Objectives, Scope, and Methodology

Concerned about the cost-effective delivery of federal crop insurance and recognizing the important role the private insurance industry plays in delivering federal crop insurance, the Congress, in section 118 of the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994, directed GAO and FCIC to jointly evaluate the financial arrangements between FCIC and participating insurance companies for delivering the crop insurance program to qualified producers and to address several specific issues. Not all participating companies reported these expenses to FCIC in a consistent format until 1994; furthermore, 1996 expenses for selling and servicing crop insurance were not complete at the time of our review. Administrative Expense Reimbursements Paid by the Government Exceed Private Companies’ Expenses

In 1994 and 1995, FCIC’s reimbursement payments to the nine participating companies in our review were higher than the expenses that can be reasonably associated with the sale and service of federal crop insurance. Collectively, reported expenses were $38 million less than the reimbursements the companies received. Some Reported Expenses Do Not Appear to Be Reasonably Associated With Crop Insurance Delivery

Our review of the nine companies’ reported expenses showed that about $43 million did not appear to be reasonably associated with the sale and service of federal crop insurance to farmers and thus should not be considered in determining an appropriate future reimbursement rate for administrative expenses. Other Reported Expenses Represent Opportunities to Lower Reimbursement Rates

We also found a number of expenses reported by the nine companies that, while in categories associated with the sale and service of crop insurance, seemed to be excessive in nature for a taxpayer-supported program and offer opportunities for FCIC to reduce future reimbursement rates. Each of these factors is discussed below. Recommendations to the Secretary of Agriculture

We recommend that the Secretary of Agriculture direct the Administrator of the Risk Management Agency to determine the administrative expense reimbursement rate that reflects the appropriate and reasonable costs of selling and servicing traditional buyup insurance and include this rate in the new agreement currently being developed with the companies; determine the compensation that reflects the appropriate and reasonable costs of selling and servicing catastrophic crop insurance and include it in the new agreement currently being developed with the companies; explicitly convey to participating insurance companies the type of expenses that the administrative reimbursement is intended to cover; and monitor companies’ expenses to ensure that the established rate is reasonable for the services provided. In 1995, it was more costly for the government to deliver catastrophic insurance through private companies than through USDA. Cost to the Government in 1995 for USDA Delivery Less Because of Underwriting Gain Paid to Companies

In 1995, the total cost to the government to deliver catastrophic insurance was less when provided through USDA than through private companies. In 1995, companies earned an underwriting gain of an estimated $45 million, or about a 37-percent return on the catastrophic premiums for which they retained risk. This underwriting gain increased the government’s delivery cost for company delivery by $127 per crop policy. Each has advantages and disadvantages. Industry leaders prefer FCIC’s current reimbursement method because it is relatively simple to administer and because they believe that most alternatives could reduce their reimbursements. Each alternative, however, has advantages and disadvantages compared with the current reimbursement arrangement.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the financial arrangements between the Federal Crop Insurance Corporation (FCIC) and participating insurance companies for delivering crop insurance to qualified producers, focusing on the: (1) adequacy of the current administrative reimbursement rate for expenses of participating crop insurance companies; (2) comparative cost to the government in 1995 of private companies' and the Department of Agriculture's (USDA) delivery of catastrophic insurance; and (3) advantages and disadvantages of different expense reimbursement alternatives.

What GAO Found

GAO noted that: (1) in 1994 and 1995, the government's administrative expense reimbursement to insurance companies was greater than the companies' expenses to sell and service federal crop insurance; (2) for the 2-year period, companies reported expenses that were less than the reimbursements paid to them by FCIC; (3) 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; (4) in addition, even within the expense categories reasonably associated with the sale and service of crop insurance, GAO found expenses that appeared excessive for reimbursement under a taxpayer-supported program suggesting an opportunity to further reduce future reimbursement rates; (5) these expenses included agents' commissions that exceeded the industry average, unnecessary travel-related expenses, and questionable entertainment activities; (6) finally, higher premiums in the crop insurance program have had the effect of increasing the government's reimbursement to companies for the time period GAO examined; (7) 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; (8) combined, all these factors indicate that FCIC could lower the reimbursement rate and still amply cover companies' reasonable expenses for selling and servicing federal crop insurance policies; (9) in 1995, the government's costs to deliver catastrophic insurance were higher through private companies than through USDA; (10) 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; (11) in 1995, the underwriting gain to participating companies for catastrophic insurance totalled about $45 million; (12) in 1996, the underwriting gains were even higher; (13) GAO identified a number of different approaches to reimbursing companies for their administrative expenses that offer the opportunity for cost savings; (14) each has advantages and disadvantages compared with the existing reimbursement arrangement; and (15) companies generally prefer the existing reimbursement method because it is relatively simple to administer.