CROP INSURANCE

Opportunities Exist to 

Improve Program 

Delivery and Reduce 

Costs

Report to the Honorable Dianne 

Feinstein, U.S. Senate

July 2017

GAO-17-501

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-501, a report to the 

Honorable Dianne Feinstein, U.S. Senate

July 2017

CROP INSURANCE

Opportunities Exist to Improve Program Delivery and 

Reduce Costs

What GAO Found

The U.S. Department of Agriculture’s (USDA) Risk Management Agency (RMA)

makes payments to insurance companies to cover the cost of selling and 

servicing federal crop insurance policies. A cap on these payments stabilized

them at about $1.4 billion per year from 2011 to 2015. In capping the annual 

payment to companies, RMA sought to make these payments more stable and 

dependable for companies and agents, but payments have fluctuated widely by 

crop, state, and county because, as GAO’s analysis shows, the method RMA 

uses for calculating payments has allowed large fluctuations at the policy level.

Specifically, RMA calculates payments based on such factors as crop price, and 

a price change can cause a change in the payments. For example, the average 

payment for almonds decreased by 42 percent from 2010 to 2011 but increased 

by 75 percent from 2013 to 2014. RMA could reduce such fluctuations and 

achieve greater stability by considering adjustments to how the payments are 

calculated when it negotiates a new agreement with companies.

The crop insurance program’s target rate of return—the average annual rate of 

return that insurance companies are expected to earn—does not reflect market 

conditions. A 2009 USDA-commissioned study found that a 12.8 percent rate of 

return was reasonable for participating companies for 1989 through 2008 based 

on economic factors, such as interest rates. RMA used this study in 2010 

negotiations with insurance companies to set a 14.5 percent target rate. 

According to GAO’s analysis, which updated information in the study for 2009 

through 2015, the reasonable rate of return declined, averaging 9.6 percent. 

GAO identified two opportunities to reduce federal delivery costs for the program.

• First, given that GAO’s analysis shows that the target rate of return does not 

reflect market conditions, that rate could be reduced. As a result, companies 

would earn a lower rate of return on their existing base of retained premiums.

At the 2015 premium level, if the target rate were reduced by 4.9 percentage 

points, from the current rate of 14.5 percent to 9.6 percent, the companies’ 

expected annual underwriting gains would decrease by $364 million.

• Second, the portion of premiums retained by companies could be reduced so 

that they would earn a rate of return on a smaller premium base. The portion 

of premiums retained by companies has changed little, averaging 77 percent 

since 2000, while USDA has retained the rest. Part of the justification for 

companies’ retaining a significant portion of premiums was that they needed

financial incentive to more carefully adjust farmers’ loss claims. The need for 

this incentive decreased after a statutory change in 2000 improved RMA’s 

ability to monitor those claims and companies’ adjustment of them. Reducing 

the premiums that companies retain by 5 percentage points could reduce 

companies’ annual underwriting gains by up to $100 million.

However, a provision in the Agricultural Act of 2014 requires any changes 

negotiated for a new SRA be budget neutral. To realize savings, such changes 

would require congressional action to repeal this provision. If Congress were to 

direct RMA to adjust the target rate in future negotiations or assess the portion of 

premiums companies retain, the agency could generate significant cost savings 

for the program. 

View GAO-17-501. For more information, 

contact Steve Morris at (202) 512-3841 or 

morriss@gao.gov.

Why GAO Did This Study

To implement the federal crop 

insurance program, USDA’s RMA 

partners with private insurance 

companies, which sell and service 

policies. In 2010, USDA negotiated an 

agreement with insurance companies

to set a national cap on the annual 

payments it makes to them for 

expenses and a target rate of return. 

GAO was asked to examine (1) the 

changes in expense payments to 

companies due to the cap, (2) the 

extent to which the program’s target 

rate of return reflects market 

conditions, and (3) opportunities for the 

federal government to reduce its 

delivery costs for the program. GAO 

analyzed RMA data on payments to 

companies for their expenses,

conducted an updated analysis based 

on a USDA-commissioned study of the 

annual rate of return that companies 

should be expected to earn, and 

interviewed RMA officials.

What GAO Recommends

Congress should consider repealing 

the Agricultural Act of 2014 provision 

that any revision to the agreement with 

insurance companies not reduce their

expected underwriting gains and direct

RMA to (1) adjust companies’ target 

rate of return to reflect market 

conditions and (2) assess the portion 

of premiums that companies retain and 

adjust it, if warranted. GAO also

recommends that RMA consider 

adjusting the method it uses to 

determine payments to insurance 

companies for expenses. RMA stated it 

will take steps to implement GAO’s 

recommendation.
Page i GAO-17-501 Crop Insurance Delivery Costs

Letter 1

Background 7

The 2011 SRA’s Cap on A&O Expense Subsidies Has Stabilized 

Overall Costs, but Subsidies Have Fluctuated Widely by Crop, 

State, and County 13

The Federal Crop Insurance Program’s Target Rate of Return 

Does Not Reflect Market Conditions 23

Two Opportunities Exist for the Federal Government to Reduce 

the Delivery Costs of the Program 27

Conclusions 32

Matter for Congressional Consideration 33

Recommendation for Executive Action 33

Agency Comments and Our Evaluation 34

Appendix I Objectives, Scope, and Methodology 36

Appendix II Percentage Change in the Average Administrative and Operating 

Subsidy, by Crop, 2011-2015 39

Appendix III Percentage Change in the Average Administrative and Operating 

Subsidy, by State, 2011-2015 43

Appendix IV Percentage Change in the Average Administrative and Operating 

Subsidy, by County, 2011-2015 45

Appendix V Analysis of Reasonable Rate of Return 50

Appendix VI Summary of Potential Actions and Estimated Savings for the Crop 

Insurance Program, 2012 through 2015 57

Contents
Page ii GAO-17-501 Crop Insurance Delivery Costs

Appendix VII Participating Insurance Companies’ Retained Premiums and 

Underwriting Gains/Losses, 1996-2015 58

Appendix VIII Comments from the U.S. Department of Agriculture 60

Appendix IX GAO Contact and Staff Acknowledgments 62

Tables

Table 1: GAO Calculation of Reasonable and Actual Rates of 

Return, 1996 through 2015 25

Table 2: Participating Insurance Companies’ Actual Rate of 

Return on Retained Premiums, 1996 through 2015 26

Table 3: Annual Percentage Change in the Average 

Administrative and Operating Expense Subsidy per 

Policy, by Crop, 2011-2015 39

Table 4: Annual Percentage Change in the Average 

Administrative and Operating Expense Subsidy per 

Policy, by State, 2011-2015 43

Table 5: Reasonable Rate of Return on Equity of Property and 

Casualty Insurance Companies, Beta, Inflation, Equity 

Risk Premium and Interest Rates, 1989 through 2015 55

Table 6: GAO Reports on Potential Savings in the Crop Insurance 

Program, 2012 through 2015 57

Table 7: Participating Insurance Companies’ Retained Premiums, 

the Government’s Quota Share, and Companies’ 

Underwriting Gains/Losses, 1996 through 2015 59

Figures

Figure 1: Overview of the Federal Crop Insurance Program 10

Figure 2: Administrative and Operating (A&O) Expense Subsidies 

and Underwriting Gains Paid to Insurance Companies, 

2000 through 2015 11

Figure 3: Average Administrative and Operating (A&O) Expense 

Subsidy Per Policy, 2000 through 2015 15

Figure 4: Annual Percentage Change in the Average 

Administrative and Operating (A&O) Expense Subsidy 
Page iii GAO-17-501 Crop Insurance Delivery Costs

per Policy for Corn, Soybeans, and Wheat, 2011 through 

2015 16

Figure 5: Annual Percentage Change in the Average 

Administrative and Operating (A&O) Expense Subsidy 

per Policy for Almonds, Apples, and Grapes, 2011 

through 2015 17

Figure 6: Annual Percentage Change in the Average 

Administrative and Operating (A&O) Expense Subsidy 

per Policy for Selected States and Nationwide, 2011 

through 2015 18

Figure 7: Percentage Change in the Average Administrative and 

Operating Expense Subsidy per Policy by County, from 

2011 through 2015 20

Figure 8: Percentage Change in the Average Administrative and 

Operating Expense Subsidy per Policy, by County, 2011 45

Figure 9: Percentage Change in the Average Administrative and 

Operating Expense Subsidy per Policy, by County, 2012 46

Figure 10: Percentage Change in the Average Administrative and 

Operating Expense Subsidy per Policy, by County, 2013 47

Figure 11: Percentage Change in the Average Administrative and 

Operating Expense Subsidy per Policy, by County, 2014 48

Figure 12: Percentage Change in the Average Administrative and 

Operating Expense Subsidy per Policy, by County, 2015 49
Page iv GAO-17-501 Crop Insurance Delivery Costs

Abbreviations

A&O administrative and operating 

CBO Congressional Budget Office 

RMA Risk Management Agency

SRA standard reinsurance agreement 

USDA U.S. Department of Agriculture

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Page 1 GAO-17-501 Crop Insurance Delivery Costs

441 G St. N.W.

Washington, DC 20548

July 26, 2017

The Honorable Dianne Feinstein

United States Senate

Dear Senator Feinstein:

Federally subsidized crop insurance, which helps farmers manage the 

risk inherent in farming, is one of the most important programs in the farm 

safety net. Under the federal crop insurance program, farmers can insure 

against losses caused by poor crop yields resulting from natural causes, 

declines in crop prices, or both. To implement the program, the U.S. 

Department of Agriculture’s (USDA) Risk Management Agency (RMA) 

partners with private insurance companies, which sell and service the 

insurance policies and share with RMA in the risk of loss and the 

opportunity for gain associated with the policies.1 RMA has overall 

responsibility for administering the federal crop insurance program, 

including controlling costs and protecting against fraud, waste, and 

abuse. RMA administers the program through a financial agreement 

called the standard reinsurance agreement (SRA), which it negotiates 

with insurers.2 RMA’s most recent renegotiation of the SRA—the 2011 

SRA—was completed in 2010. The previous agreement was the 2005 

SRA.

Under the Federal Crop Insurance Act, the federal government is to 

reimburse insurance companies for the reasonable administrative and 

operating (A&O) expenses associated with selling and servicing crop 

insurance policies. The method for determining the level of this federal 

subsidy is set in the SRA. RMA provides A&O payments, which are 

based on a percentage of crop insurance premiums, to insurance 

companies. These payments are intended to cover the companies’

expenses to sell and service policies. Crop insurance premiums and A&O 

expense subsidies rise and fall in value with, among other things, the 

 1

USDA designated 16 companies to provide insurance coverage for the year 2017.

2

The SRA incorporates the terms and conditions by which the private insurance 

companies that sell and service crop insurance policies are to abide.

Letter
Page 2 GAO-17-501 Crop Insurance Delivery Costs

price of the crop being insured.3 A&O expenses can include company 

overhead, such as employee salaries; fees paid to insurance adjusters to 

verify claims; and sales commissions and other compensation (e.g., profit 

sharing) paid to the insurance agents who sell crop insurance to farmers. 

In January 2017, the Congressional Budget Office (CBO) projected that 

federal crop insurance would cost the federal government an average of 

about $7.9 billion per year for 2017 through 2026.4 These costs include 

payments to private insurance companies for program delivery; these 

payments make up about one-third of the program’s total annual costs 

and comprise a projected annual average of about $1.4 billion for A&O 

subsidies and about $1.3 billion for companies’ underwriting gains.5 As 

part of the crop insurance program, the federal government pays for an 

average of about 62 percent of the premiums. Farmers pay the remaining 

38 percent. These premium subsidies make up the majority of the 

program’s overall costs. The SRA does not affect the premiums that 

farmers pay.6

In 2009, we reported on the cost of A&O subsidies. From 2006 through 

2008, a period of rising major crop prices and crop insurance premiums,7

A&O subsidies increased from about $960 million to about $2 billion per 

year.8 To better ensure that the A&O subsidies provided to the crop 

insurance industry are sufficient for program delivery, but not excessive, 

 3

RMA sets premiums to cover the risk of insuring crops against expected crop losses. 

RMA calculates premiums by multiplying the value of the insured crop, a base premium 

rate, and adjustment factors that individualize the premium rate to a farmer’s particular 

crop, yield history, geographic dispersion of the lands insured, and the percentage of the 

crop value that the farmer chooses to insure.

4

Congressional Budget Office, CBO’s January 2017 Baseline for Farm Programs

(Washington, D.C.: Jan. 24, 2017).

5

Companies’ underwriting gains are the amount by which the premiums that companies 

retain exceed their share of the indemnities paid to farmers for crop losses followed by 

adjustments based on SRA provisions. The program’s underwriting gains are the amount 

by which total premiums exceed the total indemnities paid to farmers for crop losses. In 

this report, we refer to companies’ underwriting gains and A&O subsidies as program 

delivery costs.

6

Premium subsidy percentages are set in the Federal Crop Insurance Act and require 

Congressional action to change.

7

The major crops that experienced price increases during this time frame included corn, 

soybeans, and wheat.

8

GAO, Crop Insurance: Opportunities Exist to Reduce the Costs of Administering the 

Program, GAO-09-445 (Washington, D.C.: Apr. 29, 2009). 
Page 3 GAO-17-501 Crop Insurance Delivery Costs

we recommended that USDA develop a new methodology for calculating 

the A&O subsidies so that they are more closely aligned with business 

expenses. We also recommended that once this alignment was 

completed, the RMA Administrator should minimize annual fluctuations in 

A&O subsidies that were unrelated to business expenses, while 

recognizing variations in delivery expenses across regions of the country. 

RMA agreed with this recommendation. In 2010, partly in response to our 

report, USDA completed SRA negotiations and implemented the 2011 

SRA to reduce A&O subsidies,9 capping them for the most common types 

of policies.10 The A&O subsidy for a crop insurance policy remains based 

on a fixed percentage (e.g., 18.5 percent) of the premium, which means 

that the dollar amount of the A&O subsidy rises and falls with the market 

price of the crop being insured because the market price of the crop 

affects the dollar amount of the premium. However, if the total A&O 

subsidies for policy types that are subject to the cap exceed the capped 

amount, the A&O subsidies for these policy types are proportionally 

reduced to make the total A&O subsidies for these policies equal to the 

capped amount.

The SRA sets the terms of the program’s risk sharing between 

participating insurance companies and the government—in particular, the 

portion of total premiums (the sum of the portion paid by farmers and the 

premium subsidies provided by the government) that are “retained” by the 

insurance companies and the portion of claims payments to farmers that 

are the responsibility of the insurance companies. These allocations 

determine the companies’ and the government’s share of each year’s 

program underwriting gain or loss. An insurance company’s rate of return 

on crop insurance for a given year is the company’s underwriting gain (or 

loss) divided by the premiums on which the company retains a risk of loss 

or an opportunity for gain. A 2009 USDA-commissioned study derived the 

annual rate of return that companies participating in the federal crop 

insurance program should be expected to earn.11 This annual rate of 

return should produce earnings that are equal to earnings from alternative 

 9

The Office of Management and Budget estimated that the 2011 SRA’s 10-year budgetary 

savings, including savings from the cap on A&O subsidies, would be about $6 billion.

10In 2011, the cap on A&O subsidies for the subject policy types was $1.22 billion. The 

cap is based on a formula in the SRA that includes an annual adjustment for inflation.

11Milliman, Inc., Rate of Return Update - 2008: Reasonable Rate of Return Section 3.1, a 

report prepared at the request of the Risk Management Agency, U.S. Department of 

Agriculture, June 23, 2009. Milliman is a consulting firm.
Page 4 GAO-17-501 Crop Insurance Delivery Costs

investment opportunities relative to the risk assumed—a reasonable or 

market-based rate of return. This study found that from 1989 through 

2008, participating insurance companies’ actual rate of return on equity 

averaged 17.1 percent and that a reasonable rate of return on equity 

during this period was an average of 12.8 percent. The current target rate 

of return on retained premiums for federal crop insurance providers, as 

set by the 2011 SRA, is 14.5 percent.12

The cost of the federal crop insurance program has come under scrutiny 

as the nation’s budgetary pressures have increased. In a January 2017 

report on the federal government’s fiscal future, we stated that, absent 

policy changes, the federal government’s fiscal path is unsustainable and 

that to change the long-term fiscal path, policymakers will need to 

consider policy changes to the entire range of federal activities and 

spending.13 Any savings found in the crop insurance program could be 

used for deficit reduction or other needs such as other farm program

priorities. For example, part of the savings achieved by the 2011 SRA 

was used for the Pasture, Rangeland, and Forage crop insurance 

program.

In November 2015, a provision in the Bipartisan Budget Act of 2015 

established a target rate of return on retained premiums of 8.9 percent for 

crop insurance providers.14 CBO projected that the resulting 10-year 

savings would be about $3 billion.15 However, this provision was repealed 

in a December 2015 transportation bill.16

In this context, you asked us to review issues related to the program 

delivery costs of the federal crop insurance program. This report 

examines (1) the changes, if any, in the distribution of A&O expense 

subsidies due to the implementation of the 2011 SRA’s national cap on 

 12Participating insurance companies’ rate of return on retained premiums is their 

underwriting gains divided by the premiums that they retain.

13GAO, The Nation’s Fiscal Health: Action is Needed to Address the Federal 

Government’s Fiscal Future, GAO-17-237SP (Washington, D.C.: Jan. 17, 2017).

14Pub. L. No. 114-74 § 201, 129 Stat. 584, 587.

15Congressional Budget Office, Estimate of the Budgetary Effects of H.R. 1314, the 

Bipartisan Budget Act of 2015, as reported by the House Committee on Rules on October 

27, 2015.

16Fixing America’s Surface Transportation Act (FAST Act), Pub. L. No. 114-94 § 32205, 

129 Stat. 1312, 1740.
Page 5 GAO-17-501 Crop Insurance Delivery Costs

subsidies; (2) the extent to which the federal crop insurance program’s 

target rate of return reflects market conditions; and (3) opportunities, if 

any, for the federal government to reduce its delivery costs for the 

program.

To address these objectives, we reviewed, among other things, sections 

of 2011 SRA drafts and the final 2011 SRA; RMA documents on the 

development and implementation of the 2011 SRA; crop insurance 

industry documents; provisions of the Food, Conservation, and Energy 

Act of 2008 (2008 farm bill), the Agricultural Act of 2014 (2014 farm bill), 

the Agricultural Risk Protection Act of 2000; prior GAO reports; and 

standards for internal control in the federal government. We also 

interviewed RMA officials to discuss the development and implementation 

of the 2011 SRA. To examine the changes, if any, in the distribution of 

A&O expense subsidies due to the implementation of the 2011 SRA’s 

national cap, we reviewed and analyzed RMA crop insurance data by 

state, county, and crop for 2010 through 2015. We chose this period to 

examine changes associated with the implementation of the 2011 SRA 

because it contained the most recent data available at the time of our 

review. We analyzed changes in A&O subsidies per policy by state, 

county, and crop to identify and summarize trends during 2011 through 

2015.

To examine the extent to which the federal crop insurance program’s 

target rate of return reflects market conditions, our work included 

reviewing a 2009 USDA-commissioned study.17 This study derived, for 

the 20 years from 1989 through 2008, the annual rate of return on equity 

that companies participating in the federal crop insurance program should 

be expected to earn. We identified the major factors that the study used 

to estimate the reasonable rate of return and collected data on these 

factors from sources of financial information, such as Value Line 

Investment Survey.18 Using the two models that the USDA-commissioned 

study used, we then estimated the reasonable rate of return for 2009 

through 2015, years that were not included in the study. In addition, for 

 17This study consisted of the following two reports: Milliman, Inc., Rate of Return Update -

2008: Reasonable Rate of Return Section 3.1, a report prepared at the request of the Risk 

Management Agency, U.S. Department of Agriculture, June 23, 2009; and Milliman, Inc., 

Historical Rate of Return Analysis, a report prepared at the request of the Risk 

Management Agency, U.S. Department of Agriculture, August 18, 2009. 

18Value Line Investment Survey is an independent investment advisory service that 

provides extensive coverage on approximately 1,700 publicly traded stocks.
Page 6 GAO-17-501 Crop Insurance Delivery Costs

the 20 years from 1996 through 2015, we summarized RMA data on the 

actual rates of return on retained premiums of participating insurance 

companies. To examine opportunities for the federal government to 

reduce its delivery costs for the program, we also reviewed and 

summarized RMA data on companies’ underwriting gains and risk sharing 

as expressed by total program premiums and premiums retained by 

companies for the 20 years from 1996 through 2015. We also reviewed 

the 2005 SRA and 2011 SRA sections on risk sharing, as well as crop 

insurance industry documents, including industry responses to 2011 SRA 

drafts. Regarding RMA’s program monitoring, we reviewed RMA 

documents on data mining and other program integrity efforts; USDA 

Office of the Inspector General reports; and previous GAO reports, 

including our 2005 report on fraud, waste, and abuse19 and our 2012 

report that examined RMA’s data mining.20

To evaluate the reliability of the RMA data, we reviewed an assessment 

for a previous GAO study, reviewed agency documentation related to the 

data systems, and obtained updated information on the data systems 

from knowledgeable officials. We assessed the reliability of the data from 

the 2009 USDA-commissioned study and the financial information 

sources by reviewing relevant documentation. In addition, for one of the 

financial information sources, we reviewed an assessment for a previous 

GAO study. In each case, we concluded that the data were sufficiently 

reliable for the purposes of this report. A more detailed discussion of our 

objectives, scope, and methodology is presented in appendix I.

We conducted this performance audit from April 2015 to July 2017 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence we obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

 19GAO, Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to Fraud, 

Waste, and Abuse, GAO-05-528 (Washington, D.C.: Sept. 30, 2005).

20GAO, Crop Insurance: Savings Would Result from Program Changes and Greater Use 

of Data Mining, GAO-12-256 (Washington, D.C.: Mar. 13, 2012).
Page 7 GAO-17-501 Crop Insurance Delivery Costs

Farming is an inherently risky enterprise. In conducting their operations, 

farmers are exposed to financial losses because of production risks—

droughts, floods, hurricanes, and other natural disasters—as well as the 

risk of crop revenue loss resulting from declines in production, price, or 

both. The federal government has played an active role in helping to 

mitigate the effects of these risks on farm income by promoting the use of 

crop insurance.

RMA partners with private insurance companies, which sell and service 

federal crop insurance policies. Under the Federal Crop Insurance Act, 

RMA pays these companies A&O subsidies to cover the reasonable 

expenses of selling and servicing crop insurance policies. Prior to the 

changes implemented in the 2011 SRA, RMA calculated A&O subsidies 

by using a fixed percentage of a policy’s premium. This fixed percentage, 

which is called the A&O subsidy rate, varies by the type of insurance 

policy. In 2015, these rates ranged from 12 percent to 21.9 percent.21 The 

most common type of insurance policy is revenue protection, which has 

had an A&O subsidy rate of 18.5 percent since 2011.22 The price of the 

crop being insured is one of the factors in the premium amount. As a 

result, A&O subsidies rise and fall over time with changes in crop prices. 

For example, from 2000 to 2009, insurance companies’ A&O subsidies 

nearly tripled as a result of increases in crop prices during that time 

frame. This increase in the A&O subsidies occurred without a proportional 

increase in the workload for selling and servicing policies as expressed by 

the number of policies, acres, and the amount of insurance coverage 

purchased. To address the increases in A&O subsidies, the 2008 farm bill 

directed RMA to consider alternative methods for determining A&O 

payment rates as part of the 2011 SRA, stating that changes should take 

into account current financial conditions of the program and ensure 

continued availability of the crop insurance program to producers on a 

nationwide basis.

Besides crop price changes, changes in premium rates cause changes in 

premium amounts and, in turn, A&O subsidies. RMA sets premium rates, 

 21For catastrophic policies, which provide farmers with less protection against losses than 

other policies, the A&O subsidy rate is zero. Instead, USDA pays a loss adjustment 

expense subsidy of 6 percent of the premium for these policies.

22Revenue protection policies protect against crop revenue loss resulting from declines in 

production, price, or both.

Background

A&O Subsidies
Page 8 GAO-17-501 Crop Insurance Delivery Costs

which are a percentage of the insured crop value. Premium rates can 

change because of changes in a farm’s crop yield history and RMA 

updates of county premium rates that reflect past loss experience.

Insurance companies’ expenses include overhead (e.g., employee 

salaries and rent), fees paid to insurance adjusters to verify loss claims, 

and commissions paid to insurance agents. Insurance agencies’

expenses include salaries and benefits, training, rent and equipment, 

software to aid farmers’ decisions, and legal services. Insurance agents’

responsibilities can include (1) informing farmers about applicable crop 

insurance policy provisions and (2) accurately preparing and completing a 

farmer’s insurance application, certification of production history, acreage 

reports, and other sales-related documents.

The federal government is the primary reinsurer for the private insurance 

companies that take on the risk of covering, or “underwriting,” losses to 

insured farmers. The SRA sets the terms of the risk sharing between the 

participating insurance companies and USDA. The insurance companies 

retain part of the premiums and associated risk, and USDA holds the 

remaining premiums and risk. In addition, the 2005 SRA introduced a 

quota share provision, under which each company cedes to USDA a 

percentage of its underwriting gains or losses.23 The 2005 SRA set the 

quota share at 5 percent.

In accounting for the crop insurance program’s costs to the government,24

the major categories are the following:

 23A quota share is a type of reinsurance contract in which the insurer and reinsurer share 

premiums and losses according to a fixed percentage. 

24The costs to the government can be expressed in different ways, based on different 

groupings of the components of cost. For example: (1) as shown here in the text, the cost 

to the government is expressed as A&O subsidies, plus premium subsidies, plus excess 

losses (i.e., plus total underwriting losses), plus company underwriting gains; (2) since 

adding total underwriting losses is the same as subtracting total underwriting gains, the 

cost to the government can also be expressed as A&O subsidies, plus premium subsidies, 

minus total underwriting gains, plus company underwriting gains (here, total underwriting 

gains are expressed as savings to the government, but the portion of those underwriting 

gains that are shared with the insurance companies are a cost to the government); and (3) 

since total underwriting gains minus company underwriting gains equals the government’s 

share of underwriting gains, the cost to the government can be expressed as A&O 

subsidies, plus premium subsidies, minus government underwriting gains.

Risk Sharing and 

Underwriting Gains

Crop Insurance Program 

Costs to the Government
Page 9 GAO-17-501 Crop Insurance Delivery Costs

• Premium subsidies. Premium subsidies are provided by the 

government on behalf of farmers. As of January 2017, CBO projected 

that premium subsidies from 2017 through 2026 would average about 

$6.2 billion per year.

• A&O subsidies. The government pays A&O subsidies to participating 

insurance companies to cover the companies’ expenses to sell and 

service crop insurance policies. As of January 2017, CBO projected 

that A&O subsidies from 2017 through 2026 would average about 

$1.4 billion per year.

• Companies’ underwriting gains/losses. The government pays 

underwriting gains to participating insurance companies in 

accordance with the SRA’s gain/loss sharing provisions. The term 

refers to companies’ retained premiums minus their share of the 

indemnities paid to farmers followed by adjustments based on the 

SRA’s gain/loss sharing and quota share provisions. As of January 

2017, CBO projected that companies’ underwriting gains from 2017 

through 2026 would average about $1.3 billion per year.

• Excess losses. Excess losses are total indemnities—payments to 

farmers for losses—minus total premiums (i.e., premiums paid by 

farmers plus premium subsidies provided by the government). As of 

January 2017, CBO projected that excess losses from 2017 through 

2026 would average about -$1 billion per year, meaning that 

indemnities are projected to average about $1 billion less than total 

premiums per year.

Figure 1 shows an overview of the program.
Page 10 GAO-17-501 Crop Insurance Delivery Costs

Figure 1: Overview of the Federal Crop Insurance Program

Note: The number of acres insured and the amount of loss coverage are as of 2016. The number of 

insurance companies is as 2017. The numbers of agents and adjusters and the percentage of farmer 

premiums subsidized by RMA are as of 2014.

Figure 2 shows the A&O subsidies and underwriting gains that the 

government paid to insurance companies for program delivery from 2000 

through 2015. In 14 of these 16 years, companies had underwriting gains, 
Page 11 GAO-17-501 Crop Insurance Delivery Costs

with underwriting losses in 2002 and 2012.25 From 2000 through 2015, 

companies’ underwriting gains averaged $884 million per year. From 

2011 through 2015—the first 5 years in which the 2011 SRA has been in 

in effect—companies’ underwriting gains averaged $773 million per year. 

As of March 2017, preliminary RMA information indicates that 2016 

underwriting gains will be about $2.6 billion. If 2016 underwriting gains 

were $2.6 billion, then during the 6 years in which the 2011 SRA has 

been in effect, companies’ underwriting gains would average about $1.1 

billion per year.

Figure 2: Administrative and Operating (A&O) Expense Subsidies and Underwriting Gains Paid to Insurance Companies, 2000 

through 2015

Note: The 2011 standard reinsurance agreement capped the total A&O subsidies for certain types of 

policies.

As mentioned above, CBO projected that A&O subsidies and companies’

underwriting gains would average about $1.4 billion and $1.3 billion, 

 25In 2012, a major drought caused companies to have underwriting losses.
Page 12 GAO-17-501 Crop Insurance Delivery Costs

respectively, per year from 2017 through 2026. Thus, projected federal 

payments to the companies for delivering the federal crop insurance 

program would comprise about one-third of projected total program costs, 

which CBO projected would be about $7.9 billion per year.

A provision in the 2014 farm bill requires that any revised SRA is to be 

budget neutral with respect to estimates of future underwriting gains for 

the participating insurance companies, and the estimated total A&O 

subsidies cannot be less than the amounts that would have been 

provided under the previous SRA.26 The 2014 farm bill conference 

manager’s report states that a renegotiated SRA should not be used as a 

means of achieving further cuts in the federal crop insurance program. 

During the farm bill debate, according to a Congressional Research 

Service report, some Members of Congress argued that such cuts, if any, 

should be made by Congress so it could claim the budget savings toward 

either deficit reduction or to offset the cost of any new legislative 

initiative.27 In addition, the 2014 farm bill requires that if any SRA savings 

are realized, they have to be used to increase participating insurance 

companies’ underwriting gains or A&O payments. The conference report 

to the 2014 farm bill noted that crop insurance funding had been reduced 

over the previous 6 years, including in the 2008 farm bill and the 2011 

SRA.

In part to improve the government’s ability to ensure the integrity of the 

federal crop insurance program, Congress passed the Agricultural Risk 

Protection Act of 2000.28 The act provided RMA with new tools for 

monitoring and controlling program abuses. Among other things, the act 

required the Secretary of Agriculture to use data mining—a technique for 

extracting knowledge from large volumes of data that was made possible 

by advances in computing—to administer and enforce the crop insurance 

program. RMA uses data mining to detect potential cases of fraud, waste, 

or abuse. For example, RMA and the insurance companies use data 

mining results to conduct reviews of policies with anomalous loss claim 

payments. According to RMA documents, RMA’s data mining efforts have 

 26Pub. L. No. 113-79 § 11012, 128 Stat. 649, 960 (codified at 7 U.S.C. § 1508(k)(8)).

27Congressional Research Service, Crop Insurance Provisions in the 2014 Farm Bill (P.L. 

113-79), April 22, 2014.

28The Agricultural Risk Protection Act of 2000, Pub. L. No. 106-224 § 121, 114 Stat. 358, 

372 (codified as amended at 7 U.S.C. § 1515).

The Federal Government’s 

Monitoring of the Program
Page 13 GAO-17-501 Crop Insurance Delivery Costs

improved program monitoring. RMA estimates that from 2001 through 

2014, its data mining to identify anomalous policies resulted in $1.1 billion 

in cumulative cost avoidance—or, reduction in the amount of indemnities 

claimed (i.e., losses claimed by farmers). 

The 2011 SRA’s cap on A&O expense subsidies—payments to insurance 

companies to cover the cost of selling and servicing crop insurance 

policies—stabilized the program’s overall costs, but subsidies have 

fluctuated widely by crop, state, and county. When negotiating the 2011 

SRA, RMA adjusted the A&O subsidy calculation method by applying a 

national cap on the overall annual A&O subsidies. The cap was 

successful in stabilizing the overall subsidy amount. However, the revised 

calculation method has allowed changes in crop prices to result in 

substantial fluctuations in the subsidies for many crops as well as states 

and counties. For example, the average A&O subsidy per policy in 

California decreased by 32 percent from 2010 to 2011, when the subsidy 

declined for two of the state’s leading insured crops, almonds and grapes. 

The average A&O subsidy per policy in California increased by 66 

percent from 2013 to 2014, when the subsidy for almonds and grapes 

and other crops produced in California increased. 

In developing the 2011 SRA, RMA sought to stabilize A&O subsidies to 

help make the program more sustainable over time. To control 

government costs and stabilize fluctuations in A&O subsidies from year to 

year, RMA considered revisions to the A&O subsidy calculation method 

when negotiating the 2011 SRA and ultimately chose to apply a national 

A&O subsidy cap. Specifically, through a revised subsidy calculation 

method, RMA capped annual A&O subsidies for the most commonly used 

types of policies and set a minimum annual subsidy for these policy 

The 2011 SRA’s Cap 

on A&O Expense 

Subsidies Has 

Stabilized Overall 

Costs, but Subsidies 

Have Fluctuated 

Widely by Crop, 

State, and County

RMA Adjusted the A&O 

Subsidy Calculation 

Method by Applying a 

National Subsidy Cap
Page 14 GAO-17-501 Crop Insurance Delivery Costs

types.29 The cap controls government costs when crop prices rise, and 

the minimum protects companies against low market prices. Because 

A&O subsidies remain linked to crop prices under the revised calculation 

method, initial A&O subsidy calculations may exceed the cap during 

years when crop prices are high. Under such circumstances, RMA has 

applied an “adjustment factor” to bring down overall annual A&O subsidy 

expenses to within the capped amount. For a given year, the adjustment 

factor is equal to the capped A&O subsidy amount divided by the total 

dollar amount of unadjusted A&O subsidies for all policies. RMA applies 

this adjustment factor to each policy by multiplying it by the policy’s 

unadjusted A&O subsidy amount.30 For example, in 2011 the total amount 

of unadjusted A&O subsidies was $2.12 billion, and the cap was $1.22 

billion, or 58 percent of the unadjusted amount. Thus, the adjustment 

factor was 0.58.

As a result of the revised calculation method, overall A&O subsidies have 

become more stable since 2010, staying at about $1.4 billion per year 

from 2011 through 2015. Figure 3 shows the average A&O subsidy per 

policy for 2000 through 2015. The average A&O subsidy per policy 

increased from $418 in 2000 to $834 in 2006. Then, as a result of higher 

prices for major crops, such as corn, soybeans, and wheat, the average 

subsidy increased sharply, reaching $1,756 in 2008. Crop price declines 

brought down the average A&O subsidy per policy to $1,200 by 2010. 

Although the prices of corn, soybeans, and wheat increased again in 

2011, the 2011 SRA’s cap on total A&O subsidies for the most common 

types of policies prevented the average A&O subsidy per policy from 

increasing, holding it at $1,178. From 2011 through 2015, the overall 

 29The subject policy types include revenue protection, which protects against crop 

revenue loss resulting from declines in production, price, or both, and yield protection, 

which protects against a production loss relative to the historical production per acre. In 

2011, the cap on A&O subsidies for the subject policy types was $1.22 billion. The 

minimum annual subsidy was $1 billion. Calculations for both the maximum and the 

minimum include annual adjustments for inflation. In addition to the adjustment for 

inflation, additional A&O subsidies can be provided for loss adjustment expenses when 

losses exceed a threshold. Specifically, in states that have total loss payments greater 

than 120 percent of the total premiums, additional A&O subsidies amounting to 1.15 

percent of the premiums are paid to provide additional funding for companies’ loss 

adjustment expenses. In addition to limiting the total annual A&O subsidies for most 

policies, the 2011 SRA capped the amount of compensation (i.e., commissions and profit 

sharing) that a company can pay to crop insurance agents within a state to no more than 

the total A&O subsidy amount for that state.

30The adjustment factors were 0.58, 0.62, 0.60, 0.71, and 0.75 for 2011, 2012, 2013, 

2014, and 2015, respectively.
Page 15 GAO-17-501 Crop Insurance Delivery Costs

average A&O subsidy per policy was relatively stable, ranging from 

$1,139 to $1,189.

Figure 3: Average Administrative and Operating (A&O) Expense Subsidy Per Policy, 2000 through 2015

Note: The 2011 standard reinsurance agreement (SRA) capped the total A&O subsidies for the most 

common types of policies.

Based on our analysis of RMA data, we found that for many crops the 

average A&O subsidy per policy fluctuated substantially between 2010 

and 2015. Changes in crop prices and the A&O subsidy adjustment factor 

affected the extent of these fluctuations. The average A&O subsidy per 

policy for each of the three leading crops—corn, soybeans, and wheat—

fluctuated modestly during this period.31 The fluctuations were larger for 

many of the other crops. Figure 4 shows the annual percentage changes 

for corn, soybeans, and wheat, and figure 5 shows the changes for 

almonds, apples, and grapes. For corn, the largest change was a 7 

percent increase in 2015. For soybeans, the largest change was a 6 

percent decrease in 2013. For wheat, the largest change was an 11 

percent decrease in 2014. In contrast, as shown in figure 5, the 

fluctuations for almonds, apples, and grapes were larger. For example, 

 31Corn, soybeans, and wheat are major crops in terms of program premiums. For 

example, in 2011, the total premiums for these three crops combined were 77 percent of 

the total premiums for all program crops.

A&O Subsidies Have 

Fluctuated Substantially 

for Many Crops
Page 16 GAO-17-501 Crop Insurance Delivery Costs

the changes for almonds exceeded 29 percent in each year except 2013, 

including an increase of 75 percent in 2014. In addition to almonds, 

apples, and grapes, many other crops had large changes. For example, 

the average A&O subsidy for cotton increased 36 percent in 2011, and for 

peanuts increased 49 percent in 2013. Appendix II shows the annual 

percentage changes in the average A&O subsidy per policy for all crops 

that were insured under the federal crop insurance program during 2011 

through 2015.

Figure 4: Annual Percentage Change in the Average Administrative and Operating 

(A&O) Expense Subsidy per Policy for Corn, Soybeans, and Wheat, 2011 through 

2015

Note: Corn, soybeans, and wheat are major crops in terms of program premiums. For example, in 

2011, the total premiums for these three crops combined were 77 percent of the total premiums for all 

program crops.
Page 17 GAO-17-501 Crop Insurance Delivery Costs

Figure 5: Annual Percentage Change in the Average Administrative and Operating 

(A&O) Expense Subsidy per Policy for Almonds, Apples, and Grapes, 2011 through 

2015

Note: Almonds, apples, and grapes are examples of crops other than corn, soybeans, and wheat, 

which are the three major crop insurance program crops. We selected almonds, apples, and grapes 

because they were among the leading crops in terms of program premiums. In 2015, almonds were 

seventh in premiums, apples were eighth, and grapes were fifteenth.

Based on our analysis of RMA data, we found that the level of fluctuation 

in A&O subsidies varied among states and counties. Figure 6 shows the 

annual percentage change in the A&O subsidy per policy nationwide and 

for California, Iowa, and Texas since 2010; we selected these three 

states to review more closely because they have substantial crop 

insurance program participation, and they are located in different regions 

of the country. The 2011 SRA’s cap on nationwide A&O subsidies 

stabilized the changes in the nationwide average A&O subsidy per policy 

in a relatively narrow range, as shown in the figure.

Fluctuations in A&O 

Subsidies Varied among 

States and Counties
Page 18 GAO-17-501 Crop Insurance Delivery Costs

Figure 6: Annual Percentage Change in the Average Administrative and Operating 

(A&O) Expense Subsidy per Policy for Selected States and Nationwide, 2011 

through 2015

Note: We selected these three states because they have substantial crop insurance program 

participation, and they are located in different regions of the country.

As shown in the figure, California’s average A&O subsidy per policy was 

volatile between 2011 and 2015. California’s average subsidy per policy 

decreased by 32 percent in 2011 and then increased during the next 4 

years, especially in 2014, when it increased 66 percent. The A&O subsidy 

adjustment factor, which was 58 percent in 2011 and increased to 71 

percent in 2014, contributed to California’s 2011 decrease and its 2014 

increase. Iowa, where the leading insured crops are corn and soybeans, 

experienced substantially less fluctuation than California.32 Texas’s 

average subsidy per policy increased by 21 percent in 2011. That 

increase coincided with increases in the prices of cotton and wheat, 

 32The effects of crop price changes on A&O subsidies for corn and soybeans were 

reduced by changes in the A&O subsidy adjustment factors.
Page 19 GAO-17-501 Crop Insurance Delivery Costs

Texas’s two leading insured crops in 2011. Texas’s average subsidy per 

policy decreased by 6 percent and 9 percent in 2013 and 2015, 

respectively.

Appendix III shows the annual percentage changes in the average A&O 

subsidy per policy for each of the 50 states from 2011 through 2015.

Figure 7 shows the percentage change in the average A&O subsidy per 

policy by county from 2011 through 2015. As shown in the maps, many 

counties had substantial fluctuations in their average A&O subsidy per 

policy.
Page 20 GAO-17-501 Crop Insurance Delivery Costs

2011 2012 2013 2014 2015

Percentage change:

More than 20 20 to 10 10 to -10 -10 to -20 Less than -20

Sources: GAO analysis of U.S. Department of Agriculture’s Risk Management Agency data; MapInfo (map). | GAO-17-501

Figure 7: Percentage Change in the Average Administrative and Operating Expense Subsidy per Policy by County, from 2011 

through 2015

Instructions: To view percentage changes by county, use cursor to select a year below. For a printable

version of the interactive information, see appendix IV. Interactive Graphic
Page 21 GAO-17-501 Crop Insurance Delivery Costs

According to a crop insurance industry organization document, a large 

decrease in A&O subsidies for a state can disrupt program delivery in that 

state.33 In the 2011 SRA, RMA sought to stabilize A&O subsidies, 

according to an RMA document, which states that “because the A&O 

subsidy will be less vulnerable to extreme commodity price changes, 

companies and their agents will enjoy more stable and dependable 

subsidies in the future to support the cost of delivering the program,”

making the program more sustainable over time.34 Furthermore, 

according to the RMA document, by providing relatively stable A&O 

payments and a cap on agent commissions, the new SRA will allow for a 

more sustainable delivery system in the future, protecting producers, 

companies, and taxpayers.

RMA had previously considered other A&O subsidy calculation methods 

to reduce fluctuations in A&O subsidies. For example, in the 1990s, RMA 

considered a fixed amount per policy plus a percentage of the policy’s 

premium. More recently, in its first two drafts of the 2011 SRA, RMA 

proposed the use of reference crop prices—rather than market prices—to 

calculate A&O subsidies. In general, a reference crop price is a fixed 

amount that does not change from year to year. Reference crop prices 

have been used in other farm programs to stabilize farmers’ incomes.35

Specifically, RMA proposed the use of reference crop prices in calculating 

A&O subsidies for seven major commodities—corn, soybeans, wheat, 

grain sorghum, cotton, barley, and rice. The proposed reference prices 

were based on a 10-year average (1999 through 2008) of each crop’s 

market price. However, the crop insurance industry expressed concerns 

about RMA’s reference crop price proposal. For example, according to an 

RMA document, 36 many companies noted price volatility factors in 

comments on the draft SRA. 37 This document said that price volatility 

 33Frank Schnapp and Keith Collins, “The 2011 SRA: A Chronology and Assessment,”

Crop Insurance Today (November 2010). 

34U.S. Department of Agriculture, Risk Management Agency, Standard Reinsurance 

Agreement Frequently Asked Questions Updated for Final Draft – June 10, 2010.

35For example, the 2014 farm bill’s Price Loss Coverage program makes payments to 

farmers when the higher of either the annual average market price or the loan rate for a 

marketing assistance loan of an eligible crop is less than a fixed statutory price.

36U.S. Department of Agriculture Risk Management Agency, Standard Reinsurance 

Agreement Frequently Asked Questions Updated for Final Draft – June 10, 2010.

37Price volatility factors are based on price volatilities over the final 5 trading days of a 

price discovery period. Before the beginning of a crop growing season, RMA sets the 

projected crop price on the basis of a price discovery period. 
Page 22 GAO-17-501 Crop Insurance Delivery Costs

factors have become significant in the determination of premiums for the 

increasing number of revenue-based policies and, consequently, the A&O 

subsidy for those policies. This document also said that using reference 

prices alone to stabilize the A&O subsidy accounts for levels of high 

commodity prices, but ignores changes in price volatility. In addition, this

RMA document stated that incorporating reference crop prices for the 

seven major commodities could affect areas of the country differently, 

depending on the types and mixture of crops in each area. RMA 

ultimately removed its reference crop price proposal from the 2011 SRA 

and replaced it with the current calculation method to cap overall A&O 

subsidies.

Although the current calculation method has resulted in relatively modest 

fluctuations in A&O subsidies for corn, soybeans, and wheat, it has not 

done so for other crops or for all states and counties. In some cases, 

double-digit decreases were followed by double-digit increases. As 

mentioned earlier, RMA’s intention was to stabilize A&O subsidies. 

Without stability in A&O subsidies, the sustainability of the program’s 

delivery system in states and counties that experience large fluctuations 

may be compromised. For example, according to crop insurance industry 

organization documents, reductions may adversely affect the services 

provided to farmers. In addition, fluctuations may make it more difficult for 

insurance agencies to operate and budget effectively. By considering an 

adjustment to the A&O expense subsidy calculation method that reduces 

the effects of changes in premiums caused by changes in crop prices or 

other factors, when it renegotiates the SRA, RMA could reduce year-toyear fluctuations in the A&O expense subsidies that companies receive at 

the crop, state, and county levels.

RMA officials acknowledged to us that large fluctuations have occurred 

for some crops, states, and counties. However, the officials said that an 

advantage of the current method is its ease of administration and that the 

crop insurance industry has become familiar with and understands it. 

While changing the calculation method may add complexity, not changing 

it will likely result in continued large annual fluctuations for some crops, 

states, and counties.
Page 23 GAO-17-501 Crop Insurance Delivery Costs

The federal crop insurance program’s target rate of return—the average 

annual rate of return that insurance companies are expected to earn—

does not reflect market conditions. A 2009 USDA-commissioned study,38

which RMA used in SRA renegotiations, estimated a reasonable rate of 

return for crop insurance providers for 1989 through 2008 based on 

economic factors, such as interest rates, which are subject to changes in 

market conditions. Interest rates have decreased since 2008, and our 

analysis that updated the information in the USDA-commissioned study, 

in which we estimated the reasonable rates of return for 2009 through 

2015 (years not included in the study), shows that the market-based 

(reasonable) rate of return has declined.

The USDA-commissioned 2009 study was based on the premise that 

government intervention should reflect competitive, market-based 

outcomes. The 2009 study derived the annual rate of return on equity that 

insurance companies participating in the federal crop insurance program 

should be expected to earn. This annual rate of return should produce 

earnings that are equal to earnings from alternative investment 

opportunities relative to the risk assumed—a reasonable or market-based 

rate of return. To determine a reasonable rate of return for companies 

participating in the federal crop insurance program, the USDAcommissioned study averaged the results obtained from using two 

generally accepted methodologies: the capital asset pricing model and 

the discounted cash flow model.39 We conducted our updated analysis 

using the two methods that the 2009 study used. Our capital asset pricing 

model calculations estimate that the average reasonable rate of return 

from 2009 through 2015 was 9.7 percent.40 Our discounted cash flow 

 38Milliman, Inc., Rate of Return Update - 2008: Reasonable Rate of Return Section 3.1, a 

report prepared at the request of the Risk Management Agency, U.S. Department of 

Agriculture, June 23, 2009.

39The capital asset pricing model uses the return on a risk-free asset, usually a U.S. 

Treasury security, to calculate an estimate of the additional return an investor would 

expect as compensation for the additional risk associated with alternative investments. 

The discounted cash flow model is constructed on the assumption that the cost of an 

investment (e.g., a stock) would equal the present value of cash flows (e.g., future 

dividend payments or capital gains) resulting from the investment. If the present value of 

cash flows resulting from the investment does not equal the price, investors would bid on 

the investment until the values are equal. For a more detailed discussion of these models, 

see appendix V.

40We performed sensitivity analysis on our capital asset pricing model calculations by 

testing the impact of different risk-free rates and beta coefficients. For a discussion of this 

sensitivity analysis, see appendix V.

The Federal Crop 

Insurance Program’s 

Target Rate of Return 

Does Not Reflect 

Market Conditions
Page 24 GAO-17-501 Crop Insurance Delivery Costs

model calculations estimate that the average reasonable rate of return 

was 9.6 percent.41 The average of the two methods was 9.6 percent. We 

also note that the reasonable annual rate of return generally trended 

downward from 2009 through 2015 and reached a low of 8.8 percent in 

2015. Lower interest rates contributed to the decrease in the reasonable 

rate. For example, from 2008 to 2015, one measure of an average 

interest rate—U.S. Treasury securities—fell from 3.1 percent to 1.4 

percent.42

An overview of the results of our updated analysis based on the 2009 

study and our summary of RMA data on the actual rates of return on 

retained premiums of participating insurance companies for the 20 years 

from 1996 through 2015 is presented in table 1. Appendix V provides 

more information on the USDA-commissioned study, its results for 1989 

through 2008, and our updated analysis for 2009 through 2015.

 41We performed two sets of discounted cash flow model calculations. One set of 

calculations only included publicly traded property and casualty insurance companies that 

reported complete historical and forecasted earnings and dividends. This is the basis for 

the discounted cash flow rates of return reported on the average of the two methods. 

However, for comparison purposes, we also calculated the reasonable rate of return for all 

publicly traded property and casualty companies covered by Value Line Investment 

Survey by imputing zeros for missing values, which produced an average reasonable rate 

of return of about 8.5 percent from 2009 through 2015. However, out of concern that 

imputing zeroes could skew the rate of return estimate downward, we used the higher 

average rate of return of 9.6 percent based on the companies that reported complete data. 

For a more detailed discussion of our discounted cash flow model calculations, see 

appendix V.

42The “average interest rate” is the average of yields on short-, intermediate-, and longterm U.S. Treasury securities.
Page 25 GAO-17-501 Crop Insurance Delivery Costs

Table 1: GAO Calculation of Reasonable and Actual Rates of Return, 1996 through 2015

(In percentages)

Years Capital asset 

pricing model 

rate of return 

on equity 

Discounted 

cash flow model 

rate of return on 

equity 

Reasonable rate 

of return on 

equity

Actual rate of 

return on 

retained 

premiumsa 

1996-2015 (20-year average) 11.4 10.7 11.0 18.0

2009-2015 (7-year average) 9.7 9.6 9.6 16.0

2015 9.0 8.6 8.8 24.8

Source: GAO analysis of data from the Federal Reserve; Value Line Investment Survey; 2015 Ibbotson Stocks, Bonds, Bills, and Inflation (SBBI) Classic Yearbook; 2016 Ibbotson Stocks, Bonds, Bills, 

and Inflation (SBBI) Yearbook; and a 2009 study commissioned by the U.S. Department of Agriculture. | GAO-17-501

Notes: A 2009 USDA-commissioned study found that the reasonable rate of return on equity for 1989 

through 2008 was an average of 12.8 percent. Using the 2009 study’s method for determining the 

reasonable rate of return on equity, we conducted our own analysis updating the study’s results 

through 2015. The reasonable rate of return on equity is the average of the rates from the capital 

asset pricing model and the discounted cash flow model. For the 20 years from 1996 through 2015 

and the 7 years from 2009 through 2015, we averaged Risk Management Agency data on the actual 

rates of return on retained premiums of participating insurance companies.

a

These actual rates of return are calculated as a percentage of retained premiums rather than as a 

percentage of equity because of data limitations. However, crop insurers’ premiums and equity have 

been fairly close to each other, on average. For instance, the ratio of premium to equity averaged 1.1 

from 2005 through 2009. Moreover, the standard reinsurance agreement renegotiations use rates of 

return as a percentage of retained premiums, as data on retained premiums have been more easily 

obtainable than data on equity.

According to a document from a crop insurance industry organization, 

participating insurance companies’ financial returns under the 2011 SRA 

have been lower than expected. The average rate of return on retained 

premiums for the first 4 years that the 2011 SRA was in effect—2011 

through 2014—was less than the 14.5 percent target rate, and companies 

had underwriting losses in 2012, when a major drought occurred. 

However, 4 years is a short time for assessing the rate of return. The 

2009 study noted that the federal crop insurance program has significant 

catastrophe exposure. According to the study, with most lines of 

insurance that have a significant catastrophe exposure, insurers expect to 

earn significant profits in non-catastrophe years and significant losses in 

years with catastrophes. As a result, average returns over relatively short 

sample periods are not necessarily indicative of the long-term pattern of 

returns.

Participating insurance companies’ actual rate of return can vary 

significantly from year to year. Table 2 shows the participating insurance 

companies’ actual rate of return on retained premiums for each year from 

1996 through 2015. The average actual rate of return for these 20 years 
Page 26 GAO-17-501 Crop Insurance Delivery Costs

was 18.0 percent. During the 5 years that the 2011 SRA has been in 

effect—2011 through 2015—the average rate of return on retained 

premiums was 9.4 percent.43 A major reason the rate of return during 

these 5 years was less than the target rate was because the rate dropped 

to -15.3 percent in 2012. In that year, a major drought caused 

underwriting losses. Because the 2011 SRA’s target rate of return is 14.5 

percent, additional years of experience would, on average, likely result in 

an increase in the average rate of return under the 2011 SRA. For 

example, as of March 2017, preliminary RMA information indicates that 

the 2016 rate of return on retained premiums will be about 35 percent. If 

the 2016 rate of return on retained premiums were 35 percent, then in the 

6 years in which the 2011 SRA has been in effect, companies’

underwriting gains during those 6 years would average about 13.7 

percent.

Table 2: Participating Insurance Companies’ Actual Rate of Return on Retained 

Premiums, 1996 through 2015

(In percentages)

Year Actual rate of 

return on retained 

premiums 

1996 21.5

1997 27.9

1998 17.5

1999 14.8

2000 14.3

2001 14.6

2002 -2.1

2003 14.9

2004 22.0

2005 31.6

2006 23.5

2007 32.1

2008 14.4

2009 33.6

 43We include the 5-year average only to describe the rate of return since the 2011 SRA 

has been in effect. Because of weather variations, more than 5 years of experience are 

needed to more fully assess the actual rate of return relative to the 14.5 percent target 

rate.
Page 27 GAO-17-501 Crop Insurance Delivery Costs

(In percentages)

Year Actual rate of 

return on retained 

premiums 

2010 31.6

2011 17.4

2012 -15.3

2013 7.0

2014 13.2

2015 24.8

Source: GAO analysis of U.S. Department of Agriculture’s Risk Management Agency data. | GAO-17-501

Note: Preliminary RMA information indicated that the 2016 rate of return on retained premiums would 

be about 35 percent.

We identified two opportunities for the federal government to reduce its 

delivery costs for the crop insurance program: (1) by reducing the target 

rate of return or (2) by reducing the portion of premiums that participating 

insurance companies retain. A reduction of either the target rate of return 

or the portion of premiums that companies retain would reduce 

companies’ expected underwriting gains because those gains are equal 

to the companies’ rate of return multiplied by the premiums that 

companies retain. (As mentioned earlier, premium subsidies make up the 

majority of the federal crop insurance program’s costs. Information about 

our recent reports that identified potential actions that Congress or RMA 

could take to reduce the cost of the program and achieve budgetary 

savings is in app. VI.)

Given that our analysis shows that the federal crop insurance program’s 

target rate of return does not reflect market conditions, an opportunity 

exists for the federal government to reduce the program’s delivery costs. 

Adjusting the target rate of return to reflect market conditions could 

produce significant cost savings.44 For example, if the target rate of return 

was reduced by 3.5 percentage points, from the current target rate of 14.5 

 44The SRA includes provisions for determining the portion of underwriting gain or loss 

retained by participating insurance companies. These portions vary with the loss ratio 

(ratio of indemnities to premiums) by state in a given year. The mechanism by which RMA 

could reduce companies’ expected rate of return would be to negotiate changes to the 

provisions, such as by reducing the portion of underwriting gains, or increasing the portion 

of underwriting losses, retained by companies.

Two Opportunities 

Exist for the Federal 

Government to 

Reduce the Delivery 

Costs of the Program

Reducing the Target Rate 

of Return
Page 28 GAO-17-501 Crop Insurance Delivery Costs

percent to 11.0 percent—the average reasonable rate that we calculated 

for 1996 through 2015—on the companies’ 2015 retained premiums of 

$7.42 billion, the companies’ expected underwriting gains would decrease 

by $259 million. If the target rate of return was reduced by 4.9 percentage 

points, from the current target rate of 14.5 percent to 9.6 percent—the 

average reasonable rate that we calculated for 2009 through 2015—on 

the companies’ 2015 retained premiums of $7.42 billion, the companies’

expected underwriting gains would decrease by $364 million.45 With such 

a cost savings for a single year, the savings for the program would be 

significant over time with either reduction. As we reported in January 

2017, absent policy changes, the federal government’s fiscal path is 

unsustainable, and to change the long-term fiscal path, policymakers will 

need to consider policy changes to the entire range of federal activities 

and spending.46 We have also reported that Congress and executive 

branch agencies can act to improve the efficiency and effectiveness of 

government programs and activities.47

However, any savings that the federal government could achieve through 

the SRA by reducing companies’ expected future underwriting gains as a 

result of reducing the target rate of return cannot be implemented without 

congressional action to repeal a provision in the 2014 farm bill. This 

provision requires that any revised SRA be budget neutral with respect to 

estimates of future underwriting gains for the companies participating in 

the crop insurance program. In addition, the 2014 farm bill requires that if 

any SRA savings are realized, they have to be used to increase 

underwriting gains or A&O subsidies. If Congress directs RMA to adjust 

the participating insurance companies’ target rate of return to reflect 

market conditions, the underwriting gains that insurance companies can 

expect to receive would decrease. Such a reduction would not affect the 

premiums that farmers pay,48 but such an adjustment would reduce the 

 45Another example of the effects of reducing the target rate of return was illustrated in 

November 2015 when the Bipartisan Budget Act of 2015 established a target rate of return 

on retained premiums of 8.9 percent for crop insurance providers. In October 2015, CBO 

projected that the resulting 10-year savings from applying an 8.9 percent target rate of 

return would be about $3 billion. However, this provision was repealed in December 2015. 

46GAO-17-237SP.

47GAO, 2016 Annual Report: Additional Opportunities to Reduce Fragmentation, Overlap, 

and Duplication and Achieve Other Financial Benefits, GAO-16-375SP (Washington, D.C.: 

Apr. 13, 2016).

48As noted earlier, premium subsidy percentages are set in the Federal Crop Insurance 

Act and require congressional action to change.
Page 29 GAO-17-501 Crop Insurance Delivery Costs

cost of the crop insurance program and achieve budgetary savings for the 

federal government.

In addition to the rate of return, participating insurance companies’

underwriting gains are affected by the portion of premiums that they 

retain. Even if the target rate of return remained unchanged, reducing 

companies’ portion of retained premiums would reduce their expected 

underwriting gains because they would earn their rate of return on a 

smaller premium base. The companies would have a smaller underwriting 

stake, retaining a smaller portion of underwriting gains or losses. The 

extent of sharing in premiums—and the associated opportunities for gains 

and risk of losses—between the federal government and the companies 

has long been a subject of debate. For example, according to a report by 

a former USDA official, the degree of this sharing has been controversial 

since the beginning of the public-private partnership created by the 

Federal Crop Insurance Act of 1980.49 According to this report, part of the 

justification for the companies to share in the program’s underwriting 

losses was that it would encourage the companies to more carefully 

adjust farmers’ loss claims.50 According to a crop insurance industry 

organization document, the structure of the program is such that 

companies have dollars at risk on every policy and are thus financially 

incentivized to reduce fraudulent loss claims.

The Agricultural Risk Protection Act of 2000, however, improved RMA’s 

ability to monitor farmers’ loss claims and companies’ adjustment of these 

loss claims by enhancing the agency’s data mining capabilities. Since 

2001, RMA has used its enhanced data mining capabilities to identify 

policies with anomalous loss claims as compared to similar policies in a 

geographic region. For example, RMA and the companies review these 

policies with anomalous loss claims. As a result of its enhanced data 

mining capabilities, RMA’s ability to monitor companies’ adjustment of 

loss claims has improved. Furthermore, with more recent technological 

advances, such as the inclusion of satellite data in data mining methods, 

RMA’s data mining ability has continued to improve. According to RMA 

 49Taxpayers for Common Sense, Crop Insurance and Private Sector Delivery: 

Reassessing the Public-Private Partnership, Joseph W. Glauber, October 2016. 

50Although insurance companies participating in the federal crop insurance program share 

in the federal crop insurance program’s underwriting risk and subsequent gains or losses, 

insurance companies participating in the National Flood Insurance Program do not share 

in the program’s underwriting gains or losses.

Reducing the Portion of 

Premiums that Companies 

Retain
Page 30 GAO-17-501 Crop Insurance Delivery Costs

documents, the agency’s data mining efforts have improved program 

monitoring. RMA estimated its data mining resulted in $1.1 billion in 

cumulative cost avoidance—reduction in the amount of indemnities 

claimed—from 2001 through 2014.

Moreover, the 2005 SRA reduced the companies’ share of the premiums 

and their potential underwriting gains or losses through a quota share 

provision. A quota share is a type of reinsurance contract in which the 

insurer—in this case, the insurance companies participating in the crop

insurance program—and the reinsurer—in this case, the federal 

government—share premiums, gains, and losses according to a fixed 

percentage. The quota share concept was introduced in the 2005 SRA as 

a way to transfer underwriting gains from the companies to the 

government in order to generate a reduction in program costs, according 

to RMA officials. Under quota share provisions in the 2005 SRA and 2011 

SRA, each company ceded to USDA a percentage of its premiums and 

potential underwriting gains or losses. The 2005 SRA’s quota share was 

5 percent, and the 2011 SRA’s quota share was 6.5 percent.51 For 

example, in 2010, the quota share reduced companies’ retained 

premiums by $319 million (5 percent) from $6,382 million to $6,063 

million and reduced companies’ underwriting gains by $101 million (5 

percent) from $2,017 million to $1,916 million. Thus, the quota share 

increased the government’s underwriting gains by $101 million and 

reduced program delivery costs by that amount.

Although RMA’s program monitoring has improved since 2000 and even 

with the implementation of a quota share, there has been little change in 

the level at which companies are allowed to retain premiums and share in 

program underwriting gains or losses—which provides companies with 

financial incentive to carefully adjust farmers’ loss claims. In 2000, 

insurance companies retained $1,895 million (75 percent) of the 

program’s $2,538 million in total premiums. In 2004, the insurance 

companies retained $3,140 million (75 percent) of the program’s $4,186 

million in total premiums. In 2015, 14 years after RMA implemented the 

Agricultural Risk Protection Act of 2000’s data mining activities and 10 

 51The 2011 SRA’s quota share was 6.5 percent of underwriting gains or losses, and up to 

1.5 percent of any gain was to be distributed to companies that service underserved or 

less-served states according to the premiums generated in those states. In 2011, 2013, 

and 2015, the net underwriting gain transferred from companies to USDA was 5 percent. 

In 2014, this amount was 6.5 percent. In 2012, when companies had an underwriting loss, 

6.5 percent of this loss was transferred from the companies to RMA.
Page 31 GAO-17-501 Crop Insurance Delivery Costs

years after RMA implemented a quota share, the insurance companies 

retained $7,422 million (76 percent) of the program’s $9,744 million in 

total premiums.52 Thus, during the period that RMA was improving its 

program monitoring, the portion of premiums that companies retained 

stayed about the same, the crop insurance program grew, and the 

potential amount of companies’ underwriting gains increased. The last 

time RMA had an opportunity to assess and change the level of sharing in 

program gains or losses was in 2010 when it completed renegotiating the 

SRA.

Reducing the portion of premiums that companies retain by, for example, 

5 percentage points, could save the government tens of millions of dollars 

per year by increasing the government’s share of the insurance coverage, 

thereby giving the government more opportunity to reduce its cost by 

achieving underwriting gains.53 For example, in 2009, the SRA’s quota 

share provision, which reduced the premiums that companies retained by 

5 percentage points, resulted in program cost savings of $121 million for 

that year. An additional adjustment in the portion of premiums that 

companies retain could result in comparable savings.

As mentioned earlier, we reported in January 2017 that, absent policy 

changes, the federal government’s fiscal path is unsustainable.54

However, any savings that could be achieved through the SRA by 

reducing insurance companies’ expected future underwriting gains as a 

result of reducing the portion of premiums that participating companies 

may retain would require congressional action to repeal a provision in the 

2014 farm bill. This provision requires that any revised SRA be budget 

neutral with respect to estimates of future underwriting gains for the 

companies. In addition, the 2014 farm bill requires that if any SRA 

savings are realized, they have to be used to increase underwriting gains. 

Given fiscal pressures and the improvement in RMA’s program 

monitoring, an assessment and possible adjustment in the portion of 

 52Appendix VII provides more information on participating insurance companies’ retained 

premiums, the government’s quota share, and companies’ underwriting gains/losses for 

1996 through 2015.

53An increase in the government’s share of the risk would also expose the government to 

greater risk of loss in years with unusually high levels of claims. On average, however, the 

government would be expected to achieve a greater underwriting gain, resulting in 

program cost savings.

54GAO-17-237SP.
Page 32 GAO-17-501 Crop Insurance Delivery Costs

premiums that participating insurance companies retain may be 

warranted.

Federally subsidized crop insurance, which helps farmers manage the 

risk inherent in farming, is one of the most important programs in the farm 

safety net. USDA and private insurance companies share in the risk of 

loss and the opportunity for gain associated with crop insurance policies. 

The 2009 USDA-commissioned study estimates an annual rate of return 

that would allow insurance companies participating in the crop insurance 

program to have expected earnings that are equal to earnings from 

alternative investment opportunities relative to the risk assumed—a 

reasonable or market-based rate of return. However, the reasonable rate 

of return has declined since the 2011 SRA. This decline indicates that the 

current target rate of return for the federal crop insurance program 

exceeds the reasonable rate of return. If Congress were to direct RMA to 

adjust the participating insurance companies’ target rate of return to 

reflect market conditions, the underwriting gains that insurance 

companies receive would potentially be reduced, and any such reduction 

would not affect the premiums that farmers pay. Such an adjustment 

would, however, reduce the expected cost of the crop insurance program 

and achieve expected budgetary savings for the federal government, 

which could be used for deficit reduction or other purposes, such as other 

farm programs or enhancements of crop insurance products available to 

farmers. However, any savings that could be achieved through the SRA 

by reducing companies’ expected future underwriting gains as a result of 

reducing the target rate of return would require congressional action to 

repeal a provision in the 2014 farm bill because this provision requires 

that any revised SRA is to be budget neutral with respect to estimates of 

future underwriting gains for the companies.

In addition, the portion of program premiums that participating insurance 

companies retain—which provides the companies with financial incentive 

to accurately adjust farmers’ loss claims—has changed little since 2000. 

The last time RMA had an opportunity to assess and change the level of 

portion of premiums retained was in 2010 when it completed 

renegotiating the SRA. Given the improvement in RMA’s ability to monitor 

the program, an additional assessment and possible adjustment in the 

portion of premiums retained by participating insurance companies may 

be appropriate. Such an adjustment could generate significant cost 

savings for the program. However, because a provision in the 2014 farm 

bill requires that any revised SRA is to be budget neutral with respect to 

estimates of future underwriting gains for the companies, any savings that 

Conclusions
Page 33 GAO-17-501 Crop Insurance Delivery Costs

could be achieved through the SRA by reducing companies’ expected 

future underwriting gains as a result of reducing the portion of premiums 

retained by participating insurance companies are not allowed under

current law and would also require congressional action to repeal this 

provision in the 2014 farm bill.

Moreover, RMA sought to make A&O expense subsidies more stable and 

dependable when it negotiated the 2011 SRA, and the current calculation 

method has resulted in relatively modest fluctuations in A&O expense 

subsidies for corn, soybeans, and wheat, the program’s three leading 

crops. However, our analysis shows the SRA’s calculation method also 

resulted in substantial subsidy fluctuations for many crops, states, and 

counties with double-digit decreases followed by double-digit increases in 

some cases. Because large decreases in A&O expense subsidies can 

disrupt program delivery, and the sustainability of the program’s delivery 

system in states and counties that experience large fluctuations can be 

compromised, an adjustment to the A&O expense subsidy calculation 

method that reduces the effects of changes in premiums caused by 

changes in crop prices or other factors when RMA renegotiates the SRA, 

could help RMA reduce year-to-year fluctuations in the A&O expense 

subsidies that companies receive at the crop, state, and county levels.

To reduce the cost of delivering the crop insurance program, Congress 

should consider repealing the 2014 farm bill requirement that any revision 

to the standard reinsurance agreement not reduce insurance companies’

expected underwriting gains, and directing the Risk Management Agency 

to, during the next renegotiation of the agreement, (1) adjust the 

participating insurance companies’ target rate of return to reflect market 

conditions and (2) assess the portion of premiums that participating 

insurance companies retain and, if warranted, adjust it.

To reduce year-to-year fluctuations in the administrative and operating 

expense subsidies that companies receive at the crop, state, and county 

levels, we recommend that the Secretary of Agriculture direct the 

Administrator of the Risk Management Agency to consider adjusting the 

administrative and operating expense subsidy calculation method in a 

way that reduces the effects of changes in premiums caused by changes 

in crop prices or other factors when it renegotiates the standard 

reinsurance agreement.

Matter for 

Congressional 

Consideration

Recommendation for 

Executive Action
Page 34 GAO-17-501 Crop Insurance Delivery Costs

We provided USDA with a draft of this report for review and comment. 

RMA, responding on behalf of USDA, stated in its written comments (see 

app. VIII) that it had no comment on the matter for congressional 

consideration. RMA also stated that, consistent with our recommendation, 

it will examine with insurance companies the potential to reduce 

variations in A&O expense subsidies the next time the SRA is 

renegotiated.

RMA stated that the 2011 SRA produced substantial savings for 

taxpayers of approximately $4.5 billion, which was accomplished with no 

significant disruption of service. RMA also stated that our report omits the 

SRA’s success. We agree that the 2011 SRA produced successful 

results, and we discuss some of them in our report. For example, the 

report states that the Office of Management and Budget estimated the 

2011 SRA’s 10-year budgetary savings would be about $6 billion and that 

the national cap on annual A&O expense subsidies controls government 

costs when crop prices rise. In addition, the report states that the 2011 

SRA’s national cap on annual A&O subsidies was successful in stabilizing 

the overall subsidy amount. In addition, we noted that for the three 

leading crops—corn, soybeans, and wheat—A&O subsidy fluctuations 

were relatively modest and linked these modest fluctuations to the 2011 

SRA’s A&O subsidy calculation method. However, as we state in the 

report, our analysis also found substantial subsidy fluctuations for many 

crops, states, and counties.

Further, RMA stated that our report gives the impression that the cap on 

A&O expense subsidies negatively impacted service to farmers and that 

stabilizing A&O subsidies would not lead to any discernible difference in 

service to farmers. However, crop insurance industry organization 

documents suggest that reductions in A&O subsidies could have negative 

effects. As we state in the report, according to crop insurance industry 

organization documents, reductions in A&O subsidies may adversely 

affect the services provided to farmers. Furthermore, in the 2011 SRA, 

RMA sought to stabilize A&O subsidies, according to an RMA document, 

which states that “because the A&O subsidy will be less vulnerable to 

extreme commodity price changes, companies and their agents will enjoy 

more stable and dependable subsidies in the future to support the cost of 

delivering the program,” making the program more sustainable over time. 

According to this RMA document, by providing relatively stable A&O 

payments and a cap on agent commissions, the new SRA will allow for a 

more sustainable delivery system in the future, protecting producers, 

companies, and taxpayers.

Agency Comments 

and Our Evaluation
Page 35 GAO-17-501 Crop Insurance Delivery Costs

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the 

appropriate congressional committees; the Secretary of Agriculture; the 

Director, Office of Management and Budget; and other interested parties. 

In addition, this report will be available at no charge on the GAO website 

at http://www.gao.gov.

If you or your staff members have any questions about this report, please 

contact me at (202) 512-3841 or morriss@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. Key contributors to this report are listed in 

appendix IX.

Sincerely yours,

Steve D. Morris

Director, Natural Resources and Environment
Appendix I: Objectives, Scope, and 

Methodology

Page 36 GAO-17-501 Crop Insurance Delivery Costs

Our objectives were to examine (1) the changes, if any, in the distribution 

of administrative and operating (A&O) expense subsidies due to the 

implementation of the 2011 standard reinsurance agreement’s (SRA) 

national cap on subsidies, (2) the extent to which the federal crop 

insurance program’s target rate of return reflects market conditions and 

(3) opportunities, if any, for the federal government to reduce its delivery 

costs for the program.

To address these objectives, we reviewed, among other things, sections 

of 2011 SRA drafts and the final 2011 SRA; Risk Management Agency 

(RMA) documents on the development and implementation of the 2011 

SRA; crop insurance industry documents; provisions of the Food, 

Conservation, and Energy Act of 2008 (2008 farm bill), the Agricultural 

Act of 2014 (2014 farm bill), the Agricultural Risk Protection Act of 2000; 

prior GAO reports; and standards for internal control in the federal

government. We also interviewed RMA officials to discuss the 

development and implementation of the 2011 SRA.

To examine the changes, if any, in the distribution of A&O expense 

subsidies due to the implementation of the 2011 SRA’s national cap on 

subsidies, we reviewed and analyzed RMA crop insurance data by state, 

county, and crop for 2010 through 2015. We chose this time frame to 

examine changes associated with the implementation of the 2011 SRA 

because it contained the most recent data available at the time of our 

review. We analyzed changes in A&O subsidies per policy by state, 

county, and crop to identify and summarize trends during 2011 through 

2015. We used A&O subsidies per policy because RMA used this 

benchmark in its development of the 2011 SRA. The RMA data we used 

provided unadjusted A&O subsidy amounts (i.e., the amounts before 

adjustment in accordance with the 2011 SRA’s cap on total A&O 

subsidies for policy types that are subject to this cap). Based on the 2011 

SRA’s provisions and information from RMA officials, we performed 

calculations to convert these amounts to adjusted A&O subsidy amounts. 

We compared our adjusted A&O subsidy amounts with other RMA data—

such as state and national totals—to confirm that our adjustments were 

accurate.

To examine the extent to which the federal crop insurance program’s 

target rate of return reflects market conditions, our work included 

reviewing a 2009 study commissioned by the U.S. Department of 

Agriculture (USDA), the Rate of Return Update - 2008: Reasonable Rate

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 37 GAO-17-501 Crop Insurance Delivery Costs

of Return Section 3.1.

1 This study derived, for the 20 years from 1989 

through 2008, the annual rate of return on equity that companies 

participating in the federal crop insurance program should be expected to 

earn. We identified the major factors that the study used to estimate the 

reasonable rate of return and collected data on these factors from 

sources of financial information such as Value Line Investment Survey.

2

We then extended the study’s results to estimate the reasonable rate of 

return on equity for 2009 through 2015, years that were not included in 

the study. In addition, for the 20 years from 1996 through 2015, we 

summarized RMA data on the actual rates of return on retained premiums 

of participating insurance companies. Additional information on our 

methods for this objective is in appendix V.

To examine opportunities, if any, for the federal government to reduce its 

delivery costs for the program, we reviewed and summarized RMA data 

on companies’ underwriting gains and risk sharing as expressed by total 

program premiums and premiums retained by companies for the 20 years 

from 1996 through 2015. We also reviewed the 2005 SRA and 2011 SRA 

sections on risk sharing, as well as crop insurance industry documents, 

including industry responses to 2011 SRA drafts. Regarding RMA’s 

program monitoring, we reviewed RMA documents on data mining and 

other program integrity efforts, USDA Office of the Inspector General 

reports, and previous GAO reports including our 2005 report on fraud, 

waste, and abuse,3 and our 2012 report that examined RMA’s data 

mining.4

To evaluate the reliability of the RMA data, we reviewed an assessment 

for a previous GAO study, reviewed agency documentation related to the 

data systems, and obtained updated information on the data systems 

from knowledgeable officials. We assessed the reliability of the data from 

the 2009 USDA-commissioned study and the financial information 

 1

We also used a related report, Milliman, Inc., Historical Rate of Return Analysis, a report 

prepared at the request of the Risk Management Agency, U.S. Department of Agriculture, 

August 18, 2009. 

2

Value Line Investment Survey is an independent investment advisory service which 

provides extensive coverage on approximately 1,700 publicly traded stocks.

3

GAO, Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to Fraud, 

Waste, and Abuse, GAO-05-528 (Washington, D.C.: Sept. 30, 2005).

4

GAO, Crop Insurance: Savings Would Result from Program Changes and Greater Use of 

Data Mining, GAO-12-256 (Washington, D.C.: Mar. 13, 2012).
Appendix I: Objectives, Scope, and 

Methodology

Page 38 GAO-17-501 Crop Insurance Delivery Costs

sources by reviewing relevant documentation. In addition, for one of the 

financial information sources, we reviewed an assessment for a previous 

GAO study. In each case, we concluded that the data were sufficiently 

reliable for the purposes of this report. 

We conducted this performance audit from April 2015 to July 2017 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence we obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Percentage Change in the 

Average Administrative and Operating

Subsidy, by Crop, 2011-2015

Page 39 GAO-17-501 Crop Insurance Delivery Costs

Table 3: Annual Percentage Change in the Average Administrative and Operating Expense Subsidy per Policy, by Crop, 2011-

2015

Crop 2011 2012 2013 2014 2015

Adjusted gross revenue-litea -42.3 5.8 4.4 28.7 n/a

Adjusted gross revenuea -38.9 10.8 1.7 41.2 n/a

Alfalfa seed -43.1 15.6 31.1 56.9 -5.7

All other citrus trees -43.0 29.1 -3.5 21.6 -3.7

All other grapefruit -30.0 7.2 -22.7 n/a n/a

Almonds -41.5 29.4 8.4 74.5 36.0

Annual forage n/a n/a n/a n/a 0.0

Apiculture 13.7 40.2 -36.2 0.2 6.6

Apples -38.4 30.3 10.7 45.5 18.6

Avocado trees -27.8 3.9 0.4 37.1 9.7

Avocados -22.2 -2.4 6.7 4.7 -7.3

Banana -27.5 27.2 0.8 52.7 -75.8

Banana tree 117.8 13.9 7.9 -36.4 -27.3

Barley 7.6 19.5 -5.3 -6.5 27.1

Blueberries -18.3 13.5 12.1 15.2 -0.8

Buckwheat -20.3 19.5 9.5 33.3 -3.6

Burley tobacco -39.3 41.7 -16.3 86.1 -2.9

Cabbage -2.0 -18.8 46.7 22.5 25.9

Camelin n/a n/a -45.4 n/a n/a

Canola -8.6 -2.8 -2.5 -9.6 5.7

Carambola trees -37.1 -16.8 181.5 31.3 45.9

Cherries -39.1 17.5 12.0 26.5 8.5

Chili peppers -45.9 -24.6 70.5 -16.1 -2.6

Cigar binder tobacco -31.5 26.5 6.2 13.5 18.4

Cigar filler tobacco -49.2 24.0 35.1 26.0 6.3

Cigar wrapper tobacco -40.8 -22.9 14.2 30.4 -15.5

Citrus I -34.5 19.3 n/a n/a n/a

Citrus II -21.0 24.8 n/a n/a n/a

Citrus III -36.1 11.0 n/a n/a n/a

Citrus IV -32.0 18.6 n/a n/a n/a

Citrus trees I -47.3 n/a n/a n/a n/a

Citrus trees II -51.4 n/a n/a n/a n/a

Citrus trees III 76.9 n/a n/a n/a n/a

Citrus trees IV -40.3 n/a n/a n/a n/a

Citrus trees V -63.2 n/a n/a n/a n/a

Appendix II: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by Crop, 2011-2015
Appendix II: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by Crop, 2011-2015

Page 40 GAO-17-501 Crop Insurance Delivery Costs

Crop 2011 2012 2013 2014 2015

Citrus V -39.6 21.5 n/a n/a n/a

Citrus VI n/a n/a n/a n/a n/a

Citrus VII -25.2 31.7 n/a n/a n/a

Citrus VIII -39.9 24.3 n/a n/a n/a

Clams -26.4 -21.2 47.2 18.6 84.5

Coffee -69.1 -6.7 -14.7 49.9 33.2

Coffee tree -47.4 -6.8 -51.3 195.0 47.1

Corn 2.0 -0.7 -4.4 -6.5 7.2

Cotton 36.0 -19.5 -12.2 14.2 -4.8

Cotton extra-long staple -34.0 62.4 -8.8 150.3 11.8

Cranberries -60.0 28.8 30.7 -14.7 -9.1

Cucumbers n/a n/a n/a n/a 0.5

Cultivated wild rice -42.9 63.5 26.6 91.4 16.2

Dark air tobacco -44.6 27.0 -2.8 44.6 12.1

Dry beans -49.8 80.5 -27.1 25.6 -7.3

Dry peas -40.9 24.0 -7.2 -3.8 41.5

Early and midseason oranges -63.7 12.6 7.2 117.1 -39.0

Figs -25.4 11.7 1.9 110.7 14.2

Fire cured tobacco -38.1 14.8 -5.3 57.4 9.1

Flax -38.5 61.0 -10.9 28.9 -9.2

Flue cured tobacco -28.4 14.3 17.7 53.2 -16.0

Forage production -34.6 28.7 36.2 41.3 -0.3

Forage seeding -41.3 25.6 5.3 3.5 21.7

Fresh apricots -21.0 24.0 6.9 11.7 34.4

Fresh freestone peaches -32.8 -10.8 16.4 67.1 56.0

Fresh market beans n/a -9.0 -31.5 -11.2 40.8

Fresh market sweet corn -23.7 9.0 22.2 25.2 -15.3

Fresh market tomatoes -23.7 38.2 14.5 -9.5 -21.3

Fresh nectarines -20.7 -7.1 22.3 42.3 60.3

Grain sorghum 0.1 4.8 3.1 -9.3 7.6

Grapefruit -45.0 10.8 240.4 25.7 4.4

Grapefruit trees -40.6 72.2 3.8 28.3 14.2

Grapes -29.6 8.2 12.6 43.3 3.8

Grass seed n/a 6.3 4.2 63.0 85.8

Green peas -24.2 16.1 22.0 3.6 2.5

Hybrid corn seed -15.9 22.9 9.8 -22.1 -16.4

Hybrid sorghum seed -5.8 57.2 12.7 -34.3 -0.5
Appendix II: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by Crop, 2011-2015

Page 41 GAO-17-501 Crop Insurance Delivery Costs

Crop 2011 2012 2013 2014 2015

Late oranges -63.0 43.9 -9.0 114.3 25.7

Lemon trees n/a n/a n/a n/a n/a

Lemons -35.7 9.7 24.1 41.3 17.9

Lime trees n/a n/a n/a n/a 18.8

Macadamia nuts -23.9 14.8 10.1 14.4 -24.5

Macadamia trees -46.0 20.3 6.5 10.5 11.3

Mandarins -38.5 22.1 2.4 n/a n/a

Mandarins and tangerines n/a n/a n/a 2696.3 19.1

Mango trees -56.6 220.1 8.0 31.2 26.8

Maryland tobacco -71.3 34.5 -42.4 58.7 -79.1

Millet -10.6 -8.7 106.0 -16.5 -23.7

Minneola tangelos -38.7 35.1 6.0 n/a n/a

Mint -37.1 -0.6 -13.2 0.5 -18.8

Mustard -34.0 21.1 18.5 -22.3 15.6

Navel oranges -39.6 10.3 4.5 n/a n/a

Nursery (FGC) -28.0 10.5 5.0 22.9 4.5

Oats -31.7 45.8 17.3 4.6 5.1

Olives n/a n/a -19.0 18.7 26.7

Onions -26.4 8.6 20.5 27.2 7.0

Orange trees -27.7 22.8 -7.5 14.6 -4.8

Oranges n/a n/a n/a 69.7 7.8

Orlando tangelos -1.1 2.1 -25.0 n/a n/a

Oysters n/a n/a n/a n/a n/a

Papaya -68.2 21.8 27.8 -20.5 1817.6

Papaya tree 15.3 -72.2 51.4 325.4 5.1

Pasture rangeland forage 21.9 5.9 -0.7 14.2 5.0

Peaches -27.2 25.8 3.5 27.9 -27.7

Peanuts -30.1 42.0 -35.8 49.0 -3.3

Pears -41.6 24.2 9.3 38.9 49.2

Pecans -36.1 15.0 4.7 51.1 2.1

Peppers -46.4 3.0 32.4 19.0 -44.3

Pistachios n/a n/a -4.0 54.7 49.4

Plums -32.7 -3.1 -3.3 6.5 38.9

Popcorn -5.4 31.9 -5.9 16.3 -3.6

Potatoes -31.4 11.7 3.1 18.6 0.9

Processing apricots -44.2 25.2 4.8 70.6 30.1

Processing beans -13.9 -1.4 -13.5 23.4 10.7
Appendix II: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by Crop, 2011-2015

Page 42 GAO-17-501 Crop Insurance Delivery Costs

Crop 2011 2012 2013 2014 2015

Processing cling peaches -34.5 0.6 10.3 42.9 15.5

Processing freestone peaches -42.6 23.3 6.8 54.5 -3.2

Prunes -42.2 -0.9 -1.7 79.4 71.2

Pumpkins 3.1 5.6 -15.2 -9.7 5.3

Raisins -40.8 32.4 -24.3 73.1 -35.9

Rice -33.3 -1.7 6.7 61.3 -29.4

Rio red and star ruby -37.8 11.9 17.5 14.1 -10.6

Ruby red grapefruit -73.7 1.9 -7.7 33.3 -23.0

Rye -39.8 47.1 54.2 0.9 14.8

Safflower -27.9 33.6 6.8 18.2 -24.0

Sesame n/a 16.9 16.9 -6.3 24.9

Silage sorghum 12.8 17.5 114.6 -24.4 -9.3

Soybeans -5.2 -1.3 -6.3 2.6 -1.1

Strawberries n/a n/a -7.5 -40.2 192.5

Sugar beets -32.8 33.1 1.9 -21.6 7.1

Sugarcane -32.7 8.5 23.9 14.4 -43.3

Sunflowers -13.0 -3.4 -2.8 -6.6 -4.5

Sweet corn -39.6 32.2 12.0 2.2 -7.7

Sweet oranges -44.6 5.7 -7.3 n/a n/a

Sweet potatoes n/a 24.4 -28.3 43.4 -37.3

Table grapes -27.0 -11.2 0.7 36.1 1.3

Tangelos n/a n/a n/a 1268.6 17.4

Tangerine trees n/a n/a -13.4 22.0 45.7

Tangors n/a n/a n/a 30.5 13.8

Tomatoes -54.1 7.6 -8.8 52.1 26.7

Valencia oranges -42.0 22.5 0.1 n/a n/a

Walnuts -19.9 40.1 8.2 54.0 9.2

Wheat -2.8 8.3 -1.2 -10.9 -6.9

Source: GAO analysis of U.S. Department of Agriculture’s Risk Management Agency (RMA) data. | GAO-17-501

Notes: This table includes all crops that were insured under the federal crop insurance program from 

2011 through 2015. In this table, n/a means not applicable. In certain years, federal crop insurance 

was not available for some crops. In other cases, RMA changed the crop name.

a

Adjusted gross revenue-lite and adjusted gross revenue are types of policies that insure revenue of 

an entire farm rather than an individual crop.
Appendix III: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by State, 2011-2015

Page 43 GAO-17-501 Crop Insurance Delivery Costs

Table 4: Annual Percentage Change in the Average Administrative and Operating Expense Subsidy per Policy, by State, 2011-

2015

(In percentages)

State 2011 2012 2013 2014 2015

Alabama -6.3 -6.2 -12.6 10.9 4.7

Alaska 23.1 23.3 34.8 -11.6 -14.1

Arizona 29.8 -30.8 -13.4 8.8 -6.5

Arkansas -11.5 -12.8 1.9 2.4 0.4

California -32.1 11.7 8.2 65.7 14.0

Colorado -18.2 21.7 4.4 -9.9 -5.1

Connecticut -27.9 9.7 0.3 15.2 28.7

Delaware -11.4 -16.7 -9.8 -1.2 0.1

Florida -24.3 15.4 15.3 15.8 0.5

Georgia -4.2 -15.2 -20.8 23.9 5.7

Hawaii -51.0 5.0 -0.3 16.9 -5.7

Idaho -18.3 -4.2 -1.7 2.9 12.1

Illinois 9.9 -5.1 -15.1 -4.3 8.0

Indiana 10.9 -4.0 -13.3 -7.0 6.1

Iowa 8.8 1.9 -1.7 -8.6 -3.2

Kansas -5.5 6.4 -9.4 -5.9 1.1

Kentucky -4.1 3.7 -8.6 5.7 9.0

Louisiana -22.8 -0.7 3.5 0.7 -0.7

Maine -20.8 14.8 11.5 17.8 8.9

Maryland -8.8 -6.8 -7.7 0.8 5.9

Massachusetts -45.1 22.0 4.4 22.5 -2.6

Michigan -4.4 -2.2 -6.4 10.3 6.0

Minnesota -2.3 3.1 5.5 -7.2 -5.9

Mississippi -21.9 -8.8 1.7 1.2 6.0

Missouri -6.2 2.1 -8.1 6.9 18.6

Montana -8.1 3.6 -0.2 -9.2 6.0

Nebraska -3.4 4.6 -7.9 -6.1 3.8

Nevada -24.7 1.6 60.7 91.0 17.3

New Hampshire -27.3 41.1 -8.7 32.4 15.7

New Jersey -5.9 -5.4 1.7 -2.3 -1.4

New Mexico -2.2 41.8 -2.1 -3.8 -16.6

New York -16.3 7.0 -0.7 21.5 12.2

North Carolina -9.6 -13.7 -8.7 17.7 3.4

North Dakota 6.4 -9.9 9.4 0.7 0.8

Appendix III: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by State, 2011-2015
Appendix III: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by State, 2011-2015

Page 44 GAO-17-501 Crop Insurance Delivery Costs

(In percentages)

State 2011 2012 2013 2014 2015

Ohio 7.1 -0.6 -15.7 -2.4 3.3

Oklahoma -2.3 12.0 4.5 -7.6 -11.6

Oregon -16.1 -1.5 3.5 8.5 7.3

Pennsylvania -12.4 0.2 3.0 14.2 10.5

Rhode Island -25.1 1.7 13.1 5.8 8.6

South Carolina -12.7 -6.5 -10.1 12.5 2.1

South Dakota -9.4 17.4 1.6 4.1 5.1

Tennessee -10.5 -5.6 -12.0 8.5 0.8

Texas 20.5 -0.2 -6.2 -0.9 -9.2

Utah -21.7 6.4 27.2 -4.1 16.5

Vermont -11.9 29.4 21.7 10.1 20.6

Virginia -11.7 -1.8 -6.2 13.4 11.6

Washington -15.7 1.6 -3.0 18.3 19.7

West Virginia -24.0 1.3 -2.6 10.5 13.4

Wisconsin -5.8 2.7 -4.7 -2.0 5.7

Wyoming -20.4 9.1 17.7 9.9 1.8

Source: GAO analysis of U.S. Department of Agriculture’s Risk Management Agency data. | GAO-17-501
Appendix IV: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by County, 2011-2015

Page 45 GAO-17-501 Crop Insurance Delivery Costs

Figure 8: Percentage Change in the Average Administrative and Operating Expense Subsidy per Policy, by County, 2011

Appendix IV: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by County, 2011-2015
Appendix IV: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by County, 2011-2015

Page 46 GAO-17-501 Crop Insurance Delivery Costs

Figure 9: Percentage Change in the Average Administrative and Operating Expense Subsidy per Policy, by County, 2012
Appendix IV: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by County, 2011-2015

Page 47 GAO-17-501 Crop Insurance Delivery Costs

Figure 10: Percentage Change in the Average Administrative and Operating Expense Subsidy per Policy, by County, 2013
Appendix IV: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by County, 2011-2015

Page 48 GAO-17-501 Crop Insurance Delivery Costs

Figure 11: Percentage Change in the Average Administrative and Operating Expense Subsidy per Policy, by County, 2014
Appendix IV: Percentage Change in the 

Average Administrative and Operating 

Subsidy, by County, 2011-2015

Page 49 GAO-17-501 Crop Insurance Delivery Costs

Figure 12: Percentage Change in the Average Administrative and Operating Expense Subsidy per Policy, by County, 2015
Appendix V: Analysis of Reasonable Rate of 

Return

Page 50 GAO-17-501 Crop Insurance Delivery Costs

A 2009 study commissioned by the U.S. Department of Agriculture 

(USDA) estimated a reasonable rate of return for crop insurance 

providers for 1989 through 2008.1 This study used the opportunity cost of 

capital as the definition of the reasonable rate of return for crop 

insurance. In order to determine a reasonable rate of return for 

companies participating in the federal crop insurance program, the 2009 

study averaged the results obtained using two methods: the capital asset 

pricing model and the discounted cash flow model.

The capital asset pricing model uses the return on a risk-free asset, 

usually a U.S. Treasury security, to estimate the additional return an 

investor should expect as compensation for the additional risk associated 

with alternative investments. The capital asset pricing model uses the 

following equation to calculate the cost of capital:

K= rrff + ββ ∗ rrdd

in which rrff is the risk-free rate, ββ is the beta coefficient, and rrdd is the 

equity risk premium.

According to a 2000 study, movements in the cost of capital for the 

insurance industry closely follow movements in the risk-free rate of 

return.2 The 2009 USDA-commissioned study used the 3-month Treasury 

bill secondary markets, 5-year constant maturity Treasury bond, and the 

20-year constant maturity Treasury bond as the risk-free interest rates to 

estimate the short-, intermediate-, and long-term costs of capital. The 

2009 study used interest rate data from the Federal Reserve for the 

selected months of April, May, and June to estimate the cost of capital for 

each year reviewed.3 We calculated the cost of capital using April, May, 

and June interest rates in the same way as the USDA-commissioned 

study. In addition, we calculated the cost of capital using the full 12-month 

average risk-free rate for each year as a test for the robustness of our 

 1

Milliman, Inc., Rate of Return Update - 2008: Reasonable Rate of Return Section 3.1, a 

report prepared at the request of the Risk Management Agency, U.S. Department of 

Agriculture, June 23, 2009.

2

Walter Kielholz, “The Cost of Capital for Insurance Companies,” The Geneva Papers on 

Risk and Insurance. Issues and Practice, 25(1), 12 (2000). 

3

The reinsurance year begins on July 1.

Appendix V: Analysis of Reasonable Rate of 

Return

Capital Asset Pricing 

Model

Risk-Free Interest Rate in 

the Capital Asset Pricing 

Model
Appendix V: Analysis of Reasonable Rate of 

Return

Page 51 GAO-17-501 Crop Insurance Delivery Costs

results. Although our calculations begin with 2009 data, we note the 

significant decrease in interest rates from 2008, the last year covered by 

the USDA-commissioned study, to 2009, the first year for which we 

updated the analysis included in the study, as context for the downward 

trend in interest rates from 2009 through 2015. From 2008 to 2009, the 

average risk-free interest rate—defined as the average of the rates on the 

3-month, 5-year, and 20-year Treasury securities—decreased from 3.1 

percent to 2.2 percent. Furthermore, from 2009 through 2015, the 

average risk-free rate generally continued to decrease.

The “beta coefficient” (β) is an estimate of the relative volatility of a 

particular security compared with that of a proxy for the market, normally 

the S&P 500 index. The USDA-commissioned study gathered estimates 

of the beta coefficients for a sample of publicly traded property and 

casualty insurance companies.4 According to the study, beta coefficients 

should be adjusted to account for the long-run tendency of beta 

coefficients to revert to the market mean value of “1”.

5 We calculated the 

cost of capital with both unadjusted and adjusted beta coefficients for 

each year. The average unadjusted beta coefficient for property and 

casualty insurance companies from 2009 through 2015 was 0.94. The 

average adjusted beta coefficient for property and casualty insurance 

from 2009 through 2015 was 0.98.6 These results indicate that the 

property and casualty insurance industry has generally experienced 

slightly less volatility, on average, than the market as a whole.

The equity risk premium” (“rrdd”) is the additional return expected by 

investors for risk. That is, the equity risk premium is the average 

difference between the return on the risk-free asset and the return on a 

market portfolio, normally represented by the S&P 500 index. The equity 

risk premium is an arithmetic mean of this difference for each year 

beginning in 1926 through the year before which the cost of capital is 

 4

We used beta coefficients from the June and July issues of Value Line Investment 

Survey. Value Line Investment Survey is an independent investment advisory service that 

provides extensive coverage on approximately 1,700 publicly traded stocks. We used the 

June and July issues from 2009 through 2015 to update the analysis included in the 2009 

USDA-commissioned study.

5

The formula for adjusting the beta is the following: Adjusted beta = 0.35 + 0.67 * β.

6

We used the adjusted beta coefficients in our calculation of the reasonable rate of return.

Relative Volatility Measure 

(Beta Coefficient) in the 

Capital Asset Pricing 

Model

Equity Risk Premium in 

the Capital Asset Pricing 

Model
Appendix V: Analysis of Reasonable Rate of 

Return

Page 52 GAO-17-501 Crop Insurance Delivery Costs

being estimated.7 The average equity risk premium fluctuated by no more 

than 50 basis points from 2009 through 2015.

Our capital asset pricing model calculations estimate that the average 

cost of capital from 2009 through 2015 was 9.7 percent when calculated 

using an average of monthly interest rates for April, May, and June of 

each year. The cost of capital or reasonable rate of return from 2009 

through 2015 was 9.6 percent when calculated with a 12-month average 

of the interest rates for each year.

According to the 2009 USDA-commissioned study, the discounted cash 

flow model is perhaps the most widely used method for estimating the 

cost of capital, particularly in regulated industries, such as public utilities. 

The discounted cash flow model is constructed on the assumption that 

the cost of an investment (for instance, a stock) will equal the present 

value of cash flows (such as future dividend payments or capital gains) 

resulting from the investment. If the present value of cash flows resulting 

from the investment does not equal the price, investors will bid on (or 

against) the investment until the values are equal. The USDAcommissioned study collected data for a sample of publicly traded 

property and casualty insurance companies from Value Line Investment 

Survey.

 7

We obtained equity risk premium data from the 2015 Ibbotson Stocks, Bonds, Bills, and 

Inflation (SBBI) Classic Yearbook and the 2016 Ibbotson Stocks, Bonds, Bills, and 

Inflation (SBBI) Yearbook.

Discounted Cash 

Flow Model
Appendix V: Analysis of Reasonable Rate of 

Return

Page 53 GAO-17-501 Crop Insurance Delivery Costs

The discounted cash flow model uses the following equation to calculate 

the cost of capital:

K= DD1

PP0

+ gg

The first element, DD1

PP0

, is the dividend yield expected in the first year. The 

dividend, DD1, reported by Value Line Investment Survey, is the estimate of 

the cash dividends payable in the next 12 months. P0 is the price of the 

stock at the beginning of the 12-month period.

The second element in the discounted cash flow model, gg , is an average 

of the growth forecast method and fundamental analysis. The growth 

forecast method is an estimate of growth based on an equally weighted 

average of 10-year historical earnings and dividends, 5-year historical 

earnings and dividends, and a Value Line analyst’s forecasted dividends 

and earnings. Sustainable (“fundamental”) growth is the rate at which 

companies retain and reinvest earnings. Fundamental analysis assumes 

that retained earnings can be reinvested and used to produce greater 

earnings in the future—earnings that might produce higher dividends in 

the future. Alternately, the company may grow by issuing stock above 

book value, proceeds from which could finance new investments, thereby 

generating higher dividends in the future.

The discounted cash flow model thus relies on numerous financial metrics 

such as historical and forecasted earnings and dividends. However, the 

property and casualty insurance companies that make up the dataset 

may not report every figure. For instance, a company may not report 

dividends in a given year. In these places, Value Line Investment Survey

may note the missing values. As a result, we performed two sets of 

discounted cash flow calculations. One set of calculations only included 

publicly traded property and casualty insurance companies that reported 

complete historical and forecasted earnings and dividends. However, we 

also calculated the reasonable rate of return for all publicly traded 

property and casualty insurance companies covered by Value Line 

Investment Survey; we imputed zeros for missing values. As a result, we 

are reporting a range for the discounted cash flow results. Thus, the 

average reasonable rate of return from 2009 through 2015 was 9.6 

percent when calculated including only property and casualty insurance 

companies that reported complete data and 8.4 percent when calculated 

including all property and casualty insurance companies (imputing “0” for 

missing values). However, out of concern that imputing zeroes could 

skew the rate of return estimate downward, we used the higher rate of 
Appendix V: Analysis of Reasonable Rate of 

Return

Page 54 GAO-17-501 Crop Insurance Delivery Costs

return of 9.6 percent based on the companies that reported complete 

data.

To obtain the reasonable rate of return on equity from 2009 through 2015, 

we averaged the results of the capital asset pricing model with the results 

of the discounted cash flow model. According to our calculations, the 

estimated reasonable rate of return on equity for 2015 was 8.8 percent. 

The estimated average reasonable rate of return from 2009 through 2015 

was 9.6 percent. According to the capital asset pricing model, the 

average reasonable rate of return from 2009 through 2015 was 9.7 

percent. According to the discounted cash flow model, the estimated 

average reasonable rate of return from 2009 through 2015 was 9.6 

percent. The estimated average reasonable rate of return from 1996 

through 2015 was 11.0 percent. Estimates of the reasonable rate of 

return by year for 1989 through 2015 are in table 5.8

 8

We calculated the reasonable rate of return by including only discounted cash flow 

results for property and casualty insurance firms that reported complete financial data. 

These results are in the discounted cash flow model column in table 5. However, we also 

calculated discounted cash flow results for all property and casualty firms by imputing 

zeros in the place of missing values. These results are in the discounted cash flow model 

(a) column in table 5, where they are presented for comparison with the discounted cash 

flow model results.

Results
Appendix V: Analysis of Reasonable Rate of 

Return

Page 55 GAO-17-501 Crop Insurance Delivery Costs

Table 5: Reasonable Rate of Return on Equity of Property and Casualty Insurance Companies, Beta, Inflation, Equity Risk 

Premium and Interest Rates, 1989 through 2015

Year Reasonable 

rate of return

(percent)

Capital asset 

pricing model

(percent)

Discounted 

cash flow 

model

(percent)

Discounted 

cash flow 

model (a)

(percent)

Beta Inflation 

(percent)

Equity 

risk 

premium

(percent)

Average 

interest 

rate

(percent)

1989 15.9 16.3 15.4 15.4 0.98 4.8 7.8 8.7

1990 16.2 16.2 16.2 16.2 0.97 5.4 8.0 8.4

1991 15.4 14.8 16.0 16.0 0.98 4.2 7.7 7.3

1992 14.5 13.8 15.2 15.2 0.97 3.0 8.0 6.1

1993 13.8 12.6 14.9 14.9 0.97 3.0 7.9 5.0

1994 13.7 13.8 13.6 13.6 0.99 2.6 7.8 6.0

1995 13.6 13.8 13.4 13.4 0.98 2.8 7.6 6.3

1996 13.3 13.7 12.8 12.8 0.93 3.0 8.0 6.2

1997 12.9 13.5 12.3 12.3 0.90 2.3 8.1 6.2

1998 13.1 13.2 13.0 13.0 0.91 1.6 8.4 5.5

1999 12.7 13.5 11.9 11.9 0.95 2.2 8.6 5.3

2000 13.1 14.5 11.8 11.8 0.96 3.4 8.7 6.2

2001 12.0 12.5 11.4 11.4 0.93 2.8 8.4 4.8

2002 10.8 11.6 10.1 10.1 0.95 1.6 8.0 4.0

2003 9.7 10.2 9.1 9.1 0.98 2.3 7.6 2.7

2004 10.3 10.9 9.8 9.8 0.97 2.7 7.8 3.4

2005 10.7 11.2 10.2 10.2 0.96 3.4 7.8 3.7

2006 11.8 12.6 10.9 10.9 0.99 3.2 7.7 5.0

2007 11.7 12.4 11.0 11.0 0.96 2.8 7.8 4.9

2008 11.5 10.2 12.9 12.9 0.93 3.8 7.7 3.1

2009 11.6 10.5 12.6 10.1 1.05 -0.4 7.9 2.2

2010 10.5 10.5 10.6 8.4 1.02 1.6 8.0 2.2

2011 9.6 10.2 8.9 7.7 1.01 3.2 8.0 2.0

2012 8.9 8.9 9.0 8.4 0.92 2.1 8.0 1.1

2013 8.8 9.3 8.4 8.2 0.92 1.5 8.3 1.3

2014 9.1 9.2 8.9 8.2 0.83 1.6 8.4 1.6

2015 8.8 9.0 8.6 8.1 0.84 0.1 8.3 1.4

Source: GAO analysis of data from the Federal Reserve; Value Line Investment Survey; 2015 Ibbotson Stocks, Bonds, Bills, and Inflation (SBBI) Classic Yearbook; 2016 Ibbotson Stocks, Bonds, Bills,

and Inflation (SBBI) Yearbook; and a 2009 study commissioned by the U.S. Department of Agriculture. | GAO-17-501

Notes: Reasonable rate of return: Cost of capital estimates are based on an average of the “Capital 

asset pricing model” and “Discounted cash flow model” columns for each year from 2009 through 

2015. We used reasonable rate of return results for 1989 through 2008 from the 2009 USDAcommissioned study.
Appendix V: Analysis of Reasonable Rate of 

Return

Page 56 GAO-17-501 Crop Insurance Delivery Costs

Capital asset pricing model: Our estimated cost of capital is based on the capital asset pricing model. 

We used results for 1989 through 2008 from the 2009 USDA-commissioned study.

Discounted cash flow model: We computed the estimated cost of capital for 2009 through 2015 using 

only property and casualty insurance companies for which all required values were available in Value 

Line Investment Survey. We used discounted cash flow model results for 1989 through 2008 from the 

USDA-commissioned study.

Discounted cash flow model (a): We computed the estimated cost of capital for 2009 through 2015 

using data from all property and casualty insurance companies included in Value Line Investment 

Survey. We imputed a “0” for missing values. We used discounted cash flow model results for 1989 

through 2008 from the 2009 USDA-commissioned study.

Beta: Average beta coefficient for each year from Value Line Investment Survey. The beta coefficient 

is an estimate of the relative volatility of a particular security compared with that of a proxy for the 

market, normally the S&P 500 index. We used the adjusted beta coefficients in our calculation of the 

reasonable rate of return. However, to be consistent with a similar table in the 2009 USDAcommissioned study, table 5 shows the unadjusted beta coefficients for 2009 through 2015. We used 

beta coefficients for 1989 through 2008 from the 2009 USDA-commissioned study.

Inflation: Consumer Price Index-Urban average inflation rate for the year.

Equity risk premium: Equity risk premium from 2015 Ibbotson Stocks, Bonds, Bills, and Inflation 

(SBBI) Classic Yearbook and 2016 Ibbotson Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook 

based on arithmetic mean of equity risk premium from 1926 through the year before which the cost of 

capital is being estimated. We used the equity risk premiums for 1989 through 2008 from the 2009 

USDA-commissioned study.

Average interest rate: Average of yields on short, intermediate, and long-term U.S. Treasury 

securities. We used average interest rates for 1989 through 2008 from the 2009 USDAcommissioned study.

The reasonable rate of return estimates in the “Capital asset pricing model,” “Discounted cash flow 

model,” and “Discounted cash flow model (a)” columns are based on information as of July 1 of the 

indicated calendar year. Since July is the inception of the next reinsurance year, however, the 

reinsurance year is 1 year ahead of the calendar year. The reasonable rate of return for July 1989 

should be viewed as the fair return for reinsurance year 1990 (the year from July 1, 1989 through 

June 30, 1990).

We performed sensitivity analysis on our capital asset pricing model results by testing the impact of 

different risk-free rates and beta coefficients. None of these tests produced results that contradict our 

findings.
Appendix VI: Summary of Potential Actions 

and Estimated Savings for the Crop Insurance 

Program, 2012 through 2015

Page 57 GAO-17-501 Crop Insurance Delivery Costs

From 2012 through 2015, we issued four reports that identified potential 

actions that could be taken by Congress or the Risk Management Agency 

to reduce the cost of the crop insurance program and achieve budgetary 

savings. Table 6 shows the reports, potential government actions we 

reviewed, and estimated federal dollar savings associated with each 

potential action, at the time we issued these reports.

Table 6: GAO Reports on Potential Savings in the Crop Insurance Program, 2012 through 2015

Year Report Title Potential action to achieve 

savings

Estimated dollar savings 

2015 CROP INSURANCE: Reducing 

Subsidies for Highest Income 

Participants Could Save Federal 

Dollars with Minimal Effect on 

the Program (GAO-15-356)

Reducing premium subsidies by 

15 percentage points for the 

highest income participants (those 

that exceeded income limits in 

place for farm and conservation 

programs from 2009 through 2013)

More than $70 million from 2009 

through 2013

2015 CROP INSURANCE: In Areas 

with Higher Crop Production 

Risks, Costs Are Greater, and 

Premiums May Not Cover 

Expected Losses (GAO-15-215) 

Increasing adjustments of 

premium rates by as much as 20 

percent annually, in areas with 

higher crop production risks.

Tens of millions of dollars in 2013

2014 CROP INSURANCE: 

Considerations in Reducing 

Federal Premium Subsidies 

(GAO-14-700)

Reducing premium subsidies for 

revenue insurance policies by 5 

percentage points at the low end, 

up to 20 percentage points at the 

high end

From $439 million to $1.8 billion in 

2012

2012 CROP INSURANCE: Savings 

Would Result from Program 

Changes and Greater Use of 

Data Mining (GAO-12-256)

Capping premium subsidies at 

$40,000 per participant

Up to $358 million for 2010, and up 

to $1 billion for 2011

Source: GAO. | GAO-17-501

Appendix VI: Summary of Potential Actions 

and Estimated Savings for the Crop 

Insurance Program, 2012 through 2015
Appendix VII: Participating Insurance 

Companies’ Retained Premiums and 

Underwriting Gains/Losses, 1996-2015

Page 58 GAO-17-501 Crop Insurance Delivery Costs

Table 7 shows, for 1996 through 2015, the premiums on which the 

participating insurance companies retained risk and these companies’

underwriting gains or losses. It also shows the quota share amounts for 

2005 through 2015, the years for which a quota share was in effect, and 

how the quota share reduced the premiums retained by the companies, 

thus reducing their underwriting gains or losses. For example, companies’

2010 underwriting gains before deduction of the quota share were $2.017 

billion. This amount was multiplied by the agreed-upon quota share of 5 

percent, which resulted in the quota share amount of $101 million. This 

$101 million was deducted from the $2.017 billion, which resulted in 

companies’ final underwriting gains of $1.916 billion. In each year 

beginning with 2005, except 2012, the quota share reduced the 

government’s program costs by reducing companies’ underwriting gains, 

thereby increasing the government’s underwriting gains. For example, the 

quota share reduced companies’ underwriting gains for 2009 by $121 

million, thereby increasing the government’s underwriting gains by the 

same amount. In 2012, a year of major drought, the quota share reduced 

companies’ underwriting losses by $92 million, increasing the 

government’s underwriting losses by that amount.

Appendix VII: Participating Insurance 

Companies’ Retained Premiums and 

Underwriting Gains/Losses, 1996-2015
Appendix VII: Participating Insurance 

Companies’ Retained Premiums and 

Underwriting Gains/Losses, 1996-2015

Page 59 GAO-17-501 Crop Insurance Delivery Costs

Table 7: Participating Insurance Companies’ Retained Premiums, the Government’s Quota Share, and Companies’

Underwriting Gains/Losses, 1996 through 2015

Year Total 

premiumsa Retained premiums 

before

deduction of 

quota shareb

Retained 

premiums 

after 

deduction 

of quota 

share

Retained 

premiums after 

deduction of 

quota share as 

a percentage of 

total premiums

Companies’

underwriting 

gains/losses 

before 

deduction of 

quota share

Quota 

share

Companies’

underwriting 

gains/losses 

after 

deduction of 

quota share

Actual rate 

of return on 

retained 

premiumsc

1996 1,627 1,155 1,155 71 248 0 248 21.5

1997 1,689 1,263 1,263 75 352 0 352 27.9

1998 1,876 1,592 1,592 85 279 0 279 17.5

1999 2,312 1,837 1,837 79 272 0 272 14.8

2000 2,538 1,895 1,895 75 270 0 270 14.3

2001 2,979 2,373 2,373 80 346 0 346 14.6

2002 2,912 2,295 2,295 79 -47 0 -47 -2.1

2003 3,436 2,615 2,615 76 389 0 389 14.9

2004 4,186 3,140 3,140 75 691 0 691 22.0

2005 3,945 3,044 2,891 73 963 48 915 31.6

2006 4,709 3,684 3,500 74 865 43 822 23.5

2007 6,547 5,156 4,898 75 1,655 83 1,572 32.1

2008 9,839 8,103 7,698 78 1,171 59 1,112 14.4

2009 8,950 7,190 6,831 76 2,419 121 2,298 33.6

2010 7,595 6,382 6,063 80 2,017 101 1,916 31.6

2011 11,965 10,199 9,536 80 1,752 88 1,664 17.4

2012 11,120 9,242 8,642 78 -1,410 -92 -1,319 -15.3

2013 11,800 9,868 9,227 78 675 34 641 7.0

2014 10,068 8,439 7,890 78 1,115 72 1,042 13.2

2015 9,744 7,938 7,422 76 1,934 97 1,838 24.8

Source: GAO analysis of U.S. Department of Agriculture’s (USDA) Risk Management Agency data. | GAO-17-501

Notes: Companies’ underwriting gains/losses are companies’ retained premiums minus their share of 

the indemnities paid to farmers followed by adjustments based on the standard reinsurance 

agreement’s (SRA) gain/loss sharing and quota share provisions. Under the SRA’s quota share 

provision, each company cedes to USDA a percentage of its underwriting gains or losses. The 2005 

SRA set the quota share at 5 percent. The 2011 SRA’s quota share was 6.5 percent with up to 1.5 

percent of any gain to be distributed to companies that service underserved or less-served states 

according to the premiums generated in those states.

a

Total premiums include premiums paid by farmers and premium subsidies provided by the 

government.

b

Retained premiums are the premiums on which companies retain risk.

c

Rate of return on retained premiums is equal to companies’ underwriting gains/losses after deduction 

of quota share divided by retained premiums after deduction of quota share.
Appendix VIII: Comments from the U.S. 

Department of Agriculture

Page 60 GAO-17-501 Crop Insurance Delivery Costs

Appendix VIII: Comments from the U.S. 

Department of Agriculture
Appendix VIII: Comments from the U.S. 

Department of Agriculture

Page 61 GAO-17-501 Crop Insurance Delivery Costs
Appendix IX: GAO Contact and Staff 

Acknowledgments

Page 62 GAO-17-501 Crop Insurance Delivery Costs

Steve D. Morris, (202) 512-3841 or morriss@gao.gov

In addition to the individual named above, Thomas M. Cook, Assistant 

Director; Ron Aribo; Kevin S. Bray; Gary Brown; Serena Epstein; Farrah 

Graham; Michael Kendix; Emei Li; Joshua Parr; Anne Rhodes-Kline; Dan 

C. Royer; Kiki Theodoropoulos; and Frank Todisco made key 

contributions to this report. In addition, Martin (Greg) Campbell, Diana C. 

Goody, Michael Meleady, and Oliver Richard made important 

contributions to this report.

Appendix IX: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(101914)
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