Preliminary Results of GAO's Review of the Department of Agriculture's Federal Crop Insurance Program

GAO discussed the Federal Crop Insurance Corporation's (FCIC) implementation of the expanded crop insurance program that the Crop Insurance Act of 1980 called for, to determine whether: (1) FCIC based management decisions on complete, accurate, and timely information; and (2) the FCIC supporting analyses were adequate. Although FCIC expanded its insurance coverage to cover 40 crops in 3,000 countries, it experienced serious financial difficulties and had to suspend insurance payments to farmers. Because FCIC did not document the bases for its forecasts and based the forecasts on managers' judgment and existing program goals, FCIC indemnities exceeded its premium income by $877 million. In addition, FCIC did not determine the impact of its proposal to provide crop insurance through private, reinsured companies based on either farmer program participation or the program's actuarial soundness. Although gains and losses on reinsured-company-sold crop insurance are to be shared by FCIC and the companies, FCIC negotiated standard reinsurance agreement provisions that favored reinsured companies and adversely affected its ability to establish a reserve for unforeseen losses. FCIC has taken a number of actions that should enhance the insurance program's soundness, including development of a new computerized model for establishing premium rates. The model replaces the FCIC system of guaranteeing yields based on area averages with a system based on a farmer's own production history, called the Actual Production History Program (APH). However, until APH is fully implemented, FCIC will continue to use management judgment to fix premium rates.