Crop Insurance:

Program Has Not Fostered Significant Risk Sharing by Insurance Companies

RCED-92-25: Published: Jan 13, 1992. Publicly Released: Jan 24, 1992.

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Pursuant to a congressional request, GAO reviewed the Federal Crop Insurance Reinsurance Program, focusing on: (1) major problems that have affected the program since 1980; (2) the federal government's success in shifting its potential liability for agricultural production losses to reinsured companies; and (3) the Federal Crop Insurance Corporation's (FCIC) actions to comply with the 1990 farm bill directive to shift more risk to the private sector.

GAO found that: (1) since Congress reformed the Federal Crop Insurance Program in 1980, the program has experienced such problems as inadequate internal controls, insufficient control over reinsured companies, generous standard reinsurance agreements, and rapid program expansion; (2) those problems contributed to the program's inability to meet many congressionally established goals to ensure actuarial soundness, private-sector sharing, and participation; (3) from 1981 through 1990, FCIC reinsurance terms effectively shielded companies from excess program losses, but FCIC sustained over $2.3 billion in excess losses, while the reinsured companies had net gains, through underwriting, of $101 million; (4) the FCIC 1992 standard reinsurance agreement forces reinsured companies to bear more risk than the previous agreement, by requiring companies to retain increased risk of loss on their written policies, reducing the amount of available stop-loss protection, and requiring companies to take more financial risks to earn underwriting gains; and (5) although FCIC has made efforts to increase reinsured companies' risks, the amount of risk retained by the companies will remain limited, since reinsured companies will have neither the capability nor the incentive to assume significantly greater amounts of risk until FCIC reduces losses and makes significant program changes.

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