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. 




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COMMENTS FROM NATIONAL CROP
INSURANCE SERVICES, INC. 
========================================================= Appendix VII



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   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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