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GAO on Flood Insurance: Let the Private Sector Help
January 24, 2014
In last week's edition of The Taxpayer's Tab, we featured H.R. 3370 as the "Most-Friended" bill with 178 cosponsors in the House. The Homeowner Flood Insurance Affordability Act would delay a provision passed in 2012 that phases out the government's National Flood Insurance Program (NFIP) subsidies and charges higher premiums more in line with full-risk rates.
That law, the Biggert-Waters Flood Insurance Reform Act, also ordered the Government Accountability Office (GAO) to conduct a study on how to better incorporate private-sector solutions to the NFIP's financial woes. The GAO released their findings in a new report this week and suggested that reducing government involvement in the flood insurance market could benefit taxpayers in the long-run.
The NFIP's fiscal troubles have been well-documented over the years. The program has appeared on the GAO's "high-risk" list every year since 2006 and owes over $24 billion in debt; worse still, the program hasn't paid back any of the principal on the loans it's received since 2010. Unfortunately, taxpayers are ultimately responsible for digging the NFIP out of its mounting debt, and delaying premium increases would tack on an additional $900 million to that burden (as we noted in the Tab).
But as GAO points out, the damage could at least be contained going forward: "...[S]ome have suggested shifting exposure to the private sector and eliminating subsidized premium rates, so individual property owners -- not taxpayers -- would pay for their risk of flood loss."
In its report, GAO summarized a series of discussions it had with stakeholders that work within the industry to better understand how to transition towards a flood insurance market with greater private participation. That starts with making the marketplace more enticing for private firms to enter. Two key recommendations to make that a reality:
GAO suggests that there would still be a role for government involvement in the flood insurance market, but in line with previous recommendations, suggested that Congress should consider eliminating subsidized premiums and charge full-risk rates to all policyholders.
Stakeholders also voiced concern over a complicated regulatory environment that would need to be addressed before private firms decide entry into the market could be viable. Additionally, GAO supported means-testing as a possible solution to affordability issues: "Currently, subsidies are available regardless of a property owner's ability to afford a full-risk premium. Means testing the subsidies would ensure that only those who could not afford full-risk rates would receive assistance and should increase the amount in premiums NFIP collects to cover losses."
The full report is available online.
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