Between 1995 and 1998, USDA paid participating insurance companies about $1.7 billion in administrative expense reimbursements. Changes in Premium Rates for Traditional Crop Insurance Have Improved the Program’s Actuarial Condition, but Some Rates Remain Too Low

In 1995, we reported that for the six crops we reviewed—barley, corn, cotton, grain sorghum, soybeans, and wheat—basic premium rates overall were 89 percent adequate, on average, to meet the Congress’s legislative requirement of actuarial soundness. However, we found that while overall premiums were approaching actuarial soundness, USDA’s rates for some crops and locations and for some coverage and production levels were too low. These actions have contributed to the federal crop insurance program’s achieving a loss ratio well below the target in recent years, thereby improving the program’s financial soundness. Opportunities to Reduce Government Costs for Private Sector Delivery

In 1997, we reported that USDA’s administrative expense reimbursements to participating insurance companies selling traditional buyup insurance—31 percent of premiums—were much higher than the expenses that can be reasonably associated with the sale and service of federal crop insurance. Additionally, about $43 million of the companies’ reported expenses could not be reasonably associated with the sale and service of federal crop insurance to farmers. Subsequent to our report, the Agricultural Research, Extension, and Education Reform Act of 1998 revised reimbursement rates downward to 24.5 percent of premiums for traditional buyup insurance. Problems With USDA-Supported Revenue Insurance Plans Need to Be Addressed

In 1998, we reported shortcomings in the way premium rates are established for each of the three revenue insurance plans we reviewed. As a result of the shortcomings with the revenue insurance plans’ rating methods and to ensure premiums were appropriate to the risk each farmer presents, we recommended that the Secretary of Agriculture direct the Administrator of the Risk Management Agency to address the shortcomings in the methods used to set premiums. With respect to Crop Revenue Coverage, which does not incorporate the interrelationship between crop prices and farm-level yields, we recommended that the Risk Management Agency direct the plan’s developer to base premium rates on a revenue distribution or another appropriate statistical technique that recognizes this interrelationship. While USDA subsequently took action to improve the actuarial soundness of the Revenue Assurance plan, it has not, to date, acted on our recommendations regarding the other two plans. Furthermore, continued oversight of the reasonableness of the program’s administrative reimbursement rate is necessary. Increased program participation and sales volume that could result from crop insurance reform may lead to lower delivery costs, warranting a downward adjustment in the rate.
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed the Department of Agriculture's (USDA) crop insurance program, focusing on whether USDA: (1) has set adequate insurance rates to achieve the legislative requirement of actuarial soundness; (2) appropriately reimburses participating crop insurance companies for their administrative costs; and (3) has established methodologies in the revenue insurance plans that set sound premium rates.

What GAO Found

GAO noted that: (1) several aspects of the program are of concern and need attention; (2) in 1995, GAO reported that premiums charged to farmers for crop insurance were not adequate to achieve the actuarial soundness as mandated by Congress; (3) GAO's review showed that the basic premium rates for the six crops reviewed--barley, corn, cotton, grain sorghum, soybeans, and wheat--were approaching actuarial soundness in 1995, but USDA's rates for some crops and locations and for some coverage and production levels were well below the legislative requirement; (4) in 1997, GAO reported that the government's administrative expense reimbursement to insurance companies--31 percent of premiums--was greater than the companies' reported expenses to sell and service federal crop insurance; (5) furthermore, GAO stated that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance; (6) the Agricultural Research, Extension, and Education Reform Act of 1998 subsequently revised reimbursement rates downward to 24.5 percent of premiums for most crop insurance; (7) however, continued oversight of the reasonableness of the program's administrative reimbursement rate is necessary; (8) increased program participation and sales volume that could result from crop insurance reform may lead to lower delivery costs, warranting a downward adjustment in the rate; (9) in 1998, GAO reported its doubts about whether new USDA-supported revenue insurance plans were actuarially sound over the long term and appropriate to the risk each farmer presents to the program; (10) specifically, with respect to the most popular plan, Crop Revenue Coverage, GAO recommended that USDA's Risk Management Agency require the plan's developer to base premium rates on a revenue distribution or other appropriate statistical technique that recognizes the interrelationship between farm-level yields and expected crop prices; (11) USDA, to date, has not fully acted on the recommendations; (12) this year Congress is once again considering reforms to the federal crop insurance program; and (13) continued oversight of the federal crop insurance program is needed to help ensure, among other things, the adequacy of premium rates, the reasonableness of administrative expense reimbursements to companies, and the soundness of revenue insurance plans.