Soybean South :: From the Editor

 - RISK MANAGEMENT -

Partial Insurance Premium Payback

The USDA’s Risk Management Agency has put forward a Good Performance
Refund proposed rule with the intent of returning a portion of a farmer’s
out-of-pocket premium based on his or her good insurance experience.

 
The United State’s Department of Agricul-ture’s Risk Management Agency (RMA) published information on Jan. 6, 2011, in the Federal Register regarding a proposed rule on the Good Performance Refund.
The proposed Good Performance Refund program establishes a discount, in the form of a refund, that returns a portion of out-of-pocket costs paid for crop insurance premiums to qualifying farmers and ranchers throughout the country. The refund will be given to those farmers and ranchers who have participated in the Federal crop insurance program for a number of years and who have demonstrated favorable insurance experience.

Farmers and ranchers who meet the qualifications of a new or beginning farmer and demonstrate favorable performance may also receive a good performance refund according to the proposed rule. The program proposes to reward producers who purchase crop insurance for their risk management needs and demonstrate best possible management practices for eliminating or lessening loss from natural causes.

Crop insurance is available to manage the risk of the farm or ranch operation and to provide claim payments after a loss; however, when the producer has a series of good years with favorable performance, this proposed refund program rewards those producers by returning a portion of their out-of-pocket premium.

Federal rulemaking process

The terms “rule” or “regulation” are often used interchangeably. The procedures that Federal agencies are required to follow in writing regulations is called the rulemaking process.

Framing rules generally starts with an act of Congress, says Shirley Pugh, Director, Public Affairs with the Risk Management Agency in Washington, D.C. In this instance, it is the Federal Crop Insurance Act.

To implement the intent of this act, the RMA proposes a rule (such as the Good Performance Refund rule), publishes it in the Federal Register, asks for comments, refines the rule based on input from comments, then sends it to the USDA and the Office of Management and Budget’s Office of Information and Regulatory Affairs for approval.

Intent of the rule explained

According to Pugh, the comment period ended Jan. 21, and the Good Performance Refund proposed rule is still in the rulemaking process.

“It is a proposed rule at this time, and we are reviewing the comments,” Pugh says. “Since it is not yet a Federal rule, we can’t comment on it. There may be changes in the final rule to be published later. However, the intent of this rule would be to return a portion of the producer’s premium to him or her based on good insurance experience.”

If the Good Performance Refund proposed rule is approved and becomes a final rule, then the RMA can move on to the enacting stage in which a list of eligible recipients would be sent to the Treasury Department, who, in turn, will cut and mail out the checks.

“RMA’s thought process with the Good Performance Refund proposed rule is that if you have been paying on your crop insurance all this time, and you haven’t had big losses, then we have an opportunity to reward your good performance,” Pugh says.

For more details, please review the following Frequently Asked Questions section.


 - Good Performance Refund Q&A -

Q. Under this proposed rule, who qualifies for the Good Performance Refund?

A. Under the proposed rule, to qualify this year, a farmer or rancher must meet the following criteria:

• Be an active participant (farmer or rancher) in any Federal crop insurance program at the buy-up coverage level for the 2009 crop year;

• Be eligible for crop insurance for the 2010 crop year;

• Have used the same Social Security Number or Employer Identification Number to identify the primary policyholder throughout the period of years used for determining the good performance refund;

• Have paid more out-of-pocket premium into the program over the period of time than was received in indemnity;

• Have limited losses depending on the years of experience (see below):

• Farmers and ranchers who have purchased Federal crop insurance for seven to 10 years and have had a maximum of one loss during the 10-year period (2000-2009) may qualify for a refund.

• Farmers and ranchers who have purchased Federal crop insurance 4-6 years during the last 10 years with no losses during the 10-year period may qualify for the refund.

• New or beginning farmers and ranchers who demonstrate favorable performance by paying more out-of-pocket premium into the program than they have received in indemnity payments (See more information on new or beginning farmers below).

The following is an example of how the payment is calculated if the refund is 10 percent:

Total Premium over 10 years
Total Subsidy Paid over 10 years
Net Producer Paid Premium
Indemnity received
Net Paid Premium
Good Performance Refund Percent
Refund Check = $20,000 x .10

= $76,000
= $46,000
= $30,000
= $10,000
= $20,000
= 10 percent
= $2,000

Q. For purposes of the proposed rule, how
do I know if I am a new or beginning farmer?

A. According to the proposed rule, for the 2011 refund program, which is based on crop year 2009, new or beginning farmers are those who have not participated as a primary entity or held more than a 10 percent financial interest in any farm or operation prior to 2007, regardless of whether or not they purchased crop insurance.

Farmers and ranchers with 1-3 years of crop insurance experience and identified as potentially qualifying for a refund given the qualifications above, will be sent a letter in the mail to self-certify that they do indeed qualify as a new or beginning farmer prior to a good performance refund being made. Farmers and ranchers who have simply changed entities are not eligible for a refund.


Q. Under the proposed rule, how much will I receive if I qualify for the refund?

A. Payment amounts under this proposed rule will vary by farmer or rancher and will be based on a percentage of a farmer or rancher’s “net paid premium” over the last 10 years. The net paid premium is the amount of premium the farmer or rancher has paid, excluding subsidy and claim payments, over the period of years of participation in the Federal crop insurance program. (See example on page 6). Replant payments are not considered an indemnity for the refund.

Net paid premium is based on all crops and counties for an individual farmer or rancher, and refund payments will consider whether an eligible farmer or rancher is an experienced farmer or rancher or a beginning farmer or rancher. Individual refunds will not be greater than the producer’s net paid premium amount.

According to the proposed rule, this year, experienced farmers and ranchers with favorable performance will receive a refund of approximately 10 percent of their net paid premium from 2000-2009. New or beginning farmers who have not established a long history in the program, but have nonetheless paid more premium than they have received in claim payments, will receive a percentage refund of up to half the amount that experienced farmers and ranchers receive.

When considering all qualifying farmers and ranchers, the average refund amount under this proposed rule will be approximately $1,000 this year. No refund will be made if it is less than $25, and the maximum refund given will be $25,000.


Q. If the proposed rule is approved, when will policyholders receive the refunds this year?

A. According to the timing of the proposed rule, the proposed refunds should be available within the first quarter of the 2011 calendar year.


Q. According to the proposed rule, how will policyholders receive the refunds?

A. In accordance with the proposed rule, farmers and ranchers who qualify will receive a check in the mail from the USDA.

As the proposed rule is currently published, potential new or beginning farmers will first receive a letter from the Risk Management Agency notifying them that they may be eligible. Based on the information supplied in the letter, if a farmer or rancher meets the qualifications for a new or beginning farmer, they must sign and return the certification in order to receive their Good Performance Refund.


Q. Why is RMA proposing to provide refunds now when they have not in previous years?

A. The authority to provide a performance-based discount, or refund, is contained within section 508(d)(3) of the Federal Crop Insurance Act.

Earlier this year, RMA negotiated a new Standard Reinsurance Agreement (SRA) with the private insurance companies that deliver the Federal crop insurance program. The negotiation generated savings of $6 billion over the next 10 years. Two-thirds of the savings, or $4 billion, went to reducing our national deficit, while $2 billion was used to improve and expand programs for America’s farmers and ranchers. Of that $2 billion, approximately $750 million over 10 years, or $75 million a year, was dedicated to providing this proposed refund to farmer and ranchers.

Through the efforts of the Obama Administration to negotiate a fair SRA, funds are now available for this proposed refund.


Q. Will crop insurance rates change because of the Good Performance Refund proposed rule?

A. The proposed refund will not affect crop insurance rates, as rates are set to be actuarially sufficient; rather, the refund program pays for the exceptional performance of insured farmers and ranchers who meet the qualifications as stated in the proposed rule.


Q. How much money will be provided to rural America through this proposed refund?

A. RMA expects that the proposed Good Performance Refund program will provide farmers and ranchers in two-thirds of the counties in rural America with approximately $75 million a year. It is estimated that the proposed refunds will be provided to almost 68,000 farmers and ranchers (about 14 percent of individual farmers and ranchers who have buy-up crop insurance), with an average estimated refund of $1,000. Buy-up insurance levels are those levels above the Catastrophic Risk Protection level.


Q. Will the proposed Good Performance Refund impact crop insurance companies’ underwriting gains or compensation?

A. No. Refunds will be paid from funds specifically set aside from savings resulting from SRA negotiations. There will be no changes to liability, premium or indemnity for any insured farmers and ranchers, and there will be no impact or changes to premium rates.