Wednesday, July 26, 2006

Deja-Vu, Disaster Program Weaknesses--I

Interesting testimony from GAO on the Risk Management Agency's operation of the federal crop insurance program. Briefly put, RMA reinsures private crop insurance companies for the policies they write and losses they take on crops, mostly field crops and fruits.

GAO found a number of problems, which take me back to the late 1970's when ASCS was operating a crop disaster program through its county offices, and I was involved in its administration in DC. The deja-vu ones include:
  • farmers getting indemnities in multiple years (sometimes because the coverage levels (yields) are set too high)
  • farmers dividing acreages into separate insurable units. There's a rational basis--for example hail on the Great Plains may cut a swath through the wheat. If you have 10 1,000 acre fields each insured separately rather than 1 10,000 acre field insured as one you increase the chances of having a loss on one or more fields. But there's also a reason to cheat. Because wheat is wheat, as Gertrude Stein didn't say, you can shift your actual production among different fields, possibly boosting your yield history (for future years) and/or creating a indemnifiable loss on another field

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