The Federal Emergency Management Agency (FEMA) “has not developed goals, objectives, or performance measures” for the National Flood Insurance Program, which means “NFIP’s long-term financial solvency will remain in doubt,” according to a new Government Accountability Office report.
The findings build on concerns the GAO has had for many years. The NFIP has been on the GAO’s high-risk list since 2006 because of concerns about its long-term financial solvency and operational problems. The program is slated to expire Sept. 30 unless Congress extends it.
Several insurance groups agreed with the report’s findings, arguing many of these problems have long been known to stakeholders in the NFIP and that reform is long overdue.
‘Time to Start Listening’
“The GAO’s recommendations mirror those made repeatedly by most stakeholders over the past few years, only to see the debate sidetracked by the wind/water issue and other political agendas that ran contrary to good public policy,” Jimi Grande, senior vice president of federal affairs for the National Association of Mutual Insurance Companies, said in a statement. “With another voice added to the chorus of reform, it’s time for Congress to start listening.”
“The June 9 GAO report, as well as the preceding February report, make it clear that the NFIP is in need of substantial reform to ensure that it is a more stable and secure risk management tool,” said Charles Symington, senior vice president of government affairs for the Independent Insurance Agents & Brokers of America.
‘FEMA Faces Significant Challenges’
The report begins with a rebuke of FEMA, which administers the flood insurance program:
“FEMA faces significant management challenges in areas that affect NFIP, including strategic and human capital planning; collaboration among offices; and records, financial, and acquisition management. For example, because FEMA has not developed goals, objectives, or performance measures for NFIP, it needs a strategic focus for ensuring program effectiveness. FEMA also faces human capital challenges, including high turnover and weaknesses in overseeing its many contractors.
“Further, FEMA needs a plan that would ensure consistent day-to-day operations when it deploys staff to federal disasters. FEMA has also faced challenges in collaboration between program and support offices. Finally, FEMA lacks a comprehensive set of processes and systems to guide its operations, in particular a records management policy and an electronic document management system. FEMA has begun to address some of these challenges, including acquisition management, but the results of its efforts remain to be seen. Unless it takes further steps to address these management challenges, FEMA will be limited in its ability to manage NFIP’s operations or better ensure program effectiveness. “
The report also notes, “FEMA also faces challenges modernizing NFIP’s insurance policy and claims management system. After 7 years and $40 million, FEMA ultimately canceled its latest effort (NextGen) in November 2009 because the system did not meet user expectations. As a result, the agency continues to rely on an ineffective and inefficient 30-year old system.”
‘Limited Ability to Keep Program Sound’
In addition to these problems, the NFIP also has an operating environment which the GAO says “limits FEMA’s ability to keep the program financially sound.”
“NFIP assumes all risks for its policies, must accept virtually all applicants for insurance, and cannot deny coverage for high-risk properties,” the report notes. “Moreover, additional external factors—including lapses in NFIP’s authorization, the role of state and local governments, fluctuations in premium income, and structural and organizational changes—complicate FEMA’s administration of NFIP. As GAO has previously reported, NFIP also faces external challenges that threaten the program’s long-term health. These include statutorily required subsidized premium rates, a lack of authority to include long-term erosion in flood maps, and limitations on FEMA’s authority to encourage owners of repetitive loss properties to mitigate. Until these issues are addressed, NFIP’s long-term financial solvency will remain in doubt.”
Bills Address Issues
Bills have been introduced in Congress to correct some of the problems identified in this latest GAO report on the flood program. HR 1309 would put the program on a path to reflect actuarial costs, tie policy limits to inflation, bring private insurers into the market, improve the accuracy of flood maps, and set higher deductibles for rate-subsidized properties.
The Consumer Option for an Alternative System To Allocate Losses Act of 2011, or COASTAL Act, would create a “standardized loss allocation” system to distribute losses between the National Flood Insurance Program and private or residual-market-provided wind insurance following the total loss of any property that carries both flood and wind insurance.
Currently, when all or almost all of a building’s aboveground portion is destroyed, consumers, insurers, and the National Flood Insurance Program often contest claims. Many disputes end up in court.
The COASTAL Act would establish a voluntary system, based on storm models developed by the National Oceanic and Atmospheric Administration, that would allocate losses between various parties based on a formula. Policyholders suffering a total loss of their homes would receive assurance of payment up to policy limits, and wind insurers would know that few if any losses would be attributed to wind alone and avenues for legal challenges to the claims determined under the model would be limited.
Matthew Glans ([email protected]) is a legislative specialist in financial services at The Heartland Institute.
“FEMA: Action Needed to Improve Administration of the National Flood Insurance Program,” Government Accountability Office: http://www.gao.gov/products/GAO-11-297