USDA reimburses the insurance companies for the administrative expenses associated with selling and servicing crop insurance policies, including the expenses associated with adjusting claims. 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. However, the other 89 programs, representing about 24 percent of the crop insurance premiums for the six crops in 1994, had basic rates that were less than 80 percent adequate for actuarial soundness. 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. 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. Government’s 1995 Cost to Deliver Catastrophic Insurance Through USDA Was Less Than Through Private Companies

In 1997, we also reported that the government’s costs to deliver catastrophic insurance policies in 1995 were higher through private companies than through the local offices of USDA’s Farm Service Agency. The basic cost to the government for selling and servicing catastrophic crop insurance was comparable for both delivery systems. While favorable weather and stable crop prices generated 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 will be actuarially sound and fair—that is, appropriate to the risk each farmer presents over the long term. 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. 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) federal 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; (3) can deliver catastrophic crop insurance at less cost to the government than private insurance companies; and (4) has established methodologies in the revenue insurance plans that set sound premium rates.

What GAO Found

GAO noted that: (1) GAO has reported that several aspects of USDA's crop insurance program are of concern and need attention; (2) in 1995, GAO reported that premiums charged farmers for crop insurance were not adequate to achieve the actuarial soundness mandated by Congress; (3) GAO's review showed that the basic premium rates for the six crops reviewed 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) about 24 percent of the crop insurance premiums for the six crops GAO reviewed had basic rates that were less than 80-percent adequate for actuarial soundness; (5) USDA subsequently took actions to improve the program's actuarial soundness, but some rates remain too low; (6) the government's administrative expense reimbursement to insurance companies--31 percent of premiums--were greater than the companies' reported expenses to sell and service federal crop insurance; (7) GAO stated that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance; (8) 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; (9) 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; (10) GAO reported that the government's costs to deliver catastrophic insurance in 1995 were higher through private companies than through USDA; (11) although the basic costs associated with selling and servicing catastrophic crop insurance through USDA and private companies were comparable, delivery through USDA avoids paying an underwriting gain to companies in years when there is a low incidence of catastrophic loss claims; (12) GAO reported its doubts about whether new USDA-supported revenue insurance plans will be actuarially sound over the long term and appropriate to the risk each farmer presents to the program; and (13) 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.