According to the Government Accountability Office, FEMA has borrowed some $36.5 billion since 2005 to cover NFIP losses, and would have to use revenue from current and future policyholders to repay it. The debut is largely due to discounted premiums that FEMA has been statutorily required to provide, which in turn has the effect of charging future and current policyholders for previously incurred losses. Credit: On-Air/Adobe Stock

Although Risk Rating 2.0, the updated rate-setting method for the National Flood Insurance Program (NFIP), better aligns the program's premiums with the flood risk of individual properties, it still fails to achieve actuarial sound rates, according to a report from the Government Accountability Office (GAO). The NFIP has long been plagued by rate inadequacy, with a report from Poulton Associates, LLC and HazardHub finding that the program's premiums fell 9% from 2014-2019, despite Congress mandating 5% annual increases. As the program pays out more in claims than it collects in premiums, the Federal Emergency Management Agency is forced to borrow money from the Treasury Department to make up the difference. According to the GAO report, FEMA has borrowed some $36.5 billion since 2005 to cover NFIP losses, and would have to use revenue from current and future policyholders to repay it. The debt is largely due to discounted premiums that FEMA has been statutorily required to provide, which in turn has the effect of charging future and current policyholders for previously incurred losses. Community discounts were a major propeller of the rate decline, Craig Poulton, CEO of Poulton Associates previously told PropertyCasualty360.com. "Whenever Congress would say to raise rates, the bar for community discounts would be lowered. Around 70% of homes in the program are within community discount rating sites," Poulton said. "That's what we saw, rates should have been going up but premium was going down. The data doesn't lie. The community discounts got more generous and that effectively defeated any rate increase." The cost of these shortfalls goes largely unseen by Congress and the public, according to the GAO, as they are not recognized in the federal budget and only become evident when the NFIP has to borrow from the Treasury Department. Risk Rating 2.0 is expected to move the NFIP toward fiscal solvency and give homeowners a more accurate picture of their flood risks, but it will come with continued rate increases for most policyholders, the GAO reported. Although the NFIP is aiming to better align risk and premium, it also has to balance affordability into the equation. And therein lies the rub. According to the GAO, the median annual NFIP premium was $689 in December 2022. This would need to be increased to $1,288 to reach the true "full-risk" premium. With the ushering in of Risk Rating 2.0, around one-third of policyholders have started paying these full-risk premiums, and many saw a premium reduction. However, that means 66% of policyholders will see higher rates. The GAO reported that around 9% of this group will eventually have to see increases of more than 300%. About 21% of those taking on higher NFIP premiums will see increases ranging from 1%-49%. Gulf Coast states are expected to see the biggest NFIP rate hikes. According to the GAO, policies in these states have been the most underpriced, despite the region having some of the highest flood risks. The following slideshow details the GAO's recommendations for actions Congress should take to improve the NFIP: Related: |

• Has the flood insurance headache been solved?
• Common flood insurance myths debunked
• How insurers can — and should — close the global flood protection gap

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