USDA undercharging some areas for crop insurance, GAO says
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WASHINGTON, March 11, 2015 - Farmers in drought-prone areas of the Plains and other high-risk regions often aren't being charged enough for crop insurance, according to congressional auditors.
The Government Accountability Office, the investigative arm of Congress, says in a report that USDA's Risk Management Agency needs to do a better job of tracking insurance costs for lawmakers and ensure that premium rates are being increased as much they should be legally.
From 2005 through 2013, government costs averaged 14 cents per dollar of expected crop value in higher-risk counties versus 5 cents per dollar in lower-risk ones, according to GAO. Those differences mean that for two farms, each with an expected crop value of $1 million, it cost the government on average $140,000 to insure a grower in a higher-risk county versus $50,000 in the lower-risk one.
In 2013, the cost gap between higher risk and lower counties was 17 cents versus 5 cents per dollar of crop value.
RMA challenged some aspects of GAO's analysis as well as the recommendations. In a letter published as part of the report, RMA Administrator Brandon Willis said that the agency already provided enough cost information and said that the agency had to be cautious about raising rates.
Although Willis agreed that RMA should be raising rates to account for higher costs, increasing them to the fullest extent “can subject growers to a roller-coaster ride of ups and down in their premium rates, without actually improving long-term actuarial soundness,” Willis wrote. “It also undercuts the basic purpose of insurance - to provide financial stability.”
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RMA and GAO disagreed over how higher-risk areas should be defined. GAO defined them more broadly, leading to the estimate that they were getting substantially bigger benefits from the program than lower risk areas, Willis said.
Willis argued that costs for corn coverage, for example, are largely equivalent between Texas and Indiana. The one commodity that wasn't true for was cotton, he said. Cotton growers in Texas would be hit particularly hard by a cut in premium subsidies, he said.
From 2013 to 2014, RMA raised some premiums, but not all, in higher-risk counties by the maximum 20 percent, GAO said.
The investigators didn't estimate how much money RMA could save taxpayers by increasing rates more broadly. But the report said government costs would have been reduced $600 million in 2013 if premium subsidies in higher-risk counties had been the same as they are in lower-risk counties - 4 cents per $1 of expected crop value. Premium subsidies in higher-risk counties that year averaged 11 cents per $1 of crop value.
The American Association of Crop Insurers, which represents companies that provide the coverage, applauded the GAO for what the group called its “constructive approach.”
“It is important to recall that program costs and rates aren't necessarily the same thing. That being said, we do have concerns about the level of rates in parts of the program,” the group said in a statement.
“We know that any increases in program costs will only make the crop insurance program a bigger target for its critics.”