United States Government Accountability Office

GAO Testimony 

Before the Committee on Oversight and 

Government Reform, House of 

Representatives

CROP INSURANCE 

Continuing Efforts Are 

Needed to Improve Program 

Integrity and Ensure 

Program Costs Are 

Reasonable 

Statement of Lisa Shames, Acting Director 

Natural Resources and Environment 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Thursday, May 3, 2007

 

GAO-07-819T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 3, 2007

CROP INSURANCE

Continuing Efforts Are Needed to 

Improve Program Integrity and Ensure 

Program Costs Are Reasonable 

Highlights of GAO-07-819T, a testimony 

before the Committee on Oversight and 

Government Reform, House of 

Representatives 

The U.S. Dept. of Agriculture’s 

(USDA) Risk Management Agency

(RMA) administers the federal crop 

insurance program in partnership

with private insurers. In 2006, the 

program cost $3.5 billion, including

millions in losses from fraud, 

waste, and abuse, according to 

USDA. The Agricultural Risk 

Protection Act of 2000 granted 

RMA authority to renegotiate the 

terms of RMA’s standard 

reinsurance agreement with

companies once over 5 years. 

This testimony is based on GAO’s 

2005 report, Crop Insurance: 

Actions Needed to Reduce 

Program’s Vulnerability to Fraud, 

Waste, and Abuse, as well as new 

analyses this Committee requested

on underwriting gains and 

administrative and operating 

expenses USDA paid companies. 

GAO discusses (1) USDA’s

processes to address fraud, waste,

and abuse; (2) extent the program’s 

design makes it vulnerable to 

abuse; and (3) reasonableness of

underwriting gains and other 

expenses. USDA agreed with most

of GAO’s 2005 recommendations to 

improve program integrity. RMA 

agreed that GAO’s new analyses 

were technically accurate. 

What GAO Recommends

Congress has an opportunity in the 

Farm Bill reauthorization to grant 

RMA authority to periodically

renegotiate the financial terms of

its agreement with companies to 

provide reasonable cost allowances 

and underwriting gains. 

GAO reported that RMA did not use all available tools to reduce the crop 

insurance program’s vulnerability to fraud, waste, and abuse. RMA has since 

taken some steps to improve its procedures. In particular: 

• USDA’s Farm Service Agency (FSA) inspections during the growing 

season were not being used to maximum effect. Between 2001 and 2004, 

FSA conducted only 64 percent of the inspections RMA requested. 

Without inspections, farmers may falsely claim crop losses. However, 

FSA said it could not conduct all requested inspections, as GAO 

recommended, because of insufficient resources. RMA now provides

information more frequently so FSA can conduct timelier inspections. 

• RMA’s data analysis of the largest farming operations was incomplete. 

In 2003, about 21,000 of the largest farming operations did not report all 

of the individuals or entities with an ownership interest in these 

operations, as required. Therefore, RMA was unaware of ownership 

interests that could help it prevent potential program abuse. FSA and 

RMA now share information to identify such individuals or entities. 

USDA should be able to recover up to $74 million in improper payments 

made during 2003. 

• RMA was not effectively overseeing insurance companies’ efforts to 

control program abuse. According to GAO’s review of 120 cases, 

companies did not complete all the required quality assurance reviews of 

claims, and those that were conducted were largely paper exercises. 

RMA agreed to improve oversight of their reviews, but GAO has not 

followed up to examine its implementation. 

RMA’s regulations to implement the crop insurance program, as well as 

some statutory requirements, create design problems that hinder its efforts 

to reduce abuse. For example, the regulations allow farmers to insure fields 

individually rather than together. As such, farmers can “switch” reporting of 

yield among fields to make false claims or build up a higher yield history on 

a field to increase its eligibility for higher insurance guarantees. RMA did not 

agree with GAO’s recommendation to address the problems associated with 

insuring individual fields. Statutorily high premium subsidies may also limit 

RMA’s ability to control program abuse: the subsidies shield farmers from 

the full effect of paying higher premiums associated with frequent claims. 

From 2002 through 2006, USDA paid the insurance companies underwriting gains of $2.8 billion, which represents an average annual rate of return of 

17.8 percent. In contrast, according to insurance industry statistics, the

benchmark rate of return for companies selling property and casualty 

insurance was 6.4 percent. USDA renegotiated the financial terms of its 

standard reinsurance agreement with the companies in 2005, but their rate of 

return was 30.1 percent in 2005, and 24.3 percent in 2006. It also paid the 

companies a cost allowance of $4 billion to cover administrative and 

operating costs for 2002 through 2006. USDA recommended that Congress 

provide RMA with authority to renegotiate the financial terms and 

conditions of its standard reinsurance agreement once every 3 years. 

www.gao.gov/cgi-bin/getrpt?GAO-07-819T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Lisa Shames at 

(202) 512-3841 or shamesl@gao.gov. 
Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss the U.S. Department of 

Agriculture’s (USDA) efforts to address fraud, waste, and abuse in the 

federal crop insurance program. As you know, federal crop insurance is 

part of the overall safety net of programs for American farmers. It provides

protection against financial losses caused by droughts, floods, or other 

natural disasters. USDA’s Risk Management Agency (RMA) supervises the 

Federal Crop Insurance Corporation’s (FCIC) operations and has overall 

responsibility for administering the crop insurance program, including 

controlling costs and protecting against fraud, waste, and abuse. RMA also 

partners with private insurance companies that sell and service the 

insurance policies and share a percentage of the risk of loss and 

opportunity for gain associated with each policy.

In November 2006, we identified the federal crop insurance program as a 

program in need of better oversight to ensure program funds are spent as

economically, efficiently, and effectively as possible.1

 In 2006, the crop 

insurance program provided $50 billion in insurance coverage for 242 

million acres of farmland, at a cost of $3.5 billion to the federal 

government, of which a total of $1.8 billion was paid to insurance 

companies for their participation in the crop insurance program.2

 USDA 

reports that an estimated $62 million in indemnity payments were made in 

2006 as a result of waste, such as incorrect payments or payments based 

on incomplete or missing paperwork.3

To improve the integrity of the crop insurance program, among other 

things, Congress enacted the Agricultural Risk Protection Act of 2000 

(known as ARPA). ARPA provided RMA and USDA’s Farm Service Agency 

(FSA) with new tools for monitoring and controlling program abuses.4

ARPA required the Secretary of Agriculture to develop and implement a 

 1

GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-235R (Washington,

D.C.: Nov. 17, 2006). 

2

Cost data in this testimony are reported on a fiscal year basis. Program data are reported

on a crop year basis. 

3

See U.S. Department of Agriculture, FY 2006 Performance and Accountability Report 

(Washington, D.C.: Nov. 15, 2006). RMA officials indicated that they have not developed an

estimate of losses attributable to fraud and abuse. 

4

FSA is generally responsible for helping producers enroll in agriculture support programs,

overseeing these programs, and issuing program payments.

Page 1 GAO-07-819T 
coordinated plan for FSA to assist RMA in the ongoing monitoring of the 

crop insurance program and to use information technologies, such as data

mining—the analysis of data to establish relationships and identify 

patterns—to administer and enforce the program. Furthermore, ARPA 

provided USDA with the authority to renegotiate the financial terms of its 

contractual agreement—known as the standard reinsurance agreement 

(SRA)—with the private insurance companies once during 2001 through

2005. USDA renegotiated the terms of the SRA in 2004 and implemented 

the new agreement in 2005. In its recent Farm Bill proposal, USDA 

recommended that Congress provide the agency with authority to 

renegotiate the financial terms and conditions once every 3 years. RMA 

officials also told us they sought legislative remedies to address excessive 

underwriting gains in their budget proposals for fiscal years 2006 and 2007. 

The SRA between USDA and the insurance companies includes (1) a cost 

allowance that is tied to the value of the policy and that is intended to 

cover administrative and operating expenses incurred by the companies 

for program delivery, and (2) risk-sharing formulas that establish 

underwriting gains and losses. 

GAO has issued reports on the federal crop insurance program that have 

raised a number of concerns. (See Related GAO Products.) Most recently, 

in June 2006, we reported that some farmers may have abused the crop 

insurance program by allowing crops to fail through neglect or deliberate 

actions in order to collect insurance, and some insurance companies have

not exercised due diligence in investigating losses and paying claims.5

 In 

addition, the effects of climate change, including rising temperatures and 

increasingly frequent and intense droughts, storms, and flooding, may be 

potentially significant in coming decades and affect the program’s 

financial costs to the government. As we recently reported,6

 major private 

and federal insurers are both exposed to the effects of climate change over 

the coming decades, but are responding differently. Many large private 

insurers are incorporating climate change into their annual risk 

management practices, and some are addressing it strategically by 

assessing its potential long-term, industrywide impacts. However, the 

 5

GAO, Crop Insurance: More Needs to Be Done to Reduce Program’s Vulnerability to 

Fraud, Waste, and Abuse, GAO-06-878T (Washington, D.C.: June 15, 2006), and Crop 

Insurance: Actions Needed to Reduce Program’s Vulnerability to Fraud, Waste, and

Abuse, GAO-05-528 (Washington, D.C.: September 30, 2005).

6

GAO, Climate Change: Financial Risks to Federal and Private Insurers in Coming 

Decades Are Potentially Significant, GAO-07-285 (Washington, D.C.: March 16, 2007). 

Page 2 GAO-07-819T 
major federal insurance programs, including the crop insurance program, 

have done little to develop comparable information. 

My testimony today focuses on the (1) effectiveness of USDA’s procedures 

to prevent and detect fraud, waste, and abuse in selling and servicing crop 

insurance policies; (2) extent to which program design issues may make 

the program more vulnerable to fraud, waste, and abuse; and (3) 

reasonableness of underwriting gains and administrative and operating 

expenses USDA pays to the companies for program delivery. My testimony 

is primarily based on published GAO products. In addition, at the request 

of this Committee, we analyzed underwriting gains and losses and 

administrative and operating expenses. RMA reviewed these analyses and 

told us they were technically accurate. We performed our work in 

accordance with generally accepted government auditing standards. 

In summary, since the enactment of ARPA, RMA has taken a number of 

steps to improve its procedures to prevent and detect fraud, waste, and 

abuse in the crop insurance program. Most notably, RMA reports that data 

mining analyses and subsequent communication to farmers resulted in a 

decline of at least $300 million in questionable claims payments from 2001 

to 2004. However, we found that, at the time our review, RMA was not 

effectively using all of the tools it had available and that some farmers and 

others continued to abuse the program. We identified weaknesses in four 

key areas: (1) field inspections, (2) data mining processes that exclude 

many large farming operations when farmers do not report their interest in 

them, (3) quality assurance reviews conducted by insurance companies, 

and (4) imposition of sanctions. Weaknesses in these areas left the 

program vulnerable to questionable claims, and the insurance companies

and RMA could not always determine the validity of a claim to minimize 

fraud, waste, and abuse. RMA has taken steps on some of the 

recommendations we made. For example, RMA amended its crop 

insurance policy manual to provide information more frequently to FSA on 

suspect claims so that FSA is able to conduct timelier field inspections to 

detect potential abuse. In another case, we recommended that RMA 

promulgate regulations needed to fully utilize its expanded sanction 

authority provided under ARPA. In response, RMA developed draft 

regulations that, when final, will allow the agency to fully use this 

authority to sanction program violators. 

We also found that the program’s design, as laid out in RMA’s regulations 

or as required by statute, can impede the efforts of RMA officials to 

prevent and detect fraud, waste, and abuse in a number of ways. In terms 

of RMA’s regulations, farmers can insure their fields individually instead of 

Page 3 GAO-07-819T 
insuring all fields combined, which makes it easier for them to switch 

production among fields, either to make false insurance claims or to build 

up a higher yield history on a particular field in order to increase its 

eligibility for higher future insurance guarantees. RMA disagreed with our 

recommendation to reduce the insurance guarantee or eliminate optional 

unit coverage for producers who consistently have claims that are 

irregular in comparison with other producers growing the same crop in the 

same location. RMA stated that our recommendation represents a 

disproportionate response, considering the small number of producers 

who switch the yield on a field each year. Nevertheless, we continue to 

believe that RMA could tailor an underwriting rule to target those 

relatively few farmers who file anomalous claims related to yield 

switching. In terms of statutory requirements, RMA is obligated by law to

offer farmers “prevented planting” coverage—coverage that allows for 

insurance claims if an insured crop is prevented from being planted 

because of weather conditions, but it is often difficult to determine 

whether farmers had the opportunity to plant a crop. In our 2006 

testimony, we stated that Congress may wish to consider allowing RMA to 

reduce premium subsidies—and hence raise the insurance premiums—for 

farmers who consistently have claims, such as prevented planting claims, 

that are irregular in comparison with other farmers growing the same crop 

in the same location. To date, Congress has not granted RMA the authority 

to make such reductions. 

Finally, USDA paid the insurance companies underwriting gains of $2.8 

billion, in total, from 2002 through 2006. The underwriting gains represent 

an average annual rate of return of 17.8 percent over this 5-year period.7

This rate of return is considerably higher than the insurance industry 

average. According to insurance industry statistics, the benchmark rate of 

return for U.S. insurance companies selling private property and casualty 

insurance was 6.4 percent during this period. RMA officials told us that 

this benchmark rate can be considered a starting point for measuring the 

appropriateness of the underwriting gains in the crop insurance program. 

As previously noted, USDA renegotiated the financial terms of its SRA 

with the companies beginning with the 2005 planting season. Nonetheless, 

in 2005, USDA still paid insurance companies underwriting gains of $916 

million—a rate of return of 30.1 percent. In 2006, USDA paid underwriting

gains of $886 million—a rate of return of 24.3 percent. The companies 

 7

In this testimony, we define rate of return as underwriting gains calculated as a percentage

of premiums on the policies in which companies retain risk of loss.

Page 4 GAO-07-819T 
received these underwriting gains despite drought conditions in parts of 

the country in 2005 and 2006 that would normally suggest they would earn 

lower profits. In addition to underwriting gains, USDA paid the insurance 

companies $4 billion in cost allowances to cover administrative and 

operating expenses incurred for program delivery from 2002 through 2006.

USDA expects the cost allowance paid per policy to increase by about 25 

percent by 2008 because of higher crop prices, particularly for corn and 

soybeans. These higher crop prices increase the value of the policy. 

However, the companies and their affiliated sales agents will receive this 

substantially higher cost allowance without any corresponding increase in

expenses for selling and servicing the policies. Congress has an 

opportunity in its reauthorization of the Farm Bill to provide USDA with 

the authority to periodically renegotiate the financial terms of the standard

reinsurance agreement with the insurance companies so that the 

companies’ rate of return is more in line with private insurance markets. 

USDA has requested the authority to renegotiate the SRA in its proposals 

for the Farm Bill. 

FCIC was established in 1938 to temper the economic impact of the Great

Depression, and was significantly expanded in 1980 to protect farmers 

from the financial losses brought about by drought, flood, or other natural 

disasters. RMA administers the program in partnership with private 

insurance companies, which share a percentage of the risk of loss and the 

opportunity for gain associated with each insurance policy written. RMA 

acts as a reinsurer—reinsurance is sometimes referred to as insurance for 

the insurance companies—for a portion of all policies the federal crop 

insurance program covers. In addition, RMA pays companies a percentage

of the premium on policies sold to cover the administrative costs of selling 

and servicing these policies. In turn, insurance companies use this money 

to pay commissions to their agents, who sell the policies, and fees to 

adjusters when claims are filed. 

Background 

FCIC insures agricultural commodities on a crop-by-crop and county-bycounty basis, considering farmer demand and the level of risk associated

with the crop in a given region. Major crops, such as grains, are covered in 

almost every county where they are grown, while specialty crops such as 

fruit are covered in only some areas. Participating farmers can purchase 

different types of crop insurance and at different levels. 

RMA establishes the terms and conditions that the private insurance 

companies selling and servicing crop insurance policies are to use through 

the SRA. The SRA provides for the cost allowance intended to cover 

Page 5 GAO-07-819T 
administrative and operating expenses the companies incur for the 

policies they write, among other things. The SRA also establishes the 

minimum training, quality control review procedures, and performance 

standards required of all insurance providers in delivering any policy

insured or reinsured under the Federal Crop Insurance Act, as amended.

Under the crop insurance program, participating farmers are assigned (1) 

a “normal” crop yield based on their actual production history and (2) a 

price for their commodity based on estimated market conditions. Farmers 

can then select a percentage of their normal yield to be insured and a 

percentage of the price they wish to receive if crop losses exceed the 

selected loss threshold. In addition, under the crop insurance program’s 

“prevented planting” provision, insurance companies pay farmers who 

were unable to plant the insured crop because of an insured cause of loss 

that was general to their surrounding area, such as weather conditions 

causing wet fields, and that had prevented other farmers in that area from

planting fields with similar characteristics. These farmers are entitled to 

claims payments that generally range from 50 to 70 percent, and can reach 

as high as 85 percent, of the coverage they purchased, depending on the 

crop. 

RMA is responsible for protecting against fraud, waste, and abuse in the 

federal crop insurance program. In this regard, RMA uses a broad range of

tools, including RMA’s compliance reviews of companies’ procedures, 

companies’ quality assurance reviews of claims, data mining, and FSA’s 

inspections of farmers’ fields. For example, insurance companies must 

conduct quality assurance reviews of claims that RMA has identified as 

anomalous or of those claims that are $100,000 or more to determine 

whether the claims the companies paid comply with policy provisions. 

Congress enacted ARPA, amending the Federal Crop Insurance Act, in 

part, to improve compliance with, and the integrity of, the crop insurance 

program. Among other things, ARPA provided RMA authority to impose 

sanctions against producers, agents, loss adjusters, and insurance 

companies that willfully and intentionally provide false or inaccurate 

information to FCIC or to an insurance company—previously, RMA had 

authority to impose sanctions only on individuals who willfully and 

intentionally provided false information. It also provided RMA with 

authority to impose sanctions against producers, agents, loss adjusters, 

and insurance companies for willfully and intentionally failing to comply 

with any other FCIC requirement. In addition, it increased the percentage

share of the premium the government pays for most coverage levels of 

crop insurance, beginning with the 2001 crop year. The percentage of the 

Page 6 GAO-07-819T 
premium the government pays declines as farmers select higher levels of

coverage. However, ARPA raised the percentage of federal subsidy for all 

levels of coverage, particularly for the highest levels of coverage. For 

example, the government now pays more than one-half of the premium for 

farmers who choose to insure their crop at 75-percent coverage. 

RMA has taken a number of steps to improve its procedures to prevent 

and detect fraud, waste, and abuse, such as data mining, expanded field

inspections and quality assurance reviews. In particular, RMA now 

develops a list of farmers each year whose operations warrant an on-site 

inspection during the growing season because data mining uncovered 

patterns in their past claims that are consistent with the potential for fraud 

and abuse. The list includes, for example: 

• farmers, agents, and adjusters linked in irregular behavior that suggests 

collusion; 

• farmers who for several consecutive years received most of their crop 

insurance payments from prevented planting indemnity payments; 

RMA Has 

Strengthened 

Procedures for 

Preventing 

Questionable Claims, 

but the Program 

Remains Vulnerable 

to Potential Abuse 

• farmers who appear to have claimed the production amounts for multiple 

fields as only one field’s yield, thereby creating an artificial loss on their 

other field(s); and 

• farmers who, in comparison with their peers, file unusually high claims for 

lost crops over many years. 

Since RMA began performing this data mining in 2001, it has identified 

about 3,000 farmers annually who warrant an on-site inspection because of 

anomalous claims patterns. In addition, RMA annually performs about 100 

special analyses to identify areas of potential vulnerability and trends in 

the program. 

RMA also provides the names of farmers from its list of suspect claims for 

inspection to the appropriate FSA state office for distribution to FSA 

county offices, as well as to the insurance companies selling the policies to 

farmers. As a result of these inspections and other information, RMA 

reported total cost savings of $312 million from 2001 to 2004, primarily in 

the form of estimated payments avoided. For example, according to RMA, 

claims payments to farmers identified for an inspection decreased 

nationwide from $234 million in 2001 to $122 million in 2002. According to

RMA, some of the farmers on the list for filing suspect claims bought less 

Page 7 GAO-07-819T 
insurance and a few dropped crop insurance entirely, but most simply 

changed their behavior regarding loss claims. 

However, as we testified in 2006, RMA was not effectively using all of the 

tools it had available and that some farmers and others continued to abuse 

the program, as the following discussion indicates. 

Inspections during the growing season were not being used to

maximum effect. FSA was not providing RMA with inspection assistance 

in accordance with USDA guidance. For example, between 2001 and 2004,

farmers filed claims on about 380,000 policies annually, and RMA’s data 

mining identified about 1 percent of these claims as questionable and 

needing FSA’s inspection. Under USDA guidance, FSA should have 

conducted all of the 11,966 requested inspections, but instead conducted 

only 64 percent of them; FSA inspectors said that they did not conduct all 

requested inspections primarily because they did not have sufficient 

resources. Moreover, between 2001 and 2004, FSA offices in nine states 

did not conduct any of the field inspections RMA had requested in one or 

more of the years. Until we brought this matter to their attention in 

September 2004, FSA headquarters officials were unaware that the 

requested inspections in these nine states had not been conducted. 

Furthermore, FSA might not have been as effective as possible in 

conducting field inspections because RMA did not provide it with 

information on the nature of the suspected abusive behavior or the results 

of follow-up investigations. Finally, these inspections did not always occur 

in a timely fashion during the growing season. Because of these problems, 

the insurance companies and RMA could not always determine the validity 

of a claim. 

USDA has implemented some of our recommendations to improve 

inspection practices. For example, we recommended that RMA more 

consistently inform FSA of the suspect claim patterns that it should 

investigate. RMA amended its crop insurance policy manual to provide 

information more frequently to FSA on suspect claims, as we 

recommended, so that FSA can conduct timelier field inspections to detect 

potential abuse. Specifically, RMA now provides a list twice a year—in the 

fall for crops such as wheat, and in the spring for crops such as corn and 

soybeans. However, FSA disagreed with our recommendation that it 

conduct all inspections called for under agency guidance, citing

insufficient resources as the reason. Nevertheless, we believe that 

conducting these inspections would achieve potentially substantial savings 

for the crop insurance program by identifying cases of fraudulent claims. 

Page 8 GAO-07-819T 
RMA’s data analysis of the largest farming operations was incomplete. 

RMA’s data mining analysis excluded comparisons of the largest farming 

operations—including those organized as partnerships and joint ventures. 

These entities may include individuals who are also members of one or 

more other entities. Because it did not know the ownership interests in the 

largest farming operations, RMA could not readily identify potential fraud. 

For example, farmers who are members of more than one farming 

operation could move production from one operation to another to file 

unwarranted claims, without RMA’s knowledge that these farmers 

participate in more than one farming operation. RMA could not make 

these comparisons because it had not been given access to similar data 

that FSA maintains. However, ARPA required the Secretary of Agriculture 

to develop and implement a coordinated plan for RMA and FSA to 

reconcile all relevant information received by either agency from a farmer

who obtains crop insurance coverage. 

Using FSA data, we examined the extent to which (1) farming operations 

report all members who have a substantial beneficial interest in the 

operation, (2) these farming operations file questionable crop insurance 

claims, and (3) agents or claims adjusters had financial interests in the 

claim.8

 By comparing RMA’s and FSA’s databases, we found that 21,310 

farming entities, or about 31 percent of all farming entities, did not report 

one or more members who held a beneficial interest of 10 percent or more 

in the farming operation holding the policy. RMA should be able to recover 

a portion of these payments because, according to RMA regulations, if the

policyholder fails to disclose an ownership interest in the farming 

operation, the policyholder must repay the amount of the claims payment 

that is proportionate to the interest of the person who was not disclosed.9

According to our analysis, RMA should be able to recover up to $74 million 

in claims payments for 2003. USDA has since implemented our 

recommendation that FSA and RMA share information on policyholders to 

better identify fraud, waste, and abuse. In addition, of the 21,310 entities 

failing to disclose ownership interest in 2003, we found 210 entities with 

suspicious insurance claims totaling $11.1 million. Finally, we identified 24 

crop insurance agents who sold policies to farming entities in which the 

 8

The Center for Agribusiness Excellence conducted this analysis at our request. The 

Center, located at Tarleton State University in Stephenville, Texas, provides research, 

training, and resources for data warehousing and data mining of agribusiness and 

agriculture data. The Center provides data mining of crop insurance data for RMA. 

9

7 C.F.R. § 457.8.

Page 9 GAO-07-819T 
agents held a substantial beneficial interest but failed to report their 

ownership interest to RMA as required. USDA has since implemented our 

recommendation that FSA and RMA share information on policyholders to 

better identify fraud, waste, and abuse. RMA, however, has not 

implemented our recommendation to recover claims payments to 

ineligible farmers or to entities that failed to fully disclose ownership 

interest. 

RMA was not effectively overseeing insurance companies’ quality 

assurance programs. RMA guidance requires insurance companies to 

provide oversight to properly underwrite the federal crop insurance 

program, including implementing a quality control program, conducting 

quality control reviews, and submitting an annual report to FCIC. 

However, RMA was not effectively overseeing insurance companies’ 

quality assurance programs, and for the claims we reviewed, it did not 

appear that most companies were rigorously carrying out their quality 

assurance functions. For example, 80 of the 120 insurance files we 

reviewed claimed more than $100,000 in crop losses or met some other 

significant criteria; RMA’s guidance states that the insurance provider 

must conduct a quality assurance review for such claims. However, the 

insurance companies conducted reviews on only 59 of these claims, and 

the reviews were largely paper exercises, such as computational 

verifications, rather than comprehensive analysis of the claim. RMA did 

not ensure that companies conducted all reviews called for under its 

guidance and did not examine the quality of the companies’ reviews. RMA 

agreed with our recommendation to improve oversight of companies’ 

quality assurance programs, but we have not yet followed up with the 

agency to examine its implementation. 

RMA has infrequently used its new sanction authority to address 

program abuses. RMA had only used its expanded sanction authority 

granted under ARPA on a limited basis. It had identified about 3,000 

farmers with suspicious claims payments—notable policy irregularities 

compared with other farmers growing the same crop in the same county—

each year since the enactment of ARPA. While not all of these policies 

with suspicious claims were necessarily sanctionable, RMA imposed only 

114 sanctions from 2001 through 2004. According to RMA officials, RMA 

requested and imposed few sanctions because it had not issued 

regulations to implement its expanded authority under ARPA. Without 

regulations, RMA had not established what constitutes an “FCIC 

requirement” and not explained how it would determine that a violation

had occurred or what procedural process it would follow before imposing 

sanctions. RMA agreed with our recommendation that it promulgate 

Page 10 GAO-07-819T 
regulations to implement its expanded authority, and has developed draft 

regulations. Once final, these regulations will allow the agency to fully use 

this authority to sanction program violators. 

While RMA can improve its day-to-day oversight of the federal crop 

insurance program in a number of ways, the program’s design, as laid out 

in RMA’s regulations or as required by statute, hinders the agency’s efforts 

to administer certain program provisions in order to prevent fraud, waste, 

and abuse, as the following discussion indicates.

RMA’s regulations allow farmers the option of insuring their fields 

individually rather than combined as one unit. Farmers can insure 

production of a crop on an individual field (optional units) or all their 

fields as one unit. Farmers may want to insure fields separately out of 

concern that they could experience losses in a certain field because of 

local weather conditions, such as hail or flooding. If farmers instead insure 

their entire crop in a single basic insurance unit, the hail losses might not 

cause the production yield of all units combined to be below the level 

guaranteed by the insurance and, therefore, would not warrant an 

indemnity payment. Although insurance on individual fields provides 

farmers added protection against loss, this optional unit coverage 

increases the potential for fraud and abuse in the crop insurance program. 

Insuring fields separately enables farmers to “switch” production among 

fields—reporting production of a crop from one field that is actually 

produced on another field—either to make false insurance claims based 

on low production or to build up a higher yield history on a particular field 

in order to increase that field’s eligibility for higher future insurance 

guarantees. We reported that of the 2,371 farmers identified as having 

irregular claims in 2003, 12 percent were suspected of switching 

production among their fields. 

According to a 2002 RMA study, losses per unit (e.g., a field) increase as 

the number of separately insured optional units increases.10 However, 

according to an RMA official, gathering the evidence to support a yieldswitching fraud case requires considerable resources, especially for large

farming operations. RMA disagreed with our recommendation to reduce 

RMA’s Regulations 

and Some Statutory 

Requirements Hinder 

Efforts to Reduce 

Abuse in the Crop 

Insurance Program 

 10Final Research Report For Multiple Year Coverage, Task Order # RMA-RED-01-06, Watts 

and Associates, Inc., June 27, 2002. 

Page 11 GAO-07-819T 
the insurance guarantee or eliminate optional unit coverage for farmers 

who consistently have claims that are irregular in comparison with other 

farmers growing the same crop in the same location. It stated that our 

recommendation represents a disproportionate response, considering the 

small number of producers who engage in yield switching each year, and 

that the adoption of our recommendation would not be cost effective. 

Nevertheless, we continue to believe that RMA could tailor an

underwriting rule so that it would target only a few producers each year 

and would entail few resources. Such a tool would provide RMA another 

means to discourage producers from abusing the program. 

Minimal risk sharing on some policies, as set by statute, may not 

provide insurance companies with a strong incentive to carry out their 

responsibilities under the program. In some cases, insurance companies

have little incentive to rigorously challenge questionable claims. Insurance 

companies participating in the crop insurance program share a percentage

of the risk of loss or opportunity for gain on each insurance policy they 

write, but the federal government ultimately bears a high share of the risk. 

Under the SRA, insurance companies are allowed to assign policies to one 

of three risk funds—assigned risk, developmental, or commercial. The 

SRA provides criteria for assigning policies to these funds. For the 

assigned risk fund, the companies cede up to 85 percent of the premium 

and associated liability for claims payments to the government and share a 

limited portion of the gains or losses on the policies they retain. For the 

developmental and commercial funds, the companies cede a smaller 

percent of the premium and associated liability for claims payments to the 

government.

Economic incentives to control program costs associated with fraud, 

waste, and abuse are commensurate with financial exposure. Therefore, 

for policies placed in the assigned risk fund, companies have far less 

financial incentive to investigate suspect claims. For example, in one claim 

file we reviewed, an insurance company official characterized the farmer 

as filing frequent, questionable claims; however, the company paid a claim 

of over $500,000. The official indicated that if the company had vigorously

challenged the claim, the farmer would have defended his claim just as 

vigorously, and the company would have potentially incurred significant 

litigation expenses, which RMA does not specifically reimburse. With this 

cost and reimbursement structure, in the company’s opinion, it was less 

costly to pay the claim. 

RMA and insurance companies have difficulty determining potential 

abuse associated with statutory coverage for prevented planting. Under 

Page 12 GAO-07-819T 
the Federal Crop Insurance Act, as amended, RMA must offer prevented

planting coverage. RMA allows claims for prevented planting if farmers 

cannot plant owing to an insured cause of loss that is general in the 

surrounding area and that prevents other farmers from planting acreage 

with similar characteristics. Claims for prevented planting are paid at a

reduced level, recognizing that farmers do not incur all production costs 

associated with planting and harvesting a crop. However, determining 

whether farmers can plant their crop may be difficult. Annually, RMA pays 

about $300 million in claims for prevented planting. 

Statutorily high premium subsidies may inhibit RMA’s ability to 

control program abuse. ARPA increased premium subsidies—the share of 

the premium paid by the government—but this increase may hamper 

RMA’s ability to control program fraud, waste, and abuse. Premium 

subsidies are calculated as a percentage of the total premium, and farmers 

pay only between 33 to 62 percent of the policy premium, depending on 

coverage level. High premium subsidies shield farmers from the full effect 

of paying higher premiums. Because premium rates are higher in riskier 

areas and for riskier crops, the subsidy structure transfers more federal 

dollars to those who farm in riskier areas or produce riskier crops. 

In addition, by regulation, premium rates are higher for farmers who 

choose to insure their fields separately under optional units, rather than all 

fields combined, because the frequency of claims payments is higher on 

the separately insured units. Again, however, because of high premium 

subsidies, farmers pay only a fraction of the higher premium. Thus, the 

subsidy structure creates a disincentive for farmers to insure all fields 

combined. Over one-half (56 percent) of the crop insurance agents 

responding to the survey conducted for our 2005 report believed that 

charging higher premiums for farmers with a pattern of high or frequent 

claims would discourage fraud, waste, and abuse in the crop insurance 

program. In our 2006 testimony, we stated that Congress may wish to 

consider allowing RMA to reduce premium subsidies—and hence raise the 

insurance premiums—for farmers who consistently have claims that are 

irregular in comparison with other farmers growing the same crop in the 

same location. To date, no action has been taken.

From 1997 through 2006, USDA paid over $10.9 billion to companies that 

participate in the federal crop insurance program in cost allowances and 

underwriting gains, as table 1 shows. The $10.9 billion in total payments to 

the companies represents 42 percent of the government’s cost of the crop 

insurance program—about $26 billion—over this period. That is, more 

Compensation to 

Insurance Companies 

Has Been Excessive 

Page 13 GAO-07-819T 
than 40 cents of every dollar the government spent on the federal crop 

insurance program went to the companies that deliver the program, while 

less than 60 cents went to farmers. While we provide 10 years of data to 

offer a broad perspective and to even out annual losses and gains, the 

most recent 5 years of data—2002 to 2006—show similar results. 

Table 1: Cost Allowances and Underwriting Gains Paid to Insurance Companies, and Government Costs, 1997 through 2006 

Dollars in millions

Payments to insurance companies 

Year 

Company

 cost

 allowance

Company 

underwriting

 gain (loss)

Total payments 

 to insurance 

companies 

Government cost

 for the crop

insurance programa

1997 $437.8 $352.1 $789.9 $1,095.9

1998 443.3 279.2 722.5 1,373.8

1999 500.7 271.8 772.5 1,782.7

2000 552.1 267.8 819.9 2,175.1

2001 642.0 345.9 987.9 3,162.6

2002 625.9 (47.5) 578.4 3,465.6

2003 733.9 377.9 1,111.8 3,588.7

2004 890.0 691.9 1,581.9 3,125.7

2005 829.6 916.2 1,745.8 2,698.5

2006 949.8 885.9 1,835.7 3,462.0

Total—1997 to 2006 $6,605.1 $4,341.2 $10,946.3 $25,930.6

Total—2002 to 2006 $4,029.2 $2,824.4 $6,853.6 $16,340.5

Source: GAO’s analysis of RMA’s data. 

Notes: (1) Cost data are reported on a fiscal year basis. (2) Payments to companies are reported on a

crop year basis. (3) Totals may not add due to rounding. 

a

Government costs also include total indemnities and other administrative and operating expenses, 

including certain costs for research, development, and other activities. This total is reduced by the 

premiums and administration fees that farmers pay. 

As discussed earlier, USDA pays both underwriting gains and cost 

allowances, as negotiated in the SRA. Since the crop insurance program 

was revised under ARPA—that is, from 2002 through 2006—USDA has 

paid the insurance companies a total of $2.8 billion in underwriting gains. 

In terms of profitability, these underwriting gains represent an average 

Page 14 GAO-07-819T 
annual rate of return of 17.8 percent over this 5-year period.11 According to

industry statistics, the benchmark rate of return for U.S. insurance 

companies selling private property and casualty insurance was 6.4 percent

during this period.12 RMA officials told us that this benchmark rate can be

considered a starting point for measuring the appropriateness of the 

underwriting gains in the crop insurance program. However, they stated 

that this program should have a somewhat higher rate of return because of

the (1) high volatility of underwriting gains for this program compared 

with the relatively steady gains associated with the property and casualty 

insurance industry, and (2) lack of investment opportunities when 

participating in the program because premiums are paid to the companies 

at harvest, not when farmers purchase a policy. But these officials also 

said that current rates of return are excessive. USDA renegotiated the 

financial terms of its SRA with the companies beginning with the 2005 

planting season. In 2005, USDA paid the insurance companies

underwriting gains of $916 million—a rate of return of 30.1 percent. In 

2006, USDA paid them underwriting gains of $886 million—a rate of return 

of 24.3 percent. The companies received these underwriting gains despite 

drought conditions in parts of the country in 2005 and 2006. Adverse 

weather conditions, such as drought, normally suggest that insurance 

companies would earn lower profits because of greater producer losses. 

In addition to underwriting gains, RMA pays companies a cost allowance 

to cover program delivery expenses. The allowance is calculated as a 

percentage of total premiums on the insurance policies that they sell. 

Because the cost allowance is not tied to specific expenses, the companies 

can use the payments in any way they choose. From 2002 through 2006, 

USDA paid the insurance companies over $4 billion in cost allowances. 

Because the cost allowance is a percentage of the premiums, it also 

increases when the value of policies companies sell increases, as it does 

when crop prices rise. For example, USDA expects the value of policies, 

and thereby the cost allowances paid to companies, to increase by about 

25 percent from 2006 through 2008. USDA expects these higher policy 

 11Similarly, over the 10-year period, from 1997 through 2006, USDA paid companies 

participating in the crop insurance program underwriting gains of $4.3 billion, which 

represents an average annual rate of return of 17.8 percent. 

12Best’s Aggregates and Averages: Property/Casualty, United States and Canada. 

(Oldwick, New Jersey: 2006). According to this publication, the benchmark rate of return

for property and casualty insurance for the 10-year period ending in 2005 (the most recent 

year data were available) was 6.9 percent. For calculating the rate of return, we used Best’s 

ratio of pre-tax operating income to net premium earned. 

Page 15 GAO-07-819T 
values, and ultimately higher cost allowances, because of external factors,

including higher crop prices, particularly for corn and soybeans. 

Consequently, the companies and their affiliated sales agents will receive 

substantially higher cost allowances without any corresponding increase 

in expenses for selling and servicing the policies. Substantially higher cost 

allowances provide these companies and their agents with a kind of 

windfall. Greater insurance coverage results in higher premiums and 

ultimately higher cost allowances; yet, the purpose of this allowance is to 

reimburse program delivery expenses. 

In this context, USDA has requested the authority to renegotiate the SRA 

in its proposals for the Farm Bill. Specifically, USDA recommends 

renegotiating the SRA financial terms and conditions once every 3 years. 

According to USDA, the crop insurance program’s participation has grown 

significantly since the implementation of ARPA. Because higher 

participation rates have resulted in more stable program performance, the 

reinsured companies have enjoyed historically large underwriting gains in 

the last 2 years of the program. Granting USDA authority to renegotiate 

periodically would also permit USDA to renegotiate the SRA if the 

reinsured companies experience an unexpected adverse impact. 

In conclusion, Mr. Chairman, federal crop insurance plays an invaluable 

role in protecting farmers from losses due to natural disasters, and the 

private insurance companies that participate in the program are integral to

the program’s success. Nonetheless, as we mentioned before, we identified 

crop insurance as an area for oversight to ensure that program funds are 

spent as economically, efficiently, and effectively as possible. 

Furthermore, a key reason that we identified crop insurance, as well as 

other farm programs, for oversight is that we cannot afford to continue 

business as usual, given the nation’s current deficit and growing long-term 

fiscal challenges. 

Conclusion 

RMA has made progress in addressing fraud, waste, and abuse, but the 

weaknesses we identified in program management and design continue to 

leave the crop insurance program vulnerable to potential abuse. 

Furthermore, as our work on underwriting gains and losses has shown, 

RMA’s effort to limit cost allowances and underwriting gains by 

renegotiating the SRA has had minimal effect. In fact, it offers insurance 

companies and their agents a windfall. We believe that the crop insurance 

program should be delivered to farmers at a reasonable cost that does not

over-compensate insurance companies participating in the program. A 

reduced cost allowance for administrative and operating expenses and a 

Page 16 GAO-07-819T 
decreased opportunity for underwriting gains would potentially save 

hundreds of millions of dollars annually, yet still provide sufficient funds 

for the companies to continue delivering high-quality service while 

receiving a rate of return that is closer to the industry benchmark. 

Congress has an opportunity in its reauthorization of the Farm Bill to 

provide USDA with the authority to periodically renegotiate the financial 

terms of the SRA with the insurance companies so that the companies’ 

rate of return is more in line with private insurance markets. Such a step 

can help position the nation to meet its fiscal responsibilities. 

Mr. Chairman, this concludes my prepared statement. I would be happy to

respond to any questions that you or other Members of the Committee 

may have. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this testimony. For further 

information about this testimony, please contact Lisa Shames, Acting 

Director, Natural Resources and Environment, (202) 512-3841 or 

shamesl@gao.gov. Key contributors to this testimony were James R. Jones, 

Jr., Assistant Director; Thomas M. Cook; and Carol Herrnstadt Shulman. 

Contact and Staff 

Acknowledgments 

Page 17 GAO-07-819T 
Page 18 GAO-07-819T 

Related GAO Products 

Climate Change: Financial Risks to Federal and Private Insurers in 

Coming Decades Are Potentially Significant. GAO-07-760T. Washington,

D.C.: April 19, 2007. 

Climate Change: Financial Risks to Federal and Private Insurers in 

Coming Decades Are Potentially Significant. GAO-07-285. Washington, 

D.C.: March 16, 2007. 

Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. 

Washington, D.C.: November 17, 2006. 

Crop Insurance: More Needs to Be Done to Reduce Program’s 

Vulnerability to Fraud, Waste, and Abuse. GAO-06-878T. Washington, 

D.C.: June 15, 2006. 

Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to 

Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30, 

2005. 

Crop Insurance: USDA Needs to Improve Oversight of Insurance 

Companies and Develop a Policy to Address Any Future Insolvencies. 

GAO-04-517. Washington, D.C.: June 1, 2004. 

Crop Insurance: USDA Needs a Better Estimate of Improper Payments to

Strengthen Controls Over Claims. GAO/RCED-99-266. Washington, D.C.: 

September 22, 1999. 

Crop Insurance: USDA’s Progress in Expanding Insurance for Specialty

Crops. GAO/RCED-99-67. Washington, D.C.: April 16, 1999. 

Crop Insurance: Opportunities Exist to Reduce Government Costs for 

Private-Sector Delivery. GAO/RCED-97-70. Washington, D.C.: April 17, 

1997. 

Crop Insurance: Federal Program Faces Insurability and Design 

Programs. GAO/RCED-93-98. Washington, D.C.: May 24, 1993. 

Crop Insurance: Program Has Not Fostered Significant Risk Sharing by 

Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13,

1992. 

(360841) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER