The Government Accountability Office (GAO) recently published a report on the National Flood Insurance Program (NFIP) entitled FLOOD INSURANCE: FEMA’s New Rate-Setting Methodology Improves Actuarial Soundness but Highlights Need for Broader Program Reform. Among other issues, the report addresses:
- the actuarial soundness of the NFIP’s new Risk Rating 2.0 (RR2) methodology,
- how premiums are changing for policyholders,
- efforts to make flood insurance affordable to policyholders, and
- the Federal Emergency Management Agency’s (FEMA) efforts to promote policyholder understanding of RR2.
The GAO report concludes that FEMA inadequately communicated details about RR2 to policyholders, agents, and carriers. This conclusion, along with its supporting evidence, validated many concerns that independent flood insurance agents expressed to PIA and to FEMA over the last several years.
Below are some key takeaways from the report:
Increasing Affordability Concerns
The affordability of the NFIP has been in question for nearly a decade. In 2014, Congress passed the Homeowner Flood Insurance Affordability Act (HFIAA), which required FEMA to develop an affordability framework. FEMA has since provided Congress with a proposed affordability framework, but Congress has not passed a bill authorizing FEMA to proceed with its framework—or any other affordability mechanism.
“Risk Rating 2.0 is aligning premiums with risk, but affordability concerns accompany the premium increases,” according to the GAO report. Echoing the requests of many individual members of Congress, the report recommends that Congress create an affordability program. Indeed, Congressional passage of such a program was a likely next step in the minds of members of the 113th Congress when it first passed the HFIAA.
GAO: FEMA to Blame for Botched RR2 Rollout
The report concludes that FEMA failed to give policyholders comprehensive information about RR2 and its effects on mitigation efforts and individual premiums. FEMA provided policyholders with general policy information, but it “included only one minor reference to Risk Rating 2.0 as being a new ratemaking methodology.”
After describing the material FEMA circulated to policyholders, the GAO report concludes:
“[N]one of this information explained … the new methodology or its implications for … their individual premiums or referred policyholders to FEMA’s … website where rate methodology documents and other resources could be found. Further, FEMA did not notify policyholders about the new ratemaking methodology before implementing it.” (emphasis added)
FEMA officials told the GAO that FEMA relied on Write-Your-Own (WYO) insurers and agents to communicate with policyholders and educate them about RR2. “However,” the report goes on, “FEMA did not establish any requirements to ensure that insurers and agents communicated this information to policyholders on FEMA’s behalf” (emphasis added).
The GAO report finds policyholders were understandably and justifiably uncertain about RR2. To wit:
“Officials from two associations representing insurance agents told us policyholders have expressed concern over premium increases and generally do not understand [RR2], including how it produces premiums and what factors affect those premiums. Policyholders also had questions about potential savings associated with available mitigation options … [O]fficials from insurance agent associations said policyholders asked agents how mitigating their flood risk could reduce their premium.” (emphasis added)
The report recommends that FEMA take several administrative actions; those most significant to agents are its request that FEMA “take steps to directly inform individual policyholders about Risk Rating 2.0 and make them aware of available information” (emphasis added) and its instruction that FEMA “make available to policyholders, agents, or both more detailed property-specific flood risk information to help them better understand the justification for individual premiums” and any potential savings associated with mitigation activities (emphasis added).
PIA supported FEMA’s decision to adopt its new rating methodology. However, when its implementation began, PIA vocally urged FEMA to improve its rollout of RR2 to ensure a smooth transition for policyholders and prospects. When it became clear that FEMA was proceeding with its planned Sept. 2021 rollout of RR2, regardless of the number or magnitude of obstacles it faced, PIA asked FEMA to delay its implementation, a request that was echoed by both House and Senate policymakers. FEMA refused, and the result was a messy, confusing rollout, accompanied by FEMA’s continued refusal, which persists even today, to provide agents and consumers with appropriate rate transparency.
Full Risk Rates: (Possibly) Coming 2049
Although FEMA has insisted that RR2 is “risk-based,” meaning that premiums increase as the risk of flood increases, the GAO report makes clear that the NFIP is not risk-based now and will not achieve actuarial soundness soon. In fact, because some policyholder fees are assessed without regard to specific property risk, it is possible that NFIP premiums will never be fully risk-based.
Specifically, the GAO estimates that it will take “until 2037 for 95% of current policies to reach full-risk premiums,” which would leave the program with a $27 billion premium shortfall. The report concludes that the “glide path” capping residential premium increases at 18 percent year over year means it will take the NFIP until 2049—more than 25 years—for nearly all NFIP-covered properties to reach full risk rates.
For its part, FEMA has declined to publicly project when the NFIP could become actuarially sound. The GAO’s conclusion that the NFIP may achieve actuarial soundness in about a quarter of a century is disheartening but unsurprising.
In ten days, on Sept. 30, the NFIP will expire, absent Congressional action to reauthorize it. In the coming weeks and months, PIA will continue to pressure Congress to pass a long-term reauthorization of the program and demand that FEMA provide agents and policyholders with greater transparency and accountability.