GAO said Congress should consider reform in six areas: outstanding debt, premium rates, affordability, consumer participation, barriers to private-sector involvement, and NFIP flood resilience efforts.
Congress created NFIP to reduce the rising costs of federal disaster assistance for flood damage, but also prioritized keeping flood insurance affordable, which transferred the financial burden of flood risk from property owners to the federal government. In many cases, premium rates have not reflected the full risk of loss, so NFIP has not had sufficient funds to pay claims. As of March 2017, NFIP owed $24.6 billion to Treasury. NFIP’s current authorization expires in September 2017.
The GAO reform recommendations focus on the potential actions that can help reduce federal fiscal exposure and improve resilience to flood risk. GAO solicited input from industry stakeholders (including insurers, reinsurers, and actuaries) and non-industry stakeholders (including academics, consumer groups, and real estate and environmental associations) in making its recommendations.
Among the areas of reforms, the first is developing a plan to pay off the $24.6 billion in outstanding debt that the Federal Emergency Management Agency (FEMA), which administers NFIP, owes to the Department of the Treasury. FEMA is unlikely to collect enough in premiums to repay this debt. Eliminating the debt could reduce the need to raise rates to pay interest and principal on existing debt. Raising premium rates could create affordability issues for some property owners and discourage them from purchasing flood insurance, and would require other potential actions to help mitigate these challenges.
Further, NFIP premiums do not reflect the full risk of loss, which increases the federal fiscal exposure created by the program, obscures that exposure from Congress and taxpayers, contributes to policyholder misperception of flood risk (they may not fully understand the risk of flooding), and discourages private insurers from selling flood insurance (they cannot compete on rates). Eliminating rate subsidies by requiring all rates to reflect the full risk of loss would address an underlying cause of NFIP’s debt and minimize federal fiscal exposure. It also would improve policyholder understanding of flood risk and encourage private-sector involvement. However, raising rates makes policies less affordable and could reduce consumer participation. The decreases in affordability could be offset by other actions such as providing means-based assistance.
Means-testing the assistance could help control potential costs to the federal government, and funding with an appropriation would increase transparency of the federal fiscal exposure to Congress. Many industry and non-industry stakeholders said affordability assistance should focus on helping to pay for mitigation—such as elevating buildings—because mitigation permanently reduces flood risk (thus reducing premium rates).
Expanding the mandatory purchase requirement beyond properties in the highest-risk areas is also one option for encouraging consumer participation in flood insurance. Doing so, however, could face public resistance and create affordability challenges for some, highlighting the importance of an accompanying affordability assistance program.
Stakeholders cited regulatory uncertainty and lack of data as barriers to private sector involvement. Some stakeholders said that access to NFIP claims data by the insurance industry could allow private insurers to better estimate losses and price policies. FEMA officials said they would need to address privacy concerns. Some stakeholders told GAO that greater involvement by private insurers could reduce funding available for some NFIP flood resilience efforts.