Federal crop insurance protects participating farmers against the financial losses caused by events such as droughts, floods, hurricanes, and other natural disasters. In 1995, crop insurance premiums were about $1.5 billion. USDA’s Risk Management Agency administers the federal crop insurance program through FCIC. Federal crop insurance offers farmers two primary types of insurance coverage. The first—called catastrophic insurance—provides protection against extreme crop losses for the payment of a $50 processing fee, whereas the second—called buyup insurance—provides protection against more typical smaller crop losses in exchange for a premium paid by the farmer. FCIC conducts the program primarily through private insurance companies that sell and service federal crop insurance—both catastrophic and buyup—for the federal government and retain a portion of the insurance risk. FCIC also offers catastrophic insurance through the local offices of USDA’s Farm Service Agency. FCIC pays the companies a fee, called an administrative expense reimbursement, that is intended to reimburse the companies for the expenses reasonably associated with selling and servicing crop insurance to farmers. The reimbursement is calculated as a percentage of the premiums received, regardless of the expenses incurred by the companies. Beginning in 1994, companies were required to report expenses in a consistent format following standard industry guidelines to provide FCIC with a basis for establishing future reimbursement rates. For buyup crop insurance, FCIC reduced the administrative expense reimbursement from a base rate of 34 percent of the premiums on policies sold from 1988 through 1991 to 31 percent of the premiums from 1994 through 1996. The 1994 reform act requires FCIC to reduce the reimbursement rate to no more than 29 percent of total premiums in 1997, no more than 28 percent in 1998, and no more than 27.5 percent in 1999. FCIC can set the rate lower than these mandated ceilings. In addition, the companies earn profits when insurance premiums exceed losses on policies for which they retain risk. These profits are called underwriting gains. Since 1990, companies selling crop insurance have earned underwriting gains totaling more than $500 million. FCIC had agreements with 22 companies in 1994 and 19 companies in 1995 to sell and service federal crop insurance. In 1995, the insurance companies sold about 80 percent of all federal crop insurance, while USDA’s Farm Service Agency sold the remainder. In performing our review, we examined expenses at nine companies representing about 85 percent of the total federal crop insurance premiums written by private companies in 1994 and 1995. We chose the companies considering factors such as premium volume, location, and type of ownership. In 1994 and 1995, FCIC’s administrative expense reimbursements to participating companies selling buyup insurance—31 percent of premiums—were higher than the expenses that can be reasonably associated with the sale and service of federal crop insurance. For the 2-year period, FCIC reimbursed the nine companies we reviewed about $580 million. For this period, the companies reported expenses of about $542 million to sell and service crop insurance—a difference of about $38 million. However, our review showed that about $43 million of the companies’ reported expenses could not be reasonably associated with the sale and service of federal crop insurance. Therefore, we believe that these expenses should not be considered by FCIC in determining an appropriate future reimbursement rate for administrative expenses. Furthermore, we found that a number of the reported expenses appeared excessive for reimbursement through a taxpayer-supported program and suggest an opportunity to further reduce future reimbursement rates for administrative expenses. Finally, a variety of factors have emerged since the period covered by our review that have increased companies’ revenues or may decrease their expenses, such as higher crop prices and premium rates and reduced administrative requirements. These factors should be considered in determining future reimbursement rates. Our review showed that about $43 million of the companies’ reported expenses could not be reasonably associated with the sale and service of federal crop insurance. These expenses, which we believe should not be considered in determining an appropriate future reimbursement rate for administrative expenses, included expenses for acquiring competitors’ businesses, protecting companies from underwriting losses, sharing company profits through bonuses or management fees, and lobbying expenses. Among the costs reported by the crop insurance companies that did not appear to be reasonably associated with the sale and service of crop insurance to farmers were those related to costs the companies incurred when they acquired competitors’ business. These costs potentially aided the companies in vying for market share and meant that one larger company, rather than several smaller companies, was delivering crop insurance to farmers. However, this consolidation was not required for the sale and service of crop insurance to farmers, provided no net benefit to the crop insurance program, and according to FCIC, was not an expense that FCIC expected its reimbursement to cover. For example, one company took over the business of a competing company under a lease arrangement. The lease payment totaled $3 million in both 1994 and 1995. About $400,000 of this payment could be attributed to actual physical assets the company was leasing, and we recognized that amount as a reasonable expense. However, the remaining $2.6 million—which the company was paying each year for access to the former competitor’s policyholder base—provided no benefit to the farmer and no net value to the crop insurance program. Likewise, we saw no apparent benefit to the crop insurance program from the $1.5 million the company paid executives of the acquired company over the 2-year period as compensation for not competing in the industry. In total, we identified costs in this general category totaling about $12 million for the 2-year period. We also found that two companies included payments to commercial reinsurers among their reported crop insurance delivery expenses. These are payments the companies made to other insurance companies to expand their protection against potential underwriting losses. This commercial reinsurance allows companies to expand the amount of insurance they are permitted to sell under insurance regulations while limiting their underwriting losses. The cost of reinsurance relates to company decisions to manage underwriting risks rather than to the sale and service of crop insurance to farmers. We discussed this type of expense with FCIC, and it agreed that this expense should be paid from companies’ underwriting revenues and thus should not be considered in determining a future reimbursement rate for administrative expenses. For the two companies that reported reinsurance costs as an administrative expense, these expenses totaled $10.7 million over the 2 years. Furthermore, we found that some companies included as administrative expenses for selling and servicing crop insurance, expenses that resulted from decisions to distribute profits to (1) company executives and employees through bonuses or (2) parent companies through management fees. We found that profit-sharing bonuses were a significant component of total salary expenses at one company, equaling 49 percent of basic salaries in 1994 and 63 percent in 1995. These bonuses totaled $9 million for the 2 years. While company profit sharing may benefit a company in competing with another company for employees, the bonuses do not contribute to the overall sale and service of crop insurance or serve to enhance program objectives. Furthermore, while we recognize that performance-based employee bonuses and bonuses paid to agents represent reasonable expenses, the profit-sharing bonuses in this example did not appear to be reasonable program expenses because they were paid out of profits after all necessary program expenses were paid. Additionally, we identified profit-sharing bonuses totaling $2.1 million reported as expenses at three other companies for 1994 and 1995. In total, we found expenditures in this general category amounting to $12.2 million over the 2 years. Similarly, we noted that two companies reported expenditures for management fees paid to parent companies as crop insurance administrative expenses. Company representatives provided few examples of tangible benefits received in return for their payment of the management fee. We recognized management fees as a reasonable program expense to the extent that companies could identify tangible benefits received from parent companies. Otherwise, we considered payment of management fees to be a method of sharing income with the parent company and paid in the form of a before-profit expense item rather than a dividend. These expenses totaled $1.1 million for the 2 years. FCIC’s standard reinsurance agreement with the companies precludes them from reporting expenditures for lobbying as crop insurance delivery expenses. Despite this prohibition, we found that the companies included a total of $418,400 for lobbying in their expenses reported for 1994 and 1995. The vast majority of these expenses involved the portion of companies’ membership dues attributable to lobbying by crop insurance trade associations. Adjusting for these and other expenses reported in error, we determined, and FCIC concurred, that the expense rate for companies’ expenses reasonably associated with the sale and service of buyup crop insurance in 1994-95 was about 27 percent of premiums. This is about 4 percentage points, or $81 million, less than the reimbursement FCIC provided. Of these 4 percentage points, 2 points reflect companies’ reported expenses that were less than their reimbursement; the remainder reflect adjustments to their reported expenses that did not appear to be reasonably associated with the sale and service of crop insurance. In addition, we found a number of expenses reported by the companies that, although associated with the sale and service of crop insurance, seemed to be excessive for a taxpayer-supported program. While difficult to fully quantify, these types of expenditures suggest that opportunities exist for the government to reduce its future reimbursement rate for administrative expenses while still adequately reimbursing companies for the reasonable expenses of selling and servicing crop insurance policies. For example, in the crop insurance business, participating companies compete with each other for market share through the sales commissions paid to independent insurance agents. To this end, companies offer higher commissions to agents to attract them and their farmer clients from one company to another. When an agent switches from one company to another, the acquiring company increases market share, but there is no net benefit to the crop insurance program. On average, the nine companies in our review paid agents sales commissions of 16 percent of buyup premiums they sold in 1994 and 16.2 percent in 1995.