GAO finds delaying Biggert-Waters would discourage private flood insurance
WASHINGTON (Jan. 23, 2014) – Delaying the phase-out of federal subsidies for flood insurance would discourage private insurers from writing the coverage and moving more risk from the National Flood Insurance Program into the private sector, a new report from the non-partisan Government Accountability Office concludes.
The report, which was commissioned as part of the Biggert-Waters Flood Insurance Reform Act of 2012, also finds that private insurers would need both greater access to claims data and the freedom to charge risk-based rates before they would be able to take significant market share away from the NFIP, which is currently more than $24 billion in debt to U.S. taxpayers.
“Although raising rates could create affordability concerns for some, delaying the increases could reduce the chances of increasing private sector involvement in flood insurance, leaving taxpayers to continue paying for flood claims through future borrowing from Treasury,” the GAO wrote.
Because of its persistent financial and management challenges, the NFIP has been on the GAO’s list of high-risk federal programs since March 2006. In addition to seeing unsustainable growth in its debt load, the flood program has not repaid any principal on its loans since 2010.
The report comes as the U.S. Senate prepares to consider legislation that would delay implementation of Biggert-Waters’ reforms for four years. It also comes in the wake of burgeoning interest from private insurers – both from the admitted and non-admitted markets – to begin writing flood insurance coverage in Florida, as well as intense interest from the global reinsurance and catastrophe bond markets to take on risk transfers from the NFIP.
“We agree with the GAO’s conclusions that the first step toward moving to a competitive private market in flood insurance is to preserve reforms that transition the existing federal program to risk-based rates,” R Street Senior Fellow R.J. Lehmann said. “For too long, the federal government has subsidized development in risk-prone and environmentally sensitive regions. While we’re still a long way off from a fully private flood insurance market, taking steps in that direction is the best way both to protect taxpayers and to begin the process of adapting to a changing climate.”
The GAO’s report also offers support for the notion – proposed by R Street and partner organizations within the SmarterSafer.org coalition – that the proper way to deal with affordability issues within the NFIP is through means-tested subsidies.
“Currently, subsidies are available regardless of a property owner’s ability to afford a full-risk premium,” the GAO wrote. “Means testing the subsidies would ensure that only those who could not afford full-risk rates would receive assistance and should increase the amount in premiums NFIP collects to cover losses.”
