Crop Insurance:

Federal Crop Insurance Corporation Needs To Improve Decision-Making

RCED-87-77: Published: Jul 23, 1987. Publicly Released: Jul 23, 1987.

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In response to a congressional request, GAO reviewed the Federal Crop Insurance Corporation's (FCIC) financial viability and operations to determine whether it based key management decisions on complete and accurate data, specifically those decisions affecting: (1) forecasts of income and indemnities FCIC used in budget requests; (2) a proposal to rely on reinsurance rather than both reinsurance and direct insurance; (3) rates of payments to, and gains and losses shared with, private companies selling crop insurance; and (4) actions to improve the Federal Crop Insurance Program's actuarial soundness.

GAO found that: (1) FCIC reliance on judgmental decisions and program goals, rather than program experience, to support its forecasts of premium income and indemnities has produced unreliable forecasts in its annual budgets; (2) although FCIC initially forecast premium income of $700 million for 1987, its income never exceeded $440 million; (3) FCIC analyses supporting its proposal to terminate master marketer sales and to rely on reinsurance were neither accurate nor complete, since they did not determine the impact on expanding insurance availability to farmers or the program's actuarial soundness; (4) because it relied on prior-year compensation levels to develop the 1986 percent-of-premium rate for compensating reinsured companies, FCIC established rates that were above its own costs; (5) FCIC agreed to new gain- and loss-sharing provisions with reinsured companies even though it had data showing that prior revisions had tilted the sharing of gains and losses in the companies' favor; and (6) the new revisions will be substantially more costly and will adversely affect FCIC ability to establish a reserve for unforeseen losses. GAO also found that FCIC had adequate bases for the actions it took to: (1) develop a computerized model to establish the premium rates it charges farmers for six major crops; and (2) base the development of insurance offers on farmers' actual production histories rather than the average production of all farmers in designated areas.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: No action has been taken by Congress, and none is planned to GAO knowledge.

    Matter: Congress should consider the actions taken by FCIC which continue to tilt the sharing of gains and losses in favor of the reinsured companies and, if necessary, amend the Federal Crop Insurance Act of 1980 to provide more specific guidance on how FCIC and reinsured companies should share in gains and losses.

  2. Status: Closed - Not Implemented

    Comments: Congress has not pursued this issue. There are no plans to do so as far as GAO could determine.

    Matter: In view of congressional concern over the administration's move toward an all-reinsurance program, Congress should consider what the proper balance of sales to be handled through reinsured companies and master marketers should be and, if necessary, amend the Federal Crop Insurance Act of 1980 to specify the system or systems FCIC should use to deliver crop insurance to farmers.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: FCIC disagreed with this recommendation. No action is intended.

    Recommendation: The Secretary of Agriculture should direct the Manager, FCIC, to either: (1) base reinsured companies' compensation rates on the costs FCIC covers on the insurance policies it sells directly to farmers, as required by section 508(e) of the Federal Crop Insurance Act of 1980; or (2) propose legislation to amend the act to allow FCIC to continue to establish the compensation rates through negotiations with the reinsured companies.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: FCIC revised its forecasting methodology along the lines recommended by GAO.

    Recommendation: The Secretary of Agriculture should direct the Manager, FCIC, to develop a computerized model to forecast premium income and indemnities. The model should be developed so that, to the extent feasible, objective and quantitative data can be used to make the forecasts.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Not Implemented

    Comments: FCIC does not plan to act on this recommendation.

    Recommendation: The Secretary of Agriculture should direct the Board of Directors and Managers, FCIC, to either: (1) revise subsequent reinsurance agreements by deleting the provision requiring FCIC to reimburse the reinsured companies for state premium taxes; or (2) propose legislation authorizing FCIC to reimburse reinsured companies for such taxes.

    Agency Affected: Department of Agriculture

 

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