Natural Disasters: Public Policy Options for Changing the Federal Role in Natural Catastrophe Insurance
Published: 2007-11-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In recent years, much attention has been focused on the roles that the private sector and federal government play in providing insurance and financial aid before and after catastrophic events. In this context, GAO examined (1) the rationale for and resources of federal and state programs that provide natural catastrophe insurance; (2) the extent to which Americans living in catastrophe-prone areas of the United States are uninsured and underinsured, and the types and amounts of federal payments to such individuals since the 2005 hurricanes; and (3) public policy options for revising the federal role in natural catastrophe insurance markets. To address these questions, GAO analyzed state and federal programs, examined studies of uninsured and underinsured homeowners and federal payments to them, identified and analyzed policy options, and interviewed officials from private and public sectors in both high- and low-risk areas of the United States. GAO also developed a four-goal framework to help analyze the available options.
section_title: What GAO Found
paragraphs: The federal government and some states have developed natural catastrophe insurance programs that supplement or substitute for private natural catastrophe insurance. These programs were created because homeowner coverage for catastrophic events is often not available from private insurers at prices deemed affordable by insurance regulators. Large losses associated with natural catastrophes are some of the biggest exposures that insurers face. Particularly in catastrophe-prone locations, government insurance programs have tended not to charge premiums that reflect the actual risks that homeowners face, resulting in financial deficits. After a resource-depleting disaster, the programs have postfunded themselves through, among other sources, payments from insurance companies and policyholders and appropriations from state and federal taxpayers. Large numbers of Americans are not insured for natural catastrophes. Homeowners may not purchase natural catastrophe insurance because doing so is voluntary and they may not believe that the risk justifies the expenditure. In addition, some homes may be underinsured--that is, not insured for the full replacement value. GAO estimates that the federal government made about $26 billion available to homeowners who lacked adequate insurance in response to the 2005 Hurricanes Katrina, Rita, and Wilma. Given the unsustainable fiscal path of federal and state governments, they will be challenged to maintain their current fiscal role. As Congress reevaluates the role of the federal government in insuring for natural catastrophes, Congress is faced with balancing the often-competing goals of ensuring that citizens are protected and limiting taxpayer exposure. This report examines seven public policy options for changing the federal government's role, including establishing an all-perils homeowner insurance policy, providing reinsurance for state catastrophe funds, and creating a mechanism to provide federal loans for state catastrophe funds. Each option has advantages and disadvantages, especially when weighed against competing public policy goals. For example, establishing an all-perils homeowner policy is a private sector approach that could help create broad participation. But low-income residents living in parts of the United States with high catastrophe risk could require subsidies, resulting in costs to the government. Similarly, federal reinsurance for state programs could lead to broader coverage, but could displace private reinsurance. GAO also identified several policy options for tax-based incentives for insurance companies, homeowners, investors, and state governments. But these options, which could help recipients better address catastrophe risk, could also result in ongoing costs to taxpayers. While some options would address the public policy goals of charging risk-based rates, encourage broad participation, or promote greater private sector participation, these policy goals need to be balanced with the desire to make rates affordable.

section_title: Letter
paragraphs: Natural disasters not only devastate communities and individuals but also  are costly to insurers, state governments, and the federal government. As  the 2005 hurricane season showed, costs associated with a large natural  disaster, such as a hurricane or major earthquake, can be enormous. Aside  from the human toll, Hurricanes Katrina, Rita, and Wilma caused insured  losses of an estimated $56.5 billion and total economic losses—including  both insured and uninsured losses—of more than $100 billion. The federal  government alone has appropriated more than $88 billion for disaster relief  and recovery from the 2005 hurricanes. Future disasters could be even  more expensive. One catastrophe modeling firm estimates that a large  hurricane in southeast Florida could cause insured losses of more than  $130 billion and a total economic loss of more than $260 billion. Similarly,  if San Francisco’s 1906 earthquake were to be repeated today, it is  estimated that it would cause insured losses of more than $70 billion and a  total economic loss of more than $280 billion. Also, a rupture of the Puente  Hills fault in the Los Angeles basin could lead to estimated insured losses of  more than $140 billion and a total economic loss of more than $500 billion.
As we reported earlier in 2007, large losses associated with natural  catastrophes are some of the biggest exposures that property and casualty  insurers face. To remain financially solvent, these companies must  estimate and prepare for the potential impact of such events. Because of  the increased risk of natural catastrophes and the challenges of predicting  losses from them, insurance companies have started limiting both renewals  of existing contracts and the writing of new contracts in catastrophe-prone  regions of the United States, such as coastal areas (from Massachusetts to  Texas), earthquake zones in California, and the Mississippi River area of  the central United States along the New Madrid earthquake fault.
Such events place enormous stress on insurance markets and  governments, carry huge costs, and have raised concerns about who  ultimately bears the costs and receives the benefits of government disaster  insurance programs. For these reasons, debate has arisen about the  appropriate role for the federal government in insuring against and in  recovering from natural catastrophes. While many public policy observers  agree that the federal government does and should play an integral role in  disaster relief and infrastructure recovery, some other public policy  observers have asked whether the government’s current role is the most  appropriate and have suggested alternatives. Some have argued for more  federal involvement, but others believe that the federal government may be  doing too much, crowding out private insurance and reducing the private  market’s ability and willingness to provide insurance-based solutions.  Public policy observers have raised moral hazard concerns, noting that  generous federal disaster relief may discourage homeowners from  purchasing natural catastrophe insurance. These observers have also  pointed out that government catastrophe insurance programs are  vulnerable to adverse selection, in that homeowners who are at the most  risk are also the most likely to buy catastrophe insurance.
In the context of your concerns about finding ways to ensure that the  federal government and the private sector each play an appropriate role in  the provision of natural catastrophe insurance, we examined (1) the  rationale for and resources of the federal and state programs that have  supplemented or substituted for private natural catastrophe insurance and  their funding; (2) the extent to which Americans living in catastrophe- prone areas of the United States are uninsured and underinsured and the  federal payments that have been made to such individuals since the 2005  hurricanes; and (3) public policy options for revising the federal role in  natural catastrophe insurance markets.
We reviewed or analyzed documents on federal and state catastrophe  insurance programs, the numbers of uninsured and underinsured and  federal payments that have been made, options to redefine the federal role  in natural catastrophe insurance, and goals that could be used as a basis for  designing and evaluating options for change. We interviewed officials from  public interest groups, insurance companies, reinsurance companies,  insurance agents, insurance brokers, insurance and reinsurance  associations, insurance agent associations, state catastrophe insurance and  reinsurance plans, state insurance departments, state economic  development departments, the National Association of Insurance  Commissioners (NAIC), the Federal Emergency Management Agency  (FEMA), the National Flood Insurance Program (NFIP), the Department of  Agriculture’s Risk Management Agency, the Department of Housing and  Urban Development (HUD), the Small Business Administration (SBA),  Fannie Mae, Freddie Mac, rating agencies, risk modeling organizations,  academia, law firms, a hedge fund, an insurance research organization, a  private research organization, a consumer group, and others. To determine  the mechanisms that governments use to supplement or substitute for  private catastrophe insurance markets, we collected oral and documentary  information from public and private officials in various states with high and  low catastrophe risk and from Washington, D.C. To determine the number  of uninsured and underinsured Americans and payments made to such  individuals after the 2005 hurricanes, we collected information from states,  examined federal agency data, interviewed federal officials who prepared  these data, sought information from the private sector, and interviewed  state officials responsible for disbursing federal disaster funds. Data on the  numbers and amounts of money going to the uninsured and underinsured  were incomplete and had a number of limitations, which are described in  appendix I. We determined that these data were sufficient for the purposes  of this engagement.
We identified various options for altering the role of the federal government  in catastrophe insurance by looking at bills before the current and previous  Congresses as well as other options that were not included in current  legislative proposals—for example, a proposal before a committee of  NAIC. After fieldwork for this report concluded, we were informed that  additional public policy options not considered in this report were being  discussed before a committee of NAIC. We sought out both supporters and  critics of each option, and our discussion of the third objective presents  mainly advantages and disadvantages that they have identified. We  developed a four-goal framework that was based on challenges faced by  current government natural catastrophe insurance programs and used the  framework to analyze current options for changing the federal role in  natural catastrophe insurance. We developed these goals by drawing  insights from the following: past GAO work, legislative histories of laws  that changed the roles of state governments and the federal government  after disasters, bills before the current and previous Congresses, interviews  with public and private sector officials, and refereed articles written by  academics in insurance economics. Although we identified numerous  possible goals that could assist our analysis, we believe the four goals that  we chose accurately capture the essential concerns of the federal  government. The congressional policy choices ahead involve striking an  appropriate balance among these goals.
The scope of our work covered hurricane and earthquake perils. We did not  investigate tornado, hail, or other perils, such as wildfires. We focused on  the property and casualty insurance line, especially homeowners  insurance. In reporting on the amount of federal disaster assistance to  individuals who lacked adequate insurance in the Gulf Coast states  following the 2005 hurricanes, we attempted to identify payments to  homeowners only. However, because in some instances we could not  separate out payments to renters, we included payments to both  homeowners and renters in some of our calculations. Judgments about  whether market failure did or did not exist in any particular state’s property  and casualty insurance market—and whether the cost of doing something  about it was or was not more expensive than the federal government’s not  acting—were outside the scope of this report. Appendix I contains  additional details of our objectives, scope, and methodology. We did  fieldwork in Alabama; California; Connecticut; Florida; Illinois; Indiana;  Louisiana; Massachusetts; Mississippi; Missouri; New York; Ohio; Texas;  and Washington, D.C. Our work was conducted between March 2006 and  October 2007 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: The United States is exposed to several major hazards, in particular  earthquakes and hurricanes, in coastal areas. As shown in figure 1, the  Pacific, South Atlantic, and Gulf Coasts face the highest risk of earthquakes  and hurricanes. According to the National Oceanic and Atmospheric  Administration (NOAA), 53 percent of the nation’s total population, or  approximately 153 million people, lived in coastal counties in 2003.  Moreover, the total coastal population increased by 33 million people, or   28 percent, between 1980 and 2003. California led in coastal population  change, with the number of residents increasing by 9.9 million people.  Florida showed the greatest percentage population change between 1980  and 2003, increasing nearly 75 percent. The nation’s coastal population is  expected to increase by more than 7 million people by 2008 (over current  levels) and by 12 million people by 2015.
The housing supply in coastal areas also continues to grow, despite the  high risk of earthquakes and hurricanes. NOAA reported that coastal  counties contained 52 percent of the nation’s total housing supply in 2000.  The leading states in terms of total housing units in coastal counties were  California, Florida, and New York, which together have 41 percent of the  total housing supply in these counties. One study put the estimated insured  value of coastal property in states bordering the Atlantic Ocean and Gulf of  Mexico at $7.2 trillion as of December 2004. As shown in figure 2,  properties along the Pacific and North-Atlantic Coasts and the Gulf of  Mexico have some of the highest insured property values. The value of  residential and commercial coastal property in Florida and New York was  $1.94 trillion and $1.90 trillion, respectively, in 2004.
subsections: section_title: Private Natural Catastrophe Insurance
paragraphs: Insurance coverage against natural catastrophes for a home may or may  not be included in homeowners insurance contracts. For example,  coverage against wind loss from an event such as a hurricane is typically  included. However, in some areas of certain states—mostly coastal  regions—wind coverage may be excluded from homeowners insurance  contracts and may be available only through the surplus lines insurance  market or a state-managed entity. Similarly, earthquake coverage is  commonly excluded from homeowners insurance contracts and instead is  sold separately by insurance companies or, in the case of California,  through a state-managed program.
The price of property and casualty insurance is affected by both the annual  expected loss and the cost of diversifying the risk of catastrophic losses.  Insurers can diversify the risk of catastrophic losses by, among other  things, purchasing reinsurance, which is insurance for insurance  companies, or by selling financial instruments such as catastrophe bonds.  Insurance companies do not know in advance what their actual costs are  going to be, because they can determine these costs only after a policy has  expired. The insurer’s objectives are to calculate premiums that will make  the business profitable, enable the company to compete effectively with  other insurers, and allow the company to pay claims and expenses as they  occur.
When insurers, reinsurers, and investors in catastrophe financial  instruments perceive that the expected frequency or severity of natural  catastrophes has increased, they may increase the price of insurance. If a  company believes that the risk of loss—for example, from flooding or  earthquake—is unacceptably high given the rate that can be charged, it  declines to offer coverage.
section_title: State Regulation of Insurance Prices
paragraphs: While the federal government retains the authority to regulate insurance, it  has given primary responsibility for insurance regulation to the states, in  accordance with the McCarran-Ferguson Act of 1945. State insurance  commissioners are responsible for regulating rates, monitoring the  availability of insurance, and assessing insurance firms’ solvency. The  insurance regulators of the 50 states, the District of Columbia, and the U.S.  territories have created NAIC to coordinate regulation of multistate  insurers. NAIC serves as a forum for the development of uniform policy,  and its committees develop model laws and regulations that, when adopted  by state legislatures or promulgated by state regulators, govern the U.S.  insurance industry.
Critics of state insurance regulation argue that insurance prices and terms  of coverage, particularly for homeowners insurance in areas prone to  natural catastrophes, are highly regulated and that the insurance industry is  generally not allowed to respond freely to changing risks or market  conditions. In particular, these critics say that  insurance regulators do not allow private insurers in catastrophe-prone  areas to charge rates sufficient to build surpluses or transfer risks to  reinsurers,  regulators may be subject to voter pressure and thus to legislative  pressure to keep insurance premiums affordable and coverage readily  available, and  regulatory and political restrictions prevent markets from giving  consumers accurate price signals regarding the risks of living in  catastrophe-prone areas.
NAIC officials told us that projected loss costs to cover the insurer’s  catastrophe exposure vary widely depending on which risk-modeling firm  the insurer selects to produce its catastrophe loss costs. Only future results  prove whether insurance company actuaries or insurance regulator  actuaries are correct. The officials said that one should not assume that  insurers and their actuaries have perfect information about what  catastrophes will occur during the next year and about how the economy  will behave. They added that one should also not assume that actuaries  working for insurance companies are always correct in their projections of  the needed price for the future experience period and that actuaries  working for insurance regulators are always wrong.
In the aftermath of natural catastrophes, some insurers responded by  limiting their exposure in catastrophe-prone areas with restrictions on  underwriting, higher deductibles, and lower coverage limits. In particular,  there were property insurance affordability and availability crises in the  Gulf Coast states or Florida after Hurricane Camille in 1969, Hurricane  Celia in 1970, Hurricane Andrew in 1992, and the 2005 hurricanes; and in  California following the Northridge Earthquake in 1994. Various proposals  have been put forth over the past 15 years seeking to have the federal  government take a larger role—for example, as a reinsurer or by allowing  insurance companies to accumulate tax-deferred reserves—in addressing  the affordability and availability of natural catastrophe insurance.
section_title: Federal Natural Catastrophe Insurance and Disaster Aid
paragraphs: The federal government engages in a wide variety of insurance activities,  among them providing multiperil crop insurance to farmers and flood  insurance to homeowners and businesses. In addition, the federal  government provides disaster assistance to individuals and households.  FEMA, SBA, and HUD are the primary agencies administering federal  disaster relief and recovery programs.
FCIC provides insurance coverage for farmers who suffer financial losses  when their crops are damaged by droughts, floods, or other natural  disasters. By law, FCIC pays the premium for catastrophic coverage against  losses of 50 percent of a farm’s normal yield at 55 percent of the market  price. In addition, FCIC offers premium subsidies for “buy-up” coverage  against crop, revenue, and prevented planting losses, with coverage for  losses ranging from 50 to 90 percent of a farm’s normal yield. FCIC  estimates that participation of eligible farmers is approximately 80 percent  of acres planted.
FEMA, through NFIP, offers insurance to homeowners and businesses for  losses due to flooding and currently has 5.3 million policyholders. By law,  NFIP must offer reduced premium rates for homes built in floodplains prior  to the creation of flood insurance rate maps (pre-Flood Insurance Rate Map  (FIRM) properties). About one quarter of NFIP policies are pre-FIRM and  pay about 40 percent of the risk-based rate. According to NFIP, homes built  in floodplains to an approved building code after the creation of flood maps  pay actuarially sound premiums. Participation in the program is mandatory  for homeowners with mortgages issued by federally regulated lenders on  properties in special flood hazard areas (SFHA) where flood insurance is  available. According to the RAND Corporation, about half of all  homeowners who live in SFHAs purchase flood insurance.
In addition to providing crop, flood, and other insurance, the federal  government provides disaster assistance to individuals. FEMA provides  disaster relief and recovery assistance to individual citizens through its  Individuals and Households Program (IHP), which is intended to provide  money and services to people in a disaster area when losses are not  generally covered by insurance and property has been damaged or  destroyed. IHP includes Housing Assistance (HA) and Other Needs  Assistance (ONA). FEMA may provide five types of HA: financial assistance  to rent temporary housing, “direct” temporary housing assistance, repair  assistance, replacement assistance, and permanent housing construction in  certain areas outside of the continental United States and other remote  areas. FEMA may provide ONA grant funding for transportation expenses,  medical and dental expenses, and funeral and burial expenses. ONA grant  funding may also be available to replace personal property, repair and  replace vehicles, and reimburse moving and storage expenses under  certain circumstances. IHP is not intended to restore damaged property to  its predisaster condition.
SBA’s Disaster Loan Program (DLP) is the primary federal program for  funding long-range recovery for private sector, nonfarm disaster victims.  Eligible losses include under or uninsured damages and can not duplicate  benefits received from another source (i.e. insurance recovery, FEMA,  etc.). The Small Business Act authorizes SBA to make available the  following two types of disaster loans: (1) physical disaster home loans to  homeowners, renters, and businesses of all sizes, and (2) economic injury  disaster loans to small businesses. Homeowners and renters can borrow  up to $40,000 for repair or replacement of household and personal effects.  Homeowners can also borrow up to $200,000 to repair or replace a primary  residence. Businesses of all sizes can borrow up to $1.5 million to repair or  replace disaster damaged real estate, machinery and equipment, inventory,  etc. Small businesses can borrow up to $1.5 million for disaster related  economic injury resulting from the declared disaster. The combined loans  to a business for physical loss and economic injury cannot exceed   $1.5 million. Homeowners and businesses must provide reasonable  assurance that they can repay the loan out of personal or business cash  flow, and they must have satisfactory credit and character.
HUD also provides disaster recovery assistance through several programs.  After the 2005 hurricanes, Congress appropriated $16.7 billion to the  Community Development Block Grant (CDBG) program for disaster  recovery. The CDBG program generally provides funding to metropolitan  cities and urban counties that have been designated as entitlement  communities and to states for distribution to other communities. Grant  recipients must give maximum feasible priority to activities, including  emergency-related activities, that (1) benefit low- and moderate-income  families or aid in the prevention or elimination of slums or blight, or   (2) meet urgent community development needs. However, HUD can waive  regulatory and statutory program requirements to increase the flexibility of  the CDBG funds for disaster recovery. These grants afford states and local  governments a great deal of discretion to help them recover from  presidentially declared disasters.
section_title: Government Natural Catastrophe Insurance Aims to Provide Affordable Protection but Often Requires Postfunding after Large Natural Catastrophes
paragraphs: Government natural catastrophe insurance programs were created because  certain perils are difficult to insure privately and because, when private  insurance is available, it may not be affordable. To keep natural  catastrophe insurance available and affordable, government insurance  programs operate differently than private insurance companies. Private  insurance companies generally rely on premiums collected from those they  insure to cover operating costs and losses and set premium rates at levels  that are designed to reflect the risk that the company assumes in providing  the insurance. These companies may also accumulate reserves to cover  large losses. Federal and state government insurance programs also collect  up-front premiums, but their rates do not always reflect the risks that the  programs assume. Because premiums are inadequate to cover operating  costs and losses, the government programs generally have limited  resources and often face deficits after disasters. However, unlike private  insurers, federal insurers may obtain funds after a catastrophic event  through emergency appropriations. State programs may also access  postevent funding through various means, including assessments on  private insurers, bonds, and private reinsurance. State programs may also  be postfunded through state general revenue funds and federal disaster  relief payments. This structure has several implications. First, it may  encourage homeowners in catastrophe-prone locations to seek coverage  from government programs, crowding out the private market and  increasing the government’s financial exposure. Second, homeowners may  not receive appropriate price signals about the risk of living in catastrophe- prone locations. Third, taxpayers who live in less risky locations may be  subsidizing those living in catastrophe-prone locations. Finally, the added  burden of private insurers’ assessment obligations may provide another  reason for them to leave already stressed markets.
Federal natural catastrophe insurance programs fill gaps in private  insurance markets and help limit disaster relief payments. For example,  FCIC and NFIP were created because private insurers had determined that  multiperil crop and flood losses were uninsurable and declined to provide  coverage. A 1937 study by the Executive Committee on Crop Insurance,  which noted that commercial attempts to insure against crop losses had  been unsuccessful, provided the impetus for creating FCIC in 1938. Initially,  the program was experimental and suffered heavy losses. The Federal Crop  Insurance Act of 1980 expanded the program to replace free disaster  coverage (in the form of compensation to farmers who were unable to  plant crops and who suffer yield losses) with insurance. The flood  insurance program was initiated because it had become clear by the 1950s  that private insurance companies could not profitably provide affordable  flood coverage because of the catastrophic nature of flooding and the  impossibility of developing an actuarial rate structure that could  adequately reflect the risk to flood-prone properties, among other reasons.  One of the primary purposes of the National Flood Insurance Act of 1968,  which created NFIP, was to reduce federal expenditures for disaster  assistance and flood control.
State natural catastrophe insurance programs were created to avoid  homeowners insurance crises that threatened the states’ housing markets.  For example, the California Earthquake Authority was formed in 1996 in  response to a crisis in the residential property insurance market following  the Northridge earthquake in 1994. According to the Insurance Information  Institute, California insurers had collected only $3.4 billion in earthquake  premiums in the 25-year period prior to the Northridge earthquake but had  paid out more than $15 billion on Northridge claims alone. Moreover,  insurers representing about 95 percent of the homeowners insurance  market in California began to limit their exposure to earthquakes by writing  fewer or no new homeowners insurance policies, triggering a crisis that  threatened California’s housing market and stalled the state’s recovery  from recession. See appendix II for a more detailed description of state  natural catastrophe insurance programs.
Florida Citizens is a nonprofit tax-exempt entity that provides residential  and commercial property insurance coverage when private insurance is not  available. Florida Citizens was established in 2002 after two separate  insurance pools—the Florida Windstorm Underwriting Association  (FWUA) and the Florida Residential Property and Casualty Joint  Underwriting Association (JUA)—were combined. In addition, the  Florida Hurricane Catastrophe Fund (FHCF) provides an alternative to  traditional hurricane reinsurance, reducing the cost of coverage  significantly below that of private reinsurance and lowering the cost of  insurance to homeowners. The FHCF was established in 1993 in response  to Hurricane Andrew, which resulted in a severe shortage of catastrophe  property reinsurance capacity, stricter policy terms and conditions, and  sharp increases in property catastrophe reinsurance rates in the year  following the storm. The post-Andrew reaction of a number of insurance  companies was to attempt to reduce their underwriting exposure, and 39  insurers stated in early 1993 that they intended to either cancel or not  renew approximately 844,000 policies in Florida. Other states—including  Alabama, Louisiana, Mississippi, and Texas—have created state funds to  make natural catastrophe insurance available and affordable.
subsections: section_title: Premium Rates for Government Natural Catastrophe Insurance Programs Are Often Determined by Factors Other Than Risk
paragraphs: Because government natural catastrophe insurance programs are often  created to ensure the availability and affordability of natural catastrophe  insurance, homeowner premiums for these programs—although risk- related—are generally not based entirely on the homeowners level of risk.  Federal natural catastrophe insurance program premium rates are often set  by statute and involve government subsidies. For example, to encourage  broad participation in the crop insurance program, federal law seeks to  ensure that the premiums are affordable to all farmers by requiring FCIC to  pay a portion of the premium cost. Specifically, FCIC offers farmers  varying subsidy rates for crop insurance, depending on the level of  protection they seek. Crop insurance subsidies totaled about $2.3 billion  in crop years 2005 and 2006. In addition, federal crop insurance legislation  directs FCIC to operate at a loss ratio of no more than 1.075. A loss ratio  greater than 1.00 indicates that the program paid more in claims than it  collected in premiums. Furthermore, we have previously reported that  NFIP is not designed to be actuarially sound. Annually, flood insurance  subsidies total about $1.3 billion.
State natural catastrophe insurance program premium rates may also be  set by statute. Florida Citizens historically has been required to maintain  premium rates that were not competitive with the private insurance  market. However, in January 2007, the Florida Legislature allowed Florida  Citizens to charge competitive rates. Even by 2006, Florida Citizens was  the largest property insurer in Florida. It receives much of its reinsurance  coverage from the FHCF, which charges premium rates that are estimated  to be about a quarter to a third the cost of private market reinsurance. The  program can charge these rates because of its tax-exempt status and ability  to postfund claims losses through bonds, among other advantages. These  two state programs are able to charge lower premiums than private  insurance companies, encouraging more people to seek coverage in the  state programs and leaving the state more financially vulnerable in the  event of a large hurricane.
State natural catastrophe insurance program premium rates are also  subject to approval by state insurance regulators that have generally  resisted rate increases. The Mississippi Windstorm Underwriting  Association (Mississippi Windpool) provides coverage against windstorms  and hail for people in the six coastal counties of Mississippi who might not  be able to get wind coverage in the private insurance market. After  Hurricane Katrina, the Mississippi Windpool sought a rate increase of  almost 400 percent, primarily to cover the increased cost of reinsurance.  The state insurance regulator granted a 90 percent increase. Furthermore,  the state government will use $50 million in federal disaster recovery funds  provided by HUD to offset the increased cost of reinsurance in 2007 and  2008. In addition, the state government created a reinsurance fund that  uses state general revenue funds to offset the increased cost of  reinsurance.
Similarly, the Texas Windstorm Insurance Association (Texas Windpool)  offers wind and hail coverage in 14 coastal counties and other specified  areas. By law, Texas Windpool residential and commercial premium rates  may not increase more than 10 percent above the rates for noncommercial  windstorm or hail insurance that are in effect at the time the request for an  increase is filed. However, the insurance commissioner may suspend this  rule to ensure rate adequacy in the catastrophe area. In May 2006, the  Texas Windpool sought a 19 percent residential and 24 percent commercial  rate increase, but the insurance commissioner approved a 3.1 percent  residential and 8 percent commercial rate increase. When the Texas  Windpool sought a 20 percent residential and 22 percent commercial rate  increase in November 2006, the insurance commissioner approved a 4.2  percent residential and 3.7 percent commercial rate increase. In both  instances, the insurance commissioner stated that he favored an  incremental approach to strengthening the Texas Windpool that did not put  an undue economic burden on coastal homeowners.
section_title: Federal and State Natural Catastrophe Insurance Programs Have Incurred Large Postdisaster Deficits Because of Inadequate Resources and Reliance on Postfunding
paragraphs: Unlike private insurance companies, government natural catastrophe  insurance programs often do not employ accrual accounting and are not  always required to accumulate adequate resources to meet their  obligations. Generally, insurance premiums are paid in advance, but the  period of protection extends into the future. Private insurers are required  by statutory accounting rules to establish reserves for incurred or known  claims and for the cost of “incurred but not reported” claims to ensure that  the premiums collected in advance will be available to pay future losses.  Incurred but not reported claims are insured losses that have already  happened but that for any of a variety of reasons have not yet been  reported to the insurer. Most government natural catastrophe insurance  programs are not required to have these resources, because they are  structured to postfund losses. As we have previously mentioned, NFIP and  the federal crop insurance program are postfunded by emergency  appropriations from federal taxpayers. State programs are generally  postfunded by several mechanisms, including assessments on private  insurers, bonds, and proceeds from general revenues. In most property and  casualty insurance lines, state assessments are often passed through to  policyholders. As a result, homeowners living in less risky locations also  contribute to cover the shortfall—a scenario known as cross-subsidization.  In those states where assessments cannot be passed through in some  manner, private insurers must pay the assessments, while at the same time  paying large claims from their own policyholders. In such instances, some  companies may be reluctant to continue offering coverage in the state or  may become insolvent.
In the wake of recent natural catastrophes, some government natural  catastrophe insurance programs suffered losses that eliminated their  accumulated resources. For example, NFIP reported unexpended cash of  approximately $1 billion following fiscal year 2004, but the program had  suffered almost $16 billion in losses from Hurricane Katrina alone as of  May 31, 2007. Similarly, Florida Citizens’ high-risk account had a surplus  of approximately $1.1 billion prior to the 2004 hurricane season, but the  program incurred over $2 billion in losses from the 2004 hurricanes and  almost $2 billion in losses from the 2005 hurricanes. The FHCF had  accumulated net assets of $5.5 billion at the end of the 2004 fiscal year but  had an estimated shortfall of approximately $1.4 billion following  reimbursements to participating insurers after the 2004 and 2005 hurricane  seasons. Prior to 2007, the Mississippi Windpool did not have resources  beyond premiums and reinsurance because year-end profits and losses  were shared by member companies. By the end of 2005, following  Hurricane Katrina, the Mississippi Windpool had incurred a net loss of   $473 million. In Louisiana, Citizens Property Insurance Corporation  (Louisiana Citizens), which has a structure similar to that of Florida  Citizens, had $80 million in cash reserves prior to the 2005 hurricane  season but suffered more than $1 billion in losses after Hurricanes Katrina  and Rita.
Emergency appropriations authorizing funding for federal natural  catastrophe insurance programs after disasters have often been significant.  In the case of FCIC, not only are premium rates subsidized by almost 59  percent for the most popular coverage, but farmers may receive additional  emergency disaster relief—for example, farmers received $1.6 billion  following Hurricane Katrina. In the case of NFIP, not only are premium  rates for pre-FIRM homes subsidized up to 60 percent on average, but after  Hurricane Katrina NFIP was authorized to borrow over $20 billion to pay  claims.
State natural catastrophe insurance programs have also often required  postfunding to satisfy their obligations in the wake of large natural  catastrophes. For example, to fund its 2004 and 2005 deficits, Florida  Citizens assessed insurance companies in most property and casualty lines  $516 million and $205 million, respectively, and these amounts will be  passed through to policyholders. In addition, the Florida Legislature  appropriated $715 million from the general revenue fund to reduce the size  of the 2005 deficit. Furthermore, to fund a bond issuance to cover the  FHCF’s shortfall, eligible Florida insurance policyholders incurred a   1 percent assessment that will be levied over at least 6 years beginning in  January 2007. In June 2006, the FHCF issued a $1.35 billion postevent  revenue bond to cover 2005 losses, and in July 2006 it issued a $2.8 billion  preevent financing bond to provide liquidity for 2006 and future years.
Similarly, Louisiana Citizens assessed all property insurance companies in  the state $193 million after the 2005 hurricanes. It has also issued a  postevent bond for $978 million to cover 2005 losses that will be financed  by emergency assessments on insurers in certain lines of property and  casualty insurance. These assessments are levied directly on policyholders,  who may claim a tax credit against state income tax. The assessments will  continue for as many years as needed to cover the plan’s deficit. Both  Florida Citizens and Louisiana Citizens have been declared to be  municipalities rather than insurance companies by their respective state  legislatures, and as a result cannot declare bankruptcy until the bond  obligations are satisfied. In addition, the Mississippi Windpool funded its  deficit through $525 million in assessments on member companies in  proportion to their share of business in the state. At the time, these  assessments could not be directly passed through to policyholders. At least  one private insurance company found that its assessment liability was  more than the entire amount of premiums it collected in the state and was  forced to liquidate. Finally, the Texas Windpool assessed private insurance  companies in Texas for the first $100 million in program losses and  expenses from Hurricane Rita beyond its ability to pay from premiums and  other income.
section_title: Because Many Americans Are Inadequately Insured for Natural Catastrophes, Federal Programs Play a Significant Role in Recovery
paragraphs: The 2005 hurricanes illustrated how many Americans are uninsured and  underinsured for natural catastrophes and the federal government’s role in  recovery from natural catastrophes. An analysis by HUD found that of the  192,820 owner-occupied homes with major or severe damage from  Hurricanes Katrina, Rita, and Wilma, approximately 78,000, or about   41 percent, did not have any insurance or did not have enough insurance to  cover the damage incurred. Homeowners do not purchase natural  catastrophe insurance for a variety of reasons, including financial reasons.  Moreover, buying a natural catastrophe insurance policy does not  guarantee complete coverage for a dwelling. For example, if the home’s  replacement value is calculated inaccurately, the homeowner will buy too  little insurance to cover all of the damage. More and more frequently,  responsibility for supporting the needs of individuals who lack adequate  insurance against natural catastrophe risk is falling to the federal  government. We estimate that the federal government made approximately  $26 billion available for homeowners and renters who lacked adequate  insurance in response to the 2005 hurricanes.
subsections: section_title: Homeowners May Not Be Insured against Natural Catastrophes for Several Reasons
paragraphs: Homeowners may not purchase natural catastrophe insurance because  they face budget constraints, underestimate the risk they face, or fail to  understand the protection such insurance affords. Information on the  number of individuals who are uninsured against natural catastrophe risks  is somewhat limited but helps demonstrate the extent to which  homeowners do not purchase natural catastrophe insurance. About   41 percent of homes that sustained severe damage from any peril during  the 2005 hurricanes were uninsured or underinsured. HUD reported that of  the 60,196 owner-occupied homes with major or severe wind damage,  almost 23,000, or 38 percent, lacked insurance against wind loss. Also, the  Insurance Information Institute reported that about 86 percent of  Californians did not have earthquake insurance on their homes in 2004.  Furthermore, only about one half of eligible single-family homes in Special  Flood Hazard Areas (SFHA) nationwide have purchased flood insurance.  In areas outside of SFHAs, where flood insurance is voluntary, only about 1  percent of owners of single-family homes have purchased flood insurance,  even though 20 to 25 percent of NFIP’s claims come from outside of SFHAs.
Purchasing insurance to protect homes against natural catastrophes is  mandatory for some homeowners, but often it is voluntary. For example,  homeowners who do not have mortgages are generally not required to have  property and casualty coverage, and in some areas certain types of hazards  are routinely excluded from homeowners policies. As we have seen, wind  coverage is often excluded in some coastal areas, and the surplus lines  market or a state-managed entity may offer coverage separately. Although  lenders may require homeowners to purchase this supplemental insurance,  those who own their homes outright may choose not to buy it. A similar  situation exists with earthquake coverage in certain areas of the country. In  earthquake-prone areas, earthquake coverage is commonly excluded from  the homeowners insurance contract and is sold separately by insurance  companies or, as in the case of California, by a state-managed program. In  general, lenders do not require earthquake insurance as a condition of  extending a mortgage.
Consumers will purchase natural catastrophe insurance on the basis of  their perception of risk. Studies have shown that consumers often consider  the likelihood of a future catastrophe to be much lower than insurance  companies’ estimates. According to academic research, some homeowners  may underestimate the risk of loss, have an overly optimistic view of  expected losses, or be unaware that insurance is available. One insurance  expert has concluded that if people believe that the chance of a serious  event occurring is low, they often consider insurance unnecessary and will  not seek out information on its benefits and costs. Reluctance to purchase  insurance protection can be compounded by budget constraints. For some  homeowners with relatively low incomes, disaster insurance is considered  an expense that can be made only after taking care of necessities.
An insurance expert has noted that insurance trade associations, consumer  advocacy groups, and governments can provide better information to  consumers about risk probabilities, insurer profitability, and prices to  motivate better insurance purchasing behavior. One study of those living  in earthquake zones has identified a variety of reasons for declining to  purchase earthquake insurance. Some consumers are unwilling or  reluctant to pay high premiums to insure against potentially large but rare  disaster losses. Some consumers believe that the deductible for earthquake  insurance—the standard deductible is 15 percent of the value of the  home—is too high, given the premium rates and amount of coverage  provided. A study of flood insurance market penetration rates cites  several reasons why people do not purchase flood insurance. For  property owners in SFHAs, the decision to purchase insurance is affected  primarily by its price. Outside of SFHAs, property owners are not  purchasing flood insurance because they may not be aware of flood risk,  and because flood insurance agents have less interest in promoting flood  insurance and in learning how to write flood policies. Also, certain  limitations of the coverage, such as limits on basement flooding, make the  policies less attractive in inland areas.
section_title: Inaccurate Home Valuations Can Result in Underinsurance
paragraphs: Homes may be underinsured because replacement costs are not calculated  accurately. Replacement cost has been defined as the amount necessary to  repair or replace the dwelling with material of like kind and quality at  current prices. Replacement cost may not be calculated accurately for  several reasons, including the effects of inflation, custom home building,  remodeling, high demand for contractors, and changes in building codes  following a natural catastrophe.
Generally, property insurance losses are partial losses rather than total  losses. However, in catastrophe-prone areas, the prospect of a total loss of  property is real. If a homeowner suffers a total loss of property as a result  of a natural catastrophe and the replacement cost has not been properly  calculated, the property will not be fully insured. An insurance industry  consultant estimates that in 2006 approximately 58 percent of the  residential housing stock in the United States was undervalued for  insurance purposes by an estimated 21 percent.
Homeowners insurance coverage can vary by type of policy and from  insurer to insurer, but there are fundamental similarities. The broadest  coverage generally provides that a policyholder will receive full  replacement cost with no deduction for depreciation (up to the policy  limit) if a policyholder maintains coverage limits of 80 percent or more of  the dwelling’s full replacement cost. Otherwise, the homeowner receives  a lesser amount according to the formula in the policy (see sidebar).
The reasons that replacement costs may not be calculated accurately,  leaving homeowners underinsured, are complex. First, replacement costs  must be periodically updated to account for inflation. Second, beginning in  the early 1980s developers began building more custom homes, and a  significant percentage of homes were remodeled, sometimes extensively.  Historically, the methodologies that the insurance industry used to  calculate replacement costs did not always capture custom features. The  industry has improved its calculation methodologies, but an insurance  industry consultant told us that a large number of policies had not been  properly updated. Furthermore, homeowners whose properties were  remodeled may not have understood the need to tell their insurers about  the remodeling, possibly to avoid rate increases. The problem of  underinsurance can be exacerbated in the wake of a natural catastrophe  when demand for contractors and materials to repair homes is high and the  supply is tight. This phenomenon is known as “demand surge.” In these  circumstances, the short-term costs of repairing and rebuilding homes can  escalate substantially, and replacement costs become significantly higher.  In addition, over time a community may implement improved building  codes, so that rebuilding may have to conform to stricter standards than  those that were in place when a dwelling was first built. This situation can  also make replacement costs much higher, as it did in Florida in the  aftermath of Hurricane Andrew in 1992.
section_title: Large Amounts of Federal Postdisaster Aid Have Been Distributed to Uninsured and Underinsured Homeowners
paragraphs: As of May 2007, Congress approved approximately $88 billion in emergency  appropriations to assist in relief and recovery efforts in the Gulf Coast  states following the 2005 hurricanes. Three federal agencies—FEMA,  SBA, and HUD—received over $60 billion, or about two-thirds, of this  amount. As we have previously noted, these agencies play a significant role  in distributing federal disaster relief funds to individual victims. We  estimate that, as of June 2007, the agencies had obligated approximately  $26 billion, or between a quarter and a third, of the emergency  appropriations to homeowners and renters in Alabama, Florida, Louisiana,  Mississippi, and Texas who lacked adequate insurance (see fig. 3).
Federal disaster assistance for homeowners and renters comes from  FEMA, SBA, and HUD. For example:   For disasters declared between October 1, 2004, and October 1, 2005,  FEMA could provide a maximum of $26,200 for housing and other needs  assistance to an individual or household in a disaster area if property  was damaged or destroyed and the losses were not covered by  insurance. In total, FEMA obligated over $15 billion to homeowners  and renters through IHP grants and manufactured housing. We have  reported extensively on the difficulties that FEMA experienced in  distributing disaster assistance through IHP.
Homeowners and renters can borrow up to $40,000 in personal property  loans from SBA to repair or replace clothing, furniture, cars, and  appliances damaged or destroyed in a disaster. SBA can also make real  property loans up to a maximum of $200,000 to repair or restore a main  residence to its predisaster condition. Any proceeds from insurance  coverage on the personal property or home are deducted from the total  loan amount. The interest rates on SBA disaster loans do not exceed 4  percent for those who are unable to obtain credit elsewhere or 8 percent  for those who can get other credit. As of January 31, 2007, SBA  approved over $5 billion in disaster loans for homeowners and renters  after the 2005 hurricanes, at an interest subsidy cost of almost $800  million to the federal government. We have reported on the difficulties  that SBA experienced in distributing disaster loans.
The largest recovery program for homeowners and renters after the  2005 hurricanes was HUD’s CDBG program, which received $16.7 billion  in supplemental appropriations to help homeowners with long-term  recovery (including providing funds for uninsured damages), restore  infrastructure, and fund mitigation activities in the declared disaster  areas of Alabama, Florida, Louisiana, Mississippi, and Texas. To  receive CDBG funds, HUD required that each state submit an action  plan describing how the funds would be used, but the agency waived  some program requirements for disaster recovery purposes. For  example, HUD granted a waiver to Mississippi so that a portion of the  CDBG funds could be used to pay reinsurance costs for 2 years for wind  pool insurance maintained by the Mississippi Windpool. Two of the  states receiving the largest allocation from the emergency CDBG  appropriations were Louisiana and Mississippi, both of which opted to  direct the vast majority of their housing allocations to homeowners.  Both states based the amount of compensation that homeowners  received on the value of their homes before the storms and the amount  of damage that was not covered by insurance or other forms of  assistance. The grants provided up to $150,000 for eligible  homeowners. Both programs also attached various conditions to the  acceptance of grants, such as requiring homeowners to rebuild their  homes above the latest available FEMA advisory base flood elevation  levels and establishing covenants to the land requiring that homeowners  maintain hazard and flood insurance.
It will be a challenge for federal, state, and local governments to sustain  their current role in natural catastrophe insurance going forward. The  Comptroller General of the Unites States has repeatedly warned that the  current fiscal path of the federal government is “imprudent and  unsustainable.” In addition, we reported that, for state and local  government sectors, large and growing fiscal challenges will begin to  emerge within the next few years in the absence of policy changes. The  fiscal challenges facing all levels of government are linked and should be  considered in a strategic and integrated manner.
section_title: Options for Changing the Federal Role in Natural Catastrophe Insurance Attempt to Address Market Issues but May Not Limit Federal Exposure
paragraphs: We identified seven public policy options for changing the role of the  federal government in natural catastrophe insurance (see fig. 4). These  policy options have many variants and are often contained in other  proposals, including some bills that are before Congress. Some of these  proposals are also being debated in venues such as the NAIC committees.  We examined the advantages and disadvantages of these policy options and  evaluated them against four broad public policy goals. These goals are   charging premium rates that fully reflect actual risks,   encouraging private markets to provide natural catastrophe insurance,   encouraging broad participation in natural catastrophe insurance   limiting costs to taxpayers before and after a disaster.
Our analysis showed that each of the seven options met at least one of the  policy goals but failed to meet others. The first option—a mandatory all- perils homeowners insurance policy—would help create broad  participation and could provide a private sector solution. But this option  could also require subsidies for low-income residents and thus potentially  create substantial costs for the federal government that would have to be  balanced against money saved from reduced disaster relief. A second  option would involve providing federal reinsurance for state catastrophe  funds—a change that could lead to greater private insurance market  participation but that could also displace the private reinsurance market. A  third option, establishing a federal lending facility for state catastrophe  funds, could help such funds with financing needs after a catastrophe. But  this option exposes the federal government to the risk that a state fund  might not repay a loan and thus might not limit taxpayer exposure. The  remaining four options include tax-based incentives to encourage greater  participation by insurers and homeowners in managing natural catastrophe  risks. These incentives offer some advantages, but could also represent  ongoing costs to the federal government and taxpayers.
subsections: section_title: An All-Perils Policy Would Broaden Participation but Could Require Government Subsidies
paragraphs: A mandatory all-perils policy would require private insurers to provide  coverage against all perils in a single standard homeowners policy that  would be priced according to the risk of natural hazards each homeowner  faced. For example, the policy would cover not only theft and fire but also  wind, floods, and earthquakes. It would also be mandatory for all  homeowners.
This type of option offers several potential advantages. First, a mandatory  all-perils policy, by definition, would encourage broad participation in  natural catastrophe insurance programs. Moreover, including all American  homeowners in natural catastrophe coverage could help reduce the  number of Americans needing postdisaster payments and possibly limit the  federal government’s exposure. An all-perils policy would also eliminate  existing gaps in coverage and remove the uncertainty many homeowners  face in determining whether certain perils are covered and by whom—an  issue that was spotlighted after Hurricane Katrina, when disputes emerged  between private insurers and homeowners over the extent of the insurers’  obligations to cover certain damages. Finally, because it would be  mandatory and broad-based, an all-perils policy could lessen the problem  of adverse selection that is often identified as the reason that some types of  catastrophes, such as flooding, are considered to be uninsurable. This type  of policy would spread risks geographically and potentially would make the  policy more affordable than other options.
However, this option is not without its disadvantages. First, it is unclear  how private markets would be encouraged to underwrite all risks. Second,  a mandatory all-perils policy might not be a cost-effective solution for the  federal government, because it could create affordability concerns for low- income residents in certain areas and might require targeted government  subsidies. If they did not sufficiently reduce postevent disaster relief,  these subsidies could increase costs to taxpayers. Third, an all-perils policy  would undoubtedly be more expensive than current homeowner policy  premiums in some regions of the country. As a result, at least during the  transition, it could lead to complaints about higher premium costs from  residents of catastrophe-prone areas. Moreover, homeowners in relatively  low-risk areas could wind up subsidizing the costs of insurance for those  living in high-risk areas. Fourth, enforcement would be extremely  challenging, as we have seen with mandatory flood insurance in  communities in designated floodplains. Finally, this policy option faces  opposition from the private insurance industry, in part because of concerns  about state insurance regulators impeding private insurers’ ability to  charge premiums that reflect the actual risk of loss in catastrophe-prone  areas. Private insurers have also traditionally opposed all-perils policies  because of the difficulty of pricing flood and earthquake coverage. One  insurance company has said that an all-perils policy would cause rates to  skyrocket and could cause many insurers to abandon the homeowners  insurance market. NAIC officials told us that the homeowners market was  a $55 billion market—not counting flood and earthquake exposure—and  that most insurers were unlikely to walk away from a market this large.
section_title: Federal Reinsurance Could Eliminate Timing Risk for Insurance Companies but Could Displace the Private Market
paragraphs: A federal reinsurance mechanism would provide an additional layer of  insurance coverage for very large catastrophes, or megacatastrophes, and  could be implemented in two ways. The first version of this option would  create a federal mechanism that would serve as a backstop for state  catastrophe funds to increase the amount of insurance and reinsurance  available to states, expand the availability of catastrophe coverage, and  possibly improve its affordability. States would create catastrophe funds  and enter into agreements with the federal government—possibly, but not  necessarily, the U.S. Treasury—and pay premiums for the reinsurance that  would be used to support the reinsurance fund. Each state’s payments  would be based on risk and determined using actuarial and catastrophe  modeling, and the states would be responsible for collecting premiums  from insured commercial and residential property owners. The federal  fund would provide payments to state funds for storms of a certain  magnitude up to some predetermined level of payments. If the federal  reinsurance fund was not adequately financed at the time of a catastrophe,  it would issue government-backed bonds.
A related but different version of this federal reinsurance option would  authorize the Secretary of the Treasury to create an auction process for the  sale of reinsurance contracts to private and state insurers and reinsurers.  The secretary would make available reinsurance contracts covering both  earthquakes and wind events. The auction process would be open to state  and private insurers and reinsurers and would take place in at least six  separate geographic regions, so that risks would be based on local factors  and insurers in less risk-prone areas would not be subsidizing those in  riskier areas. State programs would have to reach a minimum loss level  before they would be eligible for federal funds. This version also  establishes a disaster reinsurance fund within the U.S. Treasury to be  credited with, among other sources of funds, amounts received from the  sale of reinsurance contracts. The Treasury would be authorized to issue  debt if the fund’s resources were insufficient to pay claims—and  reinsurance premiums paid to Treasury would be used to make interest  payments to debt holders—but the fund would not receive federal  appropriations. A national commission on catastrophe risks and insurance  loss costs would advise the secretary.
Both versions of this option offer advantages and disadvantages. First,  federal reinsurance is advantageous because it has the potential to help  insurance companies by limiting timing risk—the possibility that events  will occur before insurers have collected enough premiums to cover  them—potentially making insurers more willing to underwrite natural  catastrophe insurance policies. Second, primary insurance companies  may be less interested in canceling catastrophe insurance policies in  coastal regions after a disaster if stable sources of reinsurance are available  from state catastrophe funds. This option could also encourage the  provision of catastrophe insurance via private insurance markets by  limiting private insurers’ liability for very large events and thus increasing  their willingness to offer insurance for less catastrophic events. And a  greater supply of natural catastrophe insurance could reduce the cost of  insurance as competition for business intensified. Third, this option may  also be advantageous because, if it were appropriately structured—that is,  if program losses were funded by upfront premium payments—federal  reinsurance should not require the use of taxpayer dollars. Finally, to the  extent that this option increased the availability and affordability of  catastrophe insurance, it would be preferable to postdisaster assistance  and could limit the need for some types of postevent government payouts.
While federal reinsurance has some appealing options, it is not without  disadvantages. For example, neither version of the reinsurance option is  intended to displace or compete with the private reinsurance market,  because reinsurance contracts would not be sponsored in markets where  private reinsurance markets offered coverage. However, federal  reinsurance could compete with and possibly displace private reinsurance  if the government offered coverage at levels that were well within private  market capacity or set premium rates below what the private sector would  charge for comparable risk. While the stated intent of this option is to  charge a premium that fully reflects the risk assumed by the federal  reinsurance fund, political and consumer pressures could be put on the  federal fund to underprice premiums in terms of risk to keep premiums low  for policyholders in high-risk areas. Charging a reinsurance premium that  was not fully risk-based would expose the federal fund and the government  to potentially significant unfunded contingent insurance risk. As a result,  federal reinsurance could disproportionately benefit those living in high- risk areas. Should the fund experience losses that exceeded the premiums  collected, the difference would have to be paid by the taxpayers, creating a  cross-subsidy that favored those in catastrophe-prone areas. Also, the  existence of federal reinsurance might affect market discipline, leading  private insurers and state catastrophe insurance funds to loosen  underwriting guidelines—that is, to insure properties that would not have  been insurable without the availability of (low-cost) federal reinsurance.  Such a change could be costly for the reinsuring federal facility. As a result,  a federal reinsurance role could inadvertently encourage further  development and population growth in areas with high natural catastrophe  risk. Finally, government natural catastrophe insurance programs are not  purely insurance programs and may have social goals. But if the  government plans to intervene in the catastrophe insurance market, it may  want to use mechanisms that mimic as closely as possible what operating  private markets could have been expected to do. When federal insurance  programs mimic private insurance, and base decisions on risk (as  consistent with social goals), then government losses are more likely to be  contained.
section_title: A Federal Lending Facility Would Eliminate Timing Risk for State Catastrophe Insurance Programs but Would Face the Risk That the Loan Might Not Be Repaid
paragraphs: A federal lending facility would allow the federal government to use its  borrowing power to extend temporary loans to state catastrophe funds.  State catastrophe funds may not have the creditworthiness to borrow at  acceptable interest rates. One proponent of this plan has suggested that the  private insurance market could handle all or nearly all catastrophe  exposure, but possibly not at the moment the catastrophe happened.  Creating a lending facility in the federal government would allow the  government to provide the capital to meet the temporary shortage and  spread the repayment over time without assuming the underwriting risk  held by the insurers. Under this option, state catastrophe funds would be  required to secure private reinsurance and would have the ability to sell  catastrophe bonds to repay the money loaned to them by the federal  government. The loans would be made at market prices to guarantee that  capital was efficiently allocated and—given that an insurance company  that has just paid out a large claim does not have the same quantity or  quality of assets as a solvent insurer or bank—would be secured both by  the future income stream of premium payments from state residents  through insurance companies to the state catastrophe funds and by bond  proceeds. The loans would be of short duration, perhaps 2 to 3 years at  maximum, and would provide state catastrophe funds with encouragement  and time to access the private capital market. State catastrophe funds  would be expected to demonstrate to the federal lending facility that the  states were doing all that they could to attract private capital. A proposed  trigger for the federal lending facility would be a megacatastrophe.
The creation of a federal lending facility would have several advantages.  First, a federal lending facility would shift timing risk, which is significant  in the catastrophe insurance business, from the insurance industry to the  federal government. The federal government, because of its borrowing  power, is uniquely able to deal with timing risk. Second, a federal lending  facility could mean that taxpayers would assume little or possibly no  insurance risk, because the insurers would be responsible for paying all of  the losses from catastrophic events, although not necessarily in the year of  the catastrophe. Finally, through the requirement that the states do all that  they can to attract private capital, the option may lead to insurance  regulatory reforms in areas such as rate regulation that have inhibited the  influx of private capital.
A federal lending facility would also have a number of disadvantages. First,  it is not clear how this federal lending facility would encourage premiums  that reflected risks, would foster broad citizen participation, or would be a  cost-effective solution. Second, it would expose the facility and ultimately  taxpayers to credit risk if a state did not repay its debt. Third, a federal  lending facility could also require the creation of a new federal entity or  structure to administer the system. Fourth, like the federal reinsurance  option, such a lending facility could have a competitive advantage over the  private reinsurance sector, particularly if the terms were too easy or if  borrowed funds did not have to be repaid. States in high-risk regions would  have a financial incentive to seek nonmarket terms and conditions in loans.  Finally, this option would decrease the incentives for insurers and  reinsurers to accurately assess, underwrite, and price risk.
section_title: Tax-Deferred Reserves for Insurance Companies Could Encourage Greater Private Sector Coverage but Could Be Costly for the Federal Government and Have Other Disadvantages
paragraphs: A fourth policy option would be to permit private insurers to establish tax- deferred reserves for future catastrophes. This option could encourage  some insurers to maintain or expand their catastrophe insurance coverage  in regions with significant or projected catastrophe exposures. This option  is also intended to provide insurers with an incentive to write catastrophe  coverage in hazard-prone areas while improving their own financial  strength. It would require amending the U.S. Tax Code, because current tax  laws and accounting principles discourage U.S. property and casualty  insurers from accumulating long-term assets specifically for payment of  future losses by taxing these assets. Because the size and timing of  disasters that have not taken place is uncertain, assets set aside for  catastrophe losses, together with any interest accrued, are taxed as  corporate income in the year in which they are set aside. Although there is  a federal income tax deduction for losses that have already occurred,  reserves for uncertain future losses are not tax deductible.
Tax-deferred reserving has its advantages. Tax-deferred reserving could  mean that state regulators would be more willing to approve risk-based  rates, because premiums could now be set aside rather than flow into  profits. Consistent with the intended purpose of this option, tax-deferred  reserving could increase the willingness of insurance companies to  increase capacity without risking insolvency, because the companies would  be less dependent on the uncertain prices available in reinsurance markets.  In this case, the option would encourage a solution by private insurance  markets and more broad-based participation in catastrophe insurance  programs. Finally, this approach could reduce the need for state  catastrophe insurance mechanisms by increasing the willingness of private  insurers to remain or enter certain catastrophe-prone markets, such as  Florida and other Gulf Coast states.
However, tax-deferred reserving also raises a number of broader issues  that must be considered. Tax-deferred reserving would reduce current  federal tax revenue. However, as with other options, the net cost would  have to be determined by weighing the tax cost against potential savings  from federal postdisaster assistance programs. Deferring taxes on reserves  for insurance companies could also be disadvantageous if this system  created tax benefits that favored one type of activity over another. For  example, to the extent that tax-deferred reserving became prevalent, it  could displace the reinsurance market or other forms of hedging. Finally,  such reserves could also be subject to manipulation or abuse if insurers  used them to obscure current income by smoothing income flows across  years.
section_title: Homeowner Catastrophe Savings Accounts Could Broaden Participation in Catastrophe Insurance Programs but Could Reduce Federal Tax Revenue
paragraphs: Like tax-deferred reserves, the fifth policy option would also require  amending the U.S. Tax Code to provide a tax incentive, but this one would  be aimed at homeowners, who would be allowed to accumulate before-tax  funds to pay expenses related to disasters. The accounts would operate  much like those currently in use for health care expenses, allowing  homeowners to withdraw both savings and interest for qualified disaster  expenses such as deductibles, uninsured losses, flood damage, and  structural upgrades to mitigate damage from future storms. A bank or  another designated organization would be the custodian for these  accounts. Under one current option, homeowner contributions would be  limited to (1) $2,000 for individuals with homeowners insurance and  deductibles of not more than $1,000, and (2) the lesser of $15,000 or twice  the insurance deductible for homeowner insurance deductibles of more  than $1,000. In June 2007, the South Carolina Legislature passed legislation  authorizing the creation of catastrophe savings accounts for use by state  residents in paying natural catastrophe insurance deductibles.
This option could induce more homeowners to participate in natural  catastrophe insurance programs. Moreover, allowing homeowners to use  tax-deferred savings to cover mitigation expenses might encourage more  mitigation activities to reduce natural catastrophe risk. However,  implementation challenges pose disadvantages that would have to be  addressed. For example, it is unclear to what extent such a mechanism  would encourage those who are not insured to purchase insurance. Rather  than increasing participation, it could result in a tax benefit for those who  are already insured. Like the tax-free reserves option, these savings  accounts would also cost the federal government in reduced tax revenues.  But once again, the actual net cost to the government would depend on the  potential offsetting savings from postcatastrophe funding mechanisms.
section_title: Favorable Tax Treatment for Catastrophe Bonds Could Increase Insurers’ Access to Capital Markets, but Some Question the Need for Such Tax Treatment
paragraphs: The sixth policy option would create certain tax advantages for  catastrophe bonds. Historically, catastrophe bonds have been created in  offshore jurisdictions where they are not subject to any income or any  other tax (i.e., in tax havens). This option would facilitate the creation of  onshore transactions, potentially reducing transactions costs and allowing  for increased regulatory oversight. Tax treatment of catastrophe bonds  would be similar to the treatment received by issuers of asset-backed or  mortgage-backed securities that, for example, are generally not subject to  tax on the income from underlying assets, which is passed on to investors.  More favorable tax treatment of catastrophe bonds would increase the  ability of insurance markets to access capital markets by making these  products more attractive to investors. Making catastrophe bonds more  attractive to issuers and investors could, in turn, make insurance and  reinsurance companies more willing to underwrite catastrophe risk and  increase the availability of coverage, because these companies could pass  on more catastrophe risk to investors.
One disadvantage of this option is that it is not clear how its  implementation would encourage premiums that fully reflect risk or how it  would encourage broad-based participation in catastrophe insurance  markets. It is also not clear how this option would be a cost-effective  solution for the federal government when both predisaster and postdisaster  costs are counted. Some reinsurers have pointed out that favorable tax  treatment of catastrophe bonds could be disadvantageous because it could  create a new class of reinsurer that would operate under regulatory and tax  advantages not afforded U.S. reinsurance companies. Finally, recent  catastrophe bond issuances by the two largest U.S. primary insurance  companies may indicate that catastrophe bonds do not need a different tax  treatment to make them economically viable. However, if market  transparency and the development of uniform terms and conditions do not  take place, only the largest insurers may be able to take advantage of  catastrophe bonds.
section_title: Property-Tax Assessment for Federal Reinsurance May Broaden Participation but May Be Costly for the Federal Government
paragraphs: The final policy option we examined was a state plan, funded by state  property taxes, that would require mandatory all-perils natural catastrophe  insurance coverage on residential property. All primary residential  properties in a state would be required to have catastrophe insurance  coverage. Participating insurers would assume the primary risk on the  property and would have reinsurance from a qualifying reinsurance  company. The state would pay an annual natural catastrophe insurance  premium financed by an annual property tax assessment on all residential  and commercial properties in the state, and homeowners could deduct the  cost from their federal taxes. The insurance coverage would be provided  by private insurance companies selected by a government administrator  who would qualify them as providers of catastrophe insurance. To ensure  that premiums were reasonable, the primary and reinsurance coverage  would require large deductibles that would be paid in layers by the  homeowner, the state, and the federal government. Homeowners would be  responsible for the first 10 percent of the value of the home, with a state  catastrophe fund paying the next layer of the deductible. The state would  provide a fixed-dollar deductible—for example, $100 million—for all  homeowners, with the federal government as the backstop provider, paying  a deductible that was a multiple of the amount that the state put up.
Proponents of this plan point out that it is market-based, designed to  involve the private sector, and if risk-based premiums are required is not a  “government relief program.” Plan supporters also point out that the option  protects the tax base of a state’s economy as well as the creditworthiness  of a state’s bond rating. One possible advantage of this policy option for the  consumer is that the premiums paid from property taxes are intended to be  tax deductible. Moreover, paying the premium from property taxes could  increase participation at the state level and create a broad-based program  that would limit adverse selection and moral hazard. Finally, maintaining  higher deductibles could result in lower insurance premiums.
However, this plan also has its disadvantages. Paying the premium from  homeowner property taxes collected by the state would reduce federal tax  revenues, and, if a disaster occurred, the federal government would have to  pay some portion of the deductible. Like the other tax-related options, this  option could reduce federal tax revenue if the new deduction were not  offset by savings from the elimination of preevent premium subsidies or  postevent disaster relief. As a result, it is not clear whether this option may  or may not be the most cost-effective for the federal government. Also,  using property taxes to pay insurance premiums might diminish the  effectiveness of using the price of insurance as a signal of the risk of living  in a particular location. One critic has argued that allowing homeowners to  deduct the premium portion of the property taxes combined with the  federal deductible could result in a double federal subsidy. Finally, this  policy option would raise homeowners property taxes, potentially creating  homeowner resistance to the assessment.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to NAIC for comment and provided  excerpts from the draft to Alabama Beach Pool, the CEA, FCIC, FHCF,  Florida Citizens, FHCF, the GUA, HUD, Louisiana Citizens, Mississippi  Windpool, the North Carolina Beach Plan, SBA, the South Carolina  Windpool, and the Texas Windpool. NAIC provided written comments that  are reprinted in appendix III. In these comments, NAIC officials said that  our draft report was thorough, and that they were pleased that we outlined  the advantages and disadvantages of several proposals rather than favoring  a single outcome. NAIC officials suggested that we also include in this  report two recently proposed options, including one that includes an  allocation system for determining what portion of hurricane damages  should be attributed to wind and what portion to flooding and the creation  of a federal entity to oversee property insurance rates in the coastal zone.  While there are interesting features to both options, they were too recent to  be included in our review and analysis. However, we will explore both  options during the course of our ongoing work involving NFIP.
NAIC officials also commented on the language in the draft report  discussing allegations made by some critics of state rate regulation who  suggest that state regulators may be suppressing rates for some  catastrophe insurers. As these officials pointed out, the allegations in this  report are attributed to others and are not presented as our position. We  recognize the challenges involved in ensuring that consumers are charged  appropriate premiums that reflect their risk of exposure to natural  catastrophes. Given that premium rates requested are based on a variety of  factors that involve a certain amount of judgment—including anticipated  losses on claims and related expenses; the need to build a surplus; and  other factors, including profit—the rate-setting process is open to  interpretation and some amount of negotiation. That is, reasonable but  different assumptions about the probability of future losses can result in  substantial disagreements about rates. However, if state regulators and the  insurance markets consistently have divergent opinions about the cost of  the risk exposures, the implications can be far-reaching. As we discuss in  this report, for state natural catastrophe insurance programs, if premium  rates determined by state insurance regulators consistently result in  financial resources that are inadequate to pay policyholder claims after a  disaster, postfunding mechanisms must be used to pay shortfalls.  Postfunding can result in costs to the private insurance market and may  mean that taxpayers in low-risk areas are subsidizing the costs of those  living in high-risk areas. Similarly, a pattern of regulator-approved rates for  private insurance companies that are consistently below what the market  believes to be the true risk rate may result in the withdrawal of healthy,  diversified insurance companies from the market. However, if premium  rates are set at a level reflecting the market’s perception of the true risk  rate, more competitors are likely to enter.
Alabama Beach Pool, the CEA, FCIC, FEMA, Florida Citizens, FHCF, the  GUA, Louisiana Citizens, Mississippi Windpool, the North Carolina Beach  Plan, SBA, the South Carolina Windpool, and the Texas Windpool provided  technical comments that we incorporated in this report as appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of the report until 30 days from the  date of this letter. At that time, we will provide copies to interested  congressional committees; the Chairman and Ranking Member of the  Senate Committee on Banking, Housing, and Urban Affairs; and the  Chairman of the House Committee on Financial Services. We will also  make copies available to others upon request. In addition, this report will  be available at no charge on the GAO Web site at http://www.gao.gov.
Please contact me at (202) 512-8678 or williamso@gao.gov if you or your  staff have any questions concerning this report. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. Key contributors to this report are listed in  appendix IV.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives in this report were to examine (1) the rationale and funding  of the federal and state programs that have supplemented, or substituted  for, private natural catastrophe insurance; (2) the extent to which  Americans living in areas of the United States that are at high risk for  natural catastrophes are uninsured and underinsured, and the types and  amounts of federal payments to such individuals since Hurricanes Katrina,  Rita, and Wilma; and (3) public policy options for revising the federal role  in natural catastrophe insurance markets.
We reviewed or analyzed documents on federal and state natural  catastrophe insurance programs, the numbers of uninsured and  underinsured and federal payments to them, options to redefine the federal  role in natural catastrophe insurance, and principles on which change  options can be based and evaluated. We interviewed officials from public  interest groups, insurance companies, reinsurance companies, insurance  brokers, insurance and reinsurance associations, insurance agents and  their associations, state catastrophe insurance plans, state insurance  departments, federal catastrophe insurance agencies, the Department of  Housing and Urban Development (HUD), the Small Business  Administration (SBA), Fannie Mae, Freddie Mac, rating agencies, a risk  modeling organization, academia, law firms, a hedge fund, a private  research organization, consumer groups, and others. To determine the  mechanisms governments use to supplement or substitute for private  catastrophe insurance markets, we collected oral and documentary  information from public and private officials in various states with high and  low catastrophe risk and in Washington, D.C. We sourced financial data for  government natural catastrophe insurance programs from financial  statements, bond offering documents, and other similar financial  documents.
To determine the number of uninsured and underinsured Americans and  payments made to such individuals after the 2005 hurricanes, we collected  information from states, examined federal agency data, interviewed federal  officials who prepared these data, sought information from the private  sector, and interviewed state officials responsible for disbursing federal  disaster funds. We focused our analysis on the federal disaster assistance  to homeowners and renters who lacked adequate insurance in the five Gulf  Coast states directly impacted by Hurricanes Katrina, Rita, and Wilma.  These five states are Alabama, Florida, Louisiana, Mississippi, and Texas.  Data on the numbers and amounts of money disbursed to the uninsured  and underinsured were incomplete and had a number of limitations. For  instance, because we often could not separate payments to homeowners  versus payments to renters, we generally included the entire amount in our  analysis. Also, we generally excluded administrative and other expenses  that federal disaster assistance programs incur in distributing assistance.  Our analysis was limited to the major federal disaster assistance programs  that we identified as providing relief to homeowners and renters. These  programs are the Federal Emergency Management Agency’s (FEMA)  Individuals and Households Program (IHP), SBA’s Disaster Loan Program  (DLP), and HUD’s Community Development Block Grant (CDBG) program.  Our identification of relevant federal disaster assistance programs may be  incomplete. Other federal agencies are involved in federal disaster  assistance according to the mission assignment issued and approved by  FEMA, as we reported separately in Disaster Relief: Governmentwide  Framework Needed to Collect and Consolidate Information to Report on  Billions in Federal Funding for the 2005 Gulf Coast Hurricanes, GAO-06- 834 (Washington, D.C.: Sept. 6, 2006).
To determine the amount of federal disaster assistance appropriated by  Congress to FEMA and the amount paid to homeowners and renters who  lacked adequate insurance through FEMA IHP, we obtained and analyzed  data provided by FEMA officials describing the funds obligated for the  subcategories of Housing Assistance, Other Needs Assistance, and  Manufactured Housing in Alabama, Florida, Louisiana, Mississippi, and  Texas following Hurricanes Katrina, Rita, and Wilma. In analyzing these  data, we had to make certain judgments in deciding which specific  subcategories of funds to include in our analysis. In particular, FEMA noted  that the Other Needs Assistance data contained funds for services that  would not be provided by personal property coverage in standard private  homeowners insurance, such as medical and funeral expenses. However,  we included Other Needs Assistance data in our analysis because these are  expenses that may have been covered by other types of insurance, such as  health and life, and, therefore, still provide a reasonable approximation of  insurance coverage. Also, FEMA officials noted that the Manufactured  Housing data included expenses that would not be included in additional  living expenses coverage provided by standard private homeowners  insurance. For example, other expenses included unit purchase,  haul/install, utilities, site lease, maintenance, deactivation, and the  transition out of service. We included these data in our analysis because  they are designed to serve a similar purpose as the additional living  expenses coverage provided by insurance companies. We assessed the  reliability of the data provided by agency officials by interviewing agency  officials knowledgeable about the data systems; obtaining oral responses  from the agency; and reviewing agency reports regarding (1) the agency’s  methods of data collection and quality control reviews, (2) practices and  controls over data entry accuracy, and (3) any limitations of the data. It is  possible that FEMA’s data analysis methodology is different from that  employed by the other agencies we reviewed. Nevertheless, we determined  that these data were sufficiently reliable for the purposes of our  engagement. Finally, we interviewed officials from FEMA Disaster  Assistance Directorate, which administers IHP, and reviewed the document  entitled Oversight of Gulf Coast Hurricane Recovery, A Semiannual  Report to Congress, October 1, 2006-March 31, 2007, by the President’s  Council on Integrity and Efficiency and the Executive Council on Integrity  and Efficiency.
To determine the amount of federal disaster assistance appropriated by  Congress to SBA and the amount paid to homeowners and renters who  lacked adequate insurance through SBA DLP, we reviewed the previously  mentioned document entitled Oversight of Gulf Coast Hurricane  Recovery, and interviewed agency officials. We obtained and analyzed data  provided by SBA that included, among other things, the amount of loan  funds approved net of other federal disaster assistance and insurance  proceeds to loan recipients. We multiplied this total by the subsidy rate of  the loans—14.64 percent in 2006. That is, for every $100 that SBA lends, the  cost to the federal government is $14.64. The subsidy rate is roughly the  percentage of loan principal that is not repaid as well as the difference  between the market interest rate and the rate charged by SBA. We believe  that subsidy cost is the most accurate representation of the amounts made  available and paid to homeowners and renters because the loans under  DLP must be repaid by recipients at a subsidized interest rate. We assessed  the reliability of the data provided by agency officials by interviewing  agency officials knowledgeable about the data systems and obtaining from  the agency written responses regarding (1) the agency’s methods of data  collection and quality control reviews, (2) practices and controls over data  entry accuracy, and (3) any limitations of the data. It is possible that SBA’s  data analysis methodology is inconsistent with that employed by the other  agencies we reviewed. Nevertheless, we determined that these data were  sufficiently reliable for the purposes of our engagement.
To determine the amount of federal disaster assistance appropriated and  paid to homeowners and renters who lacked adequate insurance through  the HUD CDBG program, we interviewed agency officials and reviewed the  previously mentioned document entitled Oversight of Gulf Coast  Hurricane Recovery. We obtained publicly available data from HUD and  each of the five Gulf Coast states that received emergency CDBG  appropriations. We reviewed GAO testimony on Gulf Coast rebuilding that  described the CDBG programs established in the Gulf Coast states.  Congress approved emergency appropriations for HUD CDBG in two  installments: $11.5 billion in December 2005 and $5.2 billion in June 2006,  for a total appropriation of $16.7 billion. Our goal was to determine what  portion of the total appropriation was intended for homeowners in the five  Gulf States. We made certain judgments in deciding whether particular  subcategories of funds applied to our calculations for each state. It is  possible that we did not identify all of the relevant funds.
For Florida, we used the Florida Department of Community Affairs, 2005  Disaster Recovery Initiative Action Plan (Apr. 14, 2006) and 2006 Disaster  Program Action Plan (Dec. 19, 2006). HUD designated for Florida $82.9  million of the original $11.5 billion included in the December 2005  emergency appropriation. Florida’s action plan calls for the funds to be  distributed through entitlement communities, nonentitlement  communities, and federally recognized Indian tribes. Grant recipients are  required to use at least 70 percent of the funds for the provision of  affordable housing. Therefore, approximately $58 million of the Florida  CDBG grants will be allocated to the provision of affordable housing. In  addition, the June 2006 emergency appropriation included $5.2 billion to  the CDBG program, and, on August 18, 2006, HUD made $100,066,518  available to Florida for repair, rehabilitation, and reconstruction of  affordable rental housing, and for the unmet needs of evacuees who were  forced from their homes and are now living in other states. The entire  amount has been made available for mitigation programs through the My  Safe Florida Home Program and other programs.
For Alabama, we interviewed officials from the Alabama Department of  Economic and Community Affairs (DECA). We obtained and analyzed  information from DECA officials regarding the plan for distribution of HUD  CDBG disaster recovery funds. We learned that DECA determined to make  $14,460,588 available for unmet housing needs. In addition, on August 18,  2006, HUD made $21,225,574 available to Alabama for repair, rehabilitation,  and reconstruction of affordable rental housing, and for the unmet needs of  evacuees who were forced from their homes and are now living in other  states. Of this amount, $16,964,296 has been made available for Disaster  Relief, Recovery and Restoration of Housing and Infrastructure, and  Affordable Rental Housing.
For Mississippi, we used the Mississippi Development Authority,  Homeowner Assistance Program Partial Action Plan (Mar. 31, 2006).  Mississippi’s partial action plan made $3 billion available for the  Homeowner Grant Assistance Program, which is for people who owned  homes located outside of the federally designated flood zone, yet still  suffered structural flood damage caused by Hurricane Katrina. In addition,  on August 18, 2006, HUD made $423,036,059 available to Mississippi for  repair, rehabilitation, and reconstruction of affordable rental housing, and  for the unmet needs of evacuees who were forced from their homes and are  now living in other states.
For Louisiana, we obtained the Louisiana Recovery Authority, The Road  Home Housing Programs, Action Plan for the Use of Disaster Recovery  Funds (May 11, 2006) and the Louisiana Recovery Authority, Proposed  Action Plan for the Use of Disaster Recovery Funds Allocated by P.L. 109- 234 (May 16, 2007). Louisiana made $3,551,600,000 available to the Road  Home Program, which is intended to help owner-occupants repair or  rebuild their homes, buy or build replacement homes, or sell unwanted  properties so that they can be redeveloped or converted to open space. In  addition, on July 11, 2006, HUD allocated $4.2 billion to Louisiana for the  Road Home Program. Louisiana designated $2,496,150,000 of this funding  as assistance to owner-occupants to compensate them for their hurricane  loss.
For Texas, we used the State of Texas Action Plan for CDBG Disaster  Recovery Grantees under the Department of Defense Appropriations Act,  2006 (Apr. 13, 2006, and May 9, 2006) and the Proposed Partial Texas Action  Plan for Disaster Recovery to Use Community Development Block Grant  (CDBG) Funding to Assist with the Recovery of Distressed Areas Related  to the Consequences of Hurricanes Katrina, Rita, and Wilma in the Gulf of  Mexico in 2005 (Dec. 15, 2006). Texas’ action plan made $38,938,268  available for its “Minimum Housing Need Allocation.” In addition, on  August 18, 2006, HUD made $428,671,849 available to Texas for repair,  rehabilitation, and reconstruction of affordable rental housing, and for the  unmet needs of evacuees who were forced from their homes and are now  living in other states. Of this amount, $305,238,257 has been made available  for a Homeowner Assistance Program, Sabine Pass Restoration Program,  and Rental Housing Stock Restoration Program.
We identified various options for altering the role of the federal government  in catastrophe insurance by looking at bills before the current and previous  Congresses as well as other change options that were not in current  legislative proposals—for example, a proposal before a committee of the  National Association of Insurance Commissioners (NAIC). We sought out  advantages of these options from their supporters and disadvantages from  critics. We also developed a four-goal framework, on the basis of challenges  faced by current government natural catastrophe insurance programs, to  analyze current options for an increased federal role in natural catastrophe  insurance. We developed these goals by drawing insights from the  following: past GAO work, legislative histories of laws that changed the  roles of state governments and the federal government after disasters, bills  before the current and previous Congresses, interviews with public and  private sector officials, and articles written by experts in insurance  economics. Although we identified numerous possible goals that could  assist our analysis, we believe the four goals we chose accurately capture  the essential concerns of the federal government. The scope of our work  covered hurricane and earthquake perils—we did not investigate tornado,  hail, or other perils. Also, we focused on the property and casualty  insurance line—especially homeowners insurance.
We did fieldwork in Alabama; California; Connecticut; Florida; Illinois;  Indiana; Louisiana; Massachusetts; Mississippi; Missouri; New Jersey; New  York; Ohio; Texas; and Washington, D.C. Our work was conducted between  March 2006 and October 2007 according to generally accepted government  auditing standards.
section_title: Selected State Natural Catastrophe Insurance Programs
paragraphs: State government natural catastrophe insurance programs, in most cases,  have been created after disasters because homeowners insurance coverage  for catastrophic events is often not available from private insurers at prices  deemed affordable by state legislators and insurance regulators. These  programs supplement or substitute for private natural catastrophe  insurance. For example, California created an earthquake fund in 1994  when private insurers stopped writing homeowner earthquake coverage  following the Northridge Earthquake. Likewise, Florida created Citizens  Property Insurance Corporation (Florida Citizens)—the largest home  insurer in Florida—to provide state-backed insurance coverage, including  for wind damage, for homeowners who cannot get coverage in the private  sector. State natural catastrophe insurance programs differ in their details,  including the percentage of homeowners covered, geographic locations  covered, coverage limits, deductible levels, how the premiums are  calculated, losses, and other details. The natural catastrophe insurance  programs in California, Florida, and other states are funded through a  combination of premium payments and postevent assessments and bonds.  Particularly in catastrophe-prone locations, government insurance  programs have tended not to charge premiums that reflect the actual risks  that homeowners face, resulting in financial deficits. After the 2005  hurricanes, for example, some of these state programs faced large  accumulated deficits and required substantial public funding to continue  operations. See figure 5 for a comparison of the features of selected state  natural catastrophe insurance programs, especially their losses, after the  2005 hurricanes. The text that follows figure 5 contains the most recent  information on the state programs.
subsections: section_title: California Earthquake Authority
subsections: section_title: Program Overview
paragraphs: The California Earthquake Authority (CEA) is an instrumentality of the  state that sells earthquake insurance policies for residential property  throughout California. Most standard homeowners insurance policies do  not cover earthquake damage.  However, California law requires insurers  that sell residential property insurance in California to offer earthquake  coverage to their policyholders every 2 years.  In offering earthquake  coverage, insurance companies can manage the risk themselves or they can  become a CEA-participating insurance company and offer the CEA’s  residential earthquake policies.  The CEA is managed by a Governing Board  composed of the Governor, Treasurer, and Insurance Commissioner. An 11- member Advisory Panel advises the board.
The base CEA policy, known as a “minipolicy,” is a reduced-coverage,  catastrophic earthquake insurance policy intended to protect a dwelling,  while excluding coverage for costly nonessential items, such as swimming  pools, patios, and detached structures.  Dwelling coverage will help pay to  repair or (up to the policy limit) replace an insured home when structural  damage exceeds the policy deductible. Coverage for fire is not included;  fire is covered in the companion homeowners insurance policy.  The  dwelling coverage limit is determined by the insured value of the home, as  stated on the companion homeowners insurance policy.  Personal property  coverage provides up to $5,000 to replace items, including furniture,  televisions, audio and video equipment, household appliances, bedding,  and clothing. Policyholders can increase their personal property  coverage to as much as $100,000. The CEA policy provides $1,500 of  Additional Living Expense coverage to pay for necessary increases in living  expenses incurred to maintain a normal standard of living. Policyholders  can increase that coverage to as much as $15,000. In addition to providing  funds for repairing or replacing a home, the CEA base policy includes an  additional $10,000 in Building Code Upgrade coverage. For policies that  renew or become effective on or after July 1, 2006, policyholders can  choose to increase Building Code Upgrade coverage by an additional  $10,000, for a total Building Code Upgrade coverage limit of $20,000. The  CEA policy offers two deductible options:  the standard base-limit  deductible of 15 percent of the policy of the total coverage or a 10 percent  deductible option. Damage to personal property is not covered, unless the  dwelling deductible is met. There is no deductible for Additional Living  Expense/Loss of Use coverage. CEA coverage is available to homeowners  only from the insurance company that provides their residential property  insurance and only if that company is a CEA-participating insurance  company.  Participating insurance companies process all CEA policy  applications, policy renewals, invoices, and payments and handle all CEA  claims.
section_title: CEA Was Created in the Wake of the Northridge Earthquake to Avoid Collapse of the Homeowners Insurance Market
paragraphs: The Northridge Earthquake jolted the San Fernando Valley in January 1994.  It caused 57 deaths and an estimated $49.3 billion in economic losses.  California insurers had collected only $3.4 billion in earthquake premiums  in the 25-year period prior to the Northridge Earthquake and paid out more  than $15 billion on Northridge claims alone. In January 1995, insurers  representing about 95 percent of the homeowners insurance market in  California began to limit their exposure to earthquakes by writing fewer or  no new homeowners insurance policies. This triggered a crisis that by mid- 1996 threatened the vitality of California’s housing market and stalled the  state’s recovery from recession. In 1995, California lawmakers passed a bill  that allowed insurers to offer a reduced-coverage earthquake insurance  policy that became the “minipolicy.” The CEA became operational in  December 1996.
subsections: section_title: CEA Premium Rates Are Required to Be Actuarially Sound
paragraphs: In determining premium rates, the CEA is required by law to use the best  science available and is expressly permitted by law to use earthquake  computer modeling, to establish actuarially sound rates. The CEA will  examine rating factors, such as the rating territory (determined by ZIP  code), age, and type of construction of a home, in determining the premium  rate. The CEA applies a 5 percent premium discount to dwellings that meet  the following requirements:  the dwelling was built before 1979, it is of a  wood-frame construction-type, the frame is tied to the foundation, it has  cripple walls braced with plywood or its equivalent, and the water heater is  secured to the building frame.  The CEA governing board establishes  premium rates, subject to the prior approval of the Insurance  Commissioner. The Governing Board voted to reduce the base policy rates  on July 1, 2006, by a statewide average of 22.1 percent resulting in a rate  reduction for approximately 85 percent of CEA policyholders. The CEA  says that a sharp drop in the cost of reinsurance and several years without  a major earthquake, allowing CEA insurers to build up reserves, made the  cut possible. While consumer advocates support the cut, some industry  experts fear that the lower rates could make the CEA financially vulnerable  in the event of a major earthquake.
section_title: CEA Accumulates Surplus When Premiums Exceed Claims Paid
paragraphs: No state funds and no public money are used to finance the CEA. The CEA  is funded from policyholder premiums, contributions from and  assessments on participating insurers, returns on invested funds, borrowed  funds, and reinsurance. Assessments on participating insurers may not be  directly passed through to policyholders. The CEA is authorized to issue  bonds, and may not cease to exist so long as its bonds are outstanding. As  of January 2006, the CEA had a projected total claims-paying capacity of  $7.8 billion, but if an earthquake causes insured damage greater that the  CEA’s claims-paying capacity, then policyholders affected will be paid a  prorated portion of their covered losses. The surplus of the CEA increases  each year in which there is no major event.
section_title: Participation in the CEA Is Relatively Low
paragraphs: The CEA is one of the world’s largest residential earthquake insurers, with  about 755,000 policies and $501.4 million in premiums in 2006. The CEA  states that over 8 million households in California have homeowners  insurance, and that about 12 percent of these households have earthquake  insurance. The CEA states that there would not be enough capacity to  support 100 percent participation in the program. There are insurance  companies that offer only earthquake coverage and do not write  homeowners insurance. Such companies physically select the properties  that they will insure. Private insurers accounted for about 30 percent of the  earthquake insurance market in California in 2005.
section_title: Florida Citizens Property Insurance Corporation
subsections: section_title: Program Overview
paragraphs: Citizens Property Insurance Corporation (Florida Citizens) is a not-for- profit and tax-exempt government entity that provides property insurance  for personal, commercial residential, and commercial nonresidential  properties when private insurance is unavailable or, in the case of  residential insurance, unaffordable. Florida Citizens maintains three  accounts: (1) the high-risk account (HRA) provides personal and  commercial multiperil and wind-only coverage in certain high-risk coastal  areas (“HRA areas”); (2) the personal lines account (PLA) offers personal  residential multiperil policies outside of the HRA areas, and ex-wind  policies for residential properties inside of the HRA areas; and (3) the  commercial lines account (CLA) offers commercial residential and  commercial nonresidential multiperil policies outside of the HRA areas,  and ex-wind policies inside of the HRA areas. Florida law requires Citizens  to maintain the separate accounts until the retirement of bonds issued by  Citizens’ predecessors prior to Citizens’ formation. Since these predecessor  bonds have been retired, the separate accounts may be combined, but  Citizens has made no decision to do so.
Policies are sold by independent insurance agents, who receive 6 to  8 percent commissions for residential policies and 7 to 12 percent  commission for commercial policies. Underwriting standards are  somewhat limited, as the company is intended to be an insurer of last  resort. Hurricane deductibles are offered at $500, 2 percent, 5 percent, and  10 percent for personal lines multiperil policies and at $500, 2 percent,   3 percent, 4 percent, 5 percent, and 10 percent for personal lines wind-only  policies. All-other-peril deductibles are $500, $1,000, and $2,500. Coverage  limits for homeowners policies must be at least equal to 100 percent of the  estimated replacement value. Florida Citizens offers premium discounts up  to 45 percent to homeowners who take qualifying mitigation measures.  Florida Citizens imposes a surcharge on older homes that reaches a  maximum of 20 percent for homes over 40 years old, while policyholders  with newer homes can receive a premium credit of up to 10 percent.
section_title: Florida Citizens Was Created to Consolidate Separate Residual Market Mechanisms and Achieve Tax-Exempt Status to Lower Costs
paragraphs: Florida Citizens was established in 2002 after two separate insurance  pools, known as the Florida Windstorm Underwriting Association (FWUA)  and the Florida Residential Property and Casualty Joint Underwriting  Association (JUA) were combined. The FWUA was created by statute in  1970 to provide high-risk, windstorm and hail residual market coverage in  selected areas of Florida. Florida Citizens’ HRA assumed the debt and  obligations of the FWUA. The JUA was created in December 1992, in the  wake of the capacity crisis following Hurricane Andrew, to provide residual  market residential-property multiperil insurance coverage, excluding wind  if the property was within FWUA-eligible areas. Florida Citizens’ PLA and  CLA assumed the debt and obligations of the JUA. A primary driver for the  merger was that the combined entity obtained federally tax-exempt status,  thus saving federal income taxes that otherwise would have been paid by  the FWUA and the JUA. In addition, as a tax-exempt entity, Florida Citizens  is able to issue lower coupon tax-free bonds postevent, as well as taxable  preevent bonds. The merger also resulted in some overhead cost savings by  having a single organization.
section_title: Florida Citizens Premium Rates Are Required to Be Actuarially Sound, but Are Subject to Legislative Change
paragraphs: Until recently, Florida Citizens’ premium rates were required to be  noncompetitive with the voluntary market, using a formula that determined  rates on a county-by-county basis, on the basis of the highest rate offered in  the voluntary market among the state’s top 20 insurers writing in that area.  Then, as part of legislation passed in May 2006, Florida Citizens’ rates were  required to be high enough to purchase reinsurance to cover 1-in-100-year  hurricane probable maximum loss in the PLA and 1-in-70-year hurricane  probable maximum loss in the CLA. Finally, in January 2007, legislation  was passed that eliminated both of these requirements and required that  Florida Citizens’ rates be actuarially sound and not excessive, inadequate,  or unfairly discriminatory. In addition, the legislation rescinded a rate  increase that took effect on January 1, 2007; froze 2007 rates at the  December 31, 2006, rate level; and required Florida Citizens to make a new  rate filing to be effective January 1, 2009.
section_title: In the Event that Florida Citizens Has Losses That Exceed Surplus, It Can Levy Assessments to Recover the Deficit
paragraphs: Storms in 2004 and 2005 resulted in more than $30 billion in insured  damage in Florida. Florida Citizens sustained deficits of $515 million in  2004 and $1.8 billion in 2005. To fund its deficit, Florida Citizens is required  by statute to assess admitted insurers in proportion to the amount of  property and casualty insurance business (except for workers’  compensation or accident and health) they write in Florida, and also to  assess its own policyholders and surplus lines policyholders. The admitted  insurers have the ability to recoup regular assessments from their  policyholders upon renewal of a policy or issuance of a new policy. If the  amount of the deficit exceeds the amount Florida Citizens can collect as a  regular assessment, it is required to levy emergency assessments on its  own policyholders, on surplus lines policyholders, and on the policyholders  of admitted insurers. Admitted insurers collect emergency assessments  from their policyholders and remit the collections to Citizens.
To fund its 2004 deficit, Florida Citizens assessed insurance companies and  surplus lines insureds over $515 million in regular assessments. To fund the  2005 deficit of approximately $1.8 billion, the Florida Legislature  appropriated $715 million from the Florida general revenue fund, which  reduced the size of the regular assessment from $878 million to   $163 million. The regular assessment imposed to fund the 2005 deficit was  reduced from an estimated 11.2 percent to 2.07 percent due to the infusion  of general revenue funds. The Florida Legislature also directed Florida  Citizens to amortize the collection of the emergency assessment for the  remaining $888 million deficit over a 10-year period, resulting in a   1.4 percent emergency assessment levied beginning in June 2007.
Florida Citizens’ resources also come from its reinsurance arrangement  with the Florida Hurricane Catastrophe Fund (FHCF). In 2006, the FHCF  provided coverage for Florida Citizens for 90 percent of $4 billion in losses  above its deductible. As a tax-exempt entity, Florida Citizens is able to  issue tax-exempt postevent bonds as well as taxable preevent bonds. The  tax-exempt status is beneficial because in the event of a major disaster,  Florida Citizens can finance loss payment by issuing bonds that carry low  interest rates, thereby reducing financing costs over the years by hundreds  of millions of dollars. In June 2006, Florida Citizens completed a $3.05  billion taxable pre-event bond sale. In February 2007, Florida Citizens  closed a $1 billion tax-exempt postevent bond issuance. In June 2007,  Citizens completed a $1.95 billion preevent financing plan consisting of a   $1 billion line of credit and $950 million in bonds. Under its enabling  statute, Florida Citizens is a government entity and not a private insurance  company. As long as Florida Citizens has bonds outstanding, it may not file  a voluntary petition under Chapter 9 of the Federal Bankruptcy Code.
section_title: Florida Citizens Has Had Moderate Growth in All but 2 Years, Partially Due to Depopulation Incentives
paragraphs: Except for 2 years, Florida Citizens’ growth has been relatively moderate  given the market dynamics. Since its establishment in 2002, when it had  658,085 policies, the policy count has increased to 1.38 million policies-in- force as of September 30, 2007. Over this 5-year period, there has been  nominal growth in Citizens’ formerly wind-only HRA of 10 percent. Most of  the growth of Florida Citizens has been in its PLA and has been caused by  the following factors: (1) the private market pulling back following eight  hurricane events in 2004 and 2005, (2) private insurers’ curtailing coverage  in sinkhole parts of the state, and (3) the July 2006 assumption by Florida  Citizens of approximately 300,000 policies following the insolvency of a  private insurer. Aside from 2006, the only other significant policy increase  occurred in 2003, a 25 percent increase. By comparison, total policies grew  by only 7 percent in 2004, decreased by 7 percent in 2005, and grew by   7 percent for the first 9 months of 2007—all net of depopulation activities.
Prior to 2007, part of Florida Citizens’ lower growth rate was the result of  incentives to private insurers to take policies out of Citizens, also known as  depopulation incentives. Florida Citizens had the authority to pay insurers  a take-out bonus of up to 12.5 percent of premiums removed from the HRA.  The incentive program required that a minimum of 25,000 policies or a total  insured value of at least $5 billion be removed. Insurers could earn higher  bonuses, up to 10 percent, for assuming more than the minimum. They  were required to retain the policies for either 3 or 5 years. Take-out  incentives were eliminated in 2007. Nonetheless, through August 31, 2007,  131,000 policies have been removed without incentives.
section_title: Louisiana Citizens Property Insurance Corporation
subsections: section_title: Program Overview
paragraphs: The Louisiana Citizens Property Insurance Corporation (Louisiana  Citizens) is a nonprofit, tax-exempt entity that acts as a market of last  resort for residential and commercial property insurance in Louisiana.  Louisiana Citizens is modeled on a similar Citizens Plan created in Florida.
Louisiana Citizens was specifically organized to operate the state's Coastal  Plan and Fair Access to Insurance Requirements (FAIR) Plan. The Coastal  Plan offers coverage in coastal areas of the state. The FAIR Plan offers  coverage in the rest of the state. Louisiana Citizens offers coverage for fire,  vandalism, windstorm, hail, and homeowners. Residential policy limits are  up to $750,000 for property, and up to $375,000 for contents. Policy  deductibles are offered at various levels, with 2 and 5 percent offered for  wind/hail coverage. Underwriting standards are somewhat limited since  the company is intended to be an insurer of last resort. A 15-member  governing board supervises company operations. The company has very  limited infrastructure in place, as it maintains an administrative services  contract with the Property Insurance Association of Louisiana, a nonprofit  organization of licensed insurance carriers in the state. The company also  entered into agreements for underwriting, policy management, and claims  management services with three service providers.
section_title: Louisiana Citizens Was Created to Change Assessment Structure of Residual Market Mechanisms
paragraphs: Louisiana created the Louisiana Joint Reinsurance Plan (the predecessor to  the FAIR Plan) in 1968 to provide a residual market for property insurance  in inner cities within the state in response to damage caused by civil unrest.  The state created the Louisiana Insurance Underwriting Plan (the  predecessor to the Coastal Plan) in 1970 to provide a residual market for  property insurance in coastal areas of the state in response to damage  caused by Hurricane Camille. All insurers licensed to write property  insurance in the state were required to participate in the predecessor  insurance plans. Property losses caused by hailstorms, Hurricane Lili, and  Tropical Storm Isidore resulted in assessments against the participating  insurers that were not recoverable from policyholders. The insurers  became reluctant to write insurance in the state. The legislation creating  Louisiana Citizens gave participating insurers the ability to recoup a regular  assessment from policyholders and gave Louisiana Citizens the ability to  impose emergency assessments directly on policyholders.
section_title: Citizens Rates Are Not Competitive with the Private Market and Necessitated Postfunding
paragraphs: Louisiana Citizens premium rates are required to be actuarially sound.  Premium rates are not intended to be competitive with the private market  and are set at least 10 percent above the average rate of the insurer that had  the highest rate of the top 10 insurers by parish, provided they make up at  least 3 percent of the market. In 2005, Louisiana Citizens suffered more  than $1 billion in losses from Hurricanes Katrina and Rita, with the vast  majority of the losses in the FAIR Plan. Citizens had not built up sufficient  reserves to meet its obligations. It had only $80 million in cash reserves and  tapped into its reinsurance for an additional $295 million. In October 2005,  because there was still a deficit, Citizens assessed all property insurance  companies in the state a one-time regular assessment of a maximum  amount of 15 percent of premium: 10 percent for the FAIR Plan and 5  percent for the Coastal Plan. Insurers recoup the amount of their regular  assessments from their policyholders in the subsequent year. The regular  assessment following the 2005 hurricanes generated approximately $200  million for Louisiana Citizens. Because a deficit situation still existed after  the regular assessment was levied, Citizens was authorized by law to issue  bonds. In December of 2006, Citizens received approval from the State  Bond Commission to issue up to $1.4 billion of tax-exempt revenue bonds.  The actual bond issue in April 2006 was for approximately $978 million.  The bond offering will be financed by an emergency assessment on  policyholders that is estimated to be about 5 to 6 percent of insurance  premiums per year for as many years as needed to cover the plan deficit.
section_title: Mississippi Windstorm Underwriting Association
subsections: section_title: Program Overview
paragraphs: The Mississippi Windstorm Underwriting Association (Mississippi  Windpool) is a nonprofit association of all insurance companies writing  property insurance in Mississippi on a direct basis. It was established by  the legislature to provide an adequate market for windstorm and hail  insurance in the six coastal counties of Mississippi. The maximum  coverage available for residential coverage is $1 million for the dwelling  and $250,000 for contents. The policy contains a “named storm” deductible  of 2 percent of the insured value of the home with a $500 minimum or, if  coverage exceeds $500,000, a $1,000 minimum. Any structure built after  June 1, 1987, in an area that has not adopted the standard building code  must produce proof that the structure is built in substantial accordance  with the code. Otherwise, it is not insurable by the Mississippi Windpool.  Policies can be sold by any approved insurer, and agents receive a   15 percent commission on new business and a 10 percent commission on  renewals.
section_title: Mississippi Windpool Was Created in the Wake of Insurance Crisis Following Hurricane Camille
paragraphs: The Mississippi Insurance Underwriting Association (MIUA), the  predecessor to the Mississippi Windpool, was created by the Mississippi  Legislature in 1970 as the state struggled to recover from Hurricane Camille  in 1969. The MIUA provided fire and windstorm coverage in the six coastal  counties of the state, and its basic purpose was to enable individuals to  secure a mortgage since there was no private market for fire and wind  coverage. In 1987, the legislature found that the market for fire coverage  had recovered, but there remained the need for residual windstorm  coverage. Thus, the legislature created the Mississippi Windpool.
section_title: Mississippi Windpool Premium Rates Are Significantly Less Than Requested
paragraphs: Mississippi Windpool premium rates are required to be nondiscriminatory  as to the same class of risk, and are subject to the approval of the state  insurance commissioner. Prior to 2007, in light of agent commissions and  the servicing carrier agreement, the Mississippi Windpool recovered just  over 75 percent of premium payment on new business and about 82 percent  of premium payment on renewals. The Mississippi Windpool used most of  the premium to buy reinsurance. In 2004, the Windpool sought to raise  premium rates by 76 percent, but the insurance commissioner approved a  22 percent increase. In April 2006, the Mississippi Windpool sought  approval of a 397.8 percent rate increase for residential coverage. Much of  the increase was needed to buy adequate reinsurance, which cost the  Mississippi Windpool about $0.65 to $0.70 per dollar of reinsurance. The  state insurance commissioner granted a 90 percent increase. To defray the  cost of reinsurance for the Mississippi Windpool, the state requested that  HUD allow it to allocate up to $50 million in CDBG funds. HUD gave the  state permission to use $30 million in 2006 and $20 million in 2007 for the  Mississippi Windpool reinsurance. In 2007, the State Legislature created the  Mississippi Windstorm Underwriting Association Reinsurance Assistance  Fund for the purpose of defraying the cost of Mississippi Windpool  reinsurance. The fund will be financed using state tax dollars and may be  used only by the state insurance department upon appropriation by the  State Legislature. The Mississippi Windpool was also granted authority to  issue bonds and other debt instruments.
section_title: Catastrophic Mississippi Windpool Losses Are Borne by Participating Insurers
paragraphs: Following Hurricane Katrina, the Mississippi Windpool suffered about   $720 million in losses. It received loss claims from every policyholder,  about 18,000 total. About 700 to 800 policyholders did not meet their  deductible, but the vast majority of claims resulted in payment. Prior to  2007, the Mississippi Windpool did not retain profits, if any, at year-end, but  distributed them to participating insurers. The Mississippi Windpool did  not have adequate reinsurance and capital to cover their losses in Katrina,  and assessed participating insurers $525 million, on the basis of their level  of participation in the state property insurance market. About   400 companies were participating in the Mississippi Windpool at the time.  Each could reduce their assessment liability by $1.40 for every $1.00 of  voluntarily written premium for property insurance in the coastal area.  This credited amount came out of the second 90 percent of the assessment;  all members were responsible for the first 10 percent of the assessment. No  company completely wrote themselves out of the Katrina assessment, and  some companies incurred greater direct losses than their assessment.  However, some companies were assessed more than their entire direct  written premium received in the state. Legislation passed in 2007 requires  the state insurance commissioner to levy a surcharge on all property  insurance premiums in the state to recover within 1 year the amount of the  regular assessment for reimbursement to assessable insurers who paid the  regular assessment.
section_title: Texas Windstorm Insurance Association
subsections: section_title: Program Overview
paragraphs: The Texas Windstorm Insurance Association (Texas Windpool) offers  windstorm and hail coverage for residential and commercial properties in  14 coastal counties and parts of Harris County (but not Houston). About   25 percent of the state’s population lives along the coast. The membership  of the Texas Windpool includes every property insurer licensed to write  property insurance in the state. Each company’s percentage of  participation is based on their statewide sales. The Texas Windpool is  governed by a nine-member board of directors. Coverage limits are  adjusted annually to reflect inflation. Effective January 1, 2007, residential  coverage for a dwelling and its contents is capped at $1.597 million.  Policies include coverage for wind-driven rain, loss of use, and  consequential losses. Since 2004, the Texas Windpool has required that  residential properties that it insures conform to the International  Residential Code. However, under certain conditions, the Texas Windpool  will insure homes built before 1988 that were not built according to any  recognized building code. Policies are sold by individual licensed agents  who receive 16 percent of gross written premium as commission.
section_title: Texas Windpool Was Created Due to Insurance Crisis Following Hurricane Celia
paragraphs: Hurricane Celia struck the Texas coast in August 1970 and caused an  estimated $310 million in insured losses ($1.55 billion in 2005 dollars).  Many insurers decided to stop writing business in the state’s coastal  communities. In response, the State Legislature created the Texas  Catastrophe Property Insurance Association (predecessor to the Texas  Windpool) in 1971.
section_title: Texas Windpool Premium Rates Are Less Than Requested
paragraphs: The Texas Windpool must file all rates with the state insurance  commissioner for approval. The commissioner assesses whether the rates  are reasonable, adequate, not unfairly discriminatory, and nonconfiscatory  as to any class of insurer. Approved rates must be uniform throughout the  14 coastal counties. By law, the Texas Windpool residential premium rates  may not increase by more than 10 percent above the rate for  noncommercial windstorm or hail insurance in effect at the time of filing,  but the insurance commissioner may suspend this rule after a catastrophe  or series of catastrophes to ensure rate adequacy in the catastrophe area.  In May 2006, the Texas Windpool sought a 19 percent residential and   24 percent commercial rate increase. The insurance commissioner  approved a 3.1 percent residential and 8 percent rate increase. Again, in  November 2006, the Texas Windpool sought a 20 percent residential and   22 percent commercial rate increase. The insurance commissioner  approved a rate increase of 4.2 percent for residential policies and   3.7 percent for commercial policies.
section_title: Texas Windpool Claims- Paying Capacity Mixes Industry Assessments and Reserves
paragraphs: The Texas Windpool is authorized to assess participating insurers for  excess losses. In addition, the State Legislature created the Catastrophe  Reserve Trust Fund, into which Texas Windpool profits are deposited,  rather than distributed to participating insurers. Under the plan, companies  are assessed the first $100 million losses in excess of the Texas Windpool’s  premiums and other income. Losses in excess of this amount are funded by  private reinsurance and the trust fund. An additional $200 million  assessment can be levied if private reinsurance and the trust fund are  inadequate to cover losses. In March 2006, the Texas Windpool had the  ability to fund $1.3 billion in excess losses based on a combination of  assessments, reinsurance, and other means. Losses in excess of $1.3 billion  are funded through further industry assessments. An insurer may credit the  amount paid under this top-layer assessment against its premium tax.  Hurricane Rita produced estimated losses of between $160 million and  $165 million for the Texas Windpool. The payment of some 11,506  Hurricane Rita claims in 2005 resulted in a deficit and a $100 million  assessment on insurance companies. The pool grew from almost 69,000  policyholders at the end of 2001 to about 207,000 at the end of September  2007. Texas Windpool liability, or exposure to loss, was about $56 billion as  of the end of September 2007.
section_title: Alabama Insurance Underwriting Association
subsections: section_title: Program Overview
paragraphs: Alabama Insurance Underwriting Association (Alabama Beach Pool) is a  voluntary unincorporated nonprofit association established to provide  essential residential and commercial insurance coverage to the beach area  counties of Baldwin and Mobile. Twelve percent of Alabamans live on the  coast. Every licensed property insurer in the state is a member of the  Alabama Beach Pool. The Beach Pool offers two types of policies: fire and  extended coverage, and wind and hail. The Beach Pool offers coverage  limits on residential buildings up to a maximum of $500,000, combined  dwelling and contents. A hurricane deductible of 5 percent ($1,000  minimum) is applicable in the event of a named storm. Policies covering  property located in certain areas may opt for a 2 percent hurricane  deductible for an additional premium. The standard deductible for all other  perils is $500. Buildings must conform to the Southern Standard Building  Code for the Alabama Beach Pool to provide coverage. Any insurance  agent licensed in Alabama can sell Beach Pool policies and receive an   8 percent commission. The Beach Pool is managed by a board of directors.
section_title: Alabama Beach Pool Was Created Due to Insurance Crisis Following Hurricane Camille
paragraphs: The Alabama Beach Pool was created in the aftermath of Hurricane  Camille in 1969. Insurance companies operating in Alabama voluntarily  agreed to join the association at the behest of the state insurance  commissioner. The Beach Pool was not created by the State Legislature,  but is subject to regulation by the Alabama Department of Insurance.
section_title: Alabama Beach Pool Premium Rates Have Been Subject to Political Pressure
paragraphs: The Alabama Beach Pool and other insurers operating in the state must file  premium rate change requests with the Alabama Department of Insurance.  Alabama is a “prior approval” state, meaning that insurers must either  allow a waiting period to expire or receive approval from the insurance  department prior to using those rates in pricing insurance coverage.  Insurance company officials told us that they are not always able to get  their requested rates, and that Alabama Beach Pool rates are too low. Prior  to Hurricane Katrina, the state insurance department conducted a study  comparing Beach Pool premium rates with rates charged by state-run  coastal insurance programs in Florida and Mississippi. The study showed  that Alabama Beach Pool rates were higher than the Florida and  Mississippi programs. The State Legislature put pressure on the insurance  department to lower Beach Pool rates. In the wake of Hurricane Katrina,  however, coastal insurance rates in Florida and Mississippi are higher than  in Alabama.
section_title: Alabama Insurers May Not Pass-Through Alabama Beach Pool Assessments to Policyholders
paragraphs: The Alabama Beach Pool is authorized to make assessments upon all  member insurers. The calculation of the assessment is based on the  member’s proportion of net direct premiums of property insurance in the  state. Members can receive annual credit against assessments for property  insurance voluntarily written in the coastal area. In the event of  catastrophe loss requiring assessment, a first partial loss assessment will  be limited to not exceed $2 million per member insurer. Members may not  pass-through assessments to policyholders. The Beach Pool currently has  about 8,500 policies, insuring about $1.5 billion in property.
section_title: Georgia Underwriting Association
subsections: section_title: Program Overview
paragraphs: The Georgia Underwriting Association (GUA) was created by insurance  companies licensed to write property insurance in Georgia to administer  the state FAIR Plan. The plan insures homeowners throughout the state  who have not been able to find certain types of insurance coverage in the  voluntary market, and also coverage against windstorm and hail damage in  coastal counties and off-shore islands. The coverage limit for any one  building, including the dwelling and its contents, for windstorm and hail  coverage is $2 million. The deductible for windstorm and hail coverage is at  least 1 percent, subject to a minimum of $500. Any structure in the  windstorm and hail area that is less than 10 years old and not built in  compliance with the Southern Standard Building Code or its equivalent is  not eligible for coverage. Replacement cost and loss of use coverage are  available as supplemental coverage. Homeowners may apply for GUA  coverage directly or through a state-licensed insurance agent. Agents  receive a commission of 10 percent of the premium. Premium rates either  may be approved by the state insurance commissioner and must not be  excessive, inadequate, or unfairly discriminatory or may be advisory rates  and premiums from the Insurance Services Office, Inc. The average  premium for coverage is about $590. The GUA maintains reinsurance of  $100 million in excess of $50 million, and a second-event limit covers a  second loss greater than $25 million. The GUA is authorized to assess  member insurers for program losses in proportion to each member’s  property insurance premiums written during the most recent calendar year.  Member assessments may not be passed-through to policyholders. Member  insurers also share in program profits. In June 2006, the GUA had 26,882  policies in-force, of which 7,136 policies were on the coast. The exposure  statewide as of June 2006 was $3.2 billion, of which $1.3 billion was coastal  exposure.
section_title: South Carolina Wind and Hail Underwriting Association
subsections: section_title: Program Overview
paragraphs: The South Carolina General Assembly authorized the creation of the South  Carolina Wind and Hail Underwriting Association (South Carolina  Windpool) in 1971. All admitted property and casualty companies licensed  by the South Carolina Department of Insurance are members of and are  required to participate in the South Carolina Windpool. The Windpool  provides wind and hail coverage in the coastal areas of the state, which are  specifically designated by statute. The state director of insurance recently  expanded the territory eligible for Windpool coverage and divided the  territory into two zones. Insurance companies writing policies in the  defined territory may either offer wind coverage or exclude wind coverage  (for a reduced premium). If an insurer excludes wind coverage, that  coverage may be written by the South Carolina Windpool (for an additional  premium). Cover limits for one-to-four family dwellings, including mobile  homes and condominiums, is $1.3 million. Items that are specifically  excluded from coverage include property over water and wind-driven rain.  South Carolina Windpool policies are actual cash value contracts. Primary  residences are eligible to purchase replacement cost coverage. The  standard building/contents deductible is 3 percent of the policy limit in  zone 1 with a minimum deductible of 2 percent in zone 2. Loss of use  coverage is subject to a time deductible that is based on the underlying  building/contents deductible. Policies may be sold by any insurance  producer or broker licensed by the state. Premium rates must be approved  by the state director of insurance. Premium rate increases or decreases of   7 percent may take effect on a file-and-use basis; rate increases or  decreases of more than 7 percent are subject to prior approval. In 2005, the  average premium per residential policy for the South Carolina Windpool  was $1,385. In 2007, the State Legislature required the Windpool to ensure  rate adequacy so as to permit it to be self-sustaining. The South Carolina  Windpool is authorized to assess member insurers to cover program losses.  Insurers may pass through assessments to policyholders through future  rate filings. In June 2007, the State Legislature authorized the South  Carolina Windpool to sell bonds and incur debt. The South Carolina  Windpool had 36,196 residential policies in-force as of September 30, 2007,  compared with 16,430 residential policies in-force in 2001. Windpool  exposure was almost $13.735 billion as of September 30, 2007.
section_title: North Carolina Insurance Underwriting Association
subsections: section_title: Program Overview
paragraphs: The North Carolina Insurance Underwriting Association (North Carolina  Beach Plan) was created in 1969 to provide insurance coverage to people  not able to buy it through the standard insurance market only on the barrier  islands adjacent to the Atlantic Ocean. In 1998, the North Carolina General  Assembly expanded the Beach Plan to include the state’s 18 coastal  counties for windstorm and hail only coverage. A 14-member board of  directors acts as the North Carolina Beach Plan policymaking body. All  property and casualty insurance companies that do business in North  Carolina participate in funding the plan. The North Carolina Beach Plan  provides Basic coverage, which includes most major perils, and broad  coverage, which includes a broader array of perils. Coverage limits are up  to $1.5 million on private dwellings. Coverage is provided on an actual cash  value basis or replacement cost if certain specific criteria are met. Policies  meeting plan criteria are continuous 1 year policies if premiums are paid.  Underwriting standards are somewhat basic since the North Carolina  Beach Plan is intended to be an insurer of last resort. North Carolina Beach  Plan premium rates must be filed with the state insurance commissioner by  the North Carolina Rate Bureau for approval prior to their use. In 2007,  homeowner rates were raised by an average of 25 percent for beach and  coastal areas. Homeowners wind-only policies were increased 25 percent  for beach areas and 38 percent for the coastal areas. In 2006, dwelling  extended coverage rates were increased about 25 percent. For commercial  property maximum coverage limits are $3 million (combined building and  contents) and $300,000 for business income. The Beach Plan adopts  Insurance Services Office commercial loss cost filings approved by the  state insurance commissioner. All member insurers share in North Carolina  Beach Plan expenses, profits, and losses in proportion to their property  insurance net direct premium written in the state. Member insurers can  receive credit against expenses, profits, and losses for property insurance  voluntarily written in the beach and coastal areas. The North Carolina  Beach Plan has a “take out” program within its plan of operation; however,  to date, this program has not been initiated. As of fiscal year end   September 30, 2007, the Beach Plan had over 162,000 policies in-force with  an exposure of $64.1 billion, compared with about 88,000 policies and an  exposure of $28.9 billion at the end of fiscal year 2004.
section_title: Florida Hurricane Catastrophe Fund
subsections: section_title: Program Overview
paragraphs: The goal of the FHCF has been to provide a cost-effective source of  reinsurance to residential property insurers in the state. It is structured as a  tax-exempt state trust fund under the direction and control of the State  Board of Administration of Florida (State Board). The State Board is a  constitutional entity of Florida state government. It is governed by a Board  of Trustees composed of the Governor, Chief Financial Officer, and  Attorney General. The State Board appoints a nine-member advisory  council to provide the State Board with information and advice with its  administration of the FHCF. The management and day-to-day operations of  the FHCF is the responsibility of the Senior Officer. The Senior Officer  currently manages eight professional staff. Paragon Strategic Solutions,  Inc. is the FHCF administrator as well as the actuarial consultant to the  State Board.
The FHCF collects premiums from and provides reimbursements to  insurers writing residential property and casualty insurance policies within  the state. As a condition of doing business in Florida, each insurer writing  “covered policies” is required to contract with the FHCF. “Covered  policies” means any insurance policy covering residential property in the  state that provides wind or hurricane coverage. This includes any such  policy written by Florida Citizens. A limited exemption is available for  insurance companies with less than $10 million in covered exposure (not  premium). The FHCF is obligated, pursuant to reimbursement contracts, to  reimburse participating insurers for a specified percentage of qualifying  losses on the basis of selected coverage (45, 75, or 90 percent) in excess of  loss retention thresholds (or deductibles). Nearly 85 percent of insurers  selected the 90 percent coverage option for fiscal year 2005-2006   (July 1, 2005 through June 30, 2006). There were 205 insurance companies  that contracted with the FHCF during that period.
The aggregate industry deductible is set by law at $4.5 billion to be adjusted  to reflect increased exposure to the FHCF. Currently, the aggregate  deductible is $6.089 billion for the contract year ending May 31, 2007. An  individual insurer’s deductible is based on an insurer’s pro rata share of  reimbursement premium due for a contract year and other factors. An  insurer’s full deductible shall apply to each of the insurer’s largest two  hurricanes. The insurer’s full deductible would then be adjusted to one  third for any other hurricanes occurring during the contract year.
The insured value of property reinsured by the FHCF in contract year   2007 is estimated to be approximately $2 trillion. The FHCF’s claims-paying  capacity in a contract year is set by law, and legislation passed in early   2007 will increase capacity from $15 to $38.4 billion. Due to actual coverage  selected, the resulting capacity was $27.83 billion. The FHCF’s multiyear  claims-paying capacity is over $50 billion. The cap on capacity represents  the limited liability of the FHCF—it is not obligated by contract if losses in  a given contract year exceed claims-paying capacity. In contract years  where there is growth in the FHCF’s cash balance, the capacity is allowed  to increase to the lesser of the growth in the cash balance or the growth in  the reported insured property values.
The projected payout for a participating company is set as a pro rata share  of the FHCF’s annual capacity. Prior to reimbursement, an insurer’s loss  reports are examined by the State Board and tested for reasonableness.  Limited apportionment companies, which possess capital not exceeding  $20 million, are entitled to reimbursement first. No one county is  responsible for more than 9.8 percent of the fund’s exposure. Dade,  Broward, and Palm Beach Counties are contiguous and make up less than  28 percent of the fund’s total exposure.
section_title: FHCF Was Created in 1993 after Hurricane Andrew Limited the Availability of Reinsurance
paragraphs: On August 24, 1992, Hurricane Andrew hit the southern coast of Florida  just south of Miami and caused economic damages estimated in excess of  $25 billion, including an estimated $15.5 billion in insured losses. The major  impacts for primary insurance company buyers of reinsurance in the year  following Andrew included a severe shortage of catastrophe property  reinsurance capacity and stricter policy terms and conditions, as well as  sharp increases in property catastrophe cover rates.
The poststorm reaction of a number of insurance companies was to  attempt to reduce their underwriting exposure. In early 1993, 39 insurers  stated they intended to either cancel or not renew 844,433 policies in  Florida. The factors influencing these private insurers included  the inability to obtain adequate reinsurance or, when available, the cost  for reinsurance was too high;  new catastrophe risk models indicated that exposure levels were higher  than previously thought, and the exposure levels were disproportionate  to company and industry financial resources;  significant reductions in insurers’ policyholders surplus;  concerns about rate adequacy, especially for coastal counties and  certain risk categories, such as condominiums;  “hidden” exposures from potential assessments by various other  insurance mechanisms, for example, residual markets and catastrophe  funds; and  fear that unfavorable catastrophe exposure would hurt ratings from  agencies such as A.M. Best and Standard & Poor’s.
The Department of Insurance (now called the Office of Insurance  Regulation) issued a study examining the state of the property insurance  market and enumerating many recommendations. Among the  recommendations was a proposal (originally suggested and supported by  the two largest private insurers in the state—State Farm and Allstate) to  establish a tax-free state catastrophe fund to provide reinsurance  protection between that provided by the private market and a proposed  federal fund. Later, the legislature created a Study Commission on Property  Insurance and Reinsurance to look into the viability of the property  insurance industry and the adequacy of reinsurance. Of the 40  recommendations made by the commission, a key recommendation  included the establishment of a state catastrophe fund “to fill the void  between currently available private sector reinsurance and the proposed  federal catastrophic fund program.” Virtually all of the recommendations  from the commission were enacted with minor alterations, including  creation of the FHCF.
section_title: FHCF Premiums Are Significantly Less Than Private Reinsurance Premiums
paragraphs: The cost of FHCF coverage is significantly less than the cost of private  reinsurance (one fourth to one third the cost) due to the FHCF’s tax- exempt status, low administrative costs, and lack of a profit or risk-load.  The tax-exempt status of the FHCF removes a level of potential income  taxation for participating insurers resulting from the annual buildup of  contingent reserves in years when there are few or no hurricanes, and,  thus, allows for the accumulation of funds for the payment of Florida  losses. Another reason FHCF premiums are low is that a significant part of  the coverage provided by the FHCF may be paid by long-term debt issued  by the FHCF after a large hurricane event occurs, as discussed below.
A company’s annual reimbursement premium is based on an actuarial  formula that considers property location, type of construction, deductible,  and loss mitigation. Premiums have been stable over time due to  mandatory participation but have increased significantly since 2004 when  the FHCF’s capacity was increased. Growth in reported exposure has also  factored into increased premiums. The top 10 insurers in the FHCF  contribute 64 percent of the total reimbursement premiums paid. The  FHCF is expected to collect $736 million in reimbursement premium during  contract year 2006. Beginning in 2006, the FHCF was required to charge a  rapid cash build-up factor equal to 25 percent of premiums, which was  expected to provide $200 million annually. However, the Florida Legislature  repealed this provision in early 2007.
According to the FHCF, most insurers select the 90 percent coverage  option. Insurers may purchase private market reinsurance to cover their  hurricane losses for amounts below the retention, above their  reimbursement limit, or for the coinsurance amount (10 percent – along  side) that is the insurer’s responsibility for the layer of coverage provided  by the FHCF. In fact, for some large national insurers, the FHCF is a small  part of their total reinsurance program.
section_title: FHCF Maintains Reserves, but They May Not Be Adequate to Handle Catastrophe Losses
paragraphs: The FHCF is not required to have the loss reserves that are required of  insurers or reinsurers under state law. Financial reserves of the FHCF  accumulated steadily through fiscal 2004 due to limited hurricane activity.  Specifically, the FHCF had accumulated net assets of $5.5 billion at the end  of the 2004 fiscal year (June 30, 2004). Following the 2004 and 2005  hurricane seasons, the FHCF reimbursed participating insurers over   $5 billion, which has eliminated the reserves and created an estimated  shortfall of $1.425 billion. Standard & Poor’s states that this cyclical  financial performance is expected, given the nature of FHCF funding  requirements.
section_title: FHCF Authorized to Postfund Revenue Shortfalls
paragraphs: To support the capacity of the FHCF, revenue bonds may be issued. The  Florida Hurricane Catastrophe Fund Finance Corporation was formed in  1996 to issue bonds and engage in such other financial transactions as are  necessary to provide sufficient funds to achieve the purposes of the FHCF.  The corporation is governed by a five-member board of directors, including  the governor, chief financial officer, attorney general, director of the  Division of Bond Finance of the State Board, and the Senior Officer.  Revenue bonds issued are exempt from state and federal taxes. The  corporation has authority to create preevent and postevent financing. In  June 2006, the corporation undertook postevent financing of $1.35 billion  to address its 2005 shortfall. In July 2006, the corporation undertook  preevent financing of $2.8 billion to address 2006 liquidity needs.
To pay debt service on outstanding revenue bonds and to reimburse  insurers for the reimbursable losses under a covered event, the State Board  directs the Office of Insurance Regulation to levy an emergency assessment  which insurance companies collect from their policyholders. Emergency  assessments are levied on premiums for all assessable lines of business in  Florida. For 2006, there are 27 assessable lines, and medical malpractice  policies will be added in 2010. In 2004, surplus lines insurers were added to  the emergency assessment base. Excluded lines include accident and  health, workers’ compensation, and federal flood insurance. The  assessment base, which totaled $35 billion in 2005, has grown at a  compound annual growth rate of 14.6 percent since 1970. Over 40 percent  of the direct-written premium base is from auto insurance. In May 2006, a   1 percent emergency assessment was directed.
The assessments are collected by insurance companies from policyholders  and remitted to the FHCF throughout the year. Policyholders are required  to pay the assessments, and insurers are required to treat the failure to pay  the assessment as a failure to pay premium, which permits an insurer to  cancel the policy. The maximum assessment in a single season is 6 percent  of premium, and the aggregate limit is 10 percent of the premium base.  Emergency assessments had never been assessed or collected prior to the  levy of assessments relating to the issuance of the June 2006 bonds.  Statewide assessments can also be levied for Florida Citizens and the state  insurance guarantee fund. The emergency assessment of 1 percent for the  FHCF is expected to be in place for 6 years.
section_title: Comments from the National Association of Insurance Commissioners
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the person named above, Lawrence D. Cluff, Assistant  Director; Joseph A. Applebaun, Patrick S. Dynes; Philip J. Curtin;   Carrie Watkins; John P. Forrester; Emily R. Chalmers; Thomas J. McCool,  Marc W. Molino; David S. Dornisch; and Tania L. Calhoun made key  contributions to this report.
section_title: Related GAO Products
subsections: section_title: Federal Insurance
paragraphs: National Flood Insurance Program: Preliminary Views on FEMA’s  Ability to Ensure Accurate Payments on Hurricane-Damaged Properties.  GAO-07-991T. Washington, D.C.: June 12, 2007.
Climate Change: Financial Risks to Federal and Private Insurers in  Coming Decades Are Potentially Significant. GAO-07-285. Washington,  D.C.: March 16, 2007.
Definitions of Insurance and Related Information. GAO-06-424R.  Washington, D.C.: February 23, 2006.
Federal Emergency Management Agency: Improvements Needed to  Enhance Oversight and Management of the National Flood Insurance  Program. GAO-06-119. Washington, D.C.: October 18, 2005.
Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to  Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30,  2005.
Catalogue of Federal Insurance Activities. GAO-05-265R. Washington,  D.C.: March 4, 2005.
Catastrophe Risk: U.S. and European Approaches to Insure Natural  Catastrophe and Terrorism Risks. GAO-05-199. Washington, D.C.:  February 28, 2005.
Catastrophe Insurance Risks: Status of Efforts to Securitize Natural  Catastrophe and Terrorism Risk. GAO-03-1033. Washington, D.C.:  September 24, 2003.
Catastrophe Insurance Risks: The Role Risk-Linked Securities and  Factors Affecting Their Use. GAO-02-941. Washington, D.C.: September 24,  2002.
Insurers’ Ability to Pay Catastrophe Claims. GAO/GGD-00-57R.  Washington, D.C.: February 8, 2000.
Budget Issues: Budgeting for Federal Insurance Programs. GAO/AIMD- 97-16. Washington, D.C.: September 30, 1997.
Natural Disaster Insurance: Federal Government’s Interests  Insufficiently Protected Given Its Potential Financial Exposure. GAO-T- GGD-96-41. Washington, D.C.: December 5, 1995.
Federal Disaster Insurance: Goals Are Good, but Insurance Programs  Would Expose the Federal Government to Large Potential Losses. GAO/T- GGD-94-153. Washington, D.C.: May 26, 1994.
Flood Insurance: Financial Resources May Not Be Sufficient to Meet  Future Expected Losses. GAO/RCED-94-80. Washington, D.C.: March 21,  1994.
Property Insurance: Data Needed to Examine Availability, Affordability,  and Accessibility Issues. GAO/RCED-94-39. Washington, D.C.: February 9,  1994.
Crop Insurance: Federal Program Faces Insurability and Design  Problems. GAO/RCED-93-98. Washington, D.C.: May 24, 1993.
Crop Insurance: Program Has Not Fostered Significant Risk Sharing by  Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13,  1992.
Disaster Assistance: Crop Insurance Can Provide Assistance More  Effectively Than Other Programs. GAO/RCED-89-211. Washington, D.C.:  September 20, 1989.
Congress Should Consider Changing Federal Income Taxation of the  Property/Casualty Insurance Industry. GAO/GGD-85-10. Washington,  D.C.: March 25, 1985.
section_title: Federal Disaster Assistance
paragraphs: Gulf Coast Rebuilding: Observations on Federal Financial Implications.  GAO-07-1079T. Washington, D.C.: August 2, 2007.
Gulf Coast Rebuilding: Preliminary Observations on Progress to Date  and Challenges for the Future. GAO-07-574T. Washington, D.C.: April 12,  2007.
Small Business Administration: Additional Steps Needed to Enhance  Agency Preparedness for Future Disasters. GAO-07-114. Washington, D.C.:  February 14, 2007.
Hurricanes Katrina and Rita: Unprecedented Challenges Exposed the  Individuals and Households Program to Fraud and Abuse; Actions  Needed to Reduce Such Problems in Future. GAO-06-1013. Washington,  D.C.: September 27, 2006.
Catastrophic Disasters: Enhanced Leadership, Capabilities, and  Accountability Controls Will Improve the Effectiveness of the Nation’s  Preparedness, Response, and Recovery System. GAO-06-618. Washington,  D.C.: September 6, 2006.
Disaster Relief: Governmentwide Framework Needed to Collect and  Consolidate Information to Report on Billions in Federal Funding for the  2005 Gulf Coast Hurricanes. GAO-06-834. Washington, D.C.: September 6,  2006.
Small Business Administration: Actions Needed to Provide More Timely  Disaster Assistance. GAO-06-860. Washington, D.C.: July 28, 2006.
Federal Disaster Assistance: What Should the Policy Be? PAD-80-39.  Washington, D.C.: June 16, 1980.