Crop Insurance:

Additional Actions Could Further Improve Program's Financial Soundness

T-RCED-99-123: Published: Mar 17, 1999. Publicly Released: Mar 17, 1999.

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Lawrence J. Dyckman
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Pursuant to a congressional request, GAO discussed the Department of Agriculture's (USDA) crop insurance program, focusing on whether USDA: (1) has set adequate insurance rates to achieve the legislative requirement of actuarial soundness; (2) appropriately reimburses participating crop insurance companies for their administrative costs; and (3) has established methodologies in the revenue insurance plans that set sound premium rates.

GAO noted that: (1) several aspects of the program are of concern and need attention; (2) in 1995, GAO reported that premiums charged to farmers for crop insurance were not adequate to achieve the actuarial soundness as mandated by Congress; (3) GAO's review showed that the basic premium rates for the six crops reviewed--barley, corn, cotton, grain sorghum, soybeans, and wheat--were approaching actuarial soundness in 1995, but USDA's rates for some crops and locations and for some coverage and production levels were well below the legislative requirement; (4) in 1997, GAO reported that the government's administrative expense reimbursement to insurance companies--31 percent of premiums--was greater than the companies' reported expenses to sell and service federal crop insurance; (5) furthermore, GAO stated that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance; (6) the Agricultural Research, Extension, and Education Reform Act of 1998 subsequently revised reimbursement rates downward to 24.5 percent of premiums for most crop insurance; (7) however, continued oversight of the reasonableness of the program's administrative reimbursement rate is necessary; (8) increased program participation and sales volume that could result from crop insurance reform may lead to lower delivery costs, warranting a downward adjustment in the rate; (9) in 1998, GAO reported its doubts about whether new USDA-supported revenue insurance plans were actuarially sound over the long term and appropriate to the risk each farmer presents to the program; (10) specifically, with respect to the most popular plan, Crop Revenue Coverage, GAO recommended that USDA's Risk Management Agency require the plan's developer to base premium rates on a revenue distribution or other appropriate statistical technique that recognizes the interrelationship between farm-level yields and expected crop prices; (11) USDA, to date, has not fully acted on the recommendations; (12) this year Congress is once again considering reforms to the federal crop insurance program; and (13) continued oversight of the federal crop insurance program is needed to help ensure, among other things, the adequacy of premium rates, the reasonableness of administrative expense reimbursements to companies, and the soundness of revenue insurance plans.

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