GAO Report: Proposals to Expand Federal Role in State Insurance Would Increase Taxpayer Risk & Jeopardize Mitigation Efforts

(Washington, DC) – In a response to this week’s General Accounting Office analysis looking into the Homeowner’s Defense Act and other federal interventions into the private insurance market, SmarterSafer.org said the report makes the case for why proposals to expand the federal government’s role in state insurance programs would increase taxpayer risk and jeopardize efforts to implement mitigation measures aimed at protecting the impact of hurricanes and other natural disasters.

The GAO Report, “Natural Catastrophe Insurance Coverage Remains a Challenge for State Programs” found “that most programs charged rates that do not fully reflect risk of loss, potentially discouraging private market involvement and mitigation.” In addition, the report said “the combined total exposure of over $2 trillion in the Florida insurance and reinsurance programs far exceeded that of all other programs combined.”

“The GAO report makes clear that the existing state-level programs are broken beyond repair. A federal ‘backstop’ would make things worse and stick taxpayers with billions of dollars in liabilities. The federal government has a role to play in promoting mitigation, but this report should serve as a stark warning to anyone who thinks the nation would be better off with a national catastrophe insurance program,” Eli Lehrer, Senior Fellow at the Heartland Institute.

“The Report makes clear that when we provide publicly-backed insurance in many places and rates almost inevitably fail to reflect the real risks and costs involved, they can ‘inadvertently encourage further development and population growth in areas with high natural catastrophe risk.’ We have seen time and again, for instance in the National Flood Insurance Program, that high-risk and environmentally-sensitive areas along coasts and river floodplains are being developed and degraded because we are actually incentivizing their development. Then we turn around a few years later and see the nation’s disaster costs skyrocketing,” said David Conrad, Senior Water Resources Specialist with the National Wildlife Federation.

“Instead of having government backstop such unwise development, we need to focus the attention on mitigating and reducing the building risks and avoiding new development or redevelopment in these environmentally-critical, high-risk areas, like floodplains, shorelines and barrier islands,” Conrad added.

Specifically, the GAO found serious dangers and deficiencies in four proposals in the legislation being considered in Congress that would result in an increased federal role in natural catastrophe insurance. The proposals would negatively impact mitigation efforts and increase taxpayer exposure to potential costs.

The GAO found that: “In particular, a federal guarantee of state bonds could give state programs access to capital at reduced or below-market costs, allowing state programs to continue to charge premium rates that do not fully reflect risks or even to lower their premium rates. Furthermore, it could result in decreased reinsurance purchases by some state programs and increased reliance on post-event funding, which could increase taxpayers’ exposure to the potential costs in the event of state financial difficulties. In addition, a federal reinsurance program could reduce costs for state programs, but unless the federal program charged premiums that fully reflect the risk of loss, it could inadvertently encourage further development and population growth in areas with high natural catastrophe risk.”

SmarterSafer.org is a national coalition made up of a diverse set of voices united to support environmentally-responsible, fiscally-sound approaches that promote public safety. The Coalition strongly opposes legislative proposals that encourage people to build homes in hurricane-prone, environmentally-sensitive areas by creating new programs that directly or indirectly subsidize their homeowner’s insurance.