GAO Says Crop Insurance Rates Should Be Higher


by  Chris Clayton DTN Ag Policy Editor


The federal Government Accountability Office issued another report on crop insurance on Wednesday calling on USDA to increase crop-insurance premiums in counties with higher losses and insurance claims.

The GAO found that the federal government's costs per dollar of crop value were, in some counties, two and a half times the costs of other areas to provide crop insurance.

The riskiest counties are facing the highest premium increases, the GAO stated, but those increases are not enough to cover losses.

About 510 counties considered higher had average government costs of 14 cents per dollar of expected crop value risks from 2005 to 2013 while counties with lower risks had costs of about 5 cents per dollar of crop value.

The counties deemed as the highest risks in terms of premiums are include parts of the Southeast, but are mainly concentrated in the Great Plains, particularly in the Texas panhandle, eastern Colorado, western South Dakota and central parts of North Dakota.

Since 1994, the premium subsidies provided “per dollar of expected crop value” in high risk counties has continued to climb upward at a significantly higher rate than counties considered lower risk for claims. The gap then in subsidies-to-crop value has widened over time between high-risk and low-risk counties, the GAO stated.

GAO stated that without sufficient rate increases, crop-insurance premium rates many not cover expected losses and may not be as high as they could under the law.

GAO has a recent track record of analyzing the crop-insurance program and offering suggestions that Congress and USDA ultimately ignore. GAO in 2012 and 2013 recommended capping premium subsidies for all farmers. Last year, GAO also recommended Congress reduce premium subsidies for harvest-price option insurance, which was a proposal included in President Barack Obama's budget request. The House and Senate Agriculture Committees oppose that.

USDA's Risk Management Agency is capped on the amount of rate increases it can require a farmer to pay. USDA is required by statute to limit annual increases in premium rates to 20{18648621dc58566f60964eb5074c58f5f97501fe95033d5d25ee4862e704a74a} of what the farmer paid for the same coverage in the previous year.

However, GAO found that RMA doesn't raise these premium rates as high as the law allows. 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.

RMA doesn't monitor or report on crop-insurance costs in high-risk areas to identify potential savings. Without that information on high-risk areas, Congress may not have all the information it needs to make decisions on the crop-insurance program's design and costs.

GAO recommended RMA monitor and report on crop-insurance costs in areas that have higher crop-production risks. Also RMA should increase its premium rates in areas by as much as the full 20{18648621dc58566f60964eb5074c58f5f97501fe95033d5d25ee4862e704a74a} annually allowed by law.

RMA disagreed with the recommendation to focus more attention on high-risk counties, stated that the agency already provided data and information to determine insurance costs in all areas. The RMA website provides some of those details that allows others to conduct such analysis.

RMA also disputed the characterization of what GAO considered a high risk area. RMA stated the breakdown of premium benefit to dollar of expected crop value “appears to exaggerate the difference in program costs in higher-risk areas versus other areas, or at least masks some important details.”

RMA also disagreed with the need to adjust its premiums higher in some areas, again citing that the GAO makes certain assumptions about high-risk areas “that are not completely accurate and do not necessarily result in improved actuarial soundness.”

In its letter, RMA stated growers in higher-risk areas tend to choose lower coverage levels because higher premium rates make higher coverage levels less affordable. RMA noted Texas has an average coverage level for corn of 66{18648621dc58566f60964eb5074c58f5f97501fe95033d5d25ee4862e704a74a} as compared to 83{18648621dc58566f60964eb5074c58f5f97501fe95033d5d25ee4862e704a74a} for Illinois.

That's an interesting point, but my understanding is that parts of states such as Texas and Oklahoma can't buy coverage levels on an individual farm higher than 75{18648621dc58566f60964eb5074c58f5f97501fe95033d5d25ee4862e704a74a}. That's one reason the Supplemental Coverage Option was created in the last farm bill.

The full report can be viewed at…




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