Crop insurance program could save billions, auditors say
WASHINGTON – The U.S. Department of Agriculture could save hundreds of millions of dollars a year by reducing the expected profits of private crop insurance companies and limiting payments that cover their administrative costs, government auditors have concluded.
It could also take on more of the risk it shares with companies that have netted more than $240 million annually in all but two years since 1996.
The report by General Accountability Office, requested by Sen. Dianne Feinstein, D-Calif., comes as Congress contemplates achieving cost savings in a 2018 Farm Bill. The crop insurance industry called the report “disheartening.”
In January, the Congressional Budget Office projected federal crop insurance would cost the federal government $7.9 billion a year between 2017 and 2026. The federal government pays most of program premiums while farmers pay about 38 percent, the GAO found. As currently designed, insurance companies can expect to make about $1.3 billion annually over the next 10 years, the Congressional watchdog agency reported.
A more reasonable target for the companies' rate of return could cut profits by up to $364 million a year with no impact on farmers' premiums or the program's payout for insured losses, GAO concluded.
About one-third of the costs to the government is subsidy payments to private insurance companies for overhead for the 12,500 agents needed to write and service policies for 1.2 million farmers. While those subsidies for administrative costs have held steady in recent years, the GAO found the companies had losses in only two years — 2002 and 2012, the latter caused by a major drought in the corn belt.
“Crop insurance is a vital piece of our farm safety net, but this analysis by GAO suggests that changes could be made to save taxpayer dollars and improve program efficiency for our farmers,” Feinstein said Wednesday. “It deserves full consideration by members of Congress.”
The use of crop insurance has increased as Congress sought to promote it over traditional disaster assistance which is paid for entirely by taxpayers. Acreage insured has grown from 182 million in 1998 to almost 318 million in 2015.
Since insurance companies can have catastrophic losses due to bad weather or other factors, they expect to make significant profits in non-catastrophic years. Still a USDA-commissioned study in 2009 showed that between 1989 and 2008, the actual rate of return for companies averaged 17.1 percent while a reasonable rate of return based on factors like interest rates was 12.8 percent. Using the same analysis, the GAO found the companies' actual rate of return reached a high of 33.6 percent in 2009 and has exceeded 20 percent in nine of the 20 years dating back to 1996.
The government payments are intended to provide companies 14.5 percent rate of return, despite much lower interest rates since the Great Recession. In November 2015, Congress passed the Bipartisan Budget Act with a provision that set the target rate of return at 8.9 percent, with a projected 10-year savings of about $3 billion. But a month later, the provision was repealed in an otherwise unrelated transportation bill, the GAO noted. At the time, those favoring the repeal, such as House Agriculture Committee Chairman Mike Conaway, R-Texas, characterized it as reversing “cuts” to the crop insurance program.
Both the GAO and a bill reintroduced in May by Sen. Jeff Flake, R-Ariz., and Rep. Ron Kind, D-Wisc., call for a reduction in the companies’ expected rate of return.
There are currently 16 crop insurance providers in the U.S. From 2000 to 2015, the companies averaged gains of $884 million per year. In March, USDA projected underwriting gains of $2.6 billion for 2016.
The GAO found the projected 14.5 percent rate of return does not reflect market conditions. It said reducing it by 3.5 percent would lower the companies' underwriting gains by $259 million. If the targeted rate were set at a market-based rate of return of 9.6 percent, the companies’ gains would be reduced by $364 million, without affecting the premiums farmers pay or payouts for crop or revenue losses.
The GAO noted that to achieve such savings, a provision in the 2014 Farm Bill would need to be repealed. That provision requires savings to be returned to the companies, not taxpayers.
In late July, Ron Rutledge, president of the West Des Moines, Iowa-based Farmers Mutual Hail Insurance Company told the Senate Agriculture Committee that reducing the target rate of return would drive some companies from the market.
“Just like with farming, there will be bad years and good years for crop insurance companies,” Rutledge said.
National Crop Insurance Services of Overland Park, Kansas, which provides technical support for insurance company loss adjusters, released a statement critical of the new GAO findings.
“Given crop insurance’s success and popularity, it is disheartening that GAO recently recommended weakening farmers’ primary risk management tool,” it said. “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.”