June 06, 2006

NFIP current financial condition unsustainable: CBO

Acting Director of the Congressional Budget Office Donald B. Marron told the Chair of the Senate Committee on the Budget that the National Flood Insurance Program financial condition is "unsustainable," that it presently subsidizes at-risk property owners at the rate of $1.3 billion each and every year, and that it lacks resources to ever pay off the debt it has incurred to pay Hurricane Katrina claims. NFIP letter to Senator Judd Gregg dated May 31, 2006.

Forgiving the nearly $24 billion debt NFIP will have run up to pay 2005 Gulf Coast storm claims would allow NFIP to continue has it had before ... remaining actuarially unsound and costing the Treasury $10 billion to $15 billion over the next ten years, said the Director.

read more below

In January 2006, CBO testified before a Senate Committee about the results of its study of the National Flood Insurance Program (NFIP) in light of the experience of Hurricand Katrina and the other 2005 Gulf Coast storms. They calculated the explicit subsidy for policyholders in at-risk locations, resulting from premiums being deliberately set below an actuarially sound value in order to encourage people to buy insurance instead of relying on disaster relief. The estimated subsidy totaled $1.3 billion each and every year.

In the January report, the CBO analyzed likely effects on demand from eliminating or reducing the subsidy. The CBO pointed out the limitations of the cash basis accounting for flood insurance in the NFIP, as simple but not providing an accurate picture of expected long-term costs. The CBO recommended a subsidy-cost basis as an alternative to cash basis accounting, to provide "a clear display of the average expected cost of the program."

The study includes some useful charts and tables illustrating the historical cash flow of NFIP and the calculation of the overall federal subsidies for homeowners and commercial property owners who choose to develop coastal areas, river flood plains and other flood-prone locations. The Budgetary Treatment of Subsidies in the National Flood Insurance Program -- CBO Testimony -- January 25, 2006


Posted by dougsimpson at June 6, 2006 08:27 PM