percent coverage. The resulting subsidy percentage for 75 percent coverage is calculated as shown below.

Assume a 100 bushel yield, premium rate for 75 percent coverage of 10 percent, and a price election of $1.00 per bushel.

Mr. WHITTEN. According to your explanatory notes, you anticipate a reduction in overall payments for premium subsidies from $135,743,000 in fiscal year 1987 to $112,000,000 in fiscal year 1989. Please explain this decrease.

Mr. MARSHALL. The premium subsidy amount of $135.7 million was based on a total premium estimate of slightly over $500 million for 1987 while the $112 million is based on a more realistic estimate for 1989 of $450 million.

NONDISCRETIONARY INCREASE

Mr. WHITTEN. Beginning with fiscal year 1988, your budget submission included an item called nondiscretionary increase, which you described as the prorated share of inflationary increases of nonsalaried costs. Why does a nondiscretionary increase comprise over three percent of the total reimbursement of administrative expenses for reinsurance companies, whereas the nondiscretionary increase comprises only one percent of the amount for master marketers?

Mr. MARSHALL. The same inflation factor was applied to both the reinsured companies and master marketing activities in the Budget. The difference is in the number of staff-years included in the two activities. The total staff-years attributable to reinsured companies is only 29; whereas, the master marketing portion includes staff-years of 426 and personnel costs are excluded from the inflation costs.

PREMIUM RATE INCREASES TO ACHIEVE A 0.9 LOSS RATIO

Mr. WHITTEN. By how much would you have to increase premium rates on those crops on which you experience losses to have achieved a loss ratio of 0.9 for fiscal year 1987?

Mr. MARSHALL. Premium rate adjustments are not a simple matter of dividing the cumulative loss ratio by 0.9 to determine the price at which break-even occurs. There are several reason for this. First, there can be substantial slippage in insured acreage due to the impact of price elasticity on demand, that is, a higher price generally means that fewer units of the commodity-insurance-will be purchased. Second, the very nature of disaster insurance precludes this rating methodology. By definition, disasters should represent relatively infrequent events. One should not expect the farmer to pay last year's indemnity for disaster in next year's premium. That would be analogous to charging a person $50,000 for

insurance on his or her home this year because that person collected a $50,000 fire loss last year.

As noted in responses to other questions, premium rates are not the only parameter controllable by FCIC. We reduced the guarantees for soybeans in several States, but the extent of this action was modified for non-insurance reasons. Computing new county average yields appears to have generated a higher average premium rate for wheat. We will continue to work with all program parameters to seek the condition at which income over the long run can be expected to equal indemnity payments plus a reserve while maintaining a proper balance between premium and coverage.

I will provide for the record, the cumulative loss ratios by crop through 1987.

PREMIUM RATE INCREASES

Mr. WHITTEN. Did you increase the premium rates on any crops for crop year 1988? If so, please provide a schedule which will show by state and by crop the rate increases.

Mr. MARSHALL. Many crops incurred major rate adjustments, mostly increases, in 1986 and 1987. Across the board rate adjustments were much more limited for 1988. The major action to control losses was made on coverage's net rates. Transitional yields for soybeans in 13 States were reduced by up to 50 percent to more accurately reflect the farming ability of the persons who purchase crop insurance in those States. Our analysis indicated that the average person insured in those States accepted an offer by FCIC that equaled or exceeded the long-term average yield for the State, but the yield actually attained in any year from 1981-1986 was substantially lower than the average yield reported for the year by the National Agricultural Statistics Service. In the face of this persistent adverse tendency, together with the fact that about $500 million of accrued losses had occurred on soybeans in those States, FCIC determined that coverage adjustments were a more appropriate way to reduce losses than were rate increases. Previous rate increases had not slowed the losses realized on soybeans in those States.

FCIC was forced to moderate the immediate impact of this action by adopting limitations on the amount that the insurance guarantee for any person will be reduced in 1988 and subsequent years. Thus, the improvements in losses will not occur as rapidly as anticipated.

I will provide for the record tables showing specific rate review activity-not necessarily resulting in increases in all cases. [The information follows:]

Popcorn: Illinois, Indiana, Iowa, Kentucky, Michigan, Missouri, Rate adjustments to reflect changes in field corn made in 1986. Nebraska, and Ohio.

Potatoes: New Mexico, Oklahoma, and Texas

Fresh tomatoes: Florida.

No change in rates, coverages adjusted to marketable basis.
Coverage adjusted.

In addition to these rate reviews, rates were developed for several new county programs and new insurable crops.

The rating model used by FCIC for major crops varies premium rate inversely with the yield of the insured relative to the average yield for the county. Average yields were recomputed for 1988 for wheat, among other crops. This generally had the effect of increasing rates. Shown below are the average earned rates in 1987 and 1988 for wheat in five states for reinsured business only. Data for direct written business are not yet available. The data are preliminary, reflecting only business reported as of March 17, 1988. The average premium rate increased from 8.0 to 9.5 percent in the five states, or 18.8 percent. Not all this increase was due to recentering county yields since a unit surcharge of 10 percent also took effect. However, the number of units declined, so the overall impact of this additional charge was less than 10 percent. The subsidy rate increased, which indicates less business at the 75 percent coverage level and a lower average basic rate. Elimination of "Olympic scoring"-dropping the high and low yields, probably had the effect of reducing average guarantees and increasing rates. Thus, the overall increase of 18.8 percent is due to a number of causes. However, recentering county average yields did play a role, possibly around 10 percent.

We will continue to adjust all program parameters as needed to maintain adequacy of premium income.

SELECTED REINSURANCE STATISTICS FOR WHEAT IN FIVE STATES: 1987 VERSUS 1988

Mr. WHITTEN. According to the explanatory notes, you anticipate the net capital of FCIC will decrease by $118,250,000 during fiscal year 1989. Please explain why you anticipate such a decrease.

Mr. MARSHALL. The decrease of $118 million in capital is brought about by several things; first, the beginning capital was down by $61 million, then the additions to capital was down by an addition

al $16.5 million, and the balance of the decrease is estimated indemnities over premium income, thus resulting in the decrease.

CORPORATION'S CASH POSITION

Mr. WHITTEN. Please provide for the record a table showing the Corporation's cash position for the past 12 months, similar to the table on page 606 of last year's hearing record.

Mr. MARSHALL. I will be glad to provide that information. [The information follows:]

SWITCHING COMPANIES FOR POSSIBLE AVOIDANCE OF RATE INCREASE

Mr. WHITTEN. Under the actual production history system, declining yield history would usually cause an increase in rate. In your testimony last year, you noted that tracking systems are being put in place to ensure that yield history follows producers from carrier to carrier. Please provide the status of that effort.

Mr. MARSHALL. No progress was made. Instead, FCIC proposed limitation of coverage for those persons who failed to provide records. This limitation would have restricted persons without records or with only one year of records on any unit to either the 50 or 65 percent coverage level. It was believed that this action would encourage the presentation of records to obtain a better guarantee.

WHEAT LOSSES

Mr. WHITTEN. According to the budget, indemnities on wheat amounted to almost 25 percent of total indemnities since 1948. Last year, how much of the wheat loss was absorbed by FCIC? How much was absorbed by reinsurance operations?

Mr. MARSHALL. Of the total losses for wheat of 57,039 claims as of mid-March, 13,979 claims are attributed to FCIC and 43,060 was attributed to reinsured companies. We will provide for the record, wheat statistics-1948 through 1986.

[The information follows:]

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