United States Government Accountability Office
• Second, the caps address affordability poorly. For example, they are not
cost-effective because some policyholders who do not need assistance
likely are still receiving it. Concurrently, some policyholders needing
assistance likely are not receiving it, and the discounts will gradually
disappear as premiums transition to full risk.
• Third, the caps keep NFIP premiums artificially low, which undercuts
private-market premiums and hinders private-market growth.
An alternative to caps on annual premium increases is a means-based
assistance program that would provide financial assistance to policyholders
based on their ability to pay and be reflected in the federal budget. Such a
program would make NFIP’s costs transparent and avoid undercutting the private
market. If affordability needs are not addressed effectively, more policyholders
could drop coverage, leaving them unprotected from flood risk and more reliant
on federal disaster assistance. Addressing affordability needs is especially
important as actions to better align premiums with a property’s risk could result in
additional premium increases.
Estimated Premium Shortfall and Percentage of National Flood Insurance Program Policies at
Full-Risk Premiums, by Calendar Year
FEMA has had to borrow from Treasury to pay claims in previous years and
would have to use revenue from current and future policyholders to repay the
debt. NFIP’s debt largely is a result of discounted premiums that FEMA has been
statutorily required to provide. In addition, a statutorily-required assessment has
the effect of charging current and future policyholders for previously incurred
losses, which violates actuarial principles and exacerbates affordability concerns.
Even with this assessment, it is unlikely that FEMA will ever be able to repay the
debt as currently structured. For example, with the estimated premium shortfalls,
repaying the debt in 30 years at 2.5 percent interest would require an annual
payment of about $1.9 billion, equivalent to a 60 percent surcharge for each
policyholder in the first year. Such a surcharge could cause some policyholders
to drop coverage, leaving them unprotected from flood risk and leaving NFIP with
fewer policyholders to repay the debt. Unless Congress addresses this debt—for
example, by canceling it or modifying repayment terms—and the potential for
future debt, NFIP’s debt will continue to grow, actuarial soundness will be
delayed, and affordability concerns will increase.
Risk Rating 2.0 does not yet appear to have significantly changed conditions in
the private flood insurance market because NFIP premiums generally remain
lower than what a private insurer would need to charge to be profitable. Further,
certain program rules continue to impede private-market growth. Specifically,
NFIP policyholders are discouraged from seeking private coverage because
statute requires them to maintain continuous coverage with NFIP to have access
to discounted premiums, and they do not receive refunds for early cancellations if
they switch to a private policy. By authorizing FEMA to allow private coverage to
satisfy NFIP’s continuous coverage requirements and to offer risk-based partial
refunds for midterm cancellations replaced by private policies, Congress could
promote private-market growth and help to expand consumer options.
Addressing NFIP’s current debt—
for example, by canceling it or
modifying repayment terms—and
potential for future debt
• Authorizing and requiring FEMA to
revise NFIP rules hindering the
private market related to (1)
continuous coverage and (2)
partial refunds for midterm
cancellations
GAO is also making five
recommendatons to FEMA, including
that it publish an annual report on
NFIP’s actuarial soundness and fiscal
outlook. The Department of Homeland
Security agreed with the
recommendations.
View GAO-23-105977. For more information,
contact
Alicia Puente Cackley at (202) 512-
-2700 or todiscof@gao.gov.