Crop Insurance

The federal crop insurance program, which offers farmers protection from such risks as flooding and drought, was revised in 1980 to achieve, among other things, actuarial soundness and widespread participation so that other forms of disaster relief could be eliminated. Because the program is not achieving those goals, GAO examined how well the program meets basic conditions of insurability, which help promote actuarial soundness, and how efforts to expand participation have affected actuarial soundness. GAO found that the program does not meet three basic conditions of insurability: (1) some crop insurance risks are not independent, which means that many farms can be stricken by the same disaster and require relief all at once; (2) the government does not have enough farm-level information to differentiate among farmers' risks and therefore may charge similar premiums to high-risk and low-risk farmers, which can result in higher numbers of high-risk farmers covered by the program; and (3) the government cannot detect moral hazard when an insured farmer's actions increase the chance or extent of loss. Program efforts to widen participation by making crop insurance more attractive to farmers have inhibited actuarial soundness; also, with these efforts the program has failed to achieve a 50-percent national participation rate, Congress' goal.

GAO found that: (1) the federal crop insurance program has not achieved actuarial soundness because FCIC does not have sufficient information to calculate individual risks or determine the cause of losses; (2) although FCIC has attempted to increase its actuarial soundness and insurability by improving the quality of farm data and using multiyear insurance contracts, the effect of these initiatives on the program's insurability and overall cost-effectiveness is not known; (3) current legislative and crop insurance program provisions, designed to achieve 50-percent national farmer participation by providing 30-percent insurance subsidies and entitlement programs, have not significantly increased farmer participation and may impede the program's actuarial soundness; and (4) increased farmer program participation is limited by congressional disaster relief assistance and tied to various insurance and risk management options available to many farmers.