Typically, the delivery costs of private-sector insurance companies are included in the premium that insurance customers pay. In crop insurance, the Federal government reduces the cost of insurance to farmers by not including delivery costs in their premiums.
The Federal government pays the private insurance companies on behalf of farmers to defray part of their delivery costs associated with sales and servicing the policies. These expenses include agent commissions, loss adjustment, information technology and other data processing, salaries, benefits, office rent, utilities and other overhead costs. In addition, companies are subjected to rigorous Federal requirements that do not typically apply to other lines of insurance.
These additional administrative activities include extensive, large-scale data reporting requirements as well as additional Federal oversight and audit requirements in order to promote and ensure program integrity and protection of taxpayer dollars.
It is also important to recognize that A&O payments do not cover all of the delivery costs incurred. In fact, A&O payments have fallen short of actual company delivery expenses for the past 18 years in a row (1997-2014), with an average shortfall of 6.4 percent of retained premium over the period. The shortfall in 2014 alone totaled $782 million. Because expenses tend to increase over time but A&O payments are 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.