Information on the Federal Crop Insurance Corporation's 1986 Standard Reinsurance Agreement

Pursuant to a congressional request, GAO reviewed the Federal Crop Insurance Corporation's (FCIC) 1986 standard reinsurance agreement with insurance companies, focusing on: (1) how the agreement will work; (2) how the agreement compares with prior agreements; and (3) the overall financial condition of FCIC.

Under the reinsurance program, FCIC enters into agreements with private insurance companies to protect the companies from losses on crop insurance policies. As the reinsurer, FCIC is liable for most underwriting losses but receives most underwriting gains. While the 1986 agreement is similar to previous agreements, GAO found significant differences, including: (1) a new requirement that companies must insure any eligible farmer's crop, provided the company insures the same crop elsewhere in the state in which the farmer is located; (2) provisions allowing companies to relinquish up to 95 percent of their crop insurance liabilities and high risk premiums to FCIC provided the total is not more than 10 percent of the company's total business; (3) provisions allowing companies that operate in a limited geographic area to exchange local business with FCIC for an equivalent amount of business in a different geographical area; (4) an increase in the maximum share of underwriting gains and losses companies can realize; and (5) a change in the way FCIC reimburses companies for expenses incurred in the sale of crop insurance. In addition, GAO found that: (1) the financial situation of FCIC has deteriorated since 1980 because of low premiums and weather problems for certain insured crops; and (2) in order to meet its obligations for fiscal year 1985, FCIC will need an additional $113 million and will need to replace $50 million from its administrative fund that it transferred to its program fund.