WASHINGTON, D.C. – Today, the Government Accountability Office (GAO) issued a report with statistics that reveal how the federal crop insurance program incentivizes the crop insurance industry to service large farms at the expense of small and specialty crop farms. The report also shows that crop insurance companies have been earning an inflated underwriting gain that is significantly higher than other insurance sectors, and that aligning their underwriting gains with a market-based rate of return would save $7.2 billion over 10 years. This reform could fund programs that actually benefit farmers in the next Farm Bill.
U.S. Senator Cory Booker (D-N.J.), who requested the GAO report in December of 2021, reacted to the report. Booker is a member of the Senate Committee on Agriculture, Nutrition, and Forestry.
“This GAO report shows that a shocking proportion of the subsidies intended to support the cost of writing crop insurance policies for all farmers are being eaten up by companies and agents who write policies for the very largest farms. At the same time, the majority of small and diversified specialty crop farms, including many in my state of New Jersey, do not have crop insurance coverage. This means that despite taxpayers spending over $1.5 billion each year to make sure farmers get good service and understand their options in the crop insurance program, the program is still failing small and diversified farms,” said Senator Booker. “We need to pass my Insuring Fairness for Family Farmers Act, which would make the A&O subsidy a much more effective tool for incentivizing companies and the crop insurance agents they work with to cover all farm types fairly.”
“Small and specialty crops are the backbone of our agriculture economy in Oregon. Yet small growers have consistently lagged behind large commercial farms in terms of access to crop insurance,” said Rep. Salinas. “GAO’s report further demonstrates why we need to revisit the way A&O subsidies are calculated. That is exactly what the Insuring Fairness for Family Farmers Act does. Our bill incentivizes crop insurance agents to provide coverage to small family farms—a gamechanger for specialty crop growers in Oregon and across the country. I urge my colleagues on both sides of the aisle to support this critical legislation.”
“Our current approach to crop insurance fails most farmers at an enormous cost to taxpayers. Today’s report highlights the simple fact that by establishing modest payment limits, we can save money while helping small farmers and ranchers who are short changed or left out of the crop insurance program altogether,” said Rep. Blumenaur. “I appreciate Senator Booker’s longtime commitment to a better Farm Bill and look forward to continuing our work together on agricultural policy reform.”
Farmers cannot purchase crop insurance from the USDA, and must do so through private crop insurance companies. These crop insurance companies receive Administrative and Operating (A&O) subsidies from the federal government, which are meant to cover some of the companies’ administrative costs of selling the policies to farmers, especially hiring and contracting crop insurance agents, who work directly with farmers to help them understand their coverage options.
Yet, this GAO report confirms that A&O subsidies only incentivize companies and their agents to focus on serving the largest farms. The amount of A&O subsidy a company receives for each policy is based on a set percentage of the premium of the policy sold. The higher the premium, the higher the A&O. In practice, this means that companies get very large A&O subsidies for writing policies for large farms, and very little for writing policies for small farms. The GAO report shows that in 2022, almost half of all policies sold (48%) generated only 6% of the total A&O compensation. On the other hand, the largest 2% of policies accounted for a whopping 36% of total A&O subsidies. While 56% of policies received less than $200 of A&O subsidy per-policy, there were 14 policies that received more than $1 million per policy.
The result is that many small farms never get the option to purchase crop insurance, because crop insurance agents and companies have little incentive to inform them of their insurance options and allow them to purchase coverage. This is also true of diversified specialty crop farms, which require more complex types of insurance, which require more time and effort for agents to write. With the existing rules on A&O subsidies, companies and agents have no incentive to incur these higher costs to write policies for these farms. As a result, the majority of small and diversified specialty crop farms do not have insurance coverage.
These GAO statistics highlight the dire need for reform to the A&O subsidy. Senator Booker’s Insuring Fairness for Family Farmers Act (IFFFA) would make A&O a much more effective subsidy for getting farmers coverage, by basing A&O on the complexity of the policy sold, instead of a set percentage of premium. This change would make it so that agents and companies are adequately incentivized to write policies that protect small farms, specialty crop farms, and currently uninsured farms, and are not grossly over-compensated for simply renewing the largest policies year after year.
Further, the GAO report highlights that crop insurance companies have been making above-market returns on farmer premiums, and that significant savings could be made just by curbing this corporate welfare. The USDA and crop insurance companies share the risk of loss or gain, but in practice, the risk sharing terms deliver an overwhelming majority of gains to companies and an overwhelming majority of the losses to the USDA. This is because the risk-sharing between companies and USDA was designed to yield an underwriting gain to companies of 14.5%. In practice, companies have earned even more--16% gain on average. The companies’ gain of 16% is significantly higher than other insurance sectors, such as the property and casualty sector. GAO determined that a more reasonable market-based rate of return is 10.2%. Making the rate of return market-based would save $7.2 billion over 10 years, without affecting the farmer safety net. These are savings that can be used for programs that directly benefit farmers, particularly in light of an upcoming Farm Bill that is funding constrained.
“Today’s report provides new evidence that our crop insurance system is broken and fails the farmers who need it most. Offshore crop insurance companies, agents writing the policies, and the largest farming operations are the ones who benefit at the expense of farmers and ranchers who work hard to feed their local communities,” said Joe Van Wye, Policy and Outreach Director at Farm Action Fund. “Congress must reform our failing farm safety net by including the Insuring Fairness for Family Farmers Act in the next farm bill. We commend Senator Cory Booker for his ongoing leadership on this issue.”
"The newest GAO report once again sheds light on spending discrepancies in the federal crop insurance program," said Billy Hackett, Policy Specialist at the National Sustainable Agriculture Coalition. "Taxpayers pay private insurance companies on average $3 billion each year to sell and service policies, but agents are disincentivized from selling coverage to a majority of our country's beginning and diversified farmers growing fruits and vegetables to feed their communities. Most notably, the report debunks concerns that common-sense reforms to modestly reduce subsidies to these companies and high-income farm operations would negatively impact the program's actuarial soundness."
“Taxpayers for Common Sense thanks Senator Booker (D-NJ) for helping bring better transparency, accountability, and fiscal responsibility to the highly subsidized federal crop insurance program. With $34 trillion in national debt, U.S. taxpayers cannot afford to be on the hook for guaranteeing handsome profits for private crop insurance companies. Common sense reforms must be adopted in the next Farm Bill,” said Joshua Sewell, Director of Research & Policy, Taxpayers for Common Sense.
“It’s unfair to the vast majority of farmers – not to mention taxpayers – that some farmers are receiving more than $3 million in government subsidies to buy crop insurance. Fourteen times, crop insurance companies earned commissions over $1 million per policy, to cover some of America’s largest farms,” said Scott Faber, Senior Vice President for Government Affairs at Environmental Working Group. “The case for reform has never been clearer. EWG is proud to endorse Senator Booker’s Insuring Fairness for Family Farmers Act, and calls on Congress to pay attention to how the crop insurance program is enriching a few at the expense of the rest.”
The full text of the report can be found here.