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GAO recommends Congress adjust companies rate of return and assess portion of premiums retained.

September 5, 2017

3 Min Read

The Government Accountability Office has identified two ways to reduce federal government cost associated with delivering the crop insurance program.

First, given that GAO's analysis shows that the target rate of return does not reflect market conditions, that rate could be reduced. As a result, companies would earn a lower rate of return on their existing base of retained premiums. At the 2015 premium level, if the target rate were reduced by 4.9 percentage points, from the current rate of 14.5% to 9.6%, the companies' expected annual underwriting gains would decrease by $364 million. 

Second, the portion of premiums retained by companies could be reduced so that they would earn a rate of return on a smaller premium base. The portion of premiums retained by companies has changed little, averaging 77% since 2000, while USDA has retained the rest. Part of the justification for companies' retaining a significant portion of premiums was that they needed financial incentive to more carefully adjust farmers' loss claims. The need for this incentive decreased after a statutory change in 2000 improved RMA's ability to monitor those claims and companies' adjustment of them. Reducing the premiums that companies retain by 5 percentage points could reduce companies' annual underwriting gains by up to $100 million. 

In order to make these changes and the federal government to realize these savings, the farm bill would need to be changed to repeal a provision that requires changes negotiated for a new Standard Reinsurance Agreement to be budget neutral.  If Congress were to direct the Risk Management Agency to adjust the target rate in future negotiations or assess the portion of premiums companies retain, the agency could generate significant cost savings for the program.

But the crop insurance program in its current form is popular in farm country.

Crop insurance is a cornerstone of America's farm policy, and farmers call it their top Farm Bill priority, according to National Crop Insurance Services. Taxpayers are saving money because farmers and private-sector crop insurers help fund farm policy.

National Crop Insurance Services says in the 1980s, the GAO noted that "crop insurance is a more equitable and efficient way to provide disaster assistance" than both taxpayer funded disaster payments and emergency loans.”

“Given crop insurance's success and popularity, it is disheartening that GAO recently recommended weakening farmers' primary risk management tool,” National Crop Insurance Services says. The nonprofit trade group says the GAO is ‘glossing over important facts about the returns crop insurance providers receive.”

For example:

  • Insurance providers are not even achieving the returns targeted in the Standard Reinsurance Agreement with the USDA – GAO buried deep within its report the fact that actual returns have been 5 percentage points lower than USDA's target from 2011-2015.

  • GAO's data do not take insurers' full business expenses into account – essentially, they are confusing gross and net returns.

  • A 2017 study by economists from the University of Illinois and Cornell University noted that net returns for crop insurance providers were just 1.5% from 2011-2015. 

“Clearly the system is working and does not need to be weakened when it is needed most,” National Crop Insurance Service said. 

The GAO was asked to examine:

  • The changes in expense payments to companies due to the cap, which was negotiated in 2010.

  • The extent to which the program’s target rate of return reflects market conditions.

  • Opportunities for the federal government to reduce its program delivery costs.

GAO recommendations

The GAO recommends Congress repeal the 2014 farm bill provision that any revision to the agreement with insurance companies not reduce their expected underwriting gains and direct the Risk Management Agency to:

  • Adjust companies’ target rate of return to reflect market conditions

  • Assess the portion of premiums that companies retain and adjust it, if warranted.

  • Consider adjusting the method it uses to determine payments to insurance companies for expenses.

Source: GAO, National Crop Insurance Services

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