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GAO cool on adding wind cover to flood insure plan

May 6, 2008

Reuters

Kevin Drawbaugh

Adding wind coverage to the National Flood Insurance Program would present major challenges to the U.S. Federal Emergency Management Agency (FEMA) and could expose taxpayers to high costs, said a study by congressional investigators obtained by Reuters on Monday.

With the Senate expected to take up a post-Katrina flood insurance bill soon, the Government Accountability Office study said FEMA "would need to complete certain challenging steps" to add wind coverage to the program, as proposed in a bill passed by the House of Representatives in September.

As drafted months ago, the Senate bill would not add wind coverage to the program, but insurance industry lobbyists said a wind amendment may be offered. Adding wind coverage is backed by some coastal lawmakers and generally opposed by insurers.

A broad coalition of environmentalists, state floodplain managers, fiscal policy conservatives and taxpayer and consumer activists are also advocating against any wind amendment.

The GAO, which is the investigative arm of Congress, said that if wind coverage were added, FEMA would have to set wind hazard prevention standards, adapt existing programs, create a new rate-setting process and undertake promotional efforts.

"Finally, FEMA would need to put staff and procedures in place to administer and oversee the new program, while it faces current management and oversight challenges with the National Flood Insurance Program (NFIP)," the GAO said.

Katrina and the other hurricanes of 2005 left the NFIP more than $17 billion in debt to the U.S. Treasury. The program -- set to expire in September if not renewed by the government -- is widely seen as incapable of repaying that amount.

Congress has been working for months on reauthorizing the NFIP. The House bill does that and calls for creation of a combined federal program with both wind and flood coverage.

"I don't get it. You have a program that's already wasting money and doesn't work and you want to add more to it?" said Robert Hunter, former federal insurance administrator and now director of insurance at the Consumer Federation of America.

Federal wind insurance offered through the NFIP "would needlessly displace the private market, disrupt existing state funds, and create a significant burden for U.S. taxpayers," the Property Casualty Insurers Association of America, an industry group, said last month in a statement.

The White House has threatened to veto the House bill.

The GAO said the House bill would require premium rates to be adequate to cover any wind damage exposure, while it would also restrict borrowing by the program from the Treasury.

Still, the GAO said, the potential exists for losses to greatly exceed expectations, as happened with Hurricane Katrina in 2005. This could increase FEMA's total debt, it said.

Under the NFIP, about 90 private insurers sell and service flood policies on the government's behalf. The companies process claims, collect premiums and send the money to FEMA.

The government is involved in the market because the private sector on its own does not adequately cover flood risk. Most homeowners' policies cover wind damage, but not flooding.

Disputes over "wind versus water" damage have plagued State Farm, Allstate Corp and other insurers ever since Katrina slammed into the Gulf Coast in August 2005 with 140-mile-per-hour winds and a massive flood surge.

Afterward, some homeowners accused home insurers of refusing to provide coverage by blaming hurricane damage on flooding, thereby shifting claims onto the NFIP.

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