Crop Insurance A&O Do Not Cover Costs
May 3rd, 2007 by David Graves
Federal reimbursements for delivering the crop insurance program do not cover the costs of the private sector. Normally, insurance premiums are expense loaded, which means the administrative costs of selling, servicing and delivering the coverage are loaded into and are a part of the premium. This is not the case with crop insurance. Rather, the government pays these costs on behalf of policyholders. This policyholder subsidy, known as administrative and operating (A&O) subsidy, is paid to private sector companies that deliver the program to offset the costs of selling and servicing of policies. However, the A&O amounts paid fall short of covering companies’ expenses for delivering the program. Currently, the average percentage A&O reimbursement rate is approximately 20 percent of premium, which is down from an average high of more than 32 percent in the early 1990s. Companies indicate that the current A&O reimbursement rate does not cover all policy selling and servicing expenses.
Company statements regarding their total selling and servicing cost are consistent with the conclusion of an April 1997 GAO Report to Congressional Committees in which the analysis indicated that the reimbursement rate would need to be 26.5 percent of premium to “adequately reimburse companies for their reasonable expenses of selling and servicing crop insurance.”