Summary

Federal crop insurance is one of the primary mechanisms used by farmers to protect against losses caused by droughts, floods, hurricanes, and other natural disasters. Since 1995, the federal government has spent an average of about $1.4 billion each year on the crop insurance program; the program will cost an estimated $1.6 billion in 1999. This testimony discusses whether the Department of Agriculture (1) has set adequate insurance rates to achieve the actuarial soundness mandated by law, (2) appropriately reimburses participating crop insurance companies for their administrative costs, (3) can deliver catastrophic crop insurance at less cost to the government than can private insurance companies, and (4) has established methodologies in the revenue insurance plans that set sound premium rates.

GAO noted that: (1) GAO has reported that several aspects of USDA's crop insurance program are of concern and need attention; (2) in 1995, GAO reported that premiums charged farmers for crop insurance were not adequate to achieve the actuarial soundness mandated by Congress; (3) GAO's review showed that the basic premium rates for the six crops reviewed 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) about 24 percent of the crop insurance premiums for the six crops GAO reviewed had basic rates that were less than 80-percent adequate for actuarial soundness; (5) USDA subsequently took actions to improve the program's actuarial soundness, but some rates remain too low; (6) the government's administrative expense reimbursement to insurance companies--31 percent of premiums--were greater than the companies' reported expenses to sell and service federal crop insurance; (7) GAO stated that some of these reported expenses did not appear to be reasonably associated with the sale and service of federal crop insurance; (8) 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; (9) 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; (10) GAO reported that the government's costs to deliver catastrophic insurance in 1995 were higher through private companies than through USDA; (11) although the basic costs associated with selling and servicing catastrophic crop insurance through USDA and private companies were comparable, delivery through USDA avoids paying an underwriting gain to companies in years when there is a low incidence of catastrophic loss claims; (12) GAO reported its doubts about whether new USDA-supported revenue insurance plans will be actuarially sound over the long term and appropriate to the risk each farmer presents to the program; and (13) 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.