Crop Insurance
Continuing Efforts Are Needed to Improve Program Integrity and Ensure Program Costs Are Reasonable
Gao ID: GAO-07-944T June 7, 2007
The U.S. Dept. of Agriculture's (USDA) Risk Management Agency (RMA) administers the federal crop insurance program in partnership with private insurers. In 2006, the program cost $3.5 billion, including millions in losses from fraud, waste, and abuse, according to USDA. The Agricultural Risk Protection Act of 2000 granted RMA authority to renegotiate the terms of RMA's standard reinsurance agreement with companies once over 5 years. This testimony is based on GAO's 2005 report, Crop Insurance: Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and Abuse, and May 2007 testimony, Crop Insurance: Continuing Efforts Are Needed to Improve Program Integrity and Ensure Program Costs Are Reasonable. GAO discusses (1) USDA's processes to address fraud, waste, and abuse; (2) extent the program's design makes it vulnerable to abuse; and (3) reasonableness of underwriting gains and other expenses. USDA agreed with most of GAO's 2005 recommendations to improve program integrity.
GAO reported that RMA did not use all available tools to reduce the crop insurance program's vulnerability to fraud, waste, and abuse. RMA has since taken some steps to improve its procedures. In particular: (1) USDA's Farm Service Agency (FSA) inspections during the growing season were not being used to maximum effect. Between 2001 and 2004, FSA conducted only 64 percent of the inspections RMA requested. Without inspections, farmers may falsely claim crop losses. However, FSA said it could not conduct all requested inspections, as GAO recommended, because of insufficient resources. RMA now provides information more frequently so FSA can conduct timelier inspections. (2) RMA's data analysis of the largest farming operations was incomplete. In 2003, about 21,000 of the largest farming operations did not report all of the individuals or entities with an ownership interest in these operations, as required. Therefore, RMA was unaware of ownership interests that could help it prevent potential program abuse. FSA and RMA started sharing information to identify such individuals or entities, but have stopped temporarily to resolve producer privacy issues. USDA should recover up to $74 million in improper payments made during 2003. (3) RMA was not effectively overseeing insurance companies' efforts to control program abuse. According to GAO's review of 120 cases, companies did not complete all the required quality assurance reviews of claims, and those that were conducted were largely paper exercises. RMA agreed to improve oversight of their reviews, but GAO has not followed up to examine its implementation. RMA's regulations to implement the crop insurance program, as well as some statutory requirements, create design problems that hinder its efforts to reduce abuse. For example, the regulations allow farmers to insure fields individually rather than together. As such, farmers can "switch" reporting of yield among fields to make false claims or build up a higher yield history on a field to increase its eligibility for higher insurance guarantees. RMA did not agree with GAO's recommendation to address the problems associated with insuring individual fields. Statutorily high premium subsidies may also limit RMA's ability to control program abuse: the subsidies shield farmers from the full effect of paying higher premiums associated with frequent claims. From 2002 through 2006, USDA paid the insurance companies underwriting gains of $2.8 billion, which represents an average annual rate of return of 17.8 percent. In contrast, according to insurance industry statistics, the benchmark rate of return for companies selling property and casualty insurance was 6.4 percent. USDA renegotiated the financial terms of its standard reinsurance agreement with the companies in 2005, but their rate of return was 30.1 percent in 2005, and 24.3 percent in 2006. It also paid the companies a cost allowance of $4 billion to cover administrative and operating costs for 2002 through 2006. USDA recommended that Congress provide RMA with authority to renegotiate the financial terms and conditions of its standard reinsurance agreement once every 3 years.
GAO-07-944T, Crop Insurance: Continuing Efforts Are Needed to Improve Program Integrity and Ensure Program Costs Are Reasonable
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Testimony:
Before the Subcommittee on General Farm Commodities and Risk
Management, Committee on Agriculture, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT Thursday, June 7,
2007:
Crop Insurance:
Continuing Efforts Are Needed to Improve Program Integrity and Ensure
Program Costs Are Reasonable:
Statement of Robert A. Robinson, Managing Director:
Natural Resources and Environment:
GAO-07-944T:
GAO Highlights:
Highlights of GAO-07-944T, a testimony before the Subcommittee on
General Farm Commodities and Risk Management, Committee on Agriculture,
House of Representatives
Why GAO Did This Study:
The U.S. Dept. of Agriculture‘s (USDA) Risk Management Agency (RMA)
administers the federal crop insurance program in partnership with
private insurers. In 2006, the program cost $3.5 billion, including
millions in losses from fraud, waste, and abuse, according to USDA. The
Agricultural Risk Protection Act of 2000 granted RMA authority to
renegotiate the terms of RMA‘s standard reinsurance agreement with
companies once over 5 years.
This testimony is based on GAO‘s 2005 report, Crop Insurance: Actions
Needed to Reduce Program‘s Vulnerability to Fraud, Waste, and Abuse,
and May 2007 testimony, Crop Insurance: Continuing Efforts Are Needed
to Improve Program Integrity and Ensure Program Costs Are Reasonable.
GAO discusses (1) USDA‘s processes to address fraud, waste, and abuse;
(2) extent the program‘s design makes it vulnerable to abuse; and (3)
reasonableness of underwriting gains and other expenses. USDA agreed
with most of GAO‘s 2005 recommendations to improve program integrity.
What GAO Found:
GAO reported that RMA did not use all available tools to reduce the
crop insurance program‘s vulnerability to fraud, waste, and abuse. RMA
has since taken some steps to improve its procedures. In particular:
* USDA‘s Farm Service Agency (FSA) inspections during the growing
season were not being used to maximum effect. Between 2001 and 2004,
FSA conducted only 64 percent of the inspections RMA requested. Without
inspections, farmers may falsely claim crop losses. However, FSA said
it could not conduct all requested inspections, as GAO recommended,
because of insufficient resources. RMA now provides information more
frequently so FSA can conduct timelier inspections.
* RMA‘s data analysis of the largest farming operations was incomplete.
In 2003, about 21,000 of the largest farming operations did not report
all of the individuals or entities with an ownership interest in these
operations, as required. Therefore, RMA was unaware of ownership
interests that could help it prevent potential program abuse. FSA and
RMA started sharing information to identify such individuals or
entities, but have stopped temporarily to resolve producer privacy
issues. USDA should recover up to $74 million in improper payments made
during 2003.
* RMA was not effectively overseeing insurance companies‘ efforts to
control program abuse. According to GAO‘s review of 120 cases,
companies did not complete all the required quality assurance reviews
of claims, and those that were conducted were largely paper exercises.
RMA agreed to improve oversight of their reviews, but GAO has not
followed up to examine its implementation.
RMA‘s regulations to implement the crop insurance program, as well as
some statutory requirements, create design problems that hinder its
efforts to reduce abuse. For example, the regulations allow farmers to
insure fields individually rather than together. As such, farmers can
’switch“ reporting of yield among fields to make false claims or build
up a higher yield history on a field to increase its eligibility for
higher insurance guarantees. RMA did not agree with GAO‘s
recommendation to address the problems associated with insuring
individual fields. Statutorily high premium subsidies may also limit
RMA‘s ability to control program abuse: the subsidies shield farmers
from the full effect of paying higher premiums associated with frequent
claims.
From 2002 through 2006, USDA paid the insurance companies underwriting
gains of $2.8 billion, which represents an average annual rate of
return of 17.8 percent. In contrast, according to insurance industry
statistics, the benchmark rate of return for companies selling property
and casualty insurance was 6.4 percent. USDA renegotiated the financial
terms of its standard reinsurance agreement with the companies in 2005,
but their rate of return was 30.1 percent in 2005, and 24.3 percent in
2006. It also paid the companies a cost allowance of $4 billion to
cover administrative and operating costs for 2002 through 2006. USDA
recommended that Congress provide RMA with authority to renegotiate the
financial terms and conditions of its standard reinsurance agreement
once every 3 years.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-944T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Robert A. Robinson (202)
512-3841 or robinsonr@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss our recent work on the federal
crop insurance program administered by the U.S. Department of
Agriculture (USDA). As you know, federal crop insurance is part of the
overall safety net of programs for American farmers. It provides
protection against financial losses caused by droughts, floods, or
other natural disasters. USDA's Risk Management Agency (RMA) supervises
the Federal Crop Insurance Corporation's (FCIC) operations and has
overall responsibility for administering the crop insurance program,
including controlling costs and protecting against fraud, waste, and
abuse. RMA also partners with private insurance companies that sell and
service the insurance policies and share a percentage of the risk of
loss and opportunity for gain associated with each policy.
In November 2006, we identified the federal crop insurance program as a
program in need of better oversight to ensure program funds are spent
as economically, efficiently, and effectively as possible.[Footnote 1]
In 2006, the crop insurance program provided $50 billion in insurance
coverage for 242 million acres of farmland, at a cost of $3.5 billion
to the federal government, of which a total of $1.8 billion was paid to
insurance companies for their participation in the crop insurance
program.[Footnote 2] USDA reports that an estimated $62 million in
indemnity payments were made in 2006 as a result of waste, such as
incorrect payments or payments based on incomplete or missing
paperwork.[Footnote 3]
To improve the integrity of the crop insurance program, among other
things, Congress enacted the Agricultural Risk Protection Act of 2000
(known as ARPA). ARPA provided RMA and USDA's Farm Service Agency (FSA)
with new tools for monitoring and controlling program abuses.[Footnote
4] ARPA required the Secretary of Agriculture to develop and implement
a coordinated plan for FSA to assist RMA in the ongoing monitoring of
the crop insurance program and to use information technologies, such as
data mining--the analysis of data to establish relationships and
identify patterns--to administer and enforce the program. Furthermore,
ARPA provided USDA with the authority to renegotiate the financial
terms of its contractual agreement--known as the standard reinsurance
agreement (SRA)--with the private insurance companies once during 2001
through 2005. USDA renegotiated the terms of the SRA in 2004 and
implemented the new agreement in 2005. In its recent Farm Bill
proposal, USDA recommended that Congress provide the agency with
authority to renegotiate the financial terms and conditions once every
3 years. RMA officials also told us they sought legislative remedies to
address excessive underwriting gains in their budget proposals for
fiscal years 2006 and 2007. The SRA between USDA and the insurance
companies includes (1) a cost allowance that is tied to the value of
the policy and that is intended to cover administrative and operating
expenses incurred by the companies for program delivery, and (2) risk-
sharing formulas that establish underwriting gains and losses.
GAO has issued reports on the federal crop insurance program that have
raised a number of concerns. (See Related GAO Products.) Most recently,
in May 2007, we reported that some farmers may have abused the crop
insurance program by allowing crops to fail through neglect or
deliberate actions in order to collect insurance; some insurance
companies have not exercised due diligence in investigating losses and
paying claims; and, the payments that USDA makes to companies for
program delivery have been excessive.[Footnote 5] In addition, the
effects of climate change, including rising temperatures and
increasingly frequent and intense droughts, storms, and flooding, may
be potentially significant in coming decades and affect the program's
financial costs to the government. As we recently reported,[Footnote 6]
major private and federal insurers are both exposed to the effects of
climate change over the coming decades, but are responding differently.
Many large private insurers are incorporating climate change into their
annual risk management practices, and some are addressing it
strategically by assessing its potential long-term, industrywide
impacts. However, the major federal insurance programs, including the
crop insurance program, have done little to develop comparable
information.
My testimony today focuses on the (1) effectiveness of USDA's
procedures to prevent and detect fraud, waste, and abuse in selling and
servicing crop insurance policies; (2) extent to which program design
issues may make the program more vulnerable to fraud, waste, and abuse;
and (3) reasonableness of underwriting gains and administrative and
operating expenses USDA pays to the companies for program delivery. My
testimony is based on published GAO products. We performed our work in
accordance with generally accepted government auditing standards.
In summary, since the enactment of ARPA, RMA has taken a number of
steps to improve its procedures to prevent and detect fraud, waste, and
abuse in the crop insurance program. Most notably, RMA reports that
data mining analyses and subsequent communication to farmers resulted
in a decline of at least $300 million in questionable claims payments
from 2001 to 2004. However, we found that, at the time our review, RMA
was not effectively using all of the tools it had available and that
some farmers and others continued to abuse the program. We identified
weaknesses in four key areas: (1) field inspections, (2) data mining
processes that exclude many large farming operations when farmers do
not report their interest in them, (3) quality assurance reviews
conducted by insurance companies, and (4) imposition of sanctions.
Weaknesses in these areas left the program vulnerable to questionable
claims, and the insurance companies and RMA could not always determine
the validity of a claim to minimize fraud, waste, and abuse. RMA has
taken steps on some of the recommendations we made. For example, RMA
amended its crop insurance policy manual to provide information more
frequently to FSA on suspect claims so that FSA is able to conduct
timelier field inspections to detect potential abuse. In another case,
we recommended that RMA promulgate regulations needed to fully utilize
its expanded sanction authority provided under ARPA. In response, RMA
developed draft regulations that, when final, will allow the agency to
fully use this authority to sanction program violators.
We also found that the program's design, as laid out in RMA's
regulations or as required by statute, can impede the efforts of RMA
officials to prevent and detect fraud, waste, and abuse in a number of
ways. In terms of RMA's regulations, farmers can insure their fields
individually instead of insuring all fields combined, which makes it
easier for them to switch production among fields, either to make false
insurance claims or to build up a higher yield history on a particular
field in order to increase its eligibility for higher future insurance
guarantees. RMA disagreed with our recommendation to reduce the
insurance guarantee or eliminate optional unit coverage for producers
who consistently have claims that are irregular in comparison with
other producers growing the same crop in the same location. RMA stated
that our recommendation represents a disproportionate response,
considering the small number of producers who switch the yield on a
field each year. Nevertheless, we continue to believe that RMA could
tailor an underwriting rule to target those relatively few farmers who
file anomalous claims related to yield switching. In terms of statutory
requirements, RMA is obligated by law to offer farmers "prevented
planting" coverage--coverage that allows for insurance claims if an
insured crop is prevented from being planted because of weather
conditions, but it is often difficult to determine whether farmers had
the opportunity to plant a crop. In our 2006 testimony,[Footnote 7] we
stated that Congress may wish to consider allowing RMA to reduce
premium subsidies--and hence raise the insurance premiums--for farmers
who consistently have claims, such as prevented planting claims, that
are irregular in comparison with other farmers growing the same crop in
the same location. To date, Congress has not granted RMA the authority
to make such reductions.
Finally, USDA paid the insurance companies underwriting gains of $2.8
billion, in total, from 2002 through 2006. The underwriting gains
represent an average annual rate of return of 17.8 percent over this 5-
year period.[Footnote 8] This rate of return is considerably higher
than the insurance industry average. According to insurance industry
statistics, the benchmark rate of return for U.S. insurance companies
selling private property and casualty insurance was 6.4 percent during
this period. RMA officials told us that this benchmark rate can be
considered a starting point for measuring the appropriateness of the
underwriting gains in the crop insurance program. As previously noted,
USDA renegotiated the financial terms of its SRA with the companies
beginning with the 2005 planting season. Nonetheless, in 2005, USDA
still paid insurance companies underwriting gains of $916 million--a
rate of return of 30.1 percent. In 2006, USDA paid underwriting gains
of $886 million--a rate of return of 24.3 percent. The companies
received these underwriting gains despite drought conditions in parts
of the country in 2005 and 2006 that would normally suggest they would
earn lower profits. In addition to underwriting gains, USDA paid the
insurance companies $4 billion in cost allowances to cover
administrative and operating expenses incurred for program delivery
from 2002 through 2006. USDA expects the cost allowance paid per policy
to increase by about 25 percent by 2008 because of higher crop prices,
particularly for corn and soybeans. These higher crop prices increase
the value of the policy. However, the companies and their affiliated
sales agents will receive this substantially higher cost allowance
without any corresponding increase in expenses for selling and
servicing the policies. Congress has an opportunity in its
reauthorization of the Farm Bill to provide USDA with the authority to
periodically renegotiate the financial terms of the standard
reinsurance agreement with the insurance companies so that the
companies' rate of return is more in line with private insurance
markets. USDA has requested the authority to renegotiate the SRA in its
proposals for the Farm Bill.
Background:
FCIC was established in 1938 to temper the economic impact of the Great
Depression, and was significantly expanded in 1980 to protect farmers
from the financial losses brought about by drought, flood, or other
natural disasters. RMA administers the program in partnership with
private insurance companies, which share a percentage of the risk of
loss and the opportunity for gain associated with each insurance policy
written. RMA acts as a reinsurer--reinsurance is sometimes referred to
as insurance for the insurance companies--for a portion of all policies
the federal crop insurance program covers. In addition, RMA pays
companies a percentage of the premium on policies sold to cover the
administrative costs of selling and servicing these policies. In turn,
insurance companies use this money to pay commissions to their agents,
who sell the policies, and fees to adjusters when claims are filed.
FCIC insures agricultural commodities on a crop-by-crop and county-by-
county basis, considering farmer demand and the level of risk
associated with the crop in a given region. Major crops, such as
grains, are covered in almost every county where they are grown, while
specialty crops such as fruit are covered in only some areas.
Participating farmers can purchase different types of crop insurance
and at different levels.
RMA establishes the terms and conditions that the private insurance
companies selling and servicing crop insurance policies are to use
through the SRA. The SRA provides for the cost allowance intended to
cover administrative and operating expenses the companies incur for the
policies they write, among other things. The SRA also establishes the
minimum training, quality control review procedures, and performance
standards required of all insurance providers in delivering any policy
insured or reinsured under the Federal Crop Insurance Act, as amended.
Under the crop insurance program, participating farmers are assigned
(1) a "normal" crop yield based on their actual production history and
(2) a price for their commodity based on estimated market conditions.
Farmers can then select a percentage of their normal yield to be
insured and a percentage of the price they wish to receive if crop
losses exceed the selected loss threshold. In addition, under the crop
insurance program's "prevented planting" provision, insurance companies
pay farmers who were unable to plant the insured crop because of an
insured cause of loss that was general to their surrounding area, such
as weather conditions causing wet fields, and that had prevented other
farmers in that area from planting fields with similar characteristics.
These farmers are entitled to claims payments that generally range from
50 to 70 percent, and can reach as high as 85 percent, of the coverage
they purchased, depending on the crop.
RMA is responsible for protecting against fraud, waste, and abuse in
the federal crop insurance program. In this regard, RMA uses a broad
range of tools, including RMA's compliance reviews of companies'
procedures, companies' quality assurance reviews of claims, data
mining, and FSA's inspections of farmers' fields. For example,
insurance companies must conduct quality assurance reviews of claims
that RMA has identified as anomalous or of those claims that are
$100,000 or more to determine whether the claims the companies paid
comply with policy provisions.
Congress enacted ARPA, amending the Federal Crop Insurance Act, in
part, to improve compliance with, and the integrity of, the crop
insurance program. Among other things, ARPA provided RMA authority to
impose sanctions against producers, agents, loss adjusters, and
insurance companies that willfully and intentionally provide false or
inaccurate information to FCIC or to an insurance company--previously,
RMA had authority to impose sanctions only on individuals who willfully
and intentionally provided false information. It also provided RMA with
authority to impose sanctions against producers, agents, loss
adjusters, and insurance companies for willfully and intentionally
failing to comply with any other FCIC requirement. In addition, it
increased the percentage share of the premium the government pays for
most coverage levels of crop insurance, beginning with the 2001 crop
year. The percentage of the premium the government pays declines as
farmers select higher levels of coverage. However, ARPA raised the
percentage of federal subsidy for all levels of coverage, particularly
for the highest levels of coverage. For example, the government now
pays more than one-half of the premium for farmers who choose to insure
their crop at 75-percent coverage.
RMA Has Strengthened Procedures for Preventing Questionable Claims, but
the Program Remains Vulnerable to Potential Abuse:
RMA has taken a number of steps to improve its procedures to prevent
and detect fraud, waste, and abuse, such as data mining, expanded field
inspections and quality assurance reviews. In particular, RMA now
develops a list of farmers each year whose operations warrant an on-
site inspection during the growing season because data mining uncovered
patterns in their past claims that are consistent with the potential
for fraud and abuse. The list includes, for example:
* farmers, agents, and adjusters linked in irregular behavior that
suggests collusion;
* farmers who for several consecutive years received most of their crop
insurance payments from prevented planting indemnity payments;
* farmers who appear to have claimed the production amounts for
multiple fields as only one field's yield, thereby creating an
artificial loss on their other field(s); and:
* farmers who, in comparison with their peers, file unusually high
claims for lost crops over many years.
Since RMA began performing this data mining in 2001, it has identified
about 3,000 farmers annually who warrant an on-site inspection because
of anomalous claims patterns. In addition, RMA annually performs about
100 special analyses to identify areas of potential vulnerability and
trends in the program.
RMA also provides the names of farmers from its list of suspect claims
for inspection to the appropriate FSA state office for distribution to
FSA county offices, as well as to the insurance companies selling the
policies to farmers. As a result of these inspections and other
information, RMA reported total cost savings of $312 million from 2001
to 2004, primarily in the form of estimated payments avoided. For
example, according to RMA, claims payments to farmers identified for an
inspection decreased nationwide from $234 million in 2001 to $122
million in 2002. According to RMA, some of the farmers on the list for
filing suspect claims bought less insurance and a few dropped crop
insurance entirely, but most simply changed their behavior regarding
loss claims.
However, as we testified in 2006, RMA was not effectively using all of
the tools it had available and that some farmers and others continued
to abuse the program, as the following discussion indicates.
Inspections during the growing season were not being used to maximum
effect. FSA was not providing RMA with inspection assistance in
accordance with USDA guidance. For example, between 2001 and 2004,
farmers filed claims on about 380,000 policies annually, and RMA's data
mining identified about 1 percent of these claims as questionable and
needing FSA's inspection. Under USDA guidance, FSA should have
conducted all of the 11,966 requested inspections, but instead
conducted only 64 percent of them; FSA inspectors said that they did
not conduct all requested inspections primarily because they did not
have sufficient resources. Moreover, between 2001 and 2004, FSA offices
in nine states did not conduct any of the field inspections RMA had
requested in one or more of the years. Until we brought this matter to
their attention in September 2004, FSA headquarters officials were
unaware that the requested inspections in these nine states had not
been conducted. Furthermore, FSA might not have been as effective as
possible in conducting field inspections because RMA did not provide it
with information on the nature of the suspected abusive behavior or the
results of follow-up investigations. Finally, these inspections did not
always occur in a timely fashion during the growing season. Because of
these problems, the insurance companies and RMA could not always
determine the validity of a claim.
USDA has implemented some of our recommendations to improve inspection
practices. For example, we recommended that RMA more consistently
inform FSA of the suspect claim patterns that it should investigate.
RMA amended its crop insurance policy manual to provide information
more frequently to FSA on suspect claims, as we recommended, so that
FSA can conduct timelier field inspections to detect potential abuse.
Specifically, RMA now provides a list twice a year--in the fall for
crops such as wheat, and in the spring for crops such as corn and
soybeans. However, FSA disagreed with our recommendation that it
conduct all inspections called for under agency guidance, citing
insufficient resources as the reason. Nevertheless, we believe that
conducting these inspections would achieve potentially substantial
savings for the crop insurance program by identifying cases of
fraudulent claims.
RMA's data analysis of the largest farming operations was incomplete.
RMA's data mining analysis excluded comparisons of the largest farming
operations--including those organized as partnerships and joint
ventures. These entities may include individuals who are also members
of one or more other entities. Because it did not know the ownership
interests in the largest farming operations, RMA could not readily
identify potential fraud. For example, farmers who are members of more
than one farming operation could move production from one operation to
another to file unwarranted claims, without RMA's knowledge that these
farmers participate in more than one farming operation. RMA could not
make these comparisons because it had not been given access to similar
data that FSA maintains. However, ARPA required the Secretary of
Agriculture to develop and implement a coordinated plan for RMA and FSA
to reconcile all relevant information received by either agency from a
farmer who obtains crop insurance coverage.
Using FSA data, we examined the extent to which (1) farming operations
report all members who have a substantial beneficial interest in the
operation, (2) these farming operations file questionable crop
insurance claims, and (3) agents or claims adjusters had financial
interests in the claim.[Footnote 9] By comparing RMA's and FSA's
databases, we found that 21,310 farming entities, or about 31 percent
of all farming entities, did not report one or more members who held a
beneficial interest of 10 percent or more in the farming operation
holding the policy. RMA should be able to recover a portion of these
payments because, according to RMA regulations, if the policyholder
fails to disclose an ownership interest in the farming operation, the
policyholder must repay the amount of the claims payment that is
proportionate to the interest of the person who was not
disclosed.[Footnote 10] According to our analysis, RMA should be able
to recover up to $74 million in claims payments for 2003. USDA has
since implemented our recommendation that FSA and RMA share information
on policyholders to better identify fraud, waste, and abuse. In
addition, of the 21,310 entities failing to disclose ownership interest
in 2003, we found 210 entities with suspicious insurance claims
totaling $11.1 million. Finally, we identified 24 crop insurance agents
who sold policies to farming entities in which the agents held a
substantial beneficial interest but failed to report their ownership
interest to RMA as required. USDA initially implemented our
recommendation, and FSA and RMA shared information on policyholders in
2006 to better identify fraud, waste, and abuse. However, since then,
the agencies have stopped sharing this information while issues related
to producer privacy are resolved.[Footnote 11] Furthermore, RMA has not
implemented our recommendation to recover claims payments to ineligible
farmers or to entities that failed to fully disclose ownership
interest.
RMA was not effectively overseeing insurance companies' quality
assurance programs. RMA guidance requires insurance companies to
provide oversight to properly underwrite the federal crop insurance
program, including implementing a quality control program, conducting
quality control reviews, and submitting an annual report to FCIC.
However, RMA was not effectively overseeing insurance companies'
quality assurance programs, and for the claims we reviewed, it did not
appear that most companies were rigorously carrying out their quality
assurance functions. For example, 80 of the 120 insurance files we
reviewed claimed more than $100,000 in crop losses or met some other
significant criteria; RMA's guidance states that the insurance provider
must conduct a quality assurance review for such claims. However, the
insurance companies conducted reviews on only 59 of these claims, and
the reviews were largely paper exercises, such as computational
verifications, rather than comprehensive analysis of the claim. RMA did
not ensure that companies conducted all reviews called for under its
guidance and did not examine the quality of the companies' reviews. RMA
agreed with our recommendation to improve oversight of companies'
quality assurance programs, but we have not yet followed up with the
agency to examine its implementation.
RMA has infrequently used its new sanction authority to address program
abuses. RMA had only used its expanded sanction authority granted under
ARPA on a limited basis. It had identified about 3,000 farmers with
suspicious claims payments--notable policy irregularities compared with
other farmers growing the same crop in the same county--each year since
the enactment of ARPA. While not all of these policies with suspicious
claims were necessarily sanctionable, RMA imposed only 114 sanctions
from 2001 through 2004. According to RMA officials, RMA requested and
imposed few sanctions because it had not issued regulations to
implement its expanded authority under ARPA. Without regulations, RMA
had not established what constitutes an "FCIC requirement" and not
explained how it would determine that a violation had occurred or what
procedural process it would follow before imposing sanctions. RMA
agreed with our recommendation that it promulgate regulations to
implement its expanded authority, and issued proposed regulations on
May 18, 2007 for public comment. Once final, these regulations will
allow the agency to fully use this authority to sanction program
violators.
RMA's Regulations and Some Statutory Requirements Hinder Efforts to
Reduce Abuse in the Crop Insurance Program:
While RMA can improve its day-to-day oversight of the federal crop
insurance program in a number of ways, the program's design, as laid
out in RMA's regulations or as required by statute, hinders the
agency's efforts to administer certain program provisions in order to
prevent fraud, waste, and abuse, as the following discussion indicates.
RMA's regulations allow farmers the option of insuring their fields
individually rather than combined as one unit. Farmers can insure
production of a crop on an individual field (optional units) or all
their fields as one unit. Farmers may want to insure fields separately
out of concern that they could experience losses in a certain field
because of local weather conditions, such as hail or flooding. If
farmers instead insure their entire crop in a single basic insurance
unit, the hail losses might not cause the production yield of all units
combined to be below the level guaranteed by the insurance and,
therefore, would not warrant an indemnity payment. Although insurance
on individual fields provides farmers added protection against loss,
this optional unit coverage increases the potential for fraud and abuse
in the crop insurance program.
Insuring fields separately enables farmers to "switch" production among
fields--reporting production of a crop from one field that is actually
produced on another field--either to make false insurance claims based
on low production or to build up a higher yield history on a particular
field in order to increase that field's eligibility for higher future
insurance guarantees. We reported that of the 2,371 farmers identified
as having irregular claims in 2003, 12 percent were suspected of
switching production among their fields.
According to a 2002 RMA study, losses per unit (e.g., a field) increase
as the number of separately insured optional units increases.[Footnote
12] However, according to an RMA official, gathering the evidence to
support a yield-switching fraud case requires considerable resources,
especially for large farming operations. RMA disagreed with our
recommendation to reduce the insurance guarantee or eliminate optional
unit coverage for farmers who consistently have claims that are
irregular in comparison with other farmers growing the same crop in the
same location. It stated that our recommendation represents a
disproportionate response, considering the small number of producers
who engage in yield switching each year, and that the adoption of our
recommendation would not be cost effective. Nevertheless, we continue
to believe that RMA could tailor an underwriting rule so that it would
target only a few producers each year and would entail few resources.
Such a tool would provide RMA another means to discourage producers
from abusing the program.
Minimal risk sharing on some policies, as set by statute, may not
provide insurance companies with a strong incentive to carry out their
responsibilities under the program. In some cases, insurance companies
have little incentive to rigorously challenge questionable claims.
Insurance companies participating in the crop insurance program share a
percentage of the risk of loss or opportunity for gain on each
insurance policy they write, but the federal government ultimately
bears a high share of the risk. Under the SRA, insurance companies are
allowed to assign policies to one of three risk funds--assigned risk,
developmental, or commercial. The SRA provides criteria for assigning
policies to these funds. For the assigned risk fund, the companies cede
up to 85 percent of the premium and associated liability for claims
payments to the government and share a limited portion of the gains or
losses on the policies they retain. For the developmental and
commercial funds, the companies cede a smaller percent of the premium
and associated liability for claims payments to the government.
Economic incentives to control program costs associated with fraud,
waste, and abuse are commensurate with financial exposure. Therefore,
for policies placed in the assigned risk fund, companies have far less
financial incentive to investigate suspect claims. For example, in one
claim file we reviewed, an insurance company official characterized the
farmer as filing frequent, questionable claims; however, the company
paid a claim of over $500,000. The official indicated that if the
company had vigorously challenged the claim, the farmer would have
defended his claim just as vigorously, and the company would have
potentially incurred significant litigation expenses, which RMA does
not specifically reimburse. With this cost and reimbursement structure,
in the company's opinion, it was less costly to pay the claim.
RMA and insurance companies have difficulty determining potential abuse
associated with statutory coverage for prevented planting. Under the
Federal Crop Insurance Act, as amended, RMA must offer prevented
planting coverage. RMA allows claims for prevented planting if farmers
cannot plant owing to an insured cause of loss that is general in the
surrounding area and that prevents other farmers from planting acreage
with similar characteristics. Claims for prevented planting are paid at
a reduced level, recognizing that farmers do not incur all production
costs associated with planting and harvesting a crop. However,
determining whether farmers can plant their crop may be difficult.
Annually, RMA pays about $300 million in claims for prevented planting.
Statutorily high premium subsidies may inhibit RMA's ability to control
program abuse. ARPA increased premium subsidies--the share of the
premium paid by the government--but this increase may hamper RMA's
ability to control program fraud, waste, and abuse. Premium subsidies
are calculated as a percentage of the total premium, and farmers pay
only between 33 to 62 percent of the policy premium, depending on
coverage level. High premium subsidies shield farmers from the full
effect of paying higher premiums. Because premium rates are higher in
riskier areas and for riskier crops, the subsidy structure transfers
more federal dollars to those who farm in riskier areas or produce
riskier crops.
In addition, by regulation, premium rates are higher for farmers who
choose to insure their fields separately under optional units, rather
than all fields combined, because the frequency of claims payments is
higher on the separately insured units. Again, however, because of high
premium subsidies, farmers pay only a fraction of the higher premium.
Thus, the subsidy structure creates a disincentive for farmers to
insure all fields combined. Over one-half (56 percent) of the crop
insurance agents responding to the survey conducted for our 2005 report
believed that charging higher premiums for farmers with a pattern of
high or frequent claims would discourage fraud, waste, and abuse in the
crop insurance program. In our 2006 testimony, we stated that Congress
may wish to consider allowing RMA to reduce premium subsidies--and
hence raise the insurance premiums--for farmers who consistently have
claims that are irregular in comparison with other farmers growing the
same crop in the same location. To date, no action has been taken.
Compensation to Insurance Companies Has Been Excessive:
From 1997 through 2006, USDA paid over $10.9 billion to companies that
participate in the federal crop insurance program in cost allowances
and underwriting gains, as table 1 shows. The $10.9 billion in total
payments to the companies represents 42 percent of the government's
cost of the crop insurance program--about $26 billion--over this
period. That is, more than 40 cents of every dollar the government
spent on the federal crop insurance program went to the companies that
deliver the program, while less than 60 cents went to farmers. While we
provide 10 years of data to offer a broad perspective and to even out
annual losses and gains, the most recent 5 years of data--2002 to 2006-
-show similar results.
Table 1: Cost Allowances and Underwriting Gains Paid to Insurance
Companies, and Government Costs, 1997 through 2006:
Dollars in millions.
Year: 1997;
Payments to insurance companies: Company cost allowance: $437.8;
Payments to insurance companies: Company underwriting gain (loss):
$352.1;
Payments to insurance companies: Total payments to insurance companies:
$789.9;
Government cost for the crop insurance program[A]: $1,095.9.
Year: 1998;
Payments to insurance companies: Company cost allowance: 443.3;
Payments to insurance companies: Company underwriting gain (loss):
279.2;
Payments to insurance companies: Total payments to insurance companies:
722.5;
Government cost for the crop insurance program[A]: 1,373.8.
Year: 1999;
Payments to insurance companies: Company cost allowance: 500.7;
Payments to insurance companies: Company underwriting gain (loss):
271.8;
Payments to insurance companies: Total payments to insurance companies:
772.5;
Government cost for the crop insurance program[A]: 1,782.7.
Year: 2000;
Payments to insurance companies: Company cost allowance: 552.1;
Payments to insurance companies: Company underwriting gain (loss):
267.8;
Payments to insurance companies: Total payments to insurance companies:
819.9;
Government cost for the crop insurance program[A]: 2,175.1.
Year: 2001;
Payments to insurance companies: Company cost allowance: 642.0;
Payments to insurance companies: Company underwriting gain (loss):
345.9;
Payments to insurance companies: Total payments to insurance companies:
987.9;
Government cost for the crop insurance program[A]: 3,162.6.
Year: 2002;
Payments to insurance companies: Company cost allowance: 625.9;
Payments to insurance companies: Company underwriting gain (loss):
(47.5);
Payments to insurance companies: Total payments to insurance companies:
578.4;
Government cost for the crop insurance program[A]: 3,465.6.
Year: 2003;
Payments to insurance companies: Company cost allowance: 733.9;
Payments to insurance companies: Company underwriting gain (loss):
377.9;
Payments to insurance companies: Total payments to insurance companies:
1,111.8;
Government cost for the crop insurance program[A]: 3,588.7.
Year: 2004;
Payments to insurance companies: Company cost allowance: 890.0;
Payments to insurance companies: Company underwriting gain (loss):
691.9;
Payments to insurance companies: Total payments to insurance companies:
1,581.9;
Government cost for the crop insurance program[A]: 3,125.7.
Year: 2005;
Payments to insurance companies: Company cost allowance: 829.6;
Payments to insurance companies: Company underwriting gain (loss):
916.2;
Payments to insurance companies: Total payments to insurance companies:
1,745.8;
Government cost for the crop insurance program[A]: 2,698.5.
Year: 2006;
Payments to insurance companies: Company cost allowance: 949.8;
Payments to insurance companies: Company underwriting gain (loss):
885.9;
Payments to insurance companies: Total payments to insurance companies:
1,835.7;
Government cost for the crop insurance program[A]: 3,462.0.
Year: Total--1997 to 2006;
Payments to insurance companies: Company cost allowance: $6,605.1;
Payments to insurance companies: Company underwriting gain (loss):
$4,341.2;
Payments to insurance companies: Total payments to insurance companies:
$10,946.3;
Government cost for the crop insurance program[A]: $25,930.6.
Year: Total--2002 to 2006;
Payments to insurance companies: Company cost allowance: $4,029.2;
Payments to insurance companies: Company underwriting gain (loss):
$2,824.4;
Payments to insurance companies: Total payments to insurance companies:
$6,853.6;
Government cost for the crop insurance program[A]: $16,340.5.
Source: GAO's analysis of RMA's data.
Notes: (1) Cost data are reported on a fiscal year basis. (2) Payments
to companies are reported on a crop year basis. (3) Totals may not add
due to rounding.
[A] Government costs also include total indemnities and other
administrative and operating expenses, including certain costs for
research, development, and other activities. This total is reduced by
the premiums and administration fees that farmers pay.
[End of table]
As discussed earlier, USDA pays both underwriting gains and cost
allowances, as negotiated in the SRA. Since the crop insurance program
was revised under ARPA--that is, from 2002 through 2006--USDA has paid
the insurance companies a total of $2.8 billion in underwriting gains.
In terms of profitability, these underwriting gains represent an
average annual rate of return of 17.8 percent over this 5-year
period.[Footnote 13] According to industry statistics, the benchmark
rate of return for U.S. insurance companies selling private property
and casualty insurance was 6.4 percent during this period.[Footnote 14]
RMA officials told us that this benchmark rate can be considered a
starting point for measuring the appropriateness of the underwriting
gains in the crop insurance program. However, they stated that this
program should have a somewhat higher rate of return because of the (1)
high volatility of underwriting gains for this program compared with
the relatively steady gains associated with the property and casualty
insurance industry, and (2) lack of investment opportunities when
participating in the program because premiums are paid to the companies
at harvest, not when farmers purchase a policy. But these officials
also said that current rates of return are excessive. USDA renegotiated
the financial terms of its SRA with the companies beginning with the
2005 planting season. In 2005, USDA paid the insurance companies
underwriting gains of $916 million--a rate of return of 30.1 percent.
In 2006, USDA paid them underwriting gains of $886 million--a rate of
return of 24.3 percent. The companies received these underwriting gains
despite drought conditions in parts of the country in 2005 and 2006.
Adverse weather conditions, such as drought, normally suggest that
insurance companies would earn lower profits because of greater
producer losses.
In addition to underwriting gains, RMA pays companies a cost allowance
to cover program delivery expenses. The allowance is calculated as a
percentage of total premiums on the insurance policies that they sell.
Because the cost allowance is not tied to specific expenses, the
companies can use the payments in any way they choose. From 2002
through 2006, USDA paid the insurance companies over $4 billion in cost
allowances. Because the cost allowance is a percentage of the premiums,
it also increases when the value of policies companies sell increases,
as it does when crop prices rise. For example, USDA expects the value
of policies, and thereby the cost allowances paid to companies, to
increase by about 25 percent from 2006 through 2008. USDA expects these
higher policy values, and ultimately higher cost allowances, because of
external factors, including higher crop prices, particularly for corn
and soybeans. Consequently, the companies and their affiliated sales
agents will receive substantially higher cost allowances without any
corresponding increase in expenses for selling and servicing the
policies. Substantially higher cost allowances provide these companies
and their agents with a kind of windfall. Greater insurance coverage
results in higher premiums and ultimately higher cost allowances; yet,
the purpose of this allowance is to reimburse program delivery
expenses.
In this context, USDA has requested the authority to renegotiate the
SRA in its proposals for the Farm Bill. Specifically, USDA recommends
renegotiating the SRA financial terms and conditions once every 3
years. According to USDA, the crop insurance program's participation
has grown significantly since the implementation of ARPA. Because
higher participation rates have resulted in more stable program
performance, the reinsured companies have enjoyed historically large
underwriting gains in the last 2 years of the program. Granting USDA
authority to renegotiate periodically would also permit USDA to
renegotiate the SRA if the reinsured companies experience an unexpected
adverse impact.
Conclusion:
In conclusion, Mr. Chairman, federal crop insurance plays an invaluable
role in protecting farmers from losses due to natural disasters, and
the private insurance companies that participate in the program are
integral to the program's success. Nonetheless, as we mentioned before,
we identified crop insurance as an area for oversight to ensure that
program funds are spent as economically, efficiently, and effectively
as possible. Furthermore, a key reason that we identified crop
insurance, as well as other farm programs, for oversight is that we
cannot afford to continue business as usual, given the nation's current
deficit and growing long-term fiscal challenges.
RMA has made progress in addressing fraud, waste, and abuse, but the
weaknesses we identified in program management and design continue to
leave the crop insurance program vulnerable to potential abuse.
Furthermore, as our work on underwriting gains and losses has shown,
RMA's effort to limit cost allowances and underwriting gains by
renegotiating the SRA has had minimal effect. In fact, it offers
insurance companies and their agents a windfall. We believe that the
crop insurance program should be delivered to farmers at a reasonable
cost that does not over-compensate insurance companies participating in
the program. A reduced cost allowance for administrative and operating
expenses and a decreased opportunity for underwriting gains would
potentially save hundreds of millions of dollars annually, yet still
provide sufficient funds for the companies to continue delivering high-
quality service while receiving a rate of return that is closer to the
industry benchmark.
Congress has an opportunity in its reauthorization of the Farm Bill to
provide USDA with the authority to periodically renegotiate the
financial terms of the SRA with the insurance companies so that the
companies' rate of return is more in line with private insurance
markets. Such a step can help position the nation to meet its fiscal
responsibilities.
Mr. Chairman, this concludes my prepared statement. I would be happy to
respond to any questions that you or other Members of the Subcommittee
may have.
Contact and Staff Acknowledgments:
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this testimony. For further
information about this testimony, please contact Robert A. Robinson,
Managing Director, Natural Resources and Environment, (202) 512-3841 or
robinsonr@gao.gov, or Lisa Shames, Director, Natural Resources and
Environment, (202) 512-3841 or shamesl@gao.gov. Key contributors to
this testimony were James R. Jones, Jr., Assistant Director; Thomas M.
Cook; and Carol Herrnstadt Shulman.
[End of section]
Related GAO Products:
Crop Insurance: Continuing Efforts Are Needed to Improve Program
Integrity and Ensure Program Costs Are Reasonable. GAO-07-819T.
Washington, D.C.: May 3, 2007.
Climate Change: Financial Risks to Federal and Private Insurers in
Coming Decades Are Potentially Significant. GAO-07-820T. Washington,
D.C.: May 3, 2007.
Climate Change: Financial Risks to Federal and Private Insurers in
Coming Decades Are Potentially Significant. GAO-07-760T. Washington,
D.C.: April 19, 2007.
Climate Change: Financial Risks to Federal and Private Insurers in
Coming Decades Are Potentially Significant. GAO-07-285. Washington,
D.C.: March 16, 2007.
Suggested Areas for Oversight for the 110th Congress. GAO-07-235R.
Washington, D.C.: November 17, 2006.
Crop Insurance: More Needs to Be Done to Reduce Program's Vulnerability
to Fraud, Waste, and Abuse. GAO-06-878T. Washington, D.C.: June 15,
2006.
Crop Insurance: Actions Needed to Reduce Program's Vulnerability to
Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30,
2005.
Crop Insurance: USDA Needs to Improve Oversight of Insurance Companies
and Develop a Policy to Address Any Future Insolvencies. GAO-04-517.
Washington, D.C.: June 1, 2004.
Crop Insurance: USDA Needs a Better Estimate of Improper Payments to
Strengthen Controls Over Claims. GAO/RCED-99-266. Washington, D.C.:
September 22, 1999.
Crop Insurance: USDA's Progress in Expanding Insurance for Specialty
Crops. GAO/RCED-99-67. Washington, D.C.: April 16, 1999.
Crop Insurance: Opportunities Exist to Reduce Government Costs for
Private-Sector Delivery. GAO/RCED-97-70. Washington, D.C.: April 17,
1997.
Crop Insurance: Federal Program Faces Insurability and Design Programs.
GAO/RCED-93-98. Washington, D.C.: May 24, 1993.
Crop Insurance: Program Has Not Fostered Significant Risk Sharing by
Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13,
1992.
FOOTNOTES
[1] GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-
235R (Washington, D.C.: Nov. 17, 2006).
[2] Cost data in this testimony are reported on a fiscal year basis.
Program data are reported on a crop year basis.
[3] See U.S. Department of Agriculture, FY 2006 Performance and
Accountability Report (Washington, D.C.: Nov. 15, 2006). RMA officials
indicated that they have not developed an estimate of losses
attributable to fraud and abuse.
[4] FSA is generally responsible for helping producers enroll in
agriculture support programs, overseeing these programs, and issuing
program payments.
[5] GAO, Crop Insurance: Continuing Efforts Are Needed to Improve
Program Integrity and Ensure Program Costs Are Reasonable, GAO-07-819T
(Washington, D.C.: May 3, 2007). See also Crop Insurance: More Needs to
Be Done to Reduce Program's Vulnerability to Fraud, Waste, and Abuse,
GAO-06-878T (Washington, D.C.: June 15, 2006), and Crop Insurance:
Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and
Abuse, GAO-05-528 (Washington, D.C.: September 30, 2005).
[6] GAO, Climate Change: Financial Risks to Federal and Private
Insurers in Coming Decades Are Potentially Significant, GAO-07-285
(Washington, D.C.: March 16, 2007).
[7] GAO, Crop Insurance: More Needs to Be Done to Reduce Program's
Vulnerability to Fraud, Waste, and Abuse, GAO-06-878T (Washington,
D.C.: June 15, 2006).
[8] In this testimony, we define rate of return as underwriting gains
calculated as a percentage of premiums on the policies in which
companies retain risk of loss.
[9] The Center for Agribusiness Excellence conducted this analysis at
our request. The Center, located at Tarleton State University in
Stephenville, Texas, provides research, training, and resources for
data warehousing and data mining of agribusiness and agriculture data.
The Center provides data mining of crop insurance data for RMA.
[10] 7 C.F.R. § 457.8.
[11] According to an RMA official, FSA must provide a notice of routine
use to producers that states that information they provide related to
their participation in commodity programs may be shared with RMA. This
is not one of the routine uses currently listed in the relevant
regulation.
[12] Final Research Report For Multiple Year Coverage, Task Order # RMA-
RED-01-06, Watts and Associates, Inc., June 27, 2002.
[13] Similarly, over the 10-year period, from 1997 through 2006, USDA
paid companies participating in the crop insurance program underwriting
gains of $4.3 billion, which represents an average annual rate of
return of 17.8 percent.
[14] Best's Aggregates and Averages: Property/Casualty, United States
and Canada. (Oldwick, New Jersey: 2006). According to this publication,
the benchmark rate of return for property and casualty insurance for
the 10-year period ending in 2005 (the most recent year data were
available) was 6.9 percent. For calculating the rate of return, we used
Best's ratio of pre-tax operating income to net premium earned.
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