GAO Analysis: Huge Worries for NFIP Risk Rating 2.0

The National Flood Insurance Program (NFIP) is run by the Federal Emergency Management Agency (FEMA). The two agencies have been trying to find a way to get the NFIP to a break-even point.

As most of you know, the NFIP is billions in the hole, and the hole keeps growing larger with every new flood disaster.

To push the agency to break-even, in 2021 FEMA and the NFIP instituted Risk Rating 2.0. The plan is to make the NFIP actuarily sound. Criticisms from all quarters followed the announcement of the plan in 2020 and the rate hikes that followed. 

Rates for some policyholders skyrocketed and others stayed not so much.

Now the U.S. Government Accountability Office (GAO) is throwing even more water on Risk Rating 2.0 fire. The GAO analyzed the rate hike plan for actuarial soundness and found that, potentially, it could put the NFIP deeper into the tank by $27 billion.

The GAO said the annual average premium in December of 2022 was $689. To reach the NFIP’s goal, and to cover all the risk associated with a property, that rate needs to increase to $1,288.

Just a third of all NFIP insureds are paying full-risk premiums.

Since two-thirds of policyholders are on what FEMA and the NFIP call the, “glidepath,” and their rate hikes were capped at 18%. The GAO says the caps are the problem and is what will send the NFIP further in debt.

Using the Risk Rating 2.0 plan, it will take until 2037 for 95% of policyholders to reach full-risk premium prices. That will lead to the critical shortfall of $27 billion.

The GAO also says the caps are not only not cost-effective but they’re not exactly fair.

Some policyholders that don’t need assistance are still getting subsidized by the program. And worse, the GAO said many people desperate for help aren’t getting it.

“Concurrently, some policyholders needing assistance likely are not receiving it, and the discounts will gradually disappear as premiums transition to full risk,” the report said.

The GAO also pointed out that the caps are keeping NFIP insurance prices low and that is undercutting the private market. That and the other problems found in the report have the GAO suggesting that Congress implement a means-based assistance program.

It would give assistance to policyholders based on a person’s ability to pay.

Implementing that type of program improvement would also make the costs of the NFIP more transparent in the federal budget. As it stands now, the NFIP borrows money from the U.S. Treasury to stay afloat and that figure usually disappears in the figures released when a budget is set.

Other recommendations in the report include:

  • Finally addressing the NFIP’s huge debt
  • That would include cancelling the debt or modifying payments
  • It also includes a plan for potential future debt
  • The GAO recommends a revision of NFIP rules on the private market as it relates to continuous coverage and partial refunds for midterm cancellations
  • And — again — replacing discounted premiums with a means-based assistance program that can be seen in the federal budget

Lastly, the GAO wants FEMA to change how it reports the NFIP’s financial status.

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