Posted on 31 Dec 2007
A new analysis by the U.S. Government Accountability Office (GAO) reported that the federal government provided roughly $26 billion to renters and homeowners who lacked adequate insurance to recover from hurricanes Katrina, Rita and Wilma.
According to the federal findings, aid to the uninsured and underinsured represents between 25% and 33% of all federal emergency appropriations tied to the 2005 hurricanes, which totaled $88 billion as of May 2007. But the agency warns that "given the unsustainable fiscal path of federal and state governments, they will be challenged to maintain their current fiscal role."
Delivered as a report to Rep. Spencer Bacchus, R-Ala., the ranking member of the House Financial Services Committee, the study outlines seven public policy options for changing the federal role in natural catastrophe insurance. Included among the options are mandating an "all perils" policy that would cover all events; federal loan or reinsurance programs for state catastrophe funds; and changes to the tax code to allow either companies or individuals to better prepare for catastrophic events.
The report does not provide specific recommendations for Congress to take up, instead reporting perceived advantages and disadvantages based on the extent to which each proposal allows premium rates to fully reflect actual risks, permits private markets to provide natural catastrophe insurance, encourages broad participation in natural catastrophe insurance programs, and limits the cost to taxpayers after a disaster.
But the GAO made clear that taxpayers already are bearing significant costs related to underinsurance even without a formal federal insurance program in place. The report cites research by the Department of Housing and Urban Development finding roughly 78,000 of the 192,820 owner-occupied homes that suffered major damage in the 2005 hurricanes lacked adequate insurance to cover their losses. Among the 60,196 owner-occupied homes with severe wind damage, 38%, or nearly 23,000, lacked wind coverage, the GAO reports.
"Underinsurance can be exacerbated following a natural catastrophe, when rebuilding costs can increase substantially," the GAO wrote. "Uninsured and underinsured homeowners may compound the challenge of providing affordable natural catastrophe insurance by relying on the federal government for post-disaster assistance to rebuild their homes."
In the wake of the storms, the largest federal program for underinsured homeowners was the Federal Emergency Management Agency's Individuals and Households Program, which offers up to $26,600 per applicant for direct and indirect temporary housing assistance; repair and replacement assistance; and help with transportation, medical and funeral expenses. Of the $42.6 billion in federal funds allocated to the IHP, the GAO estimates $15.1 billion was provided to homeowners and renters that lacked adequate insurance.
HUD's community-development block grant program received more than $17.1 billion to aid with hurricane-recovery efforts in disaster zones in Alabama, Florida, Louisiana, Mississippi and Texas, and GAO estimates $9.9 billion was used to aid the uninsured or underinsured. Louisiana and Mississippi used the funds to provide grants to homeowners of up to $150,000 each to pay for damage that not covered by insurance. Mississippi also used a $50 million grant to offset the increased cost of reinsurance for the Mississippi Windstorm Underwriting Association in 2007 and 2008.
The Small Business Administration also offered $5 billion in personal loans — capped at $40,000 each — to help those affected by the storms replace clothing, furniture, cars and appliances. Homeowners also could borrow up to $200,000 to replace a primary residence, while small businesses could borrow up to $1.5 million for disaster-related economic injuries. Interest rates on the disaster loans were capped at 4% for those could no