In turn, insurance companies use this  money to cover their overhead expenses, such as payroll and rent, and to  pay commissions to insurance agencies and agents. In 2008, RMA provided about $2.0 billion in A&O allowances and an  estimated $1.5 billion in underwriting gains to crop insurance companies. State insurance regulators also expressed concerns that the plans  constituted a legal form of rebating, the practice of offering something of  monetary value to farmers to attract their business. Higher Crop Prices Sharply Raised A&O Allowances, and Insurance Companies Used a Large Share of These Increases to Compete for More Business

Companies’ A&O allowances nearly tripled from 2000 to 2009, primarily  because the method that RMA uses to calculate A&O allowances considers  the value of the crop and not the crop insurance industry’s actual  expenses for selling and servicing policies. The change  from 2006 to 2009 was particularly large, rising from an average of $836  per policy to an expected $1,417 per policy. The current method for calculating A&O allowances has caused allowance  payments to increase along with crop prices, but without a proportional  increase in the number of policies, acres, or coverage levels. In terms of commission dollars, the average commission paid per policy  from 2006 to 2007 increased more in the 5 major Corn Belt states overall  than in the other states, rising by a total of 86 percent in these 5 states  compared with 43 percent in the other 45 states. Companies’ Reported Expenses Exceeded A&O Allowances, but High Commissions and Expenses That Were Inconsistent with RMA Guidance Explain This Difference

Despite the increases in A&O allowances, insurance companies reported  to RMA that their expenses for delivering federal crop insurance for 2007  exceeded their A&O allowances by about $244 million. Insurance Agencies’ Commissions Have Outpaced Expenses, and Higher Commissions Can Create More Incentive for Rebating

The modest increase from 2000 through 2009 in insurance agencies’  expenses for selling policies has not been commensurate with the  dramatic increase in their commissions. That is, the  actual commissions increased by an average of about 16 percent per year  from 2000 through 2009, compared with an increase of about 3 percent per  year for commissions assumed to increase at the same rate as insurance  agents’ wages. For 2007 through 2009,  estimated commission payments exceed the adjusted commissions by  about $2.87 billion. Appendix I: Objectives, Scope, and Methodology

We were asked to examine (1) the reasons for the substantial increases in  administrative and operating (A&O) allowances in recent years, and the  purposes for which insurance companies use these allowances, and   (2) insurance agencies’ expenses for selling federal crop insurance  policies, and questionable practices, if any, that agencies use to compete  for business among farmers. Department of Agriculture: Status of Efforts to Address Major Financial  Management Challenges.
Why GAO Did This Study

The U.S. Department of Agriculture (USDA) administers the federal crop insurance program with private insurance companies, which, in turn, work with insurance agencies that sell crop insurance. In 2008, according to USDA, the program cost $6.5 billion, including about $2.0 billion in allowances to insurance companies to cover their administrative and operating (A&O) expenses, such as salaries and sales commissions to agencies. GAO was asked to examine (1) the reasons for recent substantial increases in A&O allowances, and the purposes for which insurance companies use these allowances, and (2) insurance agencies' expenses for selling federal crop insurance policies, and questionable practices, if any, that agencies use to compete for business among farmers. GAO analyzed USDA and private insurers' data, among other things.

What GAO Found

Between 2000 and 2009, companies' A&O allowances nearly tripled, primarily because USDA's calculation method for A&O allowances considers the value of the crop, rather than the crop insurance industry's actual expenses for selling and servicing policies, which generally remained stable. This increase in the A&O allowances occurred without a proportional increase in the number of policies, acres, or amount of insurance coverage purchased. The higher A&O allowances occurred because of higher crop prices since 2006. Per policy, the allowance rose from a national average of $836 in 2006 to an expected $1,417 in 2009. Companies have used most of the higher allowances to raise commissions, in an effort to compete for insurance agencies' portfolios of crop insurance policies. USDA data show that commissions increased more sharply in states with historically larger insurance underwriting gains, which add to company profits. For example, the average commission paid per policy in 5 Corn Belt states increased by 86 percent from 2006 to 2007, and by 43 percent in the other 45 states. Companies reported to USDA that their expenses to administer the program in 2007 exceeded their allowances. However, GAO determined that these expenses exceeded allowances largely because of the higher commissions paid to insurance agencies. According to GAO's analysis, crop insurance agencies' sales commissions have outpaced their expenses for selling policies. Commissions per policy increased by an average of about 16 percent per year from 2000 to 2009, compared with an increase of about 3 percent per year for insurance agents' wages, which are the largest factor in agencies' expenses. For 2007 through 2009, commissions will exceed wage-adjusted commissions by $2.87 billion. According to USDA officials, higher commissions can create more incentive for rebating, which is the practice of offering something of monetary value to farmers to attract their business. USDA prohibits this practice, as do most states. USDA and state insurance regulators are working to reduce the potential for this practice.