Unique Features of the Multiple Peril Program - Cont.

The rates established by RMA do not include a loading for insurance company expenses. Instead, insurers are compensated by the Federal government for their expenses in a separate arrangement. Currently, Congress has authorized an expense reimbursement of 24.5% of the premium for the Buy-up coverages. The expense reimbursement is intended to compensate an insurer for its commissions, administrative expenses, and all loss adjustment expenses. In comparison, a loss adjustment reimbursement of 11% applies to the imputed premium for the Catastrophic coverage. State premium taxes do not apply to MPCI premiums. The reimbursement percentage has been reduced significantly in recent years. This reduction was partially justified based on the high crop prices in the mid 1990's, since high prices result in an increase in the expense reimbursement payments without a corresponding increase in insurers' actual expenses. The reimbursement is not intended to generate a profit for private insurers. However, the reduction in crop prices in 1998 and 1999 has not resulted in an offsetting increase to the expense reimbursement percentage. As a result, the actual expenses of the crop insurance industry now exceed the amount of the expense reimbursement according to one study.

Another unusual aspect of the program is that the MPCI rates are currently established to produce a long term loss ratio of 107.5%. Since the premiums are collected and the losses are paid at the end of the cropyear, little or no investment income can be earned. As a result, the program is not designed to produce an operating profit on a direct basis for participating insurers. To encourage private participation in the MPCI program, the reinsurance arrangements in the SRA have been designed to enable insurers to earn a reasonable profit on a net basis. The financial and operational details of the SRA are complex and are beyond the scope of this discussion.