Crop Insurance: Opportunities Exist to Reduce Government Costs for
Private-Sector Delivery (Testimony, 04/17/97, GAO/T-RCED-97-139).

GAO discussed the: (1) adequacy of the administrative expense
reimbursement paid by the U.S. Department of Agriculture's (USDA)
Federal Crop Insurance Corporation (FCIC) to participating insurance
companies for selling and servicing crop insurance; and (2) comparative
cost to the government of delivering catastrophic crop insurance through
USDA and the private sector.

GAO noted that: (1) for the 1994 and 1995 period it reviewed, GAO found
that the administrative expense reimbursement rate of 31 percent of
premiums paid to insurance companies resulted in reimbursements that
were $81 million more than the companies' expenses for selling and
servicing crop insurance; (2) 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; (3) among these expenses were those associated
with acquiring competitors' businesses, profit sharing bonuses, and
lobbying; (4) in addition, GAO found other expenses that appeared
excessive for reimbursement through a taxpayer-supported program; (5)
these expenses suggest an opportunity to further reduce future
reimbursement rates; (6) these expenses included agents' commissions
that exceeded the industry average, unnecessary travel-related expenses,
and questionable entertainment activities; (7) finally, a variety of
factors that have emerged since the period covered by GAO's review have
increased companies' revenues; (8) crop prices and premium rates
increased in 1996 and 1997, generating higher premiums; (9) this had the
effect of increasing FCIC's expense reimbursement to companies; (10) 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; (11) combined, all
these factors indicate that FCIC could lower the reimbursement to a rate
in the range of 24 percent of premiums and still amply cover reasonable
company expenses for selling and servicing federal crop insurance
policies; (12) regarding the cost of catastrophic insurance delivery,
GAO found that, in 1995, the government's total costs to deliver
catastrophic insurance were less through USDA than private companies;
(13) although the basic costs associated with selling and servicing
catastrophic crop insurance through USDA and private companies were
comparable, total delivery costs were less through USDA because USDA's
delivery avoids the need to pay an underwriting gain to companies; (14)
finally, GAO identified a number of different approaches to reimbursing
companies for their administrative expenses that offer the opportunity *

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

 REPORTNUM:  T-RCED-97-139
     TITLE:  Crop Insurance: Opportunities Exist to Reduce Government 
             Costs for Private-Sector Delivery
      DATE:  04/17/97
   SUBJECT:  Insurance companies
             Insurance cost control
             Insurance premiums
             Disaster relief aid
             Administrative costs
             Agricultural production
             Grain and grain products
             Farm income stabilization programs

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


Before the Committee on Agriculture,
Nutrition, and Forestry
United States Senate

For Release on Delivery
Expected at
9:00 a.m.  EDT
Thursday
April 17, 1997

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

Statement of Robert A.  Robinson, Director,
Food and Agriculture Issues
Resources, Community, and Economic
Development Division

GAO/T-RCED-97-139

GAO/RCED-97-139T


(150120)


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

  USDA -
  FCIC -

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are pleased to have this opportunity to discuss the adequacy of
the administrative expense reimbursement paid by the U.S.  Department
of Agriculture's (USDA) Federal Crop Insurance Corporation (FCIC) to
participating insurance companies for selling and servicing crop
insurance and the comparative cost to the government of delivering
catastrophic crop insurance through USDA and the private sector.  We
also will address alternative means to reimburse companies'
administrative expenses for delivering crop insurance.  Our testimony
today is based on our report, which was mandated by the 1994 crop
insurance reform act.  This report is being issued today.\1

In summary, for the 1994 and 1995 period we reviewed, we found that
the administrative expense reimbursement rate of 31 percent of
premiums paid to insurance companies resulted in reimbursements that
were $81 million more than the companies' expenses for selling and
servicing crop insurance.  The reimbursement is calculated as a
percentage of the premiums paid to the companies, regardless of the
expenses incurred by the companies.  For the 2-year period, companies
reported expenses that were less than the reimbursements paid to them
by FCIC.  Furthermore, we 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, we found other expenses that appeared
excessive for reimbursement through a taxpayer-supported program. 
These expenses suggest 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, a variety of factors that have emerged since the period
covered by our review have increased companies' revenues or may
decrease companies' expenses.  Crop prices and premium rates
increased in 1996 and 1997, generating higher premiums.  This had the
effect of increasing FCIC's expense reimbursement to companies.  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 to a
rate in the range of 24 percent of premiums and still amply cover
reasonable company expenses for selling and servicing federal crop
insurance policies. 

Regarding the cost of catastrophic insurance delivery, we found that,
in 1995, the government's total costs to deliver catastrophic
insurance were less through USDA than private companies.  Although
the basic costs associated with selling and servicing catastrophic
crop insurance through USDA and private companies were comparable,
total delivery costs were less through USDA because USDA's delivery
avoids the need to pay an underwriting gain to companies.  In 1995,
the underwriting gains paid to participating companies for
catastrophic insurance totaled about $45 million.  In 1996, the
underwriting gains paid for catastrophic insurance were about $58
million. 

Finally, we 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 when compared with the existing reimbursement
arrangement.  Companies generally prefer the existing reimbursement
method because of its relative administrative simplicity. 


--------------------
\1 Crop Insurance:  Opportunities Exist to Reduce Government Costs
for Private-Sector Delivery (GAO/RCED-97-70, Apr.  17, 1997). 


   BACKGROUND
---------------------------------------------------------- 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.  USDA's Risk Management Agency
administers the federal crop insurance program through FCIC.  Federal
crop insurance offers farmers two primary types of insurance
coverage.  The first--called catastrophic insurance--provides
protection against extreme crop losses for the payment of a $50
processing fee, whereas the second--called buyup insurance--provides
protection against more typical smaller crop losses in exchange for a
premium paid by the farmer.  FCIC conducts the program primarily
through private insurance companies that sell and service federal
crop insurance--both catastrophic and buyup--for the federal
government and retain a portion of the insurance risk.  FCIC also
offers catastrophic insurance through the local offices of USDA's
Farm Service Agency. 

FCIC pays the companies a fee, called an administrative expense
reimbursement, that is intended to reimburse the companies for the
expenses reasonably associated with selling and servicing crop
insurance to farmers.  The reimbursement is calculated as a
percentage of the premiums received, regardless of the expenses
incurred by the companies.  Beginning in 1994, companies were
required to report expenses in a consistent format following standard
industry guidelines to provide FCIC with a basis for establishing
future reimbursement rates.  For buyup crop insurance, FCIC reduced
the administrative expense reimbursement from a base rate of 34
percent of the premiums on policies sold from 1988 through 1991 to 31
percent of the premiums from 1994 through 1996.  The 1994 reform act
requires FCIC to reduce the reimbursement rate to no more than 29
percent of total premiums in 1997, no more than 28 percent in 1998,
and no more than 27.5 percent in 1999.  FCIC can set the rate lower
than these mandated ceilings.  In addition, the companies earn
profits when insurance premiums exceed losses on policies for which
they retain risk.  These profits are called underwriting gains. 
Since 1990, companies selling crop insurance have earned underwriting
gains totaling more than $500 million. 

FCIC had agreements with 22 companies in 1994 and 19 companies in
1995 to sell and service federal crop insurance.  In 1995, the
insurance companies sold about 80 percent of all federal crop
insurance, while USDA's Farm Service Agency sold the remainder.  In
performing our review, we examined expenses at nine companies
representing about 85 percent of the total federal crop insurance
premiums written by private companies in 1994 and 1995.  We chose the
companies considering factors such as premium volume, location, and
type of ownership. 


   CURRENT REIMBURSEMENTS EXCEED
   DELIVERY EXPENSES
---------------------------------------------------------- Chapter 0:2

In 1994 and 1995, FCIC's administrative expense reimbursements to
participating companies selling buyup insurance--31 percent of
premiums--were higher than the expenses that can be reasonably
associated with the sale and service of federal crop insurance.  For
the 2-year period, FCIC reimbursed the nine companies we reviewed
about $580 million.  For this period, the companies reported expenses
of about $542 million to sell and service crop insurance--a
difference of about $38 million.  However, our review showed that
about $43 million of the companies' reported expenses could not be
reasonably associated with the sale and service of federal crop
insurance.  Therefore, we believe that these expenses should not be
considered by FCIC in determining an appropriate future reimbursement
rate for administrative expenses.  Furthermore, we found that a
number of the reported expenses appeared excessive for reimbursement
through a taxpayer-supported program and suggest an opportunity to
further reduce future reimbursement rates for administrative
expenses.  Finally, a variety of factors have emerged since the
period covered by our review that have increased companies' revenues
or may decrease their expenses, such as higher crop prices and
premium rates and reduced administrative requirements.  These factors
should be considered in determining future reimbursement rates. 


      SOME REPORTED EXPENSES NOT
      REASONABLY ASSOCIATED WITH
      CROP INSURANCE DELIVERY
-------------------------------------------------------- Chapter 0:2.1

Our review showed that about $43 million of the companies' reported
expenses could not be reasonably associated with the sale and service
of federal crop insurance.  These expenses, which we believe should
not be considered in determining an appropriate future reimbursement
rate for administrative expenses, included expenses for acquiring
competitors' businesses, protecting companies from underwriting
losses, sharing company profits through bonuses or management fees,
and lobbying expenses. 

Among the costs reported by the crop insurance companies that did not
appear to be reasonably associated with the sale and service of crop
insurance to farmers were those related to costs the companies
incurred when they acquired competitors' business.  These costs
potentially aided the companies in vying for market share and meant
that one larger company, rather than several smaller companies, was
delivering crop insurance to farmers.  However, this consolidation
was not required for the sale and service of crop insurance to
farmers, provided no net benefit to the crop insurance program, and
according to FCIC, was not an expense that FCIC expected its
reimbursement to cover.  For example, one company took over the
business of a competing company under a lease arrangement.  The lease
payment totaled $3 million in both 1994 and 1995.  About $400,000 of
this payment could be attributed to actual physical assets the
company was leasing, and we recognized that amount as a reasonable
expense.  However, the remaining $2.6 million--which the company was
paying each year for access to the former competitor's policyholder
base--provided no benefit to the farmer and no net value to the crop
insurance program.  Likewise, we saw no apparent benefit to the crop
insurance program from the $1.5 million the company paid executives
of the acquired company over the 2-year period as compensation for
not competing in the industry.  In total, we identified costs in this
general category totaling about $12 million for the 2-year period. 

We also found that two companies included payments to commercial
reinsurers among their reported crop insurance delivery expenses. 
These are payments the companies made to other insurance companies to
expand their protection against potential underwriting losses.  This
commercial reinsurance allows companies to expand the amount of
insurance they are permitted to sell under insurance regulations
while limiting their underwriting losses.  The cost of reinsurance
relates to company decisions to manage underwriting risks rather than
to the sale and service of crop insurance to farmers.  We discussed
this type of expense with FCIC, and it agreed that this expense
should be paid from companies' underwriting revenues and thus should
not be considered in determining a future reimbursement rate for
administrative expenses.  For the two companies that reported
reinsurance costs as an administrative expense, these expenses
totaled $10.7 million over the 2 years. 

Furthermore, we found that some companies included as administrative
expenses for selling and servicing crop insurance, expenses that
resulted from decisions to distribute profits to (1) company
executives and employees through bonuses or (2) parent companies
through management fees.  We found that profit-sharing bonuses were a
significant component of total salary expenses at one company,
equaling 49 percent of basic salaries in 1994 and 63 percent in 1995. 
These bonuses totaled $9 million for the 2 years.  While company
profit sharing may benefit a company in competing with another
company for employees, the bonuses do not contribute to the overall
sale and service of crop insurance or serve to enhance program
objectives.  Furthermore, while we recognize that performance-based
employee bonuses and bonuses paid to agents represent reasonable
expenses, the profit-sharing bonuses in this example did not appear
to be reasonable program expenses because they were paid out of
profits after all necessary program expenses were paid. 
Additionally, we identified profit-sharing bonuses totaling $2.1
million reported as expenses at three other companies for 1994 and
1995.  In total, we found expenditures in this general category
amounting to $12.2 million over the 2 years. 

Similarly, we noted that two companies reported expenditures for
management fees paid to parent companies as crop insurance
administrative expenses.  Company representatives provided few
examples of tangible benefits received in return for their payment of
the management fee.  We recognized management fees as a reasonable
program expense to the extent that companies could identify tangible
benefits received from parent companies.  Otherwise, we considered
payment of management fees to be a method of sharing income with the
parent company and paid in the form of a before-profit expense item
rather than a dividend.  These expenses totaled $1.1 million for the
2 years. 

FCIC's standard reinsurance agreement with the companies precludes
them from reporting expenditures for lobbying as crop insurance
delivery expenses.  Despite this prohibition, we found that the
companies included a total of $418,400 for lobbying in their expenses
reported for 1994 and 1995.  The vast majority of these expenses
involved the portion of companies' membership dues attributable to
lobbying by crop insurance trade associations. 

Adjusting for these and other expenses reported in error, we
determined, and FCIC concurred, that the expense rate for companies'
expenses reasonably associated with the sale and service of buyup
crop insurance in 1994-95 was about 27 percent of premiums.  This is
about 4 percentage points, or $81 million, less than the
reimbursement FCIC provided.  Of these 4 percentage points, 2 points
reflect companies' reported expenses that were less than their
reimbursement; the remainder reflect adjustments to their reported
expenses that did not appear to be reasonably associated with the
sale and service of crop insurance. 


      OTHER REPORTED EXPENSES
      REPRESENT OPPORTUNITIES TO
      LOWER REIMBURSEMENT RATES
-------------------------------------------------------- Chapter 0:2.2

In addition, we found a number of expenses reported by the companies
that, although associated with the sale and service of crop
insurance, seemed to be excessive for a taxpayer-supported program. 
While difficult to fully quantify, these types of expenditures
suggest that opportunities exist for the government to reduce its
future reimbursement rate for administrative expenses while still
adequately reimbursing companies for the reasonable expenses of
selling and servicing crop insurance policies. 

For example, in the crop insurance business, participating companies
compete with each other for market share through the sales
commissions paid to independent insurance agents.  To this end,
companies offer higher commissions to agents to attract them and
their farmer clients from one company to another.  When an agent
switches from one company to another, the acquiring company increases
market share, but there is no net benefit to the crop insurance
program.  On average, the nine companies in our review paid agents
sales commissions of 16 percent of buyup premiums they sold in 1994
and 16.2 percent in 1995.  However, one company paid more--an average
of 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. 

Furthermore, 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 $46,857 in total.  In another instance, as part of
paying for employees to attend industry meetings at resort locations,
we found that one company paid for golf tournament entry fees,
tickets to an amusement park, spouse travel, child care, and pet
care, and reported these as crop insurance delivery expenses. 

Our review of companies' expenses also 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 a Canadian fishing trip 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
that 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 companies'
expenditures disclosed payments 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.  While a number of the companies believe that the
type of expenses described above are important to maintaining an
effective sales force and supporting their companies' mission, we,
along with FCIC, believe that most of these expenses appear to be
excessive for a program supported by the American taxpayers. 


      EMERGING FACTORS HAVE
      INCREASED COMPANIES'
      REVENUES
-------------------------------------------------------- Chapter 0:2.3

Since the period covered by our review, a variety of factors have
emerged that have increased companies' revenues or may decrease
companies' expenses.  Crop prices and premium rates increased in 1996
and 1997, thereby generating higher premiums.  This had the effect of
increasing the reimbursements paid to companies for administrative
expenses by about 3 percent of premiums without a proportionate
increase in workload for the companies. 

Moreover, FCIC and the industry's efforts to simplify the program's
administrative requirements may reduce companies' workload, thereby
reducing their administrative expenses.  As of January 1997, FCIC had
completed 26 simplification actions and was continuing to study 11
additional potential actions.  Neither FCIC nor the companies could
precisely quantify the amount of savings that companies can expect
from these changes, but they agreed that the changes were necessary
and collectively may reduce costs. 


   GOVERNMENT'S 1995 TOTAL COST TO
   DELIVER CATASTROPHIC INSURANCE
   THROUGH USDA WAS LESS THAN
   THROUGH PRIVATE COMPANIES
---------------------------------------------------------- Chapter 0:3

In 1995, the government's total cost to deliver catastrophic
insurance policies was less through USDA than through private
companies.  The total cost to the government to deliver catastrophic
insurance consists of three components:  (1) the 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 1995 cost of delivery through private
companies more expensive to the government. 

With respect to the first component--basic sales and service delivery
costs--the cost to the government was higher in 1995 when provided
through USDA.  The government's costs for basic sales and service
delivery through USDA included expenses associated with activities
such as selling and processing policies; developing computer
software; training adjusters and adjusting claims.  These costs also
included indirect or overhead costs, such as general administration,
rent, and utilities.  Also included in the 1995 direct and indirect
costs for USDA's delivery were the Department's one-time start-up
costs for establishing its 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. 
The basic delivery cost to the government for company delivery
consisted of the administrative expense reimbursement paid to the
companies by FCIC and the cost of administrative support provided by
USDA's Farm Service Agency.  The administrative expense reimbursement
paid to the companies 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 costs to the government for both
delivery systems.  For USDA's delivery, processing fees paid by
farmers and remitted to the Treasury reduced the government's basic
delivery cost of about $133 by an average of $53 per crop policy. 
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 the companies
more expensive in 1995.  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 premium
paid to them by the government, potentially reducing the government's
total cost of company delivery in such years. 

The 37-percent underwriting gain received by the companies on
catastrophic policies in 1995 substantially exceeded FCIC's long-term
target.  According to FCIC, the large underwriting gains in 1995 may
have been unusual in that there were relatively few catastrophic loss
claims and many farmers did not provide sufficient data on their
production capabilities.  In 1996, however, the underwriting gains on
catastrophic policies were even higher--$58 million. 


   ALTERNATIVE REIMBURSEMENT
   ARRANGEMENTS OFFER POTENTIAL
   FOR SAVINGS
---------------------------------------------------------- Chapter 0:4

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 reimbursement based on a
percentage of premiums does not necessarily reflect the amount of
work involved to sell and service crop insurance policies. 
Alternative reimbursement arrangements, including, among others,
those that would (1) cap the reimbursement per policy or (2) pay a
flat dollar amount per policy plus a reduced fixed percentage of
premiums, offer the potential to better match FCIC's reimbursements
with companies' administrative expenses.  Each alternative has
advantages and disadvantages, and we make no recommendation
concerning which alternative, if any, should be pursued. 

With respect to the first alternative, 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.  Savings would vary depending on where the
cap is set.  Capping the expense reimbursement at around $1,500 per
policy, for example, would result in a potential savings of about $74
million while affecting less than 10 percent of the individual
policies written in 1995.  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 does not increase proportionately.  Therefore, for policies
with the highest premiums, there is a large differential between
FCIC's reimbursement and the costs incurred to administer those
particular 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 generated administrative
expense reimbursements ranging from about $118,000 to $472,000. 

Alternatively, FCIC could reduce its total expense reimbursements to
companies by paying a flat dollar amount per policy plus a reduced
fixed percentage of premiums.  FCIC could reimburse companies a fixed
amount for each policy written to pay for the fixed expenses
associated with each policy as well as a percentage of premium to
compensate companies for the variable expenses associated with the
size and value of a policy.  For example, paying a flat $100 per
policy plus 17.5 percent of premium could result in a potential
savings of about $67 million.  FCIC has included this alternative in
its proposed 1998 standard reinsurance agreement with the industry. 

As we discuss in more detail in our report, while these and other
alternative reimbursement methods could result in lower cost
reimbursements to insurance companies, some methods may increase
FCIC's own administrative expenses for reporting and compliance. 
Some alternatives may also assist smaller companies to compete more
effectively with larger companies and/or encourage more service to
smaller farmers than does the current system.  Companies generally
prefer FCIC's current reimbursement method because of its
administrative simplicity. 

In conclusion, we recommended that the Administrator of the Risk
Management Agency determine an appropriate reimbursement rate for
selling and servicing crop insurance and include this rate in the new
reinsurance agreement currently being developed between FCIC and the
companies.  Furthermore, we recommended that the Administrator
explicitly convey the type of expenses that the administrative
reimbursement is intended to cover.  USDA's Risk Management Agency
agreed with our recommendations and has included these changes in the
proposed 1998 agreement now being developed. 

The crop insurance industry disagreed with the methodology, findings,
conclusions, and recommendations presented in our report.  It
expressed concern that we were not responsive to the mandate in the
1994 act and did not appropriately analyze company data.  It also
expressed concern that implementing GAO's recommendations could
destabilize the industry.  We carefully reviewed the industry's
comments and continue to believe that our report fulfills the intent
of the mandate, our methodology is sound, our report's findings and
conclusions are well supported, and our recommendations offer
reasonable suggestions for reducing the costs of the crop insurance
program. 


-------------------------------------------------------- Chapter 0:4.1

This completes my prepared statement.  I will be happy to respond to
any questions you may have. 


*** End of document. ***