Farming has always been an inherently risky enterprise because farmers operate at the mercy of nature and frequently are subjected to weather-related perils such as droughts, floods, hurricanes, and other natural disasters. Since the 1930s, many farmers have been able to transfer part of the risk of loss in production to the federal government through subsidized crop insurance. Major legislation enacted in 1980 and 1994 restructured the crop insurance program. The 1980 legislation enlisted, for the first time, private insurance companies to sell, service, and share the risk of federal insurance policies. Subsequently, in 1994, the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act revised the program to offer farmers two primary levels of insurance coverage, catastrophic and buyup. Catastrophic insurance is designed to provide farmers with protection against extreme crop losses for a small processing fee. Buyup insurance provides protection against more typical and smaller crop losses in exchange for a producer-paid premium. The government subsidizes the total premium for catastrophic insurance and a portion of the premium for buyup insurance. Farmers who purchase buyup crop insurance must choose both the coverage level (the proportion of the crop to be insured) and the unit price (such as, per bushel) at which any loss is calculated. With respect to the level of production, farmers can choose to insure as much as 75 percent of normal production or as little as 50 percent of normal production at different price levels. With respect to the unit price, farmers choose whether to value their insured production at USDA’s full estimated market price or at a percentage of the full price. In recent years, USDA has introduced a new risk management tool called revenue insurance. Unlike traditional crop insurance, which insures against losses in the level of crop production, revenue insurance plans insure against losses in revenue. The plans protect the farmer from the effects of declines in crop prices or declines in crop yields, or both. Like traditional buyup insurance, the government subsidizes a portion of the premiums. One of the plans, called Crop Revenue Coverage, is available in many states for major crops. Two other plans, called Income Protection and Revenue Assurance, are available to farmers in only limited areas. USDA reimburses the insurance companies for the administrative expenses associated with selling and servicing crop insurance policies, including the expenses associated with adjusting claims. Between 1995 and 1998, USDA paid participating insurance companies about $1.7 billion in administrative expense reimbursements. In addition to receiving an administrative expense reimbursement, the insurance companies share underwriting risk with USDA and can earn or lose money according to the claims they must pay farmers for crop losses. Companies earn underwriting profits when the premiums exceed the crop loss claims paid for those policies on which the companies retain risk. They incur underwriting losses when the claims paid for crop losses exceed the premiums paid for the policies that the companies retained. Between 1995 and 1998, USDA paid participating insurance companies about $1.1 billion in underwriting profits. Critical to the success of achieving an actuarially sound crop insurance program is aligning premium rates with the risk each farmer represents. The riskiness of growing a particular crop varies from location to location, from farm to farm, and from farmer to farmer. If the rates are too high for the risk represented, farmers are less likely to purchase insurance, lowering the revenue from premiums and the usefulness of the program to farmers. Conversely, if the rates are too low, farmers are more likely to purchase crop insurance, but because the rates are too low, the revenue from premiums will be insufficient to cover the claims. Therefore, USDA sets different premium rates for the various coverage and production levels, which vary by crop, location, farm, and farmer. Consequently, hundreds of thousands of premium rates are in effect. To set premium rates, USDA calculates a basic rate for each crop in each county for the farmers who buy insurance at the 65-percent coverage level and whose normal production level is about equal to the average production in the county. From this basic rate, USDA makes adjustments to establish rates for other coverage levels and for those farmers whose production levels are higher or lower than the county’s average. In 1995, we reported that for the six crops we reviewed—barley, corn, cotton, grain sorghum, soybeans, and wheat—basic premium rates overall were 89 percent adequate, on average, to meet the Congress’s legislative requirement of actuarial soundness. However, we found that while overall premiums were approaching actuarial soundness, USDA’s rates for some crops and locations and for some coverage and production levels were too low. For the 183 state crop programs we examined, 54 had basic premium rates that were adequate to achieve actuarial soundness. These 54 programs were generally those that had the greatest volume of insurance. For the remaining 129 programs, 40 had premium rates that were near the target level. However, the other 89 programs, representing about 24 percent of the crop insurance premiums for the six crops in 1994, had basic rates that were less than 80 percent adequate for actuarial soundness. We reported that premium rates that were too low generally occurred when the historical databases used for establishing rates added or deleted years of severe losses, thus affecting USDA’s estimate of expected crop losses. USDA did not increase the rates where necessary. For example, for one of the crops we reviewed, USDA did not increase the rates as much as it could have when (1) severe losses from 1993 were added to the database for establishing the 1995 rates and (2) a year from the 1970s when losses were lower was deleted from the database. According to USDA, it had not sufficiently raised rates out of concern that higher rates would discourage farmers from buying crop insurance. Furthermore, when we examined the rates at various levels of coverage and production, we found that the rates were (1) too high for coverage at the 75-percent level and (2) too low for farmers with above-average crop yields. As a result, the rates for both coverage and production levels were not always aligned with risk. This occurred because USDA did not periodically review and update the calculations it used to adjust rates above and below the basic rate. To set premium rates for the 75-percent coverage level, USDA applies pre-established mathematical factors to the basic rate. However, these factors have not resulted in rates that are aligned with risk. For crops insured at the 75-percent coverage level, USDA set premium rates ranging from 19 to 27 percent more than required. As a result, the 1994 income from premiums was about $30 million more than required for this coverage. Although grain sorghum had the greatest percentage of rates in excess of those required, corn had the greatest amount of additional premium income because its program is much larger. USDA also adjusts the basic rates for a farmer’s individual crop yields. USDA’s basic rate applies to the farmer whose average yield is about equal to the average for all producers in the county. However, many farmers’ average yield is above or below the county’s average, and USDA’s research shows that the higher a farmer’s yield, the lower the chance of a loss. Therefore, USDA establishes rates for different yield levels using a mathematical model. The rates per $100 of insurance coverage decrease as a farmer’s average yield increases; however, the mathematical model overstated the rate decrease. According to our analysis, the rates at higher average crop yields were too low for the six crops reviewed. We reported that for these above-average yields, USDA’s rates in 1995 should have been from 13 to 33 percent higher than they were. Subsequent to our 1995 report, USDA took action to increase premium rates an average of 6 percent and developed a plan to periodically evaluate the mathematical factors used to set rates. These actions have contributed to the federal crop insurance program’s achieving a loss ratio well below the target in recent years, thereby improving the program’s financial soundness. However, although overall premium rates appear adequate, rates for crops in some states remain too low. For example, since 1996, the loss ratio has averaged 1.36 for cotton in Texas and 1.45 for peanuts in Alabama, well exceeding the target loss ratio. Thus, premium rates for these farmers may be too low. Consequently, USDA needs to continue to monitor and adjust premium rates to ensure they are appropriately aligned with risk. In 1997, we reported that USDA’s administrative expense reimbursements to participating insurance companies selling traditional buyup insurance—31 percent of premiums—were much higher than the expenses that can be reasonably associated with the sale and service of federal crop insurance. For the 2-year period we reviewed, 1994 and 1995, the companies reported $542.3 million in expenses, compared with a reimbursement of $580.2 million—a difference of about $38 million. Additionally, about $43 million of the companies’ reported expenses could not be reasonably associated with the sale and service of federal crop insurance to farmers. Therefore, we reported that these expenses should not be considered in determining an appropriate future reimbursement rate for administrative expenses. The expenses that could not be reasonably associated with the sale and service of federal crop insurance included the following: payments of $12 million to compensate executives of an acquired company to refrain from joining or starting competing companies, fees of about $11 million paid to other insurance companies to protect against underwriting losses, bonuses of about $11 million tied to company profitability, management fees of about $1 million assessed by parent companies with no identifiable benefit to subsidiary crop insurance companies, and lobbying expenditures of about $400,000. In addition, we found a number of expenses reported by the companies that, while in categories associated with the sale and service of crop insurance, seemed to be excessive under a taxpayer-supported program. These expenses included agents’ commissions of about $6 million, paid by one company, that exceeded the industry standard.