Federal Disaster Insurance: Goals Are Good, But Insurance Programs Would Expose the Federal Government to Large Potential Losses

GAO discussed Senate bill 1350, which would establish federal natural disaster insurance, reinsurance, and multihazard mitigation programs. GAO noted that: (1) although the insurance industry has absorbed losses from recent natural disasters, its ability to remain solvent and absorb future catastrophic disasters is questionable; (2) disaster insurance programs are designed to reduce the government's liability; (3) the proposed disaster mitigation program would encourage communities to enforce better building codes and emergency plans and would be funded through surcharges on premiums collected from homeowners and insurance companies; (4) although the primary insurance program would attempt to establish actuarially sound premiums and apply to the direct damage caused by earthquakes and volcanos, affordable rates would be difficult to establish and the program would require broad participation to effectively spread risk; (5) the reinsurance program is designed to protect insurance providers from the financial consequences of large disasters; (6) under the reinsurance program, the government would pay most of the insurers' losses once the losses equal a specified share of the industry's surplus; and (7) the reinsurance program could substantially increase the government's liability and create incentives for insurers to engage in inappropriate business practices.