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Letter to the Honorable Judd Gregg 1 (May 2006)

handle is hein.congrec/cbo9045 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE U S. Congress Washington, DC 20515 May 31, 2006 Honorable Judd Gregg Chairman Committee on the Budget United States Senate Washington, DC 20510 Dear Mr. Chairman: I am pleased to respond to your questions about the financial condition of the National Flood Insurance Program (NFIP) and its ability to meet its obligations to the Treasury and to its policyholders. The NFIP's current financial situation is unsustainable. The Federal Emergency Management Agency (FEMA) lacks the financial resources to cover the program's costs and the authority to make changes that might ensure that future obligations could be met. Specifically: * FEMA estimates that the NFIP needs about $3 billion more to pay claims resulting from the 2005 Gulf Coast hurricanes. Without legislation providing additional budgetary resources, those claims cannot be paid in a timely fashion. * Interest costs on the NFIP's debt from the 2005 Gulf Coast hurricanes will total about $1 billion a year. Even if FEMA increases the premiums charged for flood insurance by the maximum percentage allowed by law, premium income in the next several years is unlikely to cover claims, debt service, and other costs of the program. * The NFIP has operated on an actuarially unsound basis, with many property owners paying premiums that do not account for the full risk of insuring their properties. Thus, over the long term, premium income will be insufficient to cover the program's costs. If this policy of subsidizing certain types of properties continues, it can be expected to lead to a shortfall of about $1.3 billion a year over the long term for currently insured properties. At the current premium rates charged for flood insurance, can the program continue to meet its obligations without its debt to the Treasury being forgiven or without perpetual increases in its borrowing authority? It is very unlikely that the NFIP will be able to make timely payments on policyholders' claims in 2007 and in future years without a change in law. The program's current and future obligations for policyholder claims, operating expenses, and debt service are likely to far exceed its income from premiums. www.cbo.gov

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