Bush Opposes Expanding Flood Insurance Program; Threatens Veto

September 28, 2007

If a bill similar to one the House just passed that expands the National Flood Insurance Program reaches President Bush’s desk, he will veto it, the White House says.

The administration said it supports efforts to reform and strengthen the NFIP, but does not support the addition of coverage for windstorm damage or other provisions expanding coverage available through the federal program.

“Shifting liabilities for windstorm damage from the private sector to the NFIP would be fiscally irresponsible. Federal government insurance would displace insurance that is already provided by the private market. Expansion of the NFIP would also undermine economic incentives to mitigate risks because the program would likely distort rates from their market-determined values,” the White House argued in a statement from the Office of Management and Budget.

“Individuals would be encouraged to take on risks that are inappropriate, putting themselves in harm’s way because they would not have to bear the full costs of any subsequent damages. Finally, the inclusion of windstorm damage insurance in the NFIP would mean that all taxpayers would be subsidizing insurance rates for the benefit of those people in high-risk areas,” the administration added.

The administration also opposes provisions that would increase the scope of coverage offered by the NFIP. Total exposure for the NFIP is approximately $1 trillion, and the program is currently facing a potential debt burden of $20 billion, according to the White House.

“Increasing the coverage amounts could further encourage expensive development in high-risk areas and leave the federal taxpayer with a larger debt burden following the next catastrophe. Moreover, the need for additional types of coverage is unclear without first studying the feasibility and cost implications of expanding coverage,” its statement continued.

The White House is not alone in its concern over NFIP’s debt burden. Stuart Mathewson, chairperson of the American Academy of Actuaries Flood Insurance Subcommittee, also raised concerns after analyzing the wind peril provision.

“Even if actuarially sound rates are established, such rates do not guarantee sufficient funds to cover every potential event. The current flood program is over $17 billion in debt. Adding wind peril coverage would increase the potential for further large losses in excess of available funds,” the actuaries’ representative wrote in a letter to House leaders.

While opposing any expansion of the program, the White House said it “strongly supports” the concept in the House bill of moving to actuarially sound premiums, although it would prefer additional flexibility in the implementation of premium increases to allow an equitable transition to actuarial rates for all policyholders as quickly as possible.

The administration also supports provisions that help to enforce the mandatory purchase requirements and that improve the data presented on flood maps, particularly showing areas of residual risk.

The administration said it has constitutional concerns regarding a provision requiring federal claims adjustors in FEMA (the Federal Emergency Management Agency) to participate in state-sponsored mediation at the request of state insurance commissioners. It maintains that that the U.S. Constitution carefully allocates power between the branches of the federal government, and between the states and the federal government, a balance that could be upset were Congress to confer on state officials the authority to compel agents of the federal executive into the state’s service.

Source: The White House
Office of Management and Budget
www.whitehouse.gov

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