via a special arrangement with Informa Economics, Inc.
Companies have used bulk of higher allowances
to raise commissions
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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
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
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'
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
-- 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.
This column is copyrighted material, therefore reproduction or
retransmission is prohibited under U.S. copyright laws.