Crop Revenue Insurance

Farming is an inherently risky enterprise. Over the years, the federal government has played an active role in helping to mitigate the effects of production and price risks on farm income. A new tool--crop revenue insurance--has been introduced to help farmers manage their risks. Three federally subsidized crop revenue insurance plans--Crop Revenue Coverage, Revenue Assurance, and Income Protection--are now being sold to farmers in various parts of the country. The plans protect farmers from the effect of declines in either crop prices or yields by guaranteeing an agreed-upon level of revenue. In light of the rapid expansion of the new crop revenue insurance plans and the government's significant financial participation in them, this report (1) identifies the differences between the three new revenue insurance plans, (2) reports on the plans' sales and claims experience, and (3) analyzes the methodologies used to set the plans' premium rates.

GAO noted that: (1) the three government-subsidized revenue insurance plans differ in the revenue guarantees they provide to farmers and in their relative cost to the government; (2) two of the plans, Revenue Assurance and Income Protection, set the revenue level that is to be protected at the time that crops are being planted, while the third, Crop Revenue Coverage, determines the protected revenue at either planting or at harvest, depending on when crop prices are higher; (3) in terms of potential government costs, Crop Revenue Coverage is likely to cost the government significantly more than the other two plans because of its higher reimbursement for administrative expenses and because of potentially higher total underwriting losses; (4) furthermore, the plan's promise base the revenue guarantee on the price at planting or the price at harvest, whichever is higher, exposes the government to higher claims payments in the years when widespread crop losses are coupled with rapidly increasing prices; (5) in their first two years of availability to farmers, the crop revenue insurance plans, especially Crop Revenue Coverage, achieved a significant share of the crop insurance market, accounting for about one-third of the total crop insurance sales in the areas where they were offered; (6) in terms of the claims payments for 1997, all types of crop insurance experienced much lower than average levels of claims as a result of favorable growing conditions in most of the country; (7) morever, primarily because revenue insurance plans were often marketed in lower-risk areas, they experienced lower levels of claims payments than did multiple-peril crop insurance; (8) GAO identified shortcomings in each revenue insurance plan's approach to establishing premium rates; (9) Crop Revenue Coverage is especially problematic because its rate structure does not take into account the interrelationship between crop prices and yields--an essential component of actuarially sound rate settings; (10) while good weather and stable crop prices generated very favorable claims experience over the first 2 years of the plans' availability, GAO has doubts about whether the rates established for each plan are actuarially sound over the long term and are appropriate to the risk each farmer presents; and (11) furthermore, while the plans were initially approved on a limited basis only, the Federal Crop Insurance Corporation, acting within its authority, approved the substantial expansion of one of these plans--Crop Revenue Coverage--before initial results were available.

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