Allowing scheduled National Flood Insurance Program rate increases to move forward would be "a critical first step" toward attracting private insurers to the flood-insurance market, says the Government Accountability Office.

In a January report, the GAO says stakeholders it interviewed indicated "full-risk NFIP rates would encourage private-sector involvement because they would be much closer to the rates private insurers would need to charge."

Conversely, delaying or repealing the rate increases "may reinforce private insurers' skepticism that they would ever be permitted to charge adequate rates and make their participation unlikely in the foreseeable future," according to the report.

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

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

While the report recommends eliminating subsidized rates and charging full-risk rates to all policyholders, it does support appropriating funds for premium assistance to certain eligible policyholders to address affordability issues.

The GAO also mentions concerns it received from stakeholders about charging full-risk rates. For example, one stakeholder, says the GAO, indicated that rate increases could lower a home's market value because the cost of owning the home would rise. Additionally, whole communities with a high risk of flooding "could become economically unviable if premium-rate increases made flood insurance unaffordable for too many residents," the report says.

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

Still, the report lists charging full-risk rates among its suggestions to Congress, which the GAO says tracks recommendations it made in 2011.

In December, Insurance Information Institute President Robert Hartwig made a similar case that stakeholders made to the GAO, telling PC360 that the NFIP would "remain the dominant writer so long as its rates remain heavily subsidized by the federal taxpayer."

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

The GAO report contemplates other strategies that could encourage private participation in the flood-insurance market, such as:

Mandatory-coverage requirements to ensure a broad pool of risks and avoid adverse selection.
Limiting the government's role to a last-resort insurer or reinsurer.
Giving insurers access to NFIP policy and claims data to allow them to better assess risk.

These strategies come with concerns as well, according to the report. Affordability would need to be addressed if coverage was made mandatory; limiting the government's role to a last-resort insurer would leave the government with the highest-risk policies requiring high premiums that could reduce consumer participation; limiting the role to a reinsurer might mean passing the costs for the reinsurance on to consumers; and allowing private-insurer access to NFIP policy and claims information would have to overcome privacy concerns.

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

Special Reports /

GAO: Allowing NFIP Rate Increases a 'Critical First Step' Toward a Private Market

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