Big Profits From Crop Insurance Criticized

By Dan Morgan and Gilbert M. Gaul
Washington Post Staff Writers
Friday, May 4, 2007

Private companies are taking advantage of a poorly designed crop insurance program for farmers to reap "excessive" profits while taxpayers absorb most of the costs and risks, investigators told a House committee yesterday.

Republican and Democratic members of the House Oversight and Government Reform Committee reacted with calls for major changes in the insurance program, which has paid out $26 billion over the past 10 years. It is rare for a panel other than the Agriculture Committee to take on a major farm program in an investigative hearing.

Oversight Chairman Henry A. Waxman (D-Calif.) said the crop insurance system is "a textbook example of waste, fraud and abuse in federal spending." Citing testimony from the Agriculture Department's inspector general and a report from the Government Accountability Office, Waxman said that "over $8 billion in taxpayer funds have been squandered in excess payments to insurers and other middlemen" since 2000.

Congress established federal crop insurance during the Depression. The Agriculture Department sets the premiums that farmers pay to insure against weather losses and falling prices, but the program is operated by 16 government-approved private companies. Last year, those firms wrote 1.1 million insurance policies covering 370 commodities grown on 242 million acres.

The Washington Post reported in October that the firms made $3.1 billion in profits in the past eight years, while the government lost $1.5 billion. The USDA charges farmers only about a third of what it costs to pay the claims, and it covers most costs on policies for farms with the worst weather risk.

Congress expanded crop insurance subsidies in 2000, promising that the subsidies would end other "emergency" farm payments. But last week Congress approved $3.4 billion in drought and weather relief, ignoring a White House veto threat.

GAO investigators found that crop insurance companies had rates of return averaging 30 percent in 2005 and 24 percent in 2006, compared with a "benchmark" return of 6.4 percent for sellers of property and casualty insurance.

The USDA has also paid the companies $6.6 billion to cover administrative costs in the past decade. Much of that has been passed on to local crop insurance agents -- some of them farmers -- who constitute an influential lobby that has fought changes in the program.

The GAO noted that the USDA expects the allowance to increase by as much as 25 percent by 2008 because it is tied to crop prices, now rising sharply, "without any corresponding increase in expenses for selling and servicing the policies."

"It's a hell of a deal," said Rep. Elijah E. Cummings (D-Md.).

Rep. John J. "Jimmy" Duncan Jr. (R-Tenn.), a committee member, said, "Anybody who's fiscally conservative would be horrified by what we've heard."

In an interview, Michael R. McLeod, executive director of the American Association of Crop Insurers, which represents most companies as well as crop insurance agents, expressed "disappointment" with the findings.

He said more than half of the companies' underwriting gains are not profits because they are used to pay other insurance companies for shouldering some of the risk. Agents earn their commissions, he said, because "it's a highly labor-intensive business."

House Agriculture Committee Chairman Collin C. Peterson (D-Minn.), who is drafting a new farm bill, reacted cautiously to the criticism of the insurance program. "Unless somebody comes up with a system that's better," he said, "we're going to be working within the framework."

But at the hearing, Waxman promised further investigation. "The status quo is unacceptable," he said.

© 2007 The Washington Post Company