NACIA Washington Update
June 1, 2009

This afternoon, the General Accounting Office (GAO) released its most recent report on the crop insurance program, entitled “Crop Insurance: Opportunities Exist to Reduce the Costs of Administering the Program.” This report was requested by Representatives Waxman (D-CA), Towns (D-NY), Issa (R-CA) and Cooper (D-TN). The report, which can be viewed on the GAO webpage here, is very critical of the program. It specifically focuses on A&O allowances to companies, commissions paid to agencies, and the possibility of rebating activities.

To address these perceived excessive costs, GAO made three recommendations. They asserted that USDA should adjust the A&O allowance so it “more closely aligns with expenses;” that companies should report to RMA agency commissions by policy; and that USDA should track the delivery costs of the program and clarify regulations regarding how expenses are reported and what expenses are permissible.

We are concerned that this report will be used by Members of Congress and other farm safety net opponents to discredit the crop insurance program and provide justification for further weakening the program through damaging funding cuts. NACIA is currently working with other members of the crop insurance industry to generate several communications to Congress and other methods of combating the possible ill effects of this report. We will share these with you as they are finalized.

Here is a link to GAO’s report summary and below please find an excerpt from their “Highlights” page. Please let us know if you have any questions. 

Brent W. Gattis
NACIA Washington Representative


CROP INSURANCE
Opportunities Exist to Reduce the Costs of Administering the Program

What GAO Found

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.