NU Online News Service, Feb. 17, 10:01 a.m. EST

The Government Accountability Office has sounded the alarm on National Flood Insurance Program shortcomings, and has called on Congress to restructure the program.

The report, issued late yesterday, cited the NFIP as “high risk,” one of approximately 30 government operations that the GAO identified as a problem due to “greater vulnerabilities to fraud, waste, abuse, and mismanagement or the need for transformation to address economy, efficiency, or effectiveness challenges.”

In the report, the GAO acknowledged that the NFIP is “a key component of the federal government’s efforts to limit the damage and financial impact of floods.”

But the GAO said it believes that the program is not actuarially sound, and that NFIP management cannot do some of the things that private insurers do to manage risks.

For example, the GAO said that the 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, the report said, the NFIP’s premium rates do not reflect actual flood risk.

The GAO also said that the potential losses generated by the NFIP create substantial financial exposure for the federal government and U.S. taxpayers. As an example, the GAO said the NFIP will not likely generate sufficient revenues to repay the billions of dollars borrowed from the Treasury Department to cover claims from the 2005 hurricanes or future catastrophic losses.

Additionally, the report said, weaknesses in NFIP management and operations—including financial reporting processes, internal controls and oversight of contractors—“place the program at risk.”

The “contractors” cited in the report are the insurance underwriters and agents that handle claims under the Write-Your-Own (WYO) program.

The GAO said payments to WYO insurers generally represent one-third to two-thirds of the premiums collected in a given year. “But FEMA does not systematically consider actual expense information when calculating these payments or implement all of its financial controls for the WYO program,” the report said.

“GAO also found that FEMA does not have an effective system to manage flood insurance policy and claims data, although it invested roughly seven years and $40 million on a new system whose development has been halted because it did not meet users’ needs,” the report said.

GAO also said that it will be issuing a detailed report on underlying management and operational challenges facing NFIP next month.

Blain Rethmeier, a spokesman for the American Insurance Association, said, “The problems with the NFIP and financial challenges facing the program aren’t new. This report is another important reminder that Congress needs to address the issue and pass a longer-term extension that focuses on the needed fundamental reforms.”