USDA Has Expanded the Insurance Program for Specialty Crops Using a Multiyear Process

USDA insures 52 specialty crops —14 of which have been added since 1994—and plans to begin testing coverage for another 9 specialty crops by 2001. While these 61 crops represent a majority of the value of all specialty crops, insurance coverage will still not be available for about 300 crops, such as taro and parsley. Programs for specialty crop insurance have not expanded more rapidly because USDA follows a deliberate multistep process to ensure that the programs it develops are actuarially sound. This process can be lengthy, typically requiring about 5 years, because, among other things, the data on production history needed to develop a specialty crop program are often not readily available. According to USDA, while the development process is necessary to ensure actuarial soundness, additional resources would allow it to evaluate more crops concurrently. These strategies could increase producers’ participation and ultimately reduce the government’s administrative reimbursements to insurance companies, and one of these strategies could also reduce producers’ premiums. At the same time, however, according to USDA, these strategies have some potential disadvantages. New Strategies Have Potential to Increase Participation and Decrease Costs for Federal Crop Insurance

In recent years, insurance companies have used alternatives to the traditional structure of having independent agents market federal crop insurance to producers. Ultimately, increased sales by a number of companies could raise participation in the crop insurance program and reduce the administrative fees the government pays insurance companies. Higher Insurance Fees for Catastrophic Insurance Would Reduce Producer Participation, but the Magnitude of the Reduction Is Unclear

Under the now-rescinded provision of the Agricultural Research, Extension, and Education Reform Act of 1998 (P.L. While we were unable to estimate the magnitude of the decline, available studies for crop insurance show that, in general, for each 10-percent increase in insurance costs to producers, there is a 2- to 9-percent decrease in participation. However, the magnitude of the effect on participation is unclear. To review the new marketing practices insurance companies have introduced for specialty crops and to identify potential advantages and disadvantages of the practices, including their effect on producers’ participation, we reviewed pertinent documents from USDA and producer associations. Comments From the U.S. Department of Agriculture

	GAO’s Comments

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Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the availability of the Department of Agriculture's (USDA) federal crop insurance for specialty crops, focusing on: (1) USDA's recent progress in expanding coverage to specialty crops; (2) the new marketing practices insurance companies have introduced for specialty crops and the potential advantages and disadvantages of the practices, including their effect on producers' participation; and (3) the potential effect on participation by producers in the catastrophic crop insurance program if they were charged higher fees.

What GAO Found

GAO noted that: (1) USDA insures 52 specialty crops and plans to begin testing coverage for another 9 specialty crops by 2001; (2) these 61 crops represent a majority of the value of all specialty crops, but insurance coverage will not be available for about 300 crops; (3) while programs for specialty crop insurance have expanded in recent years, more rapid expansion has not occurred because USDA follows a deliberate multistep process involving the assessment of risk and setting of premiums to ensure that the programs it develops are actuarially sound; (4) this process, including testing, is lengthy, typically requiring about 5 years, because, among other things, the production history data needed to develop a specialty crop program are often not readily available; (5) according to USDA, while the development process cannot be accelerated because of the need to ensure actuarial soundness, additional resources would allow USDA to evaluate more crops concurrently; (6) in recent years, insurance companies have used alternatives to the traditional strategy of having independent agents market federal crop insurance to producers; (7) one alternative strategy uses endorsements--an insurance company pays a fee to a producer association to promote the sale of its insurance product; (8) a proposed strategy would allow an insurance company to pass through administrative savings to producers in the form of reduced premiums; (9) these strategies could increase producers' participation and, ultimately, if USDA chooses to share in these administrative cost savings, reduce the administrative fees the government pays insurance companies; (10) however, these strategies have some potential disadvantages; (11) under the rescinded provision of the Agricultural Research, Extension, and Education Reform Act of 1998, the increase in the processing fee for many specialty crop farmers would have been large and participation would have declined; and (12) while GAO was unable to estimate the magnitude of the decline, available studies on traditional crop insurance show that, in general, for each 10-percent increase, there is a 2- to 9-percent decrease in participation.