The Government Accountability Office put a damper on a House proposal to add wind damage to the National Flood Insurance Program, warning Congress such an expansion of coverage could break the NFIP financially and operationally, according to a report obtained by National Underwriter.

Language to add wind protection to NFIP is contained in a House flood insurance reform bill, H.R. 3121, which passed last Sept. 27. The Senate approved a different measure this week to renew and reform the flood program that does not include the wind coverage provision.

“To implement a combined federal flood and wind insurance program, [the Federal Emergency Management Agency] would need to complete a number of steps, similar to those undertaken to establish the NFIP, which would require the agency to address several challenges,” the GAO said in its report, warning that underwriting wind damage could strain the agency financially.

The report was made in response to a request from House Financial Services Committee Chair Barney Frank, D-Mass., and Rep. Ginny Brown-Waite, R-Fla., but has not yet been made public.

Effectively, the GAO said adding a wind component for the NFIP would basically require rebuilding NFIP from scratch.

FEMA, which oversees the program, would have to determine new building code standards that communities would have to meet to be eligible to participate in the NFIP, and would have to adapt the processes in the current program to include a wind component.

In addition, FEMA would have to develop a rate-setting mechanism for windstorm risk (which the GAO noted FEMA believes will require outside contractor support), as well as promote the newly expanded program to homeowners while working with communities to ensure building code enforcement.

Even these steps don't acknowledge one of the most significant hurdles facing the debt-ridden NFIP, the GAO noted.

“Finally, FEMA is facing a $17.3 billion deficit and attempting to address several management and oversight challenges associated with the NFIP, and balancing those demands with expanding current staffing capacity and contractor services to administer, operate, monitor and oversee a new program could further strain FEMA's ability to effectively manage the NFIP,” the report said.

Aside from the difficulties facing the NFIP from such areas as rate-setting, an expanded NFIP also carries the risk of adding to the exposure already facing the program, given the nature of the coverage and the policyholders who purchase it.

“Because of the potential for the program to insure only the highest-risk properties, this exposure could be very large,” the GAO warned.

Although the House legislation mandates that windstorm coverage be sold at actuarially sound rates, the GAO noted that “estimating future losses is challenging, and the potential exists for losses to exceed expectations by a large amount even if the rates are actuarially based.”

The report pointed to the aftermath of Hurricane Katrina as an example of underwriting difficulties that can develop.

“If losses for a combined flood and wind program did exceed the premiums collected by the program, FEMA would be forced to borrow from the Treasury to pay those losses, potentially adding to FEMA's total debt, which as of December 2007 was about $17.3 billion,” GAO noted.

The GAO's findings echoed many of the arguments that have been made by the insurance industry against including wind risks in the NFIP, according to Justin Roth, senior federal affairs director for the National Association of Mutual Insurance Companies.

“The report reaffirms exactly what we have been saying all along, which is that shifting wind coverage to the NFIP could have a devastating impact on the program,” he said. “The GAO report makes it very clear that such a change would benefit a small group of high-risk properties at the expense of the long-term stability of the NFIP and the federal taxpayers who will eventually have to bail out the program.”

American Insurance Association President Marc Racicot also praised the GAO report. He said the current system of covering windstorm risks for those who cannot get coverage–with state residual markets backed by private insurers–”do not place the burden of deficits on all American taxpayers.”

“Adding wind coverage to the federal flood insurance program would be a fundamental realignment of both the NFIP and the private wind insurance market,” he added. “We continue to believe the solution rests in improving, not displacing, the private sector's ability to serve homeowners and businesses in the path of potential storms.”