Three Plans’ Approaches to Insuring Revenue Result in Different Levels of Protection and Government Costs

The three government-subsidized revenue insurance plans—Income Protection, Revenue Assurance, and Crop Revenue Coverage—differ in the revenue guarantees they provide to the farmer and in their relative cost to the government. Two of the plans, Income Protection and Revenue Assurance, set the revenue level that is to be protected at the time that crops are being planted, while the third, Crop Revenue Coverage, determines the protected revenue at either planting or at harvest, depending on when prevailing crop prices are higher. Crop Revenue Coverage Is Likely to Cost the Government Significantly More Than Other Plans

Crop Revenue Coverage is likely to be more costly to the government than the other insurance plans because of its higher reimbursements for administrative expenses to participating companies and because of potentially higher total underwriting losses (the excess of claims payments over total premiums). Furthermore, the plan’s promise to base the revenue guarantee on the price at planting or at harvest, whichever is higher, exposes the government to higher claims payments in years when widespread crop losses are coupled with rapidly increased prices. New Insurance Plans Achieving Significant Share of Crop Insurance Market

In their first 2 years, the crop revenue insurance plans, especially Crop Revenue Coverage, have already achieved a significant share of the crop insurance market, accounting for about one-third of crop insurance premiums in the areas where they were offered. However, in 1997, because of the relatively favorable growing conditions in the nation, the crop insurance program had a much lower level of claims—$0.49 per $1 of premium. While favorable weather and stable crop prices generated a very favorable claims experience over the first 2 years that the plans were available to farmers, these shortcomings raise questions about whether the rates established for each plan are actuarially sound over the long term and are appropriate to the risk each farmer presents. Furthermore, while the plans were initially approved on a limited basis only, FCIC approved the substantial expansion of one of these plans—Crop Revenue Coverage—before the initial results of claims experience were available. The yield risk component is based on rates established under traditional multiple-peril crop insurance. In particular, as we reported, the rating method for Crop Revenue Coverage is especially problematic because it does not take into account the relationship between crop prices and yields. 3. 4. 5. 6. 7. 8.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed various issues pertaining to the Department of Agriculture's new crop revenue insurance plans.

What GAO Found

GAO noted that: (1) the three government-subsidized revenue insurance plans differ in the revenue guarantees they provide to farmers and in their relative cost to the government; (2) two of the plans, Revenue Assurance and Income Protection, set the revenue level that is to be protected at the time that crops are being planted, while the third, Crop Revenue Coverage, determines the protected revenue at either planting or at harvest, depending on when crop prices are higher; (3) in terms of potential government costs, Crop Revenue Coverage is likely to cost the government significantly more than the other two plans because of its higher reimbursement for administrative expenses and because of potentially higher total underwriting losses; (4) furthermore, the plan's promise base the revenue guarantee on the price at planting or the price at harvest, whichever is higher, exposes the government to higher claims payments in the years when widespread crop losses are coupled with rapidly increasing prices; (5) in their first two years of availability to farmers, the crop revenue insurance plans, especially Crop Revenue Coverage, achieved a significant share of the crop insurance market, accounting for about one-third of the total crop insurance sales in the areas where they were offered; (6) in terms of the claims payments for 1997, all types of crop insurance experienced much lower than average levels of claims as a result of favorable growing conditions in most of the country; (7) morever, primarily because revenue insurance plans were often marketed in lower-risk areas, they experienced lower levels of claims payments than did multiple-peril crop insurance; (8) GAO identified shortcomings in each revenue insurance plan's approach to establishing premium rates; (9) Crop Revenue Coverage is especially problematic because its rate structure does not take into account the interrelationship between crop prices and yields--an essential component of actuarially sound rate settings; (10) while good weather and stable crop prices generated very favorable claims experience over the first 2 years of the plans' availability, GAO has doubts about whether the rates established for each plan are actuarially sound over the long term and are appropriate to the risk each farmer presents; and (11) furthermore, while the plans were initially approved on a limited basis only, the Federal Crop Insurance Corporation, acting within its authority, approved the substantial expansion of one of these plans--Crop Revenue Coverage--before initial results were available.