Crop Insurance:

Overpayment of Claims by Private Companies Costs the Government Millions

RCED-88-7: Published: Nov 20, 1987. Publicly Released: Nov 20, 1987.

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Pursuant to a congressional request, GAO examined the Federal Crop Insurance Corporation's (FCIC) oversight and control of the loss adjustment practices of private reinsured companies.

GAO found that reinsured companies: (1) did not adjust 95 percent of 134 sample claims in accordance with FCIC policies and procedures; (2) should not have paid about 31 percent of the $9.4 million in claims; (3) may have intentionally overpaid claimants; and (4) made incorrect determinations of production guarantees, actual production, payment amounts, and program eligibility. GAO also found that FCIC: (1) improperly adjusted 62 percent of 37 sample claims; and (2) overpaid about 1 percent of those claims. In addition, GAO found that FCIC: (1) did not properly manage the loss adjustment processes of reinsured companies; (2) had inadequate oversight and control over such companies; and (3) did not screen reinsured claims for obvious errors, but recently began to systematically review the operations of reinsured companies.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: FCIC has collected about $983,721 of the overpaid claims and is continuing to process repayments for the remaining claims. The remaining claims are still in appeals. Expected date of action is unknown.

    Recommendation: In order for FCIC to acquire the needed financial and programmatic oversight and control over the loss adjustment activities of reinsured companies, the Secretary of Agriculture should require the Manager, FCIC, to require repayment by reinsured companies of the $3 million in overpaid claims found, in accordance with the terms of the reinsurance agreements.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: FCIC completed development of a computer assisted tracking system.

    Recommendation: In order for FCIC to acquire the needed financial and programmatic oversight and control over the loss adjustment activities of reinsured companies, the Secretary of Agriculture should require the Manager, FCIC, to establish a systematic process for determining whether identified overpaid claims have been repaid to FCIC, with interest where appropriate.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: FCIC has developed guidelines that address this recommendation.

    Recommendation: In order for FCIC to acquire the needed financial and programmatic oversight and control over the loss adjustment activities of reinsured companies, the Secretary of Agriculture should require the Manager, FCIC, to establish guidelines for determining when and what administrative actions to take against reinsured companies that do not follow FCIC standards or that continue to adjust claims improperly.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Implemented

    Comments: FCIC began using an automated editing system in 1989 for reinsured claims. Modifications have continued to strengthen the system's internal controls. The changes have resulted in savings, but these cannot be calculated.

    Recommendation: In order for FCIC to acquire the needed financial and programmatic oversight and control over the loss adjustment activities of reinsured companies, the Secretary of Agriculture should require the Manager, FCIC, to establish internal controls, such as computerized audit or screening, over reinsured claims prior to payment to ensure that the claims do not contain obvious errors. These controls would be similar to the controls FCIC now has on master marketer claims.

    Agency Affected: Department of Agriculture

  5. Status: Closed - Not Implemented

    Comments: The Department of Agriculture believes that this recommendation would be too labor intensive to implement.

    Recommendation: In order for FCIC to acquire the needed financial and programmatic oversight and control over the loss adjustment activities of reinsured companies, the Secretary of Agriculture should require the Manager, FCIC, to require reinsured companies to submit documentation to FCIC in support of each payment request at the time the request for payment is made to help ensure that payments by FCIC are accurate and justified. FCIC should then verify the information submitted using a statistical sampling approach.

    Agency Affected: Department of Agriculture

  6. Status: Closed - Implemented

    Comments: FCIC has expanded its Compliance Division from 16 to 64 staffmembers and increased the number of regional offices from 2 to 5. This has helped FCIC to more systematically monitor and evaluate reinsured company activities, including those relating to loss adjustment. Improved FCIC oversight has contributed to recent declines in overpayments resulting from poor loss adjustment practices.

    Recommendation: In order for FCIC to acquire the needed financial and programmatic oversight and control over the loss adjustment activities of reinsured companies, the Secretary of Agriculture should require the Manager, FCIC, to implement a comprehensive and systematic monitoring and evaluation program by its compliance division to ensure that the uniform standards set forth by FCIC are being followed. The FCIC evaluation of the effectiveness of company activities should include readjusting a sample of claims to determine whether loss adjustments are being performed accurately.

    Agency Affected: Department of Agriculture

  7. Status: Closed - Implemented

    Comments: FCIC has published quality control and training guidelines; however, they are not as stringent as those used on policies sold by master marketers.

    Recommendation: In order to improve the quality of loss adjustment practices of reinsured companies, the Secretary of Agriculture should require the Manager, FCIC, to develop and publish the guidelines now in process for improving the quality of the loss adjustment activities of reinsured companies and the associated training programs for their loss adjusters. In doing this, the Manager should require that reinsured companies pattern their loss adjustment programs, including loss adjuster training and supervisory quality control reviews, after the more comprehensive and rigorous programs now used by FCIC for claims it adjusts on policies sold by master marketers.

    Agency Affected: Department of Agriculture

  8. Status: Closed - Not Implemented

    Comments: FCIC claims that trying to reconcile the claims with the indemnities paid would not be technically feasible. Also, FCIC claims that too much time has passed to prove that the losses were incorrect or improper.

    Recommendation: In order for FCIC to acquire the needed financial and programmatic oversight and control over the loss adjustment activities of reinsured companies, the Secretary of Agriculture should require the Manager, FCIC, to determine how much of the $17.9 million in payments where drought is shown as a cause of loss on irrigated farms is erroneous and pursue collection of that amount.

    Agency Affected: Department of Agriculture

 

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