GAO Study Recommends Ways to Reduce Costs of Administering Crop Insurance Program

May 31, 2009 07:00 PM

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Companies have used bulk of higher allowances to raise commissions

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

The General Accountability Office (GAO) today released a report that recommends ways for USDA to reduce costs in administering the crop insurance program. The following is a summary of the report, and the GAO recommendations:


USDA administers the federal crop insurance program with private insurance companies, which, in turn, work with insurance agencies that sell crop insurance. In 2008, according to USDA, the program cost $6.5 billion, including about $2.0 billion in allowances to insurance companies to cover their administrative and operating (A&O) expenses, such as salaries and sales commissions to agencies. GAO was asked to examine (1) the reasons for recent substantial increases in A&O allowances, and the purposes for which insurance companies use these allowances, and (2) insurance agencies' expenses for selling federal crop insurance policies, and questionable practices, if any, that agencies use to compete for business among farmers. GAO analyzed USDA and private insurers' data, among other things.

Between 2000 and 2009, companies' A&O allowances nearly tripled, primarily because USDA's calculation method for A&O allowances considers the value of the crop, rather than the crop insurance industry's actual expenses for selling and servicing policies, which generally remained stable. This increase in the A&O allowances occurred without a proportional increase in the number of policies, acres, or amount of insurance coverage purchased.

The higher A&O allowances occurred because of higher crop prices since 2006. Per policy, the allowance rose from a national average of $836 in 2006 to an expected $1,417 in 2009.

Companies have used most of the higher allowances to raise commissions, in an effort to compete for insurance agencies' portfolios of crop insurance policies. USDA data show that commissions increased more sharply in states with historically larger insurance underwriting gains, which add to company profits.

For example, the average commission paid per policy in 5 Corn Belt states increased by 86 percent from 2006 to 2007, and by 43 percent in the other 45 states. Companies reported to USDA that their expenses to administer the program in 2007 exceeded their allowances. However, GAO determined that these expenses exceeded allowances largely because of the higher commissions paid to insurance agencies.

According to GAO's analysis, crop insurance agencies' sales commissions have outpaced their expenses for selling policies. Commissions per policy increased by an average of about 16 percent per year from 2000 to 2009, compared with an increase of about 3 percent per year for insurance agents' wages, which are the largest factor in agencies' expenses.

For 2007 through 2009, commissions will exceed wage-adjusted commissions by $2.87 billion. According to USDA officials, higher commissions can create more incentive for rebating, which is the practice of offering something of monetary value to farmers to attract their business. USDA prohibits this practice, as do most states. USDA and state insurance regulators are working to reduce the potential for this practice.

Recommendations for Executive Action

-- Recommendation: To better ensure that the A&O allowances provided to the crop insurance industry are sufficient for program delivery, but not excessive, the Secretary of Agriculture should direct the Administrator of the Risk Management Agency to develop a new methodology for calculating the A&O allowance so that it is more closely aligned with expenses, in terms of dollars per policy, as was the allowance in place before 2006, when crop prices increased sharply. Standard Reinsurance Agreement (SRA) renegotiations should achieve this goal. Once this alignment is completed, the Administrator should minimize annual fluctuations in A&O allowances that are unrelated to business expenses, while recognizing variations in delivery expenses across regions of the country.

-- Recommendation: To assist in maintaining the relationship between A&O allowances and reasonable business expenses, the Secretary of Agriculture should direct the Administrator of the Risk Management Agency to require that companies annually report the commissions they paid to insurance agencies, by policy, to the Risk Management Agency. The agency should also conduct a study of the costs associated with selling and servicing crop insurance policies to establish a standard method for assessing agencies' reasonable costs in selling and servicing policies.

-- Recommendation: To accurately track the insurance companies' expenses for delivering crop insurance, the Secretary of Agriculture should direct the Administrator of the Risk Management Agency to clarify the current guidance on reporting these expenses and specify what expenses are permitted.

Comments: I will have producer and farmer group reaction to this report at a later date.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.


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