Summary

In response to a congressional request, GAO reviewed the Federal Crop Insurance Corporation's (FCIC) financial viability and operations to determine whether it based key management decisions on complete and accurate data, specifically those decisions affecting: (1) forecasts of income and indemnities FCIC used in budget requests; (2) a proposal to rely on reinsurance rather than both reinsurance and direct insurance; (3) rates of payments to, and gains and losses shared with, private companies selling crop insurance; and (4) actions to improve the Federal Crop Insurance Program's actuarial soundness.

GAO found that: (1) FCIC reliance on judgmental decisions and program goals, rather than program experience, to support its forecasts of premium income and indemnities has produced unreliable forecasts in its annual budgets; (2) although FCIC initially forecast premium income of $700 million for 1987, its income never exceeded $440 million; (3) FCIC analyses supporting its proposal to terminate master marketer sales and to rely on reinsurance were neither accurate nor complete, since they did not determine the impact on expanding insurance availability to farmers or the program's actuarial soundness; (4) because it relied on prior-year compensation levels to develop the 1986 percent-of-premium rate for compensating reinsured companies, FCIC established rates that were above its own costs; (5) FCIC agreed to new gain- and loss-sharing provisions with reinsured companies even though it had data showing that prior revisions had tilted the sharing of gains and losses in the companies' favor; and (6) the new revisions will be substantially more costly and will adversely affect FCIC ability to establish a reserve for unforeseen losses. GAO also found that FCIC had adequate bases for the actions it took to: (1) develop a computerized model to establish the premium rates it charges farmers for six major crops; and (2) base the development of insurance offers on farmers' actual production histories rather than the average production of all farmers in designated areas.