Whenever a customer writes a premium check for an auto, health, or home insurance product, part of that payment is allocated to the cost of servicing the policy. That is, insurance companies include an expense load in the premium for each policy beyond anticipated losses to offset overhead costs, such as staff salaries, agent commissions, adjusting losses, employee training, computer systems, customer support, office space, marketing, etc. This also includes a profit component for the insurer.
Unlike other types of insurance, crop insurance policies are not loaded for expenses. Why? Because Congress wanted to make policies more affordable so farmers would purchase protection with their own money and leave taxpayers less vulnerable to agricultural risk and ad hoc disaster payments.
Of course, private-sector insurance companies cannot afford to deliver and service 1.1 million policies for free. Insurers still have overhead costs that they need to recoup, even if these costs are not included in the premium. So, the government pays a portion of the delivery costs to insurance companies on farmers’ behalf. This is known as an Administrative and Operating (A&O) payment.
Unfortunately for crop insurers, A&O payments do not cover all the costs they incur, which continue to increase over time as more and more Federal requirements and paperwork are piled on insurance providers. In fact, A&O payments have fallen short of actual company delivery expenses, with an average shortfall of 7.7 percent from 1998 to 2015. The shortfall in 2015 alone totaled $777 million. Because expenses tend to increase over time but A&O payments are essentially locked-in under the terms of the SRA, the shortfall is expected to increase in future years.
*Updated August 2018