Crop Insurance: In Areas with Higher Crop Production Risks, Costs Are Greater, and Premiums May Not Cover Expected Losses
Published: 2015-02-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federally subsidized crop insurance program, which helps farmers manage the risk inherent in farming, has become one of the most important programs in the farm safety net. Since 2000, the government's costs for the crop insurance program have increased substantially. The program's cost has come under scrutiny as the nation's budgetary pressures have been increasing.
GAO was asked to identify the costs to the federal government for insuring crops in areas with higher production risks. This report examines, for these areas, (1) the government's cost of the crop insurance program and (2) the extent to which RMA's premium rates, as implemented, cover expected losses. GAO analyzed RMA crop insurance program data from 1994 through 2013 (the most recent year with complete program data) and premium rate data for 2013 and 2014; reviewed relevant studies, RMA documents, and documents from stakeholders including farm industry groups; and interviewed RMA officials.
section_title: What GAO Found
paragraphs: The federal government's crop insurance costs are substantially higher in areas with higher crop production risks (e.g., drought risk) than in other areas. In the higher risk areas, government costs per dollar of crop value for 2005 through 2013 were over two and a half times the costs in other areas. The figure below shows the costs during this period. However, the U.S. Department of Agriculture's (USDA) Risk Management Agency (RMA)—the agency that administers the crop insurance program—does not monitor and report on the government's crop insurance costs in the higher risk areas.
RMA implemented changes to premium rates in 2014, decreasing some rates and increasing others, but GAO's analysis of RMA data shows that, for some crops, RMA's higher risk premium rates may not cover expected losses. RMA made changes to premium rates from 2013 to 2014, but its plans to phase in changes to premium rates over time could have implications for improving actuarial soundness. USDA is required by statute to limit annual increases in premium rates to 20 percent of what the farmer paid for the same coverage in the previous year. However, GAO found that, for higher risk premium rates that required an increase of at least 20 percent to cover expected losses, RMA did not raise these premium rates as high as the law allows to make the rates more actuarially sound. Without sufficient increases to premium rates, where applicable, RMA may not fully cover expected losses and make the rates more actuarially sound. Furthermore, in analyzing data on premium dollars for 2013, GAO found that had RMA's higher risk premium rates been more actuarially sound, the federal government could have potentially collected tens of millions of dollars in additional premiums.
section_title: What GAO Recommends
paragraphs: GAO recommends that RMA (1) monitor and report on crop insurance costs in areas that have higher crop production risks and (2), as appropriate, increase its adjustments of premium rates in these areas by as much as the full 20 percent annually that is allowed by law.
RMA disagreed with GAO's first recommendation and agreed with the second. GAO continues to believe that RMA can and should do more to monitor and report on crop insurance costs in higher risk areas, where government costs were found to be substantially higher.

section_title: Letter
paragraphs: The federally subsidized crop insurance program, which helps farmers  manage the risk inherent in farming, has become one of the most  important programs in the farm safety net. Farmers can insure against  losses caused by poor crop yields resulting from natural causes, declines  in crop prices, or both, for each insurable crop they produce. The U.S.  Department of Agriculture’s (USDA) Risk Management Agency (RMA)  has overall responsibility for administering the crop insurance program,  including controlling costs. Currently, RMA partners with 19 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. The federal government pays for (1) part of farmers’  crop insurance premiums, which averaged about 62 percent of total  premiums in 2013, and (2) administrative and operating expenses of  insurance companies to cover their expenses for selling and servicing  crop insurance policies.
Since 2000, the government’s costs for the federal crop insurance  program have increased substantially. Federal costs for the program  averaged $3.4 billion annually for fiscal years 2003 through 2007 and  grew to an average of $8.4 billion annually for fiscal years 2008 through  2013. The Congressional Budget Office (CBO) estimates that federal crop  insurance costs will average $8.9 billion per year for fiscal years 2015  through 2024. The cost of the federal crop insurance program has come  under scrutiny as the nation’s budgetary pressures have been increasing.  In an October 2013 review of the federal government’s long-term fiscal  outlook, we concluded that current fiscal policy is unsustainable over the  long term and that addressing the fiscal challenges of the future will  require looking at the entire range of federal activities and making difficult  choices in setting priorities.
Budget pressures have been increasing in recent years and, at the same  time, net farm income reached historically high levels. According to  USDA’s Economic Research Service (ERS), a primary source of  economic information and research, net farm income is forecast to be  $96.9 billion in 2014, down 23.4 percent from 2013’s forecast of $126.5  billion. If realized, according to ERS, the 2014 amount would be the  lowest since 2010, but net farm income would still be more than $14.5  billion higher than ERS’ previous 10-year annual average (2004 through  2013).
In 2012 and 2013 reports, we suggested that Congress reduce crop  insurance costs by limiting the amount of premium subsidies that an  individual farmer can receive each year, reducing premium subsidy rates  for all farmers, or by some combination of limiting and reducing these  subsidies. The Senate approved farm legislation in 2013 that would have  reduced premium subsidies for some farmers, but this provision was not  included in the final 2014 farm bill. In March 2014, the President’s fiscal  year 2015 budget proposed reductions in some premium subsidy rates. In  August 2014, we suggested that Congress consider reducing the level of  federal premium subsidies for revenue crop insurance policies.
Crop insurance premium subsidies contribute to relatively high  government costs in areas of the country with higher crop production  risks—that is, areas that have higher risks of crop losses from drought,  excessive moisture, or other natural causes. Because premiums are  typically higher for policies covering crops in these areas, and premium  subsidies are set at fixed percentages of the premiums, the premium  subsidies are also higher.
Current law directs RMA to adopt premium rates and coverage levels that  improve the actuarial soundness of the federal crop insurance program.  As a result, according to RMA, it must set premium rates and implement  changes to premium rates in a timely manner to cover expected losses  and allow for a reasonable reserve. Current law also directs RMA to  conduct periodic reviews of premium rates, including the methodology the  agency uses for establishing premium rates. RMA conducted its most  recent study of its methodology for setting premium rates in 2010. Among  other things, the study authors found that RMA’s methodology was  sound, but that the underlying data should be revised. Specifically, they  concluded that the agency should place more weight on loss experience  from more recent years to better account for current risks faced by  farmers. RMA adopted findings from the study, and a revision of its  methodology necessitated a change in premium rates. RMA is directed by  statute to implement new rates in a timely manner in order to improve  actuarial soundness. According to an RMA document, this provision  ensures that the federal crop insurance program does not place an  unnecessary financial burden on farmers or the government through  inaccurate premium rates.
In this context, you asked us to identify the costs to the federal  government for insuring crops in areas with higher production risks in  comparison with costs for insuring the same crops in areas with relatively  lower production risks. Our objectives were to determine, for areas with  higher crop production risks, (1) the government’s cost of the crop  insurance program and (2) the extent to which RMA’s premium rates, as  implemented, cover expected losses.
The five major crops represented 86 percent of the total crop insurance premiums for  2013. risk counties”). To calculate total government costs in these higher risk  counties, we analyzed RMA data. We also interviewed RMA officials  regarding the RMA regional offices’ role in monitoring premium rates. In  addition, we reviewed USDA’s and other studies that examined the costs  of the crop insurance program and the role of premium subsidies and  reviewed documents from other stakeholders, including farm industry  groups. To address the second objective, we analyzed RMA data on  county premium rates for the five major crops, for crop years 2013 and  2014. We also interviewed RMA officials in headquarters and two field  offices―selected based on their experience administering policies in  areas with higher production risks―regarding the agency’s method for  setting and implementing changes to county premium rates. In addition,  we reviewed USDA’s and other studies that examined the agency’s  methodology for assigning premium rates and reviewed relevant audits by  USDA’s Office of the Inspector General. To evaluate the reliability of all of  the RMA data, we reviewed related documentation, interviewed  knowledgeable agency officials, and reviewed related internal controls  information. 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 December 2013 to February  2015 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 obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The authorizing legislation for the federal crop insurance program states  that the purpose of the program is to promote the national welfare by  improving the economic stability of agriculture. According to RMA’s  mission statement, the agency provides risk-management tools, such as  crop insurance, to strengthen the economic stability of agricultural  producers and rural communities. Specifically, RMA’s fiscal years 2011 to  2015 strategic plan states that the agency’s goal for the federal crop  insurance program is that it will provide a broad-based financial safety net  for producers. The fiscal years 2011 to 2015 strategic plan includes the  agency’s strategic goals and core values in support of its mission. These  goals are, among other things, to continue to expand participation, ensure  actuarially sound products, safeguard the integrity of the program, and to  do so as responsible stewards of taxpayer dollars and with transparency.
Through the federal crop insurance program, farmers insure against  losses on more than 100 crops. These crops include the five major crops  (corn, soybeans, wheat, cotton, and grain sorghum), as well as nursery  crops and certain fruits and vegetables. According to an RMA document,  the amount of federal crop insurance purchased based on planted acres  is relatively high in comparison with the past for the five major crops. In  2012, corn acreage was 84 percent insured, soybean acreage was 84  percent insured, wheat acreage was 83 percent insured, cotton acreage  was 94 percent insured, and grain sorghum acreage was 74 percent  insured.
As shown in table 1, the federal government’s crop insurance costs  generally increased for fiscal years 2003 through 2013. A widespread  drought and crop losses in crop year 2012 contributed to the spike in  government costs to $14.1 billion in fiscal year 2012.weather conditions were more favorable, so government costs were lower  than in fiscal year 2012. According to an April 2014 CBO estimate, for  fiscal years 2014 through 2023, program costs are expected to average  $8.9 billion annually.
In crop year 2013,  The 2014 farm bill included a provision that affects the dollar value that a  farmer can insure when the farmer’s county has experienced substantial  crop losses in previous years. RMA uses the actual production history  (APH)—4 to 10 years of historical crop yields— to establish a farmer’s  insurance guarantee. Existing law before the 2014 farm bill allowed a  farmer to replace a low actual yield in the APH with a yield equal to 60  percent of the historical county crop yield. The 2014 farm bill enhanced  this provision by allowing farmers to exclude without replacement any  recorded or appraised yield from the APH calculation if the average crop  yield in the county for any particular year is less than 50 percent of the  10-year county average. According to a USDA document, this provision  will provide relief to farmers affected by severe weather, including  drought, by allowing them to have a higher approved crop yield. In  general, RMA will set increased premium rates for farmers who choose to  use this option, meaning the subsidy provided by the federal government  will increase. CBO estimated that this provision change will cost $357  million over the 10 years from fiscal year 2014 through fiscal year 2023.
section_title: The Government’s Crop Insurance Costs Are Greater in Areas with Higher Crop Production Risks
paragraphs: The government’s crop insurance costs are substantially higher in areas  with higher crop production risks than in other areas. From 2005 through  2013, government costs per dollar of crop value in areas with higher crop  production risks were over two and a half times the costs in other areas.  However, RMA does not monitor and report on the government’s crop  insurance costs in these higher risk areas.
According to an RMA official, RMA’s county target premium rates are the  best available measure of crop production risks. In the 20 percent (510) of  U.S. counties with the highest average county target premium rates,  these rates ranged from 20 percent to 83 percent, with a median rate of  25 percent. In comparison with other types of property and casualty  insurance, 25 percent is a relatively high premium rate. For example, at  25 percent, the annual homeowner’s insurance premium on a house  valued at $400,000 would be $100,000. The remaining 80 percent (2,044)  of U.S. counties had lower average county target premium rates. Those  rates ranged from 0.6 percent to nearly 20 percent, with the median rate  of 9 percent.
Figure 1 shows counties organized in groups of 20 percent based on  average county target premium rates, with the darker areas representing  counties with higher average county target premium rates. The color- shaded counties represent all 2,554 counties that had county target  premium rates for at least one of the five major crops.
Figure 2 shows the riskiest 20 percent of counties (510) in terms of  average county target premium rates. These 510 higher risk counties  are color-shaded on the basis of their 2013 premium dollars to show  which counties purchased the most crop insurance. The Great Plains,  which has areas with relatively high drought risk, had a large portion of  the higher risk counties’ premium dollars.
Figure 3 compares the estimated government crop insurance costs per  dollar of expected crop value for the five major crops in the 510 higher  risk counties with the costs in the 2,044 other U.S. counties from 2005  through 2013.year depending on weather-caused crop losses, crop prices, and farmers’  decisions about how much insurance coverage to purchase. To control  for variations in crop prices and farmers’ purchase decisions, and to  normalize the costs for higher risk counties and lower risk counties while  still reflecting weather-caused crop losses, we expressed the estimated  government costs in relation to expected crop value. As shown in figure 3,  the costs in higher risk counties were substantially greater. Over the 9- year time frame, government costs averaged 14 cents per dollar of  expected crop value in the higher risk counties and 5 cents per dollar in  the other counties. For example, if two farms each had an expected crop  value of $1 million, the higher risk farm would have had an average  annual government cost of $140,000, and the lower risk farm would have  had an average annual government cost of $50,000. In 2013, the higher  risk counties had a government cost of 17 cents per $1 of expected crop  value, 3 cents higher than the average during the time frame, and the  other counties had a government cost of 5 cents per $1 of expected crop  value, the same as the time frame average.
section_title: RMA Premium Rate Changes in Areas with Higher Production Risks May Not Cover Expected Losses
paragraphs: RMA implemented changes to premium rates in 2014, decreasing some  rates and increasing others, but our analysis of RMA data shows that, for  some crops, RMA’s higher risk premium rates may not cover expected  losses. RMA made changes to premium rates from 2013 to 2014, but its  practice of phasing in changes to premium rates over time could have  implications for actuarial soundness. Further, many premium rates in  areas with higher production risks were lower than they should have been  to cover expected losses and RMA’s increases to these premium rates  were not as high as they could have been under the law to fully cover  expected losses.
subsections: section_title: RMA Made Changes to Premium Rates in Areas with Higher Crop Production Risks in 2014
paragraphs: We found that RMA adjusted higher risk county base premium rates and  county target premium rates from 2013 to 2014 for the five major crops.  The revisions in premium rates were in response to a 2010 study of its  methodology and its periodic reviews of crop loss history. The changes  included increases and decreases of higher risk county base premium  rates and county target premium rates for each of the five major crops.  On average, RMA’s various changes to premium rates from 2013 to 2014  resulted in decreases to county base premium rates and county target premium rates for corn and soybeans and increases for grain sorghum.These changes also represented an increase in the percentage of county  base premium rates that were aligned with county target premium rates  for corn, soybeans, cotton, and grain sorghum, but not for wheat.
RMA has indicated in agency documents that it phases in new rates,  especially those that require an increase, to keep premiums stable and  provide farmers with predictable rates. For example, in a 2013  document, the agency reported that it planned to slowly phase in changes  to county base premium rates to mitigate the impact of a 2012 drought.  However, phasing in changes to premium rates can have implications for  improving actuarial soundness. For example, USDA’s Office of Inspector  General (OIG) reported in 2005 that, from crop years 2000 through 2003,  when cotton crop losses were high relative to premiums, premium rates  for cotton were decreased, unchanged, or increased only moderately  and, in these same 4 years, premiums were not sufficient to cover  losses. An RMA official told us that RMA uses judgment when changing  county base premium rates, factoring in the agency’s goal of maintaining  stability for farmers in its decisions.
section_title: Many County Base Premium Rates Are Less Than the County Target Premium Rates
paragraphs: When county base premium rates are lower than county target premium  rates, RMA is required by statute to limit annual increases in premium  rates to 20 percent of what the farmer paid for the same coverage in the  previous year. However, RMA uses discretion in deciding whether to  raise rates by the full 20 percent or by a lesser amount (as indicated by its  practice of phasing in rate changes). Based on our analysis, for the higher  risk premium rates, half of county base premium rates for corn, cotton,  and grain sorghum, and nearly half of county base premium rates for  wheat are lower than the county target premium rates.the lower risk premium rates, most of the county base premium rates for   In contrast, for  corn, cotton, grain sorghum, and wheat meet or exceed county target  premium rates. Figure 7 shows the percentage of county base premium  rates that meet, exceed, or are lower than county target premium rates in  2014.
We calculated percentage differences between county base premium  rates and county target premium rates. This provided a measure of the  gap between the premium rate RMA charges a farmer (the county base  premium rate) and the premium rate RMA should charge a farmer (the  county target premium rate). For example, for nonirrigated cotton, one  county had a county base premium rate of 26 percent and a county target  premium rate of 32 percent. Thus, the county base premium rate was 6  percentage points less than the county target premium rate; however, the  percentage difference was 23 percent.
For most higher risk premium rates where the county base premium rates  were lower than the county target premium rates, the higher risk county  base premium rates were within 20 percent of the county target premium  rates in 2014, meaning RMA could fully align the rates in a single year. As  shown in table 2, across the major crops, a larger percentage of county  base premium rates are lower than county target premium rates by 20  percent or more for higher risk premium rates as compared to the lower  risk premium rates.
Based on our analysis, from 2013 to 2014, RMA changed some county  base premium rates by the full 20 percent allowed by the law. However,  we also found that from 2013 to 2014, RMA did not raise county base  premium rates as high as the law allows for many of the higher risk  premium rates. For example, as shown in table 3, RMA made a lesser  adjustment in about half of the county base premium rates for corn and  cotton, and nearly half for grain sorghum that required a change of 20  percent or more to either meet or move closer to the county target  premium rate. Table 3 shows the percentage of premium rates where a  change of at least 20 percent was necessary to move the county base  premium rate closer to the county target premium rate and where RMA  did not use the full 20 percent authorized in statute.
An RMA official told us that the agency strives for actuarial soundness not  only nationwide, but also, at the county and crop level. Without sufficient  increases to premium rates, where such increases are necessary, RMA’s  premium rates may not cover expected losses and may not be as high as  they could be under the law, which may have implications for the actuarial  soundness of the program. Among the higher risk premium rates, if the  county base premium rates and the county target premium rates were  identical, the federal government’s total program costs in these areas  would be lower because more premium dollars would be collected. For  example, in analyzing data on premium dollars for 2013, our analysis  showed that had the county base premium rates been aligned with the  county target premium rates in higher risk counties, the federal  government could have potentially collected tens of millions of dollars in  additional premiums.
However, the federal government’s total program costs would not be  reduced by the same amount as the additional premiums. The amount of  the premium that the federal government provides on behalf of farmers  (premium subsidy), about 62 percent, on average, would increase, but the  portion of the premium that farmers pay would also increase. Thus, the  additional premiums would reduce the government’s costs. Also, when  county base premium rates are lower than county target premium rates,  farmers’ production decisions may not be based on the true cost of their  risk of loss due to weather-related events, such as drought; and, the  federal government does not have information about the full amount of  premium dollars the federal government should collect from farmers.  Ensuring that the federal government has information about the full  amount of premium dollars it should collect from farmers would be an  activity consistent with RMA’s core values.
section_title: Conclusions
paragraphs: Federal crop insurance plays an important role in protecting farmers from  losses from natural disasters and price declines, and the federal crop  insurance program has become one of the most important programs in  the farm safety net. RMA has overall responsibility for administering the  program, including controlling costs. With increasing budgetary  pressures, it is critical that federal resources are targeted as effectively as  possible. One of USDA’s strategic objectives is to maximize the return on  taxpayer investment in the department through enhanced stewardship  activities of resources and focused program evaluations. Such  evaluations could include an analysis of the government’s crop insurance  costs in higher risk areas, where, as our analysis found, government  costs are substantially higher than in other areas. However, RMA does  not monitor and report on the government’s crop insurance costs in  higher risk areas to identify potential cost savings, which would be  consistent with USDA’s strategic objective. Without additional information  from RMA on the government’s crop insurance costs in higher risk areas,  Congress may not have all the information it needs to make future  assessments of the crop insurance program’s design and costs.
In implementing premium rates, RMA seeks to balance its goals for  participation and ensuring stability for farmers with maintaining an  actuarially sound program. RMA updates its premium rates periodically,  but there are continuing gaps between county base premium rates and  county target premium rates. RMA has the ability to make changes to  more quickly achieve greater actuarial soundness at the county and crop  level but is not always doing so for areas with higher production risks.  Without sufficient increases to premium rates, where applicable, RMA  may not be taking all the actions available to achieve greater actuarial  soundness. Additionally, moving to ensure that more county base  premium rates meet county target premium rates will provide more  information about the full costs to the federal government for insuring  farmers in higher risk areas, consistent with the core value in RMA’s fiscal  years 2011 to 2015 strategic plan, and could also save federal funds.
section_title: Recommendations for Executive Action
paragraphs: To better inform Congress in the future about crop insurance program  costs, reduce present costs, and ensure greater actuarial soundness, we  recommend that the Administrator of the U.S. Department of Agriculture’s  Risk Management Agency take the following two actions:
Monitor and report on crop insurance costs in areas that have higher  crop production risks.
As appropriate, increase its adjustments of premium rates in areas  with higher crop production risks by as much as the full 20 percent  annually that is allowed by law.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided USDA with a draft of this report for review and comment. We  received written comments from the RMA Administrator. These  comments are summarized below and reproduced in appendix III. In  these comments, RMA disagreed with our first recommendation and  agreed with our second recommendation. RMA stated that, consistent  with the second recommendation, it will continue to revise premium rates  in an appropriate, prudent, and actuarially sound manner, taking proper  account of current rates and premium rate targets consistent with  generally accepted actuarial practices.
In its written comments, RMA disagreed with our first recommendation to  monitor and report on crop insurance costs in areas that have higher crop  production risks and said it currently provides crop insurance data that  have all the information necessary to determine crop insurance costs in  all areas.  RMA’s website provides some information—such as county- level data on premiums, premium subsidies, loss claim payments, and  loss ratios—that enables others to do some analysis of crop insurance  costs. However, that information is not complete for the purpose of  analyzing the government’s costs and is not organized in a way that  facilitates an understanding of the government’s costs in higher risk  areas. For example, regarding data on loss ratios (i.e., loss claim  payments divided by premiums) that is on RMA’s website, a recent article  by an agricultural economist from the University of California notes that  this loss ratio information for crop insurance (1) is not informative about  and misrepresents the actuarial exposure borne by the   program and (2) by excluding administrative expenses, understates the  extent of public expenditure on the program. We agree with this  assessment.  Furthermore, placing data on a website does not constitute  the monitoring of crop insurance costs. We continue to believe RMA can  and should do more to monitor and report on crop insurance costs in  higher risk areas, where we found government costs to be substantially  higher than in other areas. As we said in this report, without additional  information from RMA on the government’s crop insurance costs in higher  risk areas, Congress may not have all the information it needs to make  future assessments of the crop insurance program’s design and costs.
In addition, RMA commented on our analysis of the government’s cost of  the crop insurance program in higher risk areas. RMA said it has  developed a definition of high-risk land, mapped out these areas, and  applied significant premium surcharges. RMA said our definition of what  we deem to be “higher risk areas” is much broader. RMA defines “high- risk land” as acreage with identifiable physical limitations, such as  floodplains and high sand content soils. Our identification of higher risk  areas (i.e., the 20 percent of counties that had the highest weighted  average county target premium rates) enabled us to broadly assess crop  insurance costs, and we believe this approach, which we discussed with  RMA officials, was consistent with our purpose.
In its comment letter, RMA said our use of crop insurance costs (or  benefits to farmers) per dollar of expected crop value “appears to  exaggerate the difference in program costs in higher-risk areas versus  other areas, or at least masks some important details.” To present  another perspective, RMA compared corn premium subsidies per acre for  two states that had a large number of higher risk counties with two states  that had no higher risk counties and stated that the premium subsidies  per acre were similar amounts. We believe our use of a dollar-based  measure (i.e., premium subsidies per dollar of expected crop value) is  more appropriate than a physical measure (i.e., acres) for comparisons  between costs and farmer benefits in higher risk areas and other areas.  This is consistent with the methodology of a 2013 article by agricultural  economists from The Ohio State University and the University of Illinois  that compared net farm insurance payments using a dollar-based  measure.
Moreover, the use of a dollar-based measure is consistent with property  insurance methods, which are based on the value of the property being  insured. RMA stated that coverage levels were another offsetting effect,  noting that growers in higher risk areas tend to choose lower coverage  levels than in other areas, because higher premium rates make higher  coverage less affordable. RMA appears to be suggesting that our  analysis overlooks this difference, which is not true. As explained in our  report, one of the reasons that we expressed estimated government costs  in relation to expected crop value was to control for variations in farmers’  purchase decisions. Farmers’ decisions in selecting coverage levels vary  between higher risk areas and other areas. According to our analysis, in  2013, farmers in higher risk counties chose to insure, on average, 67  percent of their expected crop value, while farmers in the other counties  chose to insure, on average, 76 percent of their expected crop value.  Thus, we used expected crop value—which is not affected by coverage  levels—rather than insured crop value so that our analysis would not be  distorted by differences in coverage levels.
RMA agreed with our second recommendation that, as appropriate, RMA  increase its adjustments of premium rates in areas with higher crop  production risks by as much as the full 20 percent annually that is allowed  by law, saying it mirrors how premium rate adjustments are currently  administered. However, RMA stated it disagreed with our assessment of  the extent to which premium rates need to be adjusted to the full amount  allowed by statute and that adjusting premium rates fully to changes in  premium rate targets would undercut the basic purpose of insurance—to  provide financial stability.  We continue to believe RMA’s adjustment of  premium rates should be consistent with insurance principles and the  statutory directive to set premium rates that improve actuarial soundness.  Furthermore, in its discussion of premium rates in “higher-risk” areas,  RMA states that the report makes certain assumptions about premium  rate targets in high risk areas that are not completely accurate and do not  necessarily result in improved actuarial soundness. RMA further states  that following each random variation to its fullest can subject growers to a  roller-coaster ride of ups and downs in their premiums. RMA presented a  simulation of yields and losses, showing that adjusting premium rates by  less than needed to meet the premium rate target leads to a smaller  variation in rates.
RMA’s simulation suggested that the agency’s current method of  adjusting premium rates will yield an average premium rate that is  actuarially sound at the national level.  We agree that RMA’s average  premium rate, nationwide, may allow the program to be considered  actuarially sound. However, our analysis focused on RMA’s practices in  charging premium rates in areas with higher production risks that may be  lower or higher than the actuarially sound premium rate. In addition,  RMA’s simulation did not account for systematic variation in risk at the  county and crop level. As we concluded, RMA could more quickly achieve  actuarial soundness at the county and crop level. Moreover, as we stated,  charging premium rates that are less than the actuarially sound premium  rates could also have implications for total costs to the federal  government in areas with higher production risks. Thus, we continue to  believe that increasing the adjustments of premiums rates in areas with  higher crop production risk by as much as the full 20 percent annually that  is allowed by law is prudent and in keeping with sound fiscal practices.
As agreed with your offices, 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  Administrator of USDA’s Risk Management Agency; 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 IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine, for areas with higher crop production  risks, (1) the government’s cost of the crop insurance program and (2) the  extent to which RMA’s premium rates, as implemented, cover expected  losses.
To address these objectives, we reviewed relevant provisions of the  Food, Conservation, and Energy Act of 2008 (2008 farm bill) and the  Agricultural Act of 2014 (2014 farm bill); other statutes; and U.S.  Department of Agriculture (USDA), regulations; and we analyzed crop  insurance program data from RMA. We interviewed USDA officials,  including officials from RMA, and reviewed documents they provided,  such as, descriptions of the agency’s methodology for calculating  premium rates.
We selected 2013 because it was the most recent year for which complete RMA data on  program costs was available at the time we performed this analysis.
We recognize that an area or location may be high risk for one crop or crop type or  practice type but not for a different crop. However, by using 2013 premium dollars to  weight the average of the different target rates used in a given county, we maintain that  such a calculation allows a reasonable average approximation of a location’s production  risk. practice, and crop-type combinations RMA used for premium calculations  in 2013. Additionally, the use of a weighted-average county target  premium rate allowed us to calculate a single measure for each county by  which we could examine government costs in specific geographic areas.  We then ranked the counties from the highest to lowest weighted average  target rate. We defined those counties ranked in the top 20 percent as  “higher risk counties” and the remaining 80 percent of counties as “lower  risk counties.” To calculate total government costs in these higher risk  counties, we analyzed RMA data for 2005 through 2013. We used the  expected crop value to compare the costs in areas with higher production  risks to the costs in other areas. Expected crop value is equal to the  expected crop production multiplied by the expected (or elected) crop  price. However, we did not have information on expected crop prices, so  we calculated expected crop value by dividing the liability dollars by the  coverage rate. Finally, to address the first objective we interviewed RMA  officials, reviewed USDA’s and other studies that examined the costs of  the crop insurance program and the role of premium subsidies, and  consulted documents from other stakeholders, including farm industry  groups.
To address the second objective, we analyzed RMA data on production- based (or yield) premium rates for the five major crops (corn, cotton, grain  sorghum, soybeans, and wheat) for crop years 2013 and 2014.  Production-based premium rates are RMA’s premium rates for  production-based policies and are used to determine the premium rates  for revenue policies.and crop-type combination, on the county base premium rate and the  county target premium rate. We used the same 2013 data on county  target premium rates to identify higher risk counties in our first objective.  Using the 2013 premium rate data, we ranked the county target premium  rates from highest to lowest and identified the highest 20 percent of  county target premium rates for each crop, practice, and crop-type  combination. For a given crop, a single county may have multiple county  target premium rates, depending on the number of combinations of  practices (e.g., irrigated and nonirrigated) and crop types (e.g., winter  wheat and spring wheat) insured in the county. For example, for wheat, a  county may have county target premium rates for two practice and crop- type combinations—nonirrigated winter wheat and nonirrigated spring  wheat―in which one or both of the premium rates may fall in the highest  20 percent in 2014. For example, for wheat, County A in state B had  county target premium rates for two practice and crop-type  combinations—nonirrigated winter wheat and nonirrigated spring wheat— that were in the highest 20 percent in 2014. In total, there were 40  combinations or rankings of crops, practices, and crop types. Thus, if a  county target premium rate fell into the top 20 percent in its ranking, that  county target premium rate was placed in the “higher risk premium rate”  category. The remaining 80 percent were placed in the “lower risk  premium rate” category. We compared each county base premium rate  with the applicable county target premium rate identified above. In each  instance, we compared the county base premium rate with the county  target premium rate for a single practice, and crop-type combination, and  calculated the percentage difference. We calculated the percentage  difference by subtracting the county base premium rate from the county  target premium rate and dividing the result by the county base premium  rate. If the percentage difference between the county base premium rate  and the county target premium rate was zero, we considered the county  base premium rate as having met the county target premium rate. If the  percentage difference was greater than zero, we placed the county base  premium rate in the “lower than” category; and, if the percentage  difference was less than zero, we placed the county base rate in the  “higher than” category. Table 4 provides details on the crop-type and   RMA provided us with data, for each crop, practice,  practice combinations included in this review. Finally, we interviewed  RMA officials in headquarters and two field offices regarding the agency’s  method for setting and implementing changes to county premium rates.  We judgmentally selected the field offices based on the offices having  had experience implementing premium rates in areas with higher  production risks. We also reviewed studies that examined the agency’s  methodology for assigning premium rates and reviewed relevant audits by  USDA’s Office of the Inspector General.
For the various data used in our analyses, as discussed, we generally  reviewed related documentation, interviewed knowledgeable officials, and  reviewed related internal controls information to evaluate the reliability of  these data. In each case, we concluded that the data were sufficiently  reliable for the purposes of this report.
We conducted this performance audit from December 2013 to February  2015 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 obtained provides a reasonable basis for our findings  and conclusions based on our objectives.
section_title: Appendix II: Premiums in the 10 Percent of Counties with the Highest Premium Rates, 2013
paragraphs: Figure 8 shows the 255 counties that were the riskiest 10 percent of  counties in terms of average county target premium rates. These counties  are shaded on the basis of their 2013 premium dollars to show which  risky counties had the most crop insurance.
section_title: Appendix III: Comments from the U.S. Department of Agriculture
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Thomas M. Cook, Assistant  Director; Kevin S. Bray; Mark Braza; Gary Brown; Michael Kendix; Tahra  Nichols; Susan Offutt; Ruth Solomon; and Frank Todisco made key  contributions to this report. In addition, Cheryl Arvidson, and Kiki  Theodoropoulos made important contributions to this report.
section_title: Related GAO Products
paragraphs: Climate Change: Better Management of Exposure to Potential Future  Losses Is Needed for Federal Flood and Crop Insurance. GAO-15-28.  Washington, D.C.: October 29, 2014.
Crop Insurance: Considerations in Reducing Federal Premium Subsidies.  GAO-14-700. Washington, D.C.: August 8, 2014.
Extreme Weather Events: Limiting Federal Fiscal Exposure and  Increasing the Nation’s Resilience. GAO-14-364T. Washington, D.C.:  February 12, 2014.
Fiscal Exposures: Improving Cost Recognition in the Federal Budget.  GAO-14-28. Washington, D.C.: October 29, 2013.  2013 Annual Report: Actions Needed to Reduce Fragmentation, Overlap,  and Duplication and Achieve Other Financial Benefits. GAO-13-279SP.  Washington, D.C.: April 9, 2013.
High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February  2013.
Crop Insurance: Savings Would Result from Program Changes and  Greater Use of Data Mining. GAO-12-256. Washington, D.C.: March 13,  2012.
Crop Insurance: Opportunities Exist to Reduce the Costs of Administering  the Program. GAO-09-445. Washington, D.C.: April 29, 2009.
Crop Insurance: Continuing Efforts Are Needed to Improve Program  Integrity and Ensure Program Costs Are Reasonable. GAO-07-944T.  Washington, D.C.: June 7, 2007.
Crop Insurance: Continuing Efforts Are Needed to Improve Program  Integrity and Ensure Program Costs Are Reasonable. GAO-07-819T.  Washington, D.C.: May 3, 2007.
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.