The Government Accountability Office released “Crop Insurance: In Areas with Higher Crop Production Risks, Costs Are Greater and Premiums May Not Cover Expected Losses” on March 10.

GAO indicated 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.”

However, the U.S. Department of Agriculture’s Risk Management Agency—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 it 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, “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, “all 2,554 counties that had county target premium rates for at least one of the five major crops.”

In addition, GAO noted the riskiest 20 percent of counties in terms of average county target premium rates. These 510 higher risk counties had the highest 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 this “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. 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 GAO report included two recommendations:

“GAO recommends that RMA one, monitor and report on crop insurance costs in areas that have higher crop production risks and two, 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.”

Source - http://www.hpj.com/