Under the federal crop insurance program, farmers can purchase crop insurance policies to manage financial risks associated with declines in crop yields and/or revenue. The program, which began in 1938 when Congress authorized the Federal Crop Insurance Corporation (FCIC) and now covers more than 100 crops, is administered by the U.S. Department of Agriculture's (USDA's) Risk Management Agency (RMA), which acts as both regulator and reinsurer. A Standard Reinsurance Agreement (SRA) between USDA and the private companies spells out expense reimbursements and risk-sharing by the federal government, including the terms under which FCIC provides subsidies and reinsurance (i.e., insurance for insurance companies) on eligible crop insurance contracts sold or reinsured by insurance companies. As a result, the SRA plays a central role in determining program costs. In late 2009, RMA began the process of renegotiating the SRA established in 2004. In the run-up to the negotiations, some had criticized it as being too generous for insurance companies following a significant increase in government costs in recent years, driven in part by rising crop prices. The 2008 farm bill ( P.L. 110-246 ) allows USDA to renegotiate the SRA once every five years starting with the 2011 reinsurance year (which runs from July 1, 2010, through June 30, 2011). The negotiation process involved USDA developing a draft agreement, meeting separately with the insurance companies, and responding to the comments, concerns, and suggestions of the insurance companies and the public. On June 10, 2010, RMA issued what it called the final draft of a new SRA to cover the 2011 reinsurance year and subsequent years. On July 13, 2010, USDA announced that the agreement had been signed by all 16 approved insurance companies, putting it into effect for the 2011 reinsurance year. This report discusses federal crop insurance costs, the SRA that had been in effect for the 2010 reinsurance year, and issues related to the renegotiation of the SRA. Although Congress does not directly approve any new agreement, Congress has been interested in the SRA negotiation in an oversight capacity, particularly with respect to cost-effectiveness and changes that might affect farmer participation, policy coverage, or industry interest in selling crop insurance to farmers. Another congressional concern has been how cuts in crop insurance expenditures stemming from a new SRA might affect baseline spending levels used for determining funding for the next farm bill. Congress first authorized federal crop insurance as an experiment to address the effects of the Great Depression and crop losses in the Dust Bowl. In 1938, the Federal Crop Insurance Corporation (FCIC) was created to carry out the program, which focused on major crops in major producing regions. The federal crop insurance program remained limited until passage of the Federal Crop Insurance Act of 1980 ( P.L. 96-365 ), which expanded crop insurance to many more crops and regions of the country. Congress enhanced the crop insurance program in 1994 and again in 2000 to encourage greater participation. The changes also expanded the role of the private sector in developing new products that would help farmers manage their risks. To encourage farmer participation and reduce the need for ad hoc disaster assistance, the federal government subsidizes the purchase of crop insurance policies, which are sold and completely serviced through 16 approved private insurance companies. Independent insurance agents are paid sales commissions by the companies. Insurance company losses are reinsured by USDA, and their administrative and operating costs are reimbursed by the federal government. These costs include payroll, rent, commissions to agents, and expenses for adjusting claims (e.g., traveling to farmers' fields). The SRA does not affect policy premiums paid by farmers, which are based on RMA's estimates of risk and on subsides set in statute. The premiums depend in part on crop price levels, coverage levels that producers select, and policy type (e.g., yield-based or revenue-based). The expense reimbursement is currently calculated as a share of policy premiums. For more information on crop insurance policies, see CRS Report R40532, Federal Crop Insurance: Background and Issues , by [author name scrubbed]. Federal program costs for crop insurance fall into one of four main categories: premium subsidies, administrative and operating (A&O) expense reimbursement, program losses (or gains), and other ( Table 1 ). The SRA essentially defines the parameters that eventually determine A&O expense reimbursements and program losses (or gains). Premium subsidies are specified in the Federal Crop Insurance Act of 1980 ( P.L. 110-365 ), as amended. Periodic legislation can also affect federal outlays (see " A&O Reimbursement ," below). The largest cost category is premium subsidies, which lower the cost to farmers of purchasing insurance policies. When purchasing a policy, a producer growing an insurable crop selects a level of coverage and pays a portion of the premium. The remainder of the premium is covered by the federal government. Nearly 60% of total premium, on average, is paid by the government. As with other insurance, premiums increase with additional coverage, in terms of greater price protection or yield protection (or both). The second-largest cost category is A&O expense reimbursement. Unlike some other insurance products, premiums for crop insurance are not "expense loaded." For crop insurance, the entire premium covers only the liability associated with payment of crop losses and excludes expenses for delivery of the product. Currently, expense reimbursement for insurance companies is directly related to the value of the premiums. Therefore, as premiums rise, so does the A&O expense reimbursement, even if other factors, such as the number of policies sold, remain unchanged. The third category is program losses. As a reinsurer, the federal government is liable for insured losses as agreed to in the current SRA. In a number of recent years, the government has received a gain because of relatively favorable weather. The fourth category is other expenses such as RMA salaries and benefits or costs associated with research and development activities, which typically account for a small portion of total costs. In recent years, government costs for crop insurance have increased substantially ( Figure 1 ). After ranging between $2.1 and $3.6 billion annually during FY2000-FY2006, costs rose to $5.7 billion in FY2008 and more than $7 billion in FY2009 as higher policy premiums from rising crop prices drove up premium subsidies for farmers and expense reimbursements to private insurance companies. The Standard Reinsurance Agreement is a cooperative financial agreement between FCIC and each of the approved crop insurance companies to deliver eligible crop insurance contracts. It becomes effective upon its execution and FCIC's approval of the company's plan of operations for the applicable reinsurance year. The SRA for the 2010 reinsurance year (ending June 30, 2010) contains four sections: definitions (see box, "Selected Terms Defined in the Standard Reinsurance Agreement"), reinsurance, A&O expense reimbursement, and general provisions. The 2010 SRA establishes terms for the type of insurance contracts that will be reinsured and subsidized. In general, in order to prevent companies from "cherry-picking" the most profitable policies, an insurance company must offer and market all plans of insurance for all crops in any state in which the company writes a crop insurance contract, provided that RMA actuarial documents are available in that state. A company must also accept and approve applications from all eligible producers, and it is prohibited from providing a rebate (money, goods, or any other benefit) in exchange for purchasing a policy. Employees and agents of the company must also be properly licensed by the state in which they are doing business, if required by the state. Only the amount of net book premium—defined as the total premium calculated for all eligible crop insurance contracts, less A&O subsidy and fees—in the company's approved plan of operations may be reinsured and subsidized under the agreement. The 2010 SRA defines risk-sharing between the government and private insurance companies. Under the SRA, insurance companies may transfer some liability associated with riskier policies to the government and retain profits/losses from less risky policies. This transfer of risk is accomplished through a set of reinsurance funds maintained by FCIC. Within 30 days of the sales closing dates for each crop, companies assign each policy they sell to one of three funds—assigned risk, developmental, or commercial—for each state. Each company then decides what proportion of premiums (and potential for losses/gains) to retain within each reinsurance fund, subject to required minimum retention limits of individual funds. The ceded (i.e., not retained) portion goes to the government. Overall, a company must retain at least 35% of its book of business. The assigned risk fund is used for policies believed to be high-risk; it helps ensure that benefits of the federal crop insurance program are extended to all eligible farmers, regardless of risk. Depending on the state where the policy is sold, companies may retain as little as 15% to 25% of their highest-risk business, as specified in the 2010 SRA. Consequently, the federal government assumes a large portion of liability associated with high-risk policies. The SRA also specifies limits on the proportion of a company's business that may be placed in the assigned risk fund. When the assigned risk designation limit is reached, companies allocate policies—particularly medium-risk policies and pilot programs—to the developmental fund. Each company decides what proportion of its business (by plan type and state) to retain, ranging from 35% to 100%. The commercial fund is for policies for which companies expect to have only a small amount of losses. The companies select to retain (by plan type and state) between 50% and 100% of premium and associated liability of policies in the commercial fund. In 2008, about 20% of total premium value was placed in assigned risk, 10% in developmental, and 70% in commercial.