March 08, 2006

GAO re Katrina: 1993 Andrew Advice Still Holds; NFIP "essentially bankrupt"

The Government Accountability Office released a 50-page "Preliminary Observations" report to a Senate Subcommittee examining the government response to Hurricanes Katrina. Comptroller General David M. Walker made clear that recommendations made following Hurricane Andrew remain unimplemented and remain good advice, the federal flood insurance program is "essentially bankrupt," and government and private sector leadership does not agree on how best to provide a financial cushion against future "mega-catastrophes."

Some excerpts from Hurricane Katrina - GAO's Preliminary Observations Regarding Preparedness, Response, and Recovery - GAO 06-442T (March 8, 2006) follow.

(read more below the fold)

2005 Hurricanes re-teach same lessons taught in 1992 and 1989.

Unfortunately, many of the lessons emerging from Hurricanes Katrina and Rita are similar to those we identified more than a decade ago, in the aftermath of Hurricane Andrew in 1992, which leveled much of South Florida. The experience of Hurricane Andrew raised questions about whether and how national disaster response efforts had incorporated lessons from experiences with Hurricane Hugo in 1989. All critical players must do much more to learn from past mistakes and actually implement recommendations that address prior deficiencies in preparing for and responding to catastrophic disasters. However, these actions will not be cost-free—posing a range of challenges in determining the priority of various action steps and how they will be funded. Ibid. p. 2

"In 1993, we conducted several reviews examining the federal response to Hurricane Andrew. The reviews focused on the unique challenges involved in responding to 'catastrophic disasters.' These reviews defined “catastrophic disasters” as a subset of other disasters requiring federal assistance. Unlike the bulk of the disasters requiring FEMA to respond, catastrophic disasters can overwhelm the ability of state, local and voluntary agencies to adequately provide victims with essential services, such as food and water, within 12 to 24 hours. These prior GAO reports focused on improving the immediate response to catastrophic disasters, and we made various recommendations within this context. We recommended that, in a catastrophic disaster, (1) a single individual directly responsible and accountable to the President should be designated to act as the central focal point to lead and coordinate the overall federal response when a catastrophic disaster has happened or is imminent, (2) FEMA should immediately establish a disaster unit to independently assess damage and estimate response needs following a catastrophic disaster, and (3) FEMA should enhance the capacity of state and local governments to respond to catastrophic disasters by (a) continuing to give them increasing flexibility to match grant funding with individual response needs, (b) upgrading training and exercises for catastrophic disaster response, and (c) assessing each state’s preparedness for catastrophic disaster response. We also recommended that Congress should consider (1) giving FEMA and other federal agencies explicit authority to take actions to prepare for catastrophic disasters when there is warning and (2) removing statutory restrictions on DOD’s authority to activate Reserve units for catastrophic disaster relief." Id., p. 3

"Unfortunately, some of these recommendations were not adopted or in effect when Hurricane Katrina hit the Gulf Coast. We continue to believe, for the most part, these recommendations are still viable, as we discuss later in this testimony." Id., p. 3

National Flood Insurance Program (NFIP) "Essentially Bankrupt"

"The federal flood insurance program faces major financial difficulties challenges (sic) as the Gulf Coast recovers. The program is essentially bankrupt. FEMA officials estimate that Hurricanes Katrina and Rita will result in flood insurance claims of about $23 billion, far surpassing the total amount of claims paid in the entire history of the National Flood Insurance Program (NFIP) through 2004." Id., p. 38

The magnitude and severity of the flood losses from Hurricanes Katrina and Rita overwhelmed the ability of the NFIP to absorb the costs of paying claims, providing an illustration of the extent to which the federal government is exposed to claims coverage in catastrophic loss years. Id., p. 38

Government "Backstops" or Private Sector Solutions?

The GAO also noted that Hurricane Katrina affected the insurance industry's ability and willingness to provide insurance coverage for catastrophes, and mentioned competing proposals for private sector solutions and TRIA-like government "backstops."

"The National Association of Insurance Commissioners (NAIC) is considering a broad national plan that would create a mechanism to handle disasters, especially those larger than Hurricane Katrina. The plan proposes a public-private partnership that would reward hazard mitigation and spread catastrophic risk broadly among individual insureds, insurers, reinsurers, state reinsurance funds, and the federal government, according to NAIC. The federal government could provide a top layer of protection by acting as a reinsurer of last resort or, alternatively, by providing financial capacity to a multi-state risk pooling mechanism that could borrow from the federal government should catastrophic losses exceed the pool’s accumulated funds. This plan is similar in scope to the Terrorism Risk Insurance Act (TRIA), which Congress enacted to create a program of shared public and private compensation for insured losses attributable to acts of terrorism. Under the NAIC plan, however, taxpayers would presumably not have to pay for losses.". Id., p. 42.

"However, some in the insurance industry oppose additional government involvement and others have set forth alternative proposals. Some insurance company representatives believe that the private market for catastrophic coverage for natural events continues to exist and that insurance costs should be based upon free market principles. Still others have proposed that insurance companies be permitted to set aside additional catastrophic disaster reserves on a pre-tax basis. Supporters of tax-deductible reserves argue that the tax-free status would give insurers a financial incentive to increase their reserves and expand insurers’ capacity to cover catastrophic risks and avoid insolvency." Id., p. 42.

The full text of the Comptroller General's "Preliminary Observations" to the Senate Homeland Security and Governmental Affairs Subcommittee is at: Hurricane Katrina - GAO's Preliminary Observations Regarding Preparedness, Response, and Recovery - GAO 06-442T (March 8, 2006)

Posted by dougsimpson at March 8, 2006 07:04 PM