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Highlights

Pursuant to a legislative requirement, GAO reviewed the financial arrangements between the Federal Crop Insurance Corporation (FCIC) and participating insurance companies for delivering crop insurance to qualified producers, focusing on the: (1) adequacy of the current administrative reimbursement rate for expenses of participating crop insurance companies; (2) comparative cost to the government in 1995 of private companies' and the Department of Agriculture's (USDA) delivery of catastrophic insurance; and (3) advantages and disadvantages of different expense reimbursement alternatives.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Agriculture 1. The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to determine the administrative expense reimbursement rate that reflects the appropriate and reasonable costs of selling and servicing traditional buyup insurance and include this rate in the new agreement currently being developed with the companies.
Closed - Implemented
For 1998 and subsequent years, USDA reduced the administrative reimbursement rate to 27 percent.
Department of Agriculture 2. The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to determine the compensation that reflects the appropriate and reasonable costs of selling and servicing catastrophic crop insurance and include it in the new agreement currently being developed with the companies.
Closed - Implemented
Recently enacted P.L. 105-185 reduces the participating insurance companies' compensation for catastrophic crop insurance by mandating that USDA require the companies to remit farmer paid processing fees to the federal government beginning in 1999. Prior to enactment of this legislation, which was based on GAO's recommendation, companies were allowed to keep these fees.
Department of Agriculture 3. The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to explicitly convey to participating insurance companies the type of expenses that the administrative reimbursement is intended to cover.
Closed - Implemented
USDA has revised guidelines in its 1998 Standard Reinsurance Agreement in accordance with the recommendation.
Department of Agriculture 4. The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to monitor companies' expenses to ensure that the established rate is reasonable for the services provided.
Closed - Implemented
USDA will annually obtain information regarding expenses from each company participating in the crop insurance program. According to USDA, the expense data will be evaluated and audited on an ongoing basis to assess whether the current reimbursement is reasonable.
Department of Agriculture 5. The Secretary of Agriculture should direct the Administrator, Risk Management Agency, to closely monitor the experience of the catastrophic insurance program to ensure that over time the underwriting gains earned on catastrophic insurance by the companies do not routinely exceed FCIC's long-term target.
Closed - Implemented
USDA agreed with the recommendation and changed its 1998 standard reinsurance agreement to ensure that underwriting gains on catastrophic insurance will be more closely in line with its long-term target.

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