September 16, 2005

2003 GAO Report on Financial Challenges to NFIP

In 2003, the Government Accountability Office testified to the House of Representatives on "Challenges Facing the National Flood Insurance Program". GAO has for years reported on financial issues of the NFIP administered by FEMA.

As the testimony explains: "In 1968, in recognition of the increasing amount of flood damage, the lack of readily available insurance for property owners, and the cost to the taxpayer for flood-related disaster relief, the Congress enacted the National Flood Insurance Act (P.L. 90-448) that created the National Flood Insurance Program. Since its inception, the program has sought to minimize flood-related property losses by making flood insurance available on reasonable terms and encouraging its purchase by people who need flood insurance protection—particularly those living in floodprone areas known as special flood hazard areas."

The report points to several fundamental problems with the NFIP:
... Cash-based budgeting and accounting, instead of accrual accounting that would reflect actuarial realities;
... Subsidies and coverage of "repetitive loss properties" (properties that make claims every 10 years or so because they regularly flood)
... Lack of participation in the program, with less than 50% of eligible properties participating and even "mandatory" purchases may not be happening.

We look at 37 years of legislative and judicial recognition that flood hazards are simply not commercially insurable, and the federal subsidy of affordable flood insurance even for those who insist on living in the most exposed areas.

It is hard to know where to begin to address claims by public officials that the flood exclusions in standard in homeowners policies, as approved by the Insurance Commissioners and repeatedly upheld by the courts, "bear no reasonable relationship to the risks and needs of the business of the Defendant" insurers and are not enforceable. Unintended Consequences: Mississippi AG's Complaint Seeking to Void Standard Flood Exclusions

The Attorney General's action is sure to add false hope and the burden of frivolous litigation to a population already suffering enough. And what will it do to flood insurance sales if the A.G. convinces the citizens that, through some magic of elected politics, they retroactively get flood coverage free in their homeowners policy, despite the clear language of the flood exclusion and the repeated warnings accompanying their policies? Not only is this action unfair to the insurance industry, it is prejudicial to the entire National Flood Insurance Program.

See also: See Unintended Consequences: Flood Insurance and Exclusions, Proximate and Concurrent Causation

Posted by dougsimpson at September 16, 2005 03:44 PM