Foundation

In Rare Case, CBO Uses Private Modeling to Forecast $1.4 Billion Flood Insurance Shortfall

by Demian Brady / /

NTU Foundation’s Taxpayers’ Budget Office (TBO) project often criticizes the Congressional Budget Office (CBO) for failing to take into account the best available modeling in its projections, but there are rare instances where the agency deserves praise for doing exactly that. CBO’s newest analysis of the National Flood Insurance Program (NFIP), the government-run insurance program with a virtual monopoly on flood insurance policies, does in fact utilize private modeling that forecasts a $1.4 billion shortfall between the program’s claims paid out and premiums taken in - a larger gap than is foreseen with the actuarial model that is normally used to project NFIP’s fiscal outlook.

In its baseline, CBO expects that NFIP will see claims costing $2.7 billion, and will need to borrow an additional $1 billion from the Treasury to cover the shortfall in premiums. Even discounting the potential costs that could be incurred if in any of the next ten years there is a hurricane season as catastrophic as 2005’s, the baseline likely understates the cost of claims to NFIP.

In a new analysis, CBO took a unique approach to accounting for NFIP’s possible liabilities. The agency analyzed and scored NFIP using a cost-estimating model developed by Guy Carpenter, a company that advises firms and government agencies about risk and insurance. CBO notes Guy Carpenter’s estimates “were themselves built on two models of property damage from coastal storm surges – one developed by AIR Worldwide and another by Risk Management Solutions – that yielded similar estimates, as well as on AIR Worldwide’s model of property damage from inland flooding.”

Under this commercially available model, CBO projects NFIP will see claims running $1 billion higher, with a net shortfall of $1.4 billion. Premiums, surcharges, and fees will collect $4.3 billion while insurance claims will cost $3.7 billion, and additional costs including administrative expenses, interest owed on debt the Treasury, mitigation, and mapping, will cost an additional $2 billion.

While the calculation of data in many key reports produced by CBO are set in law, NTUF applauds CBO for using commercially available models to expose the risks of higher flood insurance claims that would force the program to take on more debt. CBO should seek out additional policy areas where use of such models developed by, and for private sector firms, will be able to provide a more accurate projection of long-term liabilities faced by federal programs, and ultimately, taxpayers.

Had it not drawn upon the expertise of private sector modeling, CBO may well have produced yet another analysis that underestimated future costs to taxpayers of a program that has proven enormously costly in its nearly 50 years of existence. NFIP’s current debt has reached nearly $25 billion, an increase of $5 billion since the program was last reauthorized.

Its current authorization expires at the end of September, prompting Congress to consider legislation to reform the program and set it on a sounder financial footing. That was the intention of the law that reauthorized the program five years ago; unfortunately, the fiscal state of NFIP has worsened by several billion dollars since then.

A new approach is needed to understanding the true scope of the costs of the program as lawmakers seek to fix it. Given the many private sector entities engaged in mapping and modeling for disaster risk, the CBO is smart to draw upon their data and use it to better inform Congress. We hope the agency will do the same in other areas as well, rather than attempting to reinvent the wheel repeatedly.


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