From the U.S. Government Accountability Office, www.gao.gov

Transcript for: Comprehensive Reform of Flood Insurance  

Description: The National Flood Insurance Program owes $24.6 billion to
the Treasury Department. How can this program reduce its costs while
keeping flood insurance affordable for property owners?

Related GAO Work: GAO-17-425 Flood Insurance: Comprehensive Reform Could
Improve Solvency and Enhance Resilience

Released: April 2017

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[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the U.S. Government Accountability Office. It's April
2017. The National Flood Insurance Program was created to reduce the
rising costs of federal disaster assistance for flood damage. At the
same time, the program tries to keep flood insurance affordable for
property owners. But, as of March 2017, the program owes the Treasury
$24.6 billion. A team led by Alicia Puente Cackley, a director in GAO's
Financial Markets and Community Investment team, looked into this issue.
Sarah Kaczmarek sat down with Alicia to talk about what they found.

[ Sarah Kaczmarek: ] Your report looks at how we can fix the National
Flood Insurance Program. And you look at kind of this comprehensive
approach. Before we get into the pieces of that, why was a comprehensive
solution important?

[ Alicia Puente Cackley: ] A comprehensive solution is important because
there are many different actions that need to be taken and they affect
each other. There are trade-offs. There are certain unintended
consequences to certain actions or potential consequences and so you
need to look at all of the actions together and think about reform in a
comprehensive way.

[ Sarah Kaczmarek: ] And is part of the reason because there are kind of
like competing goals with the National Flood Insurance Program, right?

[ Alicia Puente Cackley: ] Yes, that's absolutely right. The goals of
affordability of premiums so that people will actually purchase flood
insurance and be protected through that, but also the goal of fiscal
responsibility and not having the program cost the taxpayer too much
money.

[ Sarah Kaczmarek: ] So let's talk about the pieces of solution. The
first one I want to talk about is repaying the money that the program
owes to the Treasury Department.

[ Alicia Puente Cackley: ] The program owes over $24 billion to the
Treasury. That's billion with a B. And it can't really repay it. In
order to pay that off and also collect enough in premiums to pay future
potential costs, it's just not possible to do. And it would certainly
affect the affordability of those premiums. That's why this report is
suggesting that Congress consider eliminating the debt that's currently
owed to Treasury as one part of a comprehensive approach to reform.

[ Sarah Kaczmarek: ] Okay. So writing off that debt and then, it sounds
like one of the other reasons the program has run into some of the
financial trouble is because premiums, they're not high enough. Is that
right?

[ Alicia Puente Cackley: ] Yes. The case that premiums, many of the
premiums, that FEMA charges are discounted and that's done in order to
bring people into the program. It's also done in order to make things
affordable for homeowners but, as a result, there's just not enough
money brought into the system to cover everything.

[ Sarah Kaczmarek: ] Okay. So if the program needs to increase premiums,
how is it going to be able to keep the rates affordable?

[ Alicia Puente Cackley: ] So this is exactly one of the trade-offs we
just talked about. In order to increase premiums and keep things
affordable, the premiums need to be high enough to cover the true risk
of the program, but Congress could also appropriate money to help the
homeowners who truly can't afford the coverage to assist them either
through subsidies of their premiums or through subsidies helping them
mitigate the risk of their homes by elevating their properties or doing
other things that help to reduce the risk of flooding for a particular
property.

[ Sarah Kaczmarek: ] Okay, so kind of taking a step back. Is everybody
who needs flood insurance signing up for flood insurance?

[ Alicia Puente Cackley: ] No. And that's one of the issues. Right now,
most people who have flood insurance are people who are required to have
flood insurance because they are in the highest risk zone, and they have
a federally insured mortgage. But there are a lot of people beyond that
line, if you will, who are still at risk of flooding. They just have a
misperception that they're not because there is a bright line of high
risk zones that is part of legislation. One potential action that
Congress could take would be to expand the mandatory purchase
requirement that is already in place for people inside the highest risk
zones to cover all mortgages from federally regulated lenders. That
would, obviously, make the cost of insurance higher for more property
owners, but the premium rates for those owners would probably be
relatively low because they certainly are at lower risk than the highest
risk zones.

[ Sarah Kaczmarek: ] What could the private sector do to help improve
the program?

[ Alicia Puente Cackley: ] So the private sector is definitely one of
the players in this area now. In the beginning, when NFIP was first
created, there really wasn't a private market that was interested in
insuring flood. It wasn't a well-developed market. That's not the case
at all now. Now there are definitely private insurers who are willing to
insure for flood risk and are capable of doing it. One of the things
that this report does is speak to a couple of challenges around either
regulatory barriers to private sector companies getting into the market
but also just the whole issue of whether FEMA charges the right rate, a
premium rate that is not subsidized. That keeps private sector companies
out of the market because they can't compete with a subsidized rate.

[Sarah Kaczmarek:] So finally, what do you think is the bottom line of
this report when it comes to fixing what's going on with flood
insurance?

[ Alicia Puente Cackley: ] I think the main takeaway is that a piecemeal
approach to flood insurance reform is just not going to work. This
requires looking at all of the pieces that we lay out in the report and
really developing a comprehensive approach to reforming the program.

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