Crop Insurance:

Opportunities Exist to Reduce Government Costs for Private-Sector Delivery

RCED-97-70: Published: Apr 17, 1997. Publicly Released: Apr 17, 1997.

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Pursuant to a legislative requirement, GAO reviewed the financial arrangements between the Federal Crop Insurance Corporation (FCIC) and participating insurance companies for delivering crop insurance to qualified producers, focusing on the: (1) adequacy of the current administrative reimbursement rate for expenses of participating crop insurance companies; (2) comparative cost to the government in 1995 of private companies' and the Department of Agriculture's (USDA) delivery of catastrophic insurance; and (3) advantages and disadvantages of different expense reimbursement alternatives.

GAO noted that: (1) in 1994 and 1995, the government's administrative expense reimbursement to insurance companies was greater than the companies' expenses to sell and service federal crop insurance; (2) for the 2-year period, companies reported expenses that were less than the reimbursements paid to them by FCIC; (3) furthermore, GAO found that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance and accordingly should not be considered in determining an appropriate future reimbursement rate for administrative expenses; (4) in addition, even within the expense categories reasonably associated with the sale and service of crop insurance, GAO found expenses that appeared excessive for reimbursement under a taxpayer-supported program suggesting an opportunity to further reduce future reimbursement rates; (5) these expenses included agents' commissions that exceeded the industry average, unnecessary travel-related expenses, and questionable entertainment activities; (6) finally, higher premiums in the crop insurance program have had the effect of increasing the government's reimbursement to companies for the time period GAO examined; (7) at the same time, companies' expenses associated with crop insurance sales and service could decrease as FCIC reduces the administrative requirements with which the companies must comply; (8) combined, all these factors indicate that FCIC could lower the reimbursement rate and still amply cover companies' reasonable expenses for selling and servicing federal crop insurance policies; (9) in 1995, the government's costs to deliver catastrophic insurance were higher through private companies than through USDA; (10) although the basic costs associated with selling and servicing catastrophic crop insurance through USDA and private companies were comparable, delivery through USDA avoids paying an underwriting gain to companies in years when there is a low incidence of catastrophic loss claims; (11) in 1995, the underwriting gain to participating companies for catastrophic insurance totalled about $45 million; (12) in 1996, the underwriting gains were even higher; (13) GAO identified a number of different approaches to reimbursing companies for their administrative expenses that offer the opportunity for cost savings; (14) each has advantages and disadvantages compared with the existing reimbursement arrangement; and (15) companies generally prefer the existing reimbursement method because it is relatively simple to administer.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to monitor companies' expenses to ensure that the established rate is reasonable for the services provided.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: USDA will annually obtain information regarding expenses from each company participating in the crop insurance program. According to USDA, the expense data will be evaluated and audited on an ongoing basis to assess whether the current reimbursement is reasonable.

    Recommendation: The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to explicitly convey to participating insurance companies the type of expenses that the administrative reimbursement is intended to cover.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: USDA has revised guidelines in its 1998 Standard Reinsurance Agreement in accordance with the recommendation.

    Recommendation: The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to determine the compensation that reflects the appropriate and reasonable costs of selling and servicing catastrophic crop insurance and include it in the new agreement currently being developed with the companies.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: Recently enacted P.L. 105-185 reduces the participating insurance companies' compensation for catastrophic crop insurance by mandating that USDA require the companies to remit farmer paid processing fees to the federal government beginning in 1999. Prior to enactment of this legislation, which was based on GAO's recommendation, companies were allowed to keep these fees.

    Recommendation: The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to determine the administrative expense reimbursement rate that reflects the appropriate and reasonable costs of selling and servicing traditional buyup insurance and include this rate in the new agreement currently being developed with the companies.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: For 1998 and subsequent years, USDA reduced the administrative reimbursement rate to 27 percent.

    Recommendation: The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to closely monitor the experience of the catastrophic insurance program to ensure that over time the underwriting gains earned on catastrophic insurance by the companies do not routinely exceed FCIC's long-term target.

    Agency Affected: Department of Agriculture

    Status: Closed - Implemented

    Comments: USDA agreed with the recommendation and changed its 1998 standard reinsurance agreement to ensure that underwriting gains on catastrophic insurance will be more closely in line with its long-term target.

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