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 noted that: (1) for the 1994 and 1995 period it reviewed, GAO found that the administrative expense reimbursement rate of 31 percent of premiums paid to insurance companies resulted in reimbursements that were $81 million more than the companies' expenses for selling and servicing crop insurance; (2) 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; (3) among these expenses were those associated with acquiring competitors' businesses, profit sharing bonuses, and lobbying; (4) in addition, GAO found other expenses that appeared excessive for reimbursement through a taxpayer-supported program; (5) these expenses suggest an opportunity to further reduce future reimbursement rates; (6) these expenses included agents' commissions that exceeded the industry average, unnecessary travel-related expenses, and questionable entertainment activities; (7) finally, a variety of factors that have emerged since the period covered by GAO's review have increased companies' revenues or may decrease companies' expenses; (8) crop prices and premium rates increased in 1996 and 1997, generating higher premiums; (9) this had the effect of increasing FCIC's expense reimbursement to companies; (10) 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; (11) combined, all these factors indicate that FCIC could lower the reimbursement to a rate in the range of 24 percent of premiums and still amply cover reasonable company expenses for selling and servicing federal crop insurance policies; (12) regarding the cost of catastrophic insurance delivery, GAO found that, in 1995, the government's total costs to deliver catastrophic insurance were less through USDA than private companies; (13) although the basic costs associated with selling and servicing catastrophic crop insurance through USDA and private companies were comparable, total delivery costs were less through USDA because USDA's delivery avoids the need to pay an underwriting gain to companies; (14) finally, GAO identified a number of different approaches to reimbursing companies for their administrative expenses that offer the opportunity for cost savings; and (15) companies generally prefer the existing reimbursement method because of its relative administrative simplicity.