RMA Has Strengthened Procedures for Preventing Questionable Claims, but the Program Remains Vulnerable to Potential Abuse

RMA has taken a number of steps to improve its procedures to prevent  and detect fraud, waste, and abuse, such as data mining, expanded field  inspections and quality assurance reviews. However, as we testified in 2006, RMA was not effectively using all of the  tools it had available and that some farmers and others continued to abuse  the program, as the following discussion indicates. Inspections during the growing season were not being used to  maximum effect. FSA was not providing RMA with inspection assistance  in accordance with USDA guidance. For example, between 2001 and 2004,  farmers filed claims on about 380,000 policies annually, and RMA’s data  mining identified about 1 percent of these claims as questionable and  needing FSA’s inspection. Under USDA guidance, FSA should have  conducted all of the 11,966 requested inspections, but instead conducted  only 64 percent of them; FSA inspectors said that they did not conduct all  requested inspections primarily because they did not have sufficient  resources. RMA’s data analysis of the largest farming operations was incomplete. Because it did not know the ownership interests in the  largest farming operations, RMA could not readily identify potential fraud. According to our analysis, RMA should be able to recover up to $74 million  in claims payments for 2003. RMA was not effectively overseeing insurance companies’ quality  assurance programs. RMA  agreed with our recommendation to improve oversight of companies’  quality assurance programs, but we have not yet followed up with the  agency to examine its implementation. RMA has infrequently used its new sanction authority to address  program abuses. RMA agreed with our recommendation that it promulgate  regulations to implement its expanded authority, and has developed draft  regulations. RMA’s Regulations and Some Statutory Requirements Hinder Efforts to Reduce Abuse in the Crop Insurance Program

While RMA can improve its day-to-day oversight of the federal crop  insurance program in a number of ways, the program’s design, as laid out  in RMA’s regulations or as required by statute, hinders the agency’s efforts  to administer certain program provisions in order to prevent fraud, waste,  and abuse, as the following discussion indicates. RMA’s regulations allow farmers the option of insuring their fields  individually rather than combined as one unit. Insuring fields separately enables farmers to “switch” production among  fields—reporting production of a crop from one field that is actually  produced on another field—either to make false insurance claims based  on low production or to build up a higher yield history on a particular field  in order to increase that field’s eligibility for higher future insurance  guarantees. Statutorily high premium subsidies may inhibit RMA’s ability to  control program abuse. High premium subsidies shield farmers from the full effect  of paying higher premiums. Since the crop insurance program  was revised under ARPA—that is, from 2002 through 2006—USDA has  paid the insurance companies a total of $2.8 billion in underwriting gains. In terms of profitability, these underwriting gains represent an average  annual rate of return of 17.8 percent over this 5-year period. According to  industry statistics, the benchmark rate of return for U.S. insurance  companies selling private property and casualty insurance was 6.4 percent  during this period. However, they stated  that this program should have a somewhat higher rate of return because of  the (1) high volatility of underwriting gains for this program compared  with the relatively steady gains associated with the property and casualty  insurance industry, and (2) lack of investment opportunities when  participating in the program because premiums are paid to the companies  at harvest, not when farmers purchase a policy. In  2006, USDA paid them underwriting gains of $886 million—a rate of return  of 24.3 percent. From 2002 through 2006,  USDA paid the insurance companies over $4 billion in cost allowances. Specifically, USDA recommends  renegotiating the SRA financial terms and conditions once every 3 years. Congress has an opportunity in its reauthorization of the Farm Bill to  provide USDA with the authority to periodically renegotiate the financial  terms of the SRA with the insurance companies so that the companies’  rate of return is more in line with private insurance markets. Crop Insurance: More Needs to Be Done to Reduce Program’s  Vulnerability to Fraud, Waste, and Abuse. Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to  Fraud, Waste, and Abuse.
Why GAO Did This Study

The U.S. Dept. of Agriculture's (USDA) Risk Management Agency (RMA) administers the federal crop insurance program in partnership with private insurers. In 2006, the program cost $3.5 billion, including millions in losses from fraud, waste, and abuse, according to USDA. The Agricultural Risk Protection Act of 2000 granted RMA authority to renegotiate the terms of RMA's standard reinsurance agreement with companies once over 5 years. This testimony is based on GAO's 2005 report, Crop Insurance: Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and Abuse, as well as new analyses this Committee requested on underwriting gains and administrative and operating expenses USDA paid companies. GAO discusses (1) USDA's processes to address fraud, waste, and abuse; (2) extent the program's design makes it vulnerable to abuse; and (3) reasonableness of underwriting gains and other expenses. USDA agreed with most of GAO's 2005 recommendations to improve program integrity. RMA agreed that GAO's new analyses were technically accurate.

What GAO Found

GAO reported that RMA did not use all available tools to reduce the crop insurance program's vulnerability to fraud, waste, and abuse. RMA has since taken some steps to improve its procedures. In particular, USDA's Farm Service Agency (FSA) inspections during the growing season were not being used to maximum effect. Between 2001 and 2004, FSA conducted only 64 percent of the inspections RMA requested. Without inspections, farmers may falsely claim crop losses. However, FSA said it could not conduct all requested inspections, as GAO recommended, because of insufficient resources. RMA now provides information more frequently so FSA can conduct timelier inspections. RMA's data analysis of the largest farming operations was incomplete. In 2003, about 21,000 of the largest farming operations did not report all of the individuals or entities with an ownership interest in these operations, as required. Therefore, RMA was unaware of ownership interests that could help it prevent potential program abuse. FSA and RMA now share information to identify such individuals or entities. USDA should be able to recover up to $74 million in improper payments made during 2003. RMA was not effectively overseeing insurance companies' efforts to control program abuse. According to GAO's review of 120 cases, companies did not complete all the required quality assurance reviews of claims, and those that were conducted were largely paper exercises. RMA agreed to improve oversight of their reviews, but GAO has not followed up to examine its implementation. RMA's regulations to implement the crop insurance program, as well as some statutory requirements, create design problems that hinder its efforts to reduce abuse. For example, the regulations allow farmers to insure fields individually rather than together. As such, farmers can "switch" reporting of yield among fields to make false claims or build up a higher yield history on a field to increase its eligibility for higher insurance guarantees. RMA did not agree with GAO's recommendation to address the problems associated with insuring individual fields. Statutorily high premium subsidies may also limit RMA's ability to control program abuse: the subsidies shield farmers from the full effect of paying higher premiums associated with frequent claims. From 2002 through 2006, USDA paid the insurance companies underwriting gains of $2.8 billion, which represents an average annual rate of return of 17.8 percent. In contrast, according to insurance industry statistics, the benchmark rate of return for companies selling property and casualty insurance was 6.4 percent. USDA renegotiated the financial terms of its standard reinsurance agreement with the companies in 2005, but their rate of return was 30.1 percent in 2005, and 24.3 percent in 2006. It also paid the companies a cost allowance of $4 billion to cover administrative and operating costs for 2002 through 2006. USDA recommended that Congress provide RMA with authority to renegotiate the financial terms and conditions of its standard reinsurance agreement once every 3 years.