Despite improvements, affordability concerns accompany FEMA’s rate-setting methodology: GAO

The Federal Emergency Management Agency’s (FEMA) new rate-setting methodology improves actuarial soundness, but at the same time, it highlights the need for broader program reform, the US Government Accountability Office (GAO) highlighted in a recent report.

FEMA’s National Flood Insurance Program (NFIP) is charged with keeping flood insurance affordable and staying financially solvent.

A historical focus on affordability has led to premiums that do not fully reflect flood risk, insufficient revenue to pay claims, and, ultimately, $36.5 billion in borrowing from Treasury since 2005.

In 2021, FEMA began implementing Risk Rating 2.0, a new methodology for setting premiums for the NFIP.

The new methodology substantially improves ratemaking by aligning premiums with the flood risk of individual properties, but some other aspects of NFIP still limit actuarial soundness, analysts have pointed out.

For example, in addition to the premium, policyholders pay two charges that are not risk based. Unless Congress authorises FEMA to align these charges with a property’s risk, the total amounts paid by policyholders may not be actuarially justified, and some policyholders could be over- or underpaying.

Therefore, affordability concerns accompany the premium increases some will experience, the report highlighted.

The GAO report examined several objectives, including (1) the actuarial soundness of Risk Rating 2.0, (2) how premiums are changing, (3) efforts to address affordability for policyholders, (4) options for addressing the debt, and (5) implications for the private market.

Following its analysis, the GAO concluded that Congress should consider creating a means-based assistance program that is reflected in the federal budget.

It recommended six matters for congressional consideration, specifically:

• Authorizing and requiring FEMA to replace two policyholder charges with risk-based premium charges
• Replacing discounted premiums with a means-based assistance program that is reflected in the federal budget
• Addressing NFIP’s current debt—for example, by cancelling 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

The GAO has also made a number of recommendations to FEMA, including that it publish an annual report on NFIP’s actuarial soundness and fiscal outlook. The Department of Homeland Security, it noted, agreed with the recommendations

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