Catalogue of Federal Insurance Activities
GAO-05-265R, Mar 4, 2005
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The federal government assumes insurance risk for a wide range of activities that are funded through numerous federal budget accounts and administered by a variety of federal organizations. For some activities, such as those funded through the National Flood Insurance account, the federal government assumes the entire insurance risk. The federal government also assumes part of the risk for insurance activities that are administered by state and local governments--for example, those funded through the Unemployment Trust Fund or that are partly underwritten by private insurers, such as those funded through the Special Workers' Compensation Expenses account. These insurance risks, whether fully or partially assumed by the federal government, are in lines of insurance that private insurers also recognize: health, life, disability, and property/casualty insurance. The federal government has generally assumed insurance risks for at least two reasons. First, the government may step in when insurance is not widely available because private insurers cannot collectively absorb or affordably price the insurance risk. For example, when private insurers were unable to offer affordable terrorism insurance in the aftermath of September 11, 2001, the federal government created a terrorism insurance program. Second, the federal government has self-insured--that is, elected to pay for losses itself when it has determined that doing so is preferable to purchasing insurance in the private market. For example, the government has self-insured for risks associated with legal settlements and awards to resolve property damage claims, employment litigation, and contract disputes, even though recognized lines of private insurance could cover these risks. Federal insurance activities can be difficult to identify in part because no generally accepted definition of federal insurance exists. They may also be difficult to identify because they may be funded through budget accounts with names and primary activities that are not directly related to federal insurance. For example, the Health Resources Services Administration of the Department of Health and Human Services, has a Medical Malpractice Claims Fund that provides medical liability insurance to physicians at federal health centers. This fund is part of the administration's much larger Health Resources and Services account, whose primary mission is to provide various non-insurance health services to low-income individuals. The malpractice claim fund's fiscal year 2003 outlays of $23 million were a small part of the overall account's outlays of $6.1 billion. Finally, federal insurance activities can be difficult to identify because their costs may be integrated in the account that funds overall agency operations. As part of the committee's in-depth review of insurance regulation, Congress asked us for information on federal insurance activities. On the basis of that request and subsequent discussions with committee staff, this report (1) provides criteria for identifying federal insurance activities and (2) describes federal insurance activities that meet these criteria.
We used two criteria to identify federal insurance activities. First, the federal government must accept the risk of financial loss in providing protection against specific types of losses, events, or conditions whose timing, magnitude, or duration, are uncertain or unknown. Second, by accepting this insurance risk, the federal government must be obligated to pay compensation or provide benefits if the losses, events, or conditions occur. In addition, we verified that the activities we catalogued as federal insurance were also recognized lines of insurance in the private sector. However, we found that federal insurance differed from private sector insurance in a number of ways: those covered by federal insurance need not pay premiums; for many federal insurance activities, such as those serving a nationwide population, the federal government need not identify a risk pool for pricing its risk because the pool of insureds will be sufficiently large and diverse; the insureds need not be policyholders or enrolled in the insurance activity before the loss, event, or condition occurs for which compensation or benefits are available; a contract need not exist between the insured or a group of insureds and the insurer; financial resources need not be set aside or specifically designated for paying compensation or benefits; the federal government may be the backup or secondary source rather than the initial source of compensation or benefit payments; and the federal government is assumed to have an insurable interest through the legislation authorizing the insurance activity. Some of the federal insurance activities that we have identified are directly comparable to private sector insurance, and a consensus will likely exist that they constitute federal insurance. Other activities that we categorize as insurance are sometimes identified by others as benefit programs or social insurance, because they serve groups with particular risks that are uninsurable or underinsured in the private insurance market. For example, one such activity is the State Children's Health Insurance Fund, which provides health insurance for children in low-income families. We have included this activity in our catalogue because it meets our criteria for federal insurance, and health insurance is a recognized line of insurance in the private market. In addition, we have included federal defined benefit retirement plans in our catalogue of federal insurance activities because they provide beneficiaries or their survivors with guaranteed income (or income protection) for life. These plans expose the government to insurance risk and the benefits are equivalent to private annuities, a commonly recognized insurance product.