Crop Insurance

Federal crop insurance protects farmers against the financial losses caused by various natural disasters, including droughts, floods, and hurricanes. The Agriculture Department (USDA) pays insurance companies a fee that is intended to reimburse the companies for the reasonable expenses associated with selling and servicing crop insurance to farmers. In 1994 and 1995, the government's administrative expense reimbursement to insurance companies was greater than their reported expenses to sell and service federal crop insurance. GAO found that some reported expenses were not reasonably associated with the sale and service of crop insurance and should not be considered in determining an appropriate future reimbursement rate. These expenses included costs associated with acquiring competitors' businesses, profit-sharing bonuses, and lobbying. GAO also found expenses that seemed excessive for reimbursement, including high agent commissions and questionable travel and entertainment expenses. GAO concludes that USDA could lower the reimbursement rate and still amply cover companies' reasonable expenses for selling and servicing federal crop insurance. In 1995, the government's costs to deliver catastrophic insurance were higher through private companies than through USDA. Delivery through USDA avoids paying an underwriting gain to companies in years when there are few claims for catastrophic losses. In 1995, the underwriting gain to participating companies for catastrophic insurance totaled $45 million. In 1996, the underwriting gains were even higher. GAO summarized this report in testimony before Congress; see: Crop Insurance: Opportunities Exist to Reduce Government Costs for Private Sector Delivery, by Robert A. Robinson, Director of Food and Agriculture Issues, before the Senate Committee on Agriculture, Nutrition, and Forestry (GAO/T-RCED-97-139, Apr. 17).

GAO noted that: (1) in 1994 and 1995, the government's administrative expense reimbursement to insurance companies was greater than the companies' expenses to sell and service federal crop insurance; (2) for the 2-year period, companies reported expenses that were less than the reimbursements paid to them by FCIC; (3) furthermore, GAO found that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance and accordingly should not be considered in determining an appropriate future reimbursement rate for administrative expenses; (4) in addition, even within the expense categories reasonably associated with the sale and service of crop insurance, GAO found expenses that appeared excessive for reimbursement under a taxpayer-supported program suggesting an opportunity to further reduce future reimbursement rates; (5) these expenses included agents' commissions that exceeded the industry average, unnecessary travel-related expenses, and questionable entertainment activities; (6) finally, higher premiums in the crop insurance program have had the effect of increasing the government's reimbursement to companies for the time period GAO examined; (7) at the same time, companies' expenses associated with crop insurance sales and service could decrease as FCIC reduces the administrative requirements with which the companies must comply; (8) combined, all these factors indicate that FCIC could lower the reimbursement rate and still amply cover companies' reasonable expenses for selling and servicing federal crop insurance policies; (9) in 1995, the government's costs to deliver catastrophic insurance were higher through private companies than through USDA; (10) although the basic costs associated with selling and servicing catastrophic crop insurance through USDA and private companies were comparable, delivery through USDA avoids paying an underwriting gain to companies in years when there is a low incidence of catastrophic loss claims; (11) in 1995, the underwriting gain to participating companies for catastrophic insurance totalled about $45 million; (12) in 1996, the underwriting gains were even higher; (13) GAO identified a number of different approaches to reimbursing companies for their administrative expenses that offer the opportunity for cost savings; (14) each has advantages and disadvantages compared with the existing reimbursement arrangement; and (15) companies generally prefer the existing reimbursement method because it is relatively simple to administer.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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