Crop Insurance:

USDA Needs to Improve Oversight of Insurance Companies and Develop a Policy to Address Any Future Insolvencies

GAO-04-517: Published: Jun 1, 2004. Publicly Released: Jul 1, 2004.

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U.S. Department of Agriculture's (USDA) Risk Management Agency (RMA) administers the federal crop insurance program in partnership with insurance companies who share in the risk of loss or gain. In 2002, American Growers Insurance Company (American Growers), at the time, the largest participant in the program, was placed under regulatory control by the state of Nebraska. To ensure that policyholders were protected and that farmers' claims were paid, RMA agreed to fund the dissolution of American Growers. To date, RMA has spent about $40 million. GAO was asked to determine (1) what factors led to the failure of American Growers, (2) whether RMA procedures were adequate to monitor companies' financial condition, and (3) how effectively and efficiently RMA handled the dissolution of American Growers.

The failure of American Growers was caused by the cumulative effect of company decisions that reduced the company's surplus, making it vulnerable to collapse when widespread drought in 2002 erased anticipated profits. The company's decisions were part of an overall strategy to increase the scope and size of American Growers' crop insurance business. However, when anticipated profits did not cover the company's high operating expenses and dropped its surplus below statutory minimums, Nebraska's Department of Insurance (NDOI) declared the company to be in a hazardous financial condition prompting the state commissioner to take control of the company. In 2002, RMA's oversight was inadequate to evaluate the overall financial condition of companies selling federal crop insurance. Although RMA reviewed companies' plans for selling crop insurance and analyzed selected financial data, oversight procedures generally focused on financial data 6 to 18 months old and were insufficient to assess the overall financial health of the company. Additionally, RMA did not routinely share information or otherwise coordinate with state regulators on the financial condition of companies participating in the crop insurance program. For example, NDOI had identified financial and management weaknesses at American Growers. Since American Growers' failure, RMA has acted to strengthen its oversight procedures by requiring additional information on companies' planned financial operations. It is also working to improve its coordination with state insurance regulators. However, as we completed our review, neither of these initiatives had been included in written agency policies. When American Growers failed, RMA effectively protected the company's policyholders, but lacked a policy to ensure it handled the insolvency efficiently. RMA has spent over $40 million, working with the state of Nebraska, to protect policyholders by ensuring that policies were transferred to other companies and that farmers' claims were paid. NDOI accommodated RMA's interests by allowing RMA to fund the operation of the company long enough to pay farmers' claims. Prior to American Growers' failure, RMA did not have an agreement with the NDOI commissioner defining state and federal financial roles and responsibilities. If the NDOI commissioner had decided to liquidate the company, RMA may have incurred more costs and had less flexibility in protecting policyholders.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Agency completed recommended actions.

    Recommendation: To improve RMA's financial oversight of companies participating in the federal crop insurance program and its ability to effectively address future insolvencies, the Secretary of Agriculture should direct RMA to develop written policies to improve financial and operational reviews used to monitor the financial condition of companies to include analyses of projected expenses, projected underwriting gains, relevant financial operations of holding companies, and financial data on planned acquisitions.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: Agency completed recommended actions.

    Recommendation: To improve RMA's financial oversight of companies participating in the federal crop insurance program and its ability to effectively address future insolvencies, the Secretary of Agriculture should direct RMA to develop written agreements with state insurance regulators to improve coordination and cooperation in overseeing the financial condition of companies selling crop insurance, including the sharing of examination results and supporting work papers.

    Agency Affected: Department of Agriculture

  3. Status: Closed - Implemented

    Comments: Agency completed recommended actions.

    Recommendation: To improve RMA's financial oversight of companies participating in the federal crop insurance program and its ability to effectively address future insolvencies, the Secretary of Agriculture should direct RMA to develop a written policy clarifying RMA's authority as it relates to federal/state actions and responsibilities when a state regulator decides to place a company under supervision or rehabilitation, or to liquidate the company.

    Agency Affected: Department of Agriculture

 

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