ProgramBusiness
 
  


  1. News Articles
  2. Related News Articles
  3. Comments
News Article Details

GAO Report Underscores Critical Problems of Flood Insurance Program

Source: A.M. Best


Posted on 21 Feb 2011

Facebook LinkedIn Twitter Google

According to a new report from the U.S. Government Accountability Office, the National Flood Insurance Program (NFIP) remains structurally unsound and poor management practices are exacerbating its problems.

While the NFIP plays an important role in limiting the damage and financial impact of floods, it is in no position to repay $18.5 billion borrowed from the Treasury Department to cover claims from Hurricane Katrina or other 2005 hurricanes, much less future catastrophic losses, according to the GAO report. The NFIP is intended to be funded with premium dollars from policyholders, but as created by Congress and managed by the Federal Emergency Management Agency, it is "by design" not a sound operation, the GAO determined.

"Also, weakness in NFIP management and operations, including financial reporting processes and internal controls, and oversight of contractors place the program at risk," according to the GAO.

The NFIP is badly in need of wholesale reforms at its core, said Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies. Subsidization of rates encourages irresponsible development, Grande said, as does a policy that bars the program from denying insurance on the basis of frequent losses. The GAO report found that just 1% of policies account for 25-30% of claims. The NFIP is subject to other limitations private insurers are not: it cannot build a capital surplus, may not reject high-risk applicants and is subject to statutory limits on rate increases.

"Until we have rates that match the risk, you're going to subsidize bad behavior," he said.

While the NFIP made the GAO's annual list of high-risk government operations, as it has since 2006, the picture is not entirely negative, the GAO found. FEMA has taken steps to strengthen the program, including increasing the number of policyholders and implementing a new process for overseeing contractors. FEMA has reduced its Treasury debt by $850,000 since August 2009.

"Unless these operational and management issues are addressed, FEMA risks ongoing challenges in effectively and efficiently managing NFIP, including

its management and use of information, data, and technology," according to the report.

The GAO is scheduled to issue a detailed report on management and operational challenges facing the NFIP in March.

While the NFIP's troubles are not new, "This report is another important reminder that Congress needs to address the issue and pass a longer-term extension that focuses on the needed fundamental reforms," American Insurance Association spokesman Blain Rethmeier said.

The NFIP is authorized only through Sept. 30, and insurers are hoping to avoid the rolling gaps and extensions that characterized 2010. With the electoral defeats of the top Democratic voices for including windstorm coverage in the program, some are optimistic of a long-term deal. President Barack Obama signed a one-year extension of the NFIP into law after Congress failed to pass comprehensive reauthorization legislation. Several expirations had caused brief lapses in the flood program.


Comments

Post a Comment
If you are a Storefront / Tradingfloor user, click here to login.
Note: As a guest user, please fill out the form below to post a comment.
Post your comments here.
Name :
Email Address :
Captcha :
Comments :
Character left : 2000