Crop Insurance

The federal crop insurance program has experienced many problems since Congress reformed it in 1980. At that time, private insurance companies began bearing some of the risk associated with the federal crop insurance policies they sold, and the Federal Crop Insurance Corporation (FCIC) assumed, through a reinsurance program, some of the companies' potential liabilities. Problems in the program--which GAO has reported on over the last 11 years--have contributed to the program's inability to meet many of the goals Congress set for actuarial soundness, private sector risk sharing, and participation. In addition, the provision of ad hoc disaster payments has undercut the role of crop insurance as the nation's primary way of delivering disaster assistance. During the 1980s, the government bore most of the risk for excess program losses. To ensure that companies would participate in the program, FCIC's reinsurance terms effectively shielded the companies from these losses. In fact, the reinsured companies collectively realized small profits in the years when the policies they sold had large losses. From 1981 to 1990, FCIC sustained over $2.3 billion in excess losses, while the reinsured companies had net gains, through underwriting, of $101 million. Under the 1990 farm bill, reinsured companies will bear more risk than they did in the past. The degree of company risk, however, will remain modest relative to the government's liability. Because the federal crop insurance program will likely experience continued excess losses, reinsured companies will have neither the capability nor the incentive to assume significantly greater risk.

GAO found that: (1) since Congress reformed the Federal Crop Insurance Program in 1980, the program has experienced such problems as inadequate internal controls, insufficient control over reinsured companies, generous standard reinsurance agreements, and rapid program expansion; (2) those problems contributed to the program's inability to meet many congressionally established goals to ensure actuarial soundness, private-sector sharing, and participation; (3) from 1981 through 1990, FCIC reinsurance terms effectively shielded companies from excess program losses, but FCIC sustained over $2.3 billion in excess losses, while the reinsured companies had net gains, through underwriting, of $101 million; (4) the FCIC 1992 standard reinsurance agreement forces reinsured companies to bear more risk than the previous agreement, by requiring companies to retain increased risk of loss on their written policies, reducing the amount of available stop-loss protection, and requiring companies to take more financial risks to earn underwriting gains; and (5) although FCIC has made efforts to increase reinsured companies' risks, the amount of risk retained by the companies will remain limited, since reinsured companies will have neither the capability nor the incentive to assume significantly greater amounts of risk until FCIC reduces losses and makes significant program changes.