Rates charged to homeowners and businesses by the National Flood Insurance Program are based on an outdated computer model that doesn't accurately reflect the risk of loss, according to the Government Accountability Office.
GAO issued its report as the March 3 deadline to reauthorize the program looms, with the House and Senate so far unable to reconcile differences between the separate bills each body of Congress passed to extend and reform the NFIP–including a debate over whether to add coverage for wind exposures.
The GAO report said the Department of Homeland Security should direct the Federal Emergency Management Agency 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:
o Verifying the accuracy of flood probabilities, damage estimates and flood maps.
o 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.
o FEMA should re-evaluate the practice of aggregating risks across zones.
FEMA officials said they believe the GAO report, taken as a whole, is "far too negative" in its conclusions about the accuracy of the current rate-setting process–especially given the complexity and difficulty of setting flood insurance premium rates.
FEMA officials also said the report does not accurately present the status of flood plain map modernization efforts and their impact on premium rates.
Specifically, with respect to map modernization, FEMA stated that:
o GAO's characterization of the progress on the updating of flood maps was misleading.
o It overstated the impact of older maps on rate setting.
o It 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 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.
GAO 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.
Robert Gordon, senior vice president of 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."
"As the GAO report makes clear, the NFIP is in serious need of not just long-term extension but also reform," said John Prible, assistant vice president of federal government affairs at the Independent Insurance Agents and Brokers of America.
"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," he said. "Last year's House and Senate flood reform bills would have taken steps toward correcting both of these issues, and the IIABA is very hopeful this report will push the House and Senate to restart their negotiations over reform and extension of the program."
At a press conference held by ProtectingAmerica.org to call attention to a proposal establishing a national catastrophe backstop for state funds (see related story on this page), James Lee Witt–co-chair of the lobbying group, and former FEMA director–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, had those subsidies not existed, the current NFIP deficit of nearly $18 billion would have been much smaller.
The other co-chair of ProtectingAmerica.org, James Loy–a former Coast Guard admiral, as well as the former deputy secretary of homeland security–said the NFIP issue is separate from the national catastrophe backstop his group is proposing, but he expects the two issues might be joined by lawmakers in conference should they win congressional passage.
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