Natural Disaster Insurance: Federal Government's Interests Insufficiently Protected Given Its Potential Financial Exposure

Pursuant to a congressional request, GAO discussed the proposed establishment of a privately-owned, federally-chartered corporation to provide primary insurance and reinsurance for natural disasters. GAO noted that: (1) the corporation would provide supplemental primary insurance to homeowners to protect against losses from certain natural events; (2) concerns regarding affordable and actuarily sound premiums, homeowner participation levels, and private insurers selecting the lowest risk policies for themselves remain; (3) the proposed legislation requires property owners to have insurance coverage to be eligible for post-event federal disaster assistance, but income exemptions could lower participation rates; (4) to prevent inadequate underwriting, private insurers must assume a set percentage of any losses, but this provision is weakened by allowing insurers to reinsure their quota-shares with the proposed corporation; (5) policyholders would have no protection if the corporation became insolvent; (6) although the proposed corporation would provide reinsurance to qualified insurers, the reinsurance program could expose the federal government to significant losses while limiting individual insurers' risks; (7) the definition of qualifying losses that cause insurers' insolvency is unclear; and (8) the proposed corporation would be similar to other government-sponsored enterprises, but it would be exempt from government oversight and regulations and have no federal appointees on its board.