Crop Insurance

Over the years, the federal government has played an active role in helping to mitigate the effects of risk on agriculture by offering farmers subsidized crop insurance, which allows them to receive a claims payment when production falls below an insured level. However, the federal crop insurance program has mostly focused on providing insurance coverage for producers who raise nonspecialty crops, such as wheat, corn, and soybeans. This report examines (1) the Department of Agriculture's (USDA) recent progress in expanding coverage to specialty crops and (2) the new marketing practices insurance companies have introduced for specialty crops and the potential advantages and disadvantages of those practices. GAO found that USDA insures 52 specialty crops and plans to begin testing coverage for another nine by 2001. In addition, insurance companies have used alternatives to the traditional strategy of having independent agents market federal crop insurance to farmers.

GAO noted that: (1) USDA insures 52 specialty crops and plans to begin testing coverage for another 9 specialty crops by 2001; (2) these 61 crops represent a majority of the value of all specialty crops, but insurance coverage will not be available for about 300 crops; (3) while programs for specialty crop insurance have expanded in recent years, more rapid expansion has not occurred because USDA follows a deliberate multistep process involving the assessment of risk and setting of premiums to ensure that the programs it develops are actuarially sound; (4) this process, including testing, is lengthy, typically requiring about 5 years, because, among other things, the production history data needed to develop a specialty crop program are often not readily available; (5) according to USDA, while the development process cannot be accelerated because of the need to ensure actuarial soundness, additional resources would allow USDA to evaluate more crops concurrently; (6) in recent years, insurance companies have used alternatives to the traditional strategy of having independent agents market federal crop insurance to producers; (7) one alternative strategy uses endorsements--an insurance company pays a fee to a producer association to promote the sale of its insurance product; (8) a proposed strategy would allow an insurance company to pass through administrative savings to producers in the form of reduced premiums; (9) these strategies could increase producers' participation and, ultimately, if USDA chooses to share in these administrative cost savings, reduce the administrative fees the government pays insurance companies; (10) however, these strategies have some potential disadvantages; (11) under the rescinded provision of the Agricultural Research, Extension, and Education Reform Act of 1998, the increase in the processing fee for many specialty crop farmers would have been large and participation would have declined; and (12) while GAO was unable to estimate the magnitude of the decline, available studies on traditional crop insurance show that, in general, for each 10-percent increase, there is a 2- to 9-percent decrease in participation.