On Wednesday, the Government Accountability Office (GAO) released a report on crop insurance titled, “In Areas with Higher Crop Production Risks, Costs Are Greater, and Premiums May Not Cover Expected Losses.”
GAO indicated (full report here) that, “The federal government’s crop insurance costs are substantially higher in areas with higher crop production risks (e.g., drought risk) than in other areas. In the higher risk areas, government costs per dollar of crop value for 2005 through 2013 were over two and a half times the costs in other areas. The figure below shows the costs during this period. However, the U.S. Department of Agriculture’s (USDA) Risk Management Agency (RMA)—the agency that administers the crop insurance program—does not monitor and report on the government’s crop insurance costs in the higher risk areas.”
The report added that, “RMA implemented changes to premium rates in 2014, decreasing some rates and increasing others, but GAO’s analysis of RMA data shows that, for some crops, RMA’s higher risk premium rates may not cover expected losses. RMA made changes to premium rates from 2013 to 2014, but its plans to phase in changes to premium rates over time could have implications for improving actuarial soundness. USDA is required by statute to limit annual increases in premium rates to 20 percent of what the farmer paid for the same coverage in the previous year. However, GAO found that, for higher risk premium rates that required an increase of at least 20 percent to cover expected losses, RMA did not raise these premium rates as high as the law allows to make the rates more actuarially sound. Without sufficient increases to premium rates, where applicable, RMA may not fully cover expected losses and make the rates more actuarially sound. Furthermore, in analyzing data on premium dollars for 2013, GAO found that had RMA’s higher risk premium rates been more actuarially sound, the federal government could have potentially collected tens of millions of dollars in additional premiums.”
The GAO report noted that, “As shown in table 1, the federal government’s crop insurance costs generally increased for fiscal years 2003 through 2013. A widespread drought and crop losses in crop year 2012 contributed to the spike in government costs to $14.1 billion in fiscal year 2012. In crop year 2013, weather conditions were more favorable, so government costs were lower than in fiscal year 2012. According to an April 2014 CBO estimate, for fiscal years 2014 through 2023, program costs are expected to average $8.9 billion annually.”
The GAO report also noted that, “Figure 1 shows counties organized in groups of 20 percent based on average county target premium rates, with the darker areas representing counties with higher average county target premium rates. The color-shaded counties represent all 2,554 counties that had county target premium rates for at least one of the five major crops.”
In addition, GAO noted that, “Figure 2 shows the riskiest 20 percent of counties (510) in terms of average county target premium rates. These 510 higher risk counties are color-shaded on the basis of their 2013 premium dollars to show which counties purchased the most crop insurance. The Great Plains, which has areas with relatively high drought risk, had a large portion of the higher risk counties’ premium dollars.”
And, GAO added that, “Figure 3 compares the estimated government crop insurance costs per dollar of expected crop value for the five major crops in the 510 higher risk counties with the costs in the 2,044 other U.S. counties from 2005 through 2013. Total government crop insurance costs vary from year to year depending on weather-caused crop losses, crop prices, and farmers’ decisions about how much insurance coverage to purchase. To control for variations in crop prices and farmers’ purchase decisions, and to normalize the costs for higher risk counties and lower risk counties while still reflecting weather-caused crop losses, we expressed the estimated government costs in relation to expected crop value. As shown in figure 3, the costs in higher risk counties were substantially greater. Over the 9-year time frame, government costs averaged 14 cents per dollar of expected crop value in the higher risk counties and 5 cents per dollar in the other counties. For example, if two farms each had an expected crop value of $1 million, the higher risk farm would have had an average annual government cost of $140,000, and the lower risk farm would have had an average annual government cost of $50,000. In 2013, the higher risk counties had a government cost of 17 cents per $1 of expected crop value, 3 cents higher than the average during the time frame, and the other counties had a government cost of 5 cents per $1 of expected crop value, the same as the time frame average.”
The report stated that, “Premium subsidies provided on behalf of farmers are a large component of government crop insurance costs. Figure 4 compares premium subsidies provided on behalf of farmers per dollar of expected crop value in the 510 higher risk counties with the premium subsidies in the 2,044 other counties from 1994 through 2013. Similar to the pattern shown in figure 3, figure 4 shows that premium subsidies in higher risk counties were substantially more than in the other counties. An important distinction between figure 3 and figure 4 is that figure 3 is indicative of differences in weather-related loss claim payments, which vary from year to year, while the measures of premium subsidies in figure 4 do not vary with weather-related loss claim payments and are related to the program design.”
In addiiton, the report explained that, “Figures 5 and 6 show, for 1994 through 2013, respectively, farmers’ net gains per dollar of expected crop value and net gains per dollar of premium paid by farmers. If a farmer’s net gain per dollar of premium paid is more than zero, it means the farmer received more in loss claim payments than he or she paid in premiums. As shown in these two figures, farmers’ net gains fluctuated from year to year…During the 20-year time frame, farmers’ net gains from crop insurance averaged 9 cents per $1 of expected crop value in the higher risk counties and 2 cents per $1 of expected crop value in the lower risk counties. In addition, farmers in higher risk counties averaged $1.97 in net gains per $1 of premiums paid compared with net gains averaging $0.87 per $1 of premiums paid for farmers in the lower risk counties over the 20-year time frame.”
Bringing these figures together, the GAO report indicated that, “Figures 3, 4, 5, and 6 illustrate the extent to which higher risk areas have higher relative government costs, and farmers in those areas receive higher relative benefits. Furthermore, the difference between higher risk counties and lower risk counties in premium subsidies provided on behalf of farmers per dollar of expected crop value in 2013—11 cents per $1 versus 4 cents per $1, respectively, on average—indicates that the government’s crop insurance costs might be reduced for farmers in higher risk counties without denying them sufficient risk protection. Specifically, if farmers in the other counties have sufficient risk protection while receiving premium subsidies of 4 cents per $1 of expected crop value, farmers in the higher risk counties might have sufficient risk protection with premium subsidies of less than 11 cents per $1 of expected crop value.”
The GAO report included two recommendations:
“GAO recommends that RMA (1) monitor and report on crop insurance costs in areas that have higher crop production risks and (2), as appropriate, increase its adjustments of premium rates in these areas by as much as the full 20 percent annually that is allowed by law.
“RMA disagreed with GAO’s first recommendation and agreed with the second. GAO continues to believe that RMA can and should do more to monitor and report on crop insurance costs in higher risk areas, where government costs were found to be substantially higher.”
Philip Brasher reported on Wednesday at Agri-Pulse that, “Farmers in drought-prone areas of the Plains and other high-risk regions often aren’t being charged enough for crop insurance, according to congressional auditors.”
Mr. Brasher explained that, “From 2005 through 2013, government costs averaged 14 cents per dollar of expected crop value in higher-risk counties versus 5 cents per dollar in lower-risk ones, according to GAO. Those differences mean that for two farms, each with an expected crop value of $1 million, it cost the government on average $140,000 to insure a grower in a higher-risk county versus $50,000 in the lower-risk one.
“In 2013, the cost gap between higher risk and lower counties was 17 cents versus 5 cents per dollar of crop value.
“RMA challenged some aspects of GAO’s analysis as well as the recommendations. In a letter published as part of the report, RMA Administrator Brandon Willis said that the agency already provided enough cost information and said that the agency had to be cautious about raising rates.”
The Agri-Pulse article noted that, “The American Association of Crop Insurers, which represents companies that provide the coverage, applauded the GAO for what the group called its ‘constructive approach.’
“‘It is important to recall that program costs and rates aren’t necessarily the same thing. That being said, we do have concerns about the level of rates in parts of the program,’ the group said in a statement.
“‘We know that any increases in program costs will only make the crop insurance program a bigger target for its critics.'”