Whenever a customer writes a premium check for an auto, health, or home insurance policy, 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 to offset overhead costs, such as staff salaries, agent commissions, loss adjustment expenses, employee training, computer systems, customer support, office space, marketing, etc. This expense load includes an appropriate profit component for the insurer and is in addition to the premium necessary to cover the risk of anticipated losses.

Unlike other types of insurance, Federal crop insurance policies are not loaded for expenses. Why? Because Congress wanted to make policies more affordable so farmers would purchase higher levels of protection with their own money and leave taxpayers less vulnerable to agricultural risk and ad hoc disaster payments.  Thus, Congress provided a benefit to farmers by providing an administrative and operating expense reimbursement on their behalf to the AIPs in lieu of adding the load for expenses to the underlying risk premium and increasing the farmers overall out of pocket cost.

Notwithstanding the underlying intent, A&O payments do not cover all the costs crop insurers incur. Those costs continue to increase over time as additional Federal requirements, data reporting, and expanded services are demanded of the AIPs.  A&O payments have fallen short of actual company delivery expenses, with an average shortfall of 7.7 percent from 1998 to 2015. Because expenses tend to increase over time, but A&O expense reimbursements payments are essentially locked-in under the terms of the SRA, the shortfall is expected to increase in future years.

Read more about the costs of the crop insurance program here, and more about the A&O shortfall and industry rate of return here.

*Updated July 2019