Government Accountability Office Advises Cutting Crop Insurance’s Rate of Return08/31/2017
Reducing the rate of return for companies participating in the federal crop insurance program could result in significant savings, a new Government Accountability Office report concludes.
“The crop insurance program’s target rate of return – the average annual rate of return that insurance companies are expected to earn – does not reflect market conditions,” GAO said in the report delivered to Sen. Dianne Feinstein, D-Calif., last month and made public Thursday.
The recommendations in the report are directed at Congress and USDA, whose Risk Management Agency (RMA) runs the insurance program.
The current target rate of return for insurance companies, as negotiated in the 2011 standard reinsurance agreement (SRA) between USDA and the 16 companies that participate in the program, is 14.5 percent, but a GAO analysis found that a “reasonable rate of return” for 2009-2015 was 9.6 percent. Lowering the rate of return to that level would decrease companies’ expected annual underwriting gains by $364 million, GAO said.
The actual rate of return for the companies from 2009-2015 averaged 16 percent, the report found.
But National Crop Insurance Services, which represents private crop insurance companies, issued a statement Friday saying that GAO’s report vastly overstated net returns for crop insurance providers.
“Given crop insurance’s success and popularity, it is disheartening that GAO would recommend weakening farmers’ primary risk management tool,” NCIS said. “It’s even more troubling that GAO would gloss over important facts about the returns crop insurance providers receive for delivering America’s farm safety net. 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 percent from 2011-2015.”
NCIS continued, “Farmers all across the country are depending on crop insurance to help them weather the current economic crisis. And private-sector crop insurers are delivering that assistance in an efficient manner that has come in billions under budget.
“Clearly the system is working and does not need to be weakened when it is needed most. Luckily, most lawmakers recognize crop insurance’s value and are dedicated to keeping it affordable, widely available, and economically viable in the next farm bill.”
The Crop Insurance and Reinsurance Bureau also criticized the report.
“GAO’s recommendation to cut billions from the effective and efficient private sector delivery system for crop insurance was already proposed in 2015 and resoundingly rejected – not just by those involved in the private sector delivery system, but by farmers, ranchers, lenders, conservation groups and ag input organizations,” said Tara Smith, a vice president of Michael Torrey & Associates who spoke for CIRB. “Cuts to the private sector will result in fewer options for farmers and a less efficient delivery of assistance to farmers when they need it most.”
“It wasn’t a good idea two years ago and it’s still not a good idea,” Smith said.
In a March letter, dozens of farm groups urged House and Senate appropriators to oppose cuts to crop insurance during the fiscal 2018 appropriations process.
In the report, GAO also recommended reducing the portion of premiums retained by companies. The percentage of premiums retained by companies has averaged 77 percent since 2000, with USDA keeping 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,” GAO said. “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.”
GAO recommended that Congress, in order to reduce program costs, “consider repealing the 2014 farm bill requirement that any revision to the standard reinsurance agreement (SRA) not reduce insurance companies’ expected underwriting gains.”
Congress also should direct RMA, when it next renegotiates the SRA, to “adjust the participating insurance companies’ target rate of return to reflect market conditions and assess the portion of premiums that participating insurance companies retain and, if warranted, adjust it.”
GAO also said that RMA should consider adjusting the subsidy it gives companies for administrative and operating (A&O) expenses “in a way that reduces the effects of changes in premiums caused by changes in crop prices or other factors when it renegotiates the (SRA).”
“A&O subsidies rise and fall over time with changes in crop prices,” GAO said. “For example, from 2000 to 2009, insurance companies’ A&O subsidies nearly tripled as a result of increases in crop prices during that time frame,” but “without a proportional increase in the workload for selling and servicing policies as expressed by the number of policies, acres, and the amount of insurance coverage purchased.”
GAO found that the level of fluctuation in A&O subsidies varied among states and counties and some of the widest swings were in California, home of many fruit and vegetable producers, and of course, Sen. Feinstein. So for those that want to expand risk management for producers of fruits and vegetables, the report identifies why it is so difficult to make “apples to apples” or even, “almonds to almonds” comparisons.
For example, GAO said California’s average A&O subsidy per policy was volatile between 2011 and 2015. California’s average subsidy per policy decreased by 32 percent in 2011 and then increased during the next 4 years, especially in 2014, when it increased 66 percent.
The A&O subsidy adjustment factor, which was 58 percent in 2011 and increased to 71 percent in 2014, contributed to California’s 2011 decrease and its 2014 increase, GAO said.
In Iowa, where the leading insured crops are corn and soybeans, there was substantially less fluctuation than California, according to GAO.
“Texas’s average subsidy per policy increased by 21 percent in 2011. That increase coincided with increases in the prices of cotton and wheat, Texas’s two leading insured crops in 2011. Texas’s average subsidy per policy decreased by 6 percent and 9 percent in 2013 and 2015, respectively.”
The 2008 farm bill attempted to address the A&O subsidy increases by directing RMA to consider alternative means for determining A&O payment rates as part of the 2011 SRA, “stating that changes should take into account current financial conditions of the program and ensure continued availability of the crop insurance program to producers on a nationwide basis,” GAO said.
In comments on the draft report, USDA said GAO had not acknowledged the success of the 2011 SRA, which USDA said had saved taxpayers $4.5 billion without any significant disruption in service.
GAO disagreed, saying its report notes that the Office of Management and Budget “estimated the 2011 SRA’s 10-year budgetary savings would be about $6 billion and that the national cap on annual A&O expense subsidies controls government costs when crop prices rise.
“In addition, the report states that the 2011 SRA’s national cap on annual A&O subsidies was successful in stabilizing the overall subsidy amount,” GAO said. “In addition, we noted that for the three leading crops – corn, soybeans, and wheat – A&O subsidy fluctuations were relatively modest and linked these modest fluctuations to the 2011 SRA’s A&O subsidy calculation method. However, as we state in the report, our analysis also found substantial subsidy fluctuations for many crops, states, and counties.”