BULLETIN NO.: MGR-97-027 TO: All Reinsured Companies All Risk Management Field Offices FSA Headquarters, Program Delivery and Field Operations FROM: Kenneth D. Ackerman Administrator SUBJECT: Draft 1998 Standard Reinsurance Agreement Attached for your review and comment is a final draft of the 1998 Standard Reinsurance Agreement (draft SRA), as well as Appendices 1 and 2, Exhibit 20A, and Manual 14. A draft Manual 13 is being provided separately from the Kansas City Office. The original draft was revised in response to comments received directly from crop insurers and other interested parties as well as comments presented during the meetings from workgroups comprising Risk Management Agency (RMA) and crop insurance industry personnel. For ease of analysis, the SRA issues were divided into four areas, which are: 1. Risk sharing; 2 Administrative and Operating (A&O) subsidy, fees, and other payments; 3 Operations; and 4 Performance under the SRA and Manual 14. A brief synopsis of changes affecting the four major areas follows. Please read the draft SRA carefully as the synopsis is not intended to be complete. RISK SHARING The draft SRA provides three Commercial Funds in each State--one for buy-up policies, one for Catastrophic coverage policies (CAT), and one for revenue coverage policies. It also provides three Developmental Funds in each State on the same basis. One Assigned Risk Fund in each State will be used to accommodate all policies placed in such fund. Designation of policies to the Assigned Risk Fund will be as before. However, designation of policies to the Developmental Fund will be on a crop contract basis and must be completed by the contract change date for each crop. Retention limits for the Commercial and Developmental Funds may be varied by State and fund. Exhibit 14 will be reduced to one page. The proposed risk sharing parameters for each fund are shown in Section II. C. The inception point for the Reinsurance Account has been raised to 17.5 percent and 40 percent of the gain in excess of that limit will be paid to companies to cover income tax liabilities. A&O SUBSIDY, FEES AND OTHER PAYMENTS The flat percentage rate of 24.5 percent applied to net book premium will be the basis by which A&O subsidy payments will be made on most buy-up policies. FCIC will provide a 3 percent excess loss adjustment expense payment when loss ratios exceed certain limits. CAT policies will continue to receive the same loss adjustment payments as they did under the expiring SRA. A&O subsidy for revenue coverage and group risk plan policies will be limited as shown in Section III.A. Loss adjustment expenses are more fully discussed in Section IV. Traditionally, the payment of administrative and operating expenses has been in two installments. During legal review, the payment of the A&O subsidy in one installment has been questioned since some expenses may not yet be incurred at time of payment. RMA will work to resolve this matter and advise accordingly. OPERATIONS FCIC has addressed many of the issues identified by those who had comments, including the following: -- Added a new section addressing program changes; -- Revised companies' obligations under USDA's nondiscrimination policy; -- Requires companies to write all plans of insurance, except those approved under section 508(h) of the FCIC Act, in any State in which they operate and to insure all applicants for all crops in such State; -- Adds a definition of "field person," which provides reasonable flexibility to the companies for managing sales and loss adjustment; -- Changed the definition of "managing general agent" to follow State insurance rules wherever possible. In the absence of State rules, or regulations governing an MGA, the National Association of Insurance Commissioners' Model Act will apply; and -- Includes a definition of "records" as original signed documents, which may be either on paper or by electronic means. PERFORMANCE UNDER THE SRA AND MANUAL 14 Companies are required to perform certain duties under the SRA and comply with the rules and regulations of FCIC. Failure to perform duties or comply with regulations may trigger termination or suspension of the SRA and/or the payment of specified amounts. These are specified in Section V., subsections J., K., and L. Also, during final review, Section V.J.5.d. was determined to be an important provision for the overall integrity of the crop insurance program. While this was a controversial issue, during work group discussions, the provision was reworked to include the term "material" and applies only to eligible crop insurance contracts that are reviewed and such failure is determined to have occurred. Manual 14 was revised significantly. New agents must successfully complete at least 12 hours of structured training and a basic competence test administered by the Company. After the first year, agents must complete at least 3 hours of structured training and be retested every 3 years. Loss adjusters must successfully complete annual training of 10 days of structured training and a basic competence test. After the first year of loss adjustment experience, loss adjusters must annually complete at least 3 days. Loss adjusters must also successfully complete a basic competence retest every 3 years. The company must annually provide to RMA a report of training results. In regards to quality control, companies must submit their plan to conduct quality assurance reviews. The company must also provide RMA an annual report of the company's quality control review results. General review requirements are provided for both FCIC and the companies. Your written comments to this draft SRA are appreciated and will be considered if received before close of business on July 14, 1997. They should be sent by facsimile or overnight mail to the following address: USDA/Risk Management Agency Reinsurance Services Division E. Heyward Baker, Director 1400 Independence Ave, S.W. Rm. 6727-S, Stop Code 0804 Washington, D.C. 20250 Telephone: (202) 690-4232 Fax: (202) 690-3604 If you have any questions, please contact the Reinsurance Services Division. Attachments