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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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.

GAO found that USDA: (1) has improved the overall financial condition of the crop insurance program by raising the premium rates, but the basic rates still do not meet the requirement of 91-percent adequacy set by Congress; (2) sets higher rates for high-risk farmers to help reduce the government's losses; (3) has made changes to more accurately calculate farmers' production levels based on their historical experience; and (4) generally sets the same deadline for an area covering several states rather than considering the local growing conditions, and as a result some farmers are able to more precisely evaluate growing conditions at planting time and are more likely to purchase crop insurance when growing conditions are poor.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

  4. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

  5. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

  6. Status: Closed - Not Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: Department of Agriculture

 

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