Crop Insurance: USDA's Progress in Expanding Insurance for Specialty
Crops (Letter Report, 04/16/99, GAO/RCED-99-67).
Pursuant to a congressional request, GAO reviewed the availability of
the Department of Agriculture's (USDA) federal crop insurance for
specialty crops, focusing on: (1) USDA's recent progress in expanding
coverage to specialty crops; (2) the new marketing practices insurance
companies have introduced for specialty crops and the potential
advantages and disadvantages of the practices, including their effect on
producers' participation; and (3) the potential effect on participation
by producers in the catastrophic crop insurance program if they were
charged higher fees.
GAO noted that: (1) USDA insures 52 specialty crops and plans to begin
testing coverage for another 9 specialty crops by 2001; (2) these 61
crops represent a majority of the value of all specialty crops, but
insurance coverage will not be available for about 300 crops; (3) while
programs for specialty crop insurance have expanded in recent years,
more rapid expansion has not occurred because USDA follows a deliberate
multistep process involving the assessment of risk and setting of
premiums to ensure that the programs it develops are actuarially sound;
(4) this process, including testing, is lengthy, typically requiring
about 5 years, because, among other things, the production history data
needed to develop a specialty crop program are often not readily
available; (5) according to USDA, while the development process cannot
be accelerated because of the need to ensure actuarial soundness,
additional resources would allow USDA to evaluate more crops
concurrently; (6) in recent years, insurance companies have used
alternatives to the traditional strategy of having independent agents
market federal crop insurance to producers; (7) one alternative strategy
uses endorsements--an insurance company pays a fee to a producer
association to promote the sale of its insurance product; (8) a proposed
strategy would allow an insurance company to pass through administrative
savings to producers in the form of reduced premiums; (9) these
strategies could increase producers' participation and, ultimately, if
USDA chooses to share in these administrative cost savings, reduce the
administrative fees the government pays insurance companies; (10)
however, these strategies have some potential disadvantages; (11) under
the rescinded provision of the Agricultural Research, Extension, and
Education Reform Act of 1998, the increase in the processing fee for
many specialty crop farmers would have been large and participation
would have declined; and (12) while GAO was unable to estimate the
magnitude of the decline, available studies on traditional crop
insurance show that, in general, for each 10-percent increase, there is
a 2- to 9-percent decrease in participation.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-67
TITLE: Crop Insurance: USDA's Progress in Expanding Insurance for
Specialty Crops
DATE: 04/16/99
SUBJECT: Agricultural programs
Farm income stabilization programs
Agricultural products
Agricultural policies
Insurance companies
Insurance cost control
Marketing
Vegetables
Insurance premiums
IDENTIFIER: Federal Crop Insurance Program
Noninsured Crop Disaster Assistance Program
Catastrophic Crop Insurance Program
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Subcommittee on Risk
Management, Research, and Specialty Crops, Committee on Agriculture,
House of Representatives
April 1999
CROP INSURANCE - USDA'S PROGRESS
IN EXPANDING INSURANCE FOR
SPECIALTY CROPS
GAO/RCED-99-67
Specialty Crop Insurance
(150125)
Abbreviations
=============================================================== ABBREV
USDA - U.S. Department of Agriculture
Letter
=============================================================== LETTER
B-281887
April 16, 1999
The Honorable Gary A. Condit
Ranking Minority Member
Subcommittee on Risk Management
Research, and Specialty Crops
Committee on Agriculture
House of Representatives
Dear Mr. Condit:
Farming is inherently risky because producers operate at the mercy of
nature and frequently are subjected to weather-related and other
natural disasters. Over the years, the federal government has played
an active role in helping to mitigate the effects of risk on
agriculture by offering producers subsidized crop insurance, which
allows them to receive a claims payment when production falls below
an insured level. However, the federal crop insurance program has
mostly focused on providing insurance coverage for producers who
raise nonspecialty crops, such as wheat, corn, and soybeans.
Coverage for producers who grow specialty crops--fruits, nuts, and
vegetables, which generally have a higher crop value per acre--has
been limited. This is, in part, because of the large number of
specialty crops that are grown and because of specialty crops' unique
production and risk characteristics, which may require a customized
insurance program for individual types of crops.
The U.S. Department of Agriculture (USDA) manages the federal crop
insurance program and offers producers two principal levels of
insurance coverage--catastrophic and buyup. Catastrophic insurance
provides producers with protection against extreme crop losses for a
small processing fee, while buyup insurance provides protection
against more typical crop losses in exchange for a producer-paid
premium, subsidized in part by USDA. Crop insurance is delivered
through private insurance companies. In return for selling and
servicing federal crop insurance, USDA reimburses the companies for
their administrative costs, and both share in underwriting profits
and losses. The federal government's cost for the program--including
premium subsidies, administrative fees paid to companies that sell
crop insurance, and underwriting losses--is about $1.4 billion
annually.
Concerned about the availability of federal crop insurance for
specialty crops, you asked us to examine (1) USDA's recent progress
in expanding coverage to specialty crops and (2) the new marketing
practices insurance companies have introduced for specialty crops and
to identify potential advantages and disadvantages of the practices,
including their effect on producers' participation. In addition, you
asked us to review the potential effect on participation by producers
in the catastrophic crop insurance program if they were charged
higher fees. In 1998, the Agricultural Research, Extension, and
Education Reform Act imposed a higher fee, which was later reduced.\1
--------------------
\1 The Agricultural Research, Extension, and Education Reform Act of
1998 (P.L. 105-185, June 23, 1998) changed the effective cost of
catastrophic insurance from a fee of $50 per policy to the higher of
$60 or $10 plus 10 percent of the calculated premium. The Omnibus
Consolidated and Emergency Supplemental Appropriations Act, 1999
(P.L. 105-277, Oct. 21, 1998) subsequently set the fee at $60 per
policy.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
USDA insures 52 specialty crops and plans to begin testing coverage
for another 9 specialty crops by 2001. These 61 crops represent a
majority of the value of all specialty crops, but insurance coverage
will not be available for about 300 crops. While programs for
specialty crop insurance have expanded in recent years, more rapid
expansion has not occurred because USDA follows a deliberate
multistep process involving the assessment of risk and setting of
premiums to ensure that the programs it develops are actuarially
sound.\2 This process, including testing, is lengthy, typically
requiring about 5 years, because, among other things, the production
history data needed to develop a specialty crop program are often not
readily available. According to USDA, while the development process
cannot be accelerated because of the need to ensure actuarial
soundness, additional resources would allow the Department to
evaluate more crops concurrently.
In recent years, insurance companies have used alternatives to the
traditional strategy of having independent agents market federal crop
insurance to producers. One alternative strategy uses
endorsements--an insurance company pays a fee to a producer
association to promote the sale of its insurance product. A proposed
strategy would allow an insurance company to pass through
administrative savings to producers in the form of reduced premiums.
For example, if an insurance company could deliver the program for
less than the administrative fee it receives from USDA for this
service, the company would be permitted to reduce the premiums
charged to the producer. These strategies could increase producers'
participation and, ultimately, if USDA chooses to share in these
administrative cost savings, reduce the administrative fees the
government pays insurance companies. However, these strategies have
some potential disadvantages. For example, USDA is concerned that
they could prevent smaller insurance companies from competing if they
cannot provide the economic incentives that larger companies provide.
Under the now rescinded provision of the 1998 agricultural research
act, the increase in the processing fee for many specialty crop
farmers would have been large and participation would have declined.
While we were unable to estimate the magnitude of the decline,
available studies on traditional crop insurance show that, in
general, for each 10-percent increase, there is a 2- to 9-percent
decrease in participation.
--------------------
\2 Actuarial soundness is the level at which premiums, including the
portion paid by the government, are sufficient to cover claims
payments. USDA is required by law to achieve actuarial soundness.
BACKGROUND
------------------------------------------------------------ Letter :2
Federal crop insurance protects participating farmers against crop
losses caused by perils such as droughts, floods, hurricanes, and
other natural disasters. Since 1981--the first year in which the
government enlisted private insurance companies to sell and service
crop insurance--federally subsidized multiple-peril crop insurance
has been a principal means of managing the risk associated with crop
losses.\3 Federal crop insurance offers producers two primary levels
of insurance coverage, catastrophic and buyup, which are available
for major crops. Catastrophic insurance, created by the Federal Crop
Insurance Reform and Department of Agriculture Reorganization Act of
1994, was designed to provide producers with protection against
extreme crop losses for a small processing fee. Buyup insurance
protects against more typical and smaller crop losses in exchange for
a producer-paid premium. Table 1 shows the levels of coverage
available through federal crop insurance.
Table 1
Federal Crop Insurance Coverage Levels
Type of insurance Coverage level Cost to producer
------------------------------ ------------------ ------------------
Catastrophic Insures 50 percent Small processing
of production, fee for each
with payment policy (by county
provided at 55 and crop)
percent of market
price
Buyup Insures from 50 to Small processing
75 percent of fee for each
production, with policy plus
payment provided premium paid by
up to 100 percent the producer based
of market price on level of
coverage
----------------------------------------------------------------------
Source: USDA.
USDA's Risk Management Agency establishes the premiums, terms, and
conditions for federal crop insurance and manages the program. When
producers obtain insurance coverage, the government subsidizes the
total premium for catastrophic insurance and a portion of the premium
for more expensive buyup insurance. Specifically, for every dollar
of buyup premium, the government subsidizes an average of 40 cents
and the producer pays roughly 60 cents.\4 Under the terms of a
negotiated agreement, 17 insurance companies sell crop insurance and
process claims. USDA pays these companies an administrative fee for
these services. For example, the government reimburses the
participating insurance companies 24.5 cents for every dollar of
buyup insurance premium and 11 cents for catastrophic insurance.
Furthermore, the companies share underwriting profits (the difference
between premiums and claims) as well as a limited portion of any
underwriting losses with the government. However, the government
absorbs the vast majority of losses.
Nonspecialty crops have experienced higher losses than specialty
crops. Beginning in October 1998, USDA is required to achieve
actuarial soundness, defined as a loss ratio of 1.075: That is, for
every dollar in premiums, including the portion paid by the
government, the claims paid would be expected to average no more than
$1.075. For 1981 through 1998, the claims paid averaged $0.99 per
$1.00 of premium for specialty crops, compared with $1.12 per $1.00
of premium for nonspecialty crops. Appendix I provides information
on crop insurance for 1998 and the loss ratio experience by each crop
since 1981.
The cost of the federal crop insurance program--including premium
subsidies, company reimbursements, and underwriting losses--has
averaged about $1.4 billion annually since 1995 and is estimated to
be $1.6 billion for 1999. In 1998, specialty crops, such as grapes,
oranges, almonds, and tomatoes, represented about 13 percent of the
government's costs.
Many specialty crops, however, are not covered by federal crop
insurance but are instead covered by the Noninsured Crop Disaster
Assistance Program, which was created by the 1994 reform act. For an
individual producer who suffers a loss, this assistance program
provides protection only when an area--such as an entire
county--suffers a loss. Thus, unlike federal crop insurance, this
program is tied to an area's losses rather than to an individual
producer's losses.
The Agricultural Research, Extension, and Education Reform Act of
1998 temporarily raised the effective cost of catastrophic insurance
from $50 per policy to the higher of $60 or $10 plus 10 percent of
the calculated premium. The higher fee was enacted as a budget
offset to provide permanent funding to pay the commissions of agents
selling federal crop insurance policies. However, the appropriations
act for fiscal year 1999 replaced this provision, requiring that all
purchasers of catastrophic insurance pay no more than $60 per policy.
Although the Congress has made a number of changes to the crop
insurance program to encourage participation, the program has had a
relatively low level of participation in terms of acres planted and
insured. As shown in table 2, only about 51 percent and 64 percent
of specialty crop and nonspecialty crop acres, respectively, were
insured in 1997, the latest year for which complete data were
available. This level of participation represents a decline from
1995, particularly for nonspecialty crops. (For a more detailed
discussion of participation, see app. II.)
Table 2
Participation in the Federal Crop
Insurance Program, 1995-97
Percent of planted acres
----------------------------------------------
Specialty crops Nonspecialty crops
---------------------- ----------------------
Type of coverage 1995 1997 Change 1995 1997 Change
---------------------- ------ ------ ------ ------ ------ ------
Catastrophic 33.8 27.3 -6.5 42.6 22.1 -20.5
Buyup 24.7 24.0 -0.7 39.9 41.6 1.7
======================================================================
Total 58.5 51.2 -7.3 82.5 63.7 -18.8
----------------------------------------------------------------------
Note: Totals may not add because of rounding.
Source: GAO's analysis of USDA's data.
--------------------
\3 The Federal Crop Insurance Act of 1980 (P.L. 96-365, Sept. 26,
1980) authorized the use of private insurance companies to sell and
service federal crop insurance policies starting with the 1981 crop
year.
\4 For 1999, the government will subsidize an additional 15 to 21
cents per dollar of premium as a special, one-time allowance related
to the emergency assistance provided for crop losses in the 1999
appropriations act.
USDA HAS EXPANDED THE INSURANCE
PROGRAM FOR SPECIALTY CROPS
USING A MULTIYEAR PROCESS
------------------------------------------------------------ Letter :3
USDA insures 52 specialty crops\5 --14 of which have been added since
1994--and plans to begin testing coverage for another 9 specialty
crops by 2001. While these 61 crops represent a majority of the
value of all specialty crops, insurance coverage will still not be
available for about 300 crops, such as taro and parsley. Programs
for specialty crop insurance have not expanded more rapidly because
USDA follows a deliberate multistep process to ensure that the
programs it develops are actuarially sound. The process includes
collecting and analyzing data, setting appropriate premiums, and
testing and evaluating the program. This process can be lengthy,
typically requiring about 5 years, because, among other things, the
data on production history needed to develop a specialty crop program
are often not readily available. According to USDA, while the
development process is necessary to ensure actuarial soundness,
additional resources would allow it to evaluate more crops
concurrently.
--------------------
\5 USDA also insures 23 nonspecialty crops, for a total of 75 insured
crops.
USDA HAS EXPANDED THE
INSURANCE PROGRAM FOR
SPECIALTY CROPS, BUT MANY
CROPS REMAIN UNPROTECTED
---------------------------------------------------------- Letter :3.1
Between 1981 and 1994, USDA developed insurance programs for 38
specialty crops. Since the implementation of the 1994 reform act,
which encouraged USDA to develop additional plans for specialty
crops,\6 the Department has developed 14 specialty crop programs, as
shown in table 3.
Table 3
Specialty Crops Added to the Federal
Crop Insurance Program Since the 1994
Reform Act
Year Specialty crop
---------------------------------- ----------------------------------
1995 Blueberries
1996 Avocado/mango trees (Florida)
Florida fruit trees
1998 Avocados
Pecans
Sweet potatoes
1999 Cabbage
Cherries
Crambe
Mustard
Rangeland
Watermelons
Wild rice
Winter squash
----------------------------------------------------------------------
Note: Crops shown in table are pilot programs offered in limited
areas.
Source: GAO's analysis of USDA's data.
Including the 14 additions, the total number of specialty crops
currently covered by the federal crop insurance program is 52. USDA
expects to offer insurance for many other specialty crops over the
next several years. By 2001, USDA plans to add nine new specialty
crops, including, for example, cucumbers, mint, and strawberries.
These 61 crops represent about 85 percent of the market value of all
specialty crops.
Along with adding new crops to the program, USDA expanded insurance
coverage for specialty crops in other ways, including allowing
producers to insure by crop variety and making the insurance of
existing crops available in additional areas. For example, in 1995,
USDA broadened crop insurance for grapes by offering catastrophic
coverage for individual grape varieties, such as zinfandel, merlot,
and cabernet sauvignon. According to USDA officials,
participation--measured in terms of acres insured--increased in 1996
and 1997 after this change was instituted. In 1996, USDA expanded
crop insurance for citrus trees from three counties in Texas, where
it had been offered since 1983, to an additional five counties in
Florida. Moreover, in 1999, USDA began pilot testing a new
plan--known as adjusted gross revenue--in selected counties in
Florida, Maine, Massachusetts, Michigan, and New Hampshire. This new
insurance plan will provide a producer with a guaranteed level of
income, which will be determined by the producer's reported farm
income for the past 5 years. It will also provide coverage for all
specialty and nonspecialty crops as well as some livestock.\7
Despite this progress, many crops remain uninsured, and many covered
crops are not insured in all the areas where they are grown. USDA
does not offer insurance for about 300 commercially grown specialty
crops, which represent about 15 percent of the economic value of
specialty crops grown in the United States.\8 Many of the crops for
which insurance is not available are small crops, such as taro,
guava, and parsley, that are grown in limited areas. In addition,
although crop insurance may exist for a particular specialty crop,
the coverage may not be available in all locations where the crop is
grown. For example, crop insurance for grapes is available in
selected counties in Arkansas, California, Michigan, Missouri, New
York, Ohio, Oregon, Pennsylvania, and Washington but not in other
growing areasspecifically, selected counties in Arizona, Georgia,
North Carolina, and South Carolina. According to USDA, crop
insurance for grapes is not available in these states because
producers have shown limited interest.
Furthermore, USDA's authority to offer revenue insurance plans for
specialty and nonspecialty crops is legislatively limited by the
Federal Crop Insurance Act, as amended. The act only allows USDA to
offer revenue insurance on a pilot basis through 2000. According to
USDA, legislative changes would be necessary to offer revenue
insurance on a permanent basis.
--------------------
\6 However, if a private sector insurance program is generally
available, USDA is prohibited from implementing a competing insurance
program.
\7 In addition, USDA developed other new insurance plans for
nonspecialty crops in recent years, including plans offering revenue
coverage.
\8 Because of differences in categorization, these 300 crops
represent approximately 900 crops and crop varieties covered by
USDA's Noninsured Crop Disaster Assistance Program.
USDA'S PROCESS FOR
DEVELOPING SPECIALTY CROP
INSURANCE
---------------------------------------------------------- Letter :3.2
USDA's process for developing specialty crop insurance for a
particular crop is deliberate and often time-consuming, typically
requiring about 5 years to complete. Specifically, collecting and
analyzing data to determine whether a new insurance program is
feasible can require 2 years or more, and pilot testing can add
another 3 years. According to USDA, while the development process is
necessarily thorough to ensure actuarial soundness, additional
resources would allow it to evaluate more crops concurrently. Table
4 presents USDA's multistep development process.
Table 4
Major Steps in USDA's Process for
Developing Specialty Crop Insurance
Step Development process
---------------------------------- ----------------------------------
1 Select new crop to insure
2 Assemble multidisciplinary program
development team
3 Collect data necessary for program
development
4 Analyze data to develop the
specific provisions of the program
5 Test the program
6 Evaluate test results, make
necessary modifications to program
7 Implement the program on a
permanent basis or take other
actions
----------------------------------------------------------------------
Source: USDA.
In steps 1, 2, and 3--beginning the development process--USDA
considers several criteria when selecting a new crop to insure,
including legislative mandates, its own initiatives, and requests by
producers and commodity groups. Appendix III discusses these
criteria and their application to the 14 crops added to the program
since 1995. Because data for specialty crops are often not readily
available, the program development team collects data about the crop
from various sources, including producer organizations and land grant
universities. These data concern historical production, growing
practices, and the risks associated with producing the crop.
Appendix IV discusses the unique risk characteristics of specialty
crops.
In step 4--specifying the provisions for the new program--the
development team develops appropriate premium rates by developing a
statistical model using the collected data or by applying premium
rates from similar crops. In addition, the team analyzes the
collected data to establish insured crop prices and determine loss
adjustment standards. Appendix V describes in detail the insurance
plans and the rating methods USDA uses to set premiums for specialty
crops.
In steps 5, 6, and 7--the testing and evaluation phase--USDA
introduces the new program on a pilot basis and uses the experience
of this pilot to develop empirical data and refine program
operations. USDA also ensures that adequate producer participation
can be achieved. Adequate participation is generally considered key
to achieving the program's legislative objective of actuarial
soundness. Without sufficient participation among producers,
opportunities for diversification across various growing conditions
and farming practices will be limited, and this limitation will
jeopardize the actuarial soundness of the insurance program. For
example, USDA developed a pilot revenue insurance policy for almonds
in two California counties in 1998, but because premiums for the
coverage would have been higher than premiums for already available
yield insurance, almond producers indicated they would be unwilling
to purchase the revenue coverage. Consequently, USDA did not
initiate the program, citing concerns about the program's actuarial
soundness because of expected low participation.
NEW MARKETING STRATEGIES OFFER
CERTAIN ADVANTAGES AND
DISADVANTAGES
------------------------------------------------------------ Letter :4
In recent years, new marketing strategies for crop insurance have
been introduced that use endorsements by producer associations to
sell insurance or that pass through administrative savings to
producers. These strategies could increase producers' participation
and ultimately reduce the government's administrative reimbursements
to insurance companies, and one of these strategies could also reduce
producers' premiums. At the same time, however, according to USDA,
these strategies have some potential disadvantages. For example,
USDA is concerned that the strategies could prevent smaller insurance
companies from competing if they cannot provide the economic
incentives that larger companies provide. USDA is developing draft
regulations to govern the use of the new marketing strategies.
NEW STRATEGIES HAVE
POTENTIAL TO INCREASE
PARTICIPATION AND DECREASE
COSTS FOR FEDERAL CROP
INSURANCE
---------------------------------------------------------- Letter :4.1
In recent years, insurance companies have used alternatives to the
traditional structure of having independent agents market federal
crop insurance to producers. The most common of these alternatives
has an insurance company paying a fee to a producer association--such
as a cooperative or processor--in exchange for the association's
endorsement and the right to use the association's name and logo on
direct mailings to the association's members to market federal crop
insurance. Since 1995, this new strategy, frequently referred to as
an "endorsement agreement," has principally occurred in California
for specialty crops. According to USDA's Risk Management Agency,
three of the companies selling federal crop insurance engaged in an
endorsement agreement with at least one producer association in 1998.
These endorsements are used mostly for selling catastrophic
insurance.
Endorsements can contribute to increasing participation in specialty
crop insurance programs. For example, according to a large
association of California wine grape producers that has an
endorsement agreement with one of the insurance companies,
participation among the association's members increased from roughly
20 percent in 1994, prior to entering into the agreement, to about 40
percent in 1998. Similarly, according to a key California citrus
cooperative that also has an endorsement agreement, crop insurance
premiums for the cooperative's members increased from about $2.5
million in 1995 to $4 million in 1998, or roughly 60 percent.
Producer associations told us that endorsements have been successful
because specialty crop producers generally rely on their associations
for key information about production practices and risk management.
Endorsements may provide other advantages as well. They can lower
insurance companies' delivery costs by enabling the companies to
reach their intended audience through targeted marketing to
association members. Over the long term, therefore, USDA may be able
to share in these savings by reducing the administrative
reimbursements it pays to companies. Furthermore, according to USDA,
endorsements may allow companies to penetrate market niches not
currently reached by independent agents and to promote "one-stop
shopping" because many associations and cooperatives provide multiple
producer services.
Another new marketing strategy, authorized by the 1994 reform act for
buyup insurance, could also increase participation. Under this
strategy, an insurance company could reduce the premiums charged to a
producer if the company can deliver the program for less than its
administrative reimbursement from USDA. For example, if the expenses
of selling and servicing crop insurance policies are less than the
administrative reimbursement, the administrative savings could be
passed through to the producer in an effort to increase the company's
share of crop insurance sales. Ultimately, increased sales by a
number of companies could raise participation in the crop insurance
program and reduce the administrative fees the government pays
insurance companies. As of February 1999, USDA had received four
proposals to implement this new strategy.
NEW STRATEGIES MAY POSE
RISKS TO THE CROP INSURANCE
PROGRAM
---------------------------------------------------------- Letter :4.2
Although new marketing strategies may provide certain benefits to the
crop insurance program, they may also undermine the program in
several ways. First, USDA is concerned that the strategies could
harm smaller insurance companies. For example, the strategies could
prevent these smaller companies from competing if they cannot provide
the economic incentives to producer associations that larger
companies provide.
Second, with the use of endorsements, USDA has a concern about
rebating. Rebating is the offering of any benefit or valuable
consideration as an inducement to purchase insurance. Rebating can
occur when insurance companies pay producer organizations large
endorsement fees to market crop insurance. These organizations could
use the fees to provide benefits or services to those producers
purchasing the insurance, such as lowering these members' dues or
providing services that are not available to those producers who did
not purchase crop insurance. For example, in 1995, one cooperative
with an endorsement agreement paid for catastrophic insurance for
those members who agreed to sign up for the insurance. According to
USDA, the cooperative was funding the cost of the catastrophic
insurance from the endorsement fee it received from the insurance
company. USDA considered this action to be a form of rebating--a
direct inducement to producers to buy the coverage. Consequently,
starting in 1996, USDA implemented restrictions against using
endorsement fees to pay for catastrophic insurance for producers.
Third, according to USDA, these strategies could reduce a company's
ability to diversify its risk over a large geographic area if
marketing becomes highly concentrated.
Finally, USDA believes that new marketing strategies may jeopardize
its use of producer associations to independently verify data for
rating, coverage, and claim calculations. This could occur because
associations would be involved in selling crop insurance to their
members while at the same time maintaining the production records
USDA uses to settle claims.
To address these potential problems, USDA is developing new
regulations to govern the use of alternative marketing strategies.
The draft regulations require that insurance companies selling
federal crop insurance submit all marketing agreements and
endorsements to USDA for approval prior to implementing them. This
step is designed to ensure that these agreements and endorsements are
in compliance with regulations and that the program is safeguarded.
In addition, in 1999, USDA's Risk Management Agency expects to
initiate a review of new marketing strategies that will evaluate
potential advantages and disadvantages in further detail.
HIGHER INSURANCE FEES FOR
CATASTROPHIC INSURANCE WOULD
REDUCE PRODUCER PARTICIPATION,
BUT THE MAGNITUDE OF THE
REDUCTION IS UNCLEAR
------------------------------------------------------------ Letter :5
Under the now-rescinded provision of the Agricultural Research,
Extension, and Education Reform Act of 1998 (P.L. 105-185, June 23,
1998),\9 the processing fee for catastrophic insurance for many
specialty crop producers would have been significantly higher than
$50--as much as $3,821--and participation would have declined. While
we were unable to estimate the magnitude of the decline, available
studies for crop insurance show that, in general, for each 10-percent
increase in insurance costs to producers, there is a 2- to 9-percent
decrease in participation.\10
--------------------
\9 The fee increase enacted under the 1998 agricultural research act
changed the effective cost of catastrophic insurance from a fee of
$50 per policy to the higher of $60 or $10 plus 10 percent of the
calculated premium. The Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999 (P.L. 105-277, Oct. 21, 1998)
subsequently set the fee at $60 per policy.
\10 The one available study on specialty crops suggests that declines
in participation for specialty crops may be greater. This study,
however, was based on a survey that had a low response rate. The low
response rate limited the validity of the results, and therefore we
did not include them in our range.
PAYMENTS FOR SPECIALTY CROP
CATASTROPHIC INSURANCE WOULD
HAVE BEEN SIGNIFICANTLY
HIGHER
---------------------------------------------------------- Letter :5.1
According to our analysis of 1997 sales for catastrophic crop
insurance, the average fee of all specialty crop policies would have
increased from $50 to $189 had the 1998 provision gone into effect.
Table 5 shows the average fees that would have resulted from proposed
fee increases and the percentage of policies affected in different
premium ranges. The average fees shown reflect the amount producers
would have paid if the processing fees had been increased to the
greater of $60 or 10 percent of the calculated premium plus $10. For
15 percent of the policies, the average fee would have risen from $50
to $487, and for the top 2 percent of the policies, the average fee
would have risen from $50 to $3,821.
Table 5
Potential Fees for Catastrophic Crop
Insurance If Higher Processing Fee Had
Been Implemented
(Dollars per policy)
Specialty crops Nonspecialty crops
---------------------------------- ----------------------------------
Average Average Percent of Average Average Percent of
Premium range\a premium fee\b policies premium fee\b policies
----------------- ---------- ---------- ---------- ---------- ---------- ----------
$500 or less $205 $60 53 $143 $60 82
501 to 1,000 717 82 17 698 80 10
1,001 to 2,000 1,410 151 13 1,379 148 5
2,001 to 15,000 4,769 487 15 3,986 409 3
15,000+ 38,113 3,821 2 26,997 2,710 0\c
Average/total $1,789 $189 100 $398 $60 100
-----------------------------------------------------------------------------------------
\a USDA calculates and tracks premiums related to each catastrophic
insurance policy to establish administrative reimbursements and any
underwriting profits or losses owed the insurance company that sells
the policy. Premiums are based upon factors that include the value
of the crop insured and the crop's risks of production.
\b Average fee equals the greater of $60 or 10 percent of the average
premium plus $10.
\c Rounds to less than 1 percent.
Source: GAO's analysis of USDA's data.
As the table shows, if the higher fee schedule had been implemented,
the average fee would have been greater for specialty crop producers
than for nonspecialty crop producers. This is because specialty
crops have a higher value than nonspecialty crops--a key determinant
in calculating premiums--making insurance for specialty crops
generally more costly per acre. For example, the average value of
six major nonspecialty crops ranges from about $120 to $720 per acre.
In comparison, the value of a single specialty crop can be as high as
about $8,800 per acre.
AVAILABLE STUDIES INDICATE
PARTICIPATION DECLINES AS
PRODUCERS' COSTS INCREASE
---------------------------------------------------------- Letter :5.2
According to available studies on nonspecialty crops and experts we
spoke with, fee increases would lead to lower participation.
However, the magnitude of the effect on participation is unclear.
The studies indicate that a 10-percent increase in cost to the
producer would result in a 2- to 9-percent decrease in participation.
In addition, if the cost increase were larger, the decline in
participation would be correspondingly larger.
The data from these studies deal with specific crops, regions, and
time periods. Furthermore, these studies generally looked at
nonspecialty crops, such as corn and wheat, as well as at buyup crop
insurance prior to the introduction of catastrophic insurance, and
are therefore most relevant to buyup insurance. For these reasons,
it is not possible to project directly from these studies to
determine how much lower participation in specialty crop insurance
would be as a result of an increase in fees.
While premiums can affect producers' participation, other factors,
such as the availability of federal payments for crop losses, can
influence a producer's decision to purchase crop insurance. If
producers believe that disaster relief will be forthcoming when
growing or market conditions are poor, they could view federal
payments for crop losses as a free substitute for crop insurance.
Under these conditions, federal payments could have the unintended
effect of reducing participation.
AGENCY COMMENTS
------------------------------------------------------------ Letter :6
We provided USDA with a draft of this report for review and comment.
USDA made a number of technical comments and suggestions, which we
incorporated, as appropriate. USDA's comments and our responses are
presented in detail in appendix VI.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7
To determine the progress USDA has made in expanding federal
insurance coverage for specialty crops, we reviewed agency
documentation and discussed with USDA officials their efforts to
expand the number of locations for existing specialty crop programs
and to develop new programs. We described the methods used to
develop premiums for specialty crop insurance programs by summarizing
the basic specialty crop plans and rating methods used by USDA. We
also interviewed selected agency officials and academicians familiar
with the specialty crop insurance area.
To review the new marketing practices insurance companies have
introduced for specialty crops and to identify potential advantages
and disadvantages of the practices, including their effect on
producers' participation, we reviewed pertinent documents from USDA
and producer associations. Our analysis included discussions with
USDA as well as with selected producer associations and insurance
companies in key specialty crop states, including California and
Florida.
To examine the potential effect of increased insurance costs on
specialty crop producers' participation in the crop insurance
program, we analyzed USDA's crop insurance databases to determine
what the impact would have been for different policy sizes if the
increases had been applied to catastrophic insurance in 1997. We
also reviewed studies performed by economists and academic experts on
producers' responses to changes in the price for crop insurance.
We conducted our review from June 1998 through March 1999 in
accordance with generally accepted government auditing standards.
Although we did not independently assess the accuracy and reliability
of USDA's computerized databases, we used the same files USDA uses to
manage the crop insurance program, which are the only data available.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to Senator Richard Lugar,
Chairman, and Senator Tom Harkin, Ranking Minority Member, Senate
Committee on Agriculture, Nutrition, and Forestry; Representative
Larry Combest, Chairman, and Representative Charles Stenholm, Ranking
Minority Member, House Committee on Agriculture. We are also sending
copies of this report to: The Honorable Dan Glickman, Secretary of
Agriculture; The Honorable Kenneth Ackerman, Administrator of the
Risk Management Agency; and The Honorable Jacob Lew, Director of the
Office of Management and Budget. Copies will also be made available
to others upon request. If you or your staff have any questions
about the report, please contact me on (202) 512-5138. Major
contributors to this report are listed in appendix VII.
Sincerely yours,
Lawrence J. Dyckman
Director, Food and
Agriculture Issues
CROP INSURANCE EXPERIENCE, 1998
=========================================================== Appendix I
The tables in this appendix show information on crop insurance for
1998 and the loss ratio experienced by each crop since 1981.\1 Table
I.1 shows these data for specialty crops, while table I.2 shows these
data for nonspecialty crops.
Table I.1
Crop Insurance Experience for Specialty
Crops
(Acres insured and dollars in thousands)
1998
----------------------------------------------------------
Loss
First ratio
year since
insuranc insuranc
Governme e e
nt offered offered
Policies Acres Total premium Claims Loss since through
Crop in force insured premiums subsidy payments ratio\e 1981 1998
--------- -------- -------- -------- -------- -------- -------- -------- --------
Almonds 2,840 268 $24,927 $11,547 $20,154 0.81 1981 1.02
Apples 3,177 237 14,283 10,213 7,610 0.53 1981 1.23
Avocado/ 269 \d 104 84 0 0.00 1996 0.01
mango
trees
(Florida
)
Avocados 286 8 2,103 2,040 3 0.00 1998 0.00
Blueberri 238 21 797 737 168 0.21 1995 0.31
es
Canning 536 62 940 596 369 0.39 1988 0.79
beans
Citrus 1,194 \d 4,566 2,130 0 0.00 1983 0.68
trees
Citrus\a 10,975 816 18,684 15,317 1,489 0.08 1981 0.50
Cranberri 517 25 4,694 2,216 1,367 0.29 1984 0.98
es
Dry beans 10,186 1,452 26,291 12,873 15,981 0.61 1981 1.18
Dry peas 1,496 195 1,046 590 959 0.92 1981 0.90
Figs 57 8 334 185 79 0.24 1988 0.47
Florida 1,406 \d 3,031 2,814 0 0.00 1996 0.00
fruit
trees
Grapes 443 88 4,909 4,574 700 0.14 1984 0.54
(table)
Grapes 5,006 469 23,039 18,427 4,566 0.20 1981 0.61
(wine)
Green 2,367 148 2,072 979 1,936 0.93 1981 0.97
peas
Macadamia \c \c \c \c \c \c 1988 0.07\f
nuts
Macadamia 33 \d 724 386 0 0.00 1988 0.00
trees
Nursery 1,574 \d 18,477 15,179 3,587 0.19 1986 0.90
Onions 570 62 5,231 4,020 2,287 0.44 1988 0.95
Peaches 865 41 2,855 1,750 3,635 1.27 1981 2.37
Pears 751 36 1,264 1,005 116 0.09 1989 0.18
Pecans 144 36 1,372 1,000 277 0.20 1998 0.20
Peppers 39 8 2,930 1,252 2,754 0.94 1984 1.29
(fresh)
Plums 685 23 1,146 773 768 0.67 1990 1.44
Popcorn 1,403 194 3,046 1,296 4,342 1.43 1984 1.43
Potatoes 2,454 790 37,603 21,109 22,973 0.61 1981 1.43
Prunes 764 59 4,353 2,073 10,970 2.52 1986 1.24
Raisins 2,284 \d 12,261 5,186 255 0.02 1981 0.69
Stonefrui 1,686 68 4,392 2,992 2,225 0.51 1988 0.82
t\b
Sweet 134 41 1,138 667 223 0.20 1985 0.76
corn
(fresh)
Sweet 2,580 218 2,022 979 747 0.37 1981 0.88
corn
(process
ing)
Sweet 182 20 688 514 1,173 1.71 1998 1.71
potatoes
Tomatoes 327 56 7,603 4,603 3,298 0.43 1984 1.02
(fresh)
Tomatoes 796 223 6,994 4,491 2,018 0.29 1981 0.58
(process
ing)
Walnuts 761 61 1,501 1,219 337 0.22 1984 0.68
=========================================================================================
Total 59,025 5,731 $247,421 $155,815 $117,366 0.47 0.99
-----------------------------------------------------------------------------------------
Note: Data for the seven types of citrus fruit as well as the three
types of stonefruit are combined.
\a Citrus includes grapefruit, lemons, mandarins, murcotts, oranges,
tangelos, and tangerines.
\b Stonefruit includes apricots, nectarines, and peaches grown in
California.
\c The U.S. Department of Agriculture (USDA) did not report 1998
data for macadamia nuts because the policy was extended in order to
accommodate modifications made during 1998. The revised policy is in
place for 1999.
\d Nursery, tree, and raisin crops use a measurement other than
acres.
\e Loss ratio is calculated by dividing claims payments by total
premiums.
\f Loss ratio is calculated using macadamia nut data for 1988 through
1997.
Source: GAO's analysis of USDA's data.
Table I.2
Crop Insurance Experience for
Nonspecialty Crops
(Acres insured and dollars in thousands)
1998
----------------------------------------------------------
Loss
First ratio
year since
insuranc insuranc
Governme e e
nt offered offered
Policies Acres Total premium Claims Loss since through
Crop in force insured premiums subsidy payments ratio\a 1981 1998
--------- -------- -------- -------- -------- -------- -------- -------- --------
Barley 25,661 3,969 $19,905 $9,718 $15,566 0.78 1981 1.41
Canola 4,524 781 6,565 3,138 3,709 0.56 1995 1.26
Corn 359,875 51,074 534,607 233,039 292,505 0.55 1981 0.83
Cotton 57,352 11,577 253,906 150,299 334,866 1.32 1981 1.25
Extra 842 280 8,037 4,334 18,380 2.29 1984 1.61
long
staple
cotton
Flaxseed 2,069 212 959 493 390 0.41 1981 1.23
Forage 9,341 1,117 5,855 4,347 2,378 0.41 1981 0.91
producti
on
Forage 2,286 88 699 435 100 0.14 1981 1.15
seeding
Grain 65,451 6,778 51,008 25,184 85,303 1.67 1981 1.32
sorghum
Hybrid 4,155 403 12,130 5,155 2,758 0.23 1983 0.96
corn
seed
Millet 403 51 237 114 168 0.71 1996 0.60
Oats 15,979 940 4,220 2,435 2,571 0.61 1981 1.44
Peanuts 13,121 1,272 38,175 17,362 36,307 0.95 1981 1.71
Rice 9,325 2,019 16,330 11,674 10,868 0.67 1981 1.51
Rye 325 35 127 68 70 0.55 1981 0.88
Safflower 603 111 732 427 357 0.49 1987 3.93
Soybeans 320,925 45,506 313,988 149,838 139,976 0.45 1981 1.01
Sugarbeet 7,263 1,116 23,169 10,518 16,878 0.73 1981 0.93
s
Sugarcane 968 743 6,841 5,719 1,345 0.20 1981 0.88
Sunflower 15,344 2,685 18,643 9,181 12,868 0.69 1981 1.37
s
Hybrid 461 38 1,154 953 89 0.08 1988 1.05
sorghum
seed
Tobacco 38,245 459 46,209 19,428 90,498 1.96 1981 1.54
Wheat 227,300 44,237 264,747 126,264 146,926 0.55 1981 1.30
=========================================================================================
Total 1,181,81 175,490 $1,628,2 $790,123 $1,214,8 0.75 1.12
8 43 75
-----------------------------------------------------------------------------------------
\a Loss ratio is calculated by dividing claims payments by total
premiums.
Source: GAO's analysis of USDA's data.
--------------------
\1 We chose 1981 because the Federal Crop Insurance Act of 1980
significantly expanded the crop insurance program and, for the first
time, enlisted private insurance companies to sell and service
federal crop insurance policies. The U.S. Department of Agriculture
(USDA) implemented the provisions of this act in 1981.
PARTICIPATION IN SPECIALTY CROP
INSURANCE PROGRAMS
========================================================== Appendix II
The tables in this appendix show the percentage of participation, in
terms of acres planted and insured, for selected specialty crops for
1997, the latest year complete data were available. Table II.1 shows
nationwide participation by specialty crop category; table II.2 shows
nationwide participation for a cross-section of specialty crops and
the major nonspecialty crops; and table II.3 shows the major
specialty crop states and selected specialty crops they produce.
Table II.1
Nationwide Participation for Specialty
Crops by Category, 1997
(Acres in thousands)
Percent of planted acres
----------------------------
Catastro
Specialty crop Planted Insured phic Buyup
categories acres acres coverage coverage Overall
-------------------- -------- -------- -------- -------- --------
Noncitrus fruits 1,712 979 43.9 13.3 57.2
Vegetables 5,640 2,918 20.5 31.2 51.7
Nuts 606 323 27.3 26.0 53.3
Citrus fruits 1,152 448 35.7 3.2 38.9
======================================================================
Total 9,110 4,668 27.3 24.0 51.2
----------------------------------------------------------------------
Note: This table excludes fruit trees, macadamia nut trees, raisins,
and nursery crops because these crops use a measurement other than
acres.
Source: GAO's analysis of USDA's data.
Table II.2
Nationwide Participation for Specialty
and Nonspecialty Crops, 1997
(Acres in thousands)
Percent of planted acres
----------------------------
Catastro Total
Planted Insured phic Buyup particip
Selected crops acres acres coverage coverage ation
-------------------- -------- -------- -------- -------- --------
Specialty crops
Almonds 410 259 27.0 36.2 63.2
Cranberries 35 24 39.7 30.5 70.2
Pears 69 33 45.0 1.9 47.0
Peppers (fresh) 68 8 3.9 7.7 11.6
Tomatoes (fresh and 423 225 27.4 25.9 53.2
processed)
Walnuts 177 51 25.0 4.0 29.0
Other specialty 7,928 4,068 27.3 24.0 51.3
crops
======================================================================
Total 9,110 4,668 27.3 24.0 51.2
Nonspecialty crops
Corn 80,227 49,396 19.9 41.7 61.6
Cotton 13,808 11,662 37.6 46.8 84.5
Grain sorghum 10,108 6,282 20.3 41.9 62.1
Peanuts 1,431 1,180 23.3 59.1 82.5
Soybeans 70,850 43,566 24.0 37.5 61.5
Wheat 74,605 50,669 21.0 46.9 67.9
Other nonspecialty 23,827 12,299 19.3 32.3 51.6
crops
======================================================================
Total 274,856 175,054 22.1 41.6 63.7
----------------------------------------------------------------------
Source: GAO's analysis of USDA's data.
Table II.3
Crop Insurance Participation for Major
Specialty Crop States and Selected
Specialty Crops Produced, 1997
Percent
Planted Insured participat
State Crop acres acres ion
---------------------- ---------- ---------- ---------- ----------
Arizona
Apples 4,000 3,198 80.0
Grapefruit 4,700 146 3.1
Lemons 13,900 345 2.5
Oranges 9,200 293 3.2
Potatoes 6,200 4,505 72.7
Table 4,200 2,090 49.8
grapes
California
----------------------------------------------------------------------
Almonds 410,000 259,068 63.2
Apples 38,500 13,159 34.2
Apricots 19,100 10,336 54.1
(fresh
and
processed
)
Dry beans 135,000 42,706 31.6
Figs 16,000 7,777 48.6
Grapefruit 18,600 531 2.9
Lemons 47,400 408 0.9
Nectarines 37,100 20,187 54.4
(fresh)
Oranges 200,000 8,121 4.1
Peaches 66,200 35,178 53.1
(fresh
and
processed
)
Pears 22,800 10,774 47.3
Plums 42,000 24,549 58.5
(fresh)
Potatoes 43,700 14,768 34.3
Prunes 79,500 56,022 70.5
Tomatoes 270,000 168,519 62.4
(processi
ng)
Tomatoes 40,800 17,062 41.8
(fresh)
Walnuts 177,200 51,439 29.0
Florida
----------------------------------------------------------------------
Peppers 19,200 7,587 39.5
(fresh)
Citrus 815,100 437,648 53.7
Potatoes 43,500 31,487 72.4
Sweet corn 43,300 27,172 62.8
(fresh)
Tomatoes 38,300 21,984 57.4
(fresh)
Georgia
----------------------------------------------------------------------
Apples 2,300 703 30.6
Peaches 20,000 12,531 62.7
Sweet corn 20,000 5,149 25.7
(fresh)
Tomatoes 5,500 740 13.5
(fresh)
Michigan
----------------------------------------------------------------------
Apples 55,000 26,998 49.1
Blueberrie 17,000 7,817 46.0
s
Dry beans 315,000 181,326 57.6
Onions 6,200 1,623 26.2
Peaches 5,500 1,875 34.1
Potatoes 48,000 28,685 59.8
Tomatoes 3,800 2,024 53.3
(processi
ng)
Wine 12,100 7,448 61.6
grapes
New York
----------------------------------------------------------------------
Apples 51,000 23,536 46.1
Dry beans 40,000 13,283 33.2
Green peas 18,900 6,191 32.8
Onions 12,500 8,664 69.3
Peaches 1,600 169 10.6
Potatoes 28,500 8,157 28.6
Sweet corn 40,400 18,289 45.3
(processi
ng)
Wine 31,500 14,058 44.6
grapes
Oregon
----------------------------------------------------------------------
Apples 8,700 3,136 36.0
Cranberrie 2,000 579 29.0
s
Dry beans 11,000 2,056 18.7
Green peas 28,100 19,419 69.1
Onions 19,800 8,631 43.6
Pears 17,300 11,729 67.8
Sweet corn 41,500 1,427 3.4
(processi
ng)
Wine 6,300 1,124 17.8
grapes
Texas
----------------------------------------------------------------------
Dry beans 15,000 3,790 25.3
Grapefruit 20,400 0 0.0
Oranges 8,700 0 0.0
Peaches 12,000 2,618 21.8
Washington
----------------------------------------------------------------------
Apples 155,000 97,483 62.9
Cranberrie 1,500 993 66.2
s
Dry beans 38,000 11,178 29.4
Green peas 54,400 24,752 45.5
Onions 14,700 9,185 62.5
Pears 24,400 9,992 41.0
Potatoes 152,000 73,594 48.4
Sweet corn 89,600 34,320 38.3
Wine 37,000 23,774 64.3
grapes
Wisconsin
----------------------------------------------------------------------
Apples 6,500 286 4.4
Cranberrie 13,100 9,674 73.8
s
Dry beans 8,800 3,988 45.3
Green peas 62,500 16,108 25.8
Potatoes 84,000 21,258 25.3
Sweet corn 115,800 31,413 27.1
(processi
ng)
----------------------------------------------------------------------
Source: GAO's analysis of USDA's data.
FACTORS USDA CONSIDERS WHEN
SELECTING CROPS TO REVIEW FOR
INSURANCE
========================================================= Appendix III
The U.S. Department of Agriculture (USDA) considers several criteria
when selecting crops to review for insurance, with requests for
insurance for specific crops being a major factor. These requests
may come from producers; producer associations; reinsured companies;
individual Members of Congress; USDA's regional service offices; or
other USDA agencies, such as the Farm Service Agency.
According to USDA, several factors are considered in setting
priorities for these requests. First, USDA gives priority
consideration to developing new crop insurance programs for crops
that, for the most recent year, meet at least one of four criteria
for economic significance: (1) within the agricultural statistics
district that is to be covered, the value of the crop exceeds $3
million;\1 (2) within the state that is covered, the value of the
crop exceeds $9 million; (3) within the area served by the USDA
regional service office responsible for administering the insurance
program for that crop, the value of the crop exceeds $15 million; or
(4) at the national level, the value of the crop exceeds $30 million.
Second, USDA considers producer interest, as measured in a number of
ways. Specifically, high levels of payments for disaster assistance
and the Noninsured Crop Disaster Assistance Program for a crop may
signal a potentially high interest among producers of that crop for
an insurance program. In addition, USDA relies on the
recommendations resulting from the detailed feasibility studies of
each crop performed by its Economic Research Service and on
recommendations from its regional service offices regarding producer
and private company interest.
Because USDA considers a number of factors in addition to interest
when selecting a crop to review, it may not ultimately develop an
insurance program for each of the crops on the list. For example,
adequate producer participation is required for a crop insurance
program to be actuarially sound. Before implementing a new insurance
program, USDA requires documentation showing that a minimum of 10
percent of the crop's producers would be expected to participate in
the insurance program. However, some new programs, once analyzed and
properly rated to account for the risks involved, may be too
expensive to obtain adequate producer participation. In such cases,
USDA may suspend development activity. Furthermore, if a private
sector insurance program is generally available, the Federal Crop
Insurance Act of 1980 (P.L. 96-365, Sept. 26, 1980) as amended,
prohibits USDA from implementing a competing insurance program.
In addition, sufficient data must be available to develop an
insurance program, including production history, pricing information,
an analysis of perils, an analysis of marketing channels, and other
pertinent information. Generally, USDA obtains this information from
producers, but it often obtains information from other sources,
including producer associations and land grant universities. If this
information is not available or cannot be created, the development of
an actuarially sound insurance program may not be feasible.
Once crops are selected, the order in which new programs are ready
for initial pilot testing can change because of the varying lengths
of development cycles. For example, the development of an insurance
program for aquaculture--a large and diverse national program for the
commercial production of fish--began in 1994, and the development of
an insurance program for wild rice began in early 1998. However,
because of the complexity of developing the aquaculture program, it
will not be ready for implementation until 2000, while the wild rice
program, a relatively simple program, was approved for pilot testing
for 1999.
The eight new crop insurance programs USDA is offering in 1999 meet
various priority selection criteria. For example, three of the
programs--cabbage, cherries, and watermelons--each exceed $30 million
in total U.S. economic value. Two other crop programs--crambe and
mustard--are being offered because the crops can be included in a
crop rotation cycle with wheat to lessen the impact of the scab
disease occurring in North Dakota and surrounding areas. The
remaining three crop programs meet other criteria, including
legislative mandates and readily available data. In addition, many
of the crops scheduled for pilot testing in 2000 or later years have
a U.S. economic value exceeding $30 million, such as aquaculture,
cucumbers, and strawberries. Table III.1 shows the 31 crops USDA is
considering for pilot testing as of March 1999.
Table III.1
Crops Scheduled for Pilot Testing, by
Year
Year pilot program estimated to begin
----------------------------------------------------------------------
2002 and beyond
------------------------------
2000\a 2001
------------------------ ------------ -------------- --------------
Aquaculture Artichokes Floriculture
Beans (fresh) Blackberries Asparagus Garlic
Buckwheat Raspberries Bananas Hazelnuts
Chile peppers Beets (red) Hops
Cucumbers Broccoli Lettuce
Mint Carrots Mushrooms
Strawberries Cauliflower Olives
Celery Pineapple
Coffee Sesame seed
Dates Spinach
Eggplant Timber
----------------------------------------------------------------------
\a In 2000, pumpkins will be added on a pilot basis to the already
available winter squash crop insurance program and therefore, are not
included in this list.
Source: GAO's analysis of USDA's data.
Furthermore, USDA has received requests for 10 additional crops for
which development has not yet begun. These 10 crops are amaranth,
chicory, kenaf, lupins, onion seed, ramie, bahia, spelt, turnip
roots, and various herbs.
--------------------
\1 An agricultural statistics district is a contiguous group of
counties with similar production practices within a state for which
USDA's National Agricultural Statistics Service collects and reports
various crop information.
CHARACTERISTICS OF SPECIALTY CROPS
AFFECT INSURANCE RISK
========================================================== Appendix IV
While the diverse nature of specialty crops makes describing their
insurance risks difficult, they often tend to have several key
characteristics in common that differentiate them from the insurance
risks presented by nonspecialty crops. These key characteristics are
(1) greater market price risk, (2) unique production risks, (3) a
strong relationship between crop prices and farm-level yields, and
(4) the manner in which risk has traditionally been managed. These
characteristics often derive from the high perishability of many
specialty crops.
SPECIALTY CROPS OFTEN
EXPERIENCE GREATER MARKET PRICE
RISK THAN NONSPECIALTY CROPS
-------------------------------------------------------- Appendix IV:1
For many specialty crops, market price risk is a more important
factor than production risk, which is not the case for most
nonspecialty crops. Unlike nonspecialty crops, specialty crops are
generally highly perishable, often do not store well, and frequently
experience greater price volatility. Because of specialty crops'
perishability, it is difficult for producers to adjust to short-run
shifts in supply and demand other than by raising or lowering the
price. Consequently, many specialty crops, such as fresh market
fruits and vegetables, experience a greater degree of price
volatility than nonspecialty crops during the growing season.
Conversely, because producers can store nonspecialty crops, they can
often sell their crop at the most opportune time. Furthermore,
unlike most nonspecialty crops, most specialty crops are not traded
on commodity exchanges, which precludes producers from using these
markets to hedge price risk.
PRODUCTION RISKS FOR MANY
SPECIALTY CROPS DIFFER FROM
THOSE OF NONSPECIALTY CROPS
-------------------------------------------------------- Appendix IV:2
While many specialty crops experience greater market price risk
because they are more perishable than nonspecialty crops, other
specialty crops have fewer production risks, decreasing the need for
federal crop insurance. For instance, because many specialty crops
are irrigated, they are not subject to drought, which is one of the
most significant perils for nonspecialty crops. Certain crops, such
as strawberries and tomatoes, can produce fruit for several weeks,
reducing the risk that the producer may not be able to harvest
because of excess moisture or other perils. Similarly, vegetable
producers often tend to grow more than one kind of vegetable during
the year or have multiple plantings of the same crop during the
growing season. Furthermore, many specialty crops are perennials,
such as tree and vine crops, which produce fruit or nuts year after
year without replanting. Because a loss normally affects only the
fruit or nuts and not the tree or vine, the producer need only to
insure for the value of the crop, not the value of the trees or
vines.
In terms of production costs, specialty crops have total production
costs per acre that are higher than those for nonspecialty crops.
Therefore, for specialty crops that have high production costs as
well as high harvest costs, such as strawberries, insurance liability
can be limited by insuring only those costs that are preharvest. As
a result, if a loss occurs prior to harvest for a specialty crop, the
producer has not yet incurred much of the production costs, reducing
the need to be insured for the total value of the crop.
RELATIONSHIP BETWEEN PRICE AND
YIELD IS STRONGER FOR SOME
SPECIALTY CROPS THAN FOR
NONSPECIALTY CROPS
-------------------------------------------------------- Appendix IV:3
As we discussed in 1998,\1 the relationship between crop prices and
farm-level yields is an important component of risk assessment
because an increase in price caused by a decline in aggregate crop
yields can compensate for the effects of decreased production. This
tends to be the case when production areas are geographically
concentrated. Although negative price-yield relationships are
observed for both specialty and nonspecialty crops, for some
specialty crops this negative price-yield relationship is much
stronger. For example, for some specialty crops, 80 percent of
production may be grown in one county in the United States.
Therefore, if production in this county decreases, prices can rise
dramatically and total revenues at the farm level may stay the same
or even increase. That is, while the producer may face greater price
variability for growing certain specialty crops, the producer may
also experience a positive revenue effect because of the higher
price-yield relationship. At the same time, other specialty crops,
such as apples, do not have this strong negative relationship between
prices and yields. For instance, for apples, because of the
diversity in the location of production, a shortage in one part of
the country can be replaced by greater production in another part,
mitigating the strength of the price-yield relationship for this
crop.
--------------------
\1 Crop Revenue Insurance: Problems With New Plans Need to Be
Addressed (GAO/RCED-98-111, Apr. 29, 1998).
SPECIALTY CROP PRODUCERS MANAGE
RISK THROUGH VARIOUS TYPES OF
VERTICAL ARRANGEMENTS
-------------------------------------------------------- Appendix IV:4
The need for federal crop insurance for specialty crops is reduced
because of another characteristic prevalent in their markets--the use
of vertical arrangements such as producer-processor contracting to
manage both price and production risk. In general, vertical
arrangements are the result of market incentives, including risk
reduction and the avoidance of processors' market power,\2 that
encourage producers to integrate their operations to include the
processing and marketing of their own production. These
"producer-processor" relationships can include producers owning
marketing and shipping facilities, but they mainly consist of various
types of contractual arrangements. For instance, the processing
industry for tomatoes in California transacts nearly its entire
production through producer-processor contracts. This arrangement
reduces risk to the producer and the processor by predetermining a
specific price, for a certain variety of tomato, at a specific
delivery date. Such coordination of production and marketing is
especially advantageous in terms of managing the flow of product in
periods of oversupply and low prices, which are common in these
industries. Moreover, because many specialty crop producers may not
be able to integrate unilaterally, many integrate collectively by
forming marketing cooperatives that are active in such functions as
storage and processing. Examples of such marketing cooperatives
include Sunkist (citrus), Sunsweet (prunes), Calavo (avocados),
Sunmaid (raisins), Blue Diamond (almonds), and Diamond Walnut. In
California, these marketing cooperatives control half or more of the
market volume of these crops.
--------------------
\2 Market power in this case relates to the ability of large buyers
or processors to influence the price that they pay to producers for
specialty crops.
MAJOR SPECIALTY CROP INSURANCE
PLANS AND METHODS USED TO
CALCULATE PREMIUMS
=========================================================== Appendix V
Although many variations exist, the three major categories of
specialty crop insurance are (1) yield (production), (2) revenue
insurance, and (3) percent-of-damage. In addition, USDA is piloting
a new type of plan in 1999 known as the adjusted gross revenue plan.
USDA also uses three types of rating methods to calculate premiums
for specialty crops. The methods are comparative rating, statistical
modeling, and experience rating. For each of these plans, as well as
the rating methods, USDA has to customize the insurance for a given
crop. For example, a yield plan for one specialty crop would have a
different premium structure than the plan for another crop. This is
generally not the case for nonspecialty crops covered by federal crop
insurance.
SEVERAL TYPES OF CROP INSURANCE
PLANS ARE AVAILABLE
--------------------------------------------------------- Appendix V:1
This section discusses the types of crop insurance plans currently
offered or being piloted by USDA. The plans are yield, revenue, and
percent-of-damage.
YIELD INSURANCE IS THE
PREDOMINANT TYPE OF PLAN
------------------------------------------------------- Appendix V:1.1
For specialty crops, USDA offers three types of yield plans--the
actual production history, grower yield certification, and dollar
plans. Together, these plans account for a majority of all specialty
crop insurance offered by USDA. These three plans guarantee payments
on the basis of lost yield.
The actual production history plan is the most widely used insurance
for specialty crops. Generally, premiums under this plan are
calculated similarly for both specialty and nonspecialty crops. The
plan guarantees payments that are based on a percentage of the
individual producer's historical yield multiplied by a percentage of
a preestablished market price. As with actual production history
plans for nonspecialty crops, the specialty crop producer's premium
is generally calculated on the basis of one of nine categories for
yield amounts (known as yield spans). The premium rate charged to
the producer is based on the yield span in which the producer's
actual production history yield falls and the chosen coverage
level--the percent of production that is to be protected.
Like the actual production history plan, the grower yield
certification plan--sometimes classified as a subset of the actual
production history plan--is based on a certain yield per acre.
However, in a grower yield certification plan, USDA has set up
mapping areas--counties or larger areas--in which the yield guarantee
is based on the average historic yield in the producer's geographic
area, instead of a producer's individual average historic yield.
Therefore, all insured producers in a county or designated mapping
area receive the same premium rate. Unlike an actual production
history plan, a grower yield certification plan has no yield spans
for determining premium rates. Under this plan, a claim is paid if a
producer's yield falls short of the expected yield times the selected
coverage level. For some crops, however, USDA found that there is
enough variability in yields to establish a limited number of yield
spans under this plan. In addition, these crops are being converted
from grower yield certification plans to actual production history
plans, as appropriate.
The dollar plan insures certain specialty crops that have fairly
consistent costs of production for expenses that are incurred prior
to harvest. Therefore, in the event of a crop failure, all producers
in a county that participate in this program would be compensated for
these preharvest expenses. For each type of crop in a county, the
insured guarantee is a fixed dollar amount per acre, reflecting the
USDA-calculated preharvest costs of production. USDA bases this
fixed dollar amount on the cost of production, expected market
prices, and yield information, and often obtains these data from
university extension programs. Producers can insure their crop for
between 50 and 75 percent of this fixed dollar amount. Because the
price of some specialty crops fluctuates considerably, crop revenues
are also taken into account to prevent insuring for more than the
expected crop return.
When insurance claims are settled under the dollar plan, the
fixed-dollar guarantee is compared with the dollar value of
production, that is, the crop yield times the higher of a USDA price
or a market price. If the dollar value of production is less than
the fixed-dollar guarantee, the producer receives an insurance
payment. In order to receive a payment under this plan, however, the
producer must have had a crop loss. When claims are paid for losses,
they are adjusted to reflect reduced protection if the crops are
destroyed at a stage earlier than harvest. Examples of crops covered
under the dollar plan are fresh market tomatoes, peppers and sweet
corn.
While most specialty crops are insured under one of these three
plans, certain crops can be insured under more than one, depending
upon such factors as the availability of data in the area and the
perceived risks by local USDA representatives.
REVENUE INSURANCE PLANS
PROTECT AGAINST LOSSES IN
REVENUE THAT ARE DUE TO LOW
YIELDS OR LOW PRICES
------------------------------------------------------- Appendix V:1.2
Unlike traditional yield coverage, the revenue insurance plan
protects producers from declines in revenue caused by low prices, low
yields, or both. In a revenue insurance plan, the guarantee is a
producer-chosen percentage (coverage level) of the expected revenue
for that particular crop in the market. To establish the preseason
revenue guarantee, USDA collects information on the producer's
individual production history and the county average price for the
specialty crop.
While the revenue insurance plans for nonspecialty crops are more
applicable to a broader range of crops, the plans for specialty crops
have to be customized for the unique characteristics of each crop.
For example, USDA has developed pilot revenue insurance plans of
limited scope and duration for avocados and pecans.
In 1999, USDA began pilot testing a new type of revenue insurance
policy, called adjusted gross revenue, in selected counties in
Florida, Maine, Massachusetts, Michigan, and New Hampshire. This new
insurance plan will provide a producer with a guaranteed level of
income as determined by the producer's reported farm income for the
past 5 years. It will also provide coverage for both specialty and
nonspecialty crops as well as some livestock.
TREE AND NURSERY CROPS ARE
COVERED BY PERCENT-OF-DAMAGE
INSURANCE PLANS
------------------------------------------------------- Appendix V:1.3
USDA insures certain fruit crops, trees, and nursery crops, or other
perennial crops, with a percent-of-damage plan. There are two
different versions of this plan--the "lost quantity" and the "lost
value" plans. In both, payments are made when a measured amount of
damage exceeds some predetermined deductible. The guarantee for the
"lost quantity" plan is based on a percent of damage to the crop,
such as damage to a whole tree or to limbs on a tree. USDA must pay
an indemnity when the percent of damage, as evaluated by the quantity
of totally or partially destroyed property (fruit crop or trees),
exceeds the deductible. For the "lost value plan, the guarantee is
based on a dollar amount of protection times a coverage level. USDA
pays indemnities when the percent of dollar damage exceeds a
deductible. Examples of crops covered under variations of this plan
include Florida citrus fruit, Florida and Texas citrus trees,
macadamia trees, and nursery plants.
METHODS USED TO SET PREMIUM
RATES FOR SPECIALTY CROPS
--------------------------------------------------------- Appendix V:2
Premium rate-setting methods used in the insurance plans for
specialty crops include the comparative rating, experience rating,
and statistical modeling methods. In general, rating methods for
specialty crops tend to be customized for each crop and location.
Comparative rating, also called judgmental rate setting, is used
whenever the available data are thin or scanty. Generally, some
amount of data can be found for a crop in an area, but the scope of
the data are not adequate to measure the probable losses under a
variety of weather conditions. In such cases, the available data are
compared with the insurance experience for crops that have been
insured in the area. A judgment as to the relative riskiness is
needed: that is, is the crop in question relatively more or less
risky than the crop with more adequate data? A premium rate is then
established by using the existing premium rates for the reference
crop or crops as a benchmark.
For the experience rating method, USDA considers only the actual
insurance experience of a crop and uses only those data to compute
the required premium rate. One example of this method is the
calculation of loss-cost ratios to develop premium rates. Briefly,
USDA uses average coverage and production data, among other things,
to calculate a loss-cost ratio--claims payments divided by
liabilities. In order to adequately reflect future losses, many
years of historical loss data are typically needed.
Statistical modeling uses empirical or assumed probability
distributions of key variables and draws thousands of observations
from those distributions. At the end of the analysis, the events
that resulted in a loss are totaled and divided by the total
liability at risk. The result is an estimated premium rate. For
example, USDA used statistical modeling to determine rates for the
pilot revenue insurance plans for avocados and pecans. Simply put,
the premium rates offered in these plans are developed through
statistical models that construct a revenue distribution--a depiction
of expected farm revenues--on the basis of actual price and yield
data. In addition, USDA used statistical modeling in order to set
rates for fruit trees in Florida, a program that provides insurance
coverage for physical damage to the trees.
(See figure in printed edition.)Appendix VI
COMMENTS FROM THE U.S. DEPARTMENT
OF AGRICULTURE
=========================================================== Appendix V
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
GAO'S COMMENTS
1. We agree. The final report was revised to reflect USDA's
comment, as appropriate.
2. We agree and have revised our report to state that the 5 years
includes the testing phase of the development process. Also, while
we recognize that USDA developed the adjusted gross revenue insurance
plan for pilot testing in 14 months, other plans may require longer
than 2 years to reach pilot testing, as we discuss in appendix III of
our report. For example, the aquaculture plan is in its fifth year
of development and has yet to begin testing.
3. We agree and acknowledge in our report that the adjusted gross
revenue plan, if successful, will provide coverage for all specialty
and nonspecialty crops.
4. We do not believe table 2 of our report is misleading. While
crop insurance participation was required in 1995 as a condition of
eligibility for certain federal farm programs, participation in
recent years has declined, as table 2 shows. In October 1998, the
Congress passed major ad hoc disaster assistance legislation because
of losses in the Plains States but also because of insufficient
participation in the crop insurance program.
5. We agree that since 1994, in addition to developing insurance
programs for specialty crops, USDA's resources have also been used to
develop insurance programs for nonspecialty crops. Thus, we have
added this information to our report.
6. We agree that the timing of premium increases may influence their
acceptance. However, this is one of many factors, such as the level
of debt for the farm, held constant in our analysis.
7. We agree and have revised our report to reflect the fact that we
are focusing on several key characteristics of specialty crops that
differentiate them from the insurance risks presented by nonspecialty
crops. These characteristics often derive from the perishable nature
of most specialty crops.
8. We agree it is more appropriate to use the terms comparative
rating, experience rating, and statistical modeling and have revised
our report accordingly.
9. We agree that USDA's authority to offer revenue insurance plans
is limited by the Federal Crop Insurance Act to a pilot program
basis. Thus, we revised our report to reflect this limitation.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII
Robert C. Summers, Assistant Director
Thomas M. Cook, Evaluator-in-Charge
Charles W. Bausell, Jr.
Carol E. Bray
Ruth Anne Decker
Barbara J. El Osta
Carol Herrnstadt Shulman
*** End of document. ***