WASHINGTON, August 24, 2012 – Crop insurance providers need to do a better job verifying and documenting growers who qualify for new producer eligibility and who can potentially qualify for higher indemnity payments, according to a new USDA’s Office of Inspector General (OIG) report released today.
In an audit of policies issued in 2007 and 2008 crop years, OIG charged that Approved Insurance Providers (AIPs) violated their agreement under the Standard Reinsurance Agreement (SRA) by offering insured producers a type of policy to which they were not entitled and by failing to verify the eligibility status of these insured producers.
RMA has implemented data entry system controls known as “edit checks” to prevent policies from erroneously being entered into RMA’s data system as new-producer policies. However, OIG’s tests of RMA’s database identified that 49 of the 154 policies assigned to producers who were ineligible for new-producer status passed RMA’s edit check, even though the policyholders had more than 2 years of history data in RMA’s internal database records.
OIG recommended that the Risk Management Agency (RMA) deny reinsurance for 57 policies with associated losses of about $2.4 million and associated costs of $910,000, take corrective action, and recover total losses of $3,310,000. The USDA’s investigative arm also recommends that RMA require AIPs to verify new-producer eligibility for more than 6,000 policies that had more than 2 years of records and received indemnities, and take appropriate corrective action.
In response to the audit, the Risk Management Agency (RMA), said it was prohibited from addressing any of these recommended actions due to the 3-year notification limitation set forth in the Federal Crop Insurance Act.
The RMA did agree to issue a bulletin to AIPs that specifically requires them to verify and document new producer eligibility at the time of underwriting , including checks of RMA’s database and records at Farm Service Agency offices. RMA also plans to work with the Center for Agribusiness Excellence to analyze producers who qualified for new producer status in 2009 and 2010.
Of the 2.3 million total crop insurance policies administered during the 2007 and 2008 crop years, 144,000 policies received new-producer status, which could result in higher indemnity payments. RMA defines “new producers” as those insured persons who have no more than 2 years of history farming a specific crop. With premiums totaling approximately $617 million, new producers received a total of approximately $507 million in indemnities, according to OIG.
“Since not all producers have grown crops for the number of years required in order to complete an APH yield, the Federal Crop Insurance Act provided for additional methods for determining the yields to use as the basis for calculations. Essentially, if a producer does not have acceptable production records, these methods augment the APH of a producer with a transitional yield.
“As producers establish more years of actual yield production records, crop insurance models are better able to predict what producers are likely to yield, and can then adjust policy rates and coverage levels to reflect insurance risks more accurately. RMA is required to make sure that basing insurance on previous production does not prevent beginning farmers—those who have little or no history with a particular crop—from getting adequate insurance,” the OIG report points out.
In effect, OIG said that “using this assigned yield gives new producers the opportunity to purchase insurance coverage at rates that would otherwise require some years of demonstrated success with a given crop,.
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