Crop Insurance: More Needs To Be Done to Reduce Program's Vulnerability to Fraud, Waste, and Abuse
Released: 2006-06-15T00:00:00

Letter

Background

In conducting their operations, farmers are exposed to both production and price risks. Over the years, the federal government has played an active role in helping to mitigate the effects of these risks on farm income by promoting the use of crop insurance.

RMA administers the federal crop insurance program in partnership with private insurance companies that sell the insurance policies to farmers and adjust any claims. The companies also share in a percentage of the risk of loss or opportunity for gain associated with each insurance policy written.

Under the 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 is general to their surrounding area, such as weather conditions causing wet fields, and that had prevented other farmers from planting fields with similar characteristics. These farmers are entitled to claims payments that generally range from 50 to 70 percent of the coverage they purchased, depending on the crop.

RMA establishes the terms and conditions that the private insurance companies selling and servicing crop insurance policies are to use through a contract called the standard reinsurance agreement (SRA). The SRA 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.

RMA is responsible for ensuring that the federal crop insurance program is carried out efficiently and effectively and for protecting against fraud, waste, and abuse in the program. In this regard, RMA uses a broad range of tools, including RMA compliance reviews of companies’ procedures, companies’ quality assurance reviews of claims, data mining, and FSA inspections of farmers’ fields. 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 they have paid are in compliance with policy provisions.

The 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 expanded RMA’s authority to impose sanctions against farmers, agents, loss adjusters, and insurance companies that willfully and intentionally provide false or inaccurate information to FCIC or to an approved insurance provider. It also provided authority to impose civil fines for violations. ARPA also increased the percentage share of the premium the government pays for most coverage levels of crop insurance, beginning with the 2001 crop year. Although the percentage of the premium the government pays declines as farmers select higher levels of coverage, the government contribution significantly increases for all levels of coverage, particularly for the highest levels of coverage. For example, the government now pays fully one-half of the premium for farmers who choose to insure their crop at 75-percent coverage.

RMA Has Strengthened Procedures for Preventing Questionable Claims, but the Program Remains Vulnerable to Potential Abuse

RMA has taken a number of steps to improve its procedures and processes 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 claims that are consistent with the potential for fraud and abuse. For example, the list includes 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; 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, have excessive harvested losses 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 data manipulations 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 company selling the policy to the farmer. 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 insurance and a few dropped crop insurance entirely, but most simply changed their behavior regarding loss claims.

However, our review showed that RMA is not effectively using all of the tools it has available and that some farmers and others continue to take advantage of the program, as the following discussion indicates.

Inspections during the growing season are not being used to maximum effect. Although FSA is assisting RMA as required under ARPA, by conducting field inspections, FSA is not doing so in accordance with USDA guidance. 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 inspection. Under USDA guidance, FSA should have conducted all of the 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 time. Moreover, between 2001 and 2004, FSA offices in nine states did not conduct any of the field inspections RMA 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 may not be as effective as possible in conducting field inspections because RMA does not provide it with information on the nature of the suspected abusive behavior or the results of follow-up investigations. About 80 percent of the FSA inspectors we surveyed believe that receiving more information from RMA would help them be more effective in detecting fraud, waste, and abuse. Finally, these inspections do not always occur in a timely fashion, which would help detect abuse during the growing season. Because of these problems, the insurance companies and RMA cannot always determine the validity of a claim.

RMA’s data analysis of the largest farming operations is incomplete. RMA’s data mining analysis excludes 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 does not know the ownership interests in the largest farming operations, RMA cannot 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 cannot make these comparisons because it has not been given access to similar data that FSA maintains. However, ARPA requires 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. We found that of the 69,184 entities that had crop insurance policies in 2003 and that were in both RMA’s and FSA’s databases, 21,310, or about 31 percent, did not report one or more members who held a beneficial interest of 10 percent or more in the farming operation holding the policy—for a total of $224.8 million in claims paid.

RMA should be able to recover a portion of these payments. 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. The average ownership interest of the persons not disclosed for the 21,310 entities was 33 percent; as a result, RMA should be able to recover up to $74 million in claims payments. Our analysis of RMA’s and FSA’s databases for 2004 showed similar results. Of the 21,310 entities failing to disclose ownership interest in 2003, we found 210 entities with suspicious insurance claims totaling $11.1 million. In addition, we identified 24 crop insurance agents who sold policies to farming entities in which the agents held a substantial beneficial interest but failed to report their ownership interest to RMA as required. These farming entities received $978,912 in claims payments in 2003 and 2004.

RMA is 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 is not effectively overseeing insurance companies’ quality assurance programs, and for the claims we reviewed, it does not appear that most companies are rigorously carrying out their quality assurance functions. For example, 80 of the 120 insurance claim 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 has infrequently used its new sanction authority to address program abuses. Although ARPA expanded RMA’s authority to impose sanctions on farmers, agents, and adjusters who willfully and intentionally provide false or inaccurate information or fail to comply with other FCIC program requirements, RMA has only used this authority on a limited basis. RMA has 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 policy irregularities 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 has not established what constitutes an “FCIC requirement” and how it will determine that a violation has occurred or what procedural process it will follow before imposing sanctions. Insurance agents we surveyed and company officials we contacted believe that RMA needs to more aggressively seek to penalize those farmers, agents, and adjusters who abuse the program. RMA officials told us that they will give priority to issuing regulations implementing the sanctions authorized under ARPA.

RMA’s Regulations and Some Statutory Requirements Hinder Efforts to Reduce Abuse in the Crop Insurance Program

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 officials’ efforts to administer certain program provisions 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. Under RMA’s regulations, farmers can insure production of a crop on each optional unit or insure an entire basic unit. Farmers may want to insure fields separately out of concern that they would experience losses in a certain field because of local weather conditions, such as hail or flooding. If farmers instead insured their entire crop in a single basic insurance unit, the hail losses may not have caused the production yield of all units combined to have been below the level guaranteed by the insurance and, therefore, would not warrant an indemnity payment. Although optional units provide farmers added protection against loss, this coverage option 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 was 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 its eligibility for higher future insurance guarantees. Of the 2,371 farmers identified through data mining as having irregular claims in 2003, 12 percent were suspected of switching production among their fields. Furthermore, in our review of claim files, we identified 10 farmers with patterns of claims associated with this type of fraud.

According to a 2002 RMA study, relative losses per unit increase as the number of separately insured optional units increases. However, according to an RMA official, gathering the evidence to support a yield- switching fraud case requires considerable resources, especially for large farming operations.

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 some criteria for designating 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 and 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 and share a larger portion of the gains and losses on the policies they retain.

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 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 prevented planting coverage. Under the Federal Crop Insurance Act, as amended, RMA must offer prevented planting coverage. RMA allows claims for prevented planting if farmers cannot plant due 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.

Twenty-five of the FSA county officials that provided us written comments on this issue reported that they believe some farmers in their county who claimed prevented planting losses never intended to plant or did not make a good faith attempt to plant their crop. Additionally, in some cases, it appears that the insurance company’s claims adjusters may not exercise due diligence in evaluating prevented planting claims. For example, a farmer in south Texas received claims payments of over $21,000 for prevented planting claims for corn in 2003 and 2004. The farmer claimed that excess rainfall made his fields too wet to plant. However, according to a June 2004 FSA field inspection report, there was no evidence the farmer had made any attempt to prepare the fields for planting in either the 2003 or 2004 growing season. Among other things, the FSA inspection report noted, and photographs showed, the fields contained permanent grasses and 5-foot tall weeds, as well as large hay bales from the prior growing season. In response to our review, RMA investigated the 2003 and 2004 prevented planting claims for this farmer and subsequently directed the insurance company to seek reimbursement for the 2003 claims payment.

High premium subsidies may inhibit RMA’s ability to control program abuse. To encourage program participation, 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 produce riskier crops or farm in riskier areas.

In addition, 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 our survey 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.

Recently Prosecuted Crop Insurance Fraud Cases Highlight Program Vulnerabilities

Some of the issues we identified are reflected in eight recent crop insurance fraud cases that USDA’s Office of Inspector General (OIG) investigated and that resulted in criminal prosecution between June 2003 and April 2005. The cases show how a few farmers, sometimes in collusion with others, falsely report planting, claims of damage, and production to try to circumvent RMA’s procedures. In some cases, farmers hid production or switched it from one field to another. Several of these cases also demonstrate the importance of having FSA and RMA work together to identify and share information on questionable farming practices/activities. Table 1 summarizes these eight cases, which accounted for $3.1 million in fraudulent claims payments. These cases were researched and analyzed by our Office of Forensic Audits and Special Investigations.

In conclusion, Mr. Chairman, federal crop insurance plays an invaluable role in assuring the nation’s farmers that their crops will be protected from natural disasters. However, fraud, waste, and abuse can result in higher program costs and hurt the reputation of the program. In recent years, with the assistance of the new tools in ARPA, RMA has made progress in strengthening a number of program elements and thereby reducing fraud, waste, and abuse, as well as the amount of funds paid in error.

Still, the weaknesses we identified in how RMA, FSA, and insurance companies carry out their program responsibilities continue to leave the program vulnerable to questionable claims and missed opportunities to prevent losses to the federal government. In addition, RMA may be able to reduce program vulnerability and costs by improving aspects of the program’s design.

In our report, we said that the 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. We made eight recommendations to the Secretary of Agriculture to strengthen program oversight and reduce vulnerability to fraud, waste and abuse, including improved sharing of information between RMA and FSA, improved inspection practices, regulations to implement sanctions, and stronger oversight of companies’ quality control procedures. USDA agreed to act on most of our recommendations. However, it disagreed with our recommendation to ensure that FSA field offices conduct all inspections called for under agency guidance, stating that FSA did not have sufficient resources to complete all of these inspections. USDA also disagreed with our recommendation to reduce the insurance guarantee or eliminate optional unit coverage for farmers who consistently have filed claims that are irregular in comparison with other farmers growing the same crop in the same location. We continue to believe that it is reasonable for USDA to use all tools at its disposal and that our recommendations will reduce the federal crop insurance program’s vulnerability to fraud, waste, and abuse.

Mr. Chairman, this concludes my prepared statement. We would be happy to respond to any questions that your or other Members of the Subcommittee may have.

Contact and Staff Acknowledgments

Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Daniel Bertoni, Acting Director, Natural Resources and Environment, (202) 512-3841 or by email at bertonid@gao.gov. Key contributors to this statement were Ron Maxon, Thomas Cook, and Carol Herrnstadt Shulman.

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