HUD's Determination To Convert from Industry to Government Operation of the National Flood Insurance Program

The National Flood Insurance Program was established under the National Flood Insurance Act of 1968 as a subsidized, Government-sponsored program designed to help owners of real or personal property purchase flood insurance. It is administered by the Federal Insurance Administration (FIA). The 1968 act authorized the Secretary of Housing and Urban Development (HUD) to operate the program as either an industry program with Federal financial assistance (part A) or as a Government program with industry assistance (part B). The act provided that the Secretary implement part A initially. When the Secretary decided to implement part B in November 1977, the program had clearly not reached a last resort status under part A. However, the Secretary decided to convert to part B on the premise that the flood insurance program would be assisted materially by Federal assumption. The decision was reached after a cost comparison revealed that HUD could manage the program directly under contract with E.D.S. Federal Corporation for almost $15 million less than the existing agreement. This $15 million differential was supportable although many intangibles exist that are not subject to comparison, including incomparable levels of activity, dissimilar contract periods, possible cost reductions under part A, and State premium tax payments. FIA's procedure for monitoring the contract should be effective even though the cost of monitoring is higher under part B.