The government could save taxpayers "hundreds of millions per year" by reducing crop insurance companies’ rate of return on the program in line with market conditions, according to the Government Accountability Office, the investigative arm of Congress.
Lawmakers could save another $15 million a year by reducing premium subsidies for farmers who have adjusted gross incomes above $900,000, GAO says in a report requested by two Democrats on the Senate Agriculture Committee, Kirsten Gillibrand of New York and Cory Booker of New Jersey.
The report, which builds on previous GAO work but is based on data through 2022 when the program’s total cost reached $17.3 billion, is likely to provide fuel to bipartisan efforts in Congress to reform the program when lawmakers take up a new farm bill, possibly in 2024.
USDA couldn’t impose a means test on the crop insurance program or reduce the returns to insurance companies without approval from Congress. By law, USDA is barred from renegotiating a standard reinsurance agreement with companies that reduces their underwriting gains.
According to the report, released Monday, 5,537 policyholders, or 1% of the total program participants, accounted for 22% of the premium subsidies, about $2.6 billion, in 2022. That works out to an average subsidy of $464,900 for those largest participants.
Nineteen policyholders received premium subsidies of more than $3 million each in 2022. A nursery, identified only as being located in the South, received $7.7 million alone. A dairy operation in the West got $6.6 million.
At least 1,341, or 0.3%, of the 460,615 policyholders who bought crop insurance in 2022 had adjusted gross incomes above $900,000. The number of high-income policyholders could be higher, because the analysis didn’t include members of general partnerships, the report said.
The report says subsidies for those high-income growers could be reduced by 15 percentage points – from 62% to 47%, in line with a Senate-passed proposal in 2013 – without affecting the actuarial soundness of the program or reducing participation. The report says high-income policyholders would likely keep buying coverage even at the higher premiums, because of the program's importance for risk management.
Insurance companies received about $3.7 billion in 2022 to deliver the program, including $2.2 billion in administrative and operating subsidies (A&O), which go to sales commissions for agents, compensation to adjusters and other expenses. The companies also retained $1.5 billion in underwriting gains.
The companies’ compensation is projected by the Congressional Budget Office to average $3.8 billion a year from 2024 through 2033 after averaging $3 billion from 2011 through 2022.
The existing standard reinsurance agreement, signed in 2011, set a target rate of return on retained premiums of 14.5%.
But from 2011 through 2022, the companies earned an average annual rate of return of 16.8%, or an average of $1.4 billion in underwriting gains a year. The companies’ actual rate of return varied from a loss of 15.3% in 2012 to a high of 34.6% in 2016; 2012 was the only negative return.
A market-based rate of return, calculated by GAO based on interest rates, was 10.2% for that period.
The government would have saved $1.3 billion from 2011 through 2022 had companies earned the target rate of return of 14.5%, and companies would have earned an average of $1.3 billion year.
"Adjusting the program’s rate of return to more closely reflect market conditions could save the federal government hundreds of millions of dollars per year," the report says.
It’s easy to be “in the know” about what’s happening in Washington, D.C. Sign up for a FREE month of Agri-Pulse news! Simply click here.
In a joint industry statement, the American Association of Crop Insurers, Crop Insurance and Reinsurance Bureau and National Crop Insurance Services say the report “is fraught with recommendations that would dismantle the successful public-private partnership that delivers federal crop insurance to America’s hard working farmers and ranchers.
“The report contains several recommendations that in the long run would result in reduced participation, diminish the financial soundness of the current program, and reduce the effectiveness of the private-sector delivery system.”
The statement disputes the report's comparison between the SRA’s target rate of return and GAO’s market-based return.
The SRA target “is a gross revenue measure that excludes expenses. In contrast, GAO’s realized, market-based return is a net revenue measure that includes expenses. Because of this, the two measures are not directly comparable. A further concern is that GAO’s market-based return measures return relative to industry shareholder equity, whereas the SRA target rate of return measures return relative to industry premium volume,” the statement says.
The industry has told Congress and GAO that imposing a means test on crop insurance would drive wealthy farms out of the program and inevitably result in premium increases for other farmers.
GAO, however, doubts wealthy farmers would leave the program, but that even if they did it wouldn’t affect the program’s actuarial soundness.
That’s because “high-income policyholders’ premiums generally have corresponded to their likelihood of collecting claim payments, with loss ratios similar to other policyholders,” GAO said. “Consequently, their decisions to stay in or leave the program would not have affected the program’s insurance risk pool or its actuarial soundness over the period we studied.”
GAO said USDA didn't provide any comments on the report.
For more news, go to Agri-Pulse.com.
