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089736 1 (1982-08-10)

handle is hein.gao/gaobacvsx0001 and id is 1 raw text is: \d~ ml S UNITED STATES GENERAL ACCOUNTING OFFICE WASHINGTON, D.C. 20548 COMMUNITY AND ECONOMIC DEVELOPMENT DIVISION AUG 10 1982 Mr. Merritt W. Sprague Manager, Federal Crop Insurance Corporation Department of Agriculture Dear Mr. Sprague: Subject: Concerns About the Actuarial Soundness of the Federal Crop Insurance Program This letter is in response to your request during our meeting on June 21, 1982, that we inform you of our concerns about the Corporation's efforts to improve the actuarial soundness of the Federal Crop Insurance Program. You wanted this information to use during your planned comprehensive review of the Corporation's actuarial activities. Our objective is to provide you with our observations on the Corporation's activities based on the information we have obtained to date in our on-going review. We are conducting our review at the Corporation's headquarters in Washington, D.C., and the Na- tional Service Office in Kansas City, Missouri. We interviewed knowledgeable Corporation officials and analyzed pertinent data and documentation relating to the actuarial activities. As you know, the Federal Crop Insurance Act of 1980 (Public Law 96-365) authorized the nationwide expansion of a subsidized all-risk crop insurance program. The Corporation's primary efforts in implementing the act were directed toward expanding the program's geographic coverage and switching the marketing functions to the private insurance sector. The Corporation's strategy to improve the actuarial soundness of the program appar- ently relied on increased producer participation brought about by the expansion program. Supposedly, this would bring a higher proportion of low-risk producers into the program while creating a larger base to spread the risk. The Corporation has made substantial progress in expanding the insurance program coverage. The rapid expansion, however, may result in increased exposure to loss because insurance rates may be based on questionable actuarial assumptions and methodolo- gies. The Corporation has concentrated its actuarial resources on the expansion program; consequently it has not (1) performed the research necessary to resolve long-standing concerns regard- ing the program's actuarial soundness or (2) maintained normal review and evaluation activities. 1117AA

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