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Testimony: 

Before the Committee on Oversight and Government Reform, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Thursday, May 3, 2007: 

Crop Insurance: 

Continuing Efforts Are Needed to Improve Program Integrity and Ensure 
Program Costs Are Reasonable: 

Statement of Lisa Shames, Acting Director: 
Natural Resources and Environment: 

GAO-07-819T: 

GAO Highlights: 

Highlights of GAO-07-819T, a testimony before the Committee on 
Oversight and Government Reform, House of Representatives 

Why GAO Did This Study: 

The U.S. Dept. of Agriculture’s (USDA) Risk Management Agency (RMA) 
administers the federal crop insurance program in partnership with 
private insurers. In 2006, the program cost $3.5 billion, including 
millions in losses from fraud, waste, and abuse, according to USDA. The 
Agricultural Risk Protection Act of 2000 granted RMA authority to 
renegotiate the terms of RMA’s standard reinsurance agreement with 
companies once over 5 years. 

This testimony is based on GAO’s 2005 report, Crop Insurance: Actions 
Needed to Reduce Program’s Vulnerability to Fraud, Waste, and Abuse, as 
well as new analyses this Committee requested on underwriting gains and 
administrative and operating expenses USDA paid companies. GAO 
discusses (1) USDA’s processes to address fraud, waste, and abuse; (2) 
extent the program’s design makes it vulnerable to abuse; and (3) 
reasonableness of underwriting gains and other expenses. USDA agreed 
with most of GAO’s 2005 recommendations to improve program integrity. 
RMA agreed that GAO’s new analyses were technically accurate. 

What GAO Found: 

GAO reported that RMA did not use all available tools to reduce the 
crop insurance program’s vulnerability to fraud, waste, and abuse. RMA 
has since taken some steps to improve its procedures. In particular: 

* USDA’s Farm Service Agency (FSA) inspections during the growing 
season were not being used to maximum effect. Between 2001 and 2004, 
FSA conducted only 64 percent of the inspections RMA requested. Without 
inspections, farmers may falsely claim crop losses. However, FSA said 
it could not conduct all requested inspections, as GAO recommended, 
because of insufficient resources. RMA now provides information more 
frequently so FSA can conduct timelier inspections.
* RMA’s data analysis of the largest farming operations was incomplete. 
In 2003, about 21,000 of the largest farming operations did not report 
all of the individuals or entities with an ownership interest in these 
operations, as required. Therefore, RMA was unaware of ownership 
interests that could help it prevent potential program abuse. FSA and 
RMA now share information to identify such individuals or entities. 
USDA should be able to recover up to $74 million in improper payments 
made during 2003. 
* RMA was not effectively overseeing insurance companies’ efforts to 
control program abuse. According to GAO’s review of 120 cases, 
companies did not complete all the required quality assurance reviews 
of claims, and those that were conducted were largely paper exercises. 
RMA agreed to improve oversight of their reviews, but GAO has not 
followed up to examine its implementation. 

RMA’s regulations to implement the crop insurance program, as well as 
some statutory requirements, create design problems that hinder its 
efforts to reduce abuse. For example, the regulations allow farmers to 
insure fields individually rather than together. As such, farmers can 
“switch” reporting of yield among fields to make false claims or build 
up a higher yield history on a field to increase its eligibility for 
higher insurance guarantees. RMA did not agree with GAO’s 
recommendation to address the problems associated with insuring 
individual fields. Statutorily high premium subsidies may also limit 
RMA’s ability to control program abuse: the subsidies shield farmers 
from the full effect of paying higher premiums associated with frequent 
claims. 

From 2002 through 2006, USDA paid the insurance companies underwriting 
gains of $2.8 billion, which represents an average annual rate of 
return of 17.8 percent. In contrast, according to insurance industry 
statistics, the benchmark rate of return for companies selling property 
and casualty insurance was 6.4 percent. USDA renegotiated the financial 
terms of its standard reinsurance agreement with the companies in 2005, 
but their rate of return was 30.1 percent in 2005, and 24.3 percent in 
2006. It also paid the companies a cost allowance of $4 billion to 
cover administrative and operating costs for 2002 through 2006. USDA 
recommended that Congress provide RMA with authority to renegotiate the 
financial terms and conditions of its standard reinsurance agreement 
once every 3 years. 

What GAO Recommends: 

Congress has an opportunity in the Farm Bill reauthorization to grant 
RMA authority to periodically renegotiate the financial terms of its 
agreement with companies to provide reasonable cost allowances and 
underwriting gains. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-819T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Lisa Shames at (202) 512-
3841 or shamesl@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss the U.S. Department of 
Agriculture's (USDA) efforts to address fraud, waste, and abuse in the 
federal crop insurance program. As you know, federal crop insurance is 
part of the overall safety net of programs for American farmers. It 
provides protection against financial losses caused by droughts, 
floods, or other natural disasters. USDA's Risk Management Agency (RMA) 
supervises the Federal Crop Insurance Corporation's (FCIC) operations 
and has overall responsibility for administering the crop insurance 
program, including controlling costs and protecting against fraud, 
waste, and abuse. RMA also partners with private insurance companies 
that sell and service the insurance policies and share a percentage of 
the risk of loss and opportunity for gain associated with each policy. 

In November 2006, we identified the federal crop insurance program as a 
program in need of better oversight to ensure program funds are spent 
as economically, efficiently, and effectively as possible.[Footnote 1] 
In 2006, the crop insurance program provided $50 billion in insurance 
coverage for 242 million acres of farmland, at a cost of $3.5 billion 
to the federal government, of which a total of $1.8 billion was paid to 
insurance companies for their participation in the crop insurance 
program.[Footnote 2] USDA reports that an estimated $62 million in 
indemnity payments were made in 2006 as a result of waste, such as 
incorrect payments or payments based on incomplete or missing 
paperwork.[Footnote 3] 

To improve the integrity of the crop insurance program, among other 
things, Congress enacted the Agricultural Risk Protection Act of 2000 
(known as ARPA). ARPA provided RMA and USDA's Farm Service Agency (FSA) 
with new tools for monitoring and controlling program abuses.[Footnote 
4] ARPA required the Secretary of Agriculture to develop and implement 
a coordinated plan for FSA to assist RMA in the ongoing monitoring of 
the crop insurance program and to use information technologies, such as 
data mining--the analysis of data to establish relationships and 
identify patterns--to administer and enforce the program. Furthermore, 
ARPA provided USDA with the authority to renegotiate the financial 
terms of its contractual agreement--known as the standard reinsurance 
agreement (SRA)--with the private insurance companies once during 2001 
through 2005. USDA renegotiated the terms of the SRA in 2004 and 
implemented the new agreement in 2005. In its recent Farm Bill 
proposal, USDA recommended that Congress provide the agency with 
authority to renegotiate the financial terms and conditions once every 
3 years. RMA officials also told us they sought legislative remedies to 
address excessive underwriting gains in their budget proposals for 
fiscal years 2006 and 2007. The SRA between USDA and the insurance 
companies includes (1) a cost allowance that is tied to the value of 
the policy and that is intended to cover administrative and operating 
expenses incurred by the companies for program delivery, and (2) risk- 
sharing formulas that establish underwriting gains and losses. 

GAO has issued reports on the federal crop insurance program that have 
raised a number of concerns. (See Related GAO Products.) Most recently, 
in June 2006, we reported that some farmers may have abused the crop 
insurance program by allowing crops to fail through neglect or 
deliberate actions in order to collect insurance, and some insurance 
companies have not exercised due diligence in investigating losses and 
paying claims.[Footnote 5] In addition, the effects of climate change, 
including rising temperatures and increasingly frequent and intense 
droughts, storms, and flooding, may be potentially significant in 
coming decades and affect the program's financial costs to the 
government. As we recently reported,[Footnote 6] major private and 
federal insurers are both exposed to the effects of climate change over 
the coming decades, but are responding differently. Many large private 
insurers are incorporating climate change into their annual risk 
management practices, and some are addressing it strategically by 
assessing its potential long-term, industrywide impacts. However, the 
major federal insurance programs, including the crop insurance program, 
have done little to develop comparable information. 

My testimony today focuses on the (1) effectiveness of USDA's 
procedures to prevent and detect fraud, waste, and abuse in selling and 
servicing crop insurance policies; (2) extent to which program design 
issues may make the program more vulnerable to fraud, waste, and abuse; 
and (3) reasonableness of underwriting gains and administrative and 
operating expenses USDA pays to the companies for program delivery. My 
testimony is primarily based on published GAO products. In addition, at 
the request of this Committee, we analyzed underwriting gains and 
losses and administrative and operating expenses. RMA reviewed these 
analyses and told us they were technically accurate. We performed our 
work in accordance with generally accepted government auditing 
standards. 

In summary, since the enactment of ARPA, RMA has taken a number of 
steps to improve its procedures to prevent and detect fraud, waste, and 
abuse in the crop insurance program. Most notably, RMA reports that 
data mining analyses and subsequent communication to farmers resulted 
in a decline of at least $300 million in questionable claims payments 
from 2001 to 2004. However, we found that, at the time our review, RMA 
was not effectively using all of the tools it had available and that 
some farmers and others continued to abuse the program. We identified 
weaknesses in four key areas: (1) field inspections, (2) data mining 
processes that exclude many large farming operations when farmers do 
not report their interest in them, (3) quality assurance reviews 
conducted by insurance companies, and (4) imposition of sanctions. 
Weaknesses in these areas left the program vulnerable to questionable 
claims, and the insurance companies and RMA could not always determine 
the validity of a claim to minimize fraud, waste, and abuse. RMA has 
taken steps on some of the recommendations we made. For example, RMA 
amended its crop insurance policy manual to provide information more 
frequently to FSA on suspect claims so that FSA is able to conduct 
timelier field inspections to detect potential abuse. In another case, 
we recommended that RMA promulgate regulations needed to fully utilize 
its expanded sanction authority provided under ARPA. In response, RMA 
developed draft regulations that, when final, will allow the agency to 
fully use this authority to sanction program violators. 

We also found that the program's design, as laid out in RMA's 
regulations or as required by statute, can impede the efforts of RMA 
officials to prevent and detect fraud, waste, and abuse in a number of 
ways. In terms of RMA's regulations, farmers can insure their fields 
individually instead of insuring all fields combined, which makes it 
easier for them to switch production among fields, either to make false 
insurance claims or to build up a higher yield history on a particular 
field in order to increase its eligibility for higher future insurance 
guarantees. RMA disagreed with our recommendation to reduce the 
insurance guarantee or eliminate optional unit coverage for producers 
who consistently have claims that are irregular in comparison with 
other producers growing the same crop in the same location. RMA stated 
that our recommendation represents a disproportionate response, 
considering the small number of producers who switch the yield on a 
field each year. Nevertheless, we continue to believe that RMA could 
tailor an underwriting rule to target those relatively few farmers who 
file anomalous claims related to yield switching. In terms of statutory 
requirements, RMA is obligated by law to offer farmers "prevented 
planting" coverage--coverage that allows for insurance claims if an 
insured crop is prevented from being planted because of weather 
conditions, but it is often difficult to determine whether farmers had 
the opportunity to plant a crop. In our 2006 testimony, we stated that 
Congress may wish to consider allowing RMA to reduce premium subsidies-
-and hence raise the insurance premiums--for farmers who consistently 
have claims, such as prevented planting claims, that are irregular in 
comparison with other farmers growing the same crop in the same 
location. To date, Congress has not granted RMA the authority to make 
such reductions. 

Finally, USDA paid the insurance companies underwriting gains of $2.8 
billion, in total, from 2002 through 2006. The underwriting gains 
represent an average annual rate of return of 17.8 percent over this 5- 
year period.[Footnote 7] This rate of return is considerably higher 
than the insurance industry average. According to insurance industry 
statistics, the benchmark rate of return for U.S. insurance companies 
selling private property and casualty insurance was 6.4 percent during 
this period. RMA officials told us that this benchmark rate can be 
considered a starting point for measuring the appropriateness of the 
underwriting gains in the crop insurance program. As previously noted, 
USDA renegotiated the financial terms of its SRA with the companies 
beginning with the 2005 planting season. Nonetheless, in 2005, USDA 
still paid insurance companies underwriting gains of $916 million--a 
rate of return of 30.1 percent. In 2006, USDA paid underwriting gains 
of $886 million--a rate of return of 24.3 percent. The companies 
received these underwriting gains despite drought conditions in parts 
of the country in 2005 and 2006 that would normally suggest they would 
earn lower profits. In addition to underwriting gains, USDA paid the 
insurance companies $4 billion in cost allowances to cover 
administrative and operating expenses incurred for program delivery 
from 2002 through 2006. USDA expects the cost allowance paid per policy 
to increase by about 25 percent by 2008 because of higher crop prices, 
particularly for corn and soybeans. These higher crop prices increase 
the value of the policy. However, the companies and their affiliated 
sales agents will receive this substantially higher cost allowance 
without any corresponding increase in expenses for selling and 
servicing the policies. Congress has an opportunity in its 
reauthorization of the Farm Bill to provide USDA with the authority to 
periodically renegotiate the financial terms of the standard 
reinsurance agreement with the insurance companies so that the 
companies' rate of return is more in line with private insurance 
markets. USDA has requested the authority to renegotiate the SRA in its 
proposals for the Farm Bill. 

Background: 

FCIC was established in 1938 to temper the economic impact of the Great 
Depression, and was significantly expanded in 1980 to protect farmers 
from the financial losses brought about by drought, flood, or other 
natural disasters. RMA administers the program in partnership with 
private insurance companies, which share a percentage of the risk of 
loss and the opportunity for gain associated with each insurance policy 
written. RMA acts as a reinsurer--reinsurance is sometimes referred to 
as insurance for the insurance companies--for a portion of all policies 
the federal crop insurance program covers. In addition, RMA pays 
companies a percentage of the premium on policies sold to cover the 
administrative costs of selling and servicing these policies. In turn, 
insurance companies use this money to pay commissions to their agents, 
who sell the policies, and fees to adjusters when claims are filed. 

FCIC insures agricultural commodities on a crop-by-crop and county-by- 
county basis, considering farmer demand and the level of risk 
associated with the crop in a given region. Major crops, such as 
grains, are covered in almost every county where they are grown, while 
specialty crops such as fruit are covered in only some areas. 
Participating farmers can purchase different types of crop insurance 
and at different levels. 

RMA establishes the terms and conditions that the private insurance 
companies selling and servicing crop insurance policies are to use 
through the SRA. The SRA provides for the cost allowance intended to 
cover administrative and operating expenses the companies incur for the 
policies they write, among other things. The SRA also establishes the 
minimum training, quality control review procedures, and performance 
standards required of all insurance providers in delivering any policy 
insured or reinsured under the Federal Crop Insurance Act, as amended. 

Under the crop insurance program, participating farmers are assigned 
(1) a "normal" crop yield based on their actual production history and 
(2) a price for their commodity based on estimated market conditions. 
Farmers can then select a percentage of their normal yield to be 
insured and a percentage of the price they wish to receive if crop 
losses exceed the selected loss threshold. In addition, under the crop 
insurance program's "prevented planting" provision, insurance companies 
pay farmers who were unable to plant the insured crop because of an 
insured cause of loss that was general to their surrounding area, such 
as weather conditions causing wet fields, and that had prevented other 
farmers in that area from planting fields with similar characteristics. 
These farmers are entitled to claims payments that generally range from 
50 to 70 percent, and can reach as high as 85 percent, of the coverage 
they purchased, depending on the crop. 

RMA is responsible for protecting against fraud, waste, and abuse in 
the federal crop insurance program. In this regard, RMA uses a broad 
range of tools, including RMA's compliance reviews of companies' 
procedures, companies' quality assurance reviews of claims, data 
mining, and FSA's inspections of farmers' fields. For example, 
insurance companies must conduct quality assurance reviews of claims 
that RMA has identified as anomalous or of those claims that are 
$100,000 or more to determine whether the claims the companies paid 
comply with policy provisions. 

Congress enacted ARPA, amending the Federal Crop Insurance Act, in 
part, to improve compliance with, and the integrity of, the crop 
insurance program. Among other things, ARPA provided RMA authority to 
impose sanctions against producers, agents, loss adjusters, and 
insurance companies that willfully and intentionally provide false or 
inaccurate information to FCIC or to an insurance company--previously, 
RMA had authority to impose sanctions only on individuals who willfully 
and intentionally provided false information. It also provided RMA with 
authority to impose sanctions against producers, agents, loss 
adjusters, and insurance companies for willfully and intentionally 
failing to comply with any other FCIC requirement. In addition, it 
increased the percentage share of the premium the government pays for 
most coverage levels of crop insurance, beginning with the 2001 crop 
year. The percentage of the premium the government pays declines as 
farmers select higher levels of coverage. However, ARPA raised the 
percentage of federal subsidy for all levels of coverage, particularly 
for the highest levels of coverage. For example, the government now 
pays more than one-half of the premium for farmers who choose to insure 
their crop at 75-percent coverage. 

RMA Has Strengthened Procedures for Preventing Questionable Claims, but 
the Program Remains Vulnerable to Potential Abuse: 

RMA has taken a number of steps to improve its procedures to prevent 
and detect fraud, waste, and abuse, such as data mining, expanded field 
inspections and quality assurance reviews. In particular, RMA now 
develops a list of farmers each year whose operations warrant an on- 
site inspection during the growing season because data mining uncovered 
patterns in their past claims that are consistent with the potential 
for fraud and abuse. The list includes, for example: 

* farmers, agents, and adjusters linked in irregular behavior that 
suggests collusion; 

* farmers who for several consecutive years received most of their crop 
insurance payments from prevented planting indemnity payments; 

* farmers who appear to have claimed the production amounts for 
multiple fields as only one field's yield, thereby creating an 
artificial loss on their other field(s); and: 

* farmers who, in comparison with their peers, file unusually high 
claims for lost crops over many years. 

Since RMA began performing this data mining in 2001, it has identified 
about 3,000 farmers annually who warrant an on-site inspection because 
of anomalous claims patterns. In addition, RMA annually performs about 
100 special analyses to identify areas of potential vulnerability and 
trends in the program. 

RMA also provides the names of farmers from its list of suspect claims 
for inspection to the appropriate FSA state office for distribution to 
FSA county offices, as well as to the insurance companies selling the 
policies to farmers. As a result of these inspections and other 
information, RMA reported total cost savings of $312 million from 2001 
to 2004, primarily in the form of estimated payments avoided. For 
example, according to RMA, claims payments to farmers identified for an 
inspection decreased nationwide from $234 million in 2001 to $122 
million in 2002. According to RMA, some of the farmers on the list for 
filing suspect claims bought less insurance and a few dropped crop 
insurance entirely, but most simply changed their behavior regarding 
loss claims. 

However, as we testified in 2006, RMA was not effectively using all of 
the tools it had available and that some farmers and others continued 
to abuse the program, as the following discussion indicates. 

Inspections during the growing season were not being used to maximum 
effect. FSA was not providing RMA with inspection assistance in 
accordance with USDA guidance. For example, between 2001 and 2004, 
farmers filed claims on about 380,000 policies annually, and RMA's data 
mining identified about 1 percent of these claims as questionable and 
needing FSA's inspection. Under USDA guidance, FSA should have 
conducted all of the 11,966 requested inspections, but instead 
conducted only 64 percent of them; FSA inspectors said that they did 
not conduct all requested inspections primarily because they did not 
have sufficient resources. Moreover, between 2001 and 2004, FSA offices 
in nine states did not conduct any of the field inspections RMA had 
requested in one or more of the years. Until we brought this matter to 
their attention in September 2004, FSA headquarters officials were 
unaware that the requested inspections in these nine states had not 
been conducted. Furthermore, FSA might not have been as effective as 
possible in conducting field inspections because RMA did not provide it 
with information on the nature of the suspected abusive behavior or the 
results of follow-up investigations. Finally, these inspections did not 
always occur in a timely fashion during the growing season. Because of 
these problems, the insurance companies and RMA could not always 
determine the validity of a claim. 

USDA has implemented some of our recommendations to improve inspection 
practices. For example, we recommended that RMA more consistently 
inform FSA of the suspect claim patterns that it should investigate. 
RMA amended its crop insurance policy manual to provide information 
more frequently to FSA on suspect claims, as we recommended, so that 
FSA can conduct timelier field inspections to detect potential abuse. 
Specifically, RMA now provides a list twice a year--in the fall for 
crops such as wheat, and in the spring for crops such as corn and 
soybeans. However, FSA disagreed with our recommendation that it 
conduct all inspections called for under agency guidance, citing 
insufficient resources as the reason. Nevertheless, we believe that 
conducting these inspections would achieve potentially substantial 
savings for the crop insurance program by identifying cases of 
fraudulent claims. 

RMA's data analysis of the largest farming operations was incomplete. 
RMA's data mining analysis excluded comparisons of the largest farming 
operations--including those organized as partnerships and joint 
ventures. These entities may include individuals who are also members 
of one or more other entities. Because it did not know the ownership 
interests in the largest farming operations, RMA could not readily 
identify potential fraud. For example, farmers who are members of more 
than one farming operation could move production from one operation to 
another to file unwarranted claims, without RMA's knowledge that these 
farmers participate in more than one farming operation. RMA could not 
make these comparisons because it had not been given access to similar 
data that FSA maintains. However, ARPA required the Secretary of 
Agriculture to develop and implement a coordinated plan for RMA and FSA 
to reconcile all relevant information received by either agency from a 
farmer who obtains crop insurance coverage. 

Using FSA data, we examined the extent to which (1) farming operations 
report all members who have a substantial beneficial interest in the 
operation, (2) these farming operations file questionable crop 
insurance claims, and (3) agents or claims adjusters had financial 
interests in the claim.[Footnote 8] By comparing RMA's and FSA's 
databases, we found that 21,310 farming entities, or about 31 percent 
of all farming entities, did not report one or more members who held a 
beneficial interest of 10 percent or more in the farming operation 
holding the policy. RMA should be able to recover a portion of these 
payments because, according to RMA regulations, if the policyholder 
fails to disclose an ownership interest in the farming operation, the 
policyholder must repay the amount of the claims payment that is 
proportionate to the interest of the person who was not 
disclosed.[Footnote 9] According to our analysis, RMA should be able to 
recover up to $74 million in claims payments for 2003. USDA has since 
implemented our recommendation that FSA and RMA share information on 
policyholders to better identify fraud, waste, and abuse. In addition, 
of the 21,310 entities failing to disclose ownership interest in 2003, 
we found 210 entities with suspicious insurance claims totaling $11.1 
million. Finally, we identified 24 crop insurance agents who sold 
policies to farming entities in which the agents held a substantial 
beneficial interest but failed to report their ownership interest to 
RMA as required. USDA has since implemented our recommendation that FSA 
and RMA share information on policyholders to better identify fraud, 
waste, and abuse. RMA, however, has not implemented our recommendation 
to recover claims payments to ineligible farmers or to entities that 
failed to fully disclose ownership interest. 

RMA was not effectively overseeing insurance companies' quality 
assurance programs. RMA guidance requires insurance companies to 
provide oversight to properly underwrite the federal crop insurance 
program, including implementing a quality control program, conducting 
quality control reviews, and submitting an annual report to FCIC. 
However, RMA was not effectively overseeing insurance companies' 
quality assurance programs, and for the claims we reviewed, it did not 
appear that most companies were rigorously carrying out their quality 
assurance functions. For example, 80 of the 120 insurance files we 
reviewed claimed more than $100,000 in crop losses or met some other 
significant criteria; RMA's guidance states that the insurance provider 
must conduct a quality assurance review for such claims. However, the 
insurance companies conducted reviews on only 59 of these claims, and 
the reviews were largely paper exercises, such as computational 
verifications, rather than comprehensive analysis of the claim. RMA did 
not ensure that companies conducted all reviews called for under its 
guidance and did not examine the quality of the companies' reviews. RMA 
agreed with our recommendation to improve oversight of companies' 
quality assurance programs, but we have not yet followed up with the 
agency to examine its implementation. 

RMA has infrequently used its new sanction authority to address program 
abuses. RMA had only used its expanded sanction authority granted under 
ARPA on a limited basis. It had identified about 3,000 farmers with 
suspicious claims payments--notable policy irregularities compared with 
other farmers growing the same crop in the same county--each year since 
the enactment of ARPA. While not all of these policies with suspicious 
claims were necessarily sanctionable, RMA imposed only 114 sanctions 
from 2001 through 2004. According to RMA officials, RMA requested and 
imposed few sanctions because it had not issued regulations to 
implement its expanded authority under ARPA. Without regulations, RMA 
had not established what constitutes an "FCIC requirement" and not 
explained how it would determine that a violation had occurred or what 
procedural process it would follow before imposing sanctions. RMA 
agreed with our recommendation that it promulgate regulations to 
implement its expanded authority, and has developed draft regulations. 
Once final, these regulations will allow the agency to fully use this 
authority to sanction program violators. 

RMA's Regulations and Some Statutory Requirements Hinder Efforts to 
Reduce Abuse in the Crop Insurance Program: 

While RMA can improve its day-to-day oversight of the federal crop 
insurance program in a number of ways, the program's design, as laid 
out in RMA's regulations or as required by statute, hinders the 
agency's efforts to administer certain program provisions in order to 
prevent fraud, waste, and abuse, as the following discussion indicates. 

RMA's regulations allow farmers the option of insuring their fields 
individually rather than combined as one unit. Farmers can insure 
production of a crop on an individual field (optional units) or all 
their fields as one unit. Farmers may want to insure fields separately 
out of concern that they could experience losses in a certain field 
because of local weather conditions, such as hail or flooding. If 
farmers instead insure their entire crop in a single basic insurance 
unit, the hail losses might not cause the production yield of all units 
combined to be below the level guaranteed by the insurance and, 
therefore, would not warrant an indemnity payment. Although insurance 
on individual fields provides farmers added protection against loss, 
this optional unit coverage increases the potential for fraud and abuse 
in the crop insurance program. 

Insuring fields separately enables farmers to "switch" production among 
fields--reporting production of a crop from one field that is actually 
produced on another field--either to make false insurance claims based 
on low production or to build up a higher yield history on a particular 
field in order to increase that field's eligibility for higher future 
insurance guarantees. We reported that of the 2,371 farmers identified 
as having irregular claims in 2003, 12 percent were suspected of 
switching production among their fields. 

According to a 2002 RMA study, losses per unit (e.g., a field) increase 
as the number of separately insured optional units increases.[Footnote 
10] However, according to an RMA official, gathering the evidence to 
support a yield-switching fraud case requires considerable resources, 
especially for large farming operations. RMA disagreed with our 
recommendation to reduce the insurance guarantee or eliminate optional 
unit coverage for farmers who consistently have claims that are 
irregular in comparison with other farmers growing the same crop in the 
same location. It stated that our recommendation represents a 
disproportionate response, considering the small number of producers 
who engage in yield switching each year, and that the adoption of our 
recommendation would not be cost effective. Nevertheless, we continue 
to believe that RMA could tailor an underwriting rule so that it would 
target only a few producers each year and would entail few resources. 
Such a tool would provide RMA another means to discourage producers 
from abusing the program. 

Minimal risk sharing on some policies, as set by statute, may not 
provide insurance companies with a strong incentive to carry out their 
responsibilities under the program. In some cases, insurance companies 
have little incentive to rigorously challenge questionable claims. 
Insurance companies participating in the crop insurance program share a 
percentage of the risk of loss or opportunity for gain on each 
insurance policy they write, but the federal government ultimately 
bears a high share of the risk. Under the SRA, insurance companies are 
allowed to assign policies to one of three risk funds--assigned risk, 
developmental, or commercial. The SRA provides criteria for assigning 
policies to these funds. For the assigned risk fund, the companies cede 
up to 85 percent of the premium and associated liability for claims 
payments to the government and share a limited portion of the gains or 
losses on the policies they retain. For the developmental and 
commercial funds, the companies cede a smaller percent of the premium 
and associated liability for claims payments to the government. 

Economic incentives to control program costs associated with fraud, 
waste, and abuse are commensurate with financial exposure. Therefore, 
for policies placed in the assigned risk fund, companies have far less 
financial incentive to investigate suspect claims. For example, in one 
claim file we reviewed, an insurance company official characterized the 
farmer as filing frequent, questionable claims; however, the company 
paid a claim of over $500,000. The official indicated that if the 
company had vigorously challenged the claim, the farmer would have 
defended his claim just as vigorously, and the company would have 
potentially incurred significant litigation expenses, which RMA does 
not specifically reimburse. With this cost and reimbursement structure, 
in the company's opinion, it was less costly to pay the claim. 

RMA and insurance companies have difficulty determining potential abuse 
associated with statutory coverage for prevented planting. Under the 
Federal Crop Insurance Act, as amended, RMA must offer prevented 
planting coverage. RMA allows claims for prevented planting if farmers 
cannot plant owing to an insured cause of loss that is general in the 
surrounding area and that prevents other farmers from planting acreage 
with similar characteristics. Claims for prevented planting are paid at 
a reduced level, recognizing that farmers do not incur all production 
costs associated with planting and harvesting a crop. However, 
determining whether farmers can plant their crop may be difficult. 
Annually, RMA pays about $300 million in claims for prevented planting. 

Statutorily high premium subsidies may inhibit RMA's ability to control 
program abuse. ARPA increased premium subsidies--the share of the 
premium paid by the government--but this increase may hamper RMA's 
ability to control program fraud, waste, and abuse. Premium subsidies 
are calculated as a percentage of the total premium, and farmers pay 
only between 33 to 62 percent of the policy premium, depending on 
coverage level. High premium subsidies shield farmers from the full 
effect of paying higher premiums. Because premium rates are higher in 
riskier areas and for riskier crops, the subsidy structure transfers 
more federal dollars to those who farm in riskier areas or produce 
riskier crops. 

In addition, by regulation, premium rates are higher for farmers who 
choose to insure their fields separately under optional units, rather 
than all fields combined, because the frequency of claims payments is 
higher on the separately insured units. Again, however, because of high 
premium subsidies, farmers pay only a fraction of the higher premium. 
Thus, the subsidy structure creates a disincentive for farmers to 
insure all fields combined. Over one-half (56 percent) of the crop 
insurance agents responding to the survey conducted for our 2005 report 
believed that charging higher premiums for farmers with a pattern of 
high or frequent claims would discourage fraud, waste, and abuse in the 
crop insurance program. In our 2006 testimony, we stated that Congress 
may wish to consider allowing RMA to reduce premium subsidies--and 
hence raise the insurance premiums--for farmers who consistently have 
claims that are irregular in comparison with other farmers growing the 
same crop in the same location. To date, no action has been taken. 

Compensation to Insurance Companies Has Been Excessive: 

From 1997 through 2006, USDA paid over $10.9 billion to companies that 
participate in the federal crop insurance program in cost allowances 
and underwriting gains, as table 1 shows. The $10.9 billion in total 
payments to the companies represents 42 percent of the government's 
cost of the crop insurance program--about $26 billion--over this 
period. That is, more than 40 cents of every dollar the government 
spent on the federal crop insurance program went to the companies that 
deliver the program, while less than 60 cents went to farmers. While we 
provide 10 years of data to offer a broad perspective and to even out 
annual losses and gains, the most recent 5 years of data--2002 to 2006-
-show similar results. 

Table 1: Cost Allowances and Underwriting Gains Paid to Insurance 
Companies, and Government Costs, 1997 through 2006: 

Dollars in millions. 

Year: 1997; 
Payments to insurance companies: Company cost allowance: $437.8; 
Payments to insurance companies: Company underwriting gain (loss): 
$352.1; 
Payments to insurance companies: Total payments to insurance companies: 
$789.9; 
Government cost for the crop insurance program[A]: $1,095.9. 

Year: 1998; 
Payments to insurance companies: Company cost allowance: 443.3; 
Payments to insurance companies: Company underwriting gain (loss): 
279.2; 
Payments to insurance companies: Total payments to insurance companies: 
722.5; 
Government cost for the crop insurance program[A]: 1,373.8. 

Year: 1999; 
Payments to insurance companies: Company cost allowance: 500.7; 
Payments to insurance companies: Company underwriting gain (loss): 
271.8; 
Payments to insurance companies: Total payments to insurance companies: 
772.5; 
Government cost for the crop insurance program[A]: 1,782.7. 

Year: 2000; 
Payments to insurance companies: Company cost allowance: 552.1; 
Payments to insurance companies: Company underwriting gain (loss): 
267.8; 
Payments to insurance companies: Total payments to insurance companies: 
819.9; 
Government cost for the crop insurance program[A]: 2,175.1. 

Year: 2001; 
Payments to insurance companies: Company cost allowance: 642.0; 
Payments to insurance companies: Company underwriting gain (loss): 
345.9; 
Payments to insurance companies: Total payments to insurance companies: 
987.9; 
Government cost for the crop insurance program[A]: 3,162.6. 

Year: 2002; 
Payments to insurance companies: Company cost allowance: 625.9; 
Payments to insurance companies: Company underwriting gain (loss): 
(47.5); 
Payments to insurance companies: Total payments to insurance companies: 
578.4; 
Government cost for the crop insurance program[A]: 3,465.6. 

Year: 2003; 
Payments to insurance companies: Company cost allowance: 733.9; 
Payments to insurance companies: Company underwriting gain (loss): 
377.9; 
Payments to insurance companies: Total payments to insurance companies: 
1,111.8; 
Government cost for the crop insurance program[A]: 3,588.7. 

Year: 2004; 
Payments to insurance companies: Company cost allowance: 890.0; 
Payments to insurance companies: Company underwriting gain (loss): 
691.9; 
Payments to insurance companies: Total payments to insurance companies: 
1,581.9; 
Government cost for the crop insurance program[A]: 3,125.7. 

Year: 2005; 
Payments to insurance companies: Company cost allowance: 829.6; 
Payments to insurance companies: Company underwriting gain (loss): 
916.2; 
Payments to insurance companies: Total payments to insurance companies: 
1,745.8; 
Government cost for the crop insurance program[A]: 2,698.5. 

Year: 2006; 
Payments to insurance companies: Company cost allowance: 949.8; 
Payments to insurance companies: Company underwriting gain (loss): 
885.9; 
Payments to insurance companies: Total payments to insurance companies: 
1,835.7; 
Government cost for the crop insurance program[A]: 3,462.0. 

Year: Total--1997 to 2006; 
Payments to insurance companies: Company cost allowance: $6,605.1; 
Payments to insurance companies: Company underwriting gain (loss): 
$4,341.2; 
Payments to insurance companies: Total payments to insurance companies: 
$10,946.3; 
Government cost for the crop insurance program[A]: $25,930.6. 

Year: Total--2002 to 2006; 
Payments to insurance companies: Company cost allowance: $4,029.2; 
Payments to insurance companies: Company underwriting gain (loss): 
$2,824.4; 
Payments to insurance companies: Total payments to insurance companies: 
$6,853.6; 
Government cost for the crop insurance program[A]: $16,340.5. 

Source: GAO's analysis of RMA's data. 

Notes: (1) Cost data are reported on a fiscal year basis. (2) Payments 
to companies are reported on a crop year basis. (3) Totals may not add 
due to rounding. 

[A] Government costs also include total indemnities and other 
administrative and operating expenses, including certain costs for 
research, development, and other activities. This total is reduced by 
the premiums and administration fees that farmers pay. 

[End of table] 

As discussed earlier, USDA pays both underwriting gains and cost 
allowances, as negotiated in the SRA. Since the crop insurance program 
was revised under ARPA--that is, from 2002 through 2006--USDA has paid 
the insurance companies a total of $2.8 billion in underwriting gains. 
In terms of profitability, these underwriting gains represent an 
average annual rate of return of 17.8 percent over this 5-year 
period.[Footnote 11] According to industry statistics, the benchmark 
rate of return for U.S. insurance companies selling private property 
and casualty insurance was 6.4 percent during this period.[Footnote 12] 
RMA officials told us that this benchmark rate can be considered a 
starting point for measuring the appropriateness of the underwriting 
gains in the crop insurance program. However, they stated that this 
program should have a somewhat higher rate of return because of the (1) 
high volatility of underwriting gains for this program compared with 
the relatively steady gains associated with the property and casualty 
insurance industry, and (2) lack of investment opportunities when 
participating in the program because premiums are paid to the companies 
at harvest, not when farmers purchase a policy. But these officials 
also said that current rates of return are excessive. USDA renegotiated 
the financial terms of its SRA with the companies beginning with the 
2005 planting season. In 2005, USDA paid the insurance companies 
underwriting gains of $916 million--a rate of return of 30.1 percent. 
In 2006, USDA paid them underwriting gains of $886 million--a rate of 
return of 24.3 percent. The companies received these underwriting gains 
despite drought conditions in parts of the country in 2005 and 2006. 
Adverse weather conditions, such as drought, normally suggest that 
insurance companies would earn lower profits because of greater 
producer losses. 

In addition to underwriting gains, RMA pays companies a cost allowance 
to cover program delivery expenses. The allowance is calculated as a 
percentage of total premiums on the insurance policies that they sell. 
Because the cost allowance is not tied to specific expenses, the 
companies can use the payments in any way they choose. From 2002 
through 2006, USDA paid the insurance companies over $4 billion in cost 
allowances. Because the cost allowance is a percentage of the premiums, 
it also increases when the value of policies companies sell increases, 
as it does when crop prices rise. For example, USDA expects the value 
of policies, and thereby the cost allowances paid to companies, to 
increase by about 25 percent from 2006 through 2008. USDA expects these 
higher policy values, and ultimately higher cost allowances, because of 
external factors, including higher crop prices, particularly for corn 
and soybeans. Consequently, the companies and their affiliated sales 
agents will receive substantially higher cost allowances without any 
corresponding increase in expenses for selling and servicing the 
policies. Substantially higher cost allowances provide these companies 
and their agents with a kind of windfall. Greater insurance coverage 
results in higher premiums and ultimately higher cost allowances; yet, 
the purpose of this allowance is to reimburse program delivery 
expenses. 

In this context, USDA has requested the authority to renegotiate the 
SRA in its proposals for the Farm Bill. Specifically, USDA recommends 
renegotiating the SRA financial terms and conditions once every 3 
years. According to USDA, the crop insurance program's participation 
has grown significantly since the implementation of ARPA. Because 
higher participation rates have resulted in more stable program 
performance, the reinsured companies have enjoyed historically large 
underwriting gains in the last 2 years of the program. Granting USDA 
authority to renegotiate periodically would also permit USDA to 
renegotiate the SRA if the reinsured companies experience an unexpected 
adverse impact. 

Conclusion: 

In conclusion, Mr. Chairman, federal crop insurance plays an invaluable 
role in protecting farmers from losses due to natural disasters, and 
the private insurance companies that participate in the program are 
integral to the program's success. Nonetheless, as we mentioned before, 
we identified crop insurance as an area for oversight to ensure that 
program funds are spent as economically, efficiently, and effectively 
as possible. Furthermore, a key reason that we identified crop 
insurance, as well as other farm programs, for oversight is that we 
cannot afford to continue business as usual, given the nation's current 
deficit and growing long-term fiscal challenges. 

RMA has made progress in addressing fraud, waste, and abuse, but the 
weaknesses we identified in program management and design continue to 
leave the crop insurance program vulnerable to potential abuse. 
Furthermore, as our work on underwriting gains and losses has shown, 
RMA's effort to limit cost allowances and underwriting gains by 
renegotiating the SRA has had minimal effect. In fact, it offers 
insurance companies and their agents a windfall. We believe that the 
crop insurance program should be delivered to farmers at a reasonable 
cost that does not over-compensate insurance companies participating in 
the program. A reduced cost allowance for administrative and operating 
expenses and a decreased opportunity for underwriting gains would 
potentially save hundreds of millions of dollars annually, yet still 
provide sufficient funds for the companies to continue delivering high- 
quality service while receiving a rate of return that is closer to the 
industry benchmark. 

Congress has an opportunity in its reauthorization of the Farm Bill to 
provide USDA with the authority to periodically renegotiate the 
financial terms of the SRA with the insurance companies so that the 
companies' rate of return is more in line with private insurance 
markets. Such a step can help position the nation to meet its fiscal 
responsibilities. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 
respond to any questions that you or other Members of the Committee may 
have. 

Contact and Staff Acknowledgments: 

Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this testimony. For further 
information about this testimony, please contact Lisa Shames, Acting 
Director, Natural Resources and Environment, (202) 512-3841 or 
shamesl@gao.gov. Key contributors to this testimony were James R. 
Jones, Jr., Assistant Director; Thomas M. Cook; and Carol Herrnstadt 
Shulman. 

[End of section] 

Related GAO Products: 

Climate Change: Financial Risks to Federal and Private Insurers in 
Coming Decades Are Potentially Significant. GAO-07-760T. Washington, 
D.C.: April 19, 2007. 

Climate Change: Financial Risks to Federal and Private Insurers in 
Coming Decades Are Potentially Significant. GAO-07-285. Washington, 
D.C.: March 16, 2007. 

Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. 
Washington, D.C.: November 17, 2006. 

Crop Insurance: More Needs to Be Done to Reduce Program's Vulnerability 
to Fraud, Waste, and Abuse. GAO-06-878T. Washington, D.C.: June 15, 
2006. 

Crop Insurance: Actions Needed to Reduce Program's Vulnerability to 
Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30, 
2005. 

Crop Insurance: USDA Needs to Improve Oversight of Insurance Companies 
and Develop a Policy to Address Any Future Insolvencies. GAO-04-517. 
Washington, D.C.: June 1, 2004. 

Crop Insurance: USDA Needs a Better Estimate of Improper Payments to 
Strengthen Controls Over Claims. GAO/RCED-99-266. Washington, D.C.: 
September 22, 1999. 

Crop Insurance: USDA's Progress in Expanding Insurance for Specialty 
Crops. GAO/RCED-99-67. Washington, D.C.: April 16, 1999. 

Crop Insurance: Opportunities Exist to Reduce Government Costs for 
Private-Sector Delivery. GAO/RCED-97-70. Washington, D.C.: April 17, 
1997. 

Crop Insurance: Federal Program Faces Insurability and Design Programs. 
GAO/RCED-93-98. Washington, D.C.: May 24, 1993. 

Crop Insurance: Program Has Not Fostered Significant Risk Sharing by 
Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13, 
1992. 

FOOTNOTES 

[1] GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-
235R (Washington, D.C.: Nov. 17, 2006). 

[2] Cost data in this testimony are reported on a fiscal year basis. 
Program data are reported on a crop year basis. 

[3] See U.S. Department of Agriculture, FY 2006 Performance and 
Accountability Report (Washington, D.C.: Nov. 15, 2006). RMA officials 
indicated that they have not developed an estimate of losses 
attributable to fraud and abuse. 

[4] FSA is generally responsible for helping producers enroll in 
agriculture support programs, overseeing these programs, and issuing 
program payments. 

[5] GAO, Crop Insurance: More Needs to Be Done to Reduce Program's 
Vulnerability to Fraud, Waste, and Abuse, GAO-06-878T (Washington, 
D.C.: June 15, 2006), and Crop Insurance: Actions Needed to Reduce 
Program's Vulnerability to Fraud, Waste, and Abuse, GAO-05-528 
(Washington, D.C.: September 30, 2005). 

[6] GAO, Climate Change: Financial Risks to Federal and Private 
Insurers in Coming Decades Are Potentially Significant, GAO-07-285 
(Washington, D.C.: March 16, 2007). 

[7] In this testimony, we define rate of return as underwriting gains 
calculated as a percentage of premiums on the policies in which 
companies retain risk of loss. 

[8] The Center for Agribusiness Excellence conducted this analysis at 
our request. The Center, located at Tarleton State University in 
Stephenville, Texas, provides research, training, and resources for 
data warehousing and data mining of agribusiness and agriculture data. 
The Center provides data mining of crop insurance data for RMA. 

[9] 7 C.F.R. § 457.8. 

[10] Final Research Report For Multiple Year Coverage, Task Order # RMA-
RED-01-06, Watts and Associates, Inc., June 27, 2002. 

[11] Similarly, over the 10-year period, from 1997 through 2006, USDA 
paid companies participating in the crop insurance program underwriting 
gains of $4.3 billion, which represents an average annual rate of 
return of 17.8 percent. 

[12] Best's Aggregates and Averages: Property/Casualty, United States 
and Canada. (Oldwick, New Jersey: 2006). According to this publication, 
the benchmark rate of return for property and casualty insurance for 
the 10-year period ending in 2005 (the most recent year data were 
available) was 6.9 percent. For calculating the rate of return, we used 
Best's ratio of pre-tax operating income to net premium earned. 

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