Crop Revenue Insurance:

Problems With New Plans Need to Be Addressed

RCED-98-111: Published: Apr 29, 1998. Publicly Released: Apr 29, 1998.

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Pursuant to a congressional request, GAO reviewed various issues pertaining to the Department of Agriculture's new crop revenue insurance plans.

GAO noted that: (1) the three government-subsidized revenue insurance plans differ in the revenue guarantees they provide to farmers and in their relative cost to the government; (2) two of the plans, Revenue Assurance and Income Protection, set the revenue level that is to be protected at the time that crops are being planted, while the third, Crop Revenue Coverage, determines the protected revenue at either planting or at harvest, depending on when crop prices are higher; (3) in terms of potential government costs, Crop Revenue Coverage is likely to cost the government significantly more than the other two plans because of its higher reimbursement for administrative expenses and because of potentially higher total underwriting losses; (4) furthermore, the plan's promise base the revenue guarantee on the price at planting or the price at harvest, whichever is higher, exposes the government to higher claims payments in the years when widespread crop losses are coupled with rapidly increasing prices; (5) in their first two years of availability to farmers, the crop revenue insurance plans, especially Crop Revenue Coverage, achieved a significant share of the crop insurance market, accounting for about one-third of the total crop insurance sales in the areas where they were offered; (6) in terms of the claims payments for 1997, all types of crop insurance experienced much lower than average levels of claims as a result of favorable growing conditions in most of the country; (7) morever, primarily because revenue insurance plans were often marketed in lower-risk areas, they experienced lower levels of claims payments than did multiple-peril crop insurance; (8) GAO identified shortcomings in each revenue insurance plan's approach to establishing premium rates; (9) Crop Revenue Coverage is especially problematic because its rate structure does not take into account the interrelationship between crop prices and yields--an essential component of actuarially sound rate settings; (10) while good weather and stable crop prices generated very favorable claims experience over the first 2 years of the plans' availability, GAO has doubts about whether the rates established for each plan are actuarially sound over the long term and are appropriate to the risk each farmer presents; and (11) furthermore, while the plans were initially approved on a limited basis only, the Federal Crop Insurance Corporation, acting within its authority, approved the substantial expansion of one of these plans--Crop Revenue Coverage--before initial results were available.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: GAO recommended that the Risk Management Agency (RMA) reevaluate the methods and data used to set revenue insurance premium rates to ensure that each is based on the most actuarially sound foundation. RMA responded that it reviews premium rate-setting methods for all crop insurance products on an ongoing basis, and makes adjustments to the methods as knowledge is obtained from experience and research. As part of this process, RMA intends to reevaluate the methods and data used to set premium rates for revenue insurance plans.

    Recommendation: To be more certain that the revenue insurance plans are actuarially sound over the long term and are appropriate to the risk each farmer presents, the Secretary of Agriculture should direct the Administrator, Risk Management Agency, to address the shortcomings in the methods used to set premiums. Specifically, with respect to all three plans, the Secretary should direct the Risk Management Agency to reevaluate the methods and data used to set premium rates to ensure that each is based on the most actuarially sound foundation. With respect to Crop Revenue Coverage, the Risk Management Agency should base premium rates on a revenue distribution or another appropriate statistical technique that recognizes the interrelationship between farm-level yields and expected prices.

    Agency Affected: Department of Agriculture

 

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