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GAO: Money Savings in Crop Insurance
By Chris Clayton
Tuesday, December 5, 2023 6:12AM CST

OMAHA (DTN) -- The crop insurance industry's profits and the premium subsidies for the country's largest farmers are under a microscope following a government watchdog report laying out changes that "could save the federal government hundreds of millions of dollars per year."

The Government Accountability Office (GAO) released a report Monday showing the 13 private companies that sold crop insurance over the past decade have averaged $3 billion per year in underwriting gains and other costs paid by taxpayers. Along with that, a small percentage of the largest farmers generate the largest profits for insurers and taxpayer costs.

The GAO recommends capping insurance profits and expenses billed to taxpayers, as well as setting an income means test for farmers. These are ideas that have been roundly rejected in the past by some major farm groups.


The GAO has issued multiple reports about crop insurance over the past decade. Groups seeking to reform farm programs highlight the increasing costs to taxpayers, but the House and Senate Agriculture Committees have been committed to expanding crop insurance, making it more affordable for farmers and avoiding changes perceived as harming the program.

The difference now, as the next farm bill is on deck, is lawmakers have spent the last several months arguing about the federal deficit, national debt and where to cut spending.


Crop insurance companies receive underwriting gains from their policies as well as administrative and operating (A&O) expenses from the federal government. Annually, that $1.43 billion in underwriting gains combines with A&O subsidies that average $1.6 billion a year. In total, those costs averaged $3 billion a year from 2011 to 2022.

In 2022, crop insurance cost a total of $17.3 billion. Insurance companies received $3.7 billion, including $2.2 billion in A&

0 expenses, as well as $1.5 billion in underwriting gains.

Without changes, taxpayers are projected over the next decade to pay crop insurance companies an average of $3.8 billion to operate the program.


The crop insurance industry over the past decade has averaged an annual rate of return of 16.8%, which is significantly higher than typical underwriting gains for the insurance industry.

USDA had set a target of crop insurance companies earning a rate of return of 14.5%. If underwriting gains were capped at 14.5%, the federal government would save an average of $251 million per year from 2024-33, the GAO stated.

If the underwriting gains were capped at the typical "market-based rate of return" of 10.2%, the federal government would save $720 million per year from 2024-33. Underwriting gains would fall from $1.8 billion to about $1.1 billion annually.

In 2010, USDA renegotiated the Standard Reinsurance Agreements (SRA) with crop insurance companies meant to cut $6 billion in spending over 10 years. After that, Congress added a provision in the 2014 farm bill that prevented USDA from negotiating any savings in underwriting gains through those contracts with insurers. The GAO noted Congress would need to repeal that provision to generate any savings.


Since that SRA, some of the highest underwriting gains and A&O expenses for crop insurers have come from policies that do not fall under the SRA. The GAO noted some of the highest A&O subsidies are tied to dairy and other livestock policies that have increased in use over the past decade.

On the higher end, 14% of crop insurance policies -- 81,691 policies -- accounted for $1.1 billion in A&O, or about half of all policy expenses.

Of the 100 policies with the largest A&O subsidies, 97 were policies not subject to the A&O cap. Those include 61 policies for livestock and dairy protection. They averaged A&O subsidies of approximately $614,000 each.

Fourteen insurance policies had A&O expenses of more than $1 million. For at least two policies, insurers received more than $3 million. One of those policies was for a dairy and the other was a pasture, rangeland and forage policy.

On a smaller scale, 56% of crop insurance policies last year -- about 326,000 -- had A&O expenses of less than $200 per policy.


Three crop insurance industry groups -- the American Association of Crop Insurers, the Crop Insurance and Reinsurance Bureau and National Crop Insurance Services -- said in a joint statement the GAO 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 industry statement continued, "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.

"America's crop insurers work in partnership with USDA to provide insurance coverage on approximately 500 million crop and rangeland acres and provided approximately $200 billion of financial protection in 2022 to America's rural economy. This compares to 265 million acres in 2011 and $100 billion in financial protection for the same year.

"The industry will continue to review the report, but a few observations are noteworthy at this juncture," the crop insurance group said.

"GAO mischaracterizes the economics of the delivery system when it states that '... the increase in crop prices did not increase the workload to sell and service the policy.' This statement ignores the fact that since 2011 the crop insurance industry has worked with USDA to implement both the 2014 and 2018 farm bills.


The largest 1% of crop insurance policyholders -- 5,537 of them -- accounted for 22% of the total premium dollars, about $2.57 billion. The average premium for these producers is $464,900 per policy.

At least 19 farms had policies that topped $3 million in subsidies. That includes a nursery in the southern U.S. that received $7.7 million in premium subsidies, along with a single dairy operation that received $6.6 million.

On the smaller side, 57% of all policyholders -- 263,804 of them -- added up to about 7% of premium subsidy dollars, or about $847 million. The average premium subsidy for those policies was about $3,200 per policy.

The GAO cited conversations with a crop insurance trade association in which insurers said the cap on A&O expenses does not cover the actual costs. Those industry representatives said if the A&O expenses were increased, "it would be possible to create incentives for agents to focus on smaller producers."


The GAO also looked at premium subsidies for farmers with adjusted gross income above $900,000. That group of high-income farmers accounted for just 1,341 policies last year out of 460,615 total crop insurance policies.

If premium subsidies for those higher-income farmers had been reduced by 15%, the government would have saved about $15 million last year "with minimal effects on producer participation in the program and the program's financial soundness," the GAO stated.

The GAO report thwarted the crop insurance industry argument that if premium costs were raised, larger farmers would leave the program, raising rates for everyone else. Higher-income farmers have the same loss ratio as everyone else, so if they left the program, it would not affect the risk pool or the actuarial soundness of the program, the GAO stated.


Groups calling for reforms in farm bill programs pointed to the GAO report to reiterate their calls for farm subsidy reforms.

Joshua Sewell, director of research and policy at Taxpayers for Common Sense, was among those pointing to the federal deficit and national debt as reasons for tightening the belt on crop insurance. Sewell noted recent presidents have frequently called for crop insurance reforms.

"That was one of the few requests President Trump and President Obama had in their budget requests that they had agreed upon," Sewell said.

Joe Van Wye, policy and outreach director with Farm Action Fund, said crop insurance is broken and badly in need of reform. "Crop insurance largely subsidizes extremely large farming operations, multinational insurance companies and crop insurance agents, not struggling farmers and ranchers who truly need support," he said. "Lack of access to critical farm safety net systems is a key driver in agricultural consolidation as farmers -- especially new and beginning farmers and historically underserved farmers -- are unable to access the federal funds they need to survive a challenging harvest or year."

The full GAO report can be found at https://www.gao.gov/…

DTN Political Correspondent Jerry Hagstrom contributed to this report.

Chris Clayton can be reached at Chris.Clayton@dtn.com.

Follow him on X, formerly known as Twitter, @ChrisClaytonDTN.

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