In 1995, crop insurance premiums were about $1.5 billion. FCIC conducts the program primarily through private insurance companies that sell and service federal crop insurance—both catastrophic and buyup—for the federal government and retain a portion of the insurance risk. FCIC pays the companies a fee, called an administrative expense reimbursement, that is intended to reimburse the companies for the expenses reasonably associated with selling and servicing crop insurance to farmers. Current Reimbursements Exceed Delivery Expenses

In 1994 and 1995, FCIC’s administrative expense reimbursements to participating companies selling buyup insurance—31 percent of premiums—were higher than the expenses that can be reasonably associated with the sale and service of federal crop insurance. Furthermore, we found that a number of the reported expenses appeared excessive for reimbursement through a taxpayer-supported program and suggest an opportunity to further reduce future reimbursement rates for administrative expenses. Finally, a variety of factors have emerged since the period covered by our review that have increased companies’ revenues or may decrease their expenses, such as higher crop prices and premium rates and reduced administrative requirements. These expenses, which we believe should not be considered in determining an appropriate future reimbursement rate for administrative expenses, included expenses for acquiring competitors’ businesses, protecting companies from underwriting losses, sharing company profits through bonuses or management fees, and lobbying expenses. Among the costs reported by the crop insurance companies that did not appear to be reasonably associated with the sale and service of crop insurance to farmers were those related to costs the companies incurred when they acquired competitors’ business. Our review of companies’ expenses also showed that some companies’ entertainment expenditures appeared excessive for selling and servicing crop insurance to farmers. Crop prices and premium rates increased in 1996 and 1997, thereby generating higher premiums. This had the effect of increasing the reimbursements paid to companies for administrative expenses by about 3 percent of premiums without a proportionate increase in workload for the companies. Government’s 1995 Total Cost to Deliver Catastrophic Insurance Through USDA Was Less Than Through Private Companies

In 1995, the government’s total cost to deliver catastrophic insurance policies was less through USDA than through private companies. The basic delivery cost to the government for company delivery consisted of the administrative expense reimbursement paid to the companies by FCIC and the cost of administrative support provided by USDA’s Farm Service Agency. Companies generally prefer FCIC’s current reimbursement method because of its administrative simplicity. It also expressed concern that implementing GAO’s recommendations could destabilize the industry.
Why GAO Did This Study

GAO discussed the: (1) adequacy of the administrative expense reimbursement paid by the U.S. Department of Agriculture's (USDA) Federal Crop Insurance Corporation (FCIC) to participating insurance companies for selling and servicing crop insurance; and (2) comparative cost to the government of delivering catastrophic crop insurance through USDA and the private sector.

What GAO Found

GAO noted that: (1) for the 1994 and 1995 period it reviewed, GAO found that the administrative expense reimbursement rate of 31 percent of premiums paid to insurance companies resulted in reimbursements that were $81 million more than the companies' expenses for selling and servicing crop insurance; (2) furthermore, GAO found that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance and accordingly should not be considered in determining an appropriate future reimbursement rate for administrative expenses; (3) among these expenses were those associated with acquiring competitors' businesses, profit sharing bonuses, and lobbying; (4) in addition, GAO found other expenses that appeared excessive for reimbursement through a taxpayer-supported program; (5) these expenses suggest an opportunity to further reduce future reimbursement rates; (6) these expenses included agents' commissions that exceeded the industry average, unnecessary travel-related expenses, and questionable entertainment activities; (7) finally, a variety of factors that have emerged since the period covered by GAO's review have increased companies' revenues or may decrease companies' expenses; (8) crop prices and premium rates increased in 1996 and 1997, generating higher premiums; (9) this had the effect of increasing FCIC's expense reimbursement to companies; (10) at the same time, companies' expenses associated with crop insurance sales and service could decrease as FCIC reduces the administrative requirements with which the companies must comply; (11) combined, all these factors indicate that FCIC could lower the reimbursement to a rate in the range of 24 percent of premiums and still amply cover reasonable company expenses for selling and servicing federal crop insurance policies; (12) regarding the cost of catastrophic insurance delivery, GAO found that, in 1995, the government's total costs to deliver catastrophic insurance were less through USDA than private companies; (13) although the basic costs associated with selling and servicing catastrophic crop insurance through USDA and private companies were comparable, total delivery costs were less through USDA because USDA's delivery avoids the need to pay an underwriting gain to companies; (14) finally, GAO identified a number of different approaches to reimbursing companies for their administrative expenses that offer the opportunity for cost savings; and (15) companies generally prefer the existing reimbursement method because of its relative administrative simplicity.