Crop Insurance
Opportunities Exist to Reduce the Costs of Administering the Program Gao ID: GAO-09-445 April 29, 2009The U.S. Department of Agriculture (USDA) administers the federal crop insurance program with private insurance companies, which, in turn, work with insurance agencies that sell crop insurance. In 2008, according to USDA, the program cost $6.5 billion, including about $2.0 billion in allowances to insurance companies to cover their administrative and operating (A&O) expenses, such as salaries and sales commissions to agencies. GAO was asked to examine (1) the reasons for recent substantial increases in A&O allowances, and the purposes for which insurance companies use these allowances, and (2) insurance agencies' expenses for selling federal crop insurance policies, and questionable practices, if any, that agencies use to compete for business among farmers. GAO analyzed USDA and private insurers' data, among other things.
Between 2000 and 2009, companies' A&O allowances nearly tripled, primarily because USDA's calculation method for A&O allowances considers the value of the crop, rather than the crop insurance industry's actual expenses for selling and servicing policies, which generally remained stable. This increase in the A&O allowances occurred without a proportional increase in the number of policies, acres, or amount of insurance coverage purchased. The higher A&O allowances occurred because of higher crop prices since 2006. Per policy, the allowance rose from a national average of $836 in 2006 to an expected $1,417 in 2009. Companies have used most of the higher allowances to raise commissions, in an effort to compete for insurance agencies' portfolios of crop insurance policies. USDA data show that commissions increased more sharply in states with historically larger insurance underwriting gains, which add to company profits. For example, the average commission paid per policy in 5 Corn Belt states increased by 86 percent from 2006 to 2007, and by 43 percent in the other 45 states. Companies reported to USDA that their expenses to administer the program in 2007 exceeded their allowances. However, GAO determined that these expenses exceeded allowances largely because of the higher commissions paid to insurance agencies. According to GAO's analysis, crop insurance agencies' sales commissions have outpaced their expenses for selling policies. Commissions per policy increased by an average of about 16 percent per year from 2000 to 2009, compared with an increase of about 3 percent per year for insurance agents' wages, which are the largest factor in agencies' expenses. For 2007 through 2009, commissions will exceed wage-adjusted commissions by $2.87 billion. According to USDA officials, higher commissions can create more incentive for rebating, which is the practice of offering something of monetary value to farmers to attract their business. USDA prohibits this practice, as do most states. USDA and state insurance regulators are working to reduce the potential for this practice.
RecommendationsOur 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.
Director: Team: Phone:GAO-09-445, Crop Insurance: Opportunities Exist to Reduce the Costs of Administering the Program
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
April 2009:
Crop Insurance:
Opportunities Exist to Reduce the Costs of Administering the Program:
GAO-09-445:
GAO Highlights:
Highlights of GAO-09-445, a report to congressional requesters.
Why GAO Did This Study:
The U.S. Department of Agriculture (USDA) administers the federal crop
insurance program with private insurance companies, which, in turn,
work with insurance agencies that sell crop insurance. In 2008,
according to USDA, the program cost $6.5 billion, including about $2.0
billion in allowances to insurance companies to cover their
administrative and operating (A&O) expenses, such as salaries and sales
commissions to agencies. GAO was asked to examine (1) the reasons for
recent substantial increases in A&O allowances, and the purposes for
which insurance companies use these allowances, and (2) insurance
agencies‘ expenses for selling federal crop insurance policies, and
questionable practices, if any, that agencies use to compete for
business among farmers. GAO analyzed USDA and private insurers‘ data,
among other things.
What GAO Found:
Between 2000 and 2009, companies‘ A&O allowances nearly tripled,
primarily because USDA‘s calculation method for A&O allowances
considers the value of the crop, rather than the crop insurance
industry‘s actual expenses for selling and servicing policies, which
generally remained stable. This increase in the A&O allowances occurred
without a proportional increase in the number of policies, acres, or
amount of insurance coverage purchased. The higher A&O allowances
occurred because of higher crop prices since 2006. Per policy, the
allowance rose from a national average of $836 in 2006 to an expected
$1,417 in 2009. Companies have used most of the higher allowances to
raise commissions, in an effort to compete for insurance agencies‘
portfolios of crop insurance policies. USDA data show that commissions
increased more sharply in states with historically larger insurance
underwriting gains, which add to company profits. For example, the
average commission paid per policy in 5 Corn Belt states increased by
86 percent from 2006 to 2007, and by 43 percent in the other 45 states.
Companies reported to USDA that their expenses to administer the
program in 2007 exceeded their allowances. However, GAO determined that
these expenses exceeded allowances largely because of the higher
commissions paid to insurance agencies.
Figure: A&O Allowances and Underwriting Gains or Losses Paid to
Companies, 2000 through 2008:
[Refer to PDF for image: stacked vertical bar graph]
Year: 2000;
A&O allowances: $0.55 billion;
Underwriting gains or losses: $0.27 billion.
Year: 2001;
A&O allowances: $0.64 billion;
Underwriting gains or losses: $0.35 billion.
Year: 2002;
A&O allowances: $0.63 billion;
Underwriting gains or losses: -$0.05 billion.
Year: 2003;
A&O allowances: $0.73 billion;
Underwriting gains or losses: $0.38 billion.
Year: 2004;
A&O allowances: $0.85 billion;
Underwriting gains or losses: $0.69 billion.
Year: 2005;
A&O allowances: $0.83 billion;
Underwriting gains or losses: $0.92 billion.
Year: 2006;
A&O allowances: $0.96 billion;
Underwriting gains or losses: $0.89 billion.
Year: 2007;
A&O allowances: $1.33 billion;
Underwriting gains or losses: $1.65 billion.
Year: 2008;
A&O allowances: $2.01 billion;
Underwriting gains or losses: $1.5 billion (estimated).
Source: USDA.
[End of figure]
According to GAO‘s analysis, crop insurance agencies‘ sales commissions
have outpaced their expenses for selling policies. Commissions per
policy increased by an average of about 16 percent per year from 2000
to 2009, compared with an increase of about 3 percent per year for
insurance agents‘ wages, which are the largest factor in agencies‘
expenses. For 2007 through 2009, commissions will exceed wage-adjusted
commissions by $2.87 billion. According to USDA officials, higher
commissions can create more incentive for rebating, which is the
practice of offering something of monetary value to farmers to attract
their business. USDA prohibits this practice, as do most states. USDA
and state insurance regulators are working to reduce the potential for
this practice.
What GAO Recommends:
GAO recommends that USDA implement a methodology so that the A&O
allowance more closely aligns with expenses, as it did before crop
prices rose in 2006; require companies to annually report commissions
to insurance agencies, by policy; and study costs of delivering crop
insurance policies to establish a standard method for assessing
agencies‘ reasonable costs. RMA agreed with two of our three
recommendations, arguing that collecting commission data by policy may
not be valuable. GAO believes that such data would better enable RMA to
negotiate the A&O allowance it pays companies.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/products/GAO-09-445]. For more
information, contact Lisa Shames at (202) 512-2649 or shamesl@gao.gov
or Susan Offutt at (202) 512-3763 or offutts@gao.gov.
[End of section]
Contents:
Letter:
Background:
Higher Crop Prices Sharply Raised A&O Allowances, and Insurance
Companies Used a Large Share of These Increases to Compete for More
Business:
Insurance Agencies' Commissions Have Outpaced Expenses, and Higher
Commissions Can Create More Incentive for Rebating:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Commissions, Percentage Change in Commission per Policy,
and Underwriting Gains or Losses:
Appendix III: Comments from the U.S. Department of Agriculture:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: A&O Allowance Rates, by Coverage Level, 2006 through 2008 and
2009:
Table 2: Examples of Insurance Agencies' Crop Insurance Expenses:
Figures:
Figure 1: How Money Flows through the Federal Crop Insurance Program:
Figure 2: Crop Insurance A&O Allowances and Underwriting Gains or
Losses Paid to Companies, 2000 through 2008:
Figure 3: Corn, Soybean, and Wheat Prices That RMA Used in Calculating
A&O Allowances, 2000 through 2009:
Figure 4: Crop Insurance Premiums, A&O Allowances, and Commissions,
2000 through 2009:
Figure 5: Commission Rates for 2007 and Historic Underwriting Gains or
Losses, by State:
Figure 6: A&O Expenses and A&O Allowances That Crop Insurance Companies
Reported to RMA, 2006 and 2007:
Figure 7: Actual Commission per Policy Compared with Projected
Commission per Policy Adjusted for Insurance Agent Wage Inflation, 2000
through 2009:
Abbreviations:
A&O: administrative and operating
NAIC: National Association of Insurance Commissioners:
RMA: Risk Management Agency:
SRA: standard reinsurance agreement:
USDA: U.S. Department of Agriculture:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
April 29, 2009:
The Honorable Henry A. Waxman:
Chairman:
Committee on Energy and Commerce:
House of Representatives:
The Honorable Edolphus Towns:
Chairman:
The Honorable Darrell Issa:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
The Honorable Jim Cooper:
House of Representatives:
Federal crop insurance protects participating farmers against the
financial losses caused by natural disasters, such as droughts, floods,
and hurricanes, as well as declines in crop prices. In 2008, the crop
insurance program provided about $90 billion in insurance coverage for
272 million acres of farmland at a cost of $6.5 billion to the federal
government. To implement the federal crop insurance program, the U.S.
Department of Agriculture's (USDA) Risk Management Agency (RMA)
partners with 16 private insurance companies, which sell and service
the insurance policies and share a percentage of the risk of loss and
opportunity for gain associated with the policies. RMA pays insurance
companies a percentage of the premiums on policies sold to cover the
administrative and operating (A&O) expenses of selling and servicing
these policies. These expenses are generally described in RMA guidance
and can include company overhead, such as employee salaries, fees paid
to insurance adjusters to verify claims, and sales commissions paid to
the insurance agencies and their agents who sell crop insurance to
farmers. These agencies and agents generally operate independently of
the 16 insurance companies and can change companies from year to year.
We have reported for many years on the costs of the crop insurance
program associated with A&O allowances. In May and June, 2007, we
testified that RMA should ensure that expenses for delivering the crop
insurance program are reasonable.[Footnote 1] Specifically, we noted
that the federal government spent more than $6.8 billion from 2002
through 2006 to administer the program--with A&O allowances accounting
for over half of these expenditures--and recommended that Congress
authorize RMA to renegotiate its agreement with the companies that sell
and service crop insurance policies. Subsequently, Congress, through
the Food, Conservation, and Energy Act of 2008 (the 2008 Farm Bill),
reduced the A&O allowance payment rate for most crop insurance policies
by 2.3 percentage points, effective in 2009. This reduction is expected
to result in financial savings of almost $1 billion through 2013. The
2008 Farm Bill also directed RMA to consider alternative methods for
determining A&O payment rates as well as other methods, taking into
account current financial conditions, to ensure the continued
availability of the program. In 2006, we identified the need for better
oversight of the federal crop insurance program to ensure that its
funds are spent as economically, efficiently, and effectively as
possible.[Footnote 2] Furthermore, in 1997, we reported that A&O
allowances exceeded the companies' expenses that can be reasonably
associated with selling and servicing crop insurance policies.[Footnote
3] We noted that alternative arrangements for determining A&O
allowances offered potential for savings. These alternative
arrangements included paying companies a flat fee per policy, plus a
lower percentage of the premium on the policy. Furthermore, we noted
that USDA's Farm Service Agency had administered a type of crop
insurance--catastrophic insurance--at a lower cost to the government
than did private insurance companies.
While the 2008 Farm Bill reduced the A&O allowance rate, other factors
also affect A&O allowances to insurance companies. Because allowances
are a percentage of insurance premiums, they increase when the value of
policies that companies sell increases, such as when crop prices rise.
According to USDA, since 2007, the prices for major crops--such as
corn, soybeans, and wheat--have been among the highest on record, and
prices in 2009 and beyond are expected to remain relatively high.
[Footnote 4] In response to these rising crop prices, A&O allowances
increased from about $960 million in 2006 to about $2 billion in 2008.
In this context, you asked that we examine (1) the reasons for the
substantial increases in A&O allowances in recent years, and the
purposes for which insurance companies use these allowances, and (2)
insurance agencies' expenses for selling federal crop insurance
policies, and questionable practices, if any, that agencies use to
compete for business among farmers.
To examine the reasons for the substantial increases in A&O allowances
in recent years and the purposes for which insurance companies use
these allowances, we interviewed RMA officials and officials from each
of the 16 companies that participate in the federal crop insurance
program. In addition, we reviewed and analyzed RMA and company data
concerning companies' uses of the allowances from 2000 through 2007.
The sources of these data included expense reports that the companies
submitted to RMA listing the amounts that they charge to various
expense categories. We also reviewed RMA's reporting guidelines for
companies and discussed these guidelines with company officials. In
addition, we reviewed examples of companies' contracts with insurance
agencies. We selected these contracts on the basis of the volume of
business between the insurance company and the agency and, when
possible, regional diversity. For the purpose of this report,
commissions include profit-sharing bonuses that an insurance company
pays to an insurance agency on the basis of profits for a given year
and transfer bonuses that a company pays to an agency that transfers
its portfolio of crop insurance policies that it sells (book of
business) to the company. To examine insurance agencies' expenses for
selling federal crop insurance policies, and questionable practices, if
any, that agencies use to compete for business from farmers, we
interviewed officials of eight insurance agencies and reviewed
documents that some of these officials provided. We also interviewed
officials from trade associations representing insurance agents. In
addition, we interviewed officials from RMA and the National
Association of Insurance Commissioners (NAIC), an association of state
insurance regulators, and discussed with RMA its investigations of
questionable competitive practices.
We conducted this performance audit from January 2008 through April
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. Appendix I
contains more detailed information on our scope and methodology.
Background:
Farming is an inherently risky enterprise. In conducting their
operations, farmers are exposed to financial losses because of
production risks--droughts, floods, hurricanes, and other natural
disasters--as well as price risks. For decades, the federal government
has played an active role in helping to mitigate the effects of these
risks on farm income by promoting the use of crop insurance.
Through the federal crop insurance program, farmers insure against
losses on more than 100 crops. The federal government encourages
farmers' participation by subsidizing their insurance premiums and
acting as the primary reinsurer for the private insurance companies
that take on the risk of covering, or "underwriting," losses to insured
farmers. These companies achieve underwriting gains when insurance
premiums exceed the claims they must pay farmers for crop losses, and
they incur underwriting losses if claims paid on the policies exceed
the premiums. To cover the expenses of selling and servicing crop
insurance policies, the federal government pays companies an A&O
allowance. In turn, insurance companies use this money to cover their
overhead expenses, such as payroll and rent, and to pay commissions to
insurance agencies and agents. Companies also incur expenses associated
with verifying--adjusting--the amount of loss claimed. These loss
adjustment expenses include, for example, travel expenses to farmers'
fields. The relationships among the federal government, private
insurance companies, agencies, agents, and farmers are illustrated in
figure 1.
Figure 1: How Money Flows through the Federal Crop Insurance Program:
[Refer to PDF for image: illustration]
Federal government:
* Through RMA, pays insurance companies to administer crop insurance;
* Pays A&O allowances;
* Shares underwriting gains or losses.
Participating insurance companies:
* Expenses:
* Sales commissions (to insurance agents);
* Overhead:
- Salaries;
- Information technology;
* Loss adjustment;
* Claims payments to farmers;
* Receive farmers' share of premiums.
Source: GAO; Art Explosion.
[End of figure]
To encourage widespread participation in the crop insurance program,
the federal government pays the costs of selling and servicing crop
insurance policies through the A&O allowance. As designed, this
allowance increases when companies sell policies to more farmers,
insure additional acreage, or sell a higher level of insurance coverage
on acres that are already insured. However, A&O allowances can also
increase as a result of higher crop prices without corresponding
changes in the number of policies sold to farmers, insured acreage, or
levels of coverage. Such increases in A&O allowances--when decoupled
from the federal crop insurance program's interest in promoting more
insured acreage and higher levels of coverage--can create additional
incentives for insurance companies to expand their market share by
raising commission rates.
In 2008, RMA provided about $2.0 billion in A&O allowances and an
estimated $1.5 billion in underwriting gains to crop insurance
companies. Figure 2 shows the A&O allowances and underwriting gains or
losses paid to companies for 2000 through 2008.
Figure 2: Crop Insurance A&O Allowances and Underwriting Gains or
Losses Paid to Companies, 2000 through 2008:
[Refer to PDF for image: stacked vertical bar graph]
Year: 2000;
A&O allowances: $0.55 billion;
Underwriting gains or losses: $0.27 billion.
Year: 2001;
A&O allowances: $0.64 billion;
Underwriting gains or losses: $0.35 billion.
Year: 2002;
A&O allowances: $0.63 billion;
Underwriting gains or losses: -$0.05 billion.
Year: 2003;
A&O allowances: $0.73 billion;
Underwriting gains or losses: $0.38 billion.
Year: 2004;
A&O allowances: $0.85 billion;
Underwriting gains or losses: $0.69 billion.
Year: 2005;
A&O allowances: $0.83 billion;
Underwriting gains or losses: $0.92 billion.
Year: 2006;
A&O allowances: $0.96 billion;
Underwriting gains or losses: $0.89 billion.
Year: 2007;
A&O allowances: $1.33 billion;
Underwriting gains or losses: $1.65 billion.
Year: 2008[A];
A&O allowances: $2.01 billion;
Underwriting gains or losses: $1.5 billion.
Source: USDA.
[A] Underwriting gains for 2008 are estimated, as of April 15, 2009.
[End of figure]
Taking into account all payments, the crop insurance program cost
taxpayers about $31 billion for 2000 through 2008, according to the
most recent available estimate from the Center for Agricultural and
Rural Development at Iowa State University.[Footnote 5] According to
our analysis, RMA paid about $1.93 for every $1.00 in payments to
farmers, with the other $0.93 going to insurance companies over the
period. Since 2006, when crop prices began to rise sharply, RMA has
paid about $2.29 for every $1.00 that reached the farmer, with the
balance going to insurance companies.
The policies that insurance companies underwrite and service are sold
by more than 12,000 insurance agents. Some insurance agencies sell only
crop insurance, while others also sell other lines of property and
casualty insurance, such as automobile insurance and homeowner's
insurance. These agencies, which are generally independent contractors
and receive sales commissions for selling the policies, can sell
policies on behalf of multiple crop insurance companies. Farmers must
purchase policies by certain "sales closing" dates. These dates
correspond to a time before planting season for a given crop in a
certain region of the nation.
RMA is responsible for administering the federal crop insurance program
through a cooperative financial agreement called the standard
reinsurance agreement (SRA), which can be renegotiated once during a 5-
year period, or as directed by Congress. The SRA incorporates the terms
and conditions by which the private insurance companies that sell and
service crop insurance policies are to abide. Under the 2008 Farm Bill,
RMA may renegotiate the financial terms and conditions of the SRA,
effective for the 2011 reinsurance year, beginning July 1, 2010.
According to RMA officials, this effort will begin in the spring of
2009. For 2008 and 2009, RMA approved 16 insurance companies to provide
federal crop insurance.
Premiums for the policies are set by RMA and depend, in part, on the
price of the insured crop, although premiums also vary according to the
type of insurance plan and the coverage levels that farmers select. A&O
allowances are calculated as a fixed percentage of the premium, and
they vary depending upon the plan and coverage levels, as shown in
table 1.
Table 1: A&O Allowance Rates, by Coverage Level, 2006 through 2008 and
2009:
Coverage level, by year: 2006 through 2008: 75 percent or less;
A&O allowance rate, by type of insurance plan: Revenue[A]: 20.8;
A&O allowance rate, by type of insurance plan: Area[B]: 22.4;
A&O allowance rate, by type of insurance plan: Yield[C]: 24.2.
Coverage level, by year: 2006 through 2008: 80 percent;
A&O allowance rate, by type of insurance plan: Revenue[A]: 18.7;
A&O allowance rate, by type of insurance plan: Area[B]: 20.1;
A&O allowance rate, by type of insurance plan: Yield[C]: 21.7.
Coverage level, by year: 2006 through 2008: 85 percent;
A&O allowance rate, by type of insurance plan: Revenue[A]: 18.1;
A&O allowance rate, by type of insurance plan: Area[B]: 19.4;
A&O allowance rate, by type of insurance plan: Yield[C]: 21.0.
Coverage level, by year: 2009: 75 percent or less;
A&O allowance rate, by type of insurance plan: Revenue[A]: 18.5;
A&O allowance rate, by type of insurance plan: Area[B]: 12.0;
A&O allowance rate, by type of insurance plan: Yield[C]: 21.9.
Coverage level, by year: 2009: 80 percent;
A&O allowance rate, by type of insurance plan: Revenue[A]: 16.4;
A&O allowance rate, by type of insurance plan: Area[B]: 12.0;
A&O allowance rate, by type of insurance plan: Yield[C]: 19.4.
Coverage level, by year: 2009: 85 percent;
A&O allowance rate, by type of insurance plan: Revenue[A]: 15.8;
A&O allowance rate, by type of insurance plan: Area[B]: 12.0;
A&O allowance rate, by type of insurance plan: Yield[C]: 18.7.
Source: GAO analysis of RMA information and the 2008 Farm Bill.
Note: The coverage level is the percentage of revenue or production
that a farmer chooses to insure. This table does not show catastrophic
insurance plans, which compensate farmers for losses in production
exceeding 50 percent of their average historic production at a payment
rate of 55 percent of the crop price. The 2008 Farm Bill reduced the
A&O allowance rate for these plans from 8 percent to 6 percent.
[A] Revenue insurance plans protect farmers against losses in expected
revenue.
[B] Area insurance plans protect farmers against losses in revenue or
production, using a county index as the basis for determining a loss.
[C] Yield plans also include other insurance plans--such as pasture,
rangeland, and forage plans--and protect farmers against losses in
production.
[End of table]
For most policies, the 2008 Farm Bill reduced the A&O allowance rate by
2.3 percentage points beginning in 2009. However, the bill provides an
exception to cover higher loss adjustment expenses when needed.
Specifically, if a state's losses are 20 percent higher than the total
premiums for that state, only one-half of the 2.3 percentage-point
reduction would apply. In addition, the reduction in the A&O allowance
rate was larger for area insurance plans than for other plans.
The 2008 Farm Bill also repeals a provision of the Federal Crop
Insurance Reform and Department of Agriculture Reorganization Act of
1994 that allowed providers to implement "premium reduction plans" with
RMA approval. Through these plans, companies could offer a premium
discount to farmers that is equal to the amount that the companies' A&O
expenses fell below their A&O allowances for a given year. Thus, these
plans offered an incentive for companies to reduce A&O expenses,
because they allowed companies to compete for more business by, in
effect, reducing the premiums they charged farmers for crop insurance.
RMA established guidelines for the submission of the plans in a final
interim rule in the Federal Register on July 20, 2005. In commenting on
this rule, state insurance regulators expressed concerns that the plans
would result in industry consolidation, reducing competition in the
long run, and that the plans could create pressure for insurance
companies to reduce essential operating expenses, thereby
disadvantaging newer companies compared with larger, established
companies.
State insurance regulators also expressed concerns that the plans
constituted a legal form of rebating, the practice of offering
something of monetary value to farmers to attract their business.
Rebating is generally prohibited by the SRA and by most states, and the
2008 Farm Bill limits the compensation an individual can receive for
selling or servicing a crop insurance policy in which he or she has a
substantial beneficial interest.
Higher Crop Prices Sharply Raised A&O Allowances, and Insurance
Companies Used a Large Share of These Increases to Compete for More
Business:
Companies' A&O allowances nearly tripled from 2000 to 2009, primarily
because the method that RMA uses to calculate A&O allowances considers
the value of the crop and not the crop insurance industry's actual
expenses for selling and servicing policies. Companies spent a large
share of their higher A&O allowances on commission payments, in part in
an effort to compete for business from insurance agencies. They also
reported expenses that are not clearly related to selling and servicing
policies, such as legal fees.
Substantially Higher A&O Allowances Have Occurred Primarily Because of
Sharp Increases in Crop Prices:
A&O allowances nearly tripled--from $552 million in 2000 to an
estimated $1.6 billion in 2009, according to our analysis of RMA data.
The change from 2006 to 2009 was particularly large, rising from an
average of $836 per policy to an expected $1,417 per policy. These
increases occurred primarily because RMA calculates the allowance as a
percentage of the premiums on crop insurance policies, rather than the
crop insurance industry's actual expenses to sell and service policies.
Crop insurance premiums change when crop prices change. Thus, the
allowance increased sharply from 2006 through 2009, when the prices of
major crops increased.
Figure 3 shows the prices for these crops--corn, soybeans, and wheat--
that RMA used in calculating A&O allowances for 2000 through 2009.
These three crops represented about 71 percent of the crop insurance
premiums in 2008.
Figure 3: Corn, Soybean, and Wheat Prices That RMA Used in Calculating
A&O Allowances, 2000 through 2009 (dollars per bushel):
[Refer to PDF for image: multiple line graph]
Year: 2000;
Corn: $1.9;
Soybeans: $5.16;
Wheat: $3.15.
Year: 2001;
Corn: $2.05;
Soybeans: $5.26;
Wheat: $2.8.
Year: 2002;
Corn: $2;
Soybeans: $5;
Wheat: $3.15.
Year: 2003;
Corn: $2.2;
Soybeans: $5.3;
Wheat: $3.15.
Year: 2004;
Corn: $2.45;
Soybeans: $5.6;
Wheat: $3.35.
Year: 2005;
Corn: $2.2;
Soybeans: $5;
Wheat: $3.5.
Year: 2006;
Corn: $2;
Soybeans: $5.15;
Wheat: $3.15.
Year: 2007;
Corn: $3.5;
Soybeans: $7;
Wheat: $3.9.
Year: 2008;
Corn: $4.75;
Soybeans: $11.5;
Wheat: $4.9.
Year: 2009;
Corn: $4;
Soybeans: $9.9;
Wheat: $7.35.
Source: RMA.
Note: Crop prices in this figure are for yield insurance plans, which
were the plans most widely available for this period.
[End of figure]
According to RMA, A&O allowances will decrease in 2009 because crop
prices are expected to decrease and because of the reduction in the A&O
allowance rate for most crop insurance policies, as mandated in the
2008 Farm Bill. However, the prices for corn, soybeans, and wheat--the
top three crops in the crop insurance program, by premium--are expected
to remain relatively high. Thus, using RMA's estimate of premiums and
the current allowance rate, we estimated that allowances in 2009 will
be $1,417 per policy, 69 percent higher than in 2006, although down
from $1,751 per policy in 2008.
The current method for calculating A&O allowances has caused allowance
payments to increase along with crop prices, but without a proportional
increase in the number of policies, acres, or coverage levels. For 2000
through 2008, A&O allowances increased sharply despite a 13 percent
decrease in the number of crop insurance policies--the principal factor
affecting companies' workloads and costs.[Footnote 6] This increase in
A&O allowances has also been substantially greater than the increase in
the number of acres covered by the program. Since 2000, the number of
acres insured has increased slightly--by 7 percent--excluding insurance
for pasture and rangeland. These types of insurance tend to cover large
acreages in a single policy and, therefore, add many acres to the
program without a proportional increase in the number of policies or in
companies' workloads. With the addition of pasture and rangeland
insurance, the number of acres insured has increased by 32 percent
since 2000, but these policies represent only about 1 percent of all
crop insurance policies. Nor are coverage levels--which have increased
from an average of about 61 percent of crop value in 2000 to an average
of 67 percent of crop value in 2008--a major factor in the rapid
increase in A&O allowances.
Because crop prices are a principal factor in the method for
calculating A&O allowances, the allowance fluctuates as crop prices
rise and fall. Fluctuations make it more difficult for insurance
companies to budget and operate effectively over the long term.
Although USDA expects that crop prices will remain relatively high for
the next several years, prices are also expected to be volatile because
of energy markets, among other things. Crop prices are increasingly
tied to these markets because of the growing production of ethanol.
When oil prices increase, ethanol prices generally increase, which
raises demand for corn, the primary ethanol feedstock.
Companies Have Used a Large Share of Higher A&O Allowances to Compete
for More Business:
Companies generally base insurance agencies' commissions on a
percentage of the premiums that agencies bring to the companies. Thus,
as crop prices have increased, so have commissions. Figure 4 shows the
change in premiums, A&O allowances, and commissions from 2000 through
2009.
Figure 4: Crop Insurance Premiums, A&O Allowances, and Commissions,
2000 through 2009:
[Refer to PDF for image: multiple line graph]
Year: 2000;
Premiums: $2.54 billion;
A&O allowances: $0.55 billion;
Commissions: $0.42 billion.
Year: 2001;
Premiums: $2.98 billion;
A&O allowances: $0.64 billion;
Commissions: $0.47 billion.
Year: 2002;
Premiums: $2.91 billion;
A&O allowances: $0.63 billion;
Commissions: $0.47 billion.
Year: 2003;
Premiums: $3.44 billion;
A&O allowances: $0.73 billion;
Commissions: $0.56 billion.
Year: 2004;
Premiums: $3.99 billion;
A&O allowances: $0.85 billion;
Commissions: $0.62 billion.
Year: 2005;
Premiums: $3.95 billion;
A&O allowances: $0.83 billion;
Commissions: $0.59 billion.
Year: 2006;
Premiums: $4.71 billion;
A&O allowances: $0.96 billion;
Commissions: $0.71 billion.
Year: 2007;
Premiums: $6.56 billion;
A&O allowances: $1.33 billion;
Commissions: $1.12 billion.
Year: 2008[A];
Premiums: $9.85 billion;
A&O allowances: $2.01 billion;
Commissions: $1.68 billion.
Year: 2009[B];
Premiums: $9.04 billion;
A&O allowances: $1.63 billion;
Commissions: $1.41 billion.
Source: GAO analysis of data that the insurance companies provided to
RMA.
[A] For 2008, commissions are estimated on the basis of 2008 premiums
and the assumption that commission rates remained the same as they were
in 2007.
[B] For 2009, A&O allowances and commissions are estimated.
[End of figure]
The geographic pattern in commission rates indicates that the companies
are using their A&O allowances to attract insurance agencies'
portfolios of insurance policies--their "books of business." Obtaining
more books of business helps companies increase their potential to earn
underwriting gains. As figure 5 shows, the highest average commission
rates are in the states that historically have had the largest
underwriting gains.
Figure 5: Commission Rates for 2007 and Historic Underwriting Gains or
Losses, by State:
[Refer to PDF for image: map of the United States]
Underwriting gains or losses: $500 million to $1.7 billion:
Illinois: 19.3;
Indiana: 19.4;
Iowa: 21.3;
Minnesota: 20.2;
Nebraska: 21.3.
Underwriting gains or losses: $100 million to $499 million:
Arkansas: 14.1;
California: 16.1;
Michigan: 17.0;
Missouri: 17.9;
Ohio: 17.8;
Washington: 14.5.
Underwriting gains or losses: $1 million to $99 million:
Hawaii: 19.0;
Idaho: 15.5;
Kentucky: 16.4;
Louisiana: 15.5;
Maine: 13.0;
Maryland: 13.6;
New Hampshire: 13.8;
New Jersey: 13.5;
New Mexico: 12.4;
North Dakota: 15.7;
Pennsylvania: 13.4;
Rhode Island: 13.7;
West Virginia: 12.8;
Wisconsin: 17.7.
Underwriting gains or losses: -$49 million to $0:
Alaska: 8.7.
Arizona: 14.4;
Connecticut: 13.1;
Delaware: 14.7;
Georgia: 13.5;
Massachusetts: 13.0;
Mississippi: 14.5;
Nevada: 11.5;
New York: 13.7;
South Carolina: 13.0;
South Dakota: 17.6;
Tennessee: 14.0;
Utah: 12.1;
Vermont: 13.7;
Virginia: 13.8;
Wyoming: 12.8.
Underwriting gains or losses: -$300 million to -$50:
Alabama: 12.8;
Colorado: 14.6;
Florida: 15.2;
Kansas: 15.6;
Montana: 13.4;
North Carolina: 14.2;
Oklahoma: 13.7;
Oregon: 11.5;
Texas: 12.9.
Nationwide Average Commission Rate: 17.3.
Sources: GAO analysis of RMA data and data that the insurance companies
provided to RMA; Map Resources (map).
Note: Commission rates are commissions expressed as a percentage of
premiums. Historic underwriting gains or losses are for 2000 through
2007, the latest data available.
[End of figure]
While companies have paid higher commission rates in certain states,
they have also increased the rates nationwide. For example, from 2006
to 2007 in 5 major Corn Belt states--Illinois, Indiana, Iowa,
Minnesota, and Nebraska--the average commission rate increased from
17.6 percent of premium to 20.3 percent. In the other 45 states, the
average commission rate increased from 13.0 percent of premium to 14.2
percent.
In terms of commission dollars, the average commission paid per policy
from 2006 to 2007 increased more in the 5 major Corn Belt states
overall than in the other states, rising by a total of 86 percent in
these 5 states compared with 43 percent in the other 45 states. For
2007, in the 5 Corn Belt states, crop insurance companies paid a total
of $506 million in commissions--which is about $9 million more than the
total A&O allowance that the companies received from RMA for these
states. According to crop insurance company officials, having used
their A&O allowance for commissions, they rely on underwriting gains in
such states to pay their overhead expenses and fees to insurance
adjusters, who verify claims that are filed. Appendix II contains
additional information on commissions paid in 2006 and 2007.
Company officials confirmed that they increased commission rates to
compete for the insurance agencies' books of business. Obtaining more
books of business helps companies increase their potential to earn
underwriting gains.
Because RMA sets the premiums for crop insurance policies, companies
cannot compete by reducing premiums. Nor do they often have the
opportunity to insure new crop acres or sell more policies overall.
Thus, one of the key ways for companies to increase their market share
is to draw insurance agencies (and their books of business) away from
competing companies by raising the agencies' commission rates. In
addition, company officials told us that some insurance agencies have
considerable leverage in negotiating with companies for sales
commissions because these insurance agencies have long-standing
relationships with farmers whose crop insurance policies have
historically produced high underwriting gains. Thus, companies compete
against one another, offering higher and higher commissions until the
increase in A&O allowances is exhausted. Insurance agencies have
benefited from the increases in A&O allowances without selling more
policies.
In addition to increasing commission rates in certain states, some
insurance companies seek to attract agencies' books of business by
offering commission rates on the basis of the agency's size. That is,
many of the commission contracts we reviewed provided higher commission
rates to agencies that sell insurance in larger quantities.
Even as they compete for insurance agencies' books of business on
commissions, companies can also try to retain their current agencies'
business by providing in-kind services, such as policy processing
services and mailings to inform farmers about policies. These services
usually entail an investment in information technology, such as quoting
software that calculates farmer-specific premiums that agencies can use
to market the various policies.
RMA does not know how much an individual company spends on commissions
to each of the agencies with which it does business. RMA guidelines for
reporting under the SRA direct insurance companies to report only their
total commissions for each state in which they operate, not commission
amounts paid to individual agencies. Information by state does not
provide sufficient detail on commission expenses because such data do
not allow RMA to assess whether the compensation paid to agencies is
appropriate in relationship to the cost of selling and servicing crop
insurance. RMA would be better able to set the A&O allowance rate when
it renegotiates the SRA with insurance companies if it had more
detailed information on commissions provided to individual agencies,
such as commission data at the policy level. With such information on
agencies' commissions, as well as their costs, RMA could assess whether
the A&O allowances are reasonable for program delivery but not
excessive, and adjust allowances as needed. Data by policy would enable
RMA to better understand how compensation to agencies varies with
agency size and the characteristics of policies sold, such as the type
of insurance plan and expected underwriting gains. This understanding
would enable RMA to better anticipate the effects of adjustments in A&O
allowances on agencies. For example, this analysis may show that
agencies that do business primarily in a part of the state with
historically high underwriting gains received higher commission rates
than agencies that do business in a part of the state with lower
underwriting gains.
Companies' Reported Expenses Exceeded A&O Allowances, but High
Commissions and Expenses That Were Inconsistent with RMA Guidance
Explain This Difference:
Despite the increases in A&O allowances, insurance companies reported
to RMA that their expenses for delivering federal crop insurance for
2007 exceeded their A&O allowances by about $244 million. Company
officials told us that new RMA regulations and recent changes have
added a significant administrative burden. For example, they noted,
when RMA introduces an insurance product, companies must update their
information systems, train staff, and take on additional work, and RMA
provides what companies view as insufficient time for them to do so.
Furthermore, although RMA guidelines have long directed companies to
perform additional review of all claims of more than $100,000, these
reviews became more frequent when crop values started to increase
significantly in 2007 and claim amounts rose accordingly. These
activities made company operations more costly, according to company
officials. Furthermore, insurance company officials told us that
certain expenses vary by region of the country. For example, companies
that operate in regions that tend to have crop losses more frequently
incur higher overall A&O expenses because of higher loss adjustment
expenses. Nevertheless, RMA officials noted that recent changes should
have only marginally affected the cost of doing business.
We found that the amount by which companies' reported A&O expenses
exceeded allowances was largely due to the increased spending on
commissions, as well as to the reporting of expenses that was
inconsistent with RMA guidance, rather than to greater administrative
burdens. Although A&O allowances increased by 39 percent--from $960
million in 2006 to about $1.3 billion in 2007--companies increased the
commissions they paid to agencies by 58 percent--from $711 million to
about $1.1 billion. Figure 6 shows A&O expenses for 2006 and 2007 and
the A&O allowances reported.
Figure 6: A&O Expenses and A&O Allowances That Crop Insurance Companies
Reported to RMA, 2006 and 2007:
[Refer to PDF for image: stacked vertical bar graph]
Year: 2006;
A&O allowances: $960 million;
Commission expenses: $711 million;
Loss adjustment expenses: $128 million;
Overhead expenses: $260 million.
Year: 2007;
A&O allowances: $1,335 million;
Commission expenses: $1,121 million;
Loss adjustment expenses: $139 million;
Overhead expenses: $319 million.
Source: GAO analysis of data that the insurance companies provided to
RMA.
[End of figure]
For individual agencies, commissions can be large, both in terms of
actual dollars and in relationship to A&O allowance rates. For example,
in 2007, companies paid 60 insurance agencies commissions that were at
least $1.0 million and at least 20.0 percent of the premium value,
which is about equal to the average A&O allowance rate of 20.4 percent
paid to companies nationwide.
We also found that some insurance companies' reporting of program
delivery expenses was inconsistent with RMA reporting guidance. For
2007, some companies reported profit-sharing bonuses, legal fees, and
other expenses that were not directly related to the selling and
servicing of crop insurance policies. RMA guidance states that these
payments should not be included in the expense report, and, according
to RMA officials, these payments are not program delivery expenses. For
example, 10 of the 16 companies listed profit-sharing bonuses to
insurance agencies as an expense to deliver the program. Similarly, 6
of the 16 insurance companies included reinsurance expenses that relate
to business expansion, rather than to program delivery. Specifically,
insurance companies pay premiums for commercial reinsurance to (1)
reduce their risk of underwriting losses and (2) increase their
capacity to sell more insurance. According to RMA guidance, reinsurance
expenses should not be reported as A&O expenses. RMA officials told us
that these types of expenses should be paid from underwriting gains
because they are not associated with the direct sale and service of
federal crop insurance to farmers. Finally, we found one company had
included in its A&O expenses about $1 million in legal fees to defend
itself against a lawsuit from another crop insurance company. However,
the guidance notes that legal fees associated with delivering the
program should pertain to defending lawsuits related to servicing
policies. RMA officials agreed that such legal fees should not be
included as an A&O expense. RMA and company officials stated that RMA's
guidance on allowable expenses should be clarified.
Insurance Agencies' Commissions Have Outpaced Expenses, and Higher
Commissions Can Create More Incentive for Rebating:
The modest increase from 2000 through 2009 in insurance agencies'
expenses for selling policies has not been commensurate with the
dramatic increase in their commissions. Consequently, many agencies
have apparently seen substantial increases in their profits from their
crop insurance books of business; this is particularly true for states
that have had high underwriting gains, such as the Corn Belt states.
The growth in commissions can create more incentives for agents to
engage in rebating, although RMA has taken steps to reduce the
potential for this practice.
Insurance Agencies' Commissions Have Outpaced the Insurance Industry's
Expenses, as Measured by Growth in Wages:
Insurance agents' responsibilities can include (1) adequately informing
farmers about applicable crop insurance policy provisions and (2)
accurately preparing and completing the farmer's insurance application,
certification of production history, acreage reports, and other sales-
related documents. Agents also must properly maintain the crop
insurance contract files. While acknowledging that their commissions
have increased, insurance agency officials stated that selling crop
insurance policies generally entails more work for agents and thus
higher expenses than for other lines of property and casualty
insurance, and that those expenses have increased in recent years.
Table 2 provides examples of the expenses that agencies incur in
selling crop insurance.
Table 2: Examples of Insurance Agencies' Crop Insurance Expenses:
Type of expense: Pay and benefits;
Example: Salaries, health insurance, and retirement.
Type of expense: Education/Training;
Example: Training on software and changes in RMA regulations and
requirements.
Type of expense: Rent and equipment;
Example: Office space and vehicles.
Type of expense: Information technology;
Example: Quoting software to help farmers select a crop insurance plan
and coverage level that best meet their needs.
Type of expense: Legal and professional;
Example: Liability insurance (errors and omissions insurance).
Source: GAO.
[End of table]
Much of the insurance agencies' work, according to the agency officials
with whom we spoke, is related to the time required to help farmers
choose the appropriate policy. These officials said agents generally
(1) meet individually with farmers at various times during the year to
update them on policies and compliance requirements, (2) mail farmers
information on deadlines for reporting to the insurance agent on the
number of acres planted and the amount of crop produced, and (3)
provide seminars and annual meetings to help farmers understand the
crop insurance options available to them. According to one insurance
agency official, to service a crop insurance policy, an agent interacts
with a farmer a minimum of six times a year. Another agency official
told us that agents need to meet with the farmers at least four times a
year.
In addition, some of agencies' crop insurance expenses are for services
to farmers that are not described in RMA guidance but that help
insurance agencies compete for farmers' business. Crop insurance agency
officials told us that they compete on the basis of reputation,
personal relationships, and additional services. These officials also
noted that they advise farmers on how to best market their crops and
increasingly provide advanced mapping services to farmers, such as
creating and printing poster-size maps that display farmers' crop areas
to help farmers manage their land. One insurance agency official said
that the information technology needed for such services constituted
the agency's biggest expense outside of payroll.
Although insurance agency officials told us that their crop insurance
expenses are high, the documents they provided did not show that their
sales expenses have increased at the same pace as their commissions.
Because comprehensive information is not available on the expenses of
the thousands of agencies that sell crop insurance, we examined the
extent to which the growth in crop insurance commissions tracked trends
in insurance industry expenses. We used 2000 as the base year in which
crop insurance commissions are presumed to have been more closely
aligned with expenses, before the increase in the A&O allowance. We
then calculated what the commission per policy would have been for 2001
through 2009 if it had increased at the rate of change in insurance
agents' wages. We used the rate of change in insurance agents' wages
because, according to industry officials, wages account for agencies'
largest expense. For this analysis, we used commission data from RMA
and insurance agents' wage data for all lines of insurance from the
Department of Labor's Bureau of Labor Statistics. In view of the 2008
Farm Bill's 2.3 percentage point reduction in A&O allowance rates for
most insurance plans, we assumed that 2009 commission rates would
decline by half of this amount--1.15 percentage points--relative to
2007, the most recent year for which RMA data on actual commission
rates were available.[Footnote 7]
On the basis of these assumptions, we found that the rate of increase
in commission per policy to crop insurance agencies has significantly
outpaced the rate of increase in insurance agents' wages. That is, the
actual commissions increased by an average of about 16 percent per year
from 2000 through 2009, compared with an increase of about 3 percent
per year for commissions assumed to increase at the same rate as
insurance agents' wages. Figure 7 shows these comparisons.
Figure 7: Actual Commission per Policy Compared with Projected
Commission per Policy Adjusted for Insurance Agent Wage Inflation, 2000
through 2009 (dollars per policy):
[Refer to PDF for image: multiple line graph]
Year: 2000;
Commission per policy: $314;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $314.
Year: 2001;
Commission per policy: $359;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $317.
Year: 2002;
Commission per policy: $374;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $351.
Year: 2003;
Commission per policy: $451;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $351.
Year: 2004;
Commission per policy: $505;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $363.
Year: 2005;
Commission per policy: $497;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $371.
Year: 2006;
Commission per policy: $620;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $381.
Commission per policy: $620.
Year: 2007;
Commission per policy: $985;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $382.
Year: 2008[A];
Commission per policy: $1,465;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $393.
Year: 2009[A];
Commission per policy: $1,228;
Projected commission per policy adjusting for insurance agent wage
inflation from 2000 base year: $404.
Source: GAO analysis of Bureau of Labor Statistics data and data that
the insurance companies provided to RMA.
[A] Commission per policy is estimated for 2008 and 2009.
[End of figure]
As figure 7 shows, with 2000 as a base year, if commissions had
increased at the rate of increase in insurance agents' wages, the
commission per policy in 2007 would have been $382, but the actual
commission per policy that insurance companies paid to agencies in 2007
was $985--a difference of $603 per policy. According to our analysis,
in 2007, with about 1.14 million crop insurance policies, actual
commission payments exceeded the adjusted commissions by about $687
million. For 2007 through 2009, estimated commission payments exceed
the adjusted commissions by about $2.87 billion.
Crop insurance industry officials with whom we spoke generally
acknowledged that insurance agencies received higher profits as a
result of increased commissions in 2007 and 2008. While some officials
said agencies' more profitable financial years are balanced by less
profitable years, others said that the method for calculating A&O
allowances needs to be modified to bring it more in-line with
reasonable expenses for delivering the crop insurance program. Finally,
a number of insurance company officials supported limiting commissions,
although they had differing views on the best way to implement such
limits.
Higher Commission Payments for Insurance Agencies Can Create More
Incentive to Use Rebating to Compete for Farmers' Business:
According to RMA and NAIC officials, higher commissions have increased
the incentives for rebating. The RMA officials indicated that as
commissions have increased, the number of anecdotal reports of rebating
has also increased. They also observed that rebating is more prevalent
in states with higher commission rates. A number of insurance agency
officials told us that they lost business to competitors that they
believed engaged in rebating. According to RMA officials, rebating
disrupts the crop insurance market and discriminates against farmers
who purchase smaller policies. State insurance regulators also consider
rebating unfair to policyholders because it results in pricing based on
the policyholder's relationship to an agent, rather than on risk.
RMA has determined that the incidence of illegal rebating of crop
insurance premiums has grown in recent years. To combat rebating, RMA
and NAIC have sought to improve communication and coordination between
RMA and states on complaints, ongoing investigations, data analyses,
and enforcement. In December 2007, RMA issued a bulletin directing crop
insurance companies to notify agencies that state regulators and RMA
were aware that rebating schemes were proliferating and that RMA and
states would work cooperatively to discover and eliminate such schemes.
In addition, in July 2008, RMA issued guidance on a 2008 Farm Bill
provision that bars compensation to an individual for selling or
servicing crop insurance if two conditions are met. Compensation is not
allowed, either directly, or indirectly through an entity, if (1) the
individual or a member of the individual's family has a substantial
beneficial interest in the policy or plan of insurance and (2) total
compensation from that policy or plan exceeds 30 percent or the
percentage specified in state law, whichever is less, of the total of
all compensation the individual receives directly or indirectly for
selling or servicing crop insurance. RMA and NAIC officials told us
that enforcing antirebating laws is difficult because rebating is only
uncovered when complaints are made, but these officials believe that
their recent actions will reduce the potential use of this practice.
Conclusions:
Federal crop insurance plays an important role in protecting farmers
from losses due to natural disasters, and the private insurance
companies that participate in the program are integral to its success.
Nevertheless, in view of increasing pressure to reduce federal budget
deficits, A&O allowances present an opportunity to reduce government
spending without compromising the crop insurance program's safety net
for farmers.
Because A&O allowances are linked to crop prices, the A&O calculation
method and higher crop prices have significantly increased A&O
allowances, and companies--competing for underwriting gains--have
passed a larger proportion of this allowance to insurance agencies,
especially in the Corn Belt. As a result, many insurance agencies have
experienced a kind of windfall. Although the 2008 Farm Bill reduces A&O
allowance rates, these allowances, as well as commissions for 2009, are
still likely to be well above the levels that occurred before crop
prices increased in recent years. In addition, because crop prices have
become increasingly volatile, the allowances are subject to large
declines, which could make it more difficult for insurance companies
and agencies to budget and operate effectively.
A&O allowances can better reflect reasonable business expenses,
adjusted for costs in different regions of the country. Linking A&O
allowances to reasonable expenses would also help stabilize the
allowances that insurance companies receive. Furthermore, the 2008 Farm
Bill directs RMA to consider alternative methods to determine the A&O
allowance rate that would also provide savings for taxpayers. This
effort could be more effective if RMA were to collect information on
the commissions that companies have paid to individual agencies, as
well as the individual agencies' expenses. This information would
enable RMA to appropriately modify the A&O calculation method and
monitor whether this revised method produces sufficient allowances to
cover reasonable expenses.
Finally, many companies reported expenses to RMA that were not clearly
related to selling and servicing crop insurance policies. Such
reporting is due, at least in part, to inadequate guidance. Improved
guidance would enable RMA to accurately track the insurance companies'
crop insurance delivery expenses.
Recommendations for Executive Action:
To better ensure that the A&O allowances provided to the crop insurance
industry are sufficient for program delivery, but not excessive, we
recommend that the Secretary of Agriculture direct the Administrator of
the Risk Management Agency to develop a new methodology for calculating
the A&O allowance so that it is more closely aligned with expenses, in
terms of dollars per policy, as was the allowance in place before 2006,
when crop prices increased sharply. SRA renegotiations should achieve
this goal. Once this alignment is completed, the Administrator should
minimize annual fluctuations in A&O allowances that are unrelated to
business expenses, while recognizing variations in delivery expenses
across regions of the country.
To assist in maintaining the relationship between A&O allowances and
reasonable business expenses, we further recommend that the Secretary
of Agriculture direct the Administrator of the Risk Management Agency
to require that companies annually report the commissions they paid to
insurance agencies, by policy, to the Risk Management Agency. The
agency should also conduct a study of the costs associated with selling
and servicing crop insurance policies to establish a standard method
for assessing agencies' reasonable costs in selling and servicing
policies.
Finally, to accurately track the insurance companies' expenses for
delivering crop insurance, we recommend that the Secretary of
Agriculture direct the Administrator of the Risk Management Agency to
clarify the current guidance on reporting these expenses and specify
what expenses are permitted.
Agency Comments and Our Evaluation:
We provided the Risk Management Agency with a draft of this report for
review and comment. RMA agreed with our findings and two of our three
recommendations. RMA did not agree with our recommendation that it
require companies to annually report the commissions they paid to
insurance agencies by policy. RMA expressed concern that collecting
commission data by policy would significantly increase its
administrative burden and that of insurance companies because some of
the compensation that companies pay to agencies is not usually paid by
policy. However, we believe that gathering and reporting data by policy
need not significantly increase the "administrative burden" that RMA
described. First, RMA, which currently collects commission data
aggregated at the state level, could require that companies report two
additional data fields in the policy records they currently submit to
RMA--commission and other compensation. These records can already
contain over 300 such data fields. Once these changes are implemented,
the recurring costs should be minimal. In conjunction with these
changes, RMA could develop and provide allocation guidance to prorate
compensation that is not provided on a per-policy basis so that this
compensation could be apportioned to individual policies. Second,
providing policy-level data would eliminate the need for companies to
provide data aggregated at the state level, which could offset the
additional burden that RMA believes would result.
RMA also stated that more detailed commission data may not be valuable
in identifying true program delivery costs or in improving the A&O
reimbursement structure. Although we agree that commission data are not
an accurate reflection of true program delivery costs, we believe such
data would be valuable in improving the methodology that RMA uses to
calculate A&O allowances. Tracking commissions by state, as RMA does
currently, does not provide RMA with sufficient detail to take into
account differences among agencies, such as location and size. For
example, more detailed commission data may enable analysis showing that
agencies that do business primarily in a part of the state with
historically high underwriting gains received higher commission rates
than agencies that do business in a part of the state with lower
underwriting gains. This kind of information could enable RMA to better
anticipate the effects of adjustments in A&O allowances on agencies.
Finally, given the magnitude of commission payments--an estimated $1.7
billion in 2008--additional reporting would result in analyses that
would strengthen transparency and accountability in the use of taxpayer
funds.
We also added examples to this report to elaborate on the justification
that we provided in our draft report to RMA for this recommendation.
RMA also provided technical corrections that we incorporated into this
report as appropriate. RMA's written comments and our responses are
presented in appendix III.
As arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report until
30 days from its issue date. At that time, we will send copies of this
report to appropriate congressional committees; the Secretary of
Agriculture; the Director, Office of Management and Budget; and other
interested parties. In addition, this report will be available at no
charge on GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact Lisa Shames at (202) 512-2649 or shamesl@gao.gov or Susan
Offutt at (202) 512-3763 or offutts@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix IV.
Signed by:
Lisa Shames:
Director, Natural Resources and Environment:
Signed by:
Susan Offutt:
Chief Economist:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
We were asked to examine (1) the reasons for the substantial increases
in administrative and operating (A&O) allowances in recent years, and
the purposes for which insurance companies use these allowances, and
(2) insurance agencies' expenses for selling federal crop insurance
policies, and questionable practices, if any, that agencies use to
compete for business among farmers.
To examine the reasons for the substantial increases in A&O allowances
in recent years, and the purposes for which insurance companies use
these allowances, we interviewed U.S. Department of Agriculture (USDA)
officials from the Risk Management Agency (RMA) and officials from each
of the 16 insurance companies that participate in the federal crop
insurance program. In addition, we reviewed and analyzed RMA and
company data concerning companies' uses of the allowances from 2000
through 2007. The sources of these data included expense reports that
the 16 companies submitted to RMA listing the amounts that they charge
to various expense categories. We also reviewed reports that the
companies submitted to RMA listing the amount of commission and the
commission rate paid to insurance agencies by state during 2006 and
2007. For the purpose of this report, commissions include profit-
sharing bonuses that an insurance company pays to an insurance agency
on the basis of profits for a given year and transfer bonuses that a
company pays to an agency that transfers its business to the company.
In addition, we analyzed data from RMA's Summary of Business and
reviewed RMA's analysis of companies' financial data.
For our analysis of company data, we used both data reported directly
to RMA as well as data from company expense reports. RMA data on
premiums were complete for all years. Company expense report data on
both premiums and commissions were complete for 2006 and 2007, but were
only partially complete for the other years (85 percent complete for
2000, 89 percent complete for 2001, 70 percent complete for 2002, 71
percent complete for 2003, 85 percent complete for 2004, and 89 percent
complete for 2005). Data were missing largely because of changes in
company structure, such as mergers, acquisitions, and companies' going
out of business. We took the following steps to correct for the missing
data to avoid overstating any change over time (since data were more
often missing in earlier years). We assumed the data on commissions, as
reported in company expense reports, were missing to the same extent as
the data on premiums reported in the same place. We therefore adjusted
the data on total commissions paid, by year, by the same fraction
necessary to adjust the premiums reported on the company expense
reports to bring it up to the amount of premiums reported to RMA, which
we knew to be the more reliable number.
We also reviewed examples of companies' contracts with insurance
agencies. We selected these contracts on the basis of the volume of
business between the insurance company and the agency and, when
possible, regional diversity. Furthermore, we reviewed RMA's reporting
guidelines for crop insurance companies and discussed these guidelines
with company officials. In addition, we interviewed National
Association of Insurance Commissioners (NAIC) officials to better
understand allowable expenses.
To examine insurance agencies' expenses for selling federal crop
insurance policies and questionable practices, if any, that agencies
use to compete for business from farmers, we interviewed officials of
eight insurance agencies and reviewed documents that some of these
officials provided, including their income statements. We based our
selection of insurance agencies on premium volume, regional location,
crop type, and proximity to crop insurance companies. We examined the
extent to which the growth in crop insurance commissions tracked trends
in insurance industry expenses. We used 2000 as the base year in which
crop insurance commissions are presumed to have been more closely
aligned with expenses, before the increase in the A&O allowance. We
then calculated what the commission per policy would have been for 2001
through 2009 if it had increased at the rate of change in insurance
agents' wages. We used the rate of change in insurance agents' wages
because, according to industry officials, wages account for agencies'
largest expense. For this analysis, we used commission data from RMA
and insurance agents' wage data for all lines of insurance from the
Department of Labor's Bureau of Labor Statistics. In view of the Food,
Conservation, and Energy Act of 2008's 2.3 percentage point reduction
in A&O allowance rates for most insurance policies, we assumed that
2009 commission rates would decline by half of this amount--1.15
percentage points--relative to 2007, the most recent year for which RMA
data on actual commission rates were available. We then calculated what
the commission per policy would have been for 2001 through 2009 if it
had increased at the rate of change in insurance agents' wages. We also
interviewed officials from trade associations representing insurance
agents. In addition, we interviewed officials from RMA and NAIC and
discussed with RMA its investigations of questionable competitive
practices.
In addressing the objectives, we also reviewed prior GAO work and
additional relevant academic studies assessing the federal crop
insurance program. Furthermore, we reviewed analyses of premium
reduction plans as well as the Federal Register listing and associated
comments regarding these plans. We did not independently verify the
Bureau of Labor Statistics, RMA, and company data, but we discussed
with agency and company officials, as appropriate, the measures they
take to ensure the accuracy of these data. For the purposes for which
these data were used in this report, these measures seemed reasonable.
We conducted this performance audit from January 2008 through April
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Commissions, Percentage Change in Commission per Policy,
and Underwriting Gains or Losses:
State: Illinois;
Commissions[A]: Year: 2006: $78,412,807;
Commissions[A]: Year: 2007: $119,829,350;
Commissions[A]: Change: $41,416,542;
Percentage Change in Commission per policy: 61.2%;
Underwriting gains or losses 2000 through 2007: $1,440,877,198.
State: Iowa;
Commissions[A]: Year: 2006: $63,736,297;
Commissions[A]: Year: 2007: $127,604,411;
Commissions[A]: Change: $63,868,114;
Percentage Change in Commission per policy: 106.6;
Underwriting gains or losses 2000 through 2007: $1,680,044,379.
State: Minnesota;
Commissions[A]: Year: 2006: $55,246,417;
Commissions[A]: Year: 2007: $105,270,295;
Commissions[A]: Change: $50,023,877;
Percentage Change in Commission per policy: 92.9;
Underwriting gains or losses 2000 through 2007: $982,031,875.
State: North Dakota;
Commissions[A]: Year: 2006: $54,469,829;
Commissions[A]: Year: 2007: $83,846,615;
Commissions[A]: Change: $29,376,786;
Percentage Change in Commission per policy: 56.5;
Underwriting gains or losses 2000 through 2007: $11,015,469.
State: Nebraska;
Commissions[A]: Year: 2006: $51,187,444;
Commissions[A]: Year: 2007: $95,367,265;
Commissions[A]: Change: $44,179,821;
Percentage Change in Commission per policy: 93.6;
Underwriting gains or losses 2000 through 2007: $757,012,039.
State: Texas;
Commissions[A]: Year: 2006: $49,519,189;
Commissions[A]: Year: 2007: $60,393,008;
Commissions[A]: Change: $10,873,819;
Percentage Change in Commission per policy: 9.8;
Underwriting gains or losses 2000 through 2007: ($216,112,758).
State: South Dakota;
Commissions[A]: Year: 2006: $42,668,604;
Commissions[A]: Year: 2007: $74,586,111;
Commissions[A]: Change: $31,917,506;
Percentage Change in Commission per policy: 76.7;
Underwriting gains or losses 2000 through 2007: ($36,492,553).
State: Kansas;
Commissions[A]: Year: 2006: $39,891,250;
Commissions[A]: Year: 2007: $68,827,161;
Commissions[A]: Change: $28,935,911;
Percentage Change in Commission per policy: 76.6;
Underwriting gains or losses 2000 through 2007: ($289,751,007).
State: Indiana;
Commissions[A]: Year: 2006: $33,780,007;
Commissions[A]: Year: 2007: $58,304,916;
Commissions[A]: Change: $24,524,908;
Percentage Change in Commission per policy: 76.2;
Underwriting gains or losses 2000 through 2007: $659,564,954.
State: California;
Commissions[A]: Year: 2006: $26,778,219;
Commissions[A]: Year: 2007: $30,044,334;
Commissions[A]: Change: $3,266,116;
Percentage Change in Commission per policy: 13.5;
Underwriting gains or losses 2000 through 2007: $498,321,632.
State: Florida;
Commissions[A]: Year: 2006: $21,385,507;
Commissions[A]: Year: 2007: $19,295,620;
Commissions[A]: Change: ($2,089,887);
Percentage Change in Commission per policy: (1.7);
Underwriting gains or losses 2000 through 2007: ($212,135,483).
State: Ohio;
Commissions[A]: Year: 2006: $21,121,885;
Commissions[A]: Year: 2007: v34,418,894;
Commissions[A]: Change: $13,297,008;
Percentage Change in Commission per policy: 63.5;
Underwriting gains or losses 2000 through 2007: $262,618,216.
State: Missouri;
Commissions[A]: Year: 2006: $20,461,507;
Commissions[A]: Year: 2007: $33,626,430;
Commissions[A]: Change: $13,164,923;
Percentage Change in Commission per policy: 63.1;
Underwriting gains or losses 2000 through 2007: $400,298,610.
State: Wisconsin;
Commissions[A]: Year: 2006: $16,912,717;
Commissions[A]: Year: 2007: $27,967,272;
Commissions[A]: Change: $11,054,555;
Percentage Change in Commission per policy: 69.3;
Underwriting gains or losses 2000 through 2007: $51,497,302.
State: Colorado;
Commissions[A]: Year: 2006: $13,261,396;
Commissions[A]: Year: 2007: $20,134,952;
Commissions[A]: Change: $6,873,555;
Percentage Change in Commission per policy: 47.7;
Underwriting gains or losses 2000 through 2007: ($163,381,278).
State: Montana;
Commissions[A]: Year: 2006: $12,269,982;
Commissions[A]: Year: 2007: $16,088,903;
Commissions[A]: Change: $3,818,921;
Percentage Change in Commission per policy: 34.9;
Underwriting gains or losses 2000 through 2007: ($163,126,743).
State: Georgia;
Commissions[A]: Year: 2006: $12,184,145;
Commissions[A]: Year: 2007: $12,398,701;
Commissions[A]: Change: $214,556;
Percentage Change in Commission per policy: (4.0);
Underwriting gains or losses 2000 through 2007: ($38,377,197).
State: Michigan;
Commissions[A]: Year: 2006: $12,049,758;
Commissions[A]: Year: 2007: $19,751,624;
Commissions[A]: Change: $7,701,866;
Percentage Change in Commission per policy: 67.7;
Underwriting gains or losses 2000 through 2007: $140,498,209.
State: North Carolina;
Commissions[A]: Year: 2006: $11,588,482;
Commissions[A]: Year: 2007: $15,484,827;
Commissions[A]: Change: $3,896,345;
Percentage Change in Commission per policy: 31.6;
Underwriting gains or losses 2000 through 2007: ($146,898,874).
State: Oklahoma;
Commissions[A]: Year: 2006: $8,053,897;
Commissions[A]: Year: 2007: $12,154,386;
Commissions[A]: Change: $4,100,489;
Percentage Change in Commission per policy: 47.7;
Underwriting gains or losses 2000 through 2007: ($144,451,805).
State: Washington;
Commissions[A]: Year: 2006: $6,917,606;
Commissions[A]: Year: 2007: $8,309,144;
Commissions[A]: Change: $1,391,538;
Percentage Change in Commission per policy: 24.1;
Underwriting gains or losses 2000 through 2007: $104,710,814.
State: Arkansas;
Commissions[A]: Year: 2006: $6,693,417;
Commissions[A]: Year: 2007: $8,660,735;
Commissions[A]: Change: $1,967,318;
Percentage Change in Commission per policy: 16.3;
Underwriting gains or losses 2000 through 2007: $131,815,766.
State: Mississippi;
Commissions[A]: Year: 2006: $6,238,658;
Commissions[A]: Year: 2007: $8,675,622;
Commissions[A]: Change: $2,436,964;
Percentage Change in Commission per policy: 20.3;
Underwriting gains or losses 2000 through 2007: ($42,324,473).
State: Kentucky;
Commissions[A]: Year: 2006: $5,937,255;
Commissions[A]: Year: 2007: $9,887,195;
Commissions[A]: Change: $3,949,941;
Percentage Change in Commission per policy: 61.5;
Underwriting gains or losses 2000 through 2007: $29,311,314.
State: Idaho;
Commissions[A]: Year: 2006: $5,840,670;
Commissions[A]: Year: 2007: $6,668,574;
Commissions[A]: Change: $827,904;
Percentage Change in Commission per policy: 9.4;
Underwriting gains or losses 2000 through 2007: $97,428,583.
State: Louisiana;
Commissions[A]: Year: 2006: $5,421,460;
Commissions[A]: Year: 2007: $7,982,734;
Commissions[A]: Change: $2,561,274;
Percentage Change in Commission per policy: 39.8;
Underwriting gains or losses 2000 through 2007: $37,685,157.
State: Alabama;
Commissions[A]: Year: 2006: $4,624,019;
Commissions[A]: Year: 2007: $5,054,420;
Commissions[A]: Change: $430,402;
Percentage Change in Commission per policy: 5.9;
Underwriting gains or losses 2000 through 2007: ($66,285,056).
State: Tennessee;
Commissions[A]: Year: 2006: $4,605,565;
Commissions[A]: Year: 2007: $6,541,555;
Commissions[A]: Change: $1,935,991;
Percentage Change in Commission per policy: 33.4;
Underwriting gains or losses 2000 through 2007: ($3,110,142).
State: Pennsylvania;
Commissions[A]: Year: 2006: $4,054,763;
Commissions[A]: Year: 2007: $5,984,085;
Commissions[A]: Change: $1,929,322;
Percentage Change in Commission per policy: 57.5;
Underwriting gains or losses 2000 through 2007: $25,969,560.
State: South Carolina;
Commissions[A]: Year: 2006: $4,008,829;
Commissions[A]: Year: 2007: $5,017,032;
Commissions[A]: Change: $1,008,203;
Percentage Change in Commission per policy: 23.2;
Underwriting gains or losses 2000 through 2007: ($42,446,340).
State: Virginia;
Commissions[A]: Year: 2006: $3,370,504;
Commissions[A]: Year: 2007: $5,139,069;
Commissions[A]: Change: $1,768,565;
Percentage Change in Commission per policy: 50.8;
Underwriting gains or losses 2000 through 2007: ($22,158,038).
State: Oregon;
Commissions[A]: Year: 2006: $2,428,333;
Commissions[A]: Year: 2007: $2,804,002;
Commissions[A]: Change: $375,668;
Percentage Change in Commission per policy: 16.7;
Underwriting gains or losses 2000 through 2007: ($85,129,309).
State: New York;
Commissions[A]: Year: 2006: $2,315,523;
Commissions[A]: Year: 2007: $2,990,658;
Commissions[A]: Change: $675,135;
Percentage Change in Commission per policy: 34.4;
Underwriting gains or losses 2000 through 2007: ($2,260,430).
State: Maryland;
Commissions[A]: Year: 2006: $2,205,660;
Commissions[A]: Year: 2007: $3,253,648;
Commissions[A]: Change: $1,047,988;
Percentage Change in Commission per policy: 51.1;
Underwriting gains or losses 2000 through 2007: $21,445,930.
State: New Mexico;
Commissions[A]: Year: 2006: $1,391,397;
Commissions[A]: Year: 2007: $1,755,658;
Commissions[A]: Change: $364,261;
Percentage Change in Commission per policy: 28.0;
Underwriting gains or losses 2000 through 2007: $16,163,333.
State: Arizona;
Commissions[A]: Year: 2006: $1,221,424;
Commissions[A]: Year: 2007: $1,055,695;
Commissions[A]: Change: ($165,729);
Percentage Change in Commission per policy: (5.0);
Underwriting gains or losses 2000 through 2007: ($6,313,709).
State: Wyoming;
Commissions[A]: Year: 2006: $903,310;
Commissions[A]: Year: 2007: $1,675,054;
Commissions[A]: Change: $771,744;
Percentage Change in Commission per policy: 90.2;
Underwriting gains or losses 2000 through 2007: ($39,087,279).
State: Delaware;
Commissions[A]: Year: 2006: $771,875;
Commissions[A]: Year: 2007: $1,282,352;
Commissions[A]: Change: $510,478;
Percentage Change in Commission per policy: 63.9;
Underwriting gains or losses 2000 through 2007: ($876,791).
State: Maine;
Commissions[A]: Year: 2006: $649,107;
Commissions[A]: Year: 2007: $700,797;
Commissions[A]: Change: $51,690;
Percentage Change in Commission per policy: 13.8;
Underwriting gains or losses 2000 through 2007: $3,304,735.
State: Connecticut;
Commissions[A]: Year: 2006: $427,090;
Commissions[A]: Year: 2007: $549,218;
Commissions[A]: Change: $122,127;
Percentage Change in Commission per policy: 32.9;
Underwriting gains or losses 2000 through 2007: ($9,580,108).
State: New Jersey;
Commissions[A]: Year: 2006: $331,242;
Commissions[A]: Year: 2007: $571,616;
Commissions[A]: Change: $240,374;
Percentage Change in Commission per policy: 76.7;
Underwriting gains or losses 2000 through 2007: $13,121,040.
State: Massachusetts;
Commissions[A]: Year: 2006: $280,498;
Commissions[A]: Year: 2007: $378,626;
Commissions[A]: Change: $98,128;
Percentage Change in Commission per policy: 41.5;
Underwriting gains or losses 2000 through 2007: ($12,479,868).
State: Utah;
Commissions[A]: Year: 2006: $234,411;
Commissions[A]: Year: 2007: $257,585;
Commissions[A]: Change: $23,174;
Percentage Change in Commission per policy: 26.9;
Underwriting gains or losses 2000 through 2007: ($4,473,986).
State: Hawaii;
Commissions[A]: Year: 2006: $183,442;
Commissions[A]: Year: 2007: $340,909;
Commissions[A]: Change: $157,467;
Percentage Change in Commission per policy: 42.4;
Underwriting gains or losses 2000 through 2007: $4,451,873.
State: West Virginia;
Commissions[A]: Year: 2006: $164,075;
Commissions[A]: Year: 2007: $236,474;
Commissions[A]: Change: $72,399;
Percentage Change in Commission per policy: 52.2;
Underwriting gains or losses 2000 through 2007: $727,834.
State: Vermont;
Commissions[A]: Year: 2006: $115,109;
Commissions[A]: Year: 2007: $198,056;
Commissions[A]: Change: $82,947;
Percentage Change in Commission per policy: 83.6;
Underwriting gains or losses 2000 through 2007: ($1,309,708).
State: Nevada;
Commissions[A]: Year: 2006: $109,527;
Commissions[A]: Year: 2007: $92,555;
Commissions[A]: Change: ($16,972);
Percentage Change in Commission per policy: (4.4);
Underwriting gains or losses 2000 through 2007: ($5,231,273).
State: New Hampshire;
Commissions[A]: Year: 2006: $41,727;
Commissions[A]: Year: 2007: $52,269;
Commissions[A]: Change: $10,541;
Percentage Change in Commission per policy: 35.8;
Underwriting gains or losses 2000 through 2007: $287,382.
State: Rhode Island;
Commissions[A]: Year: 2006: $7,797;
Commissions[A]: Year: 2007: $11,562;
Commissions[A]: Change: $3,765;
Percentage Change in Commission per policy: 71.5;
Underwriting gains or losses 2000 through 2007: $211,129.
State: Alaska;
Commissions[A]: Year: 2006: $2,803;
Commissions[A]: Year: 2007: $3,080;
Commissions[A]: Change: $276;
Percentage Change in Commission per policy: 19.0;
Underwriting gains or losses 2000 through 2007: 9$44,194).
State: Total;
Commissions[A]: Year: 2006: $716,476,439;
Commissions[A]: Year: 2007: $1,131,525,055;
Commissions[A]: Change: $415,048,616;
Percentage Change in Commission per policy: 59.3%;
Underwriting gains or losses 2000 through 2007: $5,616,575,931.
Source: GAO analysis of the data that the insurance companies provided
to RMA.
Note: Companies report commissions each year by state. Companies also
submit to RMA an expense report, in which total commissions represent
one of several itemized expenses. The total commissions in the two
reports are not equal because RMA guidance stipulates that companies
include commissions based on profit-sharing in the state commission
report but not in the expense report. Therefore, the total commissions
in this table, which are based on the state commission report, are not
equal to the total commissions noted elsewhere in this report.
[A] Commissions are rounded to the nearest dollar.
[End of table]
[End of section]
Appendix III: Comments from the U.S. Department of Agriculture:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
United States Department of Agriculture:
Risk Management Agency:
1400 Independence Avenue, SW:
Stop 0801:
Washington, DC 20250-0806:
April 3, 2009:
Ms. Lisa Shames:
Director, Natural Resources and Environment:
Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Shames:
Thank you for the opportunity to review and provide comments on the
Government Accountability Office's (GAO) draft report on Crop
Insurance: Opportunities Exist to Reduce the Costs of Administering the
Program (GAO-09-445).
The Risk Management Agency (RMA) provides the following response and
comments to the recommendations contained in the draft report:
GAO Recommendation 1: Develop a new methodology for calculating
Administrative and Operating (A&O) subsidy so that it is more closely
aligned with actual delivery expenses in terms of dollars per policy.
Once this alignment is completed, RMA should minimize annual
fluctuations in A&O allowances that are unrelated to business expenses
while recognizing variations in delivery expenses across regions of the
country.
RMA Response: RMA has considered the GAO recommendations regarding the
alignment of A&O subsidy with actual delivery expenses, and considers
the recommendations generally consistent with the direction and
guidance provided within the 2008 Farm Bill. As part of the next
renegotiation with the private insurance companies, RMA will be
evaluating potential alternative A&O calculation methodologies for
establishing an appropriate reimbursement for services performed.
GAO Recommendation 2: Require that companies annually report to RMA the
commissions they paid to insurance agencies, by policy.
RMA Response: RMA has two major concerns with the recommendation that
the companies annually report commissions they pay to insurance
agencies by policy. First, companies often pay insurance agencies'
commissions or other compensation on a basis other than by policy.
Compensation is sometimes paid when an agency transfers a book of
business to the company, reaches aggregate premium volume thresholds,
achieves overall success in meeting reporting deadlines, or meets
policy retention goals, as just a few examples. Meeting the
recommendation for reporting by policy would require the companies or
RMA to devise an allocation system for commissions that are not usually
paid on a per policy basis. Consequently, gathering and reporting this
data by policy would represent a significant administrative burden both
for the companies and RMA. [See comment 1]
Second, it is not clear that such detailed data would be valuable in
attempting to identify true program delivery costs or in devising a
better A&O reimbursement structure. Since 2005, RMA has collected
information on the amount each company spends for agent compensation in
each state. This information, along with informed estimates of true
delivery costs, or the results of the study recommended by GAO, can
form the basis for aligning the A&O reimbursement structure more
closely to actual delivery costs. It is unclear how access to policy-
level data on company compensation payments would add significantly to
this effort. [See comment 2]
During the exit conference, RMA raised this issue. Neither in the
conference nor in the draft report does GAO explain or provide examples
of how such detailed information would contribute significantly to the
objective of aligning the A&O reimbursement with true delivery costs.
Consequently, until more explanation and rationale are given, RMA is
not inclined to agree to this recommendation. [See comments 3 and 4]
GAO Recommendation 3: Conduct a study of the costs associated with
selling and servicing crop insurance policies to establish a standard
method for assessing agencies' reasonable costs in selling and
servicing policies.
RMA Response: RMA agrees that a study of the costs associated with
selling and servicing crop insurance policies can be useful in
evaluating commission expenses paid by insurance companies and in
establishing an appropriate rate of reimbursement. RMA will pursue
initiating a study contingent on the availability of funds.
GAO Recommendation 4: Clarify the current guidance on expense reporting
and specify what expenses are permitted.
RMA Response: RMA agrees to clarify the expense reporting guidance for
the 2011 reinsurance year.
RMA appreciates the opportunity to work with your staff during the
course of this audit. Should you have any questions regarding this
response, please contact Michael Hand, RMA Deputy Administrator for
Compliance/Audit Liaison Officer at 202-720-0642.
Sincerely,
Signed by:
William J. Murphy:
Acting Administrator:
Following are GAO's comments on the Risk Management Agency's letter
dated April 3, 2009.
GAO Comments:
1. We do not agree that gathering and reporting data on commissions
paid to insurance agencies by policy would significantly increase the
"administrative burden" on RMA and insurance companies. First, RMA,
which currently collects commission data aggregated at the state level,
could require that companies report two additional data fields in the
policy records they currently submit to RMA--commissions and other
compensation. These records can already contain over 300 such data
fields. Once these changes are implemented, the recurring costs should
be minimal. In conjunction with these changes, RMA could develop and
provide allocation guidance to prorate compensation that is not
provided on a per-policy basis so that this compensation could be
apportioned to individual policies. Second, providing policy-level data
would eliminate the need for companies to provide data aggregated at
the state level, which could offset the additional burden that RMA
believes would result. Furthermore, given the magnitude of commission
payments--an estimated $1.7 billion in 2008--additional reporting would
result in analyses that would strengthen transparency and
accountability in the use of taxpayer funds.
2. We disagree with RMA's statement that more detailed commission data
may not be valuable. With data on commissions paid to insurance
agencies by policy, RMA would be better able to establish whether the
compensation paid to agencies is appropriate in relationship to the
agencies' costs of selling and servicing crop insurance. Tracking
commissions by state, as RMA does currently, does not provide RMA with
sufficient detail to take into account differences among agencies, such
as location and size.
3. We disagree with RMA's assertion that we did not adequately justify
this recommendation in the draft provided to RMA. We noted the
following in the draft:
* RMA does not know how much an individual company spends on
commissions to each of the agencies with which it does business.
* Information by state does not provide sufficient detail on commission
expenses. RMA would be better able to set the A&O allowance rate when
it negotiates the standard reinsurance agreement (SRA) with insurance
companies if it had more detailed information on commissions provided
to individual agencies.
* With information on agencies' commissions, as well their costs, RMA
could assess whether the A&O allowances are reasonable for program
delivery but not excessive, and adjust allowances as needed.
Nonetheless, we have provided additional examples in the report to make
our explanation more explicit.
4. During the exit conference with RMA officials, we explained, as we
had in the draft report, that information at the policy level would
inform RMA of the amounts that companies pay agencies for selling and
servicing policies and thus would improve RMA's position in
renegotiating the SRA. An RMA official told us that RMA knew from
commission data currently collected at the state level that agencies in
a given state earn commissions that are higher on average than those in
other states. We responded, however, that RMA cannot determine, solely
on the basis of state-level data, whether commissions vary across
agencies within a state.
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Lisa Shames, (202) 512-2649 or shamesl@gao.gov Susan Offutt, (202) 512-
3763 or offutts@gao.gov:
Staff Acknowledgments:
In addition to the individuals named above, Thomas M. Cook, Assistant
Director; Alisa Beyninson; Kevin S. Bray; Gary T. Brown; Barbara J. El-
Osta; James R. Jones, Jr.; Anne Rhodes-Kline; Benjamin Shouse; Carol
Herrnstadt Shulman; Nathaniel Taylor; and Marie Webb made key
contributions to this report. Also contributing to this report were
Carl Barden, Kim M. Raheb, and Jeremy Sebest.
[End of section]
Related GAO Products:
Crop Insurance: Continuing Efforts Are Needed to Improve Program
Integrity and Ensure Program Costs Are Reasonable. [hyperlink,
http://www.gao.gov/products/GAO-07-944T]. Washington, D.C.: June 7,
2007.
Crop Insurance: Continuing Efforts Are Needed to Improve Program
Integrity and Ensure Program Costs Are Reasonable. [hyperlink,
http://www.gao.gov/products/GAO-07-819T]. Washington, D.C.: May 3,
2007.
Crop Insurance: More Needs To Be Done to Reduce Program's Vulnerability
to Fraud, Waste, and Abuse. [hyperlink,
http://www.gao.gov/products/GAO-06-878T]. Washington, D.C.: June 15,
2006.
Crop Insurance: Actions Needed to Reduce Program's Vulnerability to
Fraud, Waste, and Abuse. [hyperlink,
http://www.gao.gov/products/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. [hyperlink,
http://www.gao.gov/products/GAO-04-517]. Washington, D.C.: June 1,
2004.
Department of Agriculture: Status of Efforts to Address Major Financial
Management Challenges. [hyperlink,
http://www.gao.gov/products/GAO-03-871T]. Washington, D.C.: June 10,
2003.
Crop Insurance: USDA Needs a Better Estimate of Improper Payments to
Strengthen Controls Over Claims. [hyperlink,
http://www.gao.gov/products/GAO/RCED-99-266]. Washington, D.C.:
September 22, 1999.
Crop Insurance: Increases in Insured Crop Prices and Premium Rates
Raise the Administrative Expense Reimbursement Paid to Companies.
[hyperlink, http://www.gao.gov/products/GAO/RCED-98-115R]. Washington,
D.C.: March 20, 1998.
Crop Insurance: Opportunities Exist to Reduce Government Costs for
Private-Sector Delivery. [hyperlink,
http://www.gao.gov/products/GAO/RCED-97-70]. Washington, D.C.: April
17, 1997.
Footnotes:
[1] GAO, Crop Insurance: Continuing Efforts Are Needed to Improve
Program Integrity and Ensure Program Costs Are Reasonable, [hyperlink,
http://www.gao.gov/products/GAO-07-944T] (Washington, D.C.: June 7,
2007); and Crop Insurance: Continuing Efforts Are Needed to Improve
Program Integrity and Ensure Program Costs Are Reasonable, [hyperlink,
http://www.gao.gov/products/GAO-07-819T] (Washington, D.C.: May 3,
2007).
[2] GAO, Suggested Areas for Oversight for the 110th Congress,
[hyperlink, http://www.gao.gov/products/GAO-07-235R] (Washington, D.C.:
Nov. 17, 2006).
[3] GAO, Crop Insurance: Opportunities Exist to Reduce Government Costs
for Private-Sector Delivery, [hyperlink,
http://www.gao.gov/products/GAO/RCED-97-70] (Washington, D.C.: Apr. 17,
1997).
[4] USDA, Office of the Chief Economist and World Agricultural Outlook
Board, USDA Agricultural Long-Term Projections to 2018 (Washington,
D.C.: February 2009).
[5] The cost of crop insurance to taxpayers is equal to A&O allowances,
plus underwriting gains paid to companies, plus claims paid to farmers,
minus the premiums that farmers pay.
[6] Specifically, crop insurance "units"--the individual farms that may
be covered under a single policy--drive the companies' workload. The
number of units covered has remained relatively stable since 2000.
[7] Company officials told us that although they could not predict the
commission rate for 2009, they did not expect that it would decline by
the full 2.3 percentage points.
[End of section]
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