More Attention Needed in Key Areas of the Expanded Crop Insurance Program

RCED-84-65: Published: Mar 14, 1984. Publicly Released: Mar 14, 1984.

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GAO reviewed the Federal Crop Insurance Corporation's (FCIC) actuarial practices, the rates at which private sector companies were compensated for selling and servicing crop insurance, and the distribution of gains and losses on crop insurance sold by private companies and reinsured by FCIC.

Congress has expressed concern regarding FCIC progress in implementing the Federal Crop Insurance Act of 1980, the effectiveness of program changes when insurance losses in 1981 and 1982 are considered, and the annual increases in FCIC appropriation requests. GAO found that, following enactment of the legislation, FCIC made substantial progress in expanding the program and involving the private sector in selling and servicing crop insurance. However, FCIC did not give appropriate attention to ensure that its insurance was actuarially sound, did not carefully evaluate its actions involving the private sector, and did not make a detailed cost study when it established the compensation rates for the private sector companies' sales and service activities. Under the expanded reinsurance program, private insurance companies obtain reinsurance coverage from FCIC as protection against part of the risk of insuring crops. Allowed annual revisions to the standard reinsurance agreement have resulted in increased costs and risks to FCIC. GAO noted that FCIC has initiated numerous actions that should improve the insurance paperwork submitted by independent insurance agents and taken steps to develop a comprehensive quality control program and a plan for an independent audit of the reinsured companies.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: FCIC continues to expand reinsurance sales in its efforts to go to an all-reinsurance program. The review of reinsurance and direct sales showed that the study was inaccurate, incomplete, and unobjective.

    Recommendation: The Secretary of Agriculture should direct the Board of Directors and Manager, FCIC, to moderate further expansion of the reinsurance program until the operation of the current program can be evaluated to ensure that it is cost-effective for both the government and the insurance companies.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: Although FCIC contracted with two firms to evaluate private sector costs and rates, the study results were inconclusive because the private companies do not segregate their costs in such a way that a determination could be made of what it costs them to handle FCIC insurance sales and services.

    Recommendation: The Secretary of Agriculture should direct the Board of Directors and Manager, FCIC, to evaluate the rates established for compensating the private sector in relation to the current or expected premium base and the private sector's costs to provide such services. The rate structure should, if warranted, be adjusted to provide reasonable compensation to the private sector for its services and, at the same time, be cost-effective to the federal government.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Not Implemented

    Comments: FCIC agreed that homogeneous risk groups should be established; however, it will take a long time to obtain the necessary data to establish such groups. Thus, FCIC does not intend to take any action on this matter for several years.

    Recommendation: The Secretary of Agriculture should direct the Board of Directors and Manager, FCIC, to consider the potential for obtaining actual crop yield data and using such data to establish homogeneous risk groups and the proper relationships among each group's yields and risk rates.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Implemented

    Comments: As recommended, all of the 14 reports were developed.

    Recommendation: The Secretary of Agriculture should direct the Board of Directors and Manager, FCIC, to give increased attention to completing actuarial reports depicting crop year 1980 and 1981 insurance experiences in order that the review and updating of the FCIC crop insurance programs might be expedited.

    Agency Affected: Department of Agriculture

  5. Status: Closed - Implemented

    Comments: FCIC took a number of actions that should correct the problems, including the development of a new premium rate-making model, implementing a new farmer production history program to use in establishing guaranteed yields, and increasing premium rates for higher-yield coverage levels.

    Recommendation: The Secretary of Agriculture should direct the Board of Directors and Manager, FCIC, to correct any inaccuracies that may be found in the recently established county insurance offers of FCIC and, if necessary, correct its older county insurance offers that may be inappropriate in light of the increased risk that may be associated with implementing the legislative requirements for higher coverages.

    Agency Affected: Department of Agriculture

  6. Status: Closed - Implemented

    Comments: FCIC completed its national expansion effort and made a number of program changes that, if properly implemented, should improve its ability to incorporate loss experience data in insurance offers on a more timely basis.

    Recommendation: The Secretary of Agriculture should direct the Board of Directors and Manager, FCIC, to moderate any further expansion so that it will not detract from the actuarial division's ability to update the crop insurance offers.

    Agency Affected: Department of Agriculture

  7. Status: Closed - Not Implemented

    Comments: FCIC revised its gain and loss distribution formula to provide for stop-loss provisions, which make regional formulas impractical. Hence, this recommendation is no longer valid.

    Recommendation: The Secretary of Agriculture should direct the Board of Directors and Manager, FCIC, to tailor the reinsurance agreements to each company's area of operation and base the gain and loss formula on the loss experience for the geographic area in which the company operates.

    Agency Affected: Department of Agriculture

 

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