August 30, 2017
For years, proponents of the status quo have rebuffed calls for modernization of the federal crop insurance program, claiming that any significant updates could cause the whole program to collapse. Like any good safety net, however, the program was never really that fragile. One of the challenges for those pushing for the program to become more efficient, effective, and equitable, however, has historically been a lack of transparency about the delivery system and how the corporations delivering crop insurance are compensated.
In its first comprehensive look at the federal crop insurance program’s delivery system since 2009, the U.S. Government Accountability Office (GAO) has published an in-depth program delivery analysis that sheds light on the subject. GAO analyzed the crop insurance program’s delivery system, and found that significant savings and improvements could be made by bringing the compensation system for crop insurance corporations in line with industry norms. The savings generated by these improvements, according to the report, could then be used to fill holes in the current program that cause it to underserve significant farming populations (e.g., beginning, minority, specialty crop, livestock, diversified, and organic producers) and over-serve others (e.g., the largest commodity crop operations).
The GAO is the Federal Government’s watchdog; it is responsible for conducting investigations into and rooting out inefficiencies and waste in federal programs. GAO’s work is highly regarded and Congress has often acted on its conclusions
Finding Efficiencies Without Harming Farmers
The GAO found that a compensation system for crop insurance corporations that “more closely aligned with business expenses,” rather than the current system of basing payment on the value of the policies, would generate significant savings for taxpayers with no negative impacts on farmers. Put more plainly, the proposed change would significantly reduce the current incentive for crop insurance agents to focus on the highest value policies (which typically tend to be for large acreages of commodity crops), and instead enable them to better serve all farmer customers according to their needs.
By basing agents’ compensation on the effort and time they put into helping farmers craft their policies rather than on the value of the policy alone, this update would also help more farmers access the Whole-Farm Revenue Protection (WFRP) program. WFRP policies tend to be smaller in value and take more time and effort for agents to craft. Because WFRP is a crop-neutral revenue insurance policy, it protects revenue on a farmer’s whole farm, not just one crop. This makes WFRP ideal for specialty crops, mixed grain-livestock operations, and diversified producers that are currently not well-served by the existing crop insurance program.
GAO also found two other cost saving modernization options within the program, one targeting the program’s current rate of return, and the other is the large amount of premiums retained by the companies. Under the subsidized federal crop insurance program, the government and the private sector insurance companies negotiate a target rate of return for the companies. According to the report, the program’s current target rate of return does not come close to reflecting market conditions; it has exceeded the target rate by 3.5 percent on average from 1996-2015. To correct this overcompensation, GAO recommends that the current target rate of return be lowered from 14.5 percent to 9.6 percent.
The second savings option suggested by GAO is to lower the amount of a given crop insurance company’s retained premiums by 5 percentage points (currently set at 77 percent), which after losses from claims amounts to roughly $1.3 billion. GAO found that while this high level of premium retention was once necessary to provide needed oversight of loss claims, changes made in 2000 have improved the US Department of Agriculture (USDA) and the industry’s ability to monitor loss claims.
If both these recommendations were put into effect, GAO estimates an annual savings of nearly $500 million in savings. These savings, if realized, then could be reinvested in the program and used, for example, to support:
It is the obligation of all taxpayer subsidized programs to effectively serve their constituents while being as efficient with taxpayer dollars as possible. These changes, if adopted, would strengthen the integrity of the program and ensure Congress and the public that it is being run in a fiscally responsibly manner.
However, before these changes can be implemented, Congress must unshackle USDA’s hands. A provision in the 2014 Farm Bill essentially locks in outsized profits for crop insurance corporations by preventing taxpayers from benefitting from any efficiency found by the companies. That prevision prevents the government from ever getting a better deal on behalf of farmers and taxpayers. The National Sustainable Agriculture Coalition (NSAC) opposed the inclusion of this provision in the 2014 Farm Bill and continues to urge Congress to repeal it.
The Standard Reinsurance Agreement
The Standard Reinsurance Agreement (SRA) governs all aspects of the relationship between USDA and the corporations that deliver the federal crop insurance program to farmers, including: risk sharing, delivery cost compensation (administrative and operating payments, or “A&O”), the target rate of return, and the amount of retained premiums. The current agreement was put in place in 2011 and was expected to last five years. However, it has already been extended to 2017 and as of yet there have been no announced plans to renegotiate the agreement. The delay in renegotiating the agreement likely stems from the aforementioned 2014 Farm Bill provision prohibiting USDA from capturing any efficiency as part of a renegotiation. Since the federal government cannot wring any cost savings out of a renegotiation, it removes any incentive to enter negotiations. The GAO report strongly recommends repealing this provision so that renegotiation of the agreement can begin.
Greater detail on the provisions of the SRA reviewed by GAO follow below.
Administrative and Operating Payments to Crop Insurance Corporations
As part of the SRA, taxpayers provide about $1.4 billion to crop insurance corporations to delivery crop insurance to farmers. Because the crop insurance program is a public-private partnership, this money is provided to cover the costs of paying agent commissions, adjusters, and other office overhead costs related to delivering the program.
The problem, however, is that the formula for calculating A&O from year-to-year is based predominantly on the value of the policies sold – not on the actual administrative and operating expenses. This means that A&O payments go up as crop prices go up, even if the companies drive down their administrative costs through the use of technology or other means. According to GAO, from 2006-2009, a period over which crop prices rose rapidly, A&O payments skyrocketed from $960 million per year to about $2 billion per year.
In 2011, USDA renegotiated the SRA so that these payments would be limited by a cap that would rise each year. The cap has stabilized A&O costs overall, though GAO found wide variation by crop and region. Many in the industry have pointed to the implementation of the cap as a sign that the program’s reimbursements have already been “right-sized”. However, even with the cap in place costs rose from $960 million in 2006 to $1.3 billion in 2011 and are closer $1.4 billion today. The idea of administrative costs rising $300 million in over six years in an industry where there is essentially little- to- no growth (as we are not making more farm land) should be extremely concerning to Congress Members and to the public.
GAO recommends that USDA’s Risk Management Agency (RMA), which operates the federal crop insurance program, prevent these wasteful anomalies by more closely aligning A&O compensation with actual business expenses in order to create a more rational and accountable compensation structure for the delivery of crop insurance.
Retained Premiums and Underwriting Gains
Crop insurance companies are compensated in two main ways for delivering the federal crop insurance program to farmers: the first is through A&O, and the second is through underwriting gains and losses. Under the terms of the SRA, the federal government and the crop insurance companies allocate the actual risk of loss through a complicated system of risk pooling wherein companies retain some polices and premiums and the associated risk and assign others to USDA.
Since 2000, the average percentage of premiums retained by the crop insurance corporations has held at 77 percent, with USDA retaining the remainder. As a result, the Congressional Budget Office has projected that the companies’ underwriting gains (retained premiums minus indemnities and other adjustments) will average $1.3 billion per year through 2026.
The allowance for companies to retain this large a percentage of premiums was a result of a historical need to encourage companies to be vigilant when assessing farmers’ loss claims. As a result of changes made in the 2000 Agriculture Risk Protection Act, RMA now has improved ability to monitor companies’ vigilance. Because of this, GAO recommends reducing the percentage of premiums retained by the crop insurance companies; just a 5-percentage point reduction would result in an annual savings of up to $100 million to USDA and taxpayers.
The efficiency opportunities identified by GAO’s report have the potential to not only to improve the integrity of the program, but also help with the overall modernization of the federal crop insurance program so that it better serves the full range and diversity of American agriculture.
As Congress begins to consider the next farm bill, we encourage them to study this GAO report carefully and consider the efficiencies that can be gained from the federal crop insurance program and how those efficiencies can be leveraged to strengthen support for the federal crop insurance program. The first step will be for Congress to repeal the 2014 provision preventing USDA and taxpayers from benefitting from any found program efficiencies in the crop insurance program. Once this boulder is removed from the path, RMA and USDA will be free to move forward in implementing the GAO report recommendations – and many other modernizations to improve program effectiveness and efficiency going forward.
Categories: Commodity, Crop Insurance & Credit Programs