WASHINGTON–Rates charged homeowners and businesses by the National Flood Insurance Program are based on an outdated computer model that doesn't accurately reflect the risk of losses from flooding, the Government Accountability Office said.
Its report was issued yesterday as the March 3 deadline to reauthorize the program loomed with the House and Senate so far unable to reconcile differences between the separate bills each body passed to extend and reform the program.
Asked to comment, Robert Gordon, senior vice president, policy development and research, at the Property Casualty Insurers Association of America, said that "government efforts to control insurance rates in any context tend to be subject to political pressures to under price risk."
He added that GAO's investigation "underscores the need for Congress to pass responsible flood reform legislation as soon as the new term begins."
Mr. Gordon said PCI is "actively working with members of the next Congress to accomplish this goal."
At a press conference held today by Protecting America.org to call attention to a proposal establishing a national catastrophe backstop for state funds, former FEMA director James Lee Witt said changes "need to take place" with the NFIP, including "revisiting" the idea of privatizing the system.
Among the more troubling aspects of the program, he pointed out, are the subsidies provided for some properties, particularly second homes. Based on his experience, he said that had those subsidies not existed, the current NFIP deficit of nearly $18 billion would have been much smaller.
Mr. Witt is a co-chair of ProtectingAmerica.org alongside former Coast Guard Admiral and Homeland Security deputy Secretary James Loy.
Mr. Loy said the NFIP issue is separate from the backstop his group is proposing, but that he expected the two issues might be joined by lawmakers in conference should they win congressional passage.
The GAO report said the Department of Homeland Security should direct the Federal Emergency Management Agency (FEMA) to take steps "to ensure that its rate-setting methods and the data it uses to set rates result in full-risk premium rates that accurately reflect the risk of losses from flooding."
Specifically, these steps should include, for example, verifying the accuracy of flood probabilities, damage estimates and flood maps, the report said.
Moreover, FEMA should act to ensure that the effects of long-term planned and ongoing development, as well as climate change, are reflected in the flood probabilities used, the report said.
And, FEMA should also reevaluate the practice of aggregating risks across zones, the report added.
Responding to the report, FEMA officials said they believe that the report taken as a whole presents a view of the accuracy of the current FEMA rate-setting process that is "far too negative," especially given the complexity and difficulty of setting flood insurance premium rates.
Second, FEMA officials defended their actions by saying the report does not accurately present the status of its flood plain map modernization efforts and their impact on premium rates.
Specifically, with respect to map modernization, FEMA stated that GAO's characterization of the progress on the updating of flood maps was misleading; that it overstated the impact of older maps on rate setting; and that the report failed to note that FEMA allows communities to reflect future conditions in flood maps the communities help develop.
The report noted that concerns about the solvency of the program have increased since Hurricanes Rita and Katrina in 2005, especially since the two hurricanes "left the program with an unprecedented $17.4 billion deficit."
The report said that amongst the concerns GAO officials have about the program include the subsidized rates NFIP must provide for about 25 percent of the policies, mostly for older buildings in high-risk flood zones.
"And although fully risk-based rates are supposed to reflect actual flood risk, concerns have been raised that they do not," the report said.
The GAO report said the NFIP model combines estimated flood risk with expected flood damage, but a number of factors may affect the accuracy of the rates the model generates.
"Collectively, these factors increase the risk that premiums collected on full-risk policies may be insufficient to cover future losses, adding to concerns about NFIP's financial stability," the report said.
"FEMA's rate-setting process for subsidized properties depends in part on the accuracy of the full-risk rates, raising concerns about how these rates are calculated as well," the report said.
John Prible, Independent Insurance Agents & Brokers of America asst. vice president, federal government affairs commented that, "As the GAO report makes clear, the NFIP is in serious need of not just long term extension but also reform."
He noted that, "The report cites two specific aspects of the program that have led to inadequate flood insurance prices on some properties; a reliance on outdated maps and the use of subsidized rates for grandfathered properties.
"Last year's House and Senate flood reform bills would have taken steps towards correcting both of these issues, and the Big "I' is very hopeful this report will push the House and Senate to restart their negotiations over reform and extension of the program."
This article updated Dec. 3, 2:30 p.m.
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