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Crop Insurance: Additional Actions Could Further Improve Program's Financial Condition

RCED-95-269 Published: Sep 28, 1995. Publicly Released: Sep 28, 1995.
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Highlights

Pursuant to a congressional request, GAO examined whether the Department of Agriculture (USDA): (1) set insurance rates to achieve the legislative requirement of 91-percent adequacy; (2) reduced the losses caused by high-risk farmers; (3) based payments to farmers for claimed losses on their actual production history; and (4) set deadlines for farmers to purchase crop insurance before planting their crops.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Agriculture To meet the 1994 legislative requirement that USDA reduce losses and set premiums to cover 91 percent of the claims paid, the Secretary of Agriculture should direct the Deputy Administrator for Risk Management to annually raise premium rates up to the 20 percent authorized by Congress, if needed, to cover future claims under the legislative requirement of 91-percent adequacy. As part of this rate-setting process, the Deputy Administrator should report the expected adequacy of premium rates each year, by crop and by state, so that USDA management and Congress can be kept informed of the program's financial condition. If the rates are not raised as required, USDA should include in its annual report the estimated cost of subsidizing farmers' purchase of crop insurance in areas where the rates are inadequate.
Closed – Implemented
In response to the recommendation, USDA increased premiums 6 percent for the overall program and 20 percent for many locations. The higher premiums have contributed to a loss ratio averaging 0.80 since 1995--well beyond 91-percent adequate.
Department of Agriculture To meet the 1994 legislative requirement that USDA reduce losses and set premiums to cover 91 percent of the claims paid, the Secretary of Agriculture should direct the Deputy Administrator for Risk Management to develop and implement a plan for periodically evaluating the mathematical factors used to set coverage and production levels above and below the basic rates to ensure that these factors continue to result in correct rates.
Closed – Implemented
In response to the recommendation, USDA intends to periodically review the mathematical factors (formulas), it uses to set premium rates above and below basic rates for crops. USDA recently hired an actuarial consulting firm to review these and other actuarial formulas.
Department of Agriculture The Secretary of Agriculture should direct the Deputy Administrator for Risk Management to remove the 10-percent annual limit on reduction in farmers' insured production levels so that the level of production insured is aligned with the farmers' actual production history. If not, USDA should include in an annual report to Congress the estimated cost of subsidizing the additional losses that will be incurred.
Closed – Implemented
Although USDA does not intend to remove the 10-percent limit on farmers insured production levels, it does intend to annually report to Congress the extent and cost of its use.
Department of Agriculture The Secretary of Agriculture should direct the Deputy Administrator for Risk Management to require that the production history provided by farmers be verified when claims are adjusted.
Closed – Implemented
USDA has extensively revised its expectations and guidelines (Manual 14) for companies selling and servicing federal crop insurance. USDA believes the changes will improve internal controls over claims payments to farmers, but it did not require that all production histories provided by farmers be verified when claims are adjusted.
Department of Agriculture The Secretary of Agriculture should direct the Deputy Administrator for Risk Management to set purchasing deadlines before the initial planting date in all areas of the country and establish criteria and procedures for routinely reviewing these deadlines to ensure that they continue to occur before initial planting dates.
Closed – Implemented
USDA is reviewing purchasing deadlines to ensure that they are set before the initial planting date in all areas of the country. The agency is also establishing criteria to routinely review these dates.
Department of Agriculture The Secretary of Agriculture should direct the Deputy Administrator for Risk Management to record the date that insurance is purchased in order to better evaluate the relationship between purchasing deadlines and claims payments.
Closed – Not Implemented
This recommendation is no longer applicable. Participation among farmers is about 80 percent and policies automatically renew each year. Few new purchase dates exist to evaluate the relationship between purchasing deadlines and claims payments.

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Topics

Agricultural productionFarm income stabilization programsFarm subsidiesFinancial managementGrain and grain productsInsurance claimsInsurance lossesInsurance premiumsInsurance regulationCrop insurance