    Crop Insurance: Opportunities Exist to Reduce Government Costs for
    Private-Sector Delivery (Chapter Report, 04/17/97, GAO/RCED-97-70).

    Pursuant to a legislative requirement, GAO reviewed the financial
    arrangements between the Federal Crop Insurance Corporation (FCIC) and
    participating insurance companies for delivering crop insurance to
    qualified producers, focusing on the: (1) adequacy of the current
    administrative reimbursement rate for expenses of participating crop
    insurance companies; (2) comparative cost to the government in 1995 of
    private companies' and the Department of Agriculture's (USDA) delivery
    of catastrophic insurance; and (3) advantages and disadvantages of
    different expense reimbursement alternatives.

    GAO noted that: (1) in 1994 and 1995, the government's administrative
    expense reimbursement to insurance companies was greater than the
    companies' expenses to sell and service federal crop insurance; (2) for
    the 2-year period, companies reported expenses that were less than the
    reimbursements paid to them by FCIC; (3) furthermore, GAO found that
    some of these reported expenses did not appear to be reasonably
    associated with the sale and service of federal crop insurance and
    accordingly should not be considered in determining an appropriate
    future reimbursement rate for administrative expenses; (4) in addition,
    even within the expense categories reasonably associated with the sale
    and service of crop insurance, GAO found expenses that appeared
    excessive for reimbursement under a taxpayer-supported program
    suggesting an opportunity to further reduce future reimbursement rates;
    (5) these expenses included agents' commissions that exceeded the
    industry average, unnecessary travel-related expenses, and questionable
    entertainment activities; (6) finally, higher premiums in the crop
    insurance program have had the effect of increasing the government's
    reimbursement to companies for the time period GAO examined; (7) at the
    same time, companies' expenses associated with crop insurance sales and
    service could decrease as FCIC reduces the administrative requirements
    with which the companies must comply; (8) combined, all these factors
    indicate that FCIC could lower the reimbursement rate and still amply
    cover companies' reasonable expenses for selling and servicing federal
    crop insurance policies; (9) in 1995, the government's costs to deliver
    catastrophic insurance were higher through private companies than
    through USDA; (10) although the basic costs associated with selling and
    servicing catastrophic crop insurance through USDA and private companies
    were comparable, delivery through USDA avoids paying an underwriting
    gain to companies in years when there is a low incidence of catastrophic
    loss claims; (11) in 1995, the underwriting gain to participating
    companies for catastrophic insurance totalled about $45 million; (12) in
    1996, the underwriting gains were even higher; (13) GAO identified a
    number of different approaches to reimbursing companies for their
    administrative expenses that offer the opportunity for cost savings;
    (14) each has advantages and disadvantages compared with the existing r*

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  RCED-97-70
         TITLE:  Crop Insurance: Opportunities Exist to Reduce Government
                 Costs for Private-Sector Delivery
          DATE:  04/17/97
       SUBJECT:  Grain and grain products
                 Agricultural production
                 Insurance companies
                 Insurance losses
                 Insurance premiums
                 Administrative costs
                 Insurance cost control
                 Farm income stabilization programs
                 Disaster relief aid
    IDENTIFIER:  FCIC Multiple Peril Crop Insurance Program
                 Federal Crop Insurance Program

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    Cover
    ================================================================ COVER

    Report to Congressional Committees

    April 1997

    CROP INSURANCE - OPPORTUNITIES
    EXIST TO REDUCE GOVERNMENT COSTS
    FOR PRIVATE-SECTOR DELIVERY

    GAO/RCED-97-70

    Crop Insurance

    (150119)

    Abbreviations
    =============================================================== ABBREV

      FAR - Federal Acquisition Regulation
      FCIC - Federal Crop Insurance Corporation
      FSA - Farm Service Agency
      NAIC - National Association of Insurance Commissioners
      NCIS - National Crop Insurance Services, Inc.
      USDA - U.S.  Department of Agriculture

    Letter
    =============================================================== LETTER

    B-276150

    April 17, 1997

    Congressional Committees:

    This report responds to the requirement in the Federal Crop Insurance
    Reform and Department of Agriculture Reorganization Act of 1994 (P.L.
    103-354, Oct.  13, 1994) that GAO and the U.S.  Department of
    Agriculture's Federal Crop Insurance Corporation (FCIC) jointly
    evaluate the financial arrangements between FCIC and participating
    insurance companies for delivering the crop insurance program to
    qualified producers.  The report contains recommendations to the
    Secretary of Agriculture to reduce the government's costs for the
    crop insurance program.

    The U.S.  Department of Agriculture's Risk Management Agency will
    report on the adequacy of return on capital to companies selling crop
    insurance for the federal government and identify alternative
    reinsurance arrangements.

    We are sending copies of this report to interested congressional
    committees; the Secretary of Agriculture; participating insurance
    companies; and the Director, Office of Management and Budget.  We
    will also make copies available to others upon request.  If you or
    your staff have any questions, I can be reached on (202) 512-5138.
    Major contributors to this report are listed in appendix X.

    Sincerely yours,

    Robert A.  Robinson
    Director, Food and
     Agriculture Issues

    Congressional Committees

    The Honorable Richard G.  Lugar
    Chairman
    The Honorable Tom Harkin
    Ranking Minority Member
    Committee on Agriculture, Nutrition, and Forestry
    United States Senate

    The Honorable Robert F.  (Bob) Smith
    Chairman
    The Honorable Charles W.  Stenholm
    Ranking Minority Member
    Committee on Agriculture
    House of Representatives

    EXECUTIVE SUMMARY
    ============================================================ Chapter 0

       PURPOSE
    ---------------------------------------------------------- Chapter 0:1

    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.  The U.S.  Department of
    Agriculture's (USDA) Risk Management Agency administers the federal
    crop insurance program through the Federal Crop Insurance Corporation
    (FCIC).  Federal crop insurance offers farmers two primary types of
    insurance coverage.  The first--called catastrophic
    insurance--provides protection against the extreme losses of crops
    for the payment of a $50 processing fee, whereas the second--called
    buyup insurance--provides protection against more typical smaller
    losses of crops 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 pays the companies a fee, called an
    administrative expense reimbursement, that is intended to reimburse
    the companies for the reasonable expenses associated with selling and
    servicing crop insurance to farmers.  The reimbursement is calculated
    as a percentage of the premiums paid, regardless of the expenses
    incurred by the companies.  In addition, the companies earn profits
    when insurance premiums exceed losses.  FCIC also offers catastrophic
    insurance through the local offices of USDA's Farm Service Agency.

    Concerned about the cost-effective delivery of federal crop insurance
    and recognizing the important role the private insurance industry
    plays in delivering federal crop insurance, the Congress, in the
    Federal Crop Insurance Reform and Department of Agriculture
    Reorganization Act of 1994, directed GAO and FCIC to jointly evaluate
    the financial arrangements between FCIC and insurance providers for
    delivering crop insurance to producers.  Separately, USDA's Risk
    Management Agency will report on the adequacy of return on capital to
    insurance companies and alternative reinsurance arrangements between
    the government and the companies.  In this report, GAO addresses (1)
    the adequacy of the current administrative reimbursement rate for
    expenses of participating crop insurance companies, (2) the
    comparative cost to the government in 1995 of private companies' and
    USDA's delivery of catastrophic insurance, and (3) the advantages and
    disadvantages of different expense reimbursement alternatives.
    Appendix I provides descriptive information on FCIC's efforts to
    simplify program administration.

       BACKGROUND
    ---------------------------------------------------------- Chapter 0:2

    Federal crop insurance began on an experimental basis in 1938, after
    private insurance companies were unable to establish a financially
    viable crop insurance business.  In 1980, the Congress enacted
    legislation that expanded the program and, for the first time,
    enlisted private insurance companies to sell, service, and share in
    the risk of federal crop insurance policies.  Under a standard
    reinsurance agreement that identifies the terms and conditions for
    selling federal crop insurance, FCIC pays the insurance companies an
    administrative fee.  This fee is a preestablished percentage of
    premiums to reimburse the companies for the expenses of selling and
    servicing crop insurance policies, including the expenses associated
    with adjusting claims.  While the reimbursement rate is intended to
    be set at a level sufficient to cover the companies' costs of selling
    and servicing crop insurance policies, under the current
    reimbursement arrangement, the companies have no obligation to spend
    their payment on expenses related to crop insurance; they can spend
    the payment in any way they choose.

    For buyup crop insurance, the administrative expense reimbursement
    has declined from a base rate of 34 percent of the premiums on
    policies sold from 1988 through 1991 to 31 percent of the premiums
    sold from 1994 through 1996.  Prior to 1994, the reimbursement rate
    for administrative expenses changed as a result of negotiations
    between FCIC and the participating companies and budget concerns, but
    it was not based on actual expenditure data.  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.

    While this reduction in the reimbursement rate was mandated by the
    act, the established rates were not based on a systematic evaluation
    of the costs associated with selling and servicing crop insurance.
    Nor have participating insurance companies been limited in how they
    spend their administrative expense reimbursement.  Moreover, all
    companies did not report detailed expense information for selling and
    servicing crop insurance in a consistent format until 1994, when USDA
    began requiring companies to report data on actual expenses in order
    to help establish a future reimbursement rate that more clearly
    reflects actual expenses.  Currently, FCIC is developing a new
    standard reinsurance agreement, including new expense reimbursement
    rates, that will be completed with the companies in June 1997.

    In addition to receiving an administrative expense reimbursement, the
    insurance companies share underwriting risk with FCIC and can earn or
    lose money according to the claims they must pay farmers for crop
    losses.  Companies earn money when the premiums exceed the crop loss
    claims paid for those policies on which the companies retain risk.
    They lose money when the claims paid for crop losses exceed the
    premiums paid for the policies that the companies retained.  Since
    1990, the companies participating in this program have collectively
    earned $528 million in underwriting gains.

    The 1994 reform act required farmers who had not previously purchased
    crop insurance to purchase at least catastrophic insurance coverage
    if they wanted to participate in federal farm programs.  (The Federal
    Agriculture Improvement and Reform Act of 1996 rescinded this
    requirement provided that farmers waive any rights to any possible
    disaster assistance.) Catastrophic insurance was designed to
    eliminate the need for expensive crop disaster assistance programs.
    Farmers could purchase catastrophic coverage either from the local
    office of USDA's Farm Service Agency or from a local insurance agent
    representing a participating insurance company.  The cost to the
    farmer is a $50 per crop processing fee whether the farmer purchases
    coverage through USDA or a private insurer.  In 1995, participating
    companies were compensated with a base reimbursement rate for
    administrative expenses of about 14 percent of catastrophic premiums,
    in addition to the $50 processing fee paid by farmers.  The 1994
    reform act authorized the companies to keep the fees they collected
    from farmers up to certain limits.

    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 its review, GAO examined expenses at nine companies
    representing about 85 percent of the total federal crop insurance
    premiums written by private companies in 1994 and 1995.  Companies
    were selected considering factors such as premium volume, location,
    and type of ownership.

       RESULTS IN BRIEF
    ---------------------------------------------------------- Chapter 0:3

    In 1994 and 1995, the government's administrative expense
    reimbursement to insurance companies was greater than the companies'
    expenses to sell and service federal crop insurance.  For the 2-year
    period, companies reported expenses that were less than the
    reimbursements paid to them by FCIC.  Furthermore, GAO found that
    some of these reported expenses did not appear to be reasonably
    associated with the sale and service of federal crop insurance and
    accordingly should not be considered in determining an appropriate
    future reimbursement rate for administrative expenses.

    Among these expenses were those associated with acquiring
    competitors' businesses, profit-sharing bonuses, and lobbying.  In
    addition, even within the expense categories reasonably associated
    with the sale and service of crop insurance, GAO found expenses that
    appeared excessive for reimbursement under a taxpayer-supported
    program suggesting an opportunity to further reduce future
    reimbursement rates.  These expenses included agents' commissions
    that exceeded the industry average, unnecessary travel-related
    expenses, and questionable entertainment activities.  Finally, higher
    premiums in the crop insurance program have had the effect of
    increasing the government's reimbursement to companies from the time
    period GAO examined.  At the same time, companies' expenses
    associated with crop insurance sales and service could decrease as
    FCIC reduces the administrative requirements with which the companies
    must comply.  Combined, all these factors indicate that FCIC could
    lower the reimbursement rate and still amply cover companies'
    reasonable expenses for selling and servicing federal crop insurance
    policies.

    In 1995, the government's costs to deliver catastrophic insurance
    were higher through private companies than through USDA.  Although
    the basic costs associated with selling and servicing catastrophic
    crop insurance through USDA and private companies were comparable,
    delivery through USDA avoids paying an underwriting gain to companies
    in years when there is a low incidence of catastrophic loss claims.
    In 1995, the underwriting gain to participating companies for
    catastrophic insurance totaled about $45 million.  In 1996, the
    underwriting gains were even higher.

    GAO identified a number of different approaches to reimbursing
    companies for their administrative expenses that offer the
    opportunity for cost savings.  Each has advantages and disadvantages
    compared with the existing reimbursement arrangement.  Companies
    generally prefer the existing reimbursement method because it is
    relatively simple to administer.

       PRINCIPAL FINDINGS
    ---------------------------------------------------------- Chapter 0:4

          CURRENT REIMBURSEMENTS
          EXCEED DELIVERY EXPENSES
    -------------------------------------------------------- Chapter 0:4.1

    In 1994 and 1995, FCIC's administrative expense reimbursements to the
    participating companies selling 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, the nine companies GAO reviewed reported $542.3
    million in expenses, compared with a reimbursement of $580.2
    million--a difference of about $38 million.  In addition, GAO's
    review of the companies' reported expenses showed that about $43
    million could not be reasonably associated with the sale and service
    of federal crop insurance to farmers.  Therefore, these expenses
    should not be considered in determining an appropriate future
    reimbursement rate for administrative expenses.  These expenses
    included payments to compensate executives of an acquired company to
    refrain from joining or starting competing companies, fees paid to
    other insurance companies to protect against underwriting losses,
    bonuses tied to company profitability, management fees assessed by
    parent companies with no identifiable benefit to subsidiary crop
    insurance companies, and lobbying expenses.  Adjusting for these
    expenses, GAO determined, and FCIC concurred, that the expense
    reimbursement rate for companies' expenses reasonably associated with
    the sale and service of crop insurance in 1994-95 was about 27
    percent of premiums.  Similarly, for 1995, GAO found that the
    compensation to companies selling catastrophic insurance--including
    farmer-paid processing fees--exceeded companies' calculated expenses
    for those policies by about 2 percent of catastrophic premiums.

    In addition, GAO 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 above-average commissions paid to
    agents by one large company, corporate aircraft and excessive
    automobile charges, country club memberships, and various
    entertainment activities for agents and employees, such as sky box
    rentals at professional sporting events and company-sponsored fishing
    trips.  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.

    Furthermore, a variety of factors that have emerged since the period
    covered by GAO's review have increased companies' revenues or may
    decrease companies' expenses.  Crop prices and premium rates
    increased in 1996 and 1997, thereby generating higher premiums, which
    had the effect of increasing the reimbursements paid to companies for
    administrative expenses by about 3 percent of premiums.  FCIC's
    efforts to simplify the program's administrative requirements may
    reduce companies' workload, thereby reducing their administrative
    expenses.

          GOVERNMENT'S COST TO DELIVER
          CATASTROPHIC INSURANCE
          THROUGH USDA IS LESS THAN
          THROUGH PRIVATE COMPANIES
    -------------------------------------------------------- Chapter 0:4.2

    In 1995, the government's costs to deliver catastrophic insurance
    policies were higher through private companies than through USDA.
    The basic cost to the government for selling and servicing crop
    insurance was comparable for both delivery systems.  However, when
    private companies delivered the insurance, they received an estimated
    $45 million underwriting gain that did not apply to USDA's delivery.
    Underwriting gains are not guaranteed and vary annually, depending on
    crop losses.  According to FCIC, the underwriting gain in 1995
    totaled 37 percent of those catastrophic premiums for which the
    companies retained risk.  This 1-year underwriting gain substantially
    exceeded FCIC's long-term target, which in 1995 was 7 percent of the
    companies' retained premiums.  In 1996, the underwriting gain was
    even higher--about $58 million.  Beginning with crops harvested in
    1997, the Federal Agriculture Improvement and Reform Act of 1996
    requires that USDA phase out its delivery of catastrophic crop
    insurance in areas that have sufficient private company providers.
    In July 1996, the Secretary of Agriculture identified 14 states where
    sufficient commercial delivery was available and USDA would no longer
    sell and service catastrophic insurance.

          ALTERNATIVE REIMBURSEMENT
          ARRANGEMENTS OFFER POTENTIAL
          FOR SAVINGS
    -------------------------------------------------------- Chapter 0:4.3

    The current arrangement for reimbursing companies for their
    administrative expenses, under which FCIC pays private companies a
    fixed percentage of premiums, has certain advantages, including ease
    of administration.  However, expense reimbursements based on a
    percentage of premiums do not necessarily reflect the amount of work
    involved to sell and service crop insurance policies.  Alternative
    reimbursement arrangements, such as (1) capping the reimbursement per
    policy, (2) paying a flat dollar amount per policy plus a reduced
    fixed percentage of premiums, and (3) paying a declining
    reimbursement rate as companies' premium volume increases, offer the
    potential to have reimbursements more reasonably reflect expenses.
    Some alternatives may also help smaller companies compete more
    effectively with larger companies and/or encourage more service to
    smaller farmers than does the current system.  While some of the
    alternative reimbursement methods may result in lower cost
    reimbursements to insurance companies, some methods may increase
    FCIC's own administrative expenses for reporting and compliance.
    Companies generally prefer FCIC's current reimbursement method
    because of its administrative simplicity.  FCIC has included the
    second alternative--paying a flat dollar amount per policy plus a
    fixed percentage of premiums--in its proposed 1998 standard
    reinsurance agreement with the industry.

       RECOMMENDATIONS TO THE
       SECRETARY OF AGRICULTURE
    ---------------------------------------------------------- Chapter 0:5

    GAO's review shows that the 1994 and 1995 administrative
    reimbursement rate for buyup crop insurance--31 percent of
    premiums--was higher than the companies' expenses reasonably
    associated with selling and servicing crop insurance for the 2-year
    period which GAO calculated at about 27 percent of premiums.
    According to GAO's analysis, if crop prices and premium rates remain
    at 1996-97 levels, FCIC could reduce its reimbursement rate 3
    percentage points below this 27-percent rate, and companies could
    still be adequately reimbursed for their reasonable expenses of
    selling and servicing crop insurance.  GAO's review also shows that
    in 1995 the compensation to companies for catastrophic insurance was
    higher than the companies' expenses associated with selling and
    servicing this insurance.  Finally, an analysis of the government's
    1995 costs to deliver catastrophic insurance through private
    companies and through USDA shows that basic delivery expenses are
    comparable for the two delivery systems but that underwriting gains
    to companies made private delivery more expensive.  Companies'
    underwriting gains to date substantially exceed FCIC's target.

    Accordingly, to better ensure that the reimbursement rate to
    participating companies more closely reflects their actual expenses
    for delivering crop insurance, GAO recommends that the Secretary of
    Agriculture direct the Administrator of the Risk Management Agency to

      -- determine a reimbursement rate for administrative expenses that
         reflects the appropriate and reasonable costs of selling and
         servicing buyup insurance and include this rate in the new
         agreement currently being developed with the companies;

      -- determine the compensation that reflects the appropriate and
         reasonable costs of selling and servicing catastrophic crop
         insurance and include it in the new agreement being developed
         with the companies;

      -- explicitly convey to participating insurance companies the type
         of expenses that the administrative reimbursement is intended to
         cover;

      -- monitor companies' expenses to ensure that the established rate
         is reasonable for the services provided; and

      -- closely monitor the experience of the catastrophic insurance
         program to ensure that over time the underwriting gains earned
         on catastrophic insurance by the companies do not exceed FCIC's
         long-term target for gains.

       USDA AND CROP INSURANCE
       INDUSTRY COMMENTS
    ---------------------------------------------------------- Chapter 0:6

    GAO provided a draft of this report to the U.S.  Department of
    Agriculture for review and comment.  GAO also provided a draft of
    this report to National Crop Insurance Services, Inc., which was
    designated by the crop insurance companies included in GAO's review
    to respond to this report.  In addition, at the request of some crop
    insurance companies, the American Association of Crop Insurers and
    the Crop Insurance Research Bureau, Inc.  jointly provided comments
    on a draft of this report.

    GAO met with USDA's Administrator for the Risk Management Agency, who
    agreed with the information presented in the draft report and its
    conclusions and recommendations.  In its proposed 1998 standard
    reinsurance agreement with the private insurance companies, FCIC has
    included changes to the expense reimbursement rate for delivering
    both buyup and catastrophic insurance.  Additionally, in this
    proposed agreement, FCIC has clarified the types of expenses that the
    administrative reimbursement is intended to cover, and it plans to
    monitor companies' expenses in the future as a result of GAO's
    review.  USDA's Risk Management Agency noted that the information in
    this report provides a strong basis for conducting future expense
    audits to continue verification of private insurance companies' costs
    for delivering crop insurance.

    The crop insurance industry disagreed with GAO's methodology,
    findings, conclusions, and recommendations.  GAO is confident that
    its methodology is sound, the report's findings and conclusions are
    well supported, and the recommendations offer reasonable suggestions
    for reducing the costs of the crop insurance program.

    In responding to GAO's draft report, the industry raised questions in
    four broad areas.

    First, the industry believes that GAO failed to meet the mandate
    contained in the 1994 reform act because the review focused on the
    costs to deliver crop insurance and did not consider quality of
    service.  GAO focused on delivery costs because in researching the
    legislative history of this provision, GAO found that in the context
    of funding this program and other agricultural programs in a deficit
    reduction environment, the paramount congressional interest was in
    controlling the costs of reimbursing crop insurers.  Furthermore, GAO
    confirmed its interpretation of the mandate in a commitment letter
    sent to the Chairmen and Ranking Minority Members of the Senate
    Committee on Agriculture, Nutrition, and Forestry, and the House
    Committee on Agriculture.  This letter set forth GAO's approach for
    meeting this mandate including its scope and methodology.
    Consequently, GAO's report focuses on costs incurred by insurers that
    are reimbursed by the government in order to provide information most
    useful to congressional decisionmakers.  Therefore, GAO believes that
    the report fulfills the mandate of the Congress.  (See ch.  1.)

    Second, the industry raised questions about the methodology used in
    the review, including the time period GAO examined; the standards GAO
    used to judge the allowability of expenses; and the applicability of
    emerging factors, such as increased premium rates and higher crop
    prices, to future cost reimbursements.  GAO examined the costs of the
    crop insurance program for 1994 and 1995 to provide a picture of
    expenses for delivering crop insurance before and after the
    implementation of the 1994 reform act.  Furthermore, these were the
    first 2 years that the industry provided the detailed data in a
    consistent format needed to fully analyze the expenses associated
    with selling and servicing crop insurance.  The industry stated that
    GAO was understating administrative expenses by using 2 years in
    which crop losses were relatively low.  GAO disagrees.  Crop losses
    for buyup coverage in 1995 were equal to or higher than crop loss
    experiences throughout the 1990s, except for 1993.  Furthermore, GAO
    found that high crop losses did not significantly increase companies'
    loss-adjusting expenses--the administrative cost component most
    likely to be affected by high crop losses.  Moreover, since the
    1980s, the companies have received additional reimbursements in years
    of high crop losses.  The standards GAO used to identify reasonable
    costs for delivering crop insurance were developed on the basis of a
    number of different widely recognized accounting, insurance, and
    acquisition standards.  FCIC agreed that the standards used were
    appropriate.  Moreover, two factors that have emerged since the
    1994-95 time period that GAO reviewed--higher premium rates and
    higher crop prices in 1996 and 1997--should be considered in
    evaluating the appropriate future reimbursement rate because these
    factors increased companies' revenues without an increase in
    expenses.  (See ch.  2.)

    Third, without offering specific details, the industry expressed
    concern that the implementation of GAO's recommendations would
    destabilize the crop insurance industry.  The industry's
    profitability is primarily driven by the difference between premiums
    received and claims paid--its underwriting profits.  Administrative
    expense reimbursements are intended to just cover expenses.  They
    were never intended to include a profit margin.  GAO continues to
    believe that a reimbursement rate in the range of 24 percent will
    adequately compensate companies for the reasonable expenses of
    delivering crop insurance.  This lower reimbursement rate should not
    diminish service to the farmer nor destabilize the program.
    Companies will still have the opportunity to realize underwriting
    profits as they have since the program began.  (See ch.  2.)

    Finally, the industry questioned GAO's methodology for comparing the
    cost to the government of the industry's and USDA's delivery of
    catastrophic insurance.  Specifically, it stated that the processing
    fees paid by farmers and the underwriting gains paid to companies
    should not be considered in analyzing the costs to the government for
    catastrophic insurance delivery.  GAO disagrees that an analysis of
    the comparative costs to the government of company- and
    USDA-delivered catastrophic insurance should exclude the processing
    fee and underwriting gains components.  In computing the overall
    costs to the government, all revenue and payment components have to
    be considered.  The industry's comments also indicate that it
    believes GAO's conclusions might mislead policymakers by implying
    that delivery of catastrophic insurance by private industry should be
    reduced.  GAO does not believe that this is the case.  GAO did not
    conclude or recommend that the industry should have its role in
    catastrophic insurance delivery reduced.  GAO continues to hold the
    view, however, that the level of underwriting gain paid to the
    companies should be managed so that it more closely follows FCIC's
    targets.  (See ch.  3.)

    The industry's specific comments and GAO's response are presented in
    detail in appendixes VIII and IX.

    INTRODUCTION
    ============================================================ Chapter 1

    Federal crop insurance protects participating farmers against crop
    losses caused by perils such as droughts, floods, hurricanes, and
    other natural disasters.  The federal program--which began on an
    experimental basis in 1938 after private insurance companies were
    unable to establish a financially viable crop insurance business--was
    restructured and greatly expanded by key legislation in 1980 and
    1994.  A major component of the 1980 legislation was the enlistment,
    for the first time, of private insurance companies to sell, service,
    and share the risk on federal crop insurance policies.  In 1994, the
    Congress further broadened the program by offering farmers
    catastrophic risk insurance.  This coverage, established at a minimum
    level, incorporated elements of the former crop disaster assistance
    program into crop insurance provided jointly by the U.S.  Department
    of Agriculture (USDA) and private insurance companies.\1

    USDA's Risk Management Agency administers the federal crop insurance
    program through the Federal Crop Insurance Corporation (FCIC).  FCIC
    pays the participating companies a fee, called an administrative
    expense reimbursement, that is intended to reimburse the companies
    for the reasonable expenses associated with selling and servicing
    crop insurance to farmers.  The reimbursement is calculated as a
    percentage of the premiums paid, regardless of the expenses incurred
    by the companies.  In addition to this reimbursement, participating
    insurance companies share with FCIC any gains or losses--known as
    underwriting gains and underwriting losses--that result from the
    insurance policies they sell.  In 1994, 22 participating insurance
    companies received $395 million from the program--about $292 million
    in administrative expense reimbursements plus about $103 million in
    underwriting gains.  In 1995, 19 participating insurance companies
    received $506 million from the program--about $373 million in
    administrative expense reimbursements plus about $133 million in
    underwriting gains.  Expense reimbursements and underwriting gains
    varied by company according to the amount of premiums written, the
    amount of risk retained, and the management of the risk retained.

    --------------------
    \1 This report focuses on multiple-peril crop insurance that protects
    against losses of production.  Since 1995, newer types of crop
    insurance have become available.  These polices are designed to
    guarantee farmers a minimum level of revenue by protecting against
    production losses and fluctuations in crop prices.

       HOW FEDERAL CROP INSURANCE
       WORKS UNDER THE CROP INSURANCE
       REFORM ACT OF 1994
    ---------------------------------------------------------- Chapter 1:1

    Federal crop insurance offers farmers two primary types of insurance
    coverage--catastrophic and buyup.  Both types of coverage are
    available for most major crops under the changes made by the Congress
    in the Federal Crop Insurance Reform and Department of Agriculture
    Reorganization Act of 1994 (P.L.  103-354, Oct.  13, 1994, title I).
    This act created catastrophic risk insurance as a replacement for
    expensive crop disaster assistance.  Catastrophic insurance provides
    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 farmer-paid
    premium.  Participating insurance companies offer both types of
    insurance, whereas USDA's Farm Service Agency (FSA), through its
    local offices, offers only catastrophic insurance.  Under the terms
    of a negotiated agreement, participating insurance companies sell
    crop insurance and process any claims in exchange for an
    administrative expense reimbursement and for the opportunity to share
    in the potential for underwriting gains.  The government pays the
    total premium for catastrophic insurance and a portion of the premium
    for buyup insurance.  FCIC establishes the premiums, terms and
    conditions for both types of insurance.

    Under the 1994 reform act, farmers who had not previously purchased
    crop insurance were required to purchase at least catastrophic
    insurance coverage if they signed up for USDA's annual commodity
    programs; obtained USDA's farm ownership, operating, or emergency
    loans; or contracted to place land in the Conservation Reserve
    Program.  Subsequently, the Federal Agriculture Improvement and
    Reform Act of 1996 (P.L.  104-127, Apr.  4, 1996) eliminated this
    mandatory linkage by permitting farmers, effective for crops
    harvested in 1996, to forgo crop insurance for any given crop without
    losing eligibility for other programs, provided they waive all rights
    to any possible crop disaster assistance in connection with the
    particular crop.

    Catastrophic insurance, which protects farmers against extreme
    losses, is often referred to as minimum coverage because it provides
    protection at the lowest production and price levels offered.
    Catastrophic insurance pays farmers only when they experience
    production losses greater than 50 percent of their normal crop.  A
    normal crop is determined on the basis of a farmer's production
    history as reported to USDA's local office or to the insurance agent.
    For production losses greater than 50 percent, farmers are paid 60
    percent of FCIC's projected market price for the crop.

    Farmers desiring protection above the minimum price or production
    levels provided by catastrophic insurance can purchase buyup
    insurance.  Unlike farmers who purchase catastrophic insurance,
    farmers purchasing buyup insurance must choose both the coverage
    level (the proportion of the crop to be insured) and the unit price
    (e.g., per bushel) at which any loss is calculated.  With respect to
    the coverage level, farmers can choose to insure as much as 75
    percent of normal production (25-percent deductible) or as little as
    50 percent of normal production (50-percent deductible) at different
    price levels.  With respect to unit price, farmers choose whether to
    value their insured production at FCIC's full projected market price
    or at a percentage of the full price.  FCIC adjusts farmers' premiums
    according to the production and price levels selected.

    The following example illustrates how a claim payment is determined
    under catastrophic insurance, which insures 50 percent of production
    and 60 percent of the price.  A farmer whose normal crop production
    averages 100 bushels of corn per acre and who chooses catastrophic
    insurance will be guaranteed 50 percent of 100 bushels, or 50 bushels
    per acre.  Assuming that FCIC had estimated the market price for corn
    at $3 per bushel, the farmer will be guaranteed a price of 60 percent
    of $3, or $1.80 per bushel.  The farmer's total coverage per acre
    will be $90 (50 bushels x $1.80 per bushel).  This total amount will
    be paid in the event of a complete crop failure.  Should an event
    like drought cut the farmer's actual harvest from 100 to 60 bushels,
    the farmer will not receive a payment because, in this example,
    catastrophic insurance only pays if the yield drops below 50 bushels
    per acre.  If a more severe problem caused the yield to fall to 25
    bushels per acre, the farmer will be paid for the loss of 25 bushels
    per acre--the difference between the insured production level of 50
    bushels and the actual production of 25 bushels.  In this case,
    catastrophic insurance will pay the farmer's claim at $1.80 x 25
    bushels, or $45 per acre.

    If this same farmer chooses buyup insurance at the 75-percent
    coverage level, the farmer will be guaranteed 75 percent of 100
    bushels, or 75 bushels per acre.  Assuming that the farmer had chosen
    the maximum price coverage of 100 percent, and that FCIC had
    estimated the market price for corn at $3 per bushel, the farmer's
    price coverage will be $3 per bushel.  Accordingly, the farmer will
    have coverage in the event of a total crop loss of $225 per acre (75
    bushels x $3 per bushel).  Should drought or other perils cut the
    farmer's actual harvest to 60 bushels, the farmer will be paid for
    the loss of 15 bushels per acre--the difference between the insured
    production level of 75 bushels and the actual production of 60
    bushels.  In this case, buyup insurance will pay the farmer's claim
    at $3 x 15 bushels, or $45 per acre.  In the event of a more severe
    loss that reduced production to a level of 25 bushels per acre, the
    farmer will be paid for the loss of 50 bushels per acre--the
    difference between the insured production level of 75 bushels and the
    actual production of 25 bushels.  In this case, buyup insurance will
    pay the farmer's claim at $3 x 50 bushels, or $150 per acre.

       THE INSURANCE COMPANIES' ROLE
       IN CROP INSURANCE DELIVERY
    ---------------------------------------------------------- Chapter 1:2

    According to a written agreement between FCIC and participating
    insurance companies--called the standard reinsurance agreement--FCIC
    pays the participating companies a uniform reimbursement for
    administrative expenses at a preestablished percentage of total
    premiums to deliver--sell and service--catastrophic and buyup
    insurance.  This base rate can be, and has been, supplemented to
    provide additional funding in years when administrative costs were
    high because of excess losses or when other factors require the
    companies to conduct additional work.  Beginning in 1994, as part of
    the agreement, FCIC required each participating company to report its
    delivery expenses to FCIC for the prior year to help determine the
    long-term adequacy of the reimbursement rate.  In addition to
    providing an administrative expense reimbursement, this agreement
    governs the participating companies' share of any underwriting gains
    or losses resulting from the policies they sell.

    FCIC does not directly reimburse the participating companies for
    their actual costs of administering the program.  Instead, FCIC pays
    all participating companies a uniform administrative expense
    reimbursement at a preestablished percentage of total premiums
    (including the farmer-paid premium, government premium subsidy\2 for
    buyup insurance, and the imputed premium\3 for catastrophic
    insurance).  FCIC pays participating companies an administrative
    expense reimbursement that is intended to reimburse them for the
    expenses that can be reasonably associated with the sale and service
    of federal crop insurance, including the expenses associated with
    adjusting claims.  Because the reimbursement is not tied to specific
    expenses, the companies are not obligated to spend the payment they
    receive on selling or servicing crop insurance policies; the payments
    can be used in any way the companies choose.  Since 1980, in fact,
    the reimbursement rate has evolved as a result of negotiations
    between FCIC and the participating companies and budget concerns and
    has not been based on a systematic evaluation of companies' expenses.

    For buyup insurance, the administrative expense reimbursement base
    rate under the standard reinsurance agreement has declined from a
    high of 34 percent of total premiums between 1988 and 1991 to 31
    percent between 1994 and 1996.  In 1995, the administrative expense
    reimbursement for buyup insurance totaled 32.6 percent of buyup
    premiums.  This reimbursement rate included a base administrative
    expense reimbursement of 31.0 percent of premiums and a supplemental
    reimbursement of 1.6 percent of premiums associated with extra
    adjustments for crop losses in 1995.  The 1994 reform act requires
    FCIC to limit the reimbursement rate for selling and servicing buyup
    insurance 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 by 1999.
    While this reduction in reimbursement rate was mandated by the act,
    the established rates were not based on a systematic evaluation of
    the costs associated with selling and servicing crop insurance.

    For catastrophic insurance, companies were paid a lower base
    reimbursement rate--13.8 percent of the imputed premiums--for
    delivering catastrophic insurance and were allowed to keep most of
    the $50 processing fee paid by farmers.  In 1995, compensation for
    catastrophic insurance totaled 24.0 percent of catastrophic premiums,
    including (1) a base administrative expense reimbursement of 13.8
    percent of premiums;\4 (2) a retained farmer-paid processing fee of
    $50, equating to 9.3 percent of premiums; and (3) a supplemental
    reimbursement of 0.9 percent of premiums associated with extra
    adjustments for crop losses in 1995.

    Beginning in 1994, FCIC began to require companies to submit a
    detailed expense report in a consistent format following standard
    industry guidelines for the prior calendar year--1993.  However, not
    all companies complied with the new requirement until 1995 when they
    reported 1994 expense data.  This expense reporting has to comply
    with a number of guidelines, such as those that the National
    Association of Insurance Commissioners issues on allocating expenses
    among lines of business.  These expense reports do not directly
    affect the amount paid to the companies but rather provide support
    and serve as an indicator for establishing future reimbursement rates
    for administrative expenses.  Included in the expenses reported are
    loss adjustment costs, sales commissions paid to local insurance
    agents, and the general administrative expenses associated with
    operating the insurance companies, such as payroll, equipment,
    travel, training, and rent.  Currently, FCIC is developing a new
    standard reinsurance agreement, including new expense reimbursement
    rates, that will be completed with the participating companies in
    June 1997.

    In addition to receiving an administrative expense reimbursement, the
    participating companies share any underwriting gains or losses with
    FCIC that result from the policies the companies sell.  Underwriting
    gains occur if the premiums exceed the claims paid on the policies.
    In the same manner, underwriting losses occur when the claims paid
    exceed the premiums.  The participating companies are able to vary
    the extent to which they share in the risk.  In general, the
    companies choose to retain more of the risk on the historically
    lower-loss producers and share more of the risk with FCIC for those
    producers who have a history of more frequent or more severe loss
    experience.  In addition, to protect participating companies against
    high underwriting losses in years with extreme crop losses, FCIC
    limits the total loss that participating companies must share.

    The number of companies selling and servicing crop insurance for FCIC
    has decreased from 27 in 1990 to 16 in 1996 because of business
    acquisitions and changing business relations.  Insurance premiums
    written by participating companies during this same period increased
    from $747 million in 1990 to $1.6 billion in 1996.  As shown in table
    1.1, FCIC paid participating companies significantly larger
    administrative expense reimbursements than the companies earned in
    underwriting gains between 1990 and 1996.  This reflects the fact
    that the reimbursement is a fixed fee based on premiums written,
    whereas the underwriting gain varies depending on crop loss
    experiences.

                                   Table 1.1

                    Participating Companies' Gains, Losses,
                           and Administrative Expense
                            Reimbursements, 1990-96

                             (Dollars in millions)

                                            Administrative
                              Underwriting         expense
    Year                       gain (loss)   reimbursement           Total
    ----------------------  --------------  --------------  --------------
    1990                               $52            $272            $324
    1991                                42             245             287
    1992                                22             246             268
    1993                              (82)             250             168
    1994                               103             292             395
    1995                               133             373             506
    1996 (estimate)                    258             490             748
    ======================================================================
    Total                             $528          $2,168          $2,696
    ----------------------------------------------------------------------
    Source:  FCIC.

    --------------------
    \2 FCIC pays a portion of the premium.  The amount of the subsidy
    varies depending on the level of coverage selected, averaging about
    40 percent of the premium.

    \3 Farmers are not required to pay any premium for catastrophic
    insurance.  However, for purposes of computing the administrative
    reimbursement, FCIC credits the companies with sales based on the
    total premiums that would otherwise apply for this level of
    insurance.

    \4 This equates to 4.7 percent of premiums calculated at the buyup
    level of 65 percent coverage and 100 percent projected market price.

       RECENT FEDERAL CROP INSURANCE
       SALES
    ---------------------------------------------------------- Chapter 1:3

    Between 1994 and 1995, federal crop insurance sales increased from
    $918 million to over $1.5 billion.  In 1995, catastrophic insurance
    accounted for $456 million in premiums, and buyup insurance accounted
    for an additional $1.1 billion in premiums.  Before catastrophic
    insurance was available, the program had been generating average
    premiums of about $700 million a year.  As shown in table 1.2,
    participating companies sold a larger portion of federal crop
    insurance than USDA.

                                            Table 1.2

                              Total Crop Insurance Premiums Sold by
                               Companies and USDA by Type, 1994-95

                                      (Dollars in millions)

                        1994                      1995                        1996
               ----------------------  --------------------------  --------------------------

    Insurance  Compan                  Companie                    Companie
    type          ies    USDA   Total         s    USDA     Total         s    USDA     Total
    ---------  ------  ------  ------  --------  ------  --------  --------  ------  --------
    Catastrop      $0      $0      $0      $175    $281      $456      $215    $209      $424
     hic
    Buyup        $918      $0    $918    $1,086      $0    $1,086    $1,397      $0    $1,397
    Total        $918      $0    $918    $1,261    $281    $1,543    $1,612    $209    $1,821
    Market       100%      0%    100%       82%     18%      100%       89%     11%      100%
     share
    -----------------------------------------------------------------------------------------
    Source:  FCIC.

    In 1996, federal catastrophic crop insurance sales decreased slightly
    to $424 million, while federal buyup insurance increased to almost
    $1.4 billion.

       GOVERNMENT COSTS HAVE INCREASED
       IN RECENT YEARS
    ---------------------------------------------------------- Chapter 1:4

    Under the expanded federal crop insurance program created by the 1994
    reform act, program costs increased from over $700 million in the
    early 1990s to about $1.6 billion in 1996.\5 As shown in table 1.3,
    federal crop insurance costs paid by the government totaled about
    $7.2 billion from 1990 through 1996 and were made up of claims paid
    in excess of premiums ($1.6 billion), premium subsidy ($2.8 billion),
    administrative expense reimbursements ($2.2 billion), and other
    administrative costs ($611 million).

                                            Table 1.3

                                 Government Cost of Federal Crop
                                            Insurance

                                      (Dollars in millions)

                  Claims paid in
                       excess of                Administrative          Other           Total
                    premiums and       Premium         expense  administrativ      government
    Fiscal year     other income       subsidy  reimbursements        e costs            cost
    ------------  --------------  ------------  --------------  -------------  --------------
    1990                    $233          $213            $272            $87            $805
    1991                     247           196             245             84             772
    1992                     232           197             246             88             763
    1993                     751           198             250            105           1,304
    1994                   (127)           247             292             78             490
    1995                     188           774             373            105           1,440
    1996                      88           978             490             64           1,620
     (estimated)
    =========================================================================================
    Total                 $1,612        $2,803          $2,168           $611          $7,194
    -----------------------------------------------------------------------------------------
    Source:  FCIC.

    --------------------
    \5 For 1990 through 1993, crop disaster assistance averaged $1.1
    billion annually.

       OBJECTIVES, SCOPE, AND
       METHODOLOGY
    ---------------------------------------------------------- Chapter 1:5

    Concerned about the cost-effective delivery of federal crop insurance
    and recognizing the important role the private insurance industry
    plays in delivering federal crop insurance, the Congress, in section
    118 of the Federal Crop Insurance Reform and Department of
    Agriculture Reorganization Act of 1994, directed GAO and FCIC to
    jointly evaluate the financial arrangements between FCIC and
    participating insurance companies for delivering the crop insurance
    program to qualified producers and to address several specific
    issues.  Separately, USDA's Risk Management Agency will report on the
    adequacy of return on capital to insurance companies and alternative
    reinsurance arrangements between the government and the companies.
    Our review focused on the following two issues:

      -- The adequacy and reasonableness of the current administrative
         reimbursement rate for expenses of participating companies; and

      -- The cost to the government of private-sector delivery compared
         with USDA delivery of catastrophic insurance.

    As required by the act, we also reviewed and reported on (1) the
    advantages and disadvantages of alternatives to the current
    arrangement for reimbursing administrative expenses, and (2) FCIC's
    actions to simplify procedural and administrative requirements.  The
    results of our work for these two topics are reported in chapter 4
    and appendix I, respectively.

    To assess the adequacy of the current reimbursement rate for
    administrative expenses, we compared participating companies'
    reported expenses for selling and servicing buyup insurance with
    reimbursements they received from FCIC for 1994 and 1995.  Not all
    participating companies reported these expenses to FCIC in a
    consistent format until 1994; furthermore, 1996 expenses for selling
    and servicing crop insurance were not complete at the time of our
    review.  We assessed expense data for crop insurance at nine
    participating companies that represented about 80 and 85 percent of
    the crop insurance premiums in 1994 and 1995, respectively.  To gain
    an understanding of crop insurance expenditures, we interviewed
    representatives from participating companies and obtained an
    explanation of all reported expenses.  In addition, to evaluate the
    reasonableness of reported expenses, we used as guidance FCIC's
    listing of allowable expenses, the National Association of Insurance
    Commissioners' guidelines, generally accepted accounting principles,
    federal acquisition regulations, and the Internal Revenue Code.

    Within the framework of these standards and guidelines, we made
    judgments about what we considered to be reasonably associated
    expenses for selling, processing, and adjusting crop insurance
    policies for the federal government and discussed these judgments
    with the FCIC officials responsible for administering the program.
    Generally, we considered as reasonable those expenses associated with
    (1) interacting with farmers, (2) reviewing insured property, (3)
    processing policy and claims paperwork, and (4) related overhead and
    indirect costs, including the training and travel of staff.  As part
    of our review, we examined participating companies' complete list of
    reported expenses.  For a judgmental sample of these reported
    expenses, we traced the expenses to source documents.  Our results
    reflect only the findings at the companies we reviewed and do not
    necessarily reflect the conditions for other companies selling
    federal crop insurance.  We did not specifically validate companies'
    accounting systems, but we did review each company's audited
    financial statements to ensure ourselves that the financial data
    provided were reasonable.  Appendix II provides a list of the
    participating companies we visited.

    To examine the cost differences to the government between USDA and
    private-sector delivery of catastrophic insurance, we analyzed the
    government's costs to use participating companies in comparison with
    the costs of using USDA.  To perform our analysis, we obtained 1995
    data on the costs to deliver catastrophic insurance through USDA,
    including costs for USDA's headquarters in Washington D.C.; its main
    field offices in Kansas City, Missouri; and its state, regional
    service, district, and local offices.  We reduced the costs for
    USDA's delivery system by the amount of processing fees the
    Department collected from farmers for catastrophic insurance.  We
    made the reduction because USDA uses these fees to reduce other
    government expenditures.  To identify the government's costs to use
    participating companies to deliver catastrophic insurance, we
    obtained data from FCIC on administrative expense reimbursements as
    well as underwriting gains paid to companies that participated in the
    catastrophic insurance program in 1995.

    To identify alternative methods for expense reimbursements, we
    interviewed officials of selected participating companies, trade
    associations, and USDA.  We then narrowed the compilation down to
    four distinct alternatives and analyzed them against the 1995 crop
    insurance experience, where reasonable, to measure their impact as if
    they had been in place for that year.  We also determined qualitative
    factors associated with each of the methods through discussions with
    industry and FCIC officials.

    To determine the status of procedural and administrative
    simplification, we reviewed FCIC's summary of completed and
    in-progress simplification and paperwork reduction actions; and we
    reviewed potential simplification actions proposed by FCIC and by
    representatives of the crop insurance industry.  We discussed the
    potential cost and benefit of these proposed actions with crop
    insurance company and FCIC officials.  The information we developed
    is presented in appendix I.

    We conducted our review from March 1996 through March 1997 in
    accordance with generally accepted government auditing standards.
    Although we did not independently assess the accuracy and reliability
    of USDA's computerized databases, we used the same files USDA uses to
    manage the crop insurance program and its local county offices.

    In December 1996, we provided USDA officials and representatives of
    National Crop Insurance Services, Inc., the American Association of
    Crop Insurers, the Crop Insurance Research Bureau, Inc., and several
    individual companies with a detailed briefing on the results of our
    review.  In March 1997, we provided a copy of our draft report to
    USDA and to the crop insurance industry organizations for their
    review and comment.  The Department's and industry's comments are
    addressed at the end of each chapter.  In addition, the industry's
    written comments are reproduced in appendixes VIII and IX.

       USDA AND CROP INSURANCE
       INDUSTRY COMMENTS
    ---------------------------------------------------------- Chapter 1:6

    USDA's Risk Management Agency found no fault with our methodology.
    However, the industry associations that received copies of our draft
    report stated that our review did not fully respond to the Congress'
    mandate in the 1994 reform act because we focused on delivery costs
    and did not address other requirements of the act.  We focused on
    delivery costs because, in researching the legislative history of
    this mandate, we found that in the context of funding this program in
    a deficit reduction environment, the paramount congressional interest
    was in controlling the costs of reimbursing crop insurers.
    Furthermore, we confirmed our interpretation of the mandate in a
    commitment letter sent to the Chairmen and Ranking Minority Members
    of the Senate Committee on Agriculture, Nutrition, and Forestry and
    the House Committee on Agriculture.  This letter set forth our
    approach for meeting this mandate including our scope and
    methodology.  Consequently, we focused on costs incurred by insurers
    that are reimbursed by the government in order to provide the
    information most useful to congressional decisionmakers.  Therefore,
    we believe that the report fulfills the Congress' mandate.

    ADMINISTRATIVE EXPENSE
    REIMBURSEMENTS PAID BY THE
    GOVERNMENT EXCEED PRIVATE
    COMPANIES' EXPENSES
    ============================================================ Chapter 2

    In 1994 and 1995, FCIC's reimbursement payments to the nine
    participating companies in our review were higher than the expenses
    that can be reasonably associated with the sale and service of
    federal crop insurance.  For the 2-year period, the companies we
    reviewed reported $542.3 million in expenses, compared with a
    reimbursement of $580.2 million--a difference of about $38 million.
    In addition, our review of the companies' reported expenses showed
    that about $43 million did not appear to be reasonably associated
    with the sale and service of federal crop insurance to farmers and
    thus, should not be considered in determining future administrative
    reimbursement rates.  These expenses included payments to compensate
    company executives for refraining from joining or starting competing
    companies, fees paid to other insurance companies to protect against
    underwriting loss, bonuses tied to company profitability, management
    fees paid to parent companies with no identifiable benefit to
    subsidiary crop insurance companies, and lobbying expenses.

    We further identified a number of expenses reported by the companies
    that, while in categories that can be reasonably associated with the
    sale and service of crop insurance, seemed to be excessive for a
    taxpayer-supported program.  These expenses included above-average
    commissions paid to agents by one large company, corporate aircraft
    and excessive automobile charges, country club memberships, and
    various entertainment activities for agents and employees, such as
    stadium sky box rentals at professional sporting events and
    company-sponsored fishing trips.  Although nothing in the current
    agreement between FCIC and the insurance companies precludes the
    companies from spending on these items, we believe that these types
    of expenses suggest that opportunities exist for the government to
    reduce its future reimbursement rate.  Furthermore, a variety of
    emerging factors, including higher crop prices and higher premium
    rates in 1996 and 1997, and program simplification, have increased
    companies' revenues or may decrease companies' expenses.

       REIMBURSEMENTS EXCEED EXPENSES
    ---------------------------------------------------------- Chapter 2:1

    For 1994 and 1995, companies collectively reported expenses that were
    less than the administrative expense reimbursement they received from
    FCIC.  For 1994, the reimbursement was equal to the expenses
    reported, and for 1995, reported expenses were about $38 million less
    than the reimbursement.  After examining the companies' expense
    reports, however, we determined that a number of the reported
    expenses did not appear to be reasonably associated with the sale and
    service of crop insurance to farmers and thus, should not be
    considered in determining an appropriate future reimbursement rate
    for administrative expenses.  After adjusting the expense reports to
    delete these items, we found that the expenses reasonably associated
    with crop insurance delivery were about $43 million less than those
    reported.

          COMPANIES RECEIVED HIGHER
          REIMBURSEMENTS THAN THEIR
          EXPENSES OVER 2-YEAR PERIOD
    -------------------------------------------------------- Chapter 2:1.1

    In total for 1994 and 1995, the nine companies we reviewed reported
    expenses for buyup and catastrophic crop insurance sales and service
    that were somewhat less than the administrative expense reimbursement
    FCIC paid them.  FCIC administrative expense reimbursements paid to
    participating companies in 1994 and 1995 were 31 and 31.4 percent of
    total premiums,\1 respectively.  This represented $236.5 million in
    1994 and $343.6 million in 1995.  For these same years, the companies
    reported expenses of 31 percent, or $236.8 million, and 27.9 percent,
    or $305.5 million, respectively.  Collectively, reported expenses
    were $38 million less than the reimbursements the companies received.

    As shown in figure 2.1, the largest component of the expenses
    reported by the companies went to pay sales commissions to local
    insurance agents.

       Figure 2.1:  Reported Crop
       Insurance Delivery Expenses,
       1994 and 1995, Nine
       Participating Companies

       (See figure in printed
       edition.)

    Source:  GAO's analysis of nine participating companies' data.

    The average commission reported for 1995 was less than in 1994--14.5
    percent of total premiums compared with 17.2 percent of total
    premiums in 1994.  The 1995 average commission was lower because in
    that year companies combined catastrophic expenses, which have lower
    agent commissions, with buyup expenses.  With respect to
    loss-adjusting expenses, although insurance claims were higher in
    1995 than in 1994, the company reports that showed average
    loss-adjusting expenses as a percent of premium actually dropped
    slightly in 1995.

    --------------------
    \1 In this context, total premiums include the farmer-paid premium as
    well as the government-paid premium subsidy.  For catastrophic
    coverage, the entire premium amount is subsidized by the government.

          SOME REPORTED EXPENSES DO
          NOT APPEAR TO BE REASONABLY
          ASSOCIATED WITH CROP
          INSURANCE DELIVERY
    -------------------------------------------------------- Chapter 2:1.2

    Our review of the nine companies' reported expenses showed that about
    $43 million did not appear to be reasonably associated with the sale
    and service of federal crop insurance to farmers and thus should not
    be considered in determining an appropriate future reimbursement rate
    for administrative expenses.  Expenses reported by the companies that
    did not appear to contribute to the sale and service of crop
    insurance were expenses related to

      -- acquiring competitors' businesses,

      -- protecting companies from underwriting losses,

      -- sharing profits through bonuses or management fees,

      -- lobbying, and

      -- reporting errors and omissions.

    Each of these types of expenses is discussed below.

             EXPENSES RELATED TO
             ACQUISITION OF
             COMPETITORS' BUSINESSES
    ------------------------------------------------------ Chapter 2:1.2.1

    Among the reported costs 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 value to
    the crop insurance program, and according to FCIC, was not an expense
    that FCIC expected its reimbursement to cover.

    We identified costs in this general category totaling $12
    million--$8.3 million in 1994 and $3.7 million in 1995.  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 this
    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 added no net value to the 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 a related instance, the company reported a $3.9 million expense to
    write down the value of an acquired company because of liabilities
    identified after acquiring that company's business.  These
    liabilities arose from crop insurance claims in dispute, crop
    insurance claims paid in error, premium adjustments, legal actions,
    and bad debts relating to the acquired company's operations in prior
    years.  This expense reflected a cost that the company incurred to
    increase its market share and provided no net benefit to the program.
    Although FCIC did not explicitly refer to this type of expense in its
    last standard reinsurance agreement with companies, we discussed this
    type of expense with FCIC.  It agreed that this expense cannot be
    reasonably associated with the sale and service of crop insurance and
    thus should not be considered in determining a future reimbursement
    rate for administrative expenses.

             EXPENSES RELATED TO
             PROTECTING THE COMPANIES
             FROM UNDERWRITING LOSSES
    ------------------------------------------------------ Chapter 2:1.2.2

    We also found that two companies included payments to commercial
    reinsurers among their reported delivery expenses for crop insurance.
    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 companies' decisions to manage underwriting risks rather
    than to the sale and service of crop insurance to farmers.  Although
    FCIC did not explicitly refer to this type of expense in its last
    standard reinsurance agreement with companies, we discussed this type
    of expense with FCIC.  It agreed that this expense should be paid
    from company underwriting results 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--$5.4 million in 1994 and $5.3 million in 1995.

             EXPENSES RESULTING FROM
             SHARING PROFITS THROUGH
             BONUSES OR MANAGEMENT
             FEES
    ------------------------------------------------------ Chapter 2:1.2.3

    Among their reported administrative expenses for crop insurance, some
    companies included expenses resulting from decisions to share profits
    with (1) company executives and employees through bonuses or (2)
    parent companies through management fees.  We found that expenditures
    in this general category totaled $12.2 million--$5 million in 1994
    and $7.2 million in 1995.  We do not believe that bonuses associated
    with profit sharing are appropriate for inclusion in a long-term
    reimbursement rate.  In contrast, we believe that bonuses given to
    recognize employee performance, as well as bonuses paid to agents,
    are reasonable expenses associated with the sale and service of crop
    insurance, and we included them as reasonable expenses.

    Profit-sharing bonuses--bonuses linked to overall company
    profitability for each year--were a significant component of total
    salary expenses at one company, equaling 49 percent of basic salaries
    in 1994 and 63 percent in 1995, and totaling $9 million for the 2
    years.  Total employee salaries at this company, as a percent of
    premium, were somewhat less than at other companies.  However, when
    the profit-sharing bonuses--paid out of profits after all necessary
    program expenses were paid--were added to salaries, overall employee
    salaries at this company were 35-percent higher than the nine-company
    average.  While company profit sharing may benefit a company in
    competing with another company for employees, the profit-sharing
    bonuses, which in this particular case seemed excessive, do not
    contribute to the overall sale and service of crop insurance or serve
    to enhance program objectives.  Additionally, we identified
    profit-sharing bonuses totaling $2.1 million reported as expenses at
    three other companies for 1994 and 1995.  FCIC agrees that this type
    of expense goes beyond the reasonable expenses associated with the
    sale and service of crop insurance.

    Similarly, we noted that two companies reported expenditures for
    management fees paid to parent companies as administrative expenses
    for crop insurance.  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 as a dividend.  These expenses totaled $1.1 million for
    1994 and 1995.

    Although FCIC did not explicitly refer to these types of expenses in
    its last standard reinsurance agreement with companies, we discussed
    these expenses with FCIC.  It agreed that to the extent the expenses
    exceed tangible benefits to the companies, they cannot be reasonably
    associated with the sale and service of crop insurance and thus
    should not be considered in determining an appropriate future
    reimbursement rate for administrative expenses.

             LOBBYING AND RELATED
             EXPENSES
    ------------------------------------------------------ Chapter 2:1.2.4

    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 in our sample
    of company transactions that the companies included a total of
    $418,400 for lobbying and related expenses in their expense reporting
    for 1994 and 1995.  The vast majority of these expenses involved
    lobbying by crop insurance trade associations.

    Each company in our review paid membership fees to one or more crop
    insurance trade associations.  Lobbying is one of the services
    provided to the companies by these associations.  In accordance with
    Internal Revenue Service's rules, each industry trade association
    provided information to its members on the extent to which the
    payments to the association were used to fund lobbying activities.
    Nevertheless, none of the companies in our review excluded these
    expenses from their expense reports.

             EXPENSES REPORTED IN
             ERROR AND OMITTED
             EXPENSES
    ------------------------------------------------------ Chapter 2:1.2.5

    We also identified a number of errors and/or omissions in the
    companies' expense reporting.  In 1994, the net effect of these
    errors and omissions was to reduce total company expenses by $8.4
    million, whereas in 1995, the net effect was to increase total
    company expenses by $0.6 million.

    In our review of companies' reported expenses, we identified various
    errors and/or omissions including expenses reported in the wrong
    year, expenses reported twice, and expenses not reported at all.
    Also, we found that five companies erred in reporting a total of $1.8
    million in state income taxes as an expense of selling and servicing
    crop insurance in 1994 and 1995.  State income taxes are the result
    of successful crop insurance delivery and are not an administrative
    expense associated with the sale and service of crop insurance to
    farmers, whether the taxes are based on underwriting gains or on
    profits made from the delivery itself.  To the extent that the taxes
    are based on profits from the delivery, they are not associated with
    the sale and service of crop insurance because, according to FCIC,
    companies are expected to earn profits from underwriting--not from
    administrative reimbursements.  To the extent that the taxes are
    based on underwriting gains, they should not be recognized as an
    expense of delivering crop insurance.

                                            Table 2.1

                              FCIC Reimbursements, Company Reported
                              Delivery Expenses and GAO Adjustments
                                for Nine Companies, 1994 and 1995

                                      (Dollars in thousands)

                                            1994                    1995
                                   ----------------------  ----------------------
    Factors considered in                      Percent of              Percent of
    calculating adequacy of                         total                   total
    expense reimbursement             Dollars    premiums     Dollars    premiums       Total
    -----------------------------  ----------  ----------  ----------  ----------  ----------
    =========================================================================================
    FCIC reimbursements to           $236,544        31.0    $343,632        31.4    $580,176
     companies
    =========================================================================================
    Company-reported expenses        $236,822        31.0    $305,468        27.9    $542,289
    GAO's adjustments
    Expenses related to               (8,356)       (1.1)     (3,661)       (0.3)    (12,017)
     acquisition of other
     companies
    Expenses related to managing      (5,416)       (0.7)     (5,322)       (0.5)    (10,738)
     underwriting risk
    Expenses related to profit        (4,981)       (0.7)     (7,237)       (0.7)    (12,219)
     sharing through bonuses or
     management fees
    Lobbying and related expenses       (114)       (0.0)       (305)       (0.0)       (418)
    Errors and omitted expenses       (8,356)       (1.1)         626         0.1     (7,730)
    =========================================================================================
    Total adjustments               ($27,223)       (3.6)   ($15,899)       (1.5)   ($43,122)
    =========================================================================================
    GAO's adjusted expenses          $209,599        27.5    $289,569        26.4    $499,167
     reasonably associated with
     selling and servicing crop
     insurance
    =========================================================================================
    FCIC's reimbursements in          $26,945         3.5     $54,063         4.9     $81,008
     excess of reasonable program
     expenses
    -----------------------------------------------------------------------------------------
    Note:  Totals may not add because of rounding.

    Source:  GAO's analysis of nine participating companies' data.

    Collectively, as shown in table 2.1, for the nine companies we
    reviewed, we found that the expenses reasonably associated with the
    sale and service of buyup and catastrophic crop insurance combined
    were 27.5 percent of total premiums for 1994 and 26.4 percent for
    1995.  These rates are considerably lower than the 31 percent and
    31.4 percent of total premiums paid by FCIC to reimburse the
    companies for these sales in those years.  In total for 1994 and
    1995, FCIC reimbursements exceeded delivery expenses by $81 million.
    FCIC reviewed and agreed with our analysis and treatment of these
    expenses.

    Appendix III provides a complete listing of those expenses that do
    not appear to be reasonably associated with the sale and service of
    federal crop insurance and should not be considered in determining an
    appropriate future administrative expense reimbursement.  Appendix
    III also includes our rationale for expense adjustments.  Appendix IV
    shows the expenses for selling and servicing federal crop insurance
    as reported by the nine companies in our review and our presentation
    of the expenses reasonably associated with the sale and service of
    federal crop insurance.  In addition, for 1995, appendix IV shows
    adjusted expenses as they relate to buyup and to catastrophic
    insurance.  As shown in the appendix, for 1995, companies' adjusted
    expenses related to buyup insurance were 27.1 percent of premiums and
    expenses related to catastrophic insurance were 22.2 percent of
    premiums.  In comparison, in 1995, companies received an
    administrative expense reimbursement for buyup insurance of 32.6
    percent of buyup premiums and compensation for catastrophic insurance
    of 24 percent of premiums.

       OTHER REPORTED EXPENSES
       REPRESENT OPPORTUNITIES TO
       LOWER REIMBURSEMENT RATES
    ---------------------------------------------------------- Chapter 2:2

    We also found a number of expenses reported by the nine companies
    that, while in categories associated with the sale and service of
    crop insurance, seemed to be excessive in nature for a
    taxpayer-supported program and offer opportunities for FCIC to reduce
    future reimbursement rates.  Collectively, controlling these expenses
    should reduce the average cost of selling and servicing crop
    insurance policies.  These expenses included above-average
    commissions to agents on buyup policies; travel expenses, such as
    corporate aircraft and excessive automobile charges; and
    entertainment expenses, such as country club memberships and stadium
    sky box rentals.  Each of these types of expenses is discussed below.

          AGENT COMMISSIONS
    -------------------------------------------------------- Chapter 2:2.1

    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.
    However, one company paid more--about 18.1 percent of buyup premiums
    sold in 1994 and 17.5 percent in 1995.  When this company, which
    accounted for about 15 percent of all sales in these 2 years, is not
    included in the companies' average, commission expenses for the other
    eight companies averaged 15.6 percent of buyup premiums in 1994 and
    15.8 percent in 1995.  This company paid its agents about $6 million
    more than the amount it would have paid had it used the average
    commission rate paid by the other eight companies.  According to FCIC
    officials, the agency plans to further study the issue of appropriate
    agent commissions.

          TRAVEL-RELATED EXPENSES
    -------------------------------------------------------- Chapter 2:2.2

    Employee travel is an essential part of selling and servicing crop
    insurance.  Although FCIC has not provided specific guidance on
    appropriate expenses for travel, government travel regulations
    provide guidance as to what type of expenses might be appropriate
    when conducting business on behalf of the government.  In our review
    of company-reported expenses, at eight of the nine companies we found
    instances of expenses that seemed to be excessive for conducting a
    taxpayer-supported program.

    For example, we found that one company in our sample for 1994
    reported expenses of $8,391 to send six company managers (four
    accompanied by their spouses) to a 3-day meeting at a resort
    location.  The billing from the resort included rooms at $323 per
    night, $405 in golf green fees, $139 in charges at a golf pro shop,
    and numerous restaurant and bar charges.  Our sample for 1995
    included a $31,483 billing from the same resort for lodging and other
    costs associated with a company "retreat" costing a total of $46,857.
    Furthermore, we found in one instance, as part of paying for
    employees to attend industry meetings at resort locations, a company
    paid for golf tournament entry fees, tickets to an amusement park,
    spouse travel, child care, and pet care.  The company reported these
    as delivery expenses for crop insurance.

    Moreover, our samples of travel expenditures revealed instances of
    charges that appeared to involve the purchase of items not related to
    business.  For example, at one company, our sample included charges
    to the company corporate charge card of $107 at a department store,
    $175 at a clothing store, $165 at a country club gift shop, $364 at a
    book and record shop, $41 at an airport gift shop, $209 at a resort
    gift shop, $208 at a hotel gift shop, and $928 from a cruise line.
    We found similar examples at five other companies.

    Some companies incurred expenses associated with maintaining their
    own travel fleet.  For example, one company owned a corporate jet and
    another leased an aircraft.  Both employed full-time pilots.
    Subsequent to the years involved in our review, both companies
    decided it would be more cost-effective to rely more heavily on
    commercial flights instead of owned or leased aircraft.  The
    companies we reviewed varied widely with respect to furnishing
    automobiles--from providing only a few pool automobiles, to providing
    automobiles for a few officials, to providing automobiles for up to
    45 percent of company employees.  The types of vehicles also varied
    from luxury and sport utility to standard and economy.

    FCIC's guidelines do not tell companies how they must spend their
    administrative expense reimbursement.  However, in our opinion, if
    the current reimbursement provides companies with the opportunities
    to travel as described above, FCIC may be able to reduce its
    reimbursement rate and still reimburse companies for the reasonable
    expenses of selling and servicing crop insurance to farmers.

          ENTERTAINMENT EXPENSES
    -------------------------------------------------------- Chapter 2:2.3

    Recruiting new employees and maintaining employee morale is a
    reasonable business expense.  However, our review of company expenses
    showed that some companies' entertainment expenditures appeared
    excessive for selling and servicing crop insurance to farmers.  For
    example, one company spent about $44,000 in 1994 for Canadian fishing
    trips for a group of company employees and agents.  It also spent
    about $18,000 to rent and furnish a sky box at a baseball stadium.
    Company officials said the expenditures were necessary to attract
    agents to the company.  These expenditures were reported as travel
    expenses in 1994 and as advertising expenses in 1995.  Moreover, the
    company's 1995 travel expenses included $22,000 for a trip to Las
    Vegas for several company employees and agents.  Similarly, our
    sample of company expenditures disclosed payment for season tickets
    to various professional sports events at two other companies; and six
    companies paid for country club memberships and related charges for
    various company officials and reported these as expenses to sell and
    service crop insurance.

    Companies also purchased promotional items as gifts for agents and
    employees.  For example, our 1994 sample of expenditures at one
    company included $17,514 paid for 1,375 boxes of chocolates and
    $8,242 paid to purchase 2,000 cookbooks as gifts to agents and
    employees.

    While a number of the companies believe the type of expenses
    described above are important to maintaining an effective sales force
    and supporting their companies' mission, we believe that most of
    these expenses appear to be excessive for a taxpayer-supported
    program.  These entertainment expenses may be helpful in competing
    for agents, but it is not clear how these types of expenses directly
    benefit either the farmer or the government in the delivery of crop
    insurance to farmers.  We did not exclude the above items from our
    determination of necessary delivery expenses because they were in
    categories that appear to be associated with crop insurance delivery.
    But FCIC agreed that these types of expenses may be excessive for a
    government-sponsored program like federal crop insurance.

       EMERGING FACTORS HAVE INCREASED
       COMPANIES' REVENUES
    ---------------------------------------------------------- Chapter 2:3

    Several emerging factors affecting the crop insurance program have
    increased companies' revenues or may decrease companies' expenses.
    These factors include the following:

      -- higher crop prices and higher premium rates in 1996 and 1997
         that resulted in higher premium income;

      -- expanded use of new types of revenue guarantee coverage (such as
         crop revenue coverage) that, for a higher premium, protects
         farmers against price drops between planting and harvest; and

      -- continuing simplification of program administrative
         requirements, potentially resulting in reduced company expenses.

    Higher crop prices and higher premium rates could enable FCIC to
    reduce the administrative expense reimbursement by about 3 percent of
    buyup premiums below the adjusted expense level determined in our
    analysis of companies' 1994-95 expenses without diminishing service
    to farmers.  New types of revenue guarantee coverage as well as
    simplification actions could serve to increase companies' revenues or
    decrease companies' expenses even further in the future.  Each of
    these factors is discussed below.

          HIGHER CROP PRICES AND
          PREMIUM RATES
    -------------------------------------------------------- Chapter 2:3.1

    Two factors affecting the premiums paid by farmers have improved the
    income potential of crop insurance companies over the levels achieved
    in 1994 and 1995.  These two factors are the (1) FCIC-projected
    market price of the commodity to be insured and (2) premium rate
    established by FCIC.  When projected market prices and premium rates
    increase, the premiums that farmers pay increase.  When the premiums
    that farmers pay increase, reimbursements to companies--which are
    currently paid on the basis of a percentage of premiums--increase
    proportionately without a proportionate increase in workload for the
    companies.

    As shown in table 2.2, the projected market price FCIC used in
    establishing crop insurance premiums for six major crops increased
    9.2 percent from 1995 to 1997, after the 1994-95 period we reviewed.

                                   Table 2.2

                      Increase in FCIC's Projected Market
                        Prices Used in Determining Crop
                               Insurance Premiums

                                           FCIC's projected
                                            market prices
                                        ----------------------
                                                                   Percent
                                                                  increase
                                                                 from 1995
    Crop                                  1995    1996    1997     to 1997
    ----------------------------------  ------  ------  ------  ----------
    Soybeans                             $5.50   $6.75   $6.15        11.8
     (per bushel)
    Grain sorghum                         2.10    2.50    2.30         9.5
     (per bushel)
    Corn                                  2.25    2.65    2.45         8.9
     (per bushel)
    Wheat                                 3.35    3.55    3.85        14.9
     (per bushel)
    Peanuts                               0.34    0.34    0.34         0.0
     (per pound)
    Cotton                                0.68    0.67    0.69         1.5
     (per pound)
    Weighted average percent increase                                  9.2
     from 1995 to 1997\a
    ----------------------------------------------------------------------
    \a Weighted by 1995 crop insurance liabilities for each crop.

    Source:  GAO's analysis of FCIC's data.

    Furthermore, to improve the actuarial soundness of the program, FCIC
    has increased the basic premium rates that are the other principal
    component of the crop insurance premiums.\2 From 1995 to 1996, basic
    premium rates for buyup insurance increased 3.6 percent, on
    average.\3 FCIC projects premium rates to further increase in 1997.
    The increase in premium rates combined with the increase in crop
    prices resulted in an overall increase in premiums of about 13
    percent.  This increase occurred after the period we studied.

    As a result of this increase in premiums, companies will receive a
    proportionate increase in their administrative expense reimbursement,
    about 3 percent of premiums, unless FCIC reduces the reimbursement
    rate.  The additional 3 percent of premiums--the 13-percent increase
    in premiums multiplied by the 27.1 percent of premiums that we
    determined represents companies' expenses reasonably associated with
    the sale and service of buyup crop insurance in 1995--is in effect an
    unanticipated bonus to the companies and does not represent
    additional work for them.  This means that FCIC, at current crop
    price and premium rates, could reduce the administrative
    reimbursement for buyup insurance by about 3 percentage points and
    still reimburse companies for the reasonable expenses associated with
    selling and servicing crop insurance.  Conversely, if premiums
    decline, the companies would receive a proportionate decrease in
    their expense reimbursement.

    The increase in the companies' reimbursement resulting from the
    higher premiums that have occurred since 1995 will not be accompanied
    by a proportionate increase in the companies' workload.  Company
    administrative work processes remain essentially the same regardless
    of the premium charged.  For example, the cost of data entry and
    transmission is a function of the number of documents and data
    elements processed and transmitted, not the premiums those documents
    represent.  Similarly, the cost of loss adjustment is a function of
    the frequency and nature of crop loss, not the premiums charged on
    the damaged crops.  Thus, as premiums increase, the companies receive
    windfall increases in their income unless the reimbursement
    percentage is reduced.

    --------------------
    \2 In 1995, we recommended that the Secretary of Agriculture raise
    crop insurance premium rates to improve actuarial soundness.  See
    Crop Insurance:  Additional Actions Could Further Improve Program's
    Financial Condition (GAO/RCED-95-269, Sept.  28, 1995).

    \3 The increase is calculated from the earned premium rate--the ratio
    of total premiums to total liabilities--for buyup crop insurance.

          EXPANDED USE OF REVENUE
          GUARANTEE COVERAGE
    -------------------------------------------------------- Chapter 2:3.2

    A second factor that may improve the companies' income potential is
    the introduction of a more expensive form of crop insurance.  In
    1996, FCIC approved a privately developed revenue guarantee crop
    insurance policy on a pilot basis in seven states.  In January 1997,
    FCIC's board of directors authorized the expansion of this program to
    additional crops and states.  The revenue guarantee policy protects
    producers against a decline in the value of the insured crop.  The
    decline in value could occur because of crop loss, as with
    traditional crop insurance policies, or it could result from decline
    in commodity prices, or some combination of the two.  Because of the
    increased risk borne by the revenue guarantee program, premiums are
    considerably higher than those charged for conventional crop
    insurance.  Thus, because the companies' reimbursement is based on a
    percentage of total premiums, they will receive higher reimbursements
    without a commensurate increase in workload.  A recent FCIC proposal
    addresses the potentially high administrative reimbursement
    associated with this product by limiting the administrative
    reimbursement for the price-risk aspect of the program.

          PROGRAM SIMPLIFICATION
          EFFORTS
    -------------------------------------------------------- Chapter 2:3.3

    A third emerging factor affecting the crop insurance program may aid
    the companies in reducing their administrative expenses.  As part of
    implementing the 1994 crop insurance reform act, FCIC and the crop
    insurance industry jointly studied potential procedural changes that
    could result in simplifying or streamlining program delivery
    processes.  As of January 1997, FCIC had completed action on 26
    simplification projects identified by the study group and was
    continuing to study 11 additional potential changes.  Simplification
    projects FCIC has implemented include

      -- restructuring actuarial documents, thereby reducing printed
         pages by one-third;

      -- providing actuarial documents electronically;

      -- simplifying processing of small claims;

      -- authorizing companies to correct obvious and incidental errors
         directly;

      -- integrating various options and endorsements into crop insurance
         policies; and

      -- implementing a single insurance policy format for most crops.

    Neither FCIC nor the companies could precisely quantify the amount of
    savings that can be expected from these changes, but they agreed that
    the changes were necessary and collectively may reduce costs
    somewhat.  Industry representatives emphasized that FCIC should
    continue to emphasize simplifying the delivery procedures.  FCIC
    officials agreed but noted that any changes must be carefully
    analyzed on the basis of their impact on the actuarial soundness of
    the crop insurance program.  Appendix I provides a more detailed
    discussion of these changes and their potential effects.

       CONCLUSIONS
    ---------------------------------------------------------- Chapter 2:4

    On the basis of our review of companies' reported expenses and
    emerging factors in the crop insurance industry, we believe that the
    current expense reimbursement rate paid to participating companies
    exceeds the reasonable expenses associated with selling and servicing
    crop insurance.  Our review showed that for 1994 and 1995, the actual
    expenses reasonably associated with the sale and service of buyup
    crop insurance for the nine companies in our review were about 27
    percent of premiums--4 percentage points below the 31-percent base
    reimbursement rate paid to companies--and that FCIC could reduce
    rates another 3 percent of premiums because of higher crop prices and
    increased premiums in 1996 and 1997 that provided companies with
    higher reimbursements without any additional work.  This would still
    provide participating companies with adequate reimbursement for the
    reasonable expenses associated with selling and servicing crop
    insurance.  The 1994 reform act directs FCIC to reduce the overall
    reimbursement for buyup insurance to no more than 27.5 percent of
    total premiums in 1999.  However, we believe that the administrative
    reimbursement rate can be reduced to a lower level at the current
    time--in the range of 24 percent.  Our analysis also showed that the
    compensation for catastrophic insurance exceeded the companies'
    expenses that can be reasonably associated with selling and servicing
    catastrophic insurance, although to a lesser extent.

       RECOMMENDATIONS TO THE
       SECRETARY OF AGRICULTURE
    ---------------------------------------------------------- Chapter 2:5

    We recommend that the Secretary of Agriculture direct the
    Administrator of the Risk Management Agency to

      -- determine the administrative expense reimbursement rate that
         reflects the appropriate and reasonable costs of selling and
         servicing traditional buyup insurance and include this rate in
         the new agreement currently being developed with the companies;

      -- determine the compensation that reflects the appropriate and
         reasonable costs of selling and servicing catastrophic crop
         insurance and include it in the new agreement currently being
         developed with the companies;

      -- explicitly convey to participating insurance companies the type
         of expenses that the administrative reimbursement is intended to
         cover; and

      -- monitor companies' expenses to ensure that the established rate
         is reasonable for the services provided.

       USDA AND CROP INSURANCE
       INDUSTRY COMMENTS
    ---------------------------------------------------------- Chapter 2:6

    Overall, USDA's Risk Management Agency agreed with the information
    presented in the draft report and its conclusions and
    recommendations.  In its proposed 1998 standard reinsurance agreement
    with the private insurance companies, FCIC has included changes to
    the expense reimbursement rate for delivering both buyup and
    catastrophic insurance.  Additionally, in this proposed agreement,
    FCIC has clarified the types of expenses that the administrative
    reimbursement is intended to cover, and it plans to monitor
    companies' expenses in the future as a result of our review.  USDA's
    Risk Management Agency also examined the methodology used to conduct
    the review and found no fault in it.

    In responding to our report, the industry raised questions about the
    methodology we used in our analysis of companies' reasonable delivery
    expenses, including (1) the time period we examined; (2) the
    standards we used to judge allowability of expenses; and (3) the
    applicability of emerging factors, such as increased premiums and
    higher crop prices.  In addition, without being specific, the
    industry stated that a lower reimbursement rate--in the range of 24
    percent--would "destabilize" the industry.

    With respect to the time period examined, we selected 1994 and 1995
    to provide a picture of expenses for delivering crop insurance before
    and after the implementation of the 1994 reform act.  Furthermore,
    these were the first 2 years that the industry consistently provided
    the detailed data in a format needed to fully analyze the expenses
    associated with the selling and servicing of crop insurance.  The
    industry stated that we understated administrative expenses by using
    2 years in which crop losses were relatively low.  We disagree.  Crop
    losses for buyup coverage in 1995 were equal to or higher than crop
    loss experiences throughout the 1990s, except for 1993.  Furthermore,
    we found that high crop losses did not significantly increase
    companies' loss-adjusting expenses--the delivery cost factor most
    likely to be affected by high crop losses.  For example, for buyup
    insurance, while companies paid out $1.28 in loss claims for every
    dollar of premium received in 1995 and $0.58 in loss claims for every
    dollar of premium received in 1994, their related loss adjusting
    expenses as a percent of premium for these 2 years were not
    substantially different.  Therefore, although losses were higher in
    1995 than in 1994, the companies' loss adjusting expenses for
    processing these claims did not increase commensurately.  In
    addition, loss adjusting expenses are not a significant portion of
    total administrative expenses (about 3.5 percent of premiums on
    average for the nine companies we reviewed).  Furthermore, since the
    1980s, the crop insurance companies have received additional
    reimbursements in years of high crop losses.

    Second, the standards we used to identify reasonable costs for
    delivering crop insurance were developed on the basis of a number of
    different widely recognized accounting, insurance, and acquisition
    standards.  FCIC agreed that the standards used were appropriate.  We
    recognized all expenses reasonably associated with selling and
    servicing crop insurance.  However, we continue to believe that the
    government should not be expected to reimburse companies for such
    expenses as those related to maximizing underwriting gains, acquiring
    other companies' business, payments to executives to refrain from
    joining or starting other companies, payments to parent companies
    with no measurable benefits to the program, profit-sharing bonuses,
    and payments to lobbyists.  We believe that these expenses should not
    be included in determining an appropriate future reimbursement rate
    for administrative expenses.

    Third, two factors that have emerged since the 1994-95 time period
    that we reviewed--higher premium rates and higher crop prices in 1996
    and 1997--should be considered in evaluating the appropriate, future
    reasonable reimbursement rate because these factors did increase
    companies' revenues without increasing expenses.  Furthermore, USDA
    projects that crop prices will generally increase through 2005.  If
    crop prices decline, FCIC could reevaluate the reimbursement rate.

    Finally, we disagree that a lower reimbursement rate--in the range of
    24 percent-- would destabilize the industry.  Such a rate represents
    the companies' current expenses that are reasonably associated with
    the sale and service of crop insurance and as a result should not
    diminish service to the farmer nor destabilize the program.
    Companies will still have the opportunity to realize underwriting
    profits.  In 1994 and 1995, for example, the companies realized
    underwriting profits of $103 million and $133 million, respectively.

    (See apps.  VIII and IX for the industry's comments and our detailed
    response.)

    USDA DELIVERED 1995 CATASTROPHIC
    INSURANCE AT LOWER COST TO
    GOVERNMENT THAN PRIVATE COMPANIES
    ============================================================ Chapter 3

    In 1995, farmers without crop insurance were required to purchase
    catastrophic risk protection insurance to participate in federal farm
    programs--a requirement that was rescinded in 1996.  Farmers could
    purchase catastrophic insurance either from USDA's FSA local offices
    or from an authorized local insurance agent.  In 1995, it was more
    costly for the government to deliver catastrophic insurance through
    private companies than through USDA.  When basic delivery costs were
    offset by income from farmer-paid processing fees, the costs to the
    government for selling and servicing catastrophic insurance in 1995
    were comparable for both USDA and private companies.  However,
    delivery through private companies was more costly to the government
    because the companies retained an estimated $45 million underwriting
    gain.  In 1995, FCIC's long-term target for underwriting gain was 7
    percent on the premiums for which the companies retained risk.
    However, in 1995, the underwriting gain paid by FCIC to the companies
    was about 37 percent.  FCIC is currently studying the issue of an
    appropriate long-term rate of return for companies participating in
    the program.  Legislation passed in 1996 requires USDA to move
    delivery of catastrophic insurance solely to private companies, where
    feasible.

       COST TO THE GOVERNMENT IN 1995
       FOR USDA DELIVERY LESS BECAUSE
       OF UNDERWRITING GAIN PAID TO
       COMPANIES
    ---------------------------------------------------------- Chapter 3:1

    In 1995, the total cost to the government to deliver catastrophic
    insurance was less when provided through USDA than through private
    companies.  The total cost to the government to deliver catastrophic
    insurance consists of three components:  (1) basic sales and service
    delivery costs, (2) offsetting income from processing fees paid by
    farmers, and (3) company-earned underwriting gains.  When only the
    first and second components were considered, the costs to the
    government for both delivery systems were comparable.  However, the
    payment of an underwriting gain to companies, the third component,
    made the total cost of company delivery more expensive to the
    government.

    With respect to the first component--the costs of basic sales and
    service delivery--the cost to the government was higher when provided
    through USDA.  The costs of basic sales and service for USDA's
    delivery included expenses associated with activities such as selling
    and processing policies, developing computer software, training
    adjusters, and adjusting claims.  This cost also included indirect or
    overhead costs such as general administration, rent, and utilities.
    Included in the 1995 direct and indirect costs for USDA delivery was
    the Department's one-time start-up costs for establishing the USDA
    delivery system.  Direct costs for basic delivery through USDA
    amounted to about $91 per crop policy, and indirect costs amounted to
    about $42 per crop policy, for a total basic delivery cost to the
    government of about $133 per crop policy.  Appendix V provides more
    detail on the components of total government costs to deliver
    catastrophic insurance through USDA and insurance companies.

    The basic delivery cost for company delivery consists of the
    administrative expense reimbursement paid to companies by FCIC and
    the cost of administrative support provided by USDA.  The
    administrative expense reimbursement amounted to about $73 per crop
    policy, and USDA's support costs amounted to about $10 per crop
    policy, for a total basic delivery cost to the government for company
    delivery of about $83 per crop policy.

    The second component--offsetting income from farmer-paid processing
    fees--reduced the basic delivery cost to the government for both
    delivery systems, but had a much larger impact in reducing the cost
    to the government for the USDA delivery system.  In 1995, farmers
    buying catastrophic insurance were required to pay a $50 processing
    fee for each crop they insured, up to certain limits.  For USDA's
    delivery, processing fees paid by farmers reduced the government's
    basic delivery cost of about $133 by an average of $53 per crop
    policy.\1 For company delivery, fees paid by farmers and remitted to
    the government reduced the government's basic delivery cost of about
    $83 by $7 per crop policy.  For company delivery, the effect on the
    cost to the government was relatively small because the 1994 reform
    act authorized the companies to retain the fees they collected from
    farmers up to certain limits.  Only those fees that exceeded these
    limits were remitted back to the government.  Combining the basic
    sales and service delivery costs and the offsetting income from
    farmer-paid processing fees, the government's costs were comparable
    for both delivery systems.

    The third component--underwriting gains paid by FCIC only to the
    companies--is the element that made delivery through USDA less
    expensive.  The insurance companies can earn underwriting gains in
    exchange for taking responsibility for any claims resulting from
    those policies for which the companies retain risk.  In 1995,
    companies earned an underwriting gain of an estimated $45 million, or
    about a 37-percent return on the catastrophic premiums for which they
    retained risk.  This underwriting gain increased the government's
    delivery cost for company delivery by $127 per crop policy.
    Underwriting gains are, of course, not guaranteed.  In years with a
    high incidence of catastrophic losses, companies could experience net
    underwriting losses, meaning that they would have to pay out money
    from their reserves in excess of the premiums paid to them by the
    government, potentially reducing the government's total cost of
    company delivery in such years.

    Table 3.1 summarizes the three components of the government's cost to
    deliver catastrophic insurance through USDA and companies in dollars
    per crop policy for 1995.

                                   Table 3.1

                         1995 Cost per Crop Policy for
                          Government's Cost to Deliver
                    Catastrophic Insurance Through USDA and
                               Private Companies

    Components                              Government          Government
    of cost                                    cost of             cost of
    to government                        USDA delivery    company delivery
    ------------------------------  ------------------  ------------------
    Basic delivery cost                        $132.72              $83.37
    Less: fees remitted to                       53.30                7.21
     government
    ======================================================================
    Subtotal cost to government                 $79.42              $76.16
    Plus: underwriting gain paid                   n/a              127.06
     to companies
    Total cost to government                    $79.42             $203.22
    ----------------------------------------------------------------------
    Source:  GAO's analysis of USDA's data.

    The table shows that, overall, the government's cost for delivering
    catastrophic insurance through USDA was about $124 less per crop
    policy than the delivery cost through companies in 1995.

    The 1995 catastrophic underwriting gain of about 37 percent was the
    critical component in the difference in comparative costs between
    USDA and company delivery.  This gain was substantially higher than
    FCIC's established long-term target of 7 percent for underwriting
    gains on the catastrophic premiums for which the companies retain
    risk.  According to FCIC's Senior Actuary, the large underwriting
    gain in 1995 may have been unusual.  However, the program's
    experience in 1996 suggests that the large underwriting gain in 1995
    may not be that unusual; 1996 underwriting gains were even
    higher--about $58 million.  FCIC is currently studying the issue of
    an appropriate long-term rate of return for companies participating
    in the program.

    --------------------
    \1 This $53 amount was calculated using data provided by FCIC on
    803,438 crop policies sold by local FSA offices and $42,822,950 in
    fees collected.

       1996 LEGISLATION DIRECTS USDA
       TO MOVE TOWARD MORE PRIVATE
       COMPANY DELIVERY OF
       CATASTROPHIC INSURANCE
    ---------------------------------------------------------- Chapter 3:2

    Beginning with crops harvested in 1997, the Federal Agriculture
    Improvement and Reform Act of 1996 requires that USDA's delivery of
    catastrophic insurance be transferred to private companies in areas
    where there are sufficient private company providers.  In July 1996,
    the Secretary of Agriculture, after consultation with approved
    insurance providers, identified 14 states in which USDA would no
    longer deliver catastrophic policies.  Effective for the 1997 crop
    year, catastrophic policyholders in these 14 states who purchased
    catastrophic coverage from USDA were either to select a local private
    company or be assigned by USDA to a local private company.  The 14
    states are Arizona, Colorado, Illinois, Indiana, Iowa, Kansas,
    Minnesota, Montana, Nebraska, North Carolina, North Dakota, South
    Dakota, Washington, and Wyoming.

    According to the American Association of Crop Insurers, crop
    insurance industry executives unanimously support securing the
    remaining 36 states for private delivery, beginning with crops
    harvested in 1998.  According to the Federal Agriculture Improvement
    and Reform Act of 1996, the Secretary of Agriculture must make the
    announcement for any additional states where USDA delivery is to be
    phased out by April 30 of the year preceding the year in which the
    applicable crops will be harvested.

       CONCLUSIONS
    ---------------------------------------------------------- Chapter 3:3

    If only 1995 is considered, the delivery of catastrophic insurance
    through USDA is less expensive to the government than through
    companies because of the underwriting gains companies earned.  These
    gains, 37 percent of catastrophic premiums on which the companies
    retained risk, were far higher than FCIC's long-term target gain of 7
    percent.  Over time, gains and losses may offset each other, and the
    target gain may be realized.  However, if underwriting gains do not
    become more commensurate with FCIC's target gain, the potential for
    high government costs and high company profits will continue.  FCIC
    is aware of this situation and is currently studying the issue of an
    appropriate long-term rate of return for companies participating in
    the program.  Furthermore, this issue of potentially high costs and
    high profits takes on added importance because of the requirements of
    the Federal Agriculture Improvement and Reform Act of 1996.  This act
    requires USDA to transfer its delivery of catastrophic insurance to
    private companies in areas where there are sufficient private company
    providers.

       RECOMMENDATION TO THE SECRETARY
       OF AGRICULTURE
    ---------------------------------------------------------- Chapter 3:4

    We recommend that the Secretary of Agriculture direct the
    Administrator of the Risk Management Agency to closely monitor the
    experience of the catastrophic insurance program to ensure that over
    time the underwriting gains earned on catastrophic insurance by the
    companies do not routinely exceed FCIC's long-term target.

       USDA AND CROP INSURANCE
       INDUSTRY COMMENTS
    ---------------------------------------------------------- Chapter 3:5

    FCIC agreed with our conclusions and recommendation and has already
    changed the proposed 1998 standard reinsurance agreement to ensure
    that underwriting gains on catastrophic insurance will be more
    closely in line with its long-term target.

    The industry, however, questioned our methodology for comparing the
    cost to the government of the USDA and company delivery systems.
    Specifically, it stated that the processing fees paid by farmers and
    the underwriting gains paid to companies should not be considered in
    analyzing the costs to the government for catastrophic insurance
    delivery.  It also suggested that restricting our analysis to 1995
    provided a distorted picture of underwriting gains because it only
    represented 1 year's experience.  It further stated that our analysis
    did not take into account that, in its view, the quality of service
    provided to farmers by the companies was much higher than that
    provided by USDA.

    We disagree that an analysis of the comparative costs to the
    government of company- and USDA-delivered catastrophic insurance
    should exclude the processing fee and underwriting gains components.
    In computing the overall costs to the government, all revenue and
    payment components have to be considered.  With respect to the
    industry's concern about our period of analysis, 1995 was the only
    year in which a comparative assessment could be made at the time we
    conducted our review because it was the only year in which both USDA
    and the companies were delivering catastrophic insurance.  Since
    then, however, we note that underwriting gains paid to the companies
    in 1996 exceeded those paid in 1995.  This would serve to make the
    cost to the government for company-delivered catastrophic insurance
    even higher.  With respect to the issue of comparative service
    quality, we did not make this a principal focus of our review.
    However, during the course of our work, we found little to suggest
    that the service provided by companies or USDA was less than
    satisfactory.

    The industry's comments also indicate that it believes our
    conclusions might mislead public policymakers by implying that
    delivery of catastrophic insurance by private industry should be
    reduced.  We do not believe that this is the case.  We did not
    conclude or recommend that the industry should have its role in
    catastrophic insurance delivery reduced.  We do hold the view,
    however, that the level of underwriting gain paid to the companies
    should be managed so that it more closely follows FCIC's target.

    ALTERNATIVE EXPENSE REIMBURSEMENT
    ARRANGEMENTS OFFER POTENTIAL FOR
    SAVINGS
    ============================================================ Chapter 4

    The current method for reimbursing administrative expenses for buyup
    insurance--whereby FCIC pays private companies a fixed percentage of
    premiums--has certain advantages, including ease of administration.
    However, expense reimbursement based on a percentage of premiums does
    not necessarily reflect the amount of work or cost involved to sell
    and service crop insurance policies.  We identified four alternative
    reimbursement arrangements that offer the potential to reduce FCIC's
    reimbursements and to more closely match reimbursements with
    expenses.  Each has advantages and disadvantages.  Industry leaders
    prefer FCIC's current reimbursement method because it is relatively
    simple to administer and because they believe that most alternatives
    could reduce their reimbursements.

       FOUR ALTERNATIVES TO THE
       CURRENT REIMBURSEMENT
       ARRANGEMENT
    ---------------------------------------------------------- Chapter 4:1

    Through our discussions with FCIC and crop insurance industry
    officials, we identified the following four alternatives to the
    current expense reimbursement method that offer potential cost
    savings to the government and may more closely match FCIC's
    reimbursements with companies' expenses:

      -- place a cap on the amount reimbursed per policy;

      -- reimburse companies a flat fee per policy, plus a reduced
         percentage of premiums;

      -- reimburse companies according to a schedule of allowable
         expenses; and

      -- reduce reimbursement rates as companies' total premium volume
         increases.

    Currently, FCIC calculates administrative expense reimbursements by
    multiplying companies' total written premiums by a set reimbursement
    percentage, regardless of the expenses incurred by the company to
    sell and service crop insurance.  Table 4.1 shows the 1995
    distribution of premiums and reimbursements for certain buyup
    policies for all participating companies.\1

                                            Table 4.1

                                1995 Distribution of Premiums and
                              Reimbursements, Total and Average per
                                              Policy

    Premium range         Premiums         Number of policies        1995 reimbursement
    -------------  ----------------------  ------------------  ------------------------------
                                                                                      Average
                        Total     Average             Percent       Total   Percent       per
    From       To      ($000)  per policy     Count  by range      ($000)  by range    policy
    -----  ------  ----------  ----------  --------  --------  ----------  --------  --------
    $1       $499     $39,627        $213   186,156      43.6     $12,284       4.9       $66
    500     1,499     101,957         900   113,321      26.5      31,607      12.5       279
    1,500   4,999     247,675       2,723    90,956      21.3      76,779      30.4       844
    5,000   9,999     162,669       6,853    23,736       5.6      50,428      20.0     2,125
    10,00  49,999     222,070      17,421    12,747       3.0      68,842      27.3     5,401
     0
    50,00  99,999      23,905      65,674       364       0.1       7,411       2.9    20,359
     0
    100,0  499,99      14,097     167,821        84     0.0\a       4,370       1.7    52,024
     00         9
    500,0    & up       2,044   1,021,993         2     0.0\a         634       0.3   316,818
     00
    =========================================================================================
    Total            $814,045      $1,905   427,366     100.0    $252,354     100.0      $590
    -----------------------------------------------------------------------------------------
    Note:  Totals may not add because of rounding.

    \a Amount less than 0.1 percent.

    Source:  GAO's analysis of FCIC's data.

    Each of the four alternatives, as discussed below, has the potential
    to more closely match FCIC's expense reimbursements to the expenses
    actually incurred by the companies for the sale and service of crop
    insurance.  In addition to having cost savings potential, the four
    alternatives offer specific advantages and disadvantages.  To
    illustrate the four alternatives, we applied them to the 1995
    experience data shown in table 4.1

    --------------------
    \1 We limited our analysis to policies with "additional"
    coverage--the most frequently purchased type of coverage.  Additional
    coverage includes coverage equal to or greater than 65 percent of the
    yield guarantee at 100 percent of the projected market price.  These
    policies represented about 65 percent of the crop insurance premiums
    written in 1995.  Although farmers are permitted to select different
    coverage levels for their operational units, they are also permitted
    to purchase one policy covering their entire farming operations.  Our
    analysis was limited to those policies with additional coverage for
    the entire farming operation.  See app.  VI.

          ALTERNATIVE 1--PLACE A CAP
          ON REIMBURSEMENTS PER POLICY
    -------------------------------------------------------- Chapter 4:1.1

    Under the current reimbursement arrangement, as policy premiums
    increase, the companies' reimbursement from FCIC for administering
    the policies increases.  However, the workload, or cost, associated
    with administering the policy generally does not increase
    proportionately.  Therefore, for policies with the highest premiums,
    there may be a large differential between FCIC's reimbursement and
    the costs incurred to administer those policies.  For example, in
    1995, the largest 3 percent of the policies received about one-third
    of the total reimbursement.  In fact, the five largest policies in
    1995 had reimbursements ranging from about $118,000 to $472,000.
    FCIC could reduce its total expense reimbursements to companies by
    capping, or placing a limit on, the amount it reimburses companies
    for the sale and service of crop insurance policies.

          ALTERNATIVE 2--PAY A FLAT
          AMOUNT PER POLICY PLUS A
          PERCENTAGE OF PREMIUMS
    -------------------------------------------------------- Chapter 4:1.2

    For each crop insurance policy written, an insurance company must
    perform some minimum level of work, regardless of the premium.  The
    company, usually through an agent, must obtain, record, and process
    certain basic policy information.  The company performs additional
    work that varies, generally depending on the size of the farm and
    value of the crops insured.  A larger farm may require more time to
    measure and inspect the component fields and more contacts with the
    farmer.  This alternative is designed to recognize both the fixed and
    variable aspects of selling and servicing crop insurance policies.
    For example, FCIC could reimburse companies a fixed amount (such as
    $100) for each policy written to pay for the fixed expense associated
    with each policy.  In addition, FCIC could pay a percentage of
    premiums to compensate companies for the variable expenses associated
    with the size and value of a policy.

          ALTERNATIVE 3--TIE
          REIMBURSEMENTS TO SCHEDULE
          OF ALLOWABLE EXPENSES
    -------------------------------------------------------- Chapter 4:1.3

    Administrative expense reimbursements could be tied to the cost of
    performing specific services that benefit the crop insurance program.
    For example, most government contractors are paid on the basis of the
    Federal Acquisition Regulation (FAR),\2 which establishes a schedule
    of allowable expenses.  Using the FAR, a contractor providing goods
    and services to the federal government submits a bill that is audited
    against a schedule of allowable expenses, and subsequently, the
    government pays an adjusted amount to the contractor, if appropriate.
    Using this approach, the amount paid would include only reimbursement
    for allowed expenses.  FCIC could limit the overall reimbursement
    rate and limit the reimbursement rate for specific components, such
    as commissions, data processing, and travel.  Companies could also be
    required to follow federal guidelines to reimburse employees or
    contractors for any travel.

    --------------------
    \2 48 C.F.R.  chapter 31 et seq.

          ALTERNATIVE 4--REDUCE
          REIMBURSEMENT RATES AS
          PREMIUM VOLUMES INCREASE
    -------------------------------------------------------- Chapter 4:1.4

    Assuming companies can realize some economies of scale for certain
    cost items, FCIC could reduce the reimbursement rates for individual
    companies as their written premium volumes increase.  For example,
    some expenses, such as underwriting and overhead, are based on fixed
    expenses, such as investments in equipment and facilities, annual
    training, and state licenses and fees.  These types of fixed expenses
    decrease as a percent of total premiums written as premium volume
    increases.  Currently, FCIC pays the same percent of written premiums
    to participating companies regardless of the companies' size of
    operation or premium amount written.  Under this alternative, FCIC
    would reimburse companies on a sliding scale based on premium volume.

       EACH ALTERNATIVE HAS POTENTIAL
       ADVANTAGES AND DISADVANTAGES
    ---------------------------------------------------------- Chapter 4:2

    We found that all four alternatives have the potential to reduce
    FCIC's reimbursement for administrative expenses.  Each alternative,
    however, has advantages and disadvantages compared with the current
    reimbursement arrangement.  For example, some alternatives have the
    advantage of possibly encouraging smaller companies to participate in
    the program.  On the other hand, some alternatives have the potential
    disadvantage of increasing the administrative burden on FCIC or
    decreasing incentives for participating companies to deliver crop
    insurance.  The potential advantages and disadvantages of each
    alternative are discussed below.

          PLACE A CAP ON
          REIMBURSEMENTS PER POLICY
    -------------------------------------------------------- Chapter 4:2.1

    Under this alternative, FCIC could realize the largest amount of
    administrative reimbursement savings while only affecting a
    relatively small percentage of policies.  This alternative would
    eliminate high reimbursement payments for large or high-premium
    policies.  To illustrate, to calculate potential cost savings using
    this alternative, we capped the administrative expense reimbursements
    on individual policies at three different levels--$1,550, $3,100, and
    $6,200--affecting about 9, 3, and 1 percent, respectively, of
    policies in 1995.  Potential savings generated from this alternative
    would depend at what level the cap was established, as shown in table
    4.2.

                                            Table 4.2

                                   Potential Savings Depend on
                                     Reimbursement Cap Level

                         Premiums                                                     Average
    Per policy         per policy     Alternative     Potential       Percent   reimbursement
                       related to   reimbursement       savings   of policies    as a percent
    reimbursement   reimbursement     (dollars in   (dollars in   affected by        of total
    cap                       cap       millions)     millions)           cap         premium
    -------------  --------------  --------------  ------------  ------------  --------------
    $1,550             $5,000 and          $177.9         $74.4           8.6            21.9
                            above
    3,100              10,000 and           212.0          40.3           3.1            26.0
                            above
    6,200              20,000 and           234.1          18.2           0.9            28.8
                            above
    -----------------------------------------------------------------------------------------
    Note:  Reimbursement is based on 31 percent of premiums.

    Source:  GAO's analysis of FCIC's 1995 data.

    As shown in the table, a $3,100 cap would have created a $40.3
    million savings while reimbursing companies at the 31-percent
    reimbursement level for more than 95 percent of the policies written
    in 1995.  Only about 3 percent of all policies written would have
    been affected by using a $3,100 cap on reimbursements.  Decreasing
    the cap to $1,550 would have provided savings to the government of
    about $74 million while limiting reimbursements on less than 10
    percent of the policies written in 1995.

    Although offering the potential for significant cost savings, this
    alternative has the disadvantage of possibly discouraging some
    companies from aggressively marketing larger crop insurance policies
    for FCIC.

          PAYING A FLAT AMOUNT PER
          POLICY PLUS A PERCENTAGE OF
          PREMIUMS
    -------------------------------------------------------- Chapter 4:2.2

    This alternative offers a potential for cost savings that is somewhat
    less than capping reimbursements at $1,550 per policy, but it may
    encourage companies to sell small-premium policies.  To illustrate
    the potential for cost savings, we selected three different
    reimbursement combinations.  As shown in table 4.3, if FCIC
    reimbursed companies a fixed $100 reimbursement per policy plus 17.5
    percent of the premiums, the overall average reimbursement rate would
    be 22.8 percent.  Compared with the 1995 reimbursement method, this
    approach would produce a savings of 8.2 percent of premiums, or about
    $67 million, from the 31 percent reimbursement rate.  Table 4.3 also
    illustrates other reimbursement combinations.

                                            Table 4.3

                                 Savings Potential for Different
                                    Reimbursement Combinations

                                           Alternative 1995 reimbursement
                       ----------------------------------------------------------------------
                            Alternative                             Average
    Alternative           reimbursement                    reimbursement as         Potential
    reimbursement           (dollars in       Average per      a percent of  savings (dollars
    arrangements              millions)            policy           premium      in millions)
    -----------------  ----------------  ----------------  ----------------  ----------------
    20 percent plus              $205.5           $480.96              25.3             $46.8
     $100 per policy
    17.5 percent plus             185.2            433.34              22.8              67.2
     $100 per policy
    17.5 percent plus             206.6            483.34              25.4              45.8
     $150 per policy
    -----------------------------------------------------------------------------------------
    Source:  GAO's analysis of FCIC's 1995 data.

    Because one component of the reimbursement would be a flat fee
    regardless of premium size, reimbursements for small, or low-premium,
    policies under this alternative may exceed reimbursements for these
    kinds of policies under the current system.  This may encourage sales
    and service to smaller farmers, a goal advanced by some crop
    insurance observers.  This alternative has the further advantage of
    more closely matching FCIC's reimbursement to the administrative
    workload of the companies and their agents.  Finally, unlike the
    previous alternative that capped reimbursements, reimbursements under
    this alternative would still be linked in part to premiums.
    Therefore, companies will continue to have an incentive to sell
    higher coverage.

    This alternative has the disadvantage of requiring FCIC to more
    closely monitor companies to ensure they do not generate additional
    policies solely to increase their revenue.

          TYING REIMBURSEMENTS TO
          SCHEDULE OF ALLOWABLE
          EXPENSES
    -------------------------------------------------------- Chapter 4:2.3

    This alternative would offer FCIC the opportunity to better control
    the expenses to be reimbursed by paying participating companies
    according to a schedule of allowable expenses for performing specific
    services, such as selling and writing a policy, processing a policy,
    and adjusting claims.  Companies could be required to reimburse
    employees or contractors for any travel according to federal
    reimbursement guidelines for travel.  Using the FAR, a contractor
    providing goods and services to the federal government submits a bill
    that is audited against a schedule of allowable expenses, and
    subsequently, the government pays an adjusted amount to the
    contractor, if appropriate.  Savings under this alternative would
    depend upon the rates agreed to by FCIC and the companies.  In
    addition, this alternative could provide participating companies with
    additional protection during years with high crop losses by
    reimbursing them for the actual loss-adjusting expenses they incur.

    A major disadvantage of this alternative is that FCIC would need to
    increase its oversight of participating companies' financial
    operations.  FCIC would need to draft and approve additional
    regulations, audit expense vouchers against a schedule of allowable
    expenses, and require participating companies to follow additional
    regulations.

          REDUCING REIMBURSEMENT RATES
          AS PREMIUM VOLUMES INCREASE
    -------------------------------------------------------- Chapter 4:2.4

    This alternative offers the advantage of potential cost savings and
    may encourage smaller companies' participation in the program.  Some
    industry observers have expressed concern at the decline in the
    number of participating companies--from 49 in 1985 to 19 in 1995.
    For this reimbursement alternative, companies could be reimbursed at
    a higher rate for their first level of business and at a reduced rate
    at higher premium levels.  To illustrate, we calculated results using
    declining reimbursement rates for premium levels of $20 million and
    below; over $20 to $50 million; over $50 to $100 million; and over
    $100 million.  Table 4.4 shows the results of our analysis.

                                            Table 4.4

                                 Savings Potential for Declining
                                       Reimbursement Rates

                                             Alternative reimbursement
                                         ----------------------------------
    Company premium
    volume range          1995 premiums                                             Potential
    (dollars in             (dollars in                     Amount (dollars  savings (dollars
    millions)                 millions)           Percent      in millions)      in millions)
    -----------------  ----------------  ----------------  ----------------  ----------------
    $20 and below                $279.3              31.0             $86.6              $0.0
    Over $20 to $50               195.2              29.0              56.6               3.9
    Over $50 to $100              196.1              27.0              52.9               7.8
    Over $100                     143.5              25.0              35.9               8.6
    =========================================================================================
    Total/average                $814.1              28.5            $232.0             $20.4
    -----------------------------------------------------------------------------------------
    Note:  Totals may not add because of rounding.

    Source:  GAO's analysis of FCIC's data.

    At the indicated premium levels, in 1995, this alternative had the
    potential to save the government about $20.4 million in
    administrative expense reimbursements while having minimal or no
    impact on participating companies.  Of the 19 participating
    companies, 10 wrote total premiums of $20 million or less, and
    therefore this alternative would have had no effect on the amount of
    reimbursements paid to these 10 companies.  Only 3 of the 19
    companies wrote premiums in excess of $100 million.

    Compared with the current system, this alternative would have the
    effect of favoring smaller companies over larger companies.  To the
    extent that smaller or nonparticipating companies perceive that
    larger companies do not have a competitive advantage based on the
    size of operations, they may see increased opportunities to stay in
    or enter the industry.  This outcome would be viewed as an advantage
    by those who want to see an increase in the number of participating
    firms.

    A disadvantage of this alternative is that it could discourage some
    larger companies from aggressively delivering crop insurance for
    FCIC.  Furthermore, to the extent that selling and servicing crop
    insurance policies are subject to economies of scale, such economies
    may not be achieved if companies do not expand their operations.

       PARTICIPATING COMPANIES
       GENERALLY PREFER CURRENT
       REIMBURSEMENT ARRANGEMENT
    ---------------------------------------------------------- Chapter 4:3

    According to crop insurance industry officials, participating
    companies generally prefer the current reimbursement arrangement
    because they believe that most alternatives would reduce their
    reimbursements and increase their administrative workload.  Officials
    at some participating companies also said that alternative
    arrangements would reduce their incentives to deliver federal crop
    insurance if their overall revenues from reimbursements were reduced.
    Several company officials also stated that any reduced administrative
    reimbursements would increase the need for FCIC to provide additional
    opportunities for underwriting gains.  In addition to continuing the
    current reimbursement arrangement, participating companies want FCIC
    to simplify administrative requirements.  They believe some of the
    existing requirements are needlessly costly and unnecessary to ensure
    the integrity of the program.  Appendix I provides more information
    about FCIC's efforts to simplify crop insurance program
    administration.

       USDA AND CROP INSURANCE
       INDUSTRY COMMENTS
    ---------------------------------------------------------- Chapter 4:4

    USDA's Risk Management Agency concurred with our draft report's
    treatment of alternative reimbursement arrangements.  In its 1998
    standard reinsurance agreement, FCIC has proposed using the second
    alternative--having the government pay a flat amount per policy and a
    percentage of premiums.

    The crop insurance industry stated that we made recommendations to
    make major changes to the reimbursement system and that these changes
    would most likely, among other things, greatly undermine agents'
    compensation.  We did not recommend one alternative over another or
    over the current system but instead described the arguments for and
    against the major alternatives that we identified.  In so doing, we
    were complying with the 1994 mandate.

    Furthermore, throughout our report and in this chapter, we focused on
    the effects on companies, not on the agents.  Companies may
    compensate their agents in ways that they consider appropriate,
    regardless of the companies' arrangement with the government.  (See
    apps.  VIII and IX.)

    SIMPLIFICATION AND PAPERWORK
    REDUCTION
    =========================================================== Appendix I

    This appendix summarizes the Federal Crop Insurance Corporation's
    (FCIC) reported progress in simplifying administrative requirements
    placed on companies delivering crop insurance for the federal
    government.  The Federal Crop Insurance Reform and Department of
    Agriculture Reorganization Act of 1994 required FCIC to initiate
    efforts to simplify the administrative burden placed on companies.

    Since implementation of the reform act in October 1994, FCIC has
    worked with an industry group to identify and implement
    simplification actions without jeopardizing program soundness.  The
    list below summarizes FCIC's reported progress as of January 1997.
    According to U.S.  Department of Agriculture (USDA) officials, in
    considering future simplification actions, USDA will continue to
    measure the effect of these actions on farmers and the program's
    actuarial soundness.

          SIMPLIFICATION ACTIONS
          COMPLETED
    ------------------------------------------------------- Appendix I:0.1

    1.  FCIC restructured actuarial documents, such as premium rate and
    special provision tables, to provide pertinent information on fewer
    pages.  This reduced the number of pages printed each year by
    one-third, or approximately 2 million pages.

    2.  FCIC began providing all actuarial tables electronically to
    companies, instead of in hard copy.  This change reduced delivery
    time to participating companies and saved the government from
    printing 4 million pages per year.

    3.  FCIC established a limited-access computer server for reinsured
    companies' use.  Now, companies can call in by modem and download
    relevant program information, such as premium rates, policy
    information, FCIC bulletins, and other company-specific information.

    4.  FCIC established a public-access computer server (i.e., an
    Internet web site) and placed a large amount of relevant crop
    insurance data on the server.  This capability allows FCIC to provide
    more information to the public more quickly and reduces the waiting
    time previously associated with FCIC's processing of special requests
    for computerized information.

    5.  FCIC analyzed its basic crop insurance computer system to ensure
    that it contained no unnecessary or redundant data requirements.  On
    the basis of this analysis, FCIC implemented processes to minimize
    companies' preparation and reporting time and reduce rejections of
    program data.

    6.  FCIC expanded the availability of the Group Risk Plan insurance.
    This coverage option requires less analysis of farm programs to
    underwrite a policy and reduces the amount of time required to settle
    a claim, relying on general, published data rather than
    producer-specific data.

    7.  FCIC eliminated the Group Risk Plan's preliminary payment
    feature, saving the companies, agents, farmers, and FCIC additional
    follow-up and reconciliation work.

    8.  FCIC made Group Risk Plan coverage for forage available at the
    catastrophic level.  Since forage insurance is a very complex product
    to administer, expanding the pilot program to provide catastrophic
    coverage provides simplification benefits to everyone involved.

    9.  FCIC introduced the Tropical Fruit Tree crop insurance plan in
    Florida.  The plan eliminates significant up-front administrative
    work by insuring the tree rather than the fruit.  Time-consuming
    paperwork is now only required at loss adjustment time and only for
    those policies that have losses.

    10.  FCIC approved an express claims pilot project for a variety of
    crops for all locations.  This simplified process for handling small
    claims allows companies to settle smaller claims more quickly and at
    a lower administrative cost.  FCIC will monitor this pilot project to
    ensure that the use of this process does not lead to increased
    underwriting losses.

    11.  FCIC eliminated the requirement that companies prorate prevented
    planting acres.  Prior to this change, companies were required to
    perform a number of detailed measurements and calculations when there
    was more than one insurance unit and crop on a policy.  Eliminating
    this requirement should save administrative effort and cost, but it
    could expose FCIC to additional losses.  FCIC will need to continue
    monitoring the results of this change.

    12.  FCIC approved the use of combined forms, on a company-by-company
    basis.  For example, producers will be able to report actual
    production history data and intended acres on one form and then
    update this form with actual acreage data if different.  According to
    FCIC, these combined forms allow companies to reduce the number of
    times that they must contact the farmer.

    13.  FCIC implemented a computerized system to track policyholders.
    This system allows insurers to verify certain facts without making
    time-consuming, in-person checks with local offices, other companies,
    or FCIC.  The data that can be verified include, for example, the
    producer's (1) insurance status the prior year and (2) compliance
    with conservation compliance requirements.

    14.  To save time and reduce policyholder and company visits, FCIC
    has combined a number of policy dates.  For example, FCIC may have
    had sales-closing dates for different crops in the same area for
    October 31, November 1, and November 15.  To the extent permitted by
    sound underwriting principles, one closing date has been established
    for as many crops as possible.  FCIC's crop insurance program has
    many different dates, including sales-closing, acreage-reporting,
    production-reporting, final-planting, late-planting, end-of-insurance
    period, cancellation and termination.  These dates vary across the
    almost 40,000 county crop programs.  Batching dates together whenever
    possible makes it easier for farmers, agents, and others to remember
    to perform all required tasks in a timely manner.

    15.  FCIC gave participating companies expanded authority to issue
    individualized insurance endorsements for farmers with particular
    needs.  In the past, prior FCIC approval was required for most of
    these special endorsements; now, companies may issue more types of
    agreements without obtaining FCIC's approval for each individual
    producer.

    16.  FCIC authorized companies to correct obvious and inadvertent
    errors, such as digit reversals and misplaced data entries without
    obtaining FCIC's consent in each case.

    17.  FCIC integrated selected policy options and endorsements into
    the standard crop insurance policy.  Now, endorsements can be
    activated automatically when farmers choose them during the normal
    application process.  Previously, each company was often required to
    process a separate application and issue a separate document.

    18.  FCIC simplified the corn grain/silage loss provisions.
    Implementing this change makes it easier for farmers to calculate and
    report harvested grain as silage, when appropriate.

    19.  FCIC standardized and simplified the type and practice codes
    used to distinguish between different types or varieties of a crop
    (i.e., early versus late oranges) or management practices (i.e.,
    irrigated versus nonirrigated).  The codes, which are used for
    processing the policies and are first applied by the agents, were not
    standard and caused unnecessary confusion and work for agents,
    companies, and FCIC.

    20.  As of December 1996, the transition to a common insurance policy
    is either complete or in process for 39 of 42 crops.  Use of a common
    policy will simplify the companies' paperwork burden by reducing the
    number of different forms and will also reduce confusion by
    eliminating minor policy differences between crops.

    21.  FCIC expanded the companies' authority to approve master yields.
    This somewhat complex part of the process for establishing the
    insurance guarantee on certain crops was previously performed by the
    Risk Management Agency's Regional Service Offices and required
    considerable time for communications between the companies and the
    regional service offices.

    22.  FCIC changed the T-yield procedure to a simple average across
    acres instead of the complex weighting system previously used.  This
    change simplified the analysis performed by agents and data
    processing by companies.

    23.  FCIC extended the requirement to verify acreage on perennial
    crops from annually to once every 5 years.  Since planted acreage for
    trees and vines does not vary greatly from year to year, the old
    requirement was unnecessarily burdensome.

    24.  FCIC provided producers' production history, crop and acreage
    data, and other pertinent data on its limited access server to
    facilitate the transfer of policyholder data to assuming companies
    during the transition of catastrophic insurance to single delivery in
    the 14 states where single delivery was authorized.

    25.  FCIC made it easier for participating companies to check
    producers' status in the Non-standard Classification System by making
    this information available electronically.  FCIC uses the
    Non-standard Classification System to adjust the rate or guarantee of
    individual farmers whose historical experience is significantly worse
    than other farmers in the same area.  Current Non-standard
    Classification System data are important to companies in accurately
    underwriting and assigning risk to some farmers.

    26.  FCIC implemented an option whereby farmers could opt out, or
    exclude, hail and fire coverage for multiple years with a single
    application.  Previously, farmers had to apply annually for this
    exclusion and submit data about the replacement coverage that they
    purchased from a private insurer.

          SIMPLIFICATION ACTIONS IN
          PROGRESS
    ------------------------------------------------------- Appendix I:0.2

    1.  FCIC is working to automate the issuance and reporting of written
    individualized endorsement agreements.  This change could reduce the
    time required for processing these agreements--about 4,000 a year--by
    2 to 4 weeks.

    2.  FCIC is automating the funding of reinsurance escrow accounts for
    the 1997 reinsurance year, which will provide funds to companies
    sooner.  This funding allows reinsured companies to be reimbursed for
    paid losses either on the same day that claims data are submitted or
    the next day.

    3.  FCIC is automating the list of farmers who have been declared
    ineligible for crop insurance and to whom the participating companies
    are prohibited from selling policies.  Easier access to these data
    will reduce errors and time.

    4.  FCIC is in the process of reviewing the quality-control
    requirements imposed in FCIC's Manual 14 to identify and eliminate
    redundant or unnecessary requirements, such as overlapping and
    duplicative reviews or inspections and outdated procedures and
    policies.

    5.  Using data from USDA's National Agricultural Statistics Service,
    FCIC is developing proxy-yield substitutes for the current T-yield
    system.  This change will address program complaints from companies,
    provide greater flexibility, and fill the gap in the crop insurance
    program when actual records are not submitted.

    6.  Simplified actual production history and added-land procedures
    are being developed to reduce the number of individual unit databases
    maintained by companies.

    7.  FCIC is currently developing a system to quote provisional prices
    to farmers.  With this type of system, FCIC can issue actuarial
    tables earlier so that farmers can purchase coverage for at least a
    minimum price, knowing that the market price, which is announced
    later, may be higher.  This change will enable companies to begin
    using actuarial data much sooner and to spread work out over a
    greater period.

    8.  FCIC is reviewing the timing of reports on fees collected from
    farmers to determine the feasibility of less frequent reporting.  The
    current administrative effort required to collect and account for the
    $50 and $10 fees seems to be excessive for the companies and for
    FCIC.

    9.  FCIC is reviewing the timing of the reconciliation of minor
    accounting errors on the companies' reports to determine the
    feasibility of less frequent reporting.  The current, monthly
    requirement may impose too great a burden for the sums involved.

    10.  FCIC is reviewing the feasibility of an automatic all-county
    insurance option.  This change, if implemented, would benefit farmers
    by automatically providing coverage in cases where farmers decide
    after the sales closing date to plant an insured crop in a county in
    which they had not intended to plant and for which they had not
    purchased insurance.

    11.  FCIC is adjusting the insurance period for the Texas Citrus Tree
    program to make the crop year and the reinsurance year coincide.
    This will eliminate the need for manual accounting and data
    processing adjustments that are required to move the business from
    one year to another.

    COMPANIES INCLUDED IN EXPENSE
    REVIEW
    ========================================================== Appendix II

    FCIC had standard reinsurance agreements with 22 companies in 1994
    and 19 companies in 1995 to sell and service federal crop insurance.
    In performing our review, we reviewed nine managing general agencies
    that each managed the business for one or more standard reinsurance
    agreement holders--those insurance companies responsible for the
    standard reinsurance agreement--representing about 85 percent of the
    total federal crop insurance premiums written by private companies in
    1994 and 1995 combined.  We made our selection of companies
    considering factors such as premium volume, location, and type of
    ownership.  As a result of business acquisitions and changing
    business relationships in 1994 and 1995, our review included 12
    standard reinsurance agreement holders for 1994 and 12 for 1995.
    Tables II.1 and II.2 list the companies included in our review for
    1994 and 1995, respectively, showing the name of the managing general
    agency, the location of the managing general agency, and the standard
    reinsurance agreement holder.

                                            Table II.1

                                Companies Included in 1994 Review

                                                                 Standard reinsurance
    Managing general agency        Location                      agreement holder
    -----------------------------  ----------------------------  ----------------------------
    American Agrisurance           Council Bluffs, Iowa          Redland Insurance Company,
                                                                 Insurance Company of the
                                                                 Prairie States

    Blakely Crop Hail, Inc.        Topeka, Kansas                Farmers Alliance Mutual
                                                                 Insurance Company

    Cotton States Mutual           Atlanta, Georgia              Cotton States Mutual
    Insurance Company                                            Insurance Company

    Country Mutual Insurance       Bloomington, Illinois         Country Mutual Insurance
    Company                                                      Company

    Crop Growers Corporation       Great Falls, Montana          Cimarron Insurance Company,
                                                                 Continental Insurance
                                                                 Company

    IGF Insurance Company          Des Moines, Iowa              IGF Insurance Company

    National Ag Underwriters,      Anoka, Minnesota              NAU Insurance Company
    Inc.

    Producers Lloyds Insurance     Amarillo, Texas               Producers Lloyds Insurance
    Company                                                      Company

    Rain and Hail Insurance        West Des Moines, Iowa         CIGNA Property and Casualty
    Services, Inc.                                               Insurance Company, Columbia
                                                                 Mutual Insurance Company
    -----------------------------------------------------------------------------------------
    Source:  GAO's analysis of FCIC's data.

                                            Table II.2

                                Companies Included in 1995 Review

                                                                 Standard reinsurance
    Managing general agency        Location                      agreement holder
    -----------------------------  ----------------------------  ----------------------------
    American Agrisurance           Council Bluffs, Iowa          Redland Insurance Company

    Blakely Crop Hail, Inc.        Topeka, Kansas                Farmers Alliance Mutual
                                                                 Insurance Company

    Cotton States Mutual           Atlanta, Georgia              Cotton States Mutual
    Insurance Company                                            Insurance Company

    Country Mutual Insurance       Bloomington, Illinois         Country Mutual Insurance
    Company                                                      Company

    Crop Growers Corporation       Great Falls, Montana          Continental Insurance
                                                                 Company, Dawson Hail
                                                                 Insurance Company, Plains
                                                                 Insurance Company

    IGF Insurance Company          Des Moines, Iowa              IGF Insurance Company, PAFCO
                                                                 General Insurance Company

    Producers Lloyds Insurance     Amarillo, Texas               Producers Lloyds Insurance
    Company                                                      Company

    Rain and Hail Insurance        West Des Moines, Iowa         CIGNA Property and Casualty
    Services, Inc.                                               Insurance Company

    Rural Community Insurance      Anoka, Minnesota              Rural Community Insurance
    Services                                                     Company
    -----------------------------------------------------------------------------------------
    Source:  GAO's analysis of FCIC's data.

    SUMMARY OF ADJUSTMENTS MADE TO
    REPORTED EXPENSES OF NINE
    COMPANIES, 1994-95
    ========================================================= Appendix III

    For the nine companies included in our review, we evaluated their
    reported expenses to determine whether the reported expenses seemed
    reasonable for the sale and service of federal crop insurance.
    Generally, we considered as reasonable those expenses associated with
    (1) interacting with farmers, (2) reviewing insured property, (3)
    processing policy and claims paperwork, and (4) related overhead and
    indirect costs, including the training and travel of staff.  In order
    to develop a consistent measure of delivery expenses across the
    industry, we deducted reported expenses that appeared unreasonable
    for the delivery of crop insurance.

    We categorized adjustments to the companies' reported crop insurance
    expenses into 19 areas, as shown in table III.1.  Amounts in
    parenthesis represent deductions from the companies' reported
    expenses; other amounts are additions to the companies' reported
    expenses.  For 1994, the nine companies reported expenses of $236.8
    million for selling and servicing buyup insurance.  Our review
    identified adjustments of $27.2 million for expenses that did not
    appear to be reasonably associated with the sale and service of crop
    insurance.  For 1995, the nine companies reported expenses of $305.5
    million related to buyup and catastrophic insurance.  Our review of
    these reported expenses identified adjustments of $15.9 million.  The
    percent of premium calculations in table III.1 are based on 1994
    premiums of $763.4 million and 1995 catastrophic and buyup combined
    premiums of $1.1 billion for the nine companies.  Following table
    III.1 is a brief explanation of each adjustment category.

                                           Table III.1

                             Summary of Adjustments Made to Reported
                               Expenses of Nine Companies, 1994-95

                                                       1994                     1995
                                             ------------------------  ----------------------
                                                           Percent of              Percent of
    Type of adjustment                             Amount     premium      Amount     premium
    ---------------------------------------  ------------  ----------  ----------  ----------
    1. Extraordinary write-offs              ($4,218,984)      (0.55)   ($51,532)      (0.00)
    2. Payments for purchased intangible      (3,329,976)      (0.44)  (2,879,096      (0.26)
     assets                                                                     )
    3. Payments for non-compete contracts       (806,932)      (0.11)   (730,632)      (0.07)
    4. Premiums paid for commercial           (5,415,638)      (0.71)  (5,321,977      (0.49)
     reinsurance                                                                )
    5. Bonuses tied to company                (4,363,099)      (0.57)  (6,750,674      (0.62)
     profitability                                                              )
    6. State income taxes and tax penalties     (483,929)      (0.06)  (1,297,906      (0.12)
                                                                                )
    7. Expenses not capitalized                         0        0.00  (2,400,000      (0.22)
                                                                                )
    8. Fronting fees with no measurable       (1,162,314)      (0.15)  (1,533,513      (0.14)
     benefit                                                                    )
    9. Loss-adjusting expenses not tied to      (114,724)      (0.02)     495,100        0.05
     correct year
    10. Crop-hail expenses                      (111,157)      (0.01)    (59,443)      (0.01)
    11. Miscalculated and omitted expenses    (4,870,931)      (0.64)   6,949,340        0.63
    12. Offsetting related income against     (1,208,465)      (0.16)  (1,188,036      (0.11)
     reported expense items                                                     )
    13. Parent company management fees with     (618,217)      (0.08)   (486,600)      (0.04)
     no measurable benefit
    14. Prior year expenses                      (20,000)      (0.00)           0        0.00
    15. Lobbying and related expenses           (113,585)      (0.01)   (304,809)      (0.03)
    16. Interest paid on late paid premiums     (611,260)      (0.08)    (38,996)      (0.00)
     to FCIC
    17. Claim overpayments/adjustments due        258,789        0.03   (298,891)      (0.03)
     to company error
    18. Personal and/or family expenses             (701)      (0.00)     (1,846)      (0.00)
    19. Undocumented expenses                    (31,467)      (0.00)           0        0.00
    =========================================================================================
    Total adjustments                        ($27,222,590      (3.57)  ($15,899,5      (1.45)
                                                        )                     11)
    -----------------------------------------------------------------------------------------
    Note:  Amounts in parenthesis were subtracted from reported expenses.

    Source:  GAO's analysis of nine participating companies' data.

    The following is a brief explanation of each numbered adjustment
    category.

    1.  Extraordinary write-offs are one-time expenses relating to the
    purchase of another company's business.  These charges included
    liabilities unforeseen at the time of purchase.

    2.  Payments for purchased intangible assets are payments for the
    purchase of another company's business above its book value, commonly
    called goodwill.

    3.  Payments for non-compete contracts are payments to individuals as
    compensation for not competing in the crop insurance industry for a
    specified period of time.  Typically, such payments are in
    conjunction with the purchase of one company by another company.

    4.  Premiums paid for commercial reinsurance are premiums paid by an
    insurance company to another company to (1) reduce its risk of
    underwriting loss and (2) increase its capacity to write more
    insurance than otherwise allowed by its own surplus.  This type of
    expense should be paid from the company's underwriting results and is
    not associated with the direct sale and service of federal crop
    insurance to farmers.

    5.  Bonuses tied to company profitability are company earnings from
    selling and servicing crop insurance distributed as bonuses and
    reported as a necessary delivery expense.  The administrative expense
    reimbursement is intended to reimburse participating companies only
    for expenses that can be reasonably associated with selling and
    servicing crop insurance, not provide a profit.  Underwriting is
    intended to provide companies with the potential to earn profits.

    6.  State income taxes and tax penalties are state taxes paid on
    profits resulting from the delivery and the underwriting of crop
    insurance and expenses related to tax penalties.  These expenses
    should be paid from underwriting results.

    7.  Expenses not capitalized are expenses of capital assets
    charged-off in the period acquired.  Generally accepted accounting
    principles require that such costs be amortized over the useful life
    of the asset.  We applied an appropriate depreciation method for the
    type of asset in question and recognized as an expense a portion of
    the asset's cost for the period of our review.

    8.  Fronting fees with no measurable benefit are fees paid to another
    company, explicitly for service or support of crop insurance, but at
    a rate that is above the industry average and for which no measurable
    benefit from this higher rate could be identified.  While this may be
    a necessary expense of selling and servicing crop insurance in some
    circumstances, we deducted seemingly high charges for which there was
    no identifiable benefit to the purchasing company or the government.

    9.  Loss-adjusting expenses not tied to correct year are both
    additions and subtractions to a company's loss-adjusting expenses to
    adjust some expenses reported on a calendar year basis to a
    reinsurance year basis.

    10.  Crop-hail expenses are expenses directly and indirectly related
    to the sale and service of private crop-hail insurance but reported
    as expenses related to the sale and service of federal crop
    insurance.

    11.  Miscalculated and omitted expenses are various amounts that were
    either calculated in error or, although associated with the sale and
    service of crop insurance, not reported.

    12.  Offsetting related income against reported expense items are
    reductions to expense accounts in an amount equal to related income
    accounts.  For example, we reduced reported interest expenses by
    offsetting, unreported interest income; we reduced automobile
    expenses by offsetting personal mileage reimbursements paid to the
    company; and we reduced legal expenses by the amount of related legal
    expense reimbursements received from FCIC.  Generally accepted
    accounting principles require a matching of income and expense items.

    13.  Parent company management fees with no measurable benefit are
    various fees assessed by parent companies to subsidiary crop
    insurance companies and reported as crop insurance delivery expenses,
    but for which no measurable benefit to the federal crop insurance
    program could be identified.

    14.  Prior year expenses are payments for 1993 premium taxes and
    other prior year commission expenses that should not be included in
    1994 and 1995 expenses.

    15.  Lobbying and related expenses are payments to industry trade
    associations for lobbying activities precluded by FCIC's standard
    reinsurance agreement.

    16.  Interest paid for late paid premiums to FCIC are interest
    payments made to FCIC or others to borrow money to pay FCIC for
    premiums due.  While these were reported by some companies as an
    expense of selling and servicing crop insurance, they were not a
    necessary expense but reflect companies' operating decisions,
    including decisions about working capital levels.

    17.  Claim overpayments/adjustments due to company error are claim
    overpayments made as a result of company oversight but charged as a
    crop insurance delivery expense.

    18.  Personal and/or family expenses are personal and family
    expenses, such as clothing and airline tickets, erroneously reported
    as crop insurance delivery expenses.

    19.  Undocumented expenses are expenses reported as crop insurance
    expenses for which no supporting documentation could be found.

    CROP INSURANCE COMPANIES' EXPENSES
    FOR SELLING AND SERVICING CROP
    INSURANCE
    ========================================================== Appendix IV

    The tables in this appendix show the expenses for selling and
    servicing federal crop insurance as reported by the nine companies in
    our review and as adjusted to reflect the expenses reasonably
    associated with the sale and service of federal crop insurance.
    Table IV.1 shows the company-reported and GAO-adjusted expenses for
    1994.  Table IV.2 shows the percent of premium, dollars per policy,
    and dollars per unit with premium for the GAO-adjusted expenses for
    1994.  Table IV.3 shows company-reported and GAO-adjusted expenses
    for 1995.  Since the companies reported combined expenses and did not
    separate expenses for catastrophic and buyup insurance, table IV.4
    shows GAO-adjusted expenses for catastrophic insurance for 1995,
    based on a proration of total adjusted expenses using units with a
    claim payment, policies with premium, and premium volume ratios.
    Table IV.5 shows GAO-adjusted expenses for buyup insurance for 1995,
    based on similar prorations.  The difference between reported and
    adjusted expense figures in these tables are the adjustments we made,
    as explained in appendix III.  Premiums, policies with premium, units
    with premium, and units with a claim payment for the nine companies
    in our review for 1994 and 1995 are shown in table IV.6.

                                            Table IV.1

                                Company-Reported and GAO-Adjusted
                                Expenses for Selling and Servicing
                                   Federal Crop Insurance, 1994

                                                         Company-reported  GAO-adjusted total
    Operating expense classifications                      total expenses            expenses
    -------------------------------------------------  ------------------  ------------------
    1. Claim adjustment services
    Direct                                                    $24,460,403         $24,463,848
    Reinsurance assumed                                             (180)                   0
    Less: reinsurance ceded                                             0                   0
    =========================================================================================
    Net claim adjustment services                             $24,460,223         $24,463,848
    2. Commission and brokerage
    Direct excluding contingent                              $129,226,151        $121,200,911
    Reinsurance assumed excluding contingent                    1,166,759             193,759
    Less: reinsurance ceded excluding contingent                        0                   0
    Contingent --direct                                           935,080             788,637
    Contingent --reinsurance assumed                                    0                   0
    Less: contingent --reinsurance ceded                                0                   0
    Policy and membership fees                                          0                   0
    =========================================================================================
    Net commission and brokerage                             $131,327,990        $122,183,307
    Lines 3-17. General operating expenses
    3. Allowances to managers and agents                         $184,274          $5,006,101
    4. Advertising                                                848,569             873,918
    5. Boards, bureaus and associations                         1,882,252           1,871,932
    6. Surveys and underwriting reports                            69,390              90,255
    7. Audit of assureds' records                                  18,033              18,030
    8. Salary-related items:
    Salaries                                                   28,035,230          25,749,033
    Payroll taxes                                               1,973,329           1,710,273
    9. Employee relations and welfare                           3,248,618           3,745,063
    10. Insurance                                                 729,616             830,871
    11. Director's fees                                            26,200              34,724
    12. Travel and travel items                                 4,220,388           4,160,899
    13. Rent and rent items                                     2,918,090           3,159,992
    14. Equipment                                               3,078,328           3,170,820
    15. Printing and stationery                                 2,585,875           2,816,230
    16. Postage, telephone and telegraph, exchange              3,813,519           3,962,573
     and express
    17. Legal and auditing                                      2,107,965           2,014,607
    =========================================================================================
    Subtotal of lines 3-17                                    $55,739,676         $59,215,321
    18.Taxes, licenses and fees
    State and local insurance taxes deducting                     $23,134              $3,134
     guaranty association credits of $
    Insurance department licenses and fees                        316,266             315,534
    Gross guaranty association assessments                              0                   0
    All other (excluding federal & foreign                        528,252             116,771
     income and real estate)
    =========================================================================================
    Total taxes, licenses and fees                               $867,652            $435,439
    =========================================================================================
    19. Real estate expenses                                      $67,369                  $0
    =========================================================================================
    20. Real estate taxes                                         $62,481                  $0
    =========================================================================================
    21. Aggregate write-ins for miscellaneous                 $24,296,372          $3,301,257
     operating expenses
    =========================================================================================
    22. Total expenses                                       $236,821,763        $209,599,172
    -----------------------------------------------------------------------------------------
    Source:  GAO's analysis of nine companies' data.

                                            Table IV.2

                              GAO-Adjusted Expenses for Selling and
                             Servicing Federal Crop Insurance, 1994,
                             as a Percent of Premium and in Terms of
                             Dollars Per Policy and Dollars Per Unit

                                                                                      Dollars
                                                     GAO-                            per unit
                                                 adjusted  Percent of     Dollars        with
    Operating expense classifications            expenses     premium  per policy     premium
    -----------------------------------------  ----------  ----------  ----------  ----------
    1. Claim adjustment services
    Direct                                     $24,463,84         3.2      $58.63      $15.64
                                                        8
    Reinsurance assumed                                 0           0        0.00        0.00
    Less: reinsurance ceded                             0         0.0        0.00        0.00
    =========================================================================================
    Net claim adjustment services\a            $24,463,84         3.2      $58.63      $15.64
                                                        8
    2. Commission and brokerage
    Direct excluding contingent                $121,200,9        15.9     $290.48      $77.49
                                                       11
    Reinsurance assumed excluding contingent      193,759         0.0        0.46        0.12
    Less: reinsurance ceded excluding                   0         0.0        0.00        0.00
     contingent
    Contingent --direct                           788,637         0.1        1.89        0.50
    Contingent --reinsurance assumed                    0           0        0.00        0.00
    Less: contingent --reinsurance ceded                0         0.0        0.00        0.00
    Policy and membership fees                          0           0        0.00        0.00
    =========================================================================================
    Net commission and brokerage               $122,183,3        16.0     $292.84      $78.12
                                                       07
    Lines 3-17. General operating expenses
    3. Allowances to managers and agents       $5,006,101         0.7      $12.00       $3.20
    4. Advertising                                873,918         0.1        2.09        0.56
    5. Boards, bureaus and associations         1,871,932         0.2        4.49        1.20
    6. Surveys and underwriting reports            90,255         0.0        0.22        0.06
    7. Audit of assureds' records                  18,030         0.0        0.04        0.01
    8. Salary-related items:
    Salaries                                   25,749,033         3.4       61.71       16.46
    Payroll taxes                               1,710,273         0.2        4.10        1.09
    9. Employee relations and welfare           3,745,063         0.5        8.98        2.39
    10. Insurance                                 830,871         0.1        1.99        0.53
    11. Director's fees                            34,724         0.0        0.08        0.02
    12. Travel and travel items                 4,160,899         0.5        9.97        2.66
    13. Rent and rent items                     3,159,992         0.4        7.57        2.02
    14. Equipment                               3,170,820         0.4        7.60        2.03
    15. Printing and stationery                 2,816,230         0.4        6.75        1.80
    16. Postage, telephone and telegraph,       3,962,573         0.5        9.50        2.53
     exchange
     and express
    17. Legal and auditing                      2,014,607         0.3        4.83        1.29
    =========================================================================================
    Subtotal of lines 3-17                     $59,215,32         7.8     $141.92      $37.86
                                                        1
    18. Taxes, licenses and fees
    State and local insurance taxes                $3,134         0.0       $0.01       $0.00
     deducting
     guaranty association credits of $
    Insurance department licenses and fees        315,534         0.0        0.76        0.20
    Gross guaranty association assessments              0         0.0        0.00        0.00
    All other (excluding federal & foreign        116,771         0.0        0.28        0.07
     income and real estate)
    =========================================================================================
    Total taxes, licenses and fees               $435,439         0.1       $1.04       $0.28
    =========================================================================================
    19. Real estate expenses                           $0         0.0       $0.00       $0.00
    =========================================================================================
    20. Real estate taxes                              $0         0.0       $0.00       $0.00
    =========================================================================================
    21. Aggregate write-ins for                $3,301,257         0.4       $7.91       $2.11
     miscellaneous
     operating expenses
    =========================================================================================
    22. Total expenses                         $209,599,1        27.5     $502.35     $134.01
                                                       72
    -----------------------------------------------------------------------------------------
    \a Net claim adjustment services were $141.13 per unit with a claim
    payment.

    Source:  GAO's analysis of FCIC's and nine companies' data.

                                            Table IV.3

                                Company-Reported and GAO-Adjusted
                                Expenses for Selling and Servicing
                                  Federal Crop Insurance, 1995\a

                                                         Company-reported  GAO-adjusted total
    Operating expense classifications                      total expenses            expenses
    -------------------------------------------------  ------------------  ------------------
    1. Claim adjustment services
    Direct                                                    $33,298,853         $36,880,112
    Reinsurance assumed                                                 0                   0
    Less: reinsurance ceded                                             0                   0
    =========================================================================================
    Net claim adjustment services                             $33,298,853         $36,880,112
    2. Commission and brokerage
    Direct excluding contingent                              $160,218,937        $155,817,956
    Reinsurance assumed excluding contingent                      597,277             155,857
    Less: reinsurance ceded excluding contingent                2,636,000                   0
    Contingent --direct                                         1,070,325           1,568,212
    Contingent --reinsurance assumed                                    0                   0
    Less: contingent --reinsurance ceded                                0                   0
    Policy and membership fees                                          0                   0
    =========================================================================================
    Net commission and brokerage                             $159,250,539        $157,542,025
    Lines 3-17. General operating expenses
    3. Allowances to managers and agents                       $2,911,220          $6,126,462
    4. Advertising                                              1,194,318           1,232,376
    5. Boards, bureaus and associations                         2,844,774           2,945,358
    6. Surveys and underwriting reports                           110,993             168,270
    7. Audit of assureds' records                                  20,344              20,344
    8. Salary-related items:
    Salaries                                                   41,837,055          37,633,413
    Payroll taxes                                               3,718,427           3,808,615
    9. Employee relations and welfare                           4,032,784           5,524,937
    10. Insurance                                                 938,831             967,129
    11. Director's fees                                            37,169              56,251
    12. Travel and travel items                                 6,344,078           6,585,353
    13. Rent and rent items                                     3,798,264           4,192,367
    14. Equipment                                               4,037,347           4,453,554
    15. Printing and stationery                                 4,943,435           5,409,392
    16. Postage, telephone and telegraph, exchange              5,720,936           6,243,747
     and express
    17. Legal and auditing                                      2,823,371           2,896,073
    =========================================================================================
    Subtotal of lines 3-17                                    $85,313,346         $88,263,642
    18. Taxes, licenses and fees
    State and local insurance taxes deducting                    $259,637            $205,137
     guaranty association credits of $
    Insurance department licenses and fees                        576,373             576,373
    Gross guaranty association assessments                              0                   0
    All other (excluding federal & foreign                      1,304,293              60,955
     income and real estate)
    =========================================================================================
    Total taxes, licenses and fees                             $2,140,303            $842,465
    =========================================================================================
    19. Real estate expenses                                     $611,554            $496,081
    =========================================================================================
    20. Real estate taxes                                         $65,884             $50,000
    =========================================================================================
    21. Aggregate write-ins for miscellaneous                 $24,787,168          $5,493,812
     operating expenses
    =========================================================================================
    22. Total expenses                                       $305,467,647        $289,568,136
    -----------------------------------------------------------------------------------------
    \a These numbers are for catastrophic and buyup insurance combined.

    Source:  GAO's analysis of nine companies' data.

                                            Table IV.4

                              GAO-Adjusted Expenses for Catastrophic
                             Insurance, 1995, as a Percent of Premium
                              and in Terms of Dollars per Policy and
                                         Dollars per Unit

                                                     GAO-                             Dollars
                                                 adjusted                            per unit
                                             catastrophic  Percent of     Dollars        with
    Operating expense classifications          expenses\a     premium  per policy     premium
    ---------------------------------------  ------------  ----------  ----------  ----------
    1. Claim adjustment services
    Direct                                     $3,357,617         2.1      $16.84       $7.50
    Reinsurance assumed                                 0         0.0        0.00        0.00
    Less: reinsurance ceded                             0         0.0        0.00        0.00
    =========================================================================================
    Net claim adjustment services\b            $3,357,617         2.1      $16.84       $7.50
    2. Commission and brokerage
    Direct excluding contingent                $6,053,764         3.8      $30.37      $13.52
    Reinsurance assumed excluding                       0         0.0        0.00        0.00
     contingent
    Less: reinsurance ceded excluding                   0         0.0        0.00        0.00
     contingent
    Contingent --direct                                 0         0.0        0.00        0.00
    Contingent --reinsurance assumed                    0         0.0        0.00        0.00
    Less: contingent --reinsurance ceded                0         0.0        0.00        0.00
    Policy and membership fees                          0         0.0        0.00        0.00
    =========================================================================================
    Net commission and brokerage               $6,053,764         3.8      $30.37      $13.52
    Lines 3-17. General operating expenses
    3. Allowances to managers and agents         $599,412         0.4       $3.01       $1.34
    4. Advertising                                346,600         0.2        1.74        0.77
    5. Boards, bureaus and associations           853,669         0.5        4.28        1.91
    6. Surveys and underwriting reports            35,309         0.0        0.18        0.08
    7. Audit of assureds' records                   6,156         0.0        0.03        0.01
    8. Salary-related items:
    Salaries                                   10,980,358         7.0       55.09       24.53
    Payroll taxes                               1,203,287         0.8        6.04        2.69
    9. Employee relations and welfare           1,491,037         0.9        7.48        3.33
    10. Insurance                                 325,858         0.2        1.63        0.73
    11. Director's fees                            11,912         0.0        0.06        0.03
    12. Travel and travel items                 2,054,867         1.3       10.31        4.59
    13. Rent and rent items                     1,161,849         0.7        5.83        2.60
    14. Equipment                               1,165,806         0.7        5.85        2.60
    15. Printing and stationery                 1,699,309         1.1        8.52        3.80
    16. Postage, telephone and telegraph,       1,861,310         1.2        9.34        4.16
     exchange
     and express
    17. Legal and auditing                        816,076         0.5        4.09        1.82
    =========================================================================================
    Subtotal of lines 3-17                    $24,612,816        15.6     $123.48      $54.98
    18. Taxes, licenses and fees
    State and local insurance taxes               $76,683         0.0       $0.38       $0.17
     deducting
     guaranty association credits of $
    Insurance department licenses and fees        174,781         0.1        0.88        0.39
    Gross guaranty association assessments              0         0.0        0.00        0.00
    All other (excluding federal & foreign         21,922         0.0        0.11        0.05
     income and real estate)
    =========================================================================================
    Total taxes, licenses and fees               $273,386         0.2       $1.37       $0.61
    =========================================================================================
    19. Real estate expenses                     $184,262         0.1       $0.92       $0.41
    =========================================================================================
    20. Real estate taxes                         $18,572         0.0       $0.09       $0.04
    =========================================================================================
    21. Aggregate write-ins for                  $520,179         0.3       $2.61       $1.16
     miscellaneous
     operating expenses
    =========================================================================================
    22. Total expenses                        $35,020,595        22.2     $175.69      $78.23
    -----------------------------------------------------------------------------------------
    \a These numbers are based on a proration of the adjusted combined
    total amounts shown in table IV.3.  Loss adjusting expenses are
    prorated between catastrophic and buyup insurance based on units
    indemnified--units with a claim payment.  Most commission expenses
    are prorated directly between catastrophic and buyup insurance; some
    are prorated based on premiums.  Line 3 expenses are prorated between
    catastrophic and buyup insurance based on premiums.  All other
    expenses are prorated between catastrophic and buyup insurance based
    on the number of policies with premiums.  See table IV.6 for unit,
    policy, and premium data used.

    \b Net claim adjustment services were $91.37 per unit with a claim
    payment.

    Source:  GAO's analysis of FCIC's and nine companies' data.

                                            Table IV.5

                                 GAO-Adjusted Expenses for Buyup
                             Insurance, 1995, as a Percent of Premium
                              and in Terms of Dollars per Policy and
                                         Dollars per Unit

                                                     GAO-                             Dollars
                                                 adjusted                            per unit
                                                    buyup  Percent of     Dollars        with
    Operating expense classifications          expenses\a     premium  per policy     premium
    ---------------------------------------  ------------  ----------  ----------  ----------
    1. Claim adjustment services
    Direct                                    $33,522,495         3.6      $73.07      $20.23
    Reinsurance assumed                                 0         0.0        0.00        0.00
    Less: reinsurance ceded                             0         0.0        0.00        0.00
    =========================================================================================
    Net claim adjustment services\b           $33,522,495         3.6      $73.07      $20.23
    2. Commission and brokerage
    Direct excluding contingent              $149,764,192        16.0     $326.45      $90.40
    Reinsurance assumed excluding                 155,857         0.0        0.34        0.09
     contingent
    Less: reinsurance ceded excluding                   0         0.0        0.00        0.00
     contingent
    Contingent --direct                         1,568,212         0.2        3.42        0.95
    Contingent --reinsurance assumed                    0         0.0        0.00        0.00
    Less: contingent --reinsurance ceded                0         0.0        0.00        0.00
    Policy and membership fees                          0         0.0        0.00        0.00
    =========================================================================================
    Net commission and brokerage             $151,488,261        16.2     $330.21      $91.44
    Lines 3-17. General operating expenses
    3. Allowances to managers and agents       $5,527,050         0.6      $12.05       $3.34
    4. Advertising                                885,776         0.1        1.93        0.53
    5. Boards, bureaus and associations         2,091,689         0.2        4.56        1.26
    6. Surveys and underwriting reports           132,961         0.0        0.29        0.08
    7. Audit of assureds' records                  14,188         0.0        0.03        0.01
    8. Salary-related items:
    Salaries                                   26,653,055         2.8       58.10       16.09
    Payroll taxes                               2,605,328         0.3        5.68        1.57
    9. Employee relations and welfare           4,033,900         0.4        8.79        2.43
    10. Insurance                                 641,271         0.1        1.40        0.39
    11. Director's fees                            44,339         0.0        0.10        0.03
    12. Travel and travel items                 4,530,486         0.5        9.88        2.73
    13. Rent and rent items                     3,030,518         0.3        6.61        1.83
    14. Equipment                               3,287,748         0.4        7.17        1.98
    15. Printing and stationery                 3,710,083         0.4        8.09        2.24
    16. Postage, telephone and telegraph,       4,382,437         0.5        9.55        2.65
     exchange
     and express
    17. Legal and auditing                      2,079,997         0.2        4.53        1.26
    =========================================================================================
    Subtotal of lines 3-17                    $63,650,826         6.8     $138.75      $38.42
    18. Taxes, licenses and fees
    State and local insurance taxes              $128,454         0.0       $0.28       $0.08
     deducting
     guaranty association credits of $
    Insurance department licenses and fees        401,592         0.0        0.88        0.24
    Gross guaranty association assessments              0         0.0        0.00        0.00
    All other (excluding federal & foreign         39,033         0.0        0.09        0.02
     income and real estate)
    =========================================================================================
    Total taxes, licenses and fees               $569,079         0.1       $1.24        0.34
    =========================================================================================
    19. Real estate expenses                     $311,819         0.0       $0.68        0.19
    =========================================================================================
    20. Real estate taxes                         $31,428         0.0       $0.07       $0.02
    =========================================================================================
    21. Aggregate write-ins for                $4,973,633         0.5      $10.84       $3.00
     miscellaneous
     operating expenses
    =========================================================================================
    22. Total expenses                       $254,547,541        27.1     $554.86     $153.65
    -----------------------------------------------------------------------------------------
    \a These numbers are based on a proration of the adjusted combined
    total amounts shown in table IV.3.  Loss adjusting expenses are
    prorated between catastrophic and buyup insurance based on units
    indemnified--units with a claim payment.  Most commission expenses
    are prorated directly between catastrophic and buyup insurance; some
    are prorated based on premiums.  Line 3 expenses are prorated between
    catastrophic and buyup insurance based on premiums.  All other
    expenses are prorated between catastrophic and buyup insurance based
    on the number of policies with premiums.  See table IV.6 for unit,
    policy, and premium data used.

    \b Net claim adjustment services were $87.08 per unit with a claim
    payment.

    Source:  GAO's analysis of FCIC's and nine companies' data.

                                   Table IV.6

                       Summary of Federal Crop Insurance
                     Activity for the Nine Companies in Our
                                 Expense Review

                                              1995
                                          Combined
                                        catastroph        1995
    Data for nine                           ic and  Catastroph  1995 Buyup
    companies combined            1994       buyup     ic only        only
    ----------------------  ----------  ----------  ----------  ----------
    Premiums                $763,400,1  $1,095,309  $157,580,7  $937,728,8
                                    48        ,588          29          59
    Policies with premium      417,239     658,094     199,333     458,761
    Units with premium       1,564,071   2,104,302     447,634   1,656,668
    Units with a claim         173,339     421,698      36,746     384,952
     payment
    ----------------------------------------------------------------------
    Source:  GAO's analysis of FCIC's data.

    METHODOLOGY FOR COMPARING 1995
    COST TO GOVERNMENT TO DELIVER
    CATASTROPHIC INSURANCE THROUGH
    USDA AND PRIVATE COMPANIES
    =========================================================== Appendix V

    The government sells and services catastrophic crop insurance through
    USDA as well as through private companies.  Table V.1 provides an
    analysis of the government's costs to deliver catastrophic insurance
    through USDA in 1995.  Table V.2 provides an analysis of the
    government's costs to deliver catastrophic insurance through private
    companies in 1995.  Unlike our evaluation of companies' expenses to
    sell and service crop insurance, this analysis is a comparison of
    costs to the government to deliver catastrophic insurance through two
    different delivery systems.  This analysis compares the total costs
    to the government to deliver catastrophic insurance through USDA and
    private companies, including all private companies, not only the ones
    in our review.  Below is an explanation of our methodology for
    determining the government's costs for each delivery system.

          METHODOLOGY FOR DETERMINING
          THE COST TO THE GOVERNMENT
          TO DELIVER CATASTROPHIC
          INSURANCE THROUGH USDA IN
          1995
    ------------------------------------------------------- Appendix V:0.1

    To determine the cost to the government for USDA's delivery of
    catastrophic crop insurance, we identified and summed all applicable
    expenses paid with government funds.  We then reduced these expenses
    by the amount of processing fees paid by farmers and collected by
    USDA's local Farm Service Agency (FSA) offices.  The government's
    basic costs to deliver catastrophic insurance through USDA in 1995
    were the costs that USDA incurred to sell and service catastrophic
    crop insurance policies.  The majority of these costs consisted of
    direct and indirect expenses incurred by FSA's local offices.  USDA
    also incurred other direct and indirect costs for software
    development, central staff support, and FCIC support.  Offsetting
    these expenses were the amount of catastrophic insurance processing
    fees collected from farmers by FSA's offices and remitted to USDA,
    thereby reducing USDA's overall delivery expenses and the costs to
    the government.  See table V.1.

    We identified the costs incurred by FSA's local offices to deliver
    catastrophic insurance using USDA's County Office Work Measurement
    and Fund Allocation System for 1995.  This system is used to track
    the amount of time in staff work days required to perform identified
    elements of work performed in local county offices which is then
    multiplied by an average cost per staff work day that includes
    salaries and benefits.  With assistance from USDA, we selected all
    work items that related directly or indirectly to the delivery of
    catastrophic insurance.  Those work items that were directly related
    to catastrophic insurance delivery are listed in table V.1 with their
    respective work item codes, for example, "225 Signup for catastrophic
    program" and "9092 Photocopies." We computed direct costs for FSA's
    local offices to be $45,965,217.

    For those work items that were indirectly related, such as general
    administration of USDA's County Office Work Measurement and Fund
    Allocation System, rent, and utilities, we included a prorated amount
    based on the relationship between the total cost of the direct
    catastrophic insurance delivery work items of $45,965,217 to the
    total cost of all direct work items in the system of $281,621,066, or
    about 16.3 percent.  We applied this percentage to the total for
    overhead work items of $202,393,699 to determine the overhead costs
    of FSA's local offices of $33,034,000.

    Other costs incurred by the government to deliver catastrophic
    insurance through USDA included direct and indirect costs for FSA's
    software development and support staff, and FCIC's support.
    According to FSA, it expended about 10,163 work hours for software
    development between June 1, 1994, and December 31, 1995.  FSA
    estimated an average software development cost, including salaries
    and benefits, of $32 per hour for a total of $325,208.  In addition,
    FSA incurred costs for central staff support\1 in its Washington,
    D.C., state, and area offices of $8,007,249.  This total included
    direct salary, travel, printing, and other costs amounting to
    $7,129,169; and estimated indirect support costs of $878,080.  FCIC's
    support costs for salaries, computer resources, training, travel,
    public awareness, loss adjusting, and other miscellaneous costs
    amounted to $19,303,489.  The total we computed for direct and
    indirect costs of $78,999,217 for FSA's local offices plus the total
    direct and indirect costs for FSA's software development, FSA's
    support staff, and FCIC's support of $27,635,946 equals the total
    basic cost to the government to deliver catastrophic insurance
    through USDA in 1995 of $106,635,163, or $132.72 per crop policy.

    FSA's local offices collected $42,822,950 in processing fees from
    farmers.  This directly reduced the cost to the government to deliver
    catastrophic insurance through USDA because these dollars were
    remitted to USDA.  Accordingly, the total cost to the government of
    USDA's delivery was $63,812,213, or $79.42 per crop policy.

    --------------------
    \1 In 1995, these staff were part of USDA's Agricultural
    Stabilization and Conservation Service.

          METHODOLOGY FOR DETERMINING
          THE COST TO THE GOVERNMENT
          TO DELIVER CATASTROPHIC
          INSURANCE THROUGH COMPANIES
          IN 1995
    ------------------------------------------------------- Appendix V:0.2

    To determine the cost to the government for private companies'
    delivery of catastrophic insurance, we identified and totaled (1) all
    government payments to private companies to deliver catastrophic crop
    insurance and (2) all expenses incurred by FSA's local offices to
    support private delivery of catastrophic insurance.  We also reduced
    the government's cost for private company delivery by the amount of
    excess processing fees collected by companies and remitted to USDA.
    The basic costs to the government to deliver catastrophic insurance
    through private companies in 1995 consisted of a percentage of
    premiums reimbursed to companies and various support costs incurred
    by FSA.  Offsetting these expenses were the amount of excess
    catastrophic insurance processing fees companies collected from
    farmers and remitted to USDA, thereby slightly reducing the
    government's cost for company delivery.  In addition, USDA paid the
    companies an underwriting gain in 1995 that was based on the amount
    of underwriting risk the companies retained.  See table V.2.

    In 1995, the government paid the companies $25,882,567 in expense
    reimbursements for catastrophic policies.  This is about 14.8 percent
    of their written catastrophic insurance premiums of about $174.9
    million.

    FSA's local offices provided various support services to private
    companies in 1995.  Costs incurred for this support are tracked using
    various work item codes in USDA's County Office Work Measurement and
    Fund Allocation System.  With assistance from FSA, we selected each
    work item relating directly to support services provided to private
    companies, such as "0210 Information for reinsured companies." We
    computed total support costs provided by FSA's local offices to be
    $3,499,061.  Combined with the expense reimbursement of $25,882,567,
    the total basic cost to the government to deliver catastrophic
    insurance through private companies in 1995 was $29,381,628, or
    $83.37 per crop policy.

    The Federal Crop Insurance Reform and Department of Agriculture
    Reorganization Act of 1994 authorized companies to retain processing
    fees collected from farmers up to specified limits per farmer per
    county.\2 Fees collected that exceeded these limits had to be
    remitted to the government.  This reduced the basic cost to the
    government for company delivery by the amount of fees that the
    companies remitted to the government, or by $2,543,000.  In 1995,
    USDA also paid companies additional reimbursements totaling $2,950
    for excess loss adjusting.  After including excess loss adjusting
    reimbursements and offsetting income from fees, the government's cost
    to deliver catastrophic insurance through private companies was
    $26,841,578 or $76.16 per crop policy.

    Also, under the 1995 standard reinsurance agreement, companies could
    share in any underwriting gains or losses resulting from the
    catastrophic insurance they sold.  Since premiums for catastrophic
    insurance coverage are paid entirely by the government, any
    underwriting gains--premiums in excess of claims paid out--are
    premium dollars funded by the government.  In 1995, the companies
    earned an estimated underwriting gain of $44,777,673.  Therefore, in
    1995, the cost to the government to deliver catastrophic insurance
    through companies was increased by this amount of underwriting gain,
    for a total cost to deliver catastrophic insurance through companies
    of $71,619,251, or $203.22 per crop policy.

    To determine costs per crop policy, we obtained from FCIC's
    Experience database 1995 crop policy counts for catastrophic
    insurance for each delivery system.  According to FCIC's Experience
    database for 1995, USDA sold 803,438 catastrophic crop policies and
    the companies sold 352,422 catastrophic crop policies.  We then
    divided the amounts derived for each cost category by these crop
    policy counts.  Although we did not independently assess the accuracy
    and reliability of USDA's computerized databases, we used the same
    files USDA uses to manage the crop insurance program and its local
    county offices.

                                            Table V.1

                                Cost to the Government to Deliver
                               Catastrophic Insurance Through USDA,
                                               1995

                                                                                   Percent of
                                                                       Cost per  $283 million
    Cost category                                            Cost   crop policy   in premiums
    -----------------------------------------------  ------------  ------------  ------------
    FSA local office direct costs--work codes and
     titles
    225 Signup for catastrophic program               $19,020,924        $23.67           6.7
    226 Actual production history for insured crops    11,427,774         14.22           4.0
    227 Refund of catastrophic processing fees            367,096          0.46           0.1
    228 Claim for indemnity                             1,501,256          1.87           0.5
    229 Acreage report                                  6,757,722          8.41           2.4
    230 Indemnity payment assignment                       17,540          0.02         0.0\a
    231 Critical loss appraisals                        1,812,832          2.26           0.6
    9092 Photocopies                                      963,255          1.20           0.3
    9093 Aerial photocopies                               409,583          0.51           0.1
    9115 Reform training travel costs                   2,679,690          3.34           0.9
    9116 Reform postage costs\b                         1,007,545          1.25           0.4
    =========================================================================================
    Subtotal of FSA local office direct costs         $45,965,217        $57.21          16.2
    =========================================================================================
    FSA local office indirect costs
    =========================================================================================
    Allocation of various overhead work items         $33,034,000        $41.12          11.7
    =========================================================================================
    Total FSA local office costs\c                    $78,999,217        $98.33          27.9
    Other direct and indirect USDA costs:
    =========================================================================================
    FSA direct central software development              $325,208         $0.40           0.1
    FSA central staff support--direct costs             7,129,169          8.87           2.5
    FSA central staff support--indirect costs             878,080          1.09           0.3
    =========================================================================================
    Subtotal FSA central staff support costs           $8,007,249         $9.97           2.8
    USDA/FCIC direct costs
    Salaries                                            1,541,635          1.92           0.5
    Computer resources                                  1,899,550          2.36           0.7
    Training                                               20,566          0.03         0.0\a
    Travel                                                628,451          0.78           0.2
    Public awareness                                    1,462,610          1.82           0.5
    Loss adjustment contractors                         7,819,110          9.73           2.8
    Miscellaneous                                       5,931,567          7.38           2.1
    =========================================================================================
    Subtotal of USDA/FCIC direct costs                $19,303,489        $24.03           6.8
    =========================================================================================
    Total of other USDA costs                         $27,635,946        $34.40           9.8
    =========================================================================================
    Total basic delivery cost to government          $106,635,163       $132.72          37.7
    =========================================================================================
    Less catastrophic fees collected                  $42,822,950        $53.30          15.1
    =========================================================================================
    Subtotal cost to government                       $63,812,213        $79.42          22.6
    =========================================================================================
    Plus underwriting gain                                     $0         $0.00           0.0
    =========================================================================================
    Total cost to government\d                        $63,812,213        $79.42          22.6
    -----------------------------------------------------------------------------------------
    Note:  Totals may not add because of rounding.

    \a Less than 0.1 percent.

    \b This work code benefitted both the USDA and the company delivery
    systems; thus, we prorated the total amount for this work code for
    both delivery systems based on total federal crop insurance crop
    policies.

    \c Local office expenses shown do not reflect indemnity activity that
    may have occurred in the first quarter of fiscal year 1996.  USDA was
    unable to provide such data.

    \d Costs include USDA's one-time start up costs for establishing the
    USDA delivery system.

    Source:  GAO's analysis of USDA's data.

                                        Table V.2

                            Cost to the Government to Deliver
                              Catastrophic Insurance Through
                                     Companies, 1995

                                                                          Percent of
                                                                              $174.9
                                                              Cost per    million in
    Cost category                                   Cost   crop policy      premiums
    --------------------------------------  ------------  ------------  ------------
    ================================================================================
    Expense reimbursement                    $25,882,567        $73.44          14.8
    Support services provided by FSA's
     local offices--work codes and titles
    0210 Information for reinsured            $2,698,827         $7.66           1.5
     companies\a
    9086 Aerial compliance\a                       1,700        0.00\b         0.0\c
    9094 Photocopies provided companies\a        165,973          0.47           0.1
    9095 Aerial photocopies provided             147,535          0.42           0.1
     companies\a
    9102 Postage costs for companies\a            43,073          0.12         0.0\c
    9116 Reform postage costs\d                  441,952          1.25           0.3
    ================================================================================
    Total cost of support services            $3,499,061         $9.93           2.0
     provided by FSA
    ================================================================================
    Total basic delivery cost to             $29,381,628        $83.37          16.8
     government
    Less catastrophic fees remitted to the    $2,543,000         $7.22           1.5
     government in excess of limits
     established by 1994 reform act
    Plus excess loss adjusting                    $2,950         $0.01         0.0\c
     reimbursement
    ================================================================================
    Subtotal of fees and excess loss        ($2,540,050)       ($7.21)         (1.5)
     adjusting reimbursement
    ================================================================================
    Subtotal cost to government              $26,841,578        $76.16          15.4
    ================================================================================
    Plus underwriting gain                   $44,777,673       $127.06          25.6
    ================================================================================
    Total cost to government                 $71,619,251       $203.22          41.0
    --------------------------------------------------------------------------------
    Note:  Totals may not add because of rounding.

    \a These work codes benefitted both catastrophic and buyup policies
    sold by the companies; thus, we prorated the total amount for this
    work code to include only the amount related to the companies'
    catastrophic crop policies.

    \b Less than $0.01.

    \c Less than 0.1 percent.

    \d This work code benefitted both delivery systems; thus, we first
    prorated the work code amount to both delivery systems based on total
    federal crop insurance crop policies and then prorated the companies'
    amount to include only the amount related to the companies'
    catastrophic crop policies.

    Source:  GAO's analysis of USDA's data.

    --------------------
    \2 Participating companies retained $17,356,400 in catastrophic
    insurance processing fees collected from farmers.

    EXPLANATION OF POLICY AND PREMIUM
    DATA USED TO ILLUSTRATE
    ALTERNATIVE EXPENSE REIMBURSEMENT
    ARRANGEMENTS
    ========================================================== Appendix VI

    Crop insurance policies typically consist of more than one unit being
    insured per policy, many with different types of coverage on those
    units.  Table VI.1 shows policy counts and premium amounts for the
    various coverage mixes selected by farmers.  Policies with additional
    coverage represent the largest percentage of both policies and
    premiums sold by companies, 60.1 and 64.6 percent, respectively.

                                            Table VI.1

                              1995 Premiums and Policies by Type of
                                             Coverage

                                      (Dollars in thousands)

                                                            Premiums by type of coverage
                                                       --------------------------------------
    Coverage              Percent
    mix on a     Number        of             Percent
    given            of     total     Total  of total  Catastro            Addition
    policy     policies  policies  premiums  premiums      phic   Limited        al     Other
    ---------  --------  --------  --------  --------  --------  --------  --------  --------
    Policies sold by companies
    -----------------------------------------------------------------------------------------
    Catastrop   186,031      26.2  $141,648      11.2  $141,648        $0        $0        $0
     hic only
    Limited      33,352       4.7    65,872       5.2         0    65,872         0         0
     addition
     al only
    Catastrop     4,910       0.7    19,811       1.6     6,212    13,599         0         0
     hic and
     limited
     addition
     al
    Additiona   427,366      60.1   814,045      64.6         0         0   814,045         0
     l only
    Catastrop    41,319       5.8   137,795      10.9    25,037         0   112,759         0
     hic and
     addition
     al
    Limited      14,704       2.1    61,075       4.8         0    23,473    37,602         0
     addition
     al and
     addition
     al
    Catastrop     2,145       0.3    15,127       1.2     1,946     5,466     7,715         0
     hic and
     limited
     addition
     al and
     addition
     al
    Other         1,331       0.2     5,235       0.4         7         4        21     5,202
    =========================================================================================
    Total       711,158     100.0  $1,260,6     100.0  $174,850  $108,415  $972,141    $5,202
     federal                             09
     crop
     insuranc
     e sold
     by
     companie
     s
    Total       457,607     100.0  $282,997     100.0  $282,979       n/a       n/a        18
     USDA
     catastro
     phic
    Total      1,168,76     100.0  $1,543,6     100.0  $457,830  $108,415  $972,141    $5,220
     federal          5                  06
     crop
     insuranc
     e sold
    -----------------------------------------------------------------------------------------
    Note:  Totals may not add because of rounding.

    Source:  GAO's analysis of FCIC's data.

    GAO-ADJUSTED DELIVERY EXPENSES FOR
    BUYUP INSURANCE IN RELATION TO
    PUBLISHED DATA ON COMMERCIAL LINES
    OF INSURANCE
    ========================================================= Appendix VII

    As mandated by the 1994 crop insurance reform act, table VII.1
    presents GAO-adjusted delivery expenses for buyup insurance as a
    percent of premium for 1994 and 1995 as well as the published 10-year
    average delivery expenses as a percent of premium for various
    commercial property and casualty lines of insurance.  The buyup
    delivery expenses compared are our adjusted, nine-company total
    expenses as a percent of buyup premium as shown in appendix IV, table
    IV.2 for 1994 and table IV.5 for 1995.  Property and casualty
    delivery expenses as a percent of premium are from Best's Aggregates
    & Averages:  Property-Casualty, 1996 Edition.  We did not, however,
    use this information to arrive at our conclusion of an appropriate
    reimbursement rate.

    As we note in our table, a comparison of companies' percentage of
    premium data for various insurance lines may be misleading because
    the amount of premium dollars involved per policy is not shown.  In
    particular, premiums for some commercial insurance lines are
    significantly lower than government crop insurance premiums.
    Consequently, although expenses as a percent of premium may appear to
    be much higher for several commercial lines, the amount of expense
    dollars involved per policy is actually less than for government crop
    insurance.

    In addition, the expense ratios for commercial lines are based on
    premiums that include both risk and expense factors, while the
    expense ratios for multiple-peril buyup crop insurance are based on
    the premiums that include only a risk factor.  Furthermore, we did
    not analyze the numbers associated with any commercial lines of
    insurance, including the factors that determine delivery expenses.

                                           Table VII.1

                                Delivery Expenses as a Percent of
                                Premium for 1994 and 1995 Adjusted
                               Government Buyup Crop Insurance and
                                  Published 10-Year Averages for
                                    Commercial Insurance Lines

                                    Delivery expenses as a percent of premium\a
                       ----------------------------------------------------------------------
                         Loss-adjusting        Commission         All other
    Line of insurance          expenses          expenses          expenses    Total expenses
    -----------------  ----------------  ----------------  ----------------  ----------------
    Group accident                  4.9               8.1               9.3              22.3
     and health
    1995 Buyup                      3.6              16.2               7.4              27.1
     (adjusted 9-co.
     total)
    1994 Buyup                      3.2              16.0               8.2              27.5
     (adjusted 9-co.
     total)
    Private passenger               8.4               8.6              13.9              31.0
     auto physical
     damage
    Workers'                       11.7               5.4              13.9              31.0
     compensation
    Other lines\b                   4.2               6.9              20.4              31.4
    Reinsurance                     6.2              20.1               6.1              32.4
    Other accident                  5.4              13.0              16.5              34.9
     and health\c
    Personal lines\d               11.2              10.0              14.2              35.4
    Private passenger              13.0               8.5              14.1              35.6
     auto liability
    Aircraft                        8.1              14.4              14.1              36.6
    Commercial auto                 6.7              15.1              14.9              36.7
     physical damage
    Total (average)                12.6              11.2              14.8              38.6
     all lines
    Fidelity                        7.3              13.0              19.3              39.6
    Allied lines                    7.4              15.1              17.6              40.1
    Farmowners                      8.8              16.6              15.1              40.5
     multiple peril
    Commercial                     13.8              12.3              15.2              41.3
     lines\a
    Commercial auto                13.0              13.3              15.2              41.5
     liability
    Ocean marine                    8.0              19.1              14.4              41.5
    Homeowners                     11.2              16.1              14.9              42.1
     multiple peril
    Burglary and                    5.2              14.6              22.7              42.5
     theft
    Fire                            5.2              17.3              20.0              42.5
    Inland marine                   5.7              17.5              19.5              42.7
    Earthquake                     14.3              13.8              16.2              44.3
    Medical                        30.7               3.9              11.3              45.9
     malpractice
    Commercial                     15.9              17.4              18.3              51.6
     multiple peril
    Boiler and                      5.0              11.5              35.8              52.3
     machinery
    Other liability                27.7              11.0              14.5              53.2
    Surety                          9.6              19.1              28.9              57.6
    -----------------------------------------------------------------------------------------
    Notes:  Totals may not add because of rounding.

    \a Percentage of premium data may be misleading because the amount of
    premium dollars involved per policy is not shown.  In particular,
    premiums for some commercial insurance lines are significantly lower
    than for government crop insurance.  Consequently, although expenses
    as a percent of premium may appear to be much higher for several
    commercial lines, the amount of expense dollars involved per policy
    is actually less than for government crop insurance.  See comment 9
    in app.  VIII or comment 7 in app.  IX for an explanation of how
    percentage of premium information should be interpreted.

    \b Other lines includes glass, credit, mortgage guaranty,
    international, and miscellaneous.

    \c Other accident and health includes credit accident & health.

    \d Personal lines include private passenger auto and homeowners
    multiple peril; commercial lines include all other lines, including
    earthquake.

    Source:  GAO's analysis of nine participating companies' data and
    data from Best's Aggregates & Averages:  Property-Casualty, 1996
    Edition (Oldwick, New Jersey:  A.M.  Best Company, Inc., 1996), pp.
    174-178.

    (See figure in printed edition.)APPENDIX VIII
    COMMENTS FROM NATIONAL CROP
    INSURANCE SERVICES, INC.
    ========================================================= Appendix VII

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

    (See figure in printed edition.)

       GAO'S COMMENTS
    ------------------------------------------------------- Appendix VII:1

    1.  Because of publishing constraints, we did not reproduce the
    comments of individual members that the association provided in an
    appendix.  However, copies of these comments are available from GAO's
    Director of Food and Agriculture Issues.

    2.  As we note early in the report, the insurance companies play an
    important role in delivering federal crop insurance.  However, much
    of the program's success resulted from changes made by the 1994
    reform act and the Federal Agriculture Improvement and Reform Act of
    1996.

    3.  Over the last 15 years, the purchase of crop insurance has become
    more important to farmers.  The 1994 reform act restricted disaster
    assistance payments, and the Federal Agriculture Improvement and
    Reform Act of 1996 made farmers more responsible for managing risk.
    As a result, farmers are more likely to purchase crop insurance.
    Therefore, while agents have to sell the product, farmers now have
    more incentives to purchase it.  While we agree that incentives are
    important for attracting, motivating, and retaining a workforce, we
    question whether a taxpayer-supported program should be asked to
    reimburse certain expenses.

    4.  Our report was intended to respond to the mandate contained in
    the 1994 reform act.  In planning our response, we developed an
    approach that addressed all of the questions in the law.  For
    reporting purposes, we focused on the issue that the legislative
    history of the mandate indicated was of most concern to congressional
    decisionmakers--the cost of administering the program.

    5.  We used 1994 and 1995 data for our analysis because these 2 years
    provide a picture of expenses for delivering crop insurance before
    and after the implementation of the reform act.  Because of industry
    concerns expressed early in our review about the use of this 2-year
    period, we considered the extent to which loss-adjusting expenses may
    change with varying loss experience as well as the extent to which
    loss-adjusting expenses may affect total administrative expenses.  We
    found that high crop losses did not significantly increase companies'
    loss-adjusting expenses--the delivery cost factor most likely to be
    affected by high crop losses.  For example, for buyup insurance,
    while companies paid out $1.28 in loss claims for every dollar of
    premium received in 1995 and $0.58 in loss claims for every dollar of
    premium received in 1994, their related loss-adjusting expenses as a
    percent of premium for these 2 years were not substantially
    different.  Therefore, although losses were higher in 1995 than in
    1994, the companies' loss-adjusting expenses for processing these
    claims did not increase commensurately.  In addition, loss-adjusting
    expenses are not a significant portion of total administrative
    expenses (about 3.5 percent of premiums on average for the nine
    companies we reviewed).  Furthermore, since the 1980s, the crop
    insurance companies have received additional reimbursements in years
    of high crop losses.

    6.  The years we examined--1994 and 1995--were the first 2 years that
    the industry provided USDA with the detailed data needed to analyze
    the expenses associated with the selling and servicing of crop
    insurance.  Data from earlier years were not available in a
    consistent, detailed format for analysis.  In 1989, the companies
    were required to submit summary expense data and ratios, but
    according to FCIC, many companies did not submit these data and the
    data that were provided were not consistent between companies.
    Furthermore, in 1991, FCIC rescinded this requirement.  In the 1995
    standard reinsurance agreement, FCIC began to require companies to
    submit a detailed expense report in the National Association of
    Insurance Commissioners' (NAIC) format using NAIC guidelines for the
    prior calendar year--calendar year 1993.  However, not all companies
    complied with the requirement until 1994.

    7.  We contacted National Crop Insurance Services, Inc.  (NCIS) early
    in our review to discuss our review objectives and obtain the
    association's views.  We spoke with NCIS officials during the course
    of our review and obtained data on company membership in NCIS.
    However, NCIS officials did not offer to provide any company expense
    data.  Furthermore, because we had access to FCIC's and the nine
    companies' original data, we did not request company expense data
    from NCIS.

    8.  As discussed above, we believe that 1994 and 1995 were the 2 most
    appropriate years to analyze.  Prior to 1994, companies did not
    report their expense data in a manner that is amenable to detailed
    analysis.  As a result, we are not at all certain that the industry's
    assertion is accurate.

    9.  In appendix VII of our draft report, we inadvertently omitted the
    loss-adjusting expenses associated with commercial insurance lines in
    our presentation of commercial lines of insurance expenses in
    relation to the expenses of government-sponsored multiple-peril crop
    insurance.  In response to the industry's observation on this
    omission, we revised the appendix to include reported loss-adjusting
    expenses.  Contrary to the industry's assertion, however, we did not
    use this information to arrive at our conclusion of an appropriate
    reimbursement rate for delivering federal crop insurance; we
    presented this information only because it was required by the 1994
    reform act.

    We did not use this information for our analysis because the
    percentages presented do not provide an appropriate comparison
    between commercial lines of insurance and government-sponsored
    multiple-peril crop insurance for several reasons.  First, the
    expense ratios for commercial lines are based on premiums that
    include both risk and expense factors, while the expense ratios for
    multiple-peril crop insurance are based on premiums that include only
    a risk factor.  Second, we did not verify the ratios for the
    commercial lines of insurance, and hence we cannot speak to the
    accuracy of the cost elements that have been included in the
    computations of those ratios.  Finally, premium rates for commercial
    insurance lines are significantly lower than average rates for
    multiple-peril crop insurance.  As a result, if a comparison to other
    lines of insurance is to be made, the only appropriate comparison is
    on a dollars-per-policy basis, not on a percentage-of-premium basis.
    Although expenses as a percent of premium may appear to be much
    higher for several commercial lines, the amount of expense dollars
    involved per policy is actually less than for government crop
    insurance.

    If we examine the dollars paid per policy instead of the percentage
    of premium per policy, the reimbursement for multiple-peril crop
    insurance per dollar of premium substantially exceeds the
    reimbursement for other lines.  For example, in 1995, according to
    NAIC, the average consumer payment for private passenger automobile
    insurance was $666 per vehicle, and the reported delivery expense
    rate was as much as 35.6 percent, or $237.  In comparison, for 1995
    buyup crop insurance, the average premium was $1,905 per policy, and
    the 31-percent reimbursement rate resulted in an average payment to
    crop insurance companies of $591--or about 2.5 times more than the
    dollar value of delivery expenses for private passenger automobile
    insurance.  If the reimbursement rate had been 27.1 percent in 1995,
    as we believe would have been appropriate for that year, the crop
    insurance companies would have received an average reimbursement
    payment per policy--$516--an amount that is still more than double
    the dollar value of delivery expenses for this private passenger
    automobile insurance.  A comparison of the reimbursement for
    multiple-peril crop insurance on a dollars-per-policy basis to other
    insurance lines yields similar results.

    10.  We welcome any additional perspectives.  However, while NCIS
    asserts that the industry's consultants will bring an "unbiased
    perspective" to the issue, we question how consultants hired by the
    industry can be truly objective.  In any event, we cannot assess the
    contribution of these consultants to the issue without seeing their
    product.

    11.  At the time of our review, the industry and the government had
    only 1 year of experience with the catastrophic insurance program.
    Furthermore, in 1996, the underwriting gains on catastrophic
    insurance were higher than in 1995.

    12.  As we state in chapter 3, the government's costs for delivering
    catastrophic insurance are higher through private insurance companies
    because these companies earn underwriting gains, and USDA does not.

    13.  We recognize that government policy is to move the sale of
    catastrophic insurance to the private sector.  Our report simply
    analyzes the differences in costs for the two delivery systems.  As
    we state in chapter 3, our only recommendation is that FCIC closely
    monitor the underwriting gains associated with private-sector
    delivery of this insurance in the context of FCIC's long-term target.

    14.  While the industry's comment focuses on agents' compensation,
    our report focuses on the government's reimbursement arrangements
    with companies, not agents.  We recognize that companies can
    compensate their agents in ways that they consider appropriate,
    regardless of the companies' arrangement with the federal government.

    15.  As required by the 1994 act, we examined the advantages and
    disadvantages of alternative reimbursements to private companies--not
    agents--and did not recommend one alternative over another.
    Furthermore, we noted that the insurance companies prefer the current
    system.

    16.  As we recognize in chapter 4, this capping alternative has the
    disadvantage of possibly discouraging some companies from
    aggressively marketing larger crop insurance policies for FCIC.
    However, our review showed that a capping alternative that achieved
    an overall 24-percent reimbursement rate for administrative expenses
    would affect only the largest 5 percent of policies.

    17.  We agree that this alternative may require additional oversight
    by FCIC, as we state in chapter 4.  While the industry appears to
    believe that this alternative provides no incentive for delivering
    crop insurance, we believe that one component of the alternative--the
    percentage of premiums--would continue to serve as an incentive.

    18.  While we agree that this alternative is likely to increase
    FCIC's administrative workload, we discuss it simply to present a
    widely considered alternative for delivery of government services.
    Moreover, at least one company within the industry believes that the
    Federal Acquisition Regulation (FAR) is an appropriate alternative.
    In 1993, one company testified before the Subcommittee on
    Agriculture, Rural Development, FDA, and Related Agencies, House
    Committee on Appropriations, that it endorsed the FAR as an
    appropriate reimbursement arrangement.

    19.  As we note in chapter 4, this alternative may discourage some
    larger companies from aggressively delivering crop insurance.

    20.  In any competitive business, companies must shoulder certain
    expenses for the opportunity to earn profits.  However, in the case
    of the federal crop insurance program, companies are paid for these
    expenses through the administrative expense reimbursement.  In
    addition, the companies have the opportunity to earn profits through
    underwriting gains.

    21.  We examined the two 1989 reports as part of our review, and to
    the extent that they provided information applicable to the current
    crop insurance program, we considered it.  However, in so doing, we
    noted that the program's size and nature has changed significantly
    since the 1980s.

    22.  We do not challenge the industry's characterization of the
    administrative expense reimbursement as a form of subsidy, but it is
    not clear what the significance of this alternative terminology is.
    Regardless of the terms used to describe this payment to insurance
    companies, it is clear that the reimbursement to companies is
    intended to compensate them for the reasonable expenses associated
    with selling and servicing crop insurance, not to provide them with
    an additional source of profits.  To believe otherwise, would negate
    the rationale for the mandated joint GAO/FCIC study of the adequacy
    of the administrative expense reimbursement.

    23.  As we note in the introduction to our report, the crop insurance
    companies play an important role in the delivery of federal crop
    insurance.  Nothing in our report suggests that their role should be
    reduced or eliminated.  However, continuing emphasis on reducing the
    federal budget requires FCIC to ensure that it is not paying more
    than is necessary to implement the crop insurance program.

    24.  We do not believe that lowering the reimbursement rate will
    destabilize the crop insurance industry.  A lower reimbursement
    rate--in the range of 24 percent--will adequately compensate
    companies for their reasonable administrative expenses to deliver
    crop insurance and should not diminish service to farmers and still
    allow profits from underwriting.

    (See figure in printed edition.)APPENDIX IX
    COMMENTS FROM THE AMERICAN
    ASSOCIATION OF CROP INSURERS AND
    THE CROP INSURANCE RESEARCH
    BUREAU, INC.
    ========================================================= Appendix VII

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       GAO'S COMMENTS
    ------------------------------------------------------- Appendix VII:2

    1.  The 1994 reform act mandated that GAO and FCIC jointly evaluate
    the current financial arrangement between FCIC and approved insurance
    providers for delivering multiple-peril crop insurance to farmers.
    In researching the legislative history of this provision, we found
    that the paramount congressional interest was in controlling the
    costs of reimbursing crop insurers in the context of funding this and
    other agricultural programs in a deficit reduction environment.
    Moreover, we confirmed our interpretation of the mandate in a
    commitment letter to the Chairmen and Ranking Minority Members of the
    Senate Committee on Agriculture, Nutrition, and Forestry, and the
    House Committee on Agriculture at the outset of our review.  This
    letter set forth our approach for meeting this mandate, including our
    scope and methodology.  We believe that the report fulfills the
    mandate.

    2.  We used 1994 and 1995 data for our analysis because these 2 years
    provide a picture of expenses for delivering crop insurance before
    and after the implementation of the reform act.  Because of industry
    concerns expressed early in our review about the use of this 2-year
    period, we considered the extent to which loss-adjusting expenses may
    change with varying loss experience as well as the extent to which
    loss-adjusting expenses may affect total administrative expenses.  We
    found that high crop losses did not significantly increase companies'
    loss-adjusting expenses--the delivery cost factor most likely to be
    affected by high crop losses.  For example, for buyup insurance,
    while companies paid out $1.28 in loss claims for every dollar of
    premium received in 1995 and $0.58 in loss claims for every dollar of
    premium received in 1994, their related loss-adjusting expenses as a
    percent of premium for these 2 years were not substantially
    different.  Therefore, although losses were higher in 1995 than in
    1994, the companies' loss-adjusting expenses for processing these
    claims did not increase commensurately.  In addition, loss-adjusting
    expenses are not a significant portion of total administrative
    expenses (about 3.5 percent of premiums on average for the nine
    companies we reviewed).  Furthermore, since the 1980s, the crop
    insurance companies have received additional reimbursements in years
    of high crop losses.

    The draft report's reference to 1995 as a year of relatively low crop
    losses was intended to reflect a low level of catastrophic loss
    claims.  Because this reference was apparently confusing, we have
    deleted it from the final report.  In actuality, the loss ratio on
    buyup coverage in 1995 exceeded the loss ratio in 1990 and 1992 and
    was about the same as the loss ratio in 1991.  Only in 1993, the year
    of a one-in-100-year flood event, was the loss ratio substantially
    higher.

    3.  Our analysis is based on actual company expenditures in 1994 and
    1995 and actual crop price information for 1996 and 1997.  We did not
    specifically address future crop prices.  However, USDA's World
    Agricultural Outlook Board projects generally increasing prices
    through 2005.  If crop prices decline, FCIC could reevaluate the
    reimbursement rate for administrative expenses.

    4.  This assertion is not correct.  As we noted in our report, the
    FAR was just one of several sources we used to develop criteria for
    identifying expenses reasonably associated with selling and servicing
    crop insurance.  We recognized all expenses reasonably associated
    with selling and servicing crop insurance.  However, we continue to
    believe that the taxpayer should not be expected to reimburse
    companies for such expenses as those related to maximizing
    underwriting gains, acquiring other companies' business, paying
    executives to refrain from joining or starting other companies,
    paying parent companies management fees without receiving any
    measurable benefits for the program, providing profit-sharing
    bonuses, and paying lobbying expenses.  We believe that these
    expenses should not be included in determining an appropriate future
    reimbursement rate for administrative expenses.

    5.  Contrary to the industry's assertion, we believe that the
    reimbursement for administrative expenses is just that.  It is
    intended to reimburse companies for the costs of selling and
    servicing crop insurance, not to provide an additional source of
    profit to the industry.  While FCIC encourages the companies to
    provide competitive service within the reimbursement rate provided,
    FCIC expects, as evidenced by the standard reinsurance agreement,
    that the profits companies seek should come from underwriting gains,
    not from the administrative reimbursement.  In fact, since 1990,
    companies have earned over $0.5 billion in net underwriting gains.

    6.  While an evaluation of the quality of service provided by the
    companies and USDA was not a principal focus of our review, we found
    little to suggest that the quality of service by companies and USDA
    to farmers was unsatisfactory.

    7.  Contrary to the industry's assertion, we did not use the
    information in appendix VII to arrive at our conclusion of an
    appropriate reimbursement rate for delivering federal crop insurance;
    we presented this information only because it was required by the
    1994 reform act.  In this appendix of our draft report, we
    inadvertently omitted the loss-adjusting expenses associated with
    commercial insurance lines in our presentation of commercial lines of
    insurance expenses in relation to the expenses of
    government-sponsored multiple-peril crop insurance.  In response to
    the industry's observation on this omission, we revised the appendix
    to include reported loss-adjusting expenses.

    We did not use this information for our analysis because the
    percentages presented do not provide an appropriate comparison
    between commercial lines of insurance and government-sponsored
    multiple-peril crop insurance for several reasons.  First, the
    expense ratios for commercial lines are based on premiums that
    include both risk and expense factors, while the expense ratios for
    multiple-peril crop insurance are based on premiums that include only
    a risk factor.  Second, we did not verify the ratios for the
    commercial lines of insurance and hence we cannot speak to the
    accuracy of the cost elements that have been included in the
    computations of those ratios.  Finally, premium rates for commercial
    insurance lines are significantly lower than average rates for
    multiple-peril crop insurance.  As a result, if a comparison to other
    lines of insurance is to be made, the only appropriate comparison is
    on a dollars-per-policy basis, not on a percentage-of-premium basis.
    Although expenses as a percent of premium may appear to be much
    higher for several commercial lines, the amount of expense dollars
    involved per policy is actually less than for government crop
    insurance.

    If we examine the dollars paid per policy instead of the percentage
    of premium per policy, the reimbursement for multiple-peril crop
    insurance per dollar of premium substantially exceeds the
    reimbursement for other lines.  For example, in 1995, according to
    NAIC, the average consumer payment for private passenger automobile
    insurance was $666 per vehicle, and the reported delivery expense
    rate was as much as 35.6 percent, or $237.  In comparison, for 1995
    buyup crop insurance, the average premium was $1,905 per policy, and
    the 31-percent reimbursement rate resulted in an average payment to
    crop insurance companies of $591--or about 2.5 times more than the
    dollar value of delivery expenses for private passenger automobile
    insurance.  If the reimbursement rate had been 27.1 percent in 1995,
    as we believe would have been appropriate for that year, the crop
    insurance companies would have received an average reimbursement
    payment per policy--$516--an amount that is still more than double
    the dollar value of delivery expenses for this private passenger
    automobile insurance.  A comparison of the reimbursement for
    multiple-peril crop insurance on a dollars-per-policy basis to other
    insurance lines yields similar results.

    8.  We have carefully reviewed the industry's comments on our report
    and our methodology, findings, conclusions, and recommendations.  We
    are confident that our work was performed with due professional care
    using a sound methodology and that our findings are well supported,
    our conclusions flow logically from the facts, and our
    recommendations offer reasonable suggestions for reducing the costs
    of the crop insurance program.  Accordingly, we have published this
    report to make it available for timely decisionmaking by FCIC and the
    Congress.

    9.  Regarding the industry's assertion concerning premium rates, as
    we noted in Crop Insurance:  Additional Actions Could Further Improve
    the Program's Financial Condition (GAO/RCED-95-269, Sept.  28, 1995),
    FCIC increased premium rates annually from 1991 through 1995.  As
    noted in our current report, FCIC also increased premium rates 3.6
    percent from 1995 to 1996.  Because of the congressionally mandated
    goal of a 1.075 loss ratio for the program, it is likely that premium
    rates will remain at their current level or increase slightly.
    Accordingly, we continue to hold the view that the assumptions we
    made with regard to premium levels are reasonable.

    10.  Data available from earlier years were not in an appropriate
    format for analysis.  In 1989, the companies were required to submit
    summary expense data and ratios, but according to FCIC, many
    companies did not submit these data, and the data that were provided
    were not consistent between companies.  Furthermore, in 1991, FCIC
    rescinded this requirement.  In the 1995 standard reinsurance
    agreement, FCIC began to require companies to submit a detailed
    expense report in the NAIC format using NAIC guidelines for the prior
    calendar year--calendar year 1993.  However, not all companies
    complied with the requirement until 1994.

    11.  Over the last 15 years, the purchase of crop insurance has
    become more important to farmers.  The 1994 reform act restricted
    disaster assistance payments, and the 1996 farm bill made farmers
    more responsible for managing risk.  As a result, farmers are more
    likely to purchase crop insurance.  Therefore, while agents have to
    sell the product, farmers now have more incentives to purchase it.

    12.  We recognize that private companies do not get fully reimbursed
    for their administrative expenses until the end of the insurance
    cycle.  However, as the companies complete different administrative
    tasks, such as reporting to FCIC the type of crop and amount of
    acreage a policyholder has planted, they are reimbursed for their
    effort.  Moreover, we believe that this arrangement ensures proper
    internal controls in the program by withholding payments until the
    work is complete.

    13.  In examining the 1995 expenses during the course of our review,
    we found instances of temporary employees being hired as well as
    overtime being paid.  Quite naturally, as business grows, staffing
    may increase.  However, the increases in the number of policies that
    led to the increase in workload also resulted in increased premium
    revenues and thus increased reimbursement for administrative
    expenses.

    14.  We agree that commercial reinsurance is an important tool for
    increasing companies' financial capacity and managing their
    underwriting risk and that reinsurance costs can be legitimate
    business expenses.  However, the cost of reinsurance relates to
    companies' decisions to manage risk rather than to the sale and
    service of crop insurance.  Therefore, we believe, and FCIC agrees,
    that this expense should be paid from companies' underwriting
    revenues and not be considered in determining a future reimbursement
    rate for administrative expenses.

    15.  We recognize that acquisition expenses are a legitimate cost of
    doing business.  To the extent that acquisitions could be attributed
    to physical assets related to the sale and service of crop insurance,
    we considered them as a reasonable crop insurance expense.  However,
    we do not believe that all acquisition expenses, such as the $3
    million non-compete payment one company reported paying the acquired
    companies' executives, should be included in the calculation for
    determining a long-term expense reimbursement rate.  FCIC agreed that
    this is not an expense reasonably associated with the sale and
    service of crop insurance.

    16.  Contrary to the industry's assertion, we recognized management
    fees as a reasonable program expense to the extent that companies
    could identify tangible benefits received from parent companies.
    Management fees paid without tangible benefits, however, represent a
    method of sharing income with the parent company, not an
    administrative expense reasonably associated with the sale and
    service of crop insurance.

    17.  We recognized all bonuses related to employee performance as
    well as all bonuses paid to agents as reasonable expenses associated
    with the sale and service of crop insurance.  However, we continue to
    believe that bonuses associated with company profit sharing should
    not be included in determining an appropriate future reimbursement
    rate for administrative expenses.  For example, at one privately-held
    company, profits from the sales of crop insurance--taken after all
    delivery expenses were met--were paid to executives and employees in
    the form of bonuses.  For the 2-year period, 1994 and 1995, the
    company paid its executives and employees $9 million in
    profit-sharing bonuses, representing about 49 percent of basic
    salaries in 1994 and 63 percent in 1995.  When these profit-sharing
    bonuses were added to salaries, overall employee salaries at this
    company were 35-percent higher than the nine-company average.

    18.  We did not recommend reducing the expense reimbursement rate on
    the basis of companies' use of corporate aircraft.  However, on the
    basis of our review of the companies' expense documentation, we
    believe that these and other similar expenses provide opportunities
    for FCIC to lower its future reimbursement rate for administrative
    expenses while still adequately reimbursing companies for the
    reasonable expenses of selling and servicing crop insurance policies.
    These other expenses included excessive automobile charges;
    entertainment expenses, including country club memberships and
    stadium sky box rentals; trips to resort locations; and personal
    expenses, such as child care and pet care.  It is not reasonable to
    expect taxpayers to fund these types of expenses.

    19.  We presented a status report on FCIC's simplification efforts in
    appendix I and did not evaluate the cost savings to the industry that
    might result.  Our report did not use potential reductions in
    administrative requirements as the basis for concluding that FCIC
    could lower its reimbursement rate.  Any cost reductions resulting
    from simplification would only serve to further reduce the companies'
    expenses of selling and servicing crop insurance.

    20.  Regardless of the terms used, FCIC's reimbursement to companies
    for administrative expenses is intended to compensate them for the
    reasonable expenses associated with selling and servicing crop
    insurance.

    21.  We stated in our report that the companies have no obligation to
    spend their FCIC reimbursement for administrative expenses on crop
    insurance-related expenses because we wanted to point out that
    companies had no legal requirement to refund federal money spent for
    activities that are not reasonably associated with the sale and
    service of government crop insurance.

    22.  The industry's assertion that the government's cost to use the
    Farm Service Agency (FSA) to sell catastrophic insurance is
    60-percent higher than using the private sector does not reflect the
    total cost to the government.  The industry excludes (1) the $50
    farmer-paid processing fee, which FSA remits to the Treasury and
    which the companies generally retain; and (2) the companies'
    underwriting gains.  As noted in chapter 3, these two factors
    resulted in a total cost to the government in 1995 for companies'
    delivery that was significantly higher than FSA's delivery cost.

    23.  We recognize that the private insurance companies perform an
    important service in informing farmers about risk management.  We
    considered the expenses associated with this effort in determining an
    appropriate future reimbursement rate for administrative expenses.
    Therefore, we do not believe that the adjustments in the
    reimbursement rate that we recommended would reduce the industry's
    incentives to educate farmers about their risk management needs.

    24.  The industry's comment reflects some misunderstanding of our (1)
    accounting for the cost to the government for catastrophic insurance
    delivery and (2) analysis of the companies' compensation for
    delivering this insurance.  Regarding the government's cost, the $50
    processing fee farmers pay offsets to some extent the government's
    delivery costs through FSA because this fee is returned to the
    Treasury.  In contrast, the $50 fee paid to the companies generally
    has no impact on the cost to the government because the companies
    retain the fee as income.  In analyzing the companies' compensation
    for delivering catastrophic insurance, we included the $50 fee in
    their total compensation for catastrophic insurance because they
    retain it.

    25.  While the private sector and FSA have played an important role
    in implementing the new program, several factors influenced
    participation in the crop insurance program in 1995 and 1996,
    including congressionally mandated participation and requirements
    that disaster assistance be on budget.

    26.  FCIC pays the companies a percentage of premiums--explicitly for
    loss-adjusting expenses--that can be used to offset any expenses,
    including administrative and operating expenses.  In fact, the
    companies' loss-adjusting expenses in 1995 were about 2 percent of
    catastrophic premiums, while their direct reimbursement from FCIC was
    about 14 percent of premiums.  Additionally, in exchange for
    delivering catastrophic insurance, private companies receive and
    retain a $50 processing fee from farmers, up to a maximum of $100 per
    farmer per county.

    27.  The 1989 Arthur Andersen study of crop insurance delivery
    expenses may not be an appropriate basis of comparison because it
    looked at two different private-sector delivery systems--not FCIC and
    private-sector delivery--and found that one system was less expensive
    than the other.

    28.  It is not clear which studies the industry is referencing.
    However, since the 1994 reform act increased the program's size
    dramatically, the relevance of these pilot studies may be
    questionable.

    29.  Our report clearly notes that the reimbursement rate will
    decline through 1999, as required by the 1994 act.

    30.  As required by the 1994 act, we examined the advantages and
    disadvantages of alternative means of reimbursing companies for their
    administrative expenses and did not recommend one alternative over
    another.  Furthermore, we noted that the insurance companies prefer
    the current system.

    31.  We did not imply any criticisms of the current reimbursement
    system's service to small farmers.  Rather, we discussed the
    potential effects of the alternatives on service to small farmers.
    In this context, table 4.1 is intended to show how premiums and
    reimbursements were distributed in 1995.

    32.  We do not believe that a cap on the administrative expense
    reimbursement would substantially destabilize the industry.  Assuming
    a capping alternative that achieves an overall 24-percent
    reimbursement rate, only the largest 5 percent of policies would be
    affected.

    33.  This alternative provides incentives for selling both small and
    large policies--a minimum payment for small policies and a
    percentage-of-premium component for larger policies.

    34.  While we agree that this alternative is likely to increase
    FCIC's administrative workload, we discuss it simply to present a
    widely considered alternative for delivery of government services.
    Moreover, at least one company within the industry believes that the
    FAR is an appropriate alternative.  In 1993, this company testified
    before the Subcommittee on Agriculture, Rural Development, FDA, and
    Related Agencies, House Committee on Appropriations, that it endorsed
    the FAR as an appropriate reimbursement arrangement.

    35.  As we noted in chapter 4, this alternative may discourage some
    larger companies from aggressively delivering crop insurance.

    36.  We acknowledged in our report that other alternatives exist, and
    we did not intend to provide an all-inclusive analysis of the
    alternatives available.  Instead, we focused on the major
    alternatives identified by discussions with industry and agency
    officials.

    37.  We disagree.  We are recommending that FCIC implement an
    administrative reimbursement rate that pays companies for the
    expenses reasonably associated with selling and servicing crop
    insurance.

    38.  We agree that the program has been generally successful.
    Furthermore, as we note in the introduction to the report, the
    private insurance companies are important players in the delivery of
    federal crop insurance.  Nevertheless, the continuing emphasis on
    reducing the federal budget requires FCIC to ensure that it is not
    paying more than is necessary to implement the crop insurance
    program.  A lower reimbursement rate--in the range of 24
    percent--will adequately compensate companies' for their expenses to
    deliver crop insurance, and a lower reimbursement rate should not
    diminish service to the farmer.

    MAJOR CONTRIBUTORS TO THIS REPORT
    =========================================================== Appendix X

    Ronald E.  Maxon, Jr., Assistant Director
    Thomas M.  Cook, Evaluator-in-Charge
    Ruth Anne Decker
    Robert R.  Seely, Jr.
    Carol Herrnstadt Shulman
    Sheldon H.  Wood, Jr.

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