. But I think it was a bona fide effort to try to deal with the issues.
The CHAIRMAN. Kansas was well represented that day.
Secretary GLICKMAN. That is right. Ken Ackerman, of course, is here with me to help me answer particularly your specific questions, which I would like him to do after I speak. And Gus Schumacher, our Under Secretary, who has responsibility for both FSA and RMA, in terms of his portfolio, I think can answer some of the issues about coordinating the role of Farm Service Agency with this new Crop Insurance Program.
Let me just say that, by and large, I believe that the bill that you passed, which we supported, addresses the issues that we were trying to make in that crop insurance bill, which was to make crop insurance more affordable, to better cover multi-year losses, to broaden the program to a national scale, not just a regional scale, but a national scale with new crops and new approaches, and to improve protections against fraud and abuse. That bill was signed by President Clinton in June 20, 2000, about 3 months ago. And the first regulations were issued 10 days later on June 30.
Page 13 PREV PAGE TOP OF DOC So we will talk a little bit about the implementation schedule, but I believe that, by and large, this bill is a good deal for America's family farmers and it does shake up the old status quo with respect to the historic crop insurance legislation. And I think that it will be a positive part of the farm safety net.
Crop insurance has grown significantly in the last 7 years. Eighty million acres were covered in 1993; 200 million acres covered today. And back then we had one insurance product. Today we have dozens. Back then we had about seven crops covered. Today, over a hundred crops are covered. Not only the program crops, but crops like cabbage, squash, cherries, and even chili peppers. And this year we are pilot testing insurance in new areas like aquaculture and whole-farm coverage. But there is still a lot to do. Livestock remains virtually uninsured, even today, and there are still problems in quickly covering certain new nonprogram crops. So we have got a lot of work to do with some of the new areas in agriculture.
In recent years, crop insurance has become very popular in helping farmers manage risk. We, being Congress and the administration, made the decision in 1994 to invest in crop insurance than in exclusively relying on annual ad hoc disaster programs. And also low prices, which increased farmers' vulnerability to any production losses, combined with weather-related catastrophes in the 1990's, have led to greater focus on how to manage risk. This, along with the farm bill's changes and USDA's expansion of insurance products, I think, have created a greater awareness among farmers of the importance and benefits of crop insurance resulting in a corresponding rise in popularity.
And as you can see from this chart on the right, participation has increased to nearly $35 billion. And we have other numbers on the percentage of farmers, and that number is moving up rather significantly as well.
A few weeks ago, I was in Oklahoma and Texas visiting with farmers and seeing firsthand the devastation caused by the record-setting drought there. I don't know, Charlie, whether it has rained where I was. It still hasn't.
Page 14 PREV PAGE TOP OF DOC Mr. STENHOLM. You got about three-quarters of an inch.
Secretary GLICKMAN. OK. But people's livelihoods were totally wiped out. And to some people, crop insurance, historically, wasn't terribly useful, although the new program will be much more useful to these people. We know that there are serious problems out there in the country. I have been asked repeatedly, what is the level of disaster this year? And our current estimates put disastrous systems payments for crop loss this year at about $1.4 billion and livestock at $800 million, over and above the estimated $2.4 billion in crop insurance indemnities. But these numbers could rise as we watch and see what happens, particularly in the drought regions of the southwest and the high plains area.
Such emergency aid can be costly and, in some cases, inefficient and unpredictable, although it has saved the lives of tens of thousands of farmers in this country. But we have an interest in providing a longer-term risk management, and that is what we tried to do in this last bill.
Today's Crop Insurance Program is neither wholly private nor wholly public. The benefits of a Government-run program include uniform standards, wider distribution and oversight of taxpayer dollars, while a privately delivered program offers faster, more diverse and personalized services to farmers. In order to balance these two goals, Congress developed the current quasi private approach, instituted and overseen by Government, but delivered by private industry.
However, while this approach is cutting edge and innovative and certainly may become a model across Government as budgets shrink and as we rely more on public/private partnerships, it also has some downside. I have serious concerns about how to maintain clear lines of authority and accountability in such an integrated system. And I believe that Congress and future secretaries will need to continually address this issue of accountability in a mixed system.
Page 15 PREV PAGE TOP OF DOC However, what everybody wants to know is, how is this new modern Crop Insurance Program doing? Are taxpayers getting what they are paying for and are farmers getting the necessary protection at prices they can afford? And, finally, are there oversight and controls in place to ensure that people are acting responsibility?
The honest answer is a qualified yes. The program has become extremely popular in a very short period of time and has provided farmers with a large measure of protection. In 1999, and again in 2000, insurers paid out in excess of $2 billion to cover losses of farmers and those payments went quickly, smoothly, and predictability. And for 7 straight years, the program has been actuarially sound, which is required by Congress. And that makes it sometimes difficult for the great demands to cover new crops and cover them at a higher payment rate. Because the law requires that the lost ratios cannot be above a certain levels and it requires that we cannot pay more out than we take in. And so it has been done for the last 7 years as well.
Understand, of course, that requiring actuarial soundness cuts both ways. It places discipline on the program, which can sometimes conflict with expectations of the farm community for higher benefits without higher cost to farmers. However, the new law, through higher premium subsidies, makes it less costly for farmers to get the protection they need, yet allows us to pursue actuarial soundness. So the new law is very, very helpful in that area.
But I want to be perfectly frank. The rapid growth of the program, both in numbers of participants and in expansion of services, has resulted in some inefficiencies, some waste, and a lot of important lessons. That is why the work this committee did, working closely with us at USDA to improve the program, was so important. Instead of looking for scapegoats and people to blame, Congress and the administration recognized that here was a program with great potential, which it properly reformed, could be extremely helpful to the men and women who produce our food. The new Agriculture Risk Protection Act gives us a mandate to improve the program and we accept that charge.
Page 16 PREV PAGE TOP OF DOC One question that continually arises, both from farmers or taxpayers, is whether the private insurance companies are being paid excessively high fees for the services they provide. Let me say that what insurers are being paid today for administrative costs, which is about $500 million a year, is almost $200 million less than they would have received under agreements in effect before 1993. Between 1993 and 1998, this administration fought for and, working with Congress, obtained a major reduction in the cap on administrative expenses that insurance companies are paid, down from 31 percent to 24.5 percent. In practice today, the average payment in administrative costs to the companies is 21.7 percent.
As the chart behind me shows, the comparable administrative expenses for other types of insurance are in about the same cost range or greater than crop insurance. So the administrative costs, we have worked to get that number down and we are basically pretty close to what the average is. Actually, in some cases, we are below the average with respect to a lot of other casualty insurance companies.
Now, with respect to the other issue, which is potential underwriting gains, which is a separate issue, the potential profits companies can earn when they sell the product. USDA, in 1997, negotiated a reduction. I remain concerned, however, whether this reduction is sufficient because the program has continued to change since 1997 with new rules and more coverage. And while company gains proportionately have fallen since 1997, their underwriting gains are still well above commercial industry averages.
So, in summary, the administrative costs, we find the companies pretty much in the ball park of other insurance fees, but underwriting gains, they are still well above the average. I believe we should renegotiate our contract with the insurance companies sooner, rather than later.
As allowed by the new law, I am seriously looking at exercising my annual option to cancel the current contract in effect since 1998, and renegotiating the terms with private insurers. I am allowed to do that once every 5 years. That said, let me say that with an election in the offing, I will consult with my successor, assuming he or she is selected in time, before rendering a final judgment by the December 31 deadlinethat is when I have to make my decisionsince it will be he or she who will actually have to renegotiate the new agreement. But I am strongly inclined to want to see that agreement renegotiated sooner rather than later.
Page 17 PREV PAGE TOP OF DOC Another important element of this year's crop insurance law is an increased protection against fraud and abuse, which this committee worked so hard to deal with. There are problems out there. I have seen some of them myself and read about them. The fact is, insurance abuse is a difficult issue throughout the commercial insurance world. Because crop insurance, however, is underwritten by the taxpayers, it must be held to the highest standard.
The fact is, is that the integrity of the program is high, as evidenced by our record of actuarial soundness. But this is a program that is more than just numbers. It is built by people, and the vast majority of our customers, agents, adjusters, company officials, and agency staff are honest principled hard-working folks. But the fact is, some cases of abuse have occurred. And there have been instances where the Government has erred as well. I do want to emphasize that I believe these are the exceptions, not the rule. That said, anytime they occur is too many and we have to take action to fix them.
The new law provides much greater assurances. And I agree with Congressman Stenholm. Some of these things in the new law will help us fight the problems that we have seen in the past. Number one, by mandating a closer working relationship between the Risk Management Agency and the Farm Service Agency to share staff, resources, and records, we will be able to get at the bottom of problems much faster than we do right now. Both of these agencies are in the gambit of Mr. Schumacher's operation. And I have instructed them they have to work together to conform with the law. And the historic differences between the agencies must lend themselves to using this vast FSA network to provide help in collecting records and helping on the staff side.
By requiring state-of-the-art technology to monitor data, as is done throughout the entire insurance world, we can target reviews of agents and loss adjusters who have disproportionate loss records. That kind of triggering computer files. We do this, for example, in the food stamp business where we can see if a store overuses food stamps. We will be able to do the same thing here and find out if there are adjusters or if there are agents who have a disproportionate amount of loss records in their own counties or in their own States.
Page 18 PREV PAGE TOP OF DOC We also are working to have faster, more efficient, processing of policy information and, as you said, Mr. Chairman, much tougher penalties for wrongdoers, working with our Inspector General, as well as other law enforcement authorities to get at these people very quickly.
I want to emphasize the first of these points. I believe that FSA's experience, close contact with farmers, understanding of local practices, will aid the Risk Management Agency in maintaining a more efficient and well-managed program. It was probably a mistake to have removed FSA so completely from the Crop Insurance Program. And I think that we are doing the right thing by bringing those folks back in.
In addition, our Risk Management Agency has recently established a special investigative branch, modeled on similar investigative units in private insurance industry, to focus on large, difficult, and systemic cases. In fact, just this week, Federal prosecutors working with information uncovered by our Office of the Inspector General and the Risk Management Agency, obtained two guilty pleas and one indictment on charges related to crop insurance fraud.
I want to make it clear to this committee and to the Congress as a whole that, by and large, you have done your part and we are moving expeditiously to put the new tools to use. We acted within weeks of the bill coming law. New premium subsidies, new rules covering yield coverage, and changes in administrative fees are in place in time for fall planting. These changes make 90 percent of the $8.2 billion in benefits, authorized by the act, available to farmers over the next 5 years.
The important point that we all must remember is that finding the right mix and profitability and protection for farmers benefits all Americans. We must remember that financially healthy farm families promote healthy rural communities and ensure a dependable supply of food, which is the fundamental building block of a healthy people. Food production is essential to our progress as well as to our national security.
Page 19 PREV PAGE TOP OF DOC One of the greatest technological achievements of the century is the spectacular increase in farm productivity. By reducing the number of people needed to produce the Nation's foodthat is what the economics of agriculture have doneit freed this country to build the greatest economic engine the world has ever seen. But the base of it, the foundation of it, is an independent family-sized agriculture and we have got to help them protect themselves from undue risk by helping them what they do best. And crop insurance is one of the tools of a farm safety net that can best help farmers deal with the changing nature of agriculture in the 21st century.
Thank you, Mr. Chairman. And I might, if I might quickly ask Mr. Ackerman, if he could do it in a couple of minutes, just to go through where we are on the regulations that you mentioned.
[The prepared statement of Mr. Glickman appears at the conclusion of the hearing.]
Mr. ACKERMAN. Thank you, Mr. Secretary. I will be very brief at this point. We have gotten off to a very fast start on implementing the new legislation. We have launched a number of joint operations with FSA already, well within the spirit of our new operating partnership. On the requirements for joint monitoring, data reconciliation, targeted reviews, data mining, expert review of productson each of these, we have started to put them in place. We have set up joint work groups with the Farm Service Agency, as well as OIG, and brought in regional and local people from both agencies to work out the specific procedures. Those will be reviewed by myself and Mr. Keith Kelly, the Administrator of FSA, and present it to the Secretary for his plan in the next few weeks.
On the regulations on multiple indemnities and preventing planting, we are drafting those currently. We want to make sure that those work for the long haul because they are very important. They address the very specific problem we have had. There are some policy judgments we are going to have to make on how they work in situations where acreage between a first and second crop don't quite line up. And we are working through those right now. We think the new FSA role will work well. Our early experience is favorable. As far as working with the industry, we have had a number of meetings already with company heads and the industry organizations to brief them on our actions.
Page 20 PREV PAGE TOP OF DOC The first step is going to be to work out the rules internally between RMA, FSA, our Inspector General, and the Secretary. And once that is finished in the next few weeks, we will be bringing in the industry on a much more intensive basis. And I will leave that for now.
The CHAIRMAN. Thank you very much. Mr. Secretary, you had mentioned in your comments, there are still a number of uninsured crops, which obviously we recognize, even though there are many more than there were, and the issue of livestock. And, as I am sure you are also aware, we did provide for a pilot program to look at livestock. No one had the answer of how we do that, but we did recognize, and do recognize that, and feel that it is a quite aggressive program and look forward to its result.
I would like to make a general comment here before we go to questions. This may or may not require a response, Mr. Secretary. But, as Secretary, you appoint members of the Federal Crop Insurance Corporation Board and are responsible for the supervision of the corporation's regulatory and programmatic functions. In H.R. 2559, Congress provided you with a number of tools to stop waste, fraud, and abuse. We need your personal efforts to ensure that these tools are quickly and effectively implemented and administered.
First, there are a number of areas where we require that the Risk Management Agency work with FSA, Farm Service Agency, and the companies, to detect waste, fraud, and abuse. But there is some indication that turf considerations may be impeding progress. If need be, Mr. Secretary, take the agencies and the companies and lock them in a room and don't let them out until the get it solved.
Second, while I am reasonably sure that there are efforts underway to improve detection of violations, I am not as confident that efforts are underway to make sure that violators are punished. We need you to make sure that there is a transparent process established, from start to finish, that leads up to ultimate punishment.
Page 21 PREV PAGE TOP OF DOC Mr. Secretary, H.R. 2559 requires the annual reconciliation of data between FSA and FCIC. I am concerned that this step is not happening in a process as expeditious as could be and that there may be problems that result from this. Could you assure me that these steps are being taken so that precise reconciliation data is accomplished in the 2001 crop year?
Secretary GLICKMAN. Yes. And I intend to hold their feet to the fire on this issue. And Mr. Ackerman may want to comment on that, but I think that is critically important.
Mr. ACKERMAN. Mr. Chairman, I will just say briefly, on the data reconciliation we have been doing this exercise the last few years under the disaster programs that have been in place. The new legislation provides us significant funding and ability to contract out to expand this process significantly. We have already gotten a proposal from one group of universities as part of a data mining project that will very much enhance the data reconciliation process as well. We hope to finalize that contract shortly in the new fiscal year and we think that will very much improve it.
The CHAIRMAN. Thank you, Mr. Ackerman. And one of reasons that we wanted to make for certain that FSA was involved in this is that, we look at this basically as providing you with an additional 12,000 people nationally to help monitor this program. And we think that their input and their expertise and the fact that they are in the field will be critical to the elimination or certainly the rapid prevention of abuse, waste, fraud, or whatever may occur. And obviously the ability for those agencies to work together is critical.
H.R. 2559 requires you to develop and implement a plan for the FSA, including the agency's field infrastructure, to assist in Federal Crop Insurance monitoring for fraud or waste and abuse. The new role for FSA is an absolutely critical component of this legislation and provision many members from both sides of the aisle feel very strongly about. Frankly, RMA simply does not have the resources necessary to detect violations where and when they are the most obviously on site and in real time. When will a draft of your plan be available to the committee and when will your draft for FSA monitoring be fully implemented?
Page 22 PREV PAGE TOP OF DOC Secretary GLICKMAN. I think the plan is being drafted now and is virtually completed. It will be available to the committee in a couple of weeks. I would say by no later than the middle of October, the 15th of October.
The CHAIRMAN. And, Mr. Secretary, or maybe actually, Mr. Ackerman that this best be addressed to, but I am assuming that as this plan is coming to be and coming into place, that there is a lot of discussion going on between FSA and RMA trying to get input from both of the agencies as to what some of the best ways might be to implement this?
No one is being left out, in other words.
Mr. ACKERMAN. Mr. Chairman, that is absolutely correct. The way we are going about this is that we have put together joint agency teams that include people from FSA and particularly State and local people from FSA, as well as people from RMA, working together to flesh out the procedures for this to make sure it works right. The plans, as the Secretary has said, the initial drafts by these work groups have been completed. They are being assembled at this point. They will go through some internal review, by myself and the Administrator of FSA, and then they will be presented, through Mr. Schumacher, to the Secretary for him to finalize. But, yes, we are getting input from all around the country.
And I would mention that even in advance of the formal plan being finalized, we have already launched a number of operations in the field in four States jointly with the two agencies very much in the spirit of the new law where FSA personnel have reported allegations to us, and we have worked with them very quickly to take advantage of their field structure to do growing season inspections, to do fact-finding. We think this partnership is going to work well.
The CHAIRMAN. In closing, and thank you, Mr. Ackerman. In closing, Mr. Secretary, I would be remiss if I did not publicly say thank you to yourself, principally, Mr. Ackerman, Mr. Schumacher, and others in the Department who so closely worked with this committee throughout the full implementation of this bill. I think that 2559 is a tremendous example of bipartisanship, both in terms of the way that the Congress worked together, as well as the way that the Congress and the administration worked, for a product which early indications, to me, show that what we had intended to do is working. And I think it provides a great opportunity for farmers.
Page 23 PREV PAGE TOP OF DOC I also think that the time that was spent and the emphasis that was put on the whole waste, fraud, and abuse problem, and the interest that the Congress and the administration worked on in trying to find ways to prevent that, show the seriousness and concern that we have that one of the greatest potential risks to this program in the future, might have been the inability to detect and to deal with that issue. And I think that it is the largest risk, is that we make for certain that those people that, in fact, do create a problem, are dealt with severely and dealt with quite strenuously.
And I would be reminded, Mr. Secretary, when you and I served on another committee in the Congress, going through on the Intelligence Committee, during one of the most critical spy problems that this country ever encountered. And there was a lot of discussion at that time about how to prevent spying. And one can't. You cannot pre-detect the fact that you have got a problem somewhere. But what you want to be able to do is to recognize that problem and deal with it as quickly as you possibly can. And that goes whether or not we have someone who decides to go bad in the intelligence community or someone who decides to try to abuse a program that is put out there for people to try to help make a living and keep them in business. And I appreciate the dedication that the administration and the Department is putting into trying to see this program work.
Secretary GLICKMAN. Mr. Combest, may I just make one comment?
The CHAIRMAN. Please.
Secretary GLICKMAN. This is one of the cases where Congress and the administration worked extraordinarily well together to produce a bipartisan piece of legislation that will truly be positive in the public interest. And not only the committee staff worked well, but our folks at both RMA and Farm Service Agency have really busted their rear ends to get this thing up and make it work well.
I would just say too is, is that you are correct. We are doing our best to involve our Inspector General much more structurally in this process so that when we have cases that they can be investigated quickly and they can be referred. You always have a problem of U.S. Attorneys deciding whether these kinds of cases are of import enough to take and prosecute. But some of the cases are. And we need to be doing a better job of developing the cases.
Page 24 PREV PAGE TOP OF DOC The third thing I would have to tell you is this. And this is not all the committee's fault or all the administration's fault, but our folks out in the countryside are strapped. I don't have to tell you. You have been hearing it yourself from people in county offices that have a myriad of programs to administer. I think all of us need to work on the staffing resources. Because if we don't have them, we won't be able to do the kind of oversight work that you talked about.
The CHAIRMAN. Well, Mr. Secretary, I would just, in responding, recognize that. And not going back over the whole history of who was asking for reductions and who was putting people back on, just say that I agree with you. Because we see in our districts in dealing with these people every day, these are some of the most dedicated employees that we have. They are not in the policy-making business. They simply are in the policy-implementing business. But they are on the front lines. They are there across that counter. I used to be there. I was on that side of the counter.
And I understand that for us to be able to adequately run a program, we have got to have the personnel in the county, and particularly in an area when we are trying to make for certain that we are asking people to do more and more. And from my standpoint, I would just say that I will be happy to work in whatever way we can to make for certain that we are adequately funded in the areas of personnel in the field. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. Let me completely associate myself with your remarks, Mr. Chairman, regarding the bipartisan and the cooperation that the Department has given this committee. And let me also add my appreciation to you, Mr. Chairman, and to your staff and to the members of the majority for the manner in which we, in this particular piece of legislation, have worked bipartisanly for a much needed end result.
And it is very reassuring to me to hear some of the responses already of what has already gone on in the spirit of the law, attempting to attack some of the many problems we have out there, but also in the dedication to making sure that the intent of the law is ultimately followed. And to do that, it is important to continue to have conversations between those who write the law and those who administer the law. And that is something that is ongoing and of which I very much appreciate.
Page 25 PREV PAGE TOP OF DOC Mr. Secretary, I could not agree more when you said it was a mistake to remove RMA from FSA. We made a mistake. We are now correcting it. And I appreciate very much the change in attitude of some in this, that hopefully now we will make this work. I am also reminded, it wasn't but a few months ago that we had another two agencies that were instructed to work together, EPA and USDA, regarding the Food Quality Protection Act. And here again, USDA has done a pretty admirable job with the meager resources that we have given you in the area of food quality and protection. But I can't say the same about EPA as of today, but I hope that, too, will change. If we could bring about the same kind of cooperation that we are talking about now between two internal agencies of USDA, to have the same work at the other level, we could do tremendously good in improved good for consumers, as well as producers of our food.
But let me ask one question in this because one area I would like to hear a little more comment on, and that is section 121 of the Agricultural Risk Protection Act, requires the use of data mining and warehousing technologies in the Crop Insurance Program. And, Mr. Secretary, what progress has been made on these provisions of the bill? Does the administration agree with Congress that these technologies hold promise for improving the efficiency and the integrity of the Crop Insurance Program? And, even in a bigger picture, what progress are we making in getting our overall technology available for USDAto put in simple terms, to have all of our agencies, FSA, Rural Development, NRCS, Federal Crop, Risk Management, and others, agreeing on one set of computers and then making sure that, as we address the much-needed personnel question, that we have first addressed it from the top down so that we will have the technology in place and we will use it and we will stop the internal bickering that we have been facing for the last 15 years in USDA, between all of the various agencies, and agree to bring ourselves into the technological age? I like what I hear on Federal Crop. I would like for you to expand a little bit more on that.
Secretary GLICKMAN. I think Mr. Ackerman can talk on your first question, which is section 121. I will talk on the second one.
Page 26 PREV PAGE TOP OF DOC Mr. ACKERMAN. Mr. Stenholm, on the data mining provisions of section 121, we think that these are a very good idea and we have done some initial work with one university, Montana State, working with the Illinois Institute of Technology. They have done some initial data mining runs on data that we have so far and the results are really very striking. The technology in this is very effective. You can use this technology to find patterns, potential vulnerabilities, potential areas of abuse. It lets you focus your resources in the places where they will work best. So the promise here is very important, particularly when you are in an area where your staff resources are limited and you need to target them effectively.
As far as where we stand in implementing it, we have funding provided by the legislation that will be available as of the new fiscal year, October 1, the end of the week. We have gotten contract proposals, primarily from our existing provider, Montana State, and ITRI, and also from a group, Tarleton and Bradley Universities. We have looked at their proposal. It looks very promising. They are going through the review process within RMA right now to make sure that the contracts are within the parameters that they need to be. We are hopeful to finalize that soon. We think that this is going to be a very rich source of data and a very good support for the program.
Secretary GLICKMAN. Well, first of all, let me say that we have asked for money to upgrade what is called common computing environment within FSA and within NRCS and Rural Development. We are putting into place some transitional funding and equipment to help us get there, largely, in the FSA system.
This is an area where we have a long way to go. As I am coming to my closing months, I would not always tell you what I really think. But I would on this issue; this is as classic case of the organization of USDA into these kind of iron-clad separate mission areas, makes it extremely difficult to deal fundamentally with these issues of common computing, because it means somebody is going to have to give up on their system or they are going to have to modify their systems to be workable among mission areas. Some areas in the Department have been better than other areas have been.
Page 27 PREV PAGE TOP OF DOC For this reason, to some extent, OMB has not been as positive towards the capital expenditures we have wanted to make in common computing as what we would like to make because they have had some lack of confidence that the Department, as a total organization, has a strategic plan for its computing systems. But FSA and Gus's mission area is on the road of developing a common computing environment that will allow all the agencies within FSA to operate. And they have a transitional plan over the next year or two until such time as we get the funds to do it. But this remains a deep structural problem within USDA.
Mr. STENHOLM. I thank you for that comment and would just, in the spirit of your previous answer, suggest that you take a look and give your successor in your position all the guidance that they might possible need to act expeditiously and early in the next administration to deal with this and, perhaps, use the optimistic tone of Mr. Ackerman with what is now occurring with what Montana Mining and others are doing, as might be a catalyst that might be utilized in accomplishing this goal and give OMB a little better attitude towards what we need.
Secretary GLICKMAN. Right. And I am not saying that. I am not blaming OMB. If I were sitting on their side of the equation, I would probably be asking the same questions. I would have to say, however, when you consider that this year we have put out about $22, $23 billion of payments to farmers, highest in the history of the United States of America, highest ever, and largely, it has gone without a hitch, something is working right.
Mr. STENHOLM. No. I agree with you on that, and our employees are to be commended. And I would say, I would not want you or I would not want OMB to do anything other than what they are doing either with what the information that we have got today.
The CHAIRMAN. Mr. Boehner.
Mr. BOEHNER. Thank you, Mr. Chairman. And, Mr. Secretary, I want to welcome you to our committee once again and tell you how much we enjoy our interaction in your current role, as much as when you were a member of this committee. Mr. Secretary, I think you would agree with me that fighting fraud and abuse in the Crop Insurance Program is absolutely essential. The fact that these types of stories that erupt cause taxpayers to have doubts about their Government. But even in a more pointed way, I think we know that when these cases begin to hit the local papers, it is other farmers who get disheartened and wonder why we have such programs and allow the abuse to occur.
Page 28 PREV PAGE TOP OF DOC So let me say I applaud the efforts of the USDA to find these, including an investigation in my own district, which I have just recently become aware of. While there apparently is an investigation going on, I hope for the sake of the system, that we get to the bottom of it. I think during our consideration of the bill, the recently passed Crop Insurance Reform bill, there are a lot of antifraud sections that I think will help the RMA in doing its job. But I think the most interesting part, and likely the most effective part long term, will be the relationship between the RMA and the local FSA.
And I want to ask you, Mr. Secretary, to describe in more detail how we expect this to work. And then, secondly, to follow up on the chairman's comment, given the staffing concerns that we have had over the last several years, how much more work are we actually putting on the local FSAs?
Secretary GLICKMAN. Let me talk just briefly about the second issue. One of the things I hear a lot of are complaints from the field about the workload and the fact that our numbers of people are going down, although we have flat-lined, I think, our permanent employees this year. And you have helped us with some additional employees in some of the disaster bills. One of the things I have got to do is, there is some work that is going on out there that doesn't need to happen. One of the things we have got to do is to figure out what are these employees doing that they don't need to be doing.
Frankly, FSA has a long history and culture of an extraordinary amount of record-keeping. And one has to ask, in this modern world, whether they have to be doing all the stuff that they are doing right now. So we are taking an internal look at that as well to see if maybe some of the stuff that is being done doesn't need to be done anymore, that was done 40 and 50 years ago, to try to relieve some of the workload from the people.
But my judgment is, is that we need more people. We probably haven't been as aggressive in asking for that as we should have been. And the budgets are tight and there are a lot of other priorities in this system. I want to go back to your point. If we want to deal with the fraud issue, you have got to have enough people on the ground, particularly giving FSA this new responsibility, to be able to let them do that, because this is all part of the safety net, the operation of the risk management programs. We have got to have enough folks to do that work and work with RMA because, It was a good idea to bring FSA back in the picture.
Page 29 PREV PAGE TOP OF DOC Now, in terms of operationally and practically of what is happening now, I think that is a good question. Ken may want to answer that.
Mr. ACKERMAN. I will say just very briefly, the new program is being developed as we speak. And the FSA/RMA work group has put together a plan. Operationally, the way we would envision it, is that FSA would act as our eyes and ears. Since the FSA local offices are aware of local people, local conditions, local practices, they see things first. And they would be able to get that information to us and work with us to develop cases. In many of these situations, the laws are on the books. The problem is developing the cases, developing the evidence, so that you can bring them forward in a form that a United States Attorney can bring a case.
In the field, we have a number of partners that we work withFSA, plus the very important role of the private sector, the private insurance companies, their loss adjusters, their quality adjustment teams, working with us. We also work with our Inspectors General, the State insurance commissioners, in many case, the National Insurance Crime Bureau, the FBI, in some cases, and others.
Mr. BOEHNER. Now, I understand all that, but the fact is, is that the local FSA employees, the local members of the committee, and farmers in these counties, they know where the abuse occurs.
They have seen all of the tricks pulled. They probably have a good sense, rightly or wrongly, of who is most likely to do this. And I think if we are really serious about eliminating fraud and abuse from the program, that there is an integral component, from FSA and the local committees, into this process. And so I would urge you as you are developing this, that those people on the ground are the ones, I think, that are going to make this part of routing out this abuse. They are the ones that are going to make it work.
Mr. ACKERMAN. Yes.
Page 30 PREV PAGE TOP OF DOC Mr. BOEHNER. Thank you, Mr. Chairman.
Secretary GLICKMAN. And I think Mr. Schumacher wants to make one quick comment.
Mr. SCHUMACHER. Just very briefly on Mr. Boehner's comments, Congressman. One of the things, I think, that, as Larry Mitchell and Keith Kelly and others, work with us in getting this done, you take the county committees, 2,500 counties, about 7,000 or 8,000 members of the county committee, and then you have 10,000they drive back and froth every day. And they are finding and detecting these issues. Some of us call it a windshield here in the coffee shop. They are now going to build this in, as you correctly point out, and report, through this system, when they see some difficulties out there.
In addition, as Ken pointed out, we have these new very sophisticated data mining efforts that are going on that we are looking at it at tiered levels to eliminate fraud, waste, and abuse in these programs. But it nothing like someone looking out of a windshield and seeing reports that it is happening again.
Mr. BOEHNER [presiding]. Mr. Bishop.
Mr. BISHOP. Thank you very much. I have a couple of questions for the Secretary. As a result of the mandate of the legislation, the Risk Management Agency has undertaken the review of compliance missions in the program and the preliminary analysis indicates a problem with collusion among agents, adjusters, and producers toward the goal of defrauding Crop Insurance Program. Section 121 of the bill contains two different provisions to address the problem. I would like to just ask you, what is the status of the implementation of these two provisions? And in the drafting, as we were preparing it, there were some additional items that the committee chose not to adopt, which would have allowed for some favorable treatment for farmers who assisted the Department by informing them of fraud that they were aware of to actually slow down the effort and to cut through the workload of some of the investigators so they could target folks with some people who could possibly give them some inside information.
Page 31 PREV PAGE TOP OF DOCSo what is the status of that minus those additional provisions that the committee did not adopt? And do you think that those two provisions are strong enough if we will have to go further in trying to address the fraud? Because I hear quite a bit from my constituents that they feel that the hard-working, honest farmers having to pay the price for those who are farming strictly for insurance and who engaged in fraud.
Mr. ACKERMAN. Mr. Bishop, I will answer on the status of where the implementation of these provisions is at this point. We are working very, very hard and very fast with FSA to develop a plan to present to the Secretary formally in the next few weeks that will implement these provisions. Section 121 includes a number of points to improve monitoring in the field, to reconcile data among the agencies, to better use the FSA field structure, to provide training, to better consult with FSA State committees, and so on. We have developed joint interagency work groups that are putting together plans to do this, and we expect that those will be effective in the next few weeks.
Your point about collusion is a very important one. Often, in these cases, the most difficult thing, as I have mentioned, is developing the evidence that you can bring forward and that is solid enough that will stand legal scrutiny. Where you do have situations of collusion between, say, a loss adjuster and an agent, those cases can be very difficult to bring. We do have conflict of interest rules within our system. They are supposed to be firewalls between agents and adjusters. But we have to watch those very, very carefully. We have been working with our Office of Inspector General to make sure that those firewall provisions, conflict-of-interest provisions, are working as well.
Secretary GLICKMAN. I can't tell you whether you should or shouldn't have adopted those provisions. I don't want to see a situation out there of putting farmers in the position of being constant informers on their neighbors either. There are a couple of statutes that you should be aware of. One, is the Federal False Claims Act, which, of course, would allow people to file lawsuit on behalf of the Government to collect against improper payments. And that is used in the defense industry. And in my judgment, it is applicable here as well, if individuals would want to do that. And, of course, we have Federal whistle-blower's
Page 32 PREV PAGE TOP OF DOC Mr. BISHOP. Farmers are not going to have time to do that
Secretary GLICKMAN. But what I am saying is, is that if there is a massive amount of fraud that is taking place, there are some of these other statutes that are generally applicable. The idea is in a county committee structure, you are correct, and Mr. Boehner made the same point, generally speaking, if there is a problem happening, somebody else is going to know about it. We got to try to provide an opportunity for people to share those views without looking like every day their neighbor is their enemy either. One of the things we are trying to do is work with our Office of Inspector General so that law enforcement is a critical component of the compliance rules.
Mr. BISHOP. Just some kind of whistle-blower provisions on the part of farmers, I think, would be helpful in the program. Very quickly, my producers are pleased with the provision in section 124 of the bill that requires the establishment of a comprehensive data base for acreage and production records as USDA is using the data that is gathered by the Risk Management Agency and the Farm Service Agency. This is going to really help you in terms of the actual production history, the APH, in terms of really improving the claims that farmers will be able to collect upon as opposed to the old system, which really limited what they were able to collect on when they actually had a loss? Actual production history, seemingly, would produce a much better result for our farmers. Is that correct?
Mr. SCHUMACHER. Yes.
Mr. BISHOP. I believe my time has expired, Mr. Chairman.
The CHAIRMAN [presiding]. Mr. Moran.
Mr. MORAN. Mr. Chairman, thank you. I would request the permission to submit a number of questions to Mr. Ackerman in writing. The one that is timely at the moment is, as of last week, the final costs were not known for revenue assurance and our Winter wheat closing period is September 30. Do we have those numbers yet? Are the rates fully known for crop revenue coverage or revenue assurance?
Page 33 PREV PAGE TOP OF DOC Mr. ACKERMAN. Yes. My understanding is that those have been filed. Those should be available.
Mr. MORAN. On both crop revenue coverage and revenue assurance?
Mr. ACKERMAN. They should be. Yes.
Mr. MORAN. Thank you very much.
Mr. ACKERMAN. Mr. Moran, we will double check that to make absolutely sure that the numbers are out there and available. They should be, but we will double check to make absolutely sure.
Mr. MORAN. Several days ago, we were told by constituents and by agents that that was not the case. And, again, September 30 is just a few days away. Mr. Chairman, I would submit my other questions in writing. And take this opportunity to thank Secretary Glickman for the relationship that he and I have had, me as a Member of Congress and he as Secretary of Agriculture. I represent a portion of the district that then-Congressman Glickman represented and I appreciate, despite the fact that he is there from time to time opening democrat headquarters. Other than that, we have had a pretty good relationship.
Secretary GLICKMAN. I would point out that the part of the district he took was the part of the district that gave me the substantial victory that I had when I was first elected to Congress. And then when it was taken away from me, I lost the seat. But it wasn't Mr. Moran who did that.
Mr. MORAN. And Mr. Chairman, I would like to express my concern about your comments earlier. When Secretary Glickman mentioned that he and one of my predecessors, Congressman Sebelius, were involved in the passage of crop insurance, I believe your response was that Kansas was well represented then. I would feel slightly better if you could put something in the record that would suggest that Kansas has a long tradition of having good representation in Agriculture in Washington. Thank you.
Page 34 PREV PAGE TOP OF DOC The CHAIRMAN. Would the gentleman yield?
Mr. MORAN. I am not certain whether I should. But, Mr. Chairman, I would yield.
The CHAIRMAN. Kansas is well-represented now. There was a period of time between Mr. Sebelius and Mr. Moran that is questionable.
Mr. MORAN. I will pass that on to my immediate predecessor. And there will be some improvement in my life as Secretary Glickman goes away on one hand and the fact that Senator Roberts' portrait is no longer hanging in the room, I am beginning to feel at home here. So I thank the chairman for the time and we will submit the questions on crop insurance to the Department. Thank you.
The CHAIRMAN. Mr. Roberts' picture is hanging in the other committee room.
Mrs. CLAYTON. But you Kansas people really get along, right? I will pass that onto Senator Roberts.
I also want to express appreciation to the Secretary and to this committee, for the crop insurance improvement or enhancement, as we call it, and make a couple of comments. And I will submit my other questions later. When I first came to Congress, the 1993 or 1994, the issue was, how do we improve our crop insurance because it is not working? And one of the part of the underlying principles, in addition to making sure it is affordable and accessible and that more farmers would use it, was also we were trying to have an instrument that would reasonably anticipate the manageable risk in trying to have an instrument that would respond to it, rather than having supposedly a crop insurance here that was there for farmers to participate in and they did not. Or it was then supplemented by large allocations of funds.
Now, we have modified the crop insurance a couple of times since I have been here. And this enhancement, certainly, I think, is an improvement. But I think it still begs the question, if I ask a questionI think I heard $22 billion so far right now. And if I ask a question and we had $6 billion for farm crisis in 1999 and in 1998, again, if I add those up, that is $28 billion. So if the issue of modifying our crop insurance to better serve and also to have an instrument that would be more efficient, the question is are we achieving that goal?
Page 35 PREV PAGE TOP OF DOC Now, I do think we have moved from having to meet a certain level of loss before farmers can participate. Second, we now subsidize the premium, all of that which adds to the affordability. But, Mr. Secretary, are we achieving savings or what are we doing?
Secretary GLICKMAN. Well, first of all, the crop insurance is largely to protect people against natural disasters. And, by and large, our farm programs are to deal with price and other substantive farm policy issues. So while there are some parallels there and some of the emergency program benefits in the last few years have touched on the natural disaster side, by and large, I think that the Crop Insurance Program does protect people who participate from natural disasters where the farm programseven the emergency farm programs do not. And the participation is going up. And what we have done with what you have done with the premiums, particularly on the buy-up coverage, is going to ensure a lot more participation in numbers. We are
Mrs. CLAYTON. Give me the numbers again.
Secretary GLICKMAN. Well, just talk a little bit, Ken, about the number of farmers participating. I think that is even a more significant number.
Mr. ACKERMAN. Thank you. Well, Mrs. Clayton, the participation in the Crop Insurance Program in the last 6 or 7 years, it is about either doubled or tripled depending on how you measure it. In terms of amount of protection, shared dollars, we have gone from out $12 billion to about $33 billion. In terms of number of policies, of number of farmers, we have gone from about 600,000, I believe, to over a million. In terms of acres, we have gone from about 80 million to over 200 million. In terms of different products that become
Mrs. CLAYTON. What years are we comparing?
Mr. ACKERMAN. Between 1993 and our estimates for 2000.
Mrs. CLAYTON. So we modified in 1994. So if we took the 1994 and we took 1998 we have doubled the number of farmers.
Page 36 PREV PAGE TOP OF DOC Mr. ACKERMAN. Between 1993 and 2000, we have approximately doubled the number of farmers and we have between doubled and tripled, depending which of these measures you use, the actual amount of protection. The program is growing in three different ways, both in terms of the numbers of farmers who use it, the levels of coverage that they buy.
Mrs. CLAYTON. Right.
Mr. ACKERMAN. Because one of the changes recently is that farmers are moving from catastrophic level to buy-up.
They are using it and they are using it better. And, third, the number of products that we have out there. In 1993, we had multi-peril crop insurance. Today we have revenue insurance, whole-farm insurance, the group risk plan. We cover a lot more of the fruits and vegetables, the specialty crops, than we did a few years ago. So all of these changes have had an effect. And with the new law, the higher levels of subsidy, we expect that that increase is going to continue even more sharply.
Secretary GLICKMAN. But I would say that if you are talking about a depressed farm economy, then you can never get the recovery, even from crop insurance, if, in fact, prices are very, very low, because the value of the coverage is notand benefits are not worth as much than if prices are higher. So crop insurance can never be a substitute for other farm programs. What we are trying to make it, is a substitute for the natural disaster part of other farm programs.
And I think we are moving in the right direction there.
Mrs. CLAYTON. Talk to me a little more about your data mining. Data miningit is addressed for fraud and abuse.
And it is to find what certain trends, vulnerabilities, repeat uses. Talk to me. I heard you say the university has submittedwhat are you looking for specifically to identify fraud and abuse? And how do you begin to address the vulnerabilities of the
Page 37 PREV PAGE TOP OF DOC Mr. ACKERMAN. What data mining is, it is a process that is being used throughout the insurance world, throughout modern industry. Basically if you have a database that goes back a number of years and that is very detailed, you can ask that database certain questions. You can look for patterns. For instance, we were talking when Mr. Bishop was asking questions, about possible collusion between agents and loss adjusters. You can find out where there are patterns of certain agents and loss adjusters working together that will give you investigative leads. You can look for certain claims patterns. You can see where there are certain adjusters or agents or parts of the country that have disproportionate losses.
Once you have that, that does not prove something wrong has gone on, but it gives you a lead where to take your human resources, your investigators, your compliance people, both in Government and in private industry, and focus them to do the follow-up work. So it is basically, as you say, it is to find patterns that we can use for leads.
And under the new statute, one of the features that we think is very helpful is that the new statute requires us to do targeted reviews of those agents and loss adjusters who are associated with disproportionate losses in their areas. That is basically the concept.
Mrs. CLAYTON. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. LaHood.
Mr. LAHOOD. Thank you, Mr. Chairman. I don't know if this will be our last full committee meeting, but again, I want to offer my thanks to you and Mr. Stenholm for the 10 hearings that we held around the country. I know that you and Mr. Stenholm attended all of them. And I think if there is anything that the committee will be remembered for this year, I think it is that we went out on the road and listened to people. And I think we can use a lot of that testimony next year as we begin to deliberate what kind of farm policy we have. So I want to offer my thanks to you for your leadership, and also, Mr. Stenholm, for his leadership in attending those meetings and listening and being attentive to the concerns of farmers and ranchers all over America.
Page 38 PREV PAGE TOP OF DOC I also want to say to Secretary Glickman, my personal thanks to you. On at least two occasions, you have been to my hometown of Peoria, to visit the Agricultural Research Lab there. And you have been a very strong advocate for research. And then when we announced the very strong aggressive CREP Program, which is helping to save the Illinois River, you have really been a leader. And I have appreciated the leadership that you have shown, particularly in my neck of the woods and the leadership you have shown towards agriculture. Obviously, there are things we disagree on, but I think something that we do agree on is that you have been a very strong voice for agriculture. And the CREP Program is working very well and the research that we are doing at the Agriculture Lab, which has been supported by you and your staff, is extraordinary. So I have appreciated your leadership and the friendship that we have had during the time that you have been Secretary.
I don't know if you know the answer to this, and, if you don't, you could submit it. But I am curious, since the Livestock Pilot Program that I have taken a great deal of interest in, if there is any kind of a report that you can give on that pilot program. And, if not, I would be happy to have you submit it for the record.
Mr. ACKERMAN. Mr. LaHood, we have, in implementing that program, looked to the private sector to develop some fleshed-out ideas that we can support. We have already received on that was submitted by a company shortly after the bill became law. We have reviewed it. We sent it back for some revisions. I believe it has now been resubmitted. And when the FCIC Board met a few weeks ago, we assigned five outside reviewers to look it over under the procedures of the new law. So we hope to have, at least, an initial program up and running, hopefully, within the next few months. The statute envisions our having several of these different pilot programs, and this will be the first one.
Mr. LAHOOD. Second, again, for the record, if you don't know there is a fairly big dispute going on in our State about combining NRCS and Rural Development and where that should be located. And I don't know if you can shed any light on that, but it is something that we have been very concerned about. And others in our delegation have. And if, maybe for the record, you could kind of tell us where you think that is going.
Page 39 PREV PAGE TOP OF DOC Secretary GLICKMAN. I think the dispute in Illinois, and there is one in Kansas, and there is one in Texashave been the three most difficult disputes on co-location. And there has been language in the appropriations bill which has limited us from moving forward. I don't have much more to tell you about it. I think to modernize the administration of agriculture, we need to co-locate these offices. And it is like most things. Everybody is for it except when it affects their backyard. And it may be up to my successor working with your committee to try to work through these problems. But most States have worked it out. There are a few that remain trouble spots.
Mr. LAHOOD. Right. Also, a words of thanks to you, Mr. Schumacher, for the good work that you have done and been responsive to concerns that we have had. And we appreciate the good things you have done also, Gus. I think, since this may be our last public opportunity, I also wanted to say thank you to you and, again, to you, Secretary Glickman. We appreciate the good work you have done and the strong voice you have been for agriculture. Thank you, Mr. Chairman.
The CHAIRMAN. Thank you. Mr. Etheridge.
Mr. ETHERIDGE. Thank you, Mr. Chairman. And let me also add my voice of appreciation to you and Mr. Stenholm for calling the meeting and to Secretary Glickman and Mr. Schumacher and his staff for their responsiveness to the issues we have before us. I want to move to another issue, if I may, in this bill, if I may, Mr. Secretary. You have covered with others that one of the questions I had planned to ask. I want to ask about a little different provision in the act. There was about $340 million, as you remember, in this bill for loss payments to some farmers in our area and a number of other States. And there was a requirement in the act that that money for the tobacco farmers be paid by October 20 of this year. A lot of these folks have made a lot of plans tied to it because it was tied to the loss payments for the last year. Can you share with me and the committee that we are on track and that will happen for those farmers?
Page 40 PREV PAGE TOP OF DOC Secretary GLICKMAN. Mr. Schumacher.
Mr. SCHUMACHER. Congressman, yes, thank you for the question. Yes. The statute is very clear. Payments were to reach farmers between October 1 and October 20. And we will make that deadline.
Mr. ETHERIDGE. Thank you. That will mean a lot to a lot of folks out there who have got those plans. And I know you are under a lot of pressure for other things. And before I ask my next and probably final question because I have run out of time, time for this answer, let me join the voices of those on this committee, Mr. Secretary, thanking you for your tremendous service to agriculture that didn't just start when you took over Secretary, and I understand that. But for those obviously who are new to the committee, your relationship did with us and you certainly have been a devout advocate for all portions of agriculture. And I think that is a critical piece when we think about it. As diverse as it is from production to marketing to all those pieces in between, at a time when agriculture in this country has probably been under some of the most intense pressures, certainly for the producers and others that it has maybe since the Great Depression. So I want to thank you for that.
And this is something of an unrelated issue to crop insurance, but it maybe the last opportunity I get to raise this too. And if you will allow me, we had a conversation last week as it related to stabilization of flue-cured tobacco and funding for that. That, as you know, in the Hurricane Floyd, it came through and devastated our State and a lot of other areas last time, and there was tremendous losses. There was funds made available in the Military Construction Act this year to provide for funding for them to buy down some of those damaged stocks that have created some problems.
And there seems to have been some delay in getting those funds out as it relates to aid for our cotton farmers and the issues there. And others may want to talk about that. I don't know. But there is about $76 million in that that is so important to the farmers that it will have a significant impact as it relates to the fall productions and determination of quotas next year, as we try to move these products, in some way, by discounting them to the national and international markets. And if we are able to discount them, it will make them really attractive to our potential Chinese purchasers and hopefully clear out some of those stocks prior to the November decisions that you will have to make, Mr. Secretary. My question to you is, can't USDA go ahead and make these funds available for this commodity and work out an accommodation with our friends in cotton, which happens to affect our State also, but so that they aren't held up until we get that worked out?
Page 41 PREV PAGE TOP OF DOC Secretary GLICKMAN. The answer is yes. Subject to OMB approval, I don't think that is going to be a problem. We are going to be putting a notice in the Federal Registerthe availability of funds on this program and solicitations of applications. And that should be published quickly, within the next few days. The fact is, is that there is a separate problem with cotton and it has to do with the fact that the loans were already repaid. And the statute is pretty clear that I can't go back and forgive loans that have already been repaid.
Mr. ETHERIDGE. Sure.
Secretary GLICKMAN. We have talked about this a little bit. But we are intending to move ahead with the area that is not in controversy.
Mr. ETHERIDGE. Thank you. And if I may follow up on that as a final question as it relates to that. Time is of this essence. This is one of those issues that if we can't get it done very quickly and the applications are extended, we got a problem. And my question would be, as it goes to the register, and we know where the funding is going, it would make a lot of sense if it could move quickly without a lot of paperwork. Because if it takes a long time, we will pass the threshold or the end of November. And if it can move even in the month of October, I think we have got a chance to make it usable this year. If it isn't made usable this year, then we have lost any opportunity we have.
Secretary GLICKMAN. Mr. Larry Mitchell, who is behind me, with the Farm Service Agency, and if not, we are going to do our best to move this as quickly as possible.
Mr. ETHERIDGE. Thank you, Mr. Secretary.
The CHAIRMAN. Mr. Smith.
Mr. SMITH. Mr. Chairman, thank you. And thank you and Mr. Stenholm for what I think has been an excellent 2 years of trying to work bipartisanly, and certainly, I suspect, Mr. Secretary, that this may be the last time that you appear before this committee. And also for your public service, certainly, as well as those times that you did not let partisan politics be involved in trying to promote agriculture and Rural Development, and certainly the same to Gus and Ken. Thank you.
Page 42 PREV PAGE TOP OF DOC I think it is a mistake not to have the Risk Management within FSA. FSA and risk management are trying to achieve similar goals when prices go down to help protect that farmerwhen weather or natural disaster results in lower yields, trying to protect that farmer. So it it has to be coordinated with our nonrecourse loan, our market loan, our LDPs, our natural disaster, if we going to end up encouraging farmers to participate in the program.
In terms of fraud and abuse, I consider it an extension of abuse when farmers in low-risk areas have to pay the same kind of premiums as farmers in high-risk areas to keep the program solvent in terms of covering those risks. In the legislation that we passed, we included language that said we would look at regions and low-risk areas in terms of ultimately determining premiums. Are we doing that?
Mr. ACKERMAN. Yes, Mr. Smith. Currently, the rating for crop insurance, the premium rates, are set on a county-by-county basis. But the legislation provides funding for us, beginning on October 1, to do a number of contract studies on rates and how our underwriting and rating system works. We intend to pursue that and initiate a number of studies very quickly.
Mr. SMITH. Do you have statistics that show the claims rate and claims pay out in different areas right now that I could see and you could furnish to me later?
Mr. ACKERMAN. Yes. We can furnish you that data. We keep all of that data on a county-by-county basis.
Mr. SMITH. And, Mr. Secretary, in terms of reassessing the reinsurance program to have a sufficient degree of risk on the part of the private companies to help assure that there is a minimal amount of fraud, that there an additional police force out looking out for their own interestsdo I understand that is what you are looking at as
Secretary GLICKMAN. Well, a maximum of once every 5 years under the new statute, we can renegotiate our contracts with the companies that are involved with underwriting and reinsurance.
Page 43 PREV PAGE TOP OF DOC And because the statute has changed and also because I have some personal concerns about the size of the underwriting fees, I think it is appropriate to renegotiate next year. But again, I want to reserve final judgment until such time as I see who my predecessor is and then talk to him or her about this. Because I have to make that decision before the new administration takes office. I have got to do it by December 31 of this year. And then the actual process of negotiation will take place next year. I would not be personally involved in that at all. And I think the issues that you raise, and perhaps the role of the companies and the whole oversight process, would be raised in that renegotiation process. Is that correct?
Mr. ACKERMAN. Yes. The reinsurance agreement that was last negotiated in 1997, covers all of the financial terms between the Government and the insurance companies.
Mr. SMITH. Do we assume that from the GAO report, et cetera, that their risk isn't substantial enough that they are out policing the kind of fraud and rather, they are keeping a good relationship with their customers to sell them more insurance the following year since you cover so much of that reinsurance?
Mr. ACKERMAN. Well, the GAO report from a couple of years ago, from 1997, dealt with the administrative fees. And we have now reduced those fees to the level recommended by the General Accounting Office. They are now down. They are pegged at 24 1/2 percent. The actual book-wide average is 21.7 percent. As far as whether the companies assume risk in payments that would cause them to do a careful job of underwriting and making sure that they do a careful job of overseeing of loss adjustment, yes, they do bear risk in these payments. The amount of risk varies by the different risk pools. For instance, there is a larger amount in the commercial fund. There is a smaller amount in the assigned risk pool. But those were increased in 1997. That issue is one that would certainly be on the table if the SRA were opened up.
Mr. SMITH. And let me just conclude, Mr. Chairman, saying that I am convinced that there needs to be coordination between the other safety net programs of SRA and where we go on risk management. Thank you, Mr. Chairman.
Page 44 PREV PAGE TOP OF DOC The CHAIRMAN. Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. I want to begin by commenting you because I think your leadership through the crop insurance reform has represented the best example of bipartisan constructive leadership I have seen as a Member of Congress, period. Really did a heck of a fine job on that. I also want to congratulate the Secretary. If I count right, the last 24 years of your professional life, you spent a lot of it in this room trying to make things better for our farmers. And this might be your last appearance in this room with a public hat on, and it has been my great pleasure to know you personally during this period of time. And I really congratulate you for every effort that you have made. Similar kudos to Under Secretary Schumacher and to Director Ackerman.
We have spent considerable time on many problems and I have always appreciated your responsiveness and your efforts to work with us.
Secretary GLICKMAN. If I just may add, North Dakota is responsible for about 92 percent of the problems of agriculture. [Laughter]
Mr. POMEROY. And after I was begin so nice. I think you said it all. A couple of things. If we were just sitting around as directors of an insurance agency and looked at, over the last not quite a decade, almost doubling the farmers, almost tripling the acres and getting people up to better coverages, we would feel like we had had a very good run, a very successful business plan. And so I think this is a complex program with a lot of areas that still need attention, a lot of things have raised questions. But if you step back and look at that broad parameter, clearly this has been a successful run for crop insurance.
And we are achieving basically two significant goalsbetter coverage for more farmers, so their investment stake is protected, and better spread of risk for the program so we can provide better coverage without draining on the Treasury because we are spreading the risk across commodities and regions. So we have made some significant progress on that. First, as to points of compensation to the industry. Well, I acknowledge that administrative fees have come down. And I have been among those signaling caution about overdoing it, less we cut out the private part of this public/private partnership. I do want to note that with buy-up levels, premiums are substantially higher in many cases, especially counting the Federal subsidy. And so that it is a lower percentage, but a lower percentage of a higher amount. We have to continue to look at it, not just isolate the percentage.
Page 45 PREV PAGE TOP OF DOC Second, and leading to my point I care more about, because I am not as concerned about administrative expenses, as you have noted, as whether or not the reinsurance agreement is constructed well. And I added the language here, with the chairman's help, to have the SRA looked at again. I was surprised to have found that the terms of the Standard Reinsurance Agreement were actually codified and is a matter of Federal Code. I think, in the future, it probably isn't optimal to have that level of detail in the Federal Code and that ought to be a matter of administrative discretion. Nonetheless, you get one renegotiating chance.
And you have indicated in your testimony you will look at levels of profit. I also encourage you to look seriously, and our language directs you to actually report language directs to look at the potential for private retention, including private reinsurance coverage. In way, when we have the retention too low, I think we dampen innovation within the program because they are innovating on our dollar. And that means the efforts they put into RD they got to share across all participating companies. If they had more retention shared by private reinsurance tier, they could retain more of a propriety exclusive contract, I believe. And we can work that out in the future. I think you can encourage innovation and bring the public level of exposure to a more appropriate level. So I hope you look at that as you renegotiate.
The other aspect that I, with the chairman's help, added to another aspect that I added to the bill was directing you to look at the quality loss discount coverage. I had no idea when we were doing that in May and June the dimensions to which this would become problematic in North Dakota just a few months later. We are having devastating quality loss discounts applied at the elevator. Farmers with Durham and Spring wheat getting less than a buck a bushel. They are pricing out on the ton. Because the discount factors make it such that the elevator doesn't even want it. Some can't get rid of it at any value. Yet the discounts are often below 15 percent required to trigger the coverage; well below the 35 percent relative to triggering adequate coverage.
Page 46 PREV PAGE TOP OF DOC You have explained to me in the past, Director Ackerman, how this is a tough one to underwrite because, in a way, the grain trade plays quality discount as a moving target, sometimes set by supply-demand consideration, sometimes seemingly set by subjective judgments in any given year.
On the other hand while it may be tough for the program it is even tougher for an individual farmer to take the exposure right out of its pocket. I have got an example here of a farmer in North Dakota. He has got about 10 percent damage. He is getting 68-cent-a-bushel bid at the elevator and no recovery. Yet, he has virtually wiped out the value of his crop.
Mr. POMEROY. This year we are working to have the disaster bill address that because this is pure economic loss to our farmers in light of production conditions beyond their control. No question about it.
But we want to get over this reliance upon disaster coverage. We really need to get down to work as directed by the legislation in coming up with a quality discount approach. I am going to add for the record, Mr. Chairman, if you don't object, this news article, ''Quality Issues Illustrate Insurance Gap,'' just for laying very starkly what we are running into in North Dakota. And I would ask your response in terms of how we might proceed to address that issue.
Mr. ACKERMAN. Well, I am speaking first the long term, then the short term. The language in the legislation, Mr. Pomeroy, as you mentioned, requires us to contract a review of this whole issue of quality adjustment and how we can balance this gap between what elevators are paying farmers, what they are actually charging, the markdowns that are actually out there in the marketplace, versus the factors that we have in place designed to protect the Government against being low-dollared, essentially, by the elevators. That has been a problem that we have wrestled with the last few years. I think the idea of our contracting out to a neutral third person to take a fresh look at this and give us a recommendation and to do it quickly would be very helpful.
Page 47 PREV PAGE TOP OF DOC Once we have issued an RFP, a Request for Proposals, generally to get contractors under this program. Once we get passed the beginning of a new fiscal year, this is one of the early ones that we want to tackle in terms of coming up with a plan for the future.
For the short term, for the current emergency in the northern plains, we are very aware of that. We have been following the losses the last few weeks. The losses in North Dakota and the surrounding States have jumped very sharply in the last few weeks because of these quality problems. We recognize also that there is a disaster package moving forward, as the Secretary mentioned in his statement, and we certainly want to work with you to develop a way to incorporate this issue into a larger package and to come up with the best way to do it that works both for FSA, which will have to administer the disaster package, and build it on top of the insurance program so that we do what we are advertising to solve the problem right now.
Mr. POMEROY. If I may just follow-up, and I see my time has expired, Mr. Chairman. The legislation will have to specifically direct some relief relative to the quality discounts, as I understand it. Because if the legislation simply comes over without that kind of specification, disaster relief will be paid out based upon the way RMA usually pays quality discounts, which, as we are seeing, totally misses the kind of economic loss our farmers are experiencing. Is that correct?
Mr. ACKERMAN. Well, your point is exactly right, that the legislation would need specific language to say that, in this case, we would pay for the quality loss that is not covered by crop insurance. Because the default, if you don't do that, FSA would administer the emergency program based on the standards currently in the Crop Insurance Program. And if those current standards are problematic, then the problem gets carried over.
Secretary GLICKMAN. I agree. You are going to have to put this in the language someplace.
Mr. POMEROY. And then, Mr. Secretary, would you be supportive of it? I mean, but to the extent that you want to have either crop insurance or a disaster package be able to cover farmers for their economic loss due to production circumstances beyond their control, it seems to me we got to respond.
Page 48 PREV PAGE TOP OF DOC Secretary GLICKMAN. The answer is yes. I mean, I have reserve judgment to determine how much money you are talking about because it is all part of a bigger dollar amount, but, in concept, I would be supportive of it.
Mr. POMEROY. Thank you.
The CHAIRMAN. Mr. Jenkins.
Mr. JENKINS. Thank you, Mr. Chairman. Mr. Secretary, you and others have talked about more involvement of the FSA in this entire process, and I certainly am among those people who believe that in having more involvement by FSA, you are certainly moving in the right direction. Now, I would like to talk about a specific crop. I represent a congressional district that has about more than 30,000 farms registered with your FSA. About 75 percent of them, I believe, have Burley tobacco allotments and Burley tobacco is actually grown on several thousand of those farms.
And as I talked to farmers around that district, they know, as well as any of us in this room, that fraud and abuse by a few people hurts all of them. And they also know that it is the worse possible time in their farming lives to be hurt in any way. They simply cannot stand the infliction of much more pain. Their situation is that bad.
So my question is, what particulars can you tell us about your work with the insurance reform that will affect and hopefully improve the world of tobacco farmers and the Tobacco Program?
Mr. ACKERMAN. Well, generally, there are a number of things in the overall bill that will be very helpful for tobacco farmers and others. The premium subsidies will make insurance more affordable, more accessible, at the buy-up levels. The provision on APH, on multiple-year losses, will be very helpful. On the particular compliance oversight issues that you have mentioned, we have already started a number of joint operations with the Farm Service Agency. We are working to put the particular new mechanisms mandated by the law into effectthe monitoring program, the data reconciliation program, the consultation with State committees and the others. That process is well underway and we think that will be very helpful.
Page 49 PREV PAGE TOP OF DOC Secretary GLICKMAN. I would also, although this is a much shorter-term answer. We will begin making payments under the 2000 Crop Year Market Loss Program for tobacco. That is $340 million. And those payments will reach farmers between October 1 and October 20, as specified in the statute. The sign-up ended on September 1, but that should be helpful, certainly, in the short term.
Mr. JENKINS. Thank you. And, Mr. Secretary, secondly, you mentioned the False Claims Statute and your belief that it has application here.
Secretary GLICKMAN. It may have application.
Mr. JENKINS. So we haven't come to the point where there has been any attempt to apply it anywhere.
Secretary GLICKMAN. I am not sure. Actually, in my prior service, I was on the House Judiciary Committee and worked on the False Claims Act with Congressman Berman and Congressman McCollum, and others. That law used to be called the Abraham Lincoln Law. And it was the way that they dealt with the fraud in the defense industry during the Civil War where they allowed people to actually sue the Government on behalf of routing out waste and fraud in the defense industry back then. And you would basically sue on behalf of the Government, you would sue. And if you were successful, you would get a portion of the recovery for fraudulent payments to defense contractors. It is basically applicable to any Government payments. But I don't know if it has ever been used here.
Mr. JENKINS. Well, is there going to be a serious effort to
Secretary GLICKMAN. The Government doesn't actually file those lawsuits. Those are individually filed lawsuits.
Mr. ACKERMAN. I would point out that it has been used in the Crop Insurance Program. I am reminded that there was a case as recently as 1993, a significant case, in the Midwest involving wet corn, which was originally brought by an individual producer and ultimately became a major Government investigation and settled this year.
Page 50 PREV PAGE TOP OF DOC Mr. JENKINS. Thank you.
The CHAIRMAN. Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. And I do want to thank you and Charlie and all the staff for the hard work, and the Secretary. It sounds like things are cracking along well. And, Mr. Secretary, if we don't get a chance to see you in this forum again, I also want to say that it has been a pleasure working with you. Your people have been real great. You have been great to work with.
Although I got a chance to perform at Farm Aid and judging, I don't want to, judging from what I kind of gleaned, I think you got some work to do yet with Willie Nelson and Neil Young and the Barenaked Ladies. And I don't think you have won them over yet.
Secretary GLICKMAN. I am really worried about Willie and Neil, but the Barenaked Ladies, I don't know if they are my cup of tea or not.
Mr. PETERSON. Anyway, during the crop insurance conference, we had this issue regarding the people with the multiple numbers and we had some controversy about whether we are going to try to do something to help those folks. And there was language that I had inserted in the bill and we had some discussionsGus, you and I. And could you tell me how that is coming along in terms of getting that sorted out.
Mr. SCHUMACHER. Do we know where we are on that one yet?
Secretary GLICKMAN. Do you want to stand up? Larry Mitchell, do you want to
Mr. MITCHELL. Congressman, we have reviewed the provision. Unfortunately, at this time, we don't have funding to provide any indemnities under that program. The funds for both the multi-year and the single-year program that was passed 2 years ago, have been exhausted.
Mr. PETERSON. So in order to make that work, we would have to appropriate some more money?
Page 51 PREV PAGE TOP OF DOC Mr. MITCHELL. Yes, sir.
Mr. PETERSON. Do you know how much?
Mr. MITCHELL. I really don't. In fact, the second problem will be, we really haven't found a way to come to terms with how do determine who is eligible under that program? Some information is available; not all the information is available. So I don't have an answer for you on how much money we would need.
Mr. PETERSON. We have had some conversations, I guess you would call them, during the conference committee, and I think it is fair to say that there are some folks within the Department that are not really too enamored of doing this. Is that what is going on here yet or
Secretary GLICKMAN. Go ahead.
Mr. SCHUMACHER. I think. When I was there at the conference, when that was taken up, and there was some discussion backwards and forwards. And as you recall, I said, we would make every effort to see if this can work. We will go back and look at this again. There is some issues, like a money issue, and I will talk again to the staff on how we implement it. We did say it was going to be a very difficult to implement.
Mr. PETERSON. I understand that. But I don't think it is impossible. I would like it if you could get some kind of a guesstimate of what you think it would take, appropriation-wise. I mean, I, for one, would maybe try to work to try to get something in there. Because these people really got the short end of the stick. And through no fault of their own, they got knocked out of that program. And then I just think we ought to try and do something if we can.
The other thing. I was looking at this chart here that was up there a while ago that lists these States and their indemnity versus premium. I understand what is going on in North Dakota and so forth, but what in the world is going on in Connecticut and Massachusetts where they have got these loss ratios of $7 1/2, $7.50 to $1 or $5.30? And then the States right around them are not at that level. So what is going on there that doesn't meet the eye?
Page 52 PREV PAGE TOP OF DOC Mr. SCHUMACHER. Well, I went up there this weekend. What they have, Congressman, is this is all tobacco. This is the cigar-wrapper tobacco that is grown under shade and open fields, which is extremely high-value in the Connecticut Valley, whether it is northern Connecticut Valley and all through western Massachusetts. And they have been traditionally insuring that crop. And this year they had a complete wipeout of the very valuable crop due to a combination of tobacco blue mold and some brown spot and lost virtually the whole crop. Very difficult and those farmers are in pretty bad shape. But they are the loss ratios are very high, especially tobacco.
Mr. PETERSON. So it is that one crop?
Mr. SCHUMACHER. It is the one crop. It is tobacco because and in some States, and in your State, in the northern end, were very, very wet. In western New England, eastern New York, extremely difficult weather conditions, mainly because of rain and cold rain all summer, whereas the Texas got the drought and Massachusetts and New York and your State got the wet.
Mr. PETERSON. All right. Lastly, this chart that you have got here for 2000, do you have that published someplace where it has got it for the last 5 years or 10 years in any kind of a format that you put together?
Mr. ACKERMAN. Do you mean the State by State chart?
Mr. PETERSON. Right.
Mr. ACKERMAN. We can provide that for you. We have this chart on our web site. We put out a similar one last year, as the year went forward, just to keep a running count of what we were expecting. But we could put something like that together for you. Yes.
Mr. PETERSON. I appreciate that. Thanks, Mr. Chairman.
The CHAIRMAN. Mr. Lucas.
Page 53 PREV PAGE TOP OF DOC Mr. LUCAS of Oklahoma. Thank you, Mr. Chairman. And let me colleagues' comments and appreciation to both you and the ranking member for the time spent both in hearings here and out in the field across the country in the preparation to lay the ground work for the challenges ahead of us next year. Certainly, that was a wise and timely decision and will bear fruit next year. And, of course, Mr. Secretary, it is hard to believe 24 years in this room.
Secretary GLICKMAN. Yes. It is.
Mr. LUCAS of Oklahoma. That is almost a superhuman accomplishment in itself. The topic today, of course, crop insurance dealing with, as you put it, natural disasters' effects on the farmers and ranchers out there. If I could slide just for a moment to a couple of very brief questions, but that relate to the natural disaster questions facing us. Of course, in Texas and Oklahoma, we have and are undergoing a drought that is certainly a major natural disaster. And you have been in both States and I certainly appreciate your willingness to tromp through the dust to see what is going on down home. Does the Department have, or do you have, any kind of running total as to what the cost of the drought has been so far in Oklahoma and Texas?
Secretary GLICKMAN. I don't have an Oklahoma and Texas number. What I said was, is that our estimate so far of drought damages is about $1.4 billion crop loss and $800 million livestock loss. Now, that is over and above the crop insurance indemnities. And those numbers are in a constant role of being readjusted. But that was an estimate, best estimate we have got to date. A big chunk of that is in the Southwest. I can't tell you what percentage of it is though.
Mr. LUCAS of Oklahoma. Well, certainly I see it up and down the roads and the byways of the sixth district of Oklahoma, what happened to the cotton crop and the sorghum crop that was not this summer. And certainly there are many wheat drills at the end of the field waiting for Mother Nature to change her mind. Along that line, should Mother Nature, in Oklahoma and Texas, decide to cooperate in the coming days and we have an opportunity to sow some of that Winter wheat, one of the pieces of language included in this bill at the present, signed into law, was the option, of course, to extend the LDP payment program in lieu of, I guess, might be the better way to describe it to include an option for Winter wheat that is grazed out. Where do we stand in the rule-making process on that, the creation of the procedures that will implement the language?
Page 54 PREV PAGE TOP OF DOC Secretary GLICKMAN. Larry Mitchell, again, I would ask that he respond.
Mr. MITCHELL. Congressman, we are in pretty good in implementing that provision. Should have a publication of the regulation some time early this fall. In fact, we had a task force, which included the State executive director of FSA from Oklahoma, in putting that together. We had caught a number of issues that we had resolved. We have got of all those behind us and we will be ready to sign farmers up for that before normal harvest would start in those counties.
Mr. LUCAS of Oklahoma. So we will see the rules this fall, and the decisions they will have to make them based on those rules, will come next
Mr. MITCHELL. Procedure training and
Mr. LUCAS of Oklahoma. Prior to harvest.
Mr. MITCHELL. Yes.
Secretary GLICKMAN. Mr. Lucas, the numbers I gave you, basically, are all natural disasters. Drought is a big part of it. There are some other water-related and other things as well.
Mr. LUCAS of Oklahoma. Thank you, Mr. Secretary. Thank you, Mr. Chairman.
The CHAIRMAN. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman, and, Mr. Secretary, for being here today. Just a couple of questions and you maybe answered this earlier. I don't know. But what is the percentage of producers in the country who participate in the Crop Insurance Program?
Secretary GLICKMAN. Mr. Ackerman tells me about 70 percent. That would be of eligible producers. That would be catastrophic in buy-up or total.
Page 55 PREV PAGE TOP OF DOC Mr. ACKERMAN. No. Total.
Secretary GLICKMAN. Total. About 70 percent.
Mr. THUNE. And how many of those are multi-peril versus revenue? Are we getting to a point where the Revenue Insurance Program is going to become a more viable, where that might replace the MPCI?
Mr. ACKERMAN. At this point, the large majority is still multi-peril, but revenue insurance has grown significantly. I am guessing on the number, but it is probably in the range of about 20 percent, give or take, for the principle crops.
Between 15 and 25 percent for the principle crops.
Secretary GLICKMAN. Just, if I may ask Ken a question? What is the goal in the participation as a result of this bill in terms of number of producers? And you talked a little bit about that yesterday.
Mr. ACKERMAN. All right. Our projection, our goal, is that in 2 or 3 years, as the bill takes effectwe now have about 70 percent participation. We would like to get that up to about 85 percent. And we would also like to see producers who currently have CAT coverage move up to buy-up, and those with buy-up to take another look at revenue. The way subsidies are now structured under the new law, the incentives are very much there for farmers to look at these higher levels so that we will get more coverage, both in terms of numbers and quality.
Mr. THUNE. And is it your expectation that in time you will see the numbers in revenue become comparable to those in multi-peril?
Mr. ACKERMAN. I expect that the numbers for revenue insurance will go up.
Mr. THUNE. Is there a point at which you say, kind of like we say that we have a structural unemployment rate in this countrythat there is just a certain amount where we have capped out? We are not going to get to where it is a 100 percent participation of the program?
Page 56 PREV PAGE TOP OF DOC Mr. ACKERMAN. Yes. I think that is a fair plan. Because you are always going to have some farmers, either because they have various small shares or because they are in a unique circumstance, for whom the numbers just won't work out.
Mr. THUNE. Well, I guess, first if all, I just want to say thank you to you, Mr. Secretary, and your team for working with us on a lot of these issues. I think that the changes that were made are on the right track. And I really believe that as part of our approach to foreign policy, we have got to have a risk management tool that works. And I think that the changes on APH and buy-up levels and everything else were the direction in which to move. I hope that we will see an improved program that does increase participation in which producers take as a serious and viable risk management took that will help shape and help provide the safety net that we all talk about for our agricultural producers.
But I would also say that I think it is really important for the program that the changes and the safeguards that were put into the legislation regarding waste, fraud, and abuse, that those things have to be implemented in a way that provides a level of confidence that these sorts of things aren't going on. And I think that, again, those provisions are designed to strengthen that. And I would hope that in the implementation phase, this things begins to take shape and work out there, that that confidence level will be there. Because I think it is critical. We have all alluded to it this morning. You hear the incidents, the anecdotal examples of people who are gaming the program and so forth. It really undermines the integrity of the program when that happens.
So just from the standpoint of, as this moves forward in the implementation phase, I would hope that we can strengthen the confidence the people have, as well as the participation. But I think we are on the right track and look forward to visiting with you all again in the future as we get a little bit more experience under our belt after the changes are fully into effect. So, thank you for being here, and thank you, Mr. Chairman.
Page 57 PREV PAGE TOP OF DOC The CHAIRMAN. Mr. Secretary, the staff informs me that you are a beagle owner. I wanted to make sure thatas many have said, this may be your last appearance before the committeethat you met Angus, who was a gift from USDA's Beagle Brigade, that we adopted on this committee after passing the law to protect these animals. Angus doesn't have any questions. But we did want to make sure you had a chance to meet him.
Secretary GLICKMAN. This further endears me to the committee.
The CHAIRMAN. Absolutely. He has his little cape on and Angus has found a wonderful home here.
Mr. Stenholm had a follow-up question.
Mr. STENHOLM. I thought I did. But I might ought to quit while we are ahead.
I have a question from Congressman Chris John asked that be submitted, and I have a little interest in the answer to this also. I understand that a proposal providing cost of production protection for producers has been submitted to USDA.
Can you tell us where the RMA is with respect to this proposal?
Mr. ACKERMAN. Mr. Stenholm, we have received this proposal. It is one of the items that is earmarked in the legislation for us to contract on. We think it is a very good project that is being developed. The actual proposal is going through our internal review and legal review so that we can finalize it. We hope to finalize it soon within the new fiscal year.
Mr. STENHOLM. Does it or will it include coverage for rice and saltwater intrusion?
Mr. ACKERMAN. Rice and saltwater intrusion, that provision, in the new law, has already been implemented. This is separate from the cost of production proposal. That will be in effect for 2001. We finalized an interim regulation just within the last week to do so.
Page 58 PREV PAGE TOP OF DOC Mr. STENHOLM. I thank you for your remarkable ability to answer a question with the added panelist on this day.
The CHAIRMAN. I would say his bark is worse than his bite. Mr. Secretary, thank you. The timing on this worked out just about right. We have two votes. We will take a brief recess and return and ask the indulgence of our other panel. If you would like, you are very welcome to come visit with Angus.
The CHAIRMAN. The hearing will resume sitting.
Our second panel of witnesses we invite to the table, Mr. Michael Connealy, CEO of Rural Community Insurance Services from Anoka MN; Mr. Jess Ben Latham, III, vice-president, Producers Lloyds, and chairman of the American Association of Crop Insurers, from Amarillo, TX; Mr. Steve Rutledge, senior vice-president of Farmers Mutual Hail Insurance Company of Iowa, on behalf of Crop Insurance Research Bureau, Inc., from Des Moines, IA; Mr. Robert Fulwider, who is executive vice-president of Ray Wuestenberg Agency, Inc., on behalf of the Independent Insurance Agents of America, from West Liberty, IA.
Mr. Connealy, please begin. And we will take the testimony from the witnesses in order of the way they were introduced.
STATEMENT OF MICHAEL CONNEALY, CEO, RURAL COMMUNITY INSURANCE SERVICES, ANOKA, MN
Mr. CONNEALY. Thank you, Mr. Chairman, members of the committee. My name is Mike Connealy, chief executive officer of Rural Community Insurance Services, a wholly owned subsidiary of Wells Fargo and Company. Accompanying me here today is Tim King, senior vice-president of Wells Fargo.
In addition to our banking activity, Wells Fargo is the parent corporation of RCIS and a participant with a Standard Reinsurance Agreement with the Federal Crop Insurance Corporation. In year 2000, RCIS sold and serviced agricultural insurance policies in 48 States with premiums in excess of $550 million.
Page 59 PREV PAGE TOP OF DOC Wells Fargo is the Nation's largest agricultural bank lender with several billion dollars in agriculture loans in both 1999 and 2000. For the most part, these are operating loans and land loans to family farmers. We also lend a significant level of dollars to related agribusiness in rural American, many of whom are also family enterprises.
The foundation for the strong rural economy begins with the food and fiber producers. Our farmers, however, must be able to reap an appropriate reward for expending their labor and capital to provide the United States with abundant food. We cannot eliminate risk at the farmer level, but Government and the private sector can work together to provide access to risk management tools, such as subsidized multi-peril crop insurance. Wells Fargo supports the recently passed crop insurance legislation and looks forward to advancing our commitment to rural America by using the Crop Insurance Program. In year 2000, most of our operating loans, particularly those that shows any signs of financial stress, are secured by crop insurance policies.
We now look forward to a 2001 loan renewal season. Banks will be forced to factor in many additional costs at the farmer level for 2001. Particularly, recently raised interest rates from the Federal Reserve and a great concern also as regard to energy prices, which would, in our estimation, add even more stress on our agriculture loans for 2001.
Before we further address the subject of today's hearing, we would like to take a moment to thank the chairman and the committee for their collective work, along with members of the Senate committee, that culminated in the passage of the Agricultural Risk Protection Act of 2000.
As with any legislation, Mr. Chairman, the success or failure of the new act will depend upon implementation. FCIC has announced changes to the farmer premium subsidy structure, instituted new CAT risk protection fees, and it also has a plan to change the APH history program to conform with requirements of the new legislation.
Early returns from the field on Winter wheat sales indicate that farmers are buying up to higher levels of coverage, particularly in Oklahoma and Texas. We are seeing several reports from our agents that the 70 percent and 75 percent levels of crop revenue coverage are very popular and they are also very affordable when compared to the previous law.
Page 60 PREV PAGE TOP OF DOC We have attached, for the record, a quote for these levels of coverage comparing 2000 and 2001 and we believe that they reflect the good work done by the committee in the new bill.
The new act makes substantial changes in the structure of FCIC that may provide significant opportunity for improvements. Although not a structural change, we urge FCIC to provide increased financial support to the interactive computer system, known in the industry as RAS/DAS, located at the FCIC office in Kansas City. We believe that the resources are needed to upgrade that facility to keep the companies and FCIC at the leading edge of technology.
The Agricultural Risk Protection Act of 2000 was written, in part, to enhance program compliance. This, in turn, will provide even more program integrity, if responsibly implemented. The conference report provides for greater civil penalties for those caught misusing the program. In addition, the conference report mandates the use of Farm Service Agencies to assist FCIC with the investigation of producer claims and in the review of new insurance policies. We are finding that even in year 2000, FSA involvement has been active and also positive, as far as reporting program abuse.
RCIS strongly supports the elimination of always fraud and abuse in the Crop Insurance Program and will assist FCIC or any Government agency in their effort to eliminate any and all forms of program abuse. Cooperation between USDA and the private sector insurance companies is imperative if we are to find and eliminate abuse regardless of where it occurs.
It is also our believe that aggressive use of new e-commerce tools will substantially reduce the opportunity for program abuse and fraud. Computer-based records are much more reliable, in our opinion, than paper-based processes that can be more easily manufactured after the fact.
We have added several charts for the benefit of the committee, to indicate the additional farmer subsidy levels for Texas wheat, and also an estimate for 2001 cotton. And we would provide this for the record. And that would conclude my oral testimony and would be happy, with the rest of the panel, to take questions upon conclusion from the rest of the panel. Thank you.
Page 61 PREV PAGE TOP OF DOC [The prepared statement of Mr. Connealy appears at the conclusion of the hearing.]
The CHAIRMAN. Mr. Latham.
STATEMENT OF JESS BENJAMIN LATHAM, III, VICE-PRESIDENT, PRODUCERS LLOYDS, AMARILLO, TX, AND CHAIRMAN, AMERICAN ASSOCIATION OF CROP INSURERS
Mr. LATHAM. Thank you. Mr. Chairman, Congressman Stenholm, it is my pleasure to appear before you today. I am Ben Latham, vice-president of Producers Lloyds Insurance Company in Amarillo, TX, and we are proud to say that is part of the 19th district. I am also chairman of the American Association of Crop Insurers, and we represent insurance companies and agents that write nearly 80 percent of the multi-peril crop insurance in the United States. I am here today to testify on behalf of that association. I want to thank you, Mr. Chairman, for holding the hearings and giving us an opportunity to testify. I have a prepared statement that I would like to submit for the record, and my remarks this morning will be brief. And I am delighted to answer any questions you or the committee might have.
I want to highlight several points from my written statement. First and foremost, I want to make it absolutely clear that we, as an industry, recognize that fraud and abuse occurs in the Crop Insurance Program. We have been, will continue to, and stand ready to take the necessary means to stamp out fraud and abuse. We place that we will continue to work with RMA in this area, as we have in the past.
Second, in my written statement, I make the point that insurance fraud and abuse is not unique to crop insurance. According to the Coalition Against Insurance Fraud, the annual cost of insurance fraud is something in the range of $79 billion. This estimate makes insurance fraud the second largest economic crime in America; second only to income tax evasion.
Insurance fraud is generally perceived as a high-return, low-risk undertaking. Many view insurance fraud as a victimless crime; only the insurance company pays for this crime. Of course, we know that this is not true and, as you said this morning, Mr. Chairman, that only results in premiums for everyone in a similar situation or a risk pool going up. The victims are, as usual, the law-abiding citizens.
Page 62 PREV PAGE TOP OF DOC The third point I want to make is that the business of crop insurance brings its own unique challenges for fighting fraud and abuse. For example, the nature of crop insurance means that we are ensuring a producer's ability to make a crop; his or her management practices. Poor management practices often result in a crop insurance claim, when a better practice would have avoided that claim. Proving how much of a claim is a result of conditions beyond a producer's control versus how much is due to poor management, is extremely difficult. Even with the governmental steps that are improved with the new bill, it is still a hard road to hoe. I offer these observations not as excuses, but to highlight the reality of the business. These are challenges we face and we must deal with them to successfully combat fraud and abuse.
The fourth point I want to make is that fraud and abuse are not the same problem. As a trade association, we believe that fraud is a deliberate action taken to generate economic gain. Insurance fraud can include the padding of claims, falsifying and insurance application, creating phony claims, or intentionally taking actions to create a claim. We believe that fraud is not nearly as prevalent within the Crop Insurance Program as abuse of the Crop Insurance Program provisions. We define abuse as someone taking advantage of the special circumstances, errors, or loopholes within the crop insurance policy. Our experience suggest that loopholes are more costly and widespread than fraud. The problems, fraud versus abuse, are not the same and, therefore, require different solutions.
Mr. Chairman, we believe the committee recognizes the complexity of these issues and legislated accordingly. The Agricultural Risk Protection Act of 2000, we believe, provides additional tools to fight fraud and abuse within the crop insurance industry.
After nearly 2 years of work and review and debate, the committee produced this act and this act improves the antifraud provisions for crop insurance and for the program. Antifraud authorities were expanded, resources were added to the Federal Government, and greater penalties were provided. It is our understanding that the RMA, FSA, and OIG intend to present a plan to the Secretary on or before October 1, 2000, and that will outline how the USDA should implement the antifraud sections of the Agriculture Risk Protection Act. And although we have not been asked to participate at this time, we were assured earlier by the Secretary this morning, that we will have the opportunity to have input.
Page 63 PREV PAGE TOP OF DOC We have also formed an industry Program Integrity Workgroup to provide our recommendations to the USDA on how, at best, to implement this act. This work group is an extension of an ongoing effort within the industry to work with RMA on this critical issue.
For example, earlier this year, RMA and industry worked together to develop a common understanding on how best to combat fraud and abuse. And our effort culminated with a recommendation that was contained in joint press release earlier this year in February. That was a result of over 18 months of work between industry and RMA to address this problem.
Mr. Chairman, we take fighting fraud and abuse seriously. We will not knowingly pay a fraudulent claim. We have dedicated significant resources to combating this fraud and abuse. And our Program Integrity Workgroup is in the process of quantifying these efforts across the industry and will provide our results to this committee.
Often we hear that the industry does not do enough, that we bear no risk under Federal reinsurance agreements, and as a result are happy to pay all claims regardless of how specious they may be. Nothing could be further from the truth. The economics of this program require every claim to be scrutinized. We, as risk bearers, share in the amount of claims paid. It behooves us, as profit entities, to ensure that every claim is paid fairly and not overpaid.
Thank you, Mr. Chairman, for the opportunity to testify and I will be happy to take questions from you or the committee. Thank you.
[The prepared statement of Mr. Latham appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you. Mr. Rutledge.
STATEMENT OF STEVEN C. RUTLEDGE, SENIOR VICE-PRESIDENT, FARMERS MUTUAL HAIL INSURANCE COMPANY OF IOWA, DES MOINES, IA, ON BEHALF OF CROP INSURANCE RESEARCH BUREAU, INC.
Mr. RUTLEDGE. Thank you, Mr. Chairman. My name is Steve Rutledge and I am senior vice-president of Farmers Mutual Hail Insurance Company of Iowa, located in Des Moines, IA. Farmers Mutual has been providing private crop hail insurance to many of our Nation's farmers since 1893, the year the company was founded by my great-grandfather, W.A. Rutledge.
Page 64 PREV PAGE TOP OF DOC In 1997, after more than a century of service in the private side of the crop insurance industry, Farmers Mutual made a decision to enter the Federal Crop Insurance Program and, in 1999, after nearly 2 years of preparation, we became an approved insurance provider and began selling multi-peril crop insurance.
So in regard to the Federal Crop Insurance Program, we are the new kids on the block. However, we believe that as such, our general perspective of the Federal program and the reasons we chose to become involved may be useful and I thank you for the opportunity to present them today.
In addition, I will be sharing the positions that we and other members of the Crop Insurance Research Bureau have on the implementation of the antifraud, waste, and abuse provisions of the Agriculture Risk Protection Act of 2000.
It only seems right to begin by extending our appreciation to Chairman Combest and the entire House Agriculture Committee for the months of hard work necessary to draft and pass into law the Agriculture Risk Protection Act.
The overwhelming support for the act clearly demonstrates the national commitment to the Federal Crop Insurance Program as the centerpiece of the safety net provided for American agriculture, and to private industry as the most effective and economically efficient vehicle for the delivery and service of the program.
Still, there exists a concern that the program is flawed, primarily by fraud and abuse. But to believe that the Federal Crop Insurance Program is somehow dysfunctional, is to ignore the progress and achievements made by the program over the past 20 years.
This program works. It is true that there have been instances, isolated instances, when the expected level of program integrity was not maintained. And the program is not all things to all people. But for the vast majority of producers in this country, the program has proven to be a very effective risk management tool. So much so, that this past year, more than 1 million policies were sold to farmers across the Nation who chose to spend, collectively, more than $1 billion of their own money to purchase multi-peril crop insurance.
Page 65 PREV PAGE TOP OF DOC Possibly the most telling evidence of the program's success is the simple fact that after nearly two decades on the sidelines, Farmers Mutual Hail has decided to participate in the program. During the early 1980's, when the partnership between public and private sectors was just beginning its evolution as a result of the passage of the Federal Crop Insurance Act, Farmers Mutual was the largest writer of crop insurance in the Nation. Today, the larger crop insurance companies are four to six times the size of Farmers Mutual.
And just since 1996, the coverage provided by the Federal program has increased nearly 75 percent, while our own private crop insurance has declined by 30 percent. By any market-driven measurement process available, the public/private partnership established 20 years ago, has been a tremendous success. However, as we have learned, there are some problems.
First, the sheer complexity of the program. This is a problem that affects everyone from the producer all the way to Congress. It creates opportunities for fraud and abuse and greatly increases the difficulty of identifying those situations.
Second, the opportunity for approved insurance providers to earn a reasonable profit margin. And this really is a more realistic concern than some might imagine.
Third, appropriate funding for the program. I don't mean additional. Appropriate is the word. The worry is that, judging by the information available to us, the Risk Management Agency may not be able to properly maintain and update their computer systems without additional funds. If RMA's systems are allowed to decay, insurance providers will not only have great difficulty delivering the program, but neither party will have the necessary data to detect cases of fraud or abuse.
And, finally, the relationship between the public and private sectors. Our belief is that if insurance providers had a greater role in the decision-making processing, particularly with regard to some of the details of program implementation, the effectiveness and efficiency of compliance efforts would be improved, the opportunities for abuse could be reduced, and the ability to detect cases of fraud could be enhanced. We are hopeful that the new legislation will help in this process.
Page 66 PREV PAGE TOP OF DOC Undoubtedly, each of us here today may have differing opinions of the various issues presented. My hope is that this fact does not overshadow the overwhelmingly positive impact the program has had on the risk management capabilities of American agriculture.
I would like to conclude by saying that Farmers Mutual Hail has invested several million dollars in order to become a part of the Federal Crop Insurance Program, primarily because the program has been so successful. We are firmly committed to try and do our part to insure its continued success. Again, I would like to thank you for the privilege of testifying at this hearing, and I will be happy to answer questions at the appropriate time.
[The prepared statement of Mr. Rutledge appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you. Mr. Fulwider.
STATEMENT OF ROBERT E. FULWIDER, EXECUTIVE VICE-PRESIDENT, RAY WUESTENBERG AGENCY, INC., WEST LIBERTY, IA, ON BEHALF OF INDEPENDENT INSURANCE AGENTS OF AMERICA
Mr. FULWIDER. Thank you, Mr. Chairman, and, Mr. Stenholm. I come before you today on behalf of the Independent Insurance Agents of America. It is a pleasure to be here again today. Today I am in capacity as chairman of IIAA's Government Affair's Committee, as well as its Crop Insurance Task Force. And with me is Mr. Tom McCrocklin, who is our Federal affairs director, and he would be happy to answer any questions you might have as time lingers on. I thank you, Mr. Chairman, for providing this forum to discuss the implementation of the Agriculture Risk Protection Act and other agricultural-related initiatives.
And by the way of introduction, I would first like to say, Chairman Combest, that the members of this committee and their staff are to be commended for 2 full years of hard work and endless negotiations. It just seems like crop insurance never goes away on the Hill. And having been involved in it for some 18 years now, and having the opportunity to testify many times, we are making grounds and the initiatives have been worth their time because I firmly believe that we have a better product today than we had when we first started. And I credit much of that to you and your colleagues for doing so.
Page 67 PREV PAGE TOP OF DOC As the primary delivery and service component of the Crop Insurance Program, independent insurance agents have a unique perspective attributable to our close working relationship with farmers in our communities. We are the people that sit across the breakfast table from them. We are maybe the people that maybe ride around on the tractor with them. And we are the people to whom they visit with us either in our mobile work stations and our automobiles or in our offices in our individual agencies across this country.
We firmly believe we are the conduit through with the Federal Government and insurers serve the risk management needs of farmers. And from this grassroots perspective then, I come to you today to focus on three concerns that we, as independent agents, have about the program.
First, the positives from which the Agriculture Risk Protection Act and related bills have taken us. Second, the concerns over the regulatory implementation. Third, misconceptions about crop insurance. And then a very minor fourth one, the role of insurance agents.
Without a doubt, Mr. Chairman, the Agricultural Risk Protection Act sent to the President this year is the single most important piece of farm policy legislation for this Congress. And our association appreciates being included in those discussions from day one. Our primary objective as agents throughout the process has been, and continues to be, to maintain the appropriate role of the State insurance regulations in the program to protect its consumers and ensure a competitive insurance market.
I have heard a lot of discussion this morning about fraud and abuse and I have heard a lot of discussion about the various players in the implementation of correcting fraud and abuse as it exists in this industry. I am somewhat disturbed by the fact that none of the players, to my knowledge, have stated anything, with the exception of Mr. Ackerman, about including the State insurance regulators in this important aspect of fraud and abuse oversight.
Page 68 PREV PAGE TOP OF DOC No one challenges the Crop Insurance Program is a Federal program. Clearly it is. But what has been troubling, and arguably done so intentionally, is the confusion and the uncertainty between Federal oversights and State oversight of certain program aspects. We believe, as a trade association, that Congress struck an important balance in this latest act in recognizing that State law does have a proven track record and it is not in the best interest of farmers or the competitive marketplace to allow the Federal Government to disrupt, at the State level, what has worked in those particular States.
For instance, we go into the anti-rebating laws, which this committee was clearly involved in, in its discussion, as the act took hold. We also are very much aware of the fact and pleased that the committee reaffirmed its commitment to ensuring that agents selling and servicing crop insurance are properly State licensed. Again, it is directly to the benefit of the farmer. And I cannot affirm this enough, that his or her insurance provider is a qualified professional with the proper training and necessary continued education that traditional insurance consumers have come to expect. With that high demand and high standards set by those respective States, much of the fraud and abuse can be controlled if there is that much in the marketplace.
My concern this morning on the fraud and abuse effort, if I may just delineate a moment from my prepared remarksit seems as though agriculture has taken a very fast track. We have gone from small individual paths of agriculture to now the interstate highway of agriculture, if you will, globalization, improved commodities, additional marketing endeavors, crop insurance. Everything that is facing the American farmer today has cause for us to look at our agricultural environment or agricultural industry as an interstate highway, if you might.
I think the Committee on Agriculture has done an adequate job of providing on that highway, toll booths. Those toll boothsone such, is to look at fraud and abuse and to police it correctly. However, our toll booth is not properly constructed, Mr. Chairman. It has got three walls. A wall made up of the insurance industry, a wall made up of the Department of Agriculture and RMA, and a wall that has been made up by the FSA offices around the country that are going to collectively work with RMA now, which we applaud, to bring this matter to a head.
Page 69 PREV PAGE TOP OF DOC There is one wall missing, and that is State regulation. And I feel if we would embrace that correctly, I know in my State of Iowa, State regulation has a big and important facet, as far as keeping our agents on track and protecting the consumer, which is what they are pledged in doing.
The rest of my comments this morning are on related legislation and I direct you to the prepared statement, which lies before you. I want to, once again, thank you for the opportunity to speak on behalf of the independent agents. We will be happy to answer any questions you might have. Thank you, Mr. Chairman.
[The prepared statement of Mr. Fulwider appears at the conclusion of the hearing.]
The CHAIRMAN. Thank you. All of your statements will be made a part of the record. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. I thank each of you for appearing here today and I will be submitting a list of questions to each of you and your associations for purposes of responding to, in writing, and for purposes of being in the record today.
Mr. Fulwider, I am very much interested in how we might get that fourth wall into this question. We have numerous programs now in which we are looking at that challenge. And any ideas and observations that you might have would certainly be welcome, as I believe they would be at RMA. My one question that I want to ask you here todayare you satisfied now with the law as passed with FSA inclusion and as you are participating in the implementation, which I understandare you satisfied that we are moving in the right direction with that wall? All of you.
Mr. LATHAM. I think that was a big step in addressing your concerns with the fraud and abuse issue. That does give FSA an arm and lots of resources to address those issues. I think, as an industry, we fully support that participation. I think what caution that we have to be careful is that we don't get bogged down in answering various allegations that might be brought that are really foundless or we spend lots of resources trying to investigate those. I think we need to make sure that once their program is put together and once we get to look at it and have some input, then I think we have a solid base to build from.
Page 70 PREV PAGE TOP OF DOC Mr. RUTLEDGE. I might add that the key is probably in the implementation and that we try to avoid duplication of effort between the two agents.
Mr. FULWIDER. Congressman, if I might, I marketed in seven counties in southeastern Iowa, so I deal directly with seven FSA offices. Some are better than others. All are really doing a very good job in trying to cooperate and make this program work. So from that standpoint, I think we are on the right track. The one area that I might suggest still needs to be worked on, there still seems to be a difference in dating mechanisms between the two offices. My producers will go to the FSA office and they will get a series of date and compliance requirements that they need to fulfill. Then they will come to my office and find out that the insurance industry has imposed different dates upon them and there is still a quality of confusion there on the part of the American farm producer as to what is right and what is wrong. And if that could be worked out, I think the two, in a marriage, have worked very well together.
Mr. CONNEALY. We have, right now, working active reconciliation processes between FSA and RMA, which is relying on the company's database. And we are, in several instances, seeing cases where they have compared LDP payments to insurance production reports and are sending out investigations in that area. So we see great promise, particularly in the reconciliation of the records for production account and shares.
Mr. STENHOLM. Your answers are very reassuring to me. Knowing the history of this question and the reluctance of all of you at the table to, at any time, shape, form, or fashion, to want FSA involved in the crop insurance. It is very reassuring to me to hear that the intent of the law with the caveats of how it can be made to work, which we are all interested in doing. I hope you will keep that attitude all the way to the final resolution and come back with the kind of cooperative arrangement and, perhaps, with some State input ultimately in it. But this is a Federal program and it must be regulated from a Federal level, hopefully in cooperation with States as you have suggested. Thank you very much.
Page 71 PREV PAGE TOP OF DOC The CHAIRMAN. As I did with the Secretary, I want to make just a general statement first and then ask you a few questions.
Mr. Latham, Mr. Connealy, I believe maybe that is correct this time, Mr. Rutledge, the companies you represent are entrusted by the public to deliver crop insurance in a manner that safeguards program integrity. Mr. Fulwider, the Congress's way of thinking the agents you represent are held to the same standard. Since you are all the first line of defense when it comes to compliance, it is important that we are all on the same page.
First, based on all the evidence to the contrary, Government reports, newspaper accounts, and stories by producers from all over the country, I believe that those who make the argument that waste, fraud, and abuse are not significant problems do the Federal Crop Insurance Program more harm than good. Admit there is a problem and chip in to fix it.
Second, although companies and agents do deliver a Federal program and are bound by certain laws and regulations, you are not obligated to live by rules that can't pass the stupid test. You are not helpless to change the rules where egregious mistakes would otherwise result. Instead you have an obligation to point out program loopholes and to help shut them down.
Third, the argument that a bureaucrat, somewhere down the line, won't listen, does not wash when there are 50 members of this committee who are concerned and responsible for this program's oversight.
Having said this, I want to simply conclude by saying that the public has placed a great deal of trust in you and your performance reflects on more than just your role in delivery but on the program itself. A lot of people, including the 50 members on this committee, are relying on you to do the right thing. And in that, I would say, that as we go through this process, the best way that the process can be made to work is for those of you who are out there and on the front line and delivering this product, are in a very good position to know and understand the good parts and the bad parts.
Page 72 PREV PAGE TOP OF DOC And you may not all be made a part of the formal process by which you can have that input made, but I assure you, I think that every member of this committee, would be very interested, in throughout the process, in hearing from you in both that areas that work and those areas that are not working. And we will look at those very seriously. Because I, as stated earlier, believe very strongly in the fact that one of the most potentially harmful activities that can occur in the future of risk management, is waste, fraud, and abuse and the attention that is given to it or should be given to it.
So I would invite you and encourage you to let us know what you think, to give us your thoughts and suggestions as we move forward, particularly in implementing this dramatic change in the program, which we are now in the process of doing. Mr. Fulwider, you had mentioned in the toll booth State regulationcould you expand that a little bit in what you would like to see occur?
Mr. FULWIDER. Congressman, what I can do is to provide for you a similar type of situation involving fraud and abuse in commercial lines insurance. If there is fraud and abuse in the marketplace and there is a whistle-blower somewhere in the systemeither it be a company person, a fellow agent, or someone elsegenerally speaking, the insurance companies that we are doing business with, have a fraud and abuse department. That department takes under careful consideration all the legalities involving the allegation, but they immediately, in most cases, draw into that discussion, the State Insurance Department, as far as a regulatory agency, involving the agent's licensing and his spirit of conduct under that respective State law.
Every State, obviously, differs somewhat. I am pretty familiar with most of those States. And I find that there is not that much difference between the 50 jurisdictions that something could not be worked out collectively with RMA and those States to bring into discussion the State regulatory agency if there was fraud and abuse suspected in this program.
Page 73 PREV PAGE TOP OF DOC We recognize fully that this program is a public monies program and we have to protect the taxpayers of this country and, consequently, the Federal Government rules in this case. But we feel that there is a quotient missing here, a very big one, in that you are not bringing into effect the people that regulate us on everything else we sell, with the exception of crop insurance. And we think it can be done, and could be done very adequately, and probably done in a respect that those States would embrace the opportunity to work with RMA on this.
Right now, I think many of those States are in a hold-off issue because they feel that the Federal Government is taking the action and they are sitting back just watching. But if they were asked to come forward and participate, I think the results would be very, very good.
The CHAIRMAN. Do the other three of you share the same opinion?
Mr. CONNEALY. What we find with the State Insurance Departments, is they haveand Bob alluded to ita method of applying sanctions fairly to agents or companies that commit wrongdoings. We are hoping that with the task force of the USDA, as we move forward into a formalized program to control waste, fraud, and abuse, that those sort of sanctions can be clarified so that an agent or a company will know exactly what the penalty is for whatever the grievance is. So we do find that the State insurance departments have done a good job of managing agent activity and company activity.
Mr. LATHAM. I would agree with the comments that have been stated. Also, in your new legislation, you do increase the penalties substantially for, I think, up to $10,000 per account if those things could be proven. The State, as he said, different States have different regulations. And as far as Texas, I think if you have a proven case, you could easily utilize the State to get that agent's license if that agent was involved.
Mr. RUTLEDGE. I am from the same State as Bob. They do a good job. And if there is some way to blend the Federal and State oversight mechanisms, I think that would be good.
Page 74 PREV PAGE TOP OF DOC The CHAIRMAN. The bill, as you may know, adds a State regulator to the FCIC board. I think that you are pointing out some things that we may want to look at even further because the ability to deal with this and the willingness to deal with it are very important to us. And I think the best way we can do that without creating unnecessary layers and burdens and regulations, is something that we may want to look at.
The law now requires the Secretary to establish procedures to detect agents and loss adjusters who consistently have greater claims or loss adjustments than their peers in a given area. What of each of you done to communicate news of this provision and other provisions aimed at fighting abuse to agents and adjusters?
Mr. CONNEALY. In one of our summaries of the legislation, we highlighted that part of it to the agents and adjusters. In addition, for 2001, we are asking each agent and each adjuster to sign a formal conflict-of-interest statement where they have to either declare that they have no conflict of interest or they have a potential conflict of interest so that we can make sure that the proper adjuster and the proper agent are working these cases on an ongoing basis.
Mr. LATHAM. Under our agreement with RMA, we are required to update agents on changes in the law. We have done that in our fall training session with those agents, which included that provision. We also use a statement, that we have agents sign, that would indicate whether they have a conflict of interest or if they suspect a conflict of interest, we ask them to provide that information to us and to sign the statement.
Mr. RUTLEDGE. We have had some adjusters' meetings and we are in the process of beginning our agency meetings now. We will communicate this information to them then. And in addition to that, we have always, throughout our history, even on the private side, stressed the need to be fair in the adjustment process and to work the claim properly. It will be no different for the Federal program.
Page 75 PREV PAGE TOP OF DOC Mr. FULWIDER. Well, Mr. Chairman, I am in an envious position because I represent this gentleman's company and I also represent three companies that Ben represents. And Mr. Connealy has tried to get me to represent him, but I ran out of farmers, so I haven't done that. But let me say this in relationship to the companies that I am familiar with and I represent, I think they do an absolutely outstanding job of acquainting us, as producing agents, with the rules and regulations that are imposed by RMA. We go through intensive training every year. That training could be laborious and boring to us because it is repetitious every year. But it is not. Because they are bringing to us what you are addressing here in Washington to bring back to us to say these are the things that need to be done that are changes in this year's program. And I applaud their efforts on behalf of the agents of America.
Now, what do we do? We have a very strenuous operation on our agencies regarding how we handle, for instance, adjusters that might have business with us. I have adjusters that work in my area of Iowa that are actual insureds of mine. We are very, very careful that everything is carefully documented, any transaction between us and them. They are not, as an example, allowed to adjust their own claims, which makes common sense.
Likewise, the regulations require that since they are an insured and working for the Federal Government as a contracted adjuster, that they also must clear certain requirements each year in the form of audits. I have a very close friend that is an adjuster that does an excellent job for us, and every year he has had an APH audit by the Federal Government. I applaud that effort. That is very necessary to keep his book of business clean. So I think we are doing as much as we can do and we are certainly open to any new suggestions within the framework of the law that would improve that situation.
The CHAIRMAN. Well, let me take just a moment to give you a little background and understanding of why this is so important and significant to me. I, be it good or bad, will say that the reform that we are seeing that are coming about from H.R. 2559 have been very positive. These are things that we wanted to do and we think we are doing. I have got, and I will admit it, I guess with some bit of pride, I have got a lot of fingerprints on this thing. This was a concept and an idea that I have had in my mind for several years. And we have spent countless numbers of hours looking at some of the fallacies in the program and trying to look at ways by which we can correct those. And this committee spent a lot of time working on it. It was the first major undertaking that we moved forward with under my chairmanship. And it is one that we feel that we drove basically the vehicle by which we got to where we are today.
Page 76 PREV PAGE TOP OF DOC And I have also stated on a number of occasions as we have gone through this process, that this is what I consider phase 1 of risk management reform. We are looking at a pilot project on how we might expand this to livestock and to many other crops that are not included today.
This committee is also charged with farm policy. And that is not an easy task. If it were an easy task, we would have already had it done. And as we grow closer to the next couple of years, that task is going to even get to be greater. I have a long history of being involved in agriculture some almost 30 years now from farming and ranching myself to spending some time with the old FSA, which was ASCS. So I have seen programs implemented up, been involved in farm programs and policy since the early 1970's, been through several farm bills on this committee as a member. And each of those gives a good deal of experience and ideas from which to grasp as you begin to look into the future.
Risk management, to me, is an area that I believe we can utilize to a great extent to help solve some of the problems that we have in agriculture today. And I want to see that expanded greatly. And one of the reasons that we are having actually our first hearing on crop insurance since its passage and since it has been signed into law, on the whole idea of waste, fraud, and abuse, is that those problems, left unchecked, I believe, could derail the process that I see unfolding over the next several years as we move forward in trying to further expand risk management.
And the reverse of that is, that the better we can do in dealing with those problems, then the better, I believe, opportunity exists for us to be able to utilize and enhanced risk management program to further get us down the road of where it is that we want to be.
So that is a lot of why I want to focus so much on what is out there today. The better that we make a programit is a Catch22the better we make a program, the more it encourages people to try to find those loopholes and those ways by which to try to manipulate it. It is really a Catch22. And I found it interestingI have literally traveled around the country talking about risk managementsome of my concepts and ideas. And it has been interesting that many of the comments that come back applaud the concept, but say you do that and you are just going to make this thing right for abuse. Now, I don't know where exactly we draw that line as the more attractive you make it, the more it wants to be abused. And so it is to those people who are willing to try to abuse this, that we are trying to direct our antifraud, waste, and abuse efforts for. And I would like to have had a lot greater penalties than are even there. Some of them probably pushing the ridiculous.
Page 77 PREV PAGE TOP OF DOC But I want it to be extremely detrimental for a person to abuse this program. I want there to be a major cost involved and I want people to know that we are serious about that. Because I do see this as a great opportunity for farmers. And yet, if we lose in the process, simply by the implementation, then we are having what, I think, may be a potentially a great tool taken away.
I was very glad to hear the Secretary discuss this morning the opportunity of, and hope, of getting at least 85 percent participation. I hope it is at least that high. And I think a lot of that is on us in making for sure there is a program out there that is workable. And hopefully this is good for your business. It is part of the process. We have decided that the best way to implement this is to have it done by independent or the private sector with a very substantial role of Government oversight, because we are stewards of the taxpayers' money.
A lot of discussion was held with the involvement of FSA. A lot of people were very opposed to that. But in terms of the data which is available to FSA and their ability to help us in this process, they, as an agency, are there. They are on the ground. They are in almost every county in the country. They have as much of an understanding of farmers, good farmers, bad farmers, farming practices, within that given county, as anyone who is there. So they are a entity in place.
And, as I had mentioned to the Secretary, we view that as, all of a sudden, giving them 12,000 additional compliance officers out there to make for sure that this program is not abused. We think that helps you as well. The better this program runs, not only do you not pay out claims that otherwise shouldn't be, but it helps in the overall acceptance of the program. We think a lot of things that we may be able to put in place and implement will be deterrence to someone who wants to try to manipulate the program that may not have necessarily been there in the past, but, as they look into the future, realizing that it is not worth the effort.
Page 78 PREV PAGE TOP OF DOC We want to reward good management. We want to try to encourage people to take a crop to harvest, if at all possible. We don't want it to be a benefit for someone. We don't want to have a program that, let us say, that creates it to be more of a benefit for a person to lose their crop early on than it is to someone who is willing to try to take it to harvest. And so these are all things that we want to try to move toward as we continue to look at not only some of the things that have happened in the past, but particularly over the next 2 or 3 years, in the implementation of this program, and where we might be able to then even take further expansion of the program.
It is my understanding that there are situations that occur that an agent has been suspended from selling crop insurance by one company. Simply moves his book of business to another company, continues the same practices for which they have been suspended. Is this a situation in which you are familiar? And if so, how much of a problem does it pose to companies holding agents accountable?
Mr. CONNEALY. Well, it is certainly a situation that I am familiar and have seen happen. And it is our hope that the compliance or a compliance handbook could be developed to deal with that and that hopefully that is part of the work group that is working on these issues now. Now, we haven't been back in touch. I mean, they are working within FSA and RMA and OIG to develop this. But that is the type of situation we would like to see answered in the upcoming regulationat least our company.
Mr. LATHAM. I would agree with those comments. Also, as part of the joint committee's work group that RMA and the industry worked on, one of the recommendations was how to handle that particular situation. And so we are looking forward to working with RMA on that particular instance of where you have agents going from one company to the next and being able to notify those other companies of the problems that the other company might have had with that agent.
Page 79 PREV PAGE TOP OF DOC Mr. RUTLEDGE. I would just agree with Ben. I think it is a matter of communication between the companies and RMA.
Mr. FULWIDER. I really am not familiar with any situation, Congressman, where this has happened. All I can say is if it did happen, it would be a compromise of an agent's ethics. And, as professional agent, we certainly would be very concerned about that and would want to see that remedied.
The CHAIRMAN. An OIG report suggests that companies do not face enough risks for them to be concerned about waste, fraud, and abuse. In other words, you don't have enough on the line. How would you respond to that?
Mr. CONNEALY. Well, I will go first. There is, we believe, a misconception in that area. The fact is, that the Standard Reinsurance Agreement attaches a liability for us on every single claim that we pay. I can't think of any instance where if a claim was paid, that at least part of that money didn't belong to the company. And so we believe that is a mechanism that promotes our interest in fraud and abuse. It has been in place for several years and it should remain in place. And we intend and do train our adjusters in that area too. Every Claimant we pay, at least a small part, and oftentimes, the majority of it, is our money.
Mr. LATHAM. Mr. Chairman, part of our agreement with RMA is that we do audits on claims and we are required to do a minimum amount of audits for that program. As a company, we go beyond that because we do have a stake in those claims. So although we are required to audit every claim over $100,000, we actually audit every claim over $35,000 because we know that it is too our benefit to do that. I think the misconception that companies don't have a stake in this is probably one of the big disservices that is out there, because companies do have a big stake in what happens on a claim.
Mr. RUTLEDGE. Mr. Chairman, not much over 5 years ago, I think there were 50-some SRA holders in the program. Now, we are down to 17, I think. And I think the reason the majority of those are gone is because they could not afford to take the risk that is now involved in the program. Mr. Ackerman and Secretary Glickman talked earlier about how the expense reimbursement had been reduced over the past few years and that now the only way you can make any money in the program is to take risk and hope that the underwriting profits outweigh the gains over time. As a new entrant into the program, we are hoping to reach that point where we can make a profit. But I think it really is a realistic concern.
Page 80 PREV PAGE TOP OF DOC Mr. FULWIDER. Mr. Chairman, you stated that some studies have shown that there is not enough at stake on our part in the event to avoid fraud and abuse. I can say, Mr. Combest, that I have everything at stake. In a small Iowa town, if it were to come to realization that the local agent was involved directly or deliberately in an activity with producers to fraud or abuse, I would be out of business overnight. I don't just write crop insurance. It is a minor book of my total business. And I have way too much at stake to even suggest that that would be an opportunity. It is not.
The CHAIRMAN. That was an OIG report and I wanted to give you an opportunity to respond to that suggestion. Several of you had mentioned that throughout this process that you appreciated being involved in it and I want that involvement to continue. As I indicated early on, the only way that we can make this work is to have everyone included in it. So we would not only solicit your thoughts and comments as we go forward, we would also hope that you would be available if we have questions and staff that we might be able to contact.
I am about prepared to end this hearing. Was there any additional comments or information anyone would wish to make on record?
Mr. LATHAM. Mr. Chairman, we want you to know that as an industry, we want to be there and available to answer your questions to help move the program to where you want it to end up. We do appreciate very much your staff's and this committee staff's help and input on these questions. So we look forward to working with you and your staff in the future.
The CHAIRMAN. Thank you very much. Without objection, the record of today's hearing will remain open for 10 days to receive additional material and supplementary written responses from witnesses to any question posed by a member of the panel.
The hearing is adjourned. Thank you.
[Whereupon, at 1:20 p.m., the committee was adjourned, subject to the call of the Chair.]
Page 81 PREV PAGE TOP OF DOC [Material submitted for inclusion in the record follows:]
Testimony of Hon. Dan Glickman
Mr. Chairman and Members of the Committee, thank you for giving me this opportunity to appear before you today to review the Department of Agriculture's progress in implementing the Agricultural Risk Protection Act of 2000.
The administration's primary goals in developing a crop insurance legislative package this past year were fourfold: (1) to make buy-up coverage more affordable and useful to farmers, (2) to address the impact of multiple-year losses on farmers' access to coverage, (3) to broaden crop insurance protection for new crops, new approaches, and less-insured regions of the country, and (4) to bolster protections against fraud and abuse. In doing so, we had a strong foundation to build on. Since 1993, we have worked together, Congress and the Administration, to improve this program dramatically. During this time, crop insurance participation has grown substantially (chart 1), it has protected farmers well in times of crisis (charts 2 and 3), we have introduced dozens of new and innovative products for farmers (chart 4), and we have done this while achieving improved financial soundness (chart 5).
As we worked through the legislative process this past year, details and the many complex implementation steps were debated. I understand that House and Senate conference staff and Risk Management Agency (RMA) officials met for over 90 hours last April and May to iron out fine points just on title I of the legislation. As with any large and detailed legislative package, we disagreed over some points. But overall, lined up against our central goals of crop insurance reform, we believe that the 2000 act is a good solid step forward and we are pleased to be moving rapidly on putting it into effect.
Mr. Chairman, we thank you, Mr. Stenholm, your Committee colleagues, and your staff for the commitment, the seriousness of purpose, and the hard work you provided this year to produce a quality product for American agriculture.
Page 82 PREV PAGE TOP OF DOC As you have requested, I will focus my testimony on title I of the act, the provisions dealing specifically with crop insurance. I note as a preliminary matter, however, that the Farm Service Agency (FSA) has already made nearly all the $5.5 billion in supplemental AMTA payments to about 1.4 million producers authorized under the act. These payments, part of a $7.1 billion relief package contained in title II of the act, will help our Nation's farmers in difficult times.
Turning to title I, USDA's immediate priority upon President Clinton's signing the new legislation into law last June was to promulgate a package of administrative actions that lowered 2001 farmer-paid premiums, increased yield coverage, and amended administrative fees as provided under title I. These changes, all finalized by RMA before the June 30 contract change date for fall-planted crops, made about 90 percent of the $8.2 billion in new benefits authorized under the act available to farmers for the next five years.
We wanted to guarantee that farmers planting fall crops this year could benefit from higher levels of protection at less cost. Revenue insurance plans will be much more affordable and the changes to the Actual Production History (APH) system will help producers suffering multiple year losses retain a reasonable amount of insurance protection.
The new APH provisions allow producers to substitute 60 percent of the applicable transitional (county average) yield when their actual yields are lower than 60 percent of that transitional yield. This change can increase yield guarantees and protect producers who have suffered multiple losses by providing more coverage while continuing to assess premiums proportional with the additional risk.
At the same time, RMA acted to implement the changes to the insurance fee structures required by the act and amended the Standard Reinsurance Agreement to lower the expense reimbursement that private insurance providers receive for servicing catastrophic risk protection policies.
Page 83 PREV PAGE TOP OF DOC With this first wave of actions now complete, RMA has begun implementing many of the more complex and forward-reaching provisions of title I aimed at expanding the crop insurance system, facilitating innovation, and improving program oversight. Some of these will unfold over the next several months, some over the next several years.
In the research and development area, for instance, RMA has rapidly begun to implement the changes in program development required by the act. We published the first of two Requests For Proposals (RFPs) in July to identify persons who will examine new and revised programs for the Federal Crop Insurance Corporation's Board of Directors. A second RFP was published in August and is designed to identify sources who can perform research and development of new and innovative risk management products.
RMA is developing a proposed rule outlining the process for submitting risk management products and the reimbursement schedule for bringing acceptable products to RMA for use in the program. This rule will be given full public exposure through the regulatory process before it is published as a final rule.
The RFP's and submissions regulations will provide the vehicles for RMA to expand risk management programs. Already since enactment, RMA has so far received seven new proposed products from private sources which are now in various stages of review.
The FCIC Board of Directors has already met twice since enactment of the new statute, its immediate focus being to update its bylaws and procedures so it may act on several new product approvals or expansions this autumn. Following the requirements of the new act under section 142(b), the Board is actively contracting for independent underwriting reviews on each of 8 product proposals, so that it can consider them formally in the next few weeks.
Regarding the 2000 act's new provisions on expanding risk management education and providing special emphasis to underserved regions, RMA has worked with other USDA agencies, primarily the Natural Resources Conservation Service and the Cooperative State Research Education and Extension Service, plus representatives from the affected regions to determine the most effective use of program funds which generally become available in October 2000. This process is to remain highly interactive. Already, RMA has developed a strategic plan to implement the education provisions of the act with input from regional universities, State departments of agriculture, grower organizations, crop insurance and farm credit businesses, and USDA offices. The program will be delivered primarily through these private partners, allowing RMA to leverage the effectiveness of government funding with the unique resources and local expertise of these groups. A key initial focus will be on encouraging use of the Adjusted Gross Revenue or ''whole farm'' insurance product in these areas. I will soon announce the actual States designated as under-served so that these programs can hit the ground running quickly over the next few months.
Page 84 PREV PAGE TOP OF DOC As part of this process, RMA is also preparing to announce a major expansion of the Dairy Options Pilot Program for the coming year. The revised program will reach 300 counties in 40 States and include training for dairy operators on using options to cover price risk .
RMA is also reviewing certain program improvements mandated by the act that must be implemented by regulation, including those affecting quality adjustment, double insurance, and prevented planting. Because the act does not provide an expedited rule-making process, RMA will publish these changes under the required notice-and-comment provisions of the Administrative Procedures Act. RMA is working diligently to target these rules for the 2002 crop year.
With respect to the Non-Insured Crop Disaster Assistance Program (NAP), the Farm Service Agency (FSA) is preparing to promulgate the regulations to implement section 109 of the act. This provision removes the ''area trigger,'' which had required a 35 percent crop loss in a county before any producer in that county could receive a NAP payment. The new provision also imposes a $100 service fee per crop per county, not to exceed $300 per producer per county or a total of $900 per producer in multiple counties. The fee is similar to that for catastrophic crop insurance coverage, and we have worked to assure that the two programs will be consistent. We expect to issue an interim rule shortly and will begin accepting NAP applications after the regulation is published.
To finance these immediate start-up steps, including essential administrative costs, I have approved, with the concurrence of the House and Senate Appropriations Committee leadership, a $13.1 million inter-fund transfer to cover costs for the 2000 fiscal year. RMA is also preparing plans to utilize funds earmarked for certain compliance-related functions, totaling $23 million over 5 years.
Page 85 PREV PAGE TOP OF DOC Now I would like to discuss our particular focus on the 2000 act's provisions to strengthen program compliance and integrity.
We appreciate your working with us throughout the legislative process to make program integrity a major priority for this new act. Insurance abuse is a difficult issue throughout the commercial insurance world, not just crop insurance. But because it is backed by public funds, taxpayers dollars, crop insurance must be held to the very highest standard. Any over-payment of public funds based on fraud, abuse, or program error is unacceptable.
That said, even recognizing the concerns that do exist, based on all the information we have seen, including our review of audit reports by USDA's Office of Inspector General, I feel confident in assuring you that taxpayer funds are being properly safeguarded and that the level of integrity in the Federal Crop Insurance Program is high. The vast majority of our farmer-customers, our agents and loss adjustors, company officials, and agency staff are honest people who work hard and play by the rules. Where cases of abuse arise, they are investigated and addressed. Program errors are fixed promptly within the bounds of our legal system. Where the system has had weaknesses, we have worked with Congress, our Inspector General, and our private insurance company partners to strengthen it.
For instance, RMA's loss ratio numbers strongly indicate that the program on a national scale is financially sound, properly rated, and effectively managed, (chart 4). For each of the last 7 years, including 2000, the Federal Crop Insurance Program has exceeded its statutory targets with loss ratios Loss ratio equals dollars paid in indemnities divided by total dollars received in premium from all sources. FCIC*s loss ratio target has been set by statute at 1.075. of near 1.0 or less. Prior to that time, the program's loss ratios had averaged 1.47 for the years 1981 through 1993. This improvement reflects enormous taxpayer savings resulting from sound management and favorable weather conditions during this period. We are actively engaged with leading industry-wide anti-fraud organizations such as the Coalition Against Insurance Fraud and the National Insurance Crime Bureau to raise national awareness that insurance fraud costs everyone.
Page 86 PREV PAGE TOP OF DOC With the new compliance tools provided under the 2000 act, our oversight system will be tightened and expanded even further. Mr. Chairman, through this legislation, you have given us a mandate to address this issue squarely; it is a mandate that we accept and welcome. Among other things, the new act will mandate (a) a tight compliance working relationship between RMA and FSA, (b) annual data reconciliation between the two agencies, (c) targeted reviews based on state-of-the-art ''data-mining'' technologies that are improving compliance throughout the commercial insurance world, (d) faster submission of policy information, and (e) tougher penalties for wrong-doers.
RMA's staff has already begun working closely with the Farm Service Agency (FSA) to develop plans for implementing the monitoring, training, FSA State committee consultation, and other related provisions of the act. RMA and FSA headquarters and field office personnel have formed teams to flesh out operational details for each of the new provisions. These teams, which include strong representation from the local and regional levels of both agencies, have worked extensively under tight deadlines. Based on their work, RMA and FSA will jointly propose a plan to me as mandated under section 121 later this fall, which I will then review with a goal of finalizing this fall.
Even as the formal plan is being developed, RMA and FSA have already launched joint operations in the field, based on current authorities, that are well within the spirit of the new law. Since enactment of the legislation, RMA compliance staff have worked with FSA State and county personnel in four States to explore potential abuse and monitor specific cases and growing crops, taking advantage of the resource provided by local people who are expert in local practices and conditions.
In the data mining area, RMA has extended its contract with Montana State University and has received a joint [unsolicited] proposal from Tarleton State and Bradley Universities to develop systems and technologies to identify indicators of waste, fraud and abuse. The agency expects to complete its review of these packages and begin solid work on a system in the very near future as funding becomes available. Here, too, the agency has already begun to incorporate data mining results into its ongoing oversight effort to pin-point areas of potential vulnerability, develop specific cases, and focus combined RMA and FSA resources.
Page 87 PREV PAGE TOP OF DOC RMA has also begun building within its Compliance Division a Special Investigative Branch (SIB) to focus on large, difficult, and systemic cases. The new Branch is modeled on similar Special Investigative Units (SIU) in the private commercial insurance industry that have been successful in addressing abuse. The new unit will play a key role in coordinating with the USDA's Office of Inspector General and with our private sector partners, some of which have established their own special investigative units. In fact, these companies have begun meetings with other SIU companies and RMA compliance staff on joint initiatives to examine potential program abuse and better equipt industry claims personnel.
In the area of data reconciliation, FSA and RMA will expand on processes developed during previous disaster programs to compare data from producers to incorporate it into our overall data-mining and oversight approach while ensuring that disparate information is not submitted in order to take advantage of separate programs.
The 2000 act has provided an important opportunity to improve the Federal Crop Insurance Program's ability to be a broad and effective production safety net for American farm producers in the years to come, strengthening the foundation that we have built over the past seven years. USDA has responded deliberately and methodically to this challenge, and we believe we are well on track to implement the new provisions in a timely and farmer-friendly way. We are committed to providing producers with effective crop insurance coverage at an affordable price. We appreciate your continued support during this important implementation process.
Mr. Chairman, that completes my statement. I would be happy to answer any questions.
Testimony of Steven C. Rutledge
Good morning. My name is Steve Rutledge and I'm senior vice-president of Farmers Mutual Hail Insurance Company of Iowa (FMH), located in Des Moines, IA. Farmers Mutual has been providing private crop hail insurance to many of our nations farmers since 1893, the year the company was founded by my great-grandfather, W.A. Rutledge.
Page 88 PREV PAGE TOP OF DOC In 1997, after more than a century of service in the private side of the crop insurance industry, FMH made a decision to enter the Federal Crop Insurance program and in 1999, after nearly two years of preparation, we became an Approved Insurance Provider and began selling Multiple Peril Crop Insurance.
So in regard to the Federal Crop Insurance Program, we are the new kids on the block. However, we believe that as such, our general perspective of the Federal program and the reasons we chose to become involved may be useful and I thank you for the opportunity to present them today.
In addition, I will be sharing the positions that we and other members of the Crop Insurance Research Bureau (CIRB) have on the implementation of the anti-fraud, waste and abuse provisions of the Agricultural Risk Protection Act of 2000. The Crop Insurance Research Bureau, CIRB for short, is a non-profit industry trade association. Established in 1964, CIRB's mission is, and has always been, to promote and work for the improvement of crop insurance in the United States. A list of our members is attached to this testimony.
It only seems right to begin by extending our appreciation to Chairman Combest and the entire House Agriculture Committee for the months of hard work necessary to draft and pass into law the Agricultural Risk Protection Act. Implementation of the Act is likely to be an arduous process as well, and given the magnitude of the changes, will require all involved to work together in order to properly carry out the intent of the Act, maintain the level of service to the American farmer and, as mandated in the Act, strive to enhance program integrity.
The overwhelming support for the Act clearly demonstrates the national commitment to the Federal Crop Insurance Program as the centerpiece of the safety net provided for American agricultural. And to private industry as the most effective and economically efficient vehicle for the delivery and service of the program. Also clearly defined in the Act was the desire of Congress to improve the program in a variety of ways. These range from increasing coverage and subsidies for the farmer to improving oversight of program administration and participant conduct. And when I say participant, I mean everyone involved. The consumer, approved insurance providers (including their agents and adjusters) and the Risk Management Agency.
Page 89 PREV PAGE TOP OF DOC I can see no logical reason for anyone to be opposed to the overall goals and intentions contained within this legislation. And the logic of the renewed commitment to the crop insurance industry as the best choice for program delivery is also inescapable. As an SRA holder, we operate in a competitive environment and I think there is no better testament to the virtues of competition than the astounding performance of our national economy in recent years.
Still, there exists among some the perception that the program is flawed and that, on a functional level, may not best serve the interests of the producers and, ultimately, the taxpayers. This issue, at least in a general sense, is the central theme of today's hearing and the primary focus of my comments.
I'd like to begin by agreeing that the program has some flaws. After all, perfection is an elusive goal. Nonetheless, to believe that the Federal Crop Insurance program is somehow dysfunctional is to ignore the progress and achievements made by the program over the past twenty years.
This program works. It is true there have been instances, isolated instances, when the expected level of program integrity was not maintained. More often than not, these cases have been associated with policies that for one reason or another contain above average levels of risk. And the program is not all things to all people. But for the vast majority of producers in this country, the program has proven to be a very effective risk management tool. So much so that, this past year, over one million policies were sold to farmers across the Nation who chose to spend, collectively, more than $1 billion of their own money to purchase Multi-Peril Crop Insurance.
Possibly the most telling evidence of the program's success is the simple fact that after nearly two decades on the sidelines, Farmers Mutual Hail decided to participate in the program and become an Approved Insurance Provider.
Why do I say this? And why did we change our mind after so many years? There are several reasons but foremost among them was the survival of our company. And let me assure you that my use of the word ''survival'' is not sensationalist in the least.
Page 90 PREV PAGE TOP OF DOC During the early 1980's, when the partnership between public and private sectors was just beginning its evolution as a result of the passage of the Federal Crop Insurance Act, FMH was the largest writer of crop insurance in the nation. Today, we are struggling just to remain in the top third of the industry in terms of premium volume and the larger crop insurance companies are now four to six times the size of Farmers Mutual Hail.
Just since 1996, the coverage provided by the Federal program has increased nearly 75 percent, while our own private crop hail coverage has declined by more than 30 percent. Although we are still the largest writer of private crop hail insurance, the market for Federal Crop Insurance is now five times the size of the private crop insurance market.
By any market driven measurement process available, the public/private partnership established twenty years ago has been a tremendous success. There are many excellent MPCI products available, some of which were developed by private industry and with the subsidies provided by government, the cost is well within the reach of most producers.
The increased subsidies and product improvements contained in the new Act will only serve to strengthen the trend toward MPCI and away from private crop hail. If Farmers Mutual intends to remain a viable operation, one capable of serving the next generation of American farmers, the path is clear. Let me say again, the program works and so here we are.
However, as we have learned, there are some problems. And many of the concerns that kept FMH out of the program for so many years are still valid. Among these concerns, many of which are shared by our fellow CIRB members and, in most cases, by all SRA holders, are the following:
First, the sheer complexity of the program. This is a problem affecting everyone from the producer all the way through to Congress. It creates opportunities for fraud and abuse and greatly increases the difficulty of identifying those situations. It imposes undue and unsustainable burdens on both the Risk Management Agency and the Insurance Providers in terms of forms development, information system requirements, training and education, and most important, the ability to properly service the producers.
Page 91 PREV PAGE TOP OF DOC Second, the opportunity for Approved Insurance Providers to earn a reasonable profit margin. This is a more realistic concern than some might imagine. There was a time when a company could earn a profit, primarily due to the amount of the A&O expense reimbursement received, without retaining much risk. That time is gone. In the past half dozen years, the amount of the A&O expense reimbursement has been reduced significantly. In fact, the reimbursement is currently set at a level too low to even cover the cost for the average company to deliver and service the program. The only way to make a profit now is to retain underwriting risk and hope that over time the gains will exceed the losses.
Again, recent experience has shown that good underwriting results are possible but the changes made to increase coverage for the producer combined with the overall growth of the program since the last major catastrophe have elevated the potential frequency and severity of losses to such an extent that long term profitability may be questionable.
Third, appropriate funding for the program. Again, this may seem a puzzling item to be concerned about given the amount of money historically allocated to the Federal Crop Insurance program.
The worry here is that, judging by the information available to us, the Risk Management Agency may not be able to properly maintain and update their computer systems without additional funds. If RMA's systems are allowed to decay, SRA holders will not only have great difficulty delivering the program but neither party will have the necessary data to detect cases of fraud or abuse. I might add that problems processing data have already become apparent and this is of great concern to all.
Finally, the relationship between the public and private sector. More specifically, the need to strengthen that relationship. The Federal Crop Insurance program is intended to be a partnership and should function as one. The most frequent and fundamental interaction within the partnership occurs between the Risk Management Agency and the SRA holders. We share a common objective but virtually all authority rests with RMA.
Page 92 PREV PAGE TOP OF DOC Our belief is that if SRA holders had a greater role in the decision making process, particularly with regard to some of the details of program implementation, the effectiveness and efficiency of compliance efforts would be improved, the opportunities for abuse could be reduced and the ability to detect cases of fraud could be enhanced.
Undoubtedly, each of us here today may have differing opinions of the various issues presented. And since this hearing is designed to address deficiencies, both perceived and real, the tone of our discussions may be inherently somewhat negative.
My hope is that this fact does not overshadow the overwhelmingly positive impact the program has had on the risk management capabilities of American agricultural.
I would like to conclude by saying that Farmers Mutual Hail has invested several million dollars in order to become a part of the Federal Crop Insurance program primarily because the program has been so successful. We are firmly committed to try and do our part to insure its continued success.
Again, I would like to thank you for the privilege of testifying at this hearing. If there are any questions I would be happy to try and answer them now.
Testimony of Robert E. Fulwider
Mr. Chairman, members of the committee, my name is Robert Fulwider, and I am an independent insurance agent from West Liberty, IA and the executive vice-president of the Wuestenberg Insurance Agency, Inc. I come before you today on behalf of the Independent Insurance Agents of America, Inc. (IIAA) in my capacity as chairman of IIAA's Government Affairs Committee as well as chairman of its Crop Insurance Task Force. IIAA is the oldest and largest insurance trade association for independent agents in the United States, representing over 300,000 insurance agents and their employees nationwide. I thank Chairman Combest for providing this forum to discuss implementation of the Agriculture Risk Protection Act and other agriculture-related initiatives.
Page 93 PREV PAGE TOP OF DOC By way of introduction, I would first like to say that Chairman Combest, the members of this committee and their staff are to be commended for two full years of hard work and relentless negotiations. In any one piece of legislation it is very difficult to satisfy competing regional, political, and business interests, particularly under the umbrella of ''agriculture''. It would be an understatement to say that IIAA and various members of this committee disagreed on the application of State insurance regulation. Yet, in the end, compromise prevailed and Congress was able to produce legislation that strengthens the position of farmers to better manage their business risk. Mr. Chairman, for this agents thank you and your colleagues.
As the primary delivery and service component of the Crop Insurance Program, independent insurance agents have a unique perspective attributable to our close working relationships with farmers in our communities. We are the conduit through which the Federal Government and insurers serve the risk management needs of farmers. From this ''grassroots'' perspective, my comments will focus on (1) the positives from the Agriculture Risk Protection Act and related bills, (2) concerns over regulatory implementation, and (3) misconceptions about crop insurance.
THE AGRICULTURE RISK PROTECTION ACT
Mr. Chairman, without a doubt, the Agriculture Risk Protection Act (Public Law: 106224) is the single most important piece of farm policy legislation in this Congress. IIAA appreciated being included in discussions about the bill from the very beginning and for the opportunity to be a constructive participant in drafting and shaping the legislation.
IIAA's primary objective throughout the process has been and continues to be to maintain the appropriate role of State insurance regulation in the program to protect consumers and ensure a competitive insurance marketplace. No one challenges that crop insurance is a Federal program; clearly it is. But what has been troublingand arguably done so intentionallyis the confusion and uncertainty between Federal oversight and State oversight of certain program aspects (insurance sales and agent licensing).
Page 94 PREV PAGE TOP OF DOC Often times it has appeared that Federal regulators administering the program blurred jurisdictional lines as a means to reserve the right, if you will, to expand or contract the breadth of their regulatory powers. Conflicting with such behavior is the fact that insurance has been regulated at the State level for well over 200 years. IIAA believes Congress struck an important balance in the Agriculture Risk Protection Act in recognizing that State law does have a proven track record and that it is not in the best interests of farmers or the competitive marketplace to allow the Federal Government to disrupt at the State level what has worked in those particular States.
For example, IIAA believes the conference committee's resolution of the ''anti-rebating'' issue was adequate to ensure continued State oversight of insurance sales activities in the States. Laws at the State level specific to illegal rebating have been enforced far longer than the creation of the Federal Crop Insurance Program and have effectively worked to deter discrimination in the selling of insurance, particularly to lower income individuals. Congress has traditionally relied on the preexisting regulatory framework the States have provided for insurance sales. Had this legislation carved out or preempted certain types of State insurance sales laws, it would have marked a swift departure from such a reliance on the expertise of the State system. I do not believe it was the intent of this committee or Congress to potentially preempt State law, particularly when Congress passed a sweeping financial services reform bill earlier in the session reaffirming the role of the States in the regulation of insurance.
IIAA was also pleased that the committee reaffirmed its commitment to ensuring that ''agents'' selling and servicing crop insurance are properly State licensed. Again, it is directly to the benefit of the farmer that his or her insurance provider is a qualified professional with the proper training and necessary continuing education that traditional insurance consumers have come to expect. States have demanded high standards of their licensed agents and, in fact, are moving toward greater uniformity in their requirements to provide for better regulatory efficiency. There has been no indication that the Federal Government wishes to impose a new Federal licensure system, let alone take the time (and devote resources) to create one. The language of this legislation is consistent with such recognition of the States' role.
Page 95 PREV PAGE TOP OF DOCOTHER RELATED LEGISLATION
Mr. Chairman, there are two other pieces of legislation that are relevant to your efforts to reform the Crop Insurance Program that warrant mentioning in this forum. They are the Freedom to E-File Act (Public Law 106222) and the Electronic Signatures in Global and National Commerce Act (Public Law 106229). Implemented in conjunction with the new crop insurance reforms, these new laws will help the private insurance industry and the Department of Agriculture provide service and information to farmers utilizing the latest electronic technology. These bills recognize that the Internet and electronic commerce, when properly harnessed, can greatly assist the public and private sectors to better serve the public.
For example, the Electronic Signatures in Global and National Commerce Act (commonly referred to as ''E-Sign'') will for the first time allow private parties to reach agreements and engage in contracts using ''electronic signatures''. This legislation provides consumers yet another procedural tool by which they can efficiently (and legally) conduct their business needs'in this case obtaining insurance. The legislation specifically states that the use of electronic signatures applies to the business of insurance. It also encourages agents to be more active in using e-signature technology by providing protections for agents against system failures not brought about by their own doing. The end result will be a more consumer-oriented, high-tech insurance industry that can and will be more responsive to risk management needs. We already are seeing such a movement in the traditional property-and-casualty industry and there is no reason why crop insurance and the Federal Government can't take full advantage.
The Freedom to E-File Act is another important bill that will have direct bearing on the administration and processing of crop insurance. As you know, the legislation will effectively bring the antiquated internal systems of the USDA into the 21st century, requiring it to be ''online'' and user-friendly. Specific to insurance activities, the Federal Crop Insurance Corporation (FCIC) and the Risk Management Agency (RMA) will be implementing plans to permit farmers to obtain and file ''all appropriate insurance forms over the Internet''. Presumably, this directive will allow crop insurance companies and agents to bring risk management tools to farmers more efficiently and will allow for the seamless transfer of information and documents between various entities. Congress is to be commended for pushing the Department of Agriculture into the age of technology and IIAA would urge members of this committee to closely monitor the scope and implementation of the plan that will achieve this user-friendly electronic system.
Page 96 PREV PAGE TOP OF DOCCONCERNS OVER REGULATORY IMPLEMENTATION
Mr. Chairman, as you well know, often what is passed by Congress looks markedly different when put into practice after implementation. I would urge the members of this committee and your colleagues to carefully monitor the implementation process. IIAA believes that the bills discussed above are clear in their plain-text reading and should not allow for creative interpretation in their implementation. IIAA sees the following as potential areas of concern:
The Role of State Insurance Regulators. As discussed earlier, it is very important that the authority and expertise of our State insurance departments be recognized in the sale and delivery of crop insurance. The Conference Committee did an excellent job of getting up to speed on State regulation of insurance sales through an open dialogue with IIAA and the State insurance commissioners represented by the National Association of Insurance Commissioners (NAIC). IIAA would urge this committee to continue to work with these State-based entities to take advantage of the accumulated experience the States have to offer.
Quality and Service v. Cost Cutting. While some people have suggested that the agency(ies) involved in the Crop Insurance Program perhaps have a hidden agenda antagonistic to a public-private partnership, I believe the conflicts that arise are based on priority. Not every piece of agriculture legislation signed by the president is an opportunity to reduce the funding necessary to operate an effective crop insurance safety net. IIAA respects the fact that RMA and others look to draft rules and regulations with an eye to cost-saving. But, as a small businessman who knows the value of a hard-earned dollar, I also recognize there is a breaking point at which the quality of product and the high level of service expected cannot be achieved with the resources expended. Simply put, Mr. Chairman, you get what you pay for. The Department of Agriculture and the RMA continually state that they are committed to the highest level of risk management service and education to farmers. I can only hope that any efforts to reduce premiums paid by farmers vis-a-vis administrative regulation do not effectively preclude the private sectorparticularly crop insurance agentsfrom providing the quality of service that my farming clients have come to expect from me.
Page 97 PREV PAGE TOP OF DOC Direct Internet Insurance Sales. Mr. Chairman, there also is concern from within the agent community that administrators will look to implement the Freedom to E-File legislation with the belief that the bill's language requires the RMA and FCIC to directly sell crop insurance over the Internet to farmers. I submit to the committee that the language of the bill neither requires nor encourages such activities, nor does it encourage the Federal Government to get back into the business of insurance sales and service.
Certainly the widespread acceptance of the Internet is transforming the way I conduct my business. Independent agents are adapting to the realities of a changing marketplace and to the technologies available, often at the request of the insurance companies for whom they write. Nevertheless, it is a bold leap of interpretation to suggest that a bill designed to move the USDA and its various programs ''online'' for user-friendly interaction is somehow a mandate to require the Federal Government or even Standard Reinsurance Agreement (SRA) holders to sell crop insurance directly to farmers.
If the traditional property-casualty marketplace is any indication of trends in insurance, larger insurers that have relied on their independent agent sales and service force are looking to empower their agents with technology, rather than eliminating them and losing their expertise. Again, I would encourage the committee to monitor the development of USDA's e-commerce plan.
MISCONCEPTIONS ABOUT CROP INSURANCE
Mr. Chairman, given this committee's commitment to a healthy crop insurance safety net, it is important to set the record straight on two aspects of the program that are constantly demagogued when crop insurance legislation or farm policy is debated. The first issue pertains to administrative and operating (A&O) expenses paid by the Federal Government to private insurers to administer the program. The second is the role of crop insurance as a risk-management tool.
Page 98 PREV PAGE TOP OF DOC A&O Expense Reimbursement. For as long as I can remember, it seems that during every session of Congress a member or group of members asserts that ''crop insurance agents are making XX percent on the sale of crop insurance at the expense of farmers or a particular agriculture spending program.'' For the record, Mr. Chairman, the Administrative & Operating expense reimbursement percentage paid to SRA holders is NOT the same thing as agent commissions. That is an inaccurate statement, and often made well-knowing the difference between expense reimbursements and agent commissions. Currently, the A&O expense reimbursement rate for SRA holders is 24.5 percent, meaning that the Federal Government reimburses crop insurance companies for the administrative costs incurred at a rate of 24.5 percent of total insurance premium written. In turn, the companies use these funds to pay their administrative & operating costs, which include the sales commissions for insurance agents to service policies.
Mr. Chairman, I have sold crop insurance a great many years. I do not earn a 24.5 percent commission on premium written for providing a farmer a crop insurance policy. I know that you and the members of this committee, who are familiar with crop insurance, know the difference between A&O reimbursement and agent commissions, but unfortunately, many of your colleagues do not, especially when they are looking to fund programs more important to them than crop insurance. I would urge the committee to join IIAA in this continuous education process to help non-committee members understand this funding distinction. As you know, Mr. Chairman, we again saw such a mischaracterization in the House Appropriations Committee during consideration of the agriculture appropriations bill. We appreciated your efforts to correct that problem, but again, it is not an issue that should need correcting given the amount of education Congress has received from the agent trades alone.
The Role of Crop Insurance. It is equally important to note what exactly crop insuranceor any property-casualty insurance for that matteris intended to do (and not intended to do). Individuals purchase property-casualty insurance to protect against the risk of loss. In the case of farmers growing and harvesting crops, it is protection against losing what keeps them in business. Is crop insurance an investment tool? Certainly. It is an investment tool the same way homeowners' insurance, commercial insurance, or auto insurance protect the value of the item you fear being damaged or suffering loss. Farmers are intelligent and they understand what it means to utilize a risk-management tool such as crop insurance. Yet, whenever Congress debates the merits of crop insurance as a risk-management tool, very often the comments made are related to how much money will the farmer make if he purchases crop insurance to protect his commodity. Crop insurance was not intended to replace the stock market or activities in the futures market. It is not that type of investment. Generally speaking, people do not buy property-casualty insurance with the hope of collecting on the policy. Instead, it is a proverbial safety net.
Page 99 PREV PAGE TOP OF DOC Congress recognized that it was simply spending too much money every year (at an unpredictable rate) on ad-hoc disaster relief to farmers. Congress wisely sought to spread its own financial risk by partnering with the private insurance industry and encouraging farmers to help manage their own risk portfolios (with the assistance of premium subsidies). Acreage coverage is at an all-time high as is the number of crop insurance policies in force. And, the numbers continue to grow. Yet this idea that Federal dollars spent to strengthen the insurance safety is wasted money because it does not directly put hard dollars in the hands of farmers misses the point of providing this insurance and fails to recognize that it is but one of many components necessary for a healthy American agriculture economy. We cannot blame sub-par commodity prices and an agriculture trade deficit on the existence of the Crop Insurance Program. Those are tied to U.S. agriculture policies and a variety of other external variables. I believe crop insurance does a sound job in meeting farmer's risk management needs and that, given the continued support of Congress to keep the program viable, it will continue to meet the needs it was designed to satisfy.
Mr. Chairman, on behalf of IIAA and my fellow independent agents across the country, I want to thank you for this opportunity to express our views. Your committee has an excellent reputation for bipartisan cooperation and for getting the job done. We look forward to working with you and other members of the committee throughout the remainder of this year and into 2001. We trust that you will continue to monitor the Crop Insurance Program mindful of State insurance regulation and the actions of your administrative counterparts. I would be happy to answer any questions the committee may have.
Statement of Ben Latham
Mr. Chairman, it is my pleasure to appear before you to talk about the Federal Crop Insurance Program. I am Ben Latham, Vice President of Producers Lloyds and Chairman of the American Association of Crop Insurers or AACI. AACI represents insurance companies and agents that write nearly 80 percent of the multiple peril crop insurance in the United States. I am testifying on behalf of the association today.
Page 100 PREV PAGE TOP OF DOC I want to thank you, Mr. Chairman, for holding this hearing and giving us the opportunity to testify. We are in the process of working with the Risk Management Agency to implement all of the provisions of the Agricultural Risk Protection Act. I understand that you wish to discuss specifically the anti-fraud provisions of the act.
The industry takes fighting fraud and abuse seriously. No member of this trade association willingly or purposefully pays a fraudulent claim. Companies have a strong incentive to ensure that the program works properly. Not only do we have a substantial financial incentive, but we face compliance reviews and enforcement actions if we make mistakes. Mr. Chairman, I want to thank you personally for taking such an interest in this topic. My experience has been that fighting white collar crime is usually on the top of the priority list of only a few. Your efforts in this important area should help those of us who wrestle with this crime as part of our profession.
Fighting insurance fraud is not unique to crop insurance. According to the Coalition Against Insurance Fraud (several AACI members belong to this organization), the annual cost of insurance fraud is $79 billion in the United States. This estimate would make insurance fraud the second largest economic crime in America, exceeded only by income tax evasion.
Insurance fraud appears to be widespread. A significant number of Americans surveyed, 35 percent, believe that it is alright to inflate insurance claims under certain circumstances, according to a 2000 Insurance Research Council survey. A 1995 Rand Institute study reported similar results. It found that 35 percent of people hurt in auto accidents exaggerate their injuries, adding $13 to $18 billion to their claims. The Coalition Against Insurance Fraud estimates that the fraud rate for homeowner's insurance is 10 percent and that for personal auto it is 16 percent.
WHY IS INSURANCE FRAUD SO PERVASIVE?
Page 101 PREV PAGE TOP OF DOC The reasons for fraud are myriad, but certainly there are common themes across different insurance lines of business. We agree with the Coalition Against Insurance Fraud that the top four reasons are public attitudes, insufficient penalties, low law enforcement priority, and insurer claim practices.
Insurance fraud is perceived as a high-return, low-risk undertaking. Many view insurance fraud as a victimless crimeonly the insurance company pays for the crime. Of course we know that not to be the case: premiums for everyone in a similar risk pool rise due to fraud. The victims are, as usual, law-abiding citizens.
Fueling this public perception, in part, is law enforcement. Law enforcement often does not give high priority to insurance fraud and other white-collar crimes. Resources are stretched just pursuing drug-related and other violent cases. Even if an individual is caught and successfully prosecuted, penalties for white collar crime are generally light.
Finally, some insurance companies unwittingly promote these public attitudes by paying suspicious claims rather than fighting them. The reality of little help from law enforcement, high legal fees, and meager penalties force companies to weigh the cost of their actions. This means that only iron-clad cases can be successfully adjudicated. This is especially true when large multi-million dollar bad faith lawsuits are brought against insurance companies when suspicious claims are not paid.
FRAUD AND ABUSE IN THE CROP INSURANCE PROGRAM
On top of these common problems, we overlay a Federal insurance program. Does the Crop Insurance Program suffer the abuse common to all lines of insurance? Obviously it does to some degree. In addition, as insurers we are required to work within a Federal program creating additional challenges. However, the salient questions are: How significant is fraud and abuse in the Crop Insurance Program? Do elements within the Crop Insurance Program foster fraud and abuse? And what can be done about it?
Page 102 PREV PAGE TOP OF DOCHOW SIGNIFICANT IS THE PROBLEM?
We all have anecdotes and stories about how fraud and abuse is perceived to permeate the Crop Insurance Program. The truth is we can't agree on the significance of the problem because we do not have a baseline measurement system in place. It clearly is a problem in some parts of the country and for some crops. But is this indicative of the entire country? We don't think so.
Earlier this year, the industry and RMA issued a joint press release outlining several steps we are taking to combat fraud and abuse in the Crop Insurance Program. One of these steps is for RMA to create a baseline so that we can measure the extent of the problem within the Crop Insurance Program.
As a trade association, we believe that fraud is a deliberate action taken to generate economic gain. Insurance fraud can include padding or inflating claims, falsifying an insurance application, creating phony claims or intentionally taking actions to create a claim. We believe that fraud is not nearly as prevalent within the Crop Insurance Program as abuse of Crop Insurance Program provisions. We define abuse as someone taking advantage of special circumstances, errors, or loopholes within a crop insurance policy. This type of abuse is found in many USDA programs. Our experience suggests that loopholes are more costly and pervasive than fraud. In addition, we believe that during hard economic times, taking advantage of loopholes becomes an even greater problem.
The problems, fraud versus abuse, are not the same and therefore require different solutions. Successfully weeding out fraud depends on many different parties: industry, RMA, OIG, U.S. attorneys or State and local courts. We can identify the cases but resolution is ultimately not up to us. Identifying and closing loopholes is clearly achievable by RMA and industry. While it takes time to close loopholes (the regulatory process and contract change date deadlines dictate time-frames), it can be done.
Page 103 PREV PAGE TOP OF DOC We believe the Committee recognizes the complexity of these issues and legislated accordingly. The Agricultural Risk Protection Act of 2000, we believe, provides additional tools to fight fraud and abuse within the Crop Insurance Program.
DO ELEMENTS WITHIN THE CROP INSURANCE PROGRAM FOSTER FRAUD AND ABUSE?
We would add two key elements unique to the Crop Insurance Program to the four items previously identified above (public attitudes, insufficient penalties, weak law enforcement priority and insurer claim practices). These unique elements add to the complexity of fighting fraud and abuse within the Crop Insurance Program.
First, the nature of crop insurance means we are insuring a producer's ability to make a crophis or her management practices. Poor management practices often result in a crop insurance claim when a better practice would have avoided a claim. Proving how much of a claim is the result of conditions beyond a producer's control versus how much is due to poor management is extremely difficult, even if the government steps in and helps with its broader investigative powers. Ambiguity abounds. Crop insurance policies, like all insurance policies are sensitive to facts and unanticipated circumstances highlight ambiguities in the insurance policy. As a matter of law, courts and arbitrators interpret any ambiguity in an insurance policy in favor of the policy holder.
Compounding this problem is a dearth of credible, expert witnesses. Insurers can turn to professional investigators when arson is suspected or doctors when a medical claim is suspicious. But farm management experts willing to testify against farmers in a local court are limited. Often we must rely on USDA, including the Farm Service Agency or the Extension Service, to render an expert opinion. In this case we may be relying on a farmer's neighbor or friend in a small community for an opinion that may be critical of the farmer. Such considerations make witnesses reluctant to help.
Second, the Crop Insurance Program is a Federal program delivered by private industry. The government is responsible for the insurance policy provisions, while the industry accepts and enforces the provisions as it delivers the program and bears risk on the insurance policy. The government does not enforce the policy provisions, which it writes, against policy holders, but against insurance companies. Communication between the government and the private sector to identify insurance provisions that encourage fraud or abuse could be improved. This is not something that can be legislated but requires continuous dialogue and evaluation between the government and industry. Unfortunately, sometimes Federal law and its interpretation stifle this needed working relationship. To fight fraud and identify abuse we cannot be successful without the full backing of government.
Page 104 PREV PAGE TOP OF DOC What Can Be Done About Fraud and Abuse in the Crop Insurance Program
First, we have to remember that fraud is not unique to the Crop Insurance Program and that some of the forces that make insurance fraud pervasive as we have outlined in this testimony are outside of the purview of this Committee, USDA and the insurance industry. Nevertheless, there is much we can do. The first item of business is to implement the anti-fraud sections of the Agricultural Risk Protection Act of 2000.
We believe this Committee and the Senate Agriculture Committee understand many of the forces that are at work within the Crop Insurance Program. After nearly two years of review and debate, the Committees produced the Agricultural Risk Protection Act of 2000. This act improves the anti-fraud provisions for the Crop Insurance Program. Anti-fraud authorities were expanded, resources were added to the Federal Government, and greater penalties were provided. In addition, industry was provided expanded authority to make good farming practice determinations. If used to their intended purpose, all of these provisions should mitigate fraud and abuse within the Crop Insurance Program.
WHAT ARE IMPLICATIONS FOR IMPLEMENTATION
It is our understanding that the RMA, FSA and OIG intend to present a plan to the Secretary on or before October 1, 2000 that will outline how USDA should implement the anti-fraud sections of the Agricultural Risk Protection Act of 2000. We have not been asked to participate in the development of the plan. We hope that once the internal process is completed, USDA will seek our input on the parts of the plan that require industry involvement prior to making final decisions.
To this end, the industry has formed a Program Integrity Workgroup to provide our recommendations to USDA on how best to implement the act. The workgroup is an extension of ongoing efforts within the industry to work with RMA on this critical issue. For example, earlier this year, RMA and industry worked together to develop a common understanding on how best to combat fraud and abuse. Our effort culminated with the recommendations contained in our joint press release. We also completed an in-depth exercise with RMA looking at the compliance function of companies and RMA using business process re-engineering tools to evaluate and determine how best to fulfill this critical function. We are continuing to work with RMA to implement this re-engineering effort.
Page 105 PREV PAGE TOP OF DOC In addition to working with RMA to develop compliance recommendations, private insurers have already enhanced their own internal compliance initiatives. Many of the private insurers who service the Federal Crop Insurance Program write other lines of insurance. These insurers have experience with tools such as special investigative units, internal whistle blower hotlines, and spot-auditing. These are used to compliment current Federal compliance requirements. Although dedicating these additional resources to strengthen company compliance efforts affects the company bottom-line, members of AACI are committed to addressing the issue of program integrity and believe that over the long term such efforts are wise investments.
Mr. Chairman, we take fighting fraud and abuse seriously. We will not knowingly pay a fraudulent claim. We have dedicated significant resources to combating fraud and abuse. Our Program Integrity Workgroup is in the process of quantifying these efforts across the industry and will provide our results to the Committee upon completion. We have been working as an industry with RMA to combat fraud and abuse.
Often we hear that industry does not do enough, that we bear no risk under the Federal reinsurance agreement and as a result are happy to pay all claims regardless of how specious they may be. Nothing could be further from the truth. The economics of this program require every claim to be scrutinized. We, as risk bearers, share in the amount of claims paid. It behooves us, as for-profit entities, to ensure that every claim is paid fairly, not overpaid.
Thank you Mr. Chairman for the opportunity to testify today. I would be happy to take any questions you or the committee might have.
Statement of Michael Connealy
Mr. Chairman, Mr. Stenholm, and members of the committee, I am Mike Connealy, chief executive officer of the Rural Community Insurance Services (RCIS) a wholly owned subsidiary of Wells Fargo & Company (WFC). Tim King, president of Wells Fargo Insurance, is accompanying me today.
Page 106 PREV PAGE TOP OF DOC In addition to our banking activity, WFC is the parent corporation of Rural Community Insurance Company (RCIC), a participant in a Standard Reinsurance Agreement with the Federal Crop Insurance Corporation (FCIC). RCIS, as the managing general agent of RCIC, sells and services Federal crop insurance reinsured by the FCIC. In 2000, we serviced agricultural insurance policies with premiums of nearly $550 million.
I am an officer of RCIC and chief executive officer of RCIS. I am currently vice chairman of the National Crop Insurance Services (NCIS) a statistical, research, training and educational trade organization. I was born and raised in Nebraska on a family farm growing corn, soybeans and wheat. This background gave me an understanding of the uncertainties and risks of family farmers; the role of the international, commercial reinsurance industry in risk management; the critical importance of the Federal Crop Insurance Program to the agricultural credit market; the complicated matters of State regulation of the insurance industry; and, the necessity for readily available credit for the production costs and annual farm operations of America's farmers, particularly young and limited resource family farmers.
WFC is the largest bank agricultural lender in the United States, with several billion dollars in agricultural loans made in 1999 and 2000. For the most part, these are operating loans and land loans to family farmers. We also lend a significant level of dollars to related agribusiness in rural America, many of whom are dependent on a strong farm economy and are family enterprises. To name just a few, these businesses include vegetable and fruit processing plants, livestock and veterinary related enterprises, chemical and seed suppliers, grain handlers, truckers, machinery dealers and repair shops, insurance agents, realtors, farm managers, and crop watchers. Recently, computer sales and service (both hardware and software) businesses have sprung up to assist farmers in their difficult task of surviving financially during hard economic times. WFC is proud of our history of being a strong agricultural lender and is prepared to move into the next decade continuing to commit our resources to promote a strong rural economy.
Page 107 PREV PAGE TOP OF DOC The foundation for a strong rural economy begins with food and fiber producers. Farmers, however, must be able to reap an appropriate reward for expending their labor and capital to provide the United States and the world with abundant food. We cannot eliminate risk at the farmer level, but government and the private sector together can provide farmers with access to risk management tools such as subsidized multi-peril crop insurance (MPCI). WFC supports the recently passed crop insurance legislation and looks forward to advancing our commitment to rural America by utilizing the Crop Insurance Program. Most of our operating loans, particularly if they show signs of stress, are secured by crop insurance policies.
One of our leading South Dakota bankers recently commented that the state of the farm economy was better because of recent infusions of dollars from Washington. Thanks in large part to the extra emergency Freedom to Farm payment, most of our loan customers can now maintain their operations through the 2000 season. With the emergency 1999 and 2000 AMTA payments, LDP payments on corn and soybeans, and high levels of Crop Revenue Coverage (CRC) insurance coverage; most farmers in Southeast South Dakota are in a positive financial position. From a banker's perspective, the infusion of the AMTA and LDP payments were and are essential. They have played a key role in the safety net for those farmers that raise average or above average crop yields.
For the long term there continues to be a need for a reliable mechanism to deal with surplus production and low prices. For example, bankers need to know that the LDP program will be in place and possibly enhanced. Because Emergency AMTA payments are not part of any ongoing budget authority, they cannot be factored into 2001 operating loans.
It is with great concern that we have watched the Federal Reserve Board raise interest rates. In addition, energy costs have risen rapidly over the last several months. These are two major expense components for our farmers. The loans that were made last winter did not contemplate this level of expense. For 2001 loan renewal, banks will be forced to factor in continued higher interest rates and energy prices, which will add even more stress on agriculture loans.
Page 108 PREV PAGE TOP OF DOC While crop insurance coverage is a great safeguard against weather related risks, you cannot insure the operation's profitabilityespecially when commodity prices are low. Even with high levels of revenue insurance coverage protection, such as CRC, it is possible to have a low price disaster and not make a recovery on your insurance policy due to high crop yields. We would emphasize to everyone that crop insurance is just one of the many tools that farmers need in today's farm economy.
Before I further address the subject of today's hearing, I would like to take a moment to thank the Chairman and the Committee for their collective work, along with members of the Senate Agriculture Committee, that culminated in passage of the Agricultural Risk Protection Act of 2000. Reform of the Crop Insurance Program has never been easy and, in the last few years, has become quite controversial. However, Mr. Chairman, for the first time in recent memory the insurance industry, farm and commodity groups, agricultural trade associations, banks and credit institutions all joined together to provide some guidance as to what we believed the ultimate reform package should contain. Although that package of suggested reforms evolved through the legislative process, there was one constant goal: an increase in the Federal contribution to the premium paid on behalf of farmers to insure their crops. Congress, through your guidance, has accomplished that goal.
As with any legislation, Mr. Chairman, the success or failure of the new act will depend on the implementation. FCIC has already announced changes to the farmer premium subsidy structure, instituted new catastrophic risk protection fees, and plan to change the Actual Production History program to conform to the requirements of the new legislation. Other provisions of the legislation appear to be on a reasonably fast track. As FCIC continues the march toward full implementation, RCIS believes that an open and meaningful dialogue with the insurance industry is vital if we are to pursue and reach the mutual goal of a successful Crop Insurance Program that provides farmers real risk protection.
Page 109 PREV PAGE TOP OF DOC Each section of the newly implemented act has consequences for farmers, credit markets and the insurance industry delivery system. Because the Crop Insurance Program has grown so quickly and to such a premium and risk magnitude, even seemingly small implementation decisions may have unforeseen and unintended consequences if they are not well thought out and vetted through all available sources of information and expertise.
RCIS also believes that the continued use of the independent insurance agent delivery system is an absolute must. With the many risk management plans that most farmers will now have available, a well-informed, trained and knowledgeable crop insurance agent fills the role of a risk management counselor as well as a sales agent.
The new act makes substantial changes in the structure of FCIC that may provide significant opportunity for improvement. Although not a structural change, RCIS urges FCIC to provide increased financial support to the interactive computer system (known as the RAS/DAS) located in the FCIC Kansas City office. RCIS and each SRA holder electronically exchange large amounts of data with FCIC/KC on a daily basis. Accurate farmer premium and indemnity data is highly dependent on that system. If the RAS/DAS system is not accurate, not timely, or were to malfunction, farmers might not receive their indemnities timely, if at all; the integrity of data collected and exchanged between USDA agencies would be put in question; FCIC compliance functions would not be properly supported; and reimbursements to insurance companies could be disrupted.
RCIS annually spends substantial sums of money on its computer hardware, software and computer related contractors. We provide that level of financial support in an effort to meet the requirements of the SRA and to utilize the latest technological developments. Also important to RCIS, our parent corporation, WFC, has a corporate philosophy and policy of moving toward Internet based e-commerce solutions in order to open a new channel to the farmers and agents for the exchange of information and ideas. We are excited to be on the cutting edge of this effort and are happy to provide this to farmers as an optionnot a mandate. Certainly e-commerce will change the environment that all people work in, but no one needs to be afraid of the changes that Internet strategies will allow. Years from now, we may look at the e-commerce bill as more important to agriculture than the crop insurance bill.
Page 110 PREV PAGE TOP OF DOC The e-commerce initiative will require that FCIC review and update its role as a regulator. While there should be few barriers for farmers or agents wishing to do business over the Internet, we must have appropriate security safeguards in place to protect confidential information.
With the new act came provisions designed to ultimately provide specialty crops farmers the option to buy crop insurance protection. Because of traditional crop demands, too often the old program did not adequately address the specialty crop grower risk needs. With the new financial emphasis on product development that the new act provides, new crop insurance risk management tools should be available to specialty crop growers in the near future. From an RCIS point of view, the missing emphasis on specialty crops has now been provided.
The Agricultural Risk Protection Act of 2000 was written, in part, to enhance program compliance. This in turn will provide even more program integrity, if responsibly implemented. The conference report provides for greater civil penalties and program disqualification for producers, agents, loss adjusters and other entities that misuse the program. In addition, the conference report mandates that the Farm Service Agency (FSA) assist FCIC with the investigation of producer claims and in the review of new insurance policies for vulnerabilities that could lead to waste, fraud and abuse. FCIC was directed to establish methods to identify producers, agents and loss adjusters who may be abusing the program. RCIS strongly supports the elimination of waste, fraud, and abuse in the Federal Crop Insurance Program and will assist FCIC, or any other government agency, in their efforts to eliminate any and all forms of abuse of the program.
RCIS has approximately 4000 independent and licensed agents and 800 part time and full time loss adjustor employees. We are one of a very few nationwide writers of crop insurance. Under the terms of the SRA, RCIS is responsible for both agent and loss adjustor training and we take that responsibility very seriously. Like any other line of insurance and even other government programs, however, if there are people intent on abusing the program or system, they often find a way to do soin spite of company oversight. Cooperation between FCIC and company SRA holders is imperative if we are to find and eliminate abuse, regardless of where it appears in the crop insurance delivery system.
Page 111 PREV PAGE TOP OF DOC Several years ago, the SRA holders and the FCIC Compliance Division mutually recognized the need for improved compliance activities. Over a period of several months and during several joint meetings, a matrix of how to improve crop insurance compliance was developed, mutually agreed upon, and, in June of 1999, submitted to the FCIC management for action. RCIS is somewhat uncertain of the future of that plan, but does believe that it goes a long way toward improving the compliance effort in both RMA and the participating insurance companies. Only if FCIC Compliance and the insurance companies work together will program waste, fraud and abuse ever be minimized.
It is also our belief that aggressive use of e-commerce tools will substantially reduce the opportunity for abuse. Computer based records are much more reliable than paper based processes that can be easily manufactured after the fact.
Mr. Chairman, I have added four charts for the benefit of the Committee that indicate what the additional farmer subsidy provides for the Texas wheat producer. As you can see, the new legislation provides quite a financial enticement for the Texas wheat producer to buy a high level of crop insurance protection. This will ultimately allow higher dollar collateral for operating loans. In our opinion, this is a great foundation for the 2001 season.
In conclusion, Mr. Chairman and Members of the Committee, RCIS looks forward to the implementation of all provisions of the new act. RCIS worked with the agricultural community and Congress throughout the process, and is strongly supportive of the new legislation. We recognize that effective implementation of the new act is critical to its success. We offer our full support to you, the Committee and FCIC to make the program work.
Mr. Chairman, that concludes my testimony and I welcome any questions that you or other committee members may have.
"The Official Committee record contains additional material here."
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