Allowing scheduled National Flood Insurance Program rateincreases to move forward would be "a critical first step" towardattracting private insurers to the flood-insurance market, says theGovernment Accountability Office.

In a January report, the GAO says stakeholders itinterviewed indicated "full-risk NFIP rates wouldencourage private-sector involvement because they would be muchcloser to the rates private insurers would need to charge."

Conversely, delaying or repealing the rate increases "mayreinforce private insurers' skepticism that they would ever bepermitted to charge adequate rates and make their participationunlikely in the foreseeable future," according to the report.

The GAO report, mandated by the 2012 Biggert-Waters Act thatrenewed the NFIP for five years, explores strategies for increasingprivate-sector involvement in flood insurance.

The GAO notes that the NFIP has accrued $24 billion in debt,"highlighting structural weaknesses in the program and increasingconcerns about its burden on taxpayers." It adds that a delay orrepeal of the rate increases may address affordability concerns forsome policyholders "but would likely continue to increase NFIP'slong-term burden on taxpayers."

While the report recommends eliminating subsidized rates andcharging full-risk rates to all policyholders, it does supportappropriating funds for premium assistance to certain eligiblepolicyholders to address affordability issues.

The GAO also mentions concerns it received from stakeholdersabout charging full-risk rates. For example, one stakeholder, saysthe GAO, indicated that rate increases could lower a home's marketvalue because the cost of owning the home would rise. Additionally,whole communities with a high risk of flooding "could becomeeconomically unviable if premium-rate increases made floodinsurance unaffordable for too many residents," the reportsays.

Furthermore, homeowners who are not required to purchase thecoverage may reject it if it becomes too expensive.

Still, the report lists charging full-risk rates among itssuggestions to Congress, which the GAO says tracks recommendationsit made in 2011.

In December, Insurance Information Institute President RobertHartwig made a similar case that stakeholders made to the GAO,telling PC360 that the NFIP would "remain the dominant writerso long as its rates remain heavily subsidized by the federaltaxpayer."

He said the Biggert-Waters Act, would, over time, eliminatethese subsidies, bringing NFIP rates closer to an actuarially soundbasis. In that case, he said, "It is likely that some insurerswould be willing to increase capacity and others would enter themarket for the first time, bringing totally new capacity to themarket," adding that a prolonged delay or rollback would have anadverse impact on private insurers' participation.

The GAO report contemplates other strategies that couldencourage private participation in the flood-insurance market, suchas:

• Mandatory-coverage requirements to ensure a broad pool of risksand avoid adverse selection.
• Limiting the government's role to a last-resort insurer orreinsurer.
• Giving insurers access to NFIP policy and claims data to allowthem to better assess risk.

These strategies come with concerns as well, according to thereport. Affordability would need to be addressed if coverage wasmade mandatory; limiting the government's role to a last-resortinsurer would leave the government with the highest-risk policiesrequiring high premiums that could reduce consumer participation;limiting the role to a reinsurer might mean passing the costs forthe reinsurance on to consumers; and allowing private-insureraccess to NFIP policy and claims information would have to overcomeprivacy concerns.

The Biggert-Waters Act was overwhelmingly passed in 2012, butregulators, governors and legislators—including Maxine Waters,D-Calif., a named sponsor of the bill—have since raised concernsabout the magnitude of rate increases for homeowners in somestates. Efforts to delay the increases have included legal actionand a series of bills introduced in the House and Senate.