Government Accountability Officials cautioned members of the Senate Banking Committee Wednesday that major changes in National Flood Insurance Program's policies and administration are needed, and could involve tough decisions that Congress may be unwilling to make.
Orice Williams Brown, GAO director of financial markets and community investment, cautioned that, "Addressing the financial challenges facing NFIP would likely require actions by both FEMA and Congress that involve trade-offs, and the challenges could be difficult to remedy."
Ms. Brown's comments were made at a flood insurance hearing, whose witnesses included Sen. Roger Wicker, R-Miss.. a member of the committee; Steve Ellis, vice president, Taxpayers for Common Sense; Sally McConkey, vice chairperson of the Association of State Floodplain Managers; and Nick D'Ambrosia, vice president of training and recruiting for Long & Foster Companies, on behalf of the National Association of Realtors.
They testified as insurance and real estate industry officials put pressure on the House to concur with legislation passed by the Senate late Tuesday, extending the current program until Sept. 30, 2011.
Unless the House acts, the program expires Sept. 30.
But it was the GAO testimony that raised the most concern, generating the majority of questions from members of the committee.
Ms. Brown pointed out that "reducing subsidies could increase collected premiums, but reduce program participation."
At the same time, she said, "FEMA must address its operational and management issues."
Ms. Brown implied that only some of the challenges facing the program were to be addressed in any legislation providing long-reauthorization.
She testified that the program is, by design, not actuarially sound. "NFIP cannot do some of the things that private insurers do to manage their risks," she said.
For example, she explained, NFIP is not structured to build a capital surplus, is likely unable to purchase reinsurance to cover catastrophic losses, cannot reject high-risk applicants, and is subject to statutory limits on rate increases.
In addition, she said, its premium rates do not reflect actual flood risk. "For example, nearly one in four property owners pay subsidized rates, 'full-risk' rates may not reflect the full risk of flooding, and NFIP allows 'grandfathered' rates that permit some property owners to continue paying rates that do not reflect reassessments of their properties' flood risk."
Further, she said, NFIP cannot deny insurance on the basis of frequent losses and thus provides policies for repetitive loss properties, which represent only 1 percent of policies but accounts for 25 to 30 percent of claims.
However, it is unlikely to pay off its full $18.8 billion debt, especially if it faces catastrophic loss years, Ms. Brown said.
Operational and management issues may also limit efforts to address NFIP's financial challenges and meet program goals, she said.
Ms. Brown was also critical of the write-your-own program.
She said payments to write-your-own (WYO) insurers, which are key to NFIP operations, represent one-third to two-thirds of the premiums collected.
However, "FEMA does not systematically consider actual flood insurance expense information when calculating these payments and has not aligned its WYO bonus structure with NFIP goals or implemented all of its financial controls for the WYO program," she said.
She noted that GAO also found that FEMA did not consistently follow its procedures for monitoring non-WYO contractors or coordinate contract monitoring responsibilities among departments on some contracts.
"Some contract monitoring records were missing, and no system was in place that would allow departments to share information on contractor deficiencies," Ms. Brown said.
In ongoing GAO work examining FEMA's management of NFIP, some similar issues are emerging, she observed. For example, FEMA still lacks an effective system to manage flood insurance policy and claims data, despite investing roughly 7 years and $40 million on a new system whose development has been halted.
"However, FEMA has begun to acknowledge its management challenges and develop a plan of action," Ms. Brown concluded.
At the hearing, Sen. Chris Dodd, D-Conn., chairman of the panel, argued for a multi-year reform bill, saying it would be "preferable to an extension."
He added, however, that "an extension will, in my view, provide necessary program and market stability to homeowners, lenders, and insurers while Congress considers the next steps for the reform of the NFIP."
Sen. Wicker said that while he is "glad" the Senate passed the one-year extension of NFIP, "this is just a band-aid."
In his talks with Mississippians, he said, "it is clear that the NFIP needs to be reauthorized on a long-term basis and in a way that addresses some of the unique challenges of coastal areas."
Sen. Wicker pointed out that a key issue when it comes to protecting property owners from hurricanes is that two kinds of insurance coverage are required--wind and flood. Sen. Wicker reiterated his support for multi-peril insurance as well as other new proposals to address some of the problems residents face on the Gulf Coast.
Sen. Wicker also highlighted legislation he introduced in July, known as the Coordination of Wind and Flood Perils Act, S. 3672, as a way to help property owners after a hurricane.
Under his bill, he said, the burden of determining flood and wind loss allocation would be removed from the policy holder and placed on insurers.
Along with the coordination of wind and flood benefits, Sen. Wicker also urged the committee to consider comprehensive reform legislation that would improve flood maps and provide incentives for property owners to make their homes and businesses more flood and wind-proof.