Reserve Forces: Observations on the Ready Reserve Mobilization Income
Insurance Program (Testimony, 05/08/97, GAO/T-NSIAD-97-154).

GAO discussed the Ready Reserve Mobilization Income Insurance Program
and the Department of Defense (DOD) Inspector General's (IG) review of
that program. GAO did not independently review the program or meet with
DOD officials to verify the accuracy of the IG's work. GAO could not
offer a final opinion until it had an opportunity to review the IG's
report, which the IG has not yet completed.

GAO noted that: (1) because of its limited work, GAO could make only a
few observations about the Ready Reserve Mobilization Income Insurance
Program; (2) DOD estimated that about 40 percent of the eligible
reservists would enroll in the program, but less than 3 percent actually
did; (3) the low enrollment rate raises a key question about the extent
of the need for the program; (4) although previous studies showed that
many reservists suffered economic losses and would be interested in an
income insurance program, very few actually enrolled when the program
was offered; (5) while there is some evidence that DOD did not market
the program as effectively as possible, this alone cannot explain the
low enrollment rate; (6) because of the low enrollment, which limits the
amount of premiums paid into the insurance fund, and because many of
those who did enroll suspected, or possibly knew, they would be
activated for the ongoing Bosnia operation, the program is not
self-sustaining, as intended; (7) many reservists activated for duty in
Bosnia began to receive benefits almost immediately after enrolling in
the program; (8) the program is expected to be $72 million in the red by
September 1997; (9) the legislation allows DOD to seek a supplemental
appropriation from the Congress to cover funding shortfalls; (10)
because enrollment in the program is a one-time opportunity that most
reservists have already declined, the existing program cannot
significantly improve its viability through increased premium income
from new enrollees, at least in the near term; (11) the program is not
actuarially sound because of the unpredictability of future reserve
call-ups, including the frequency of call-ups, their duration, and the
number and types of reservists that might be needed; and (12) GAO's
observations tend to support DOD's recent proposal to suspend the
program and reexamine the need for it and to consider possible
alternatives to meet the needs of reservists and their families.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD-97-154
     TITLE:  Reserve Forces: Observations on the Ready Reserve 
             Mobilization Income Insurance Program
      DATE:  05/08/97
   SUBJECT:  Insurance
             Insurance premiums
             Military reserve personnel
             Actuarial tables
             Mobilization
             Losses
             Marketing
IDENTIFIER:  DOD Ready Reserve Mobilization Income Insurance Program
             Bosnia
             Desert Storm
             Ready Reserve Income Insurance Fund
             
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Cover
================================================================ COVER


Before the Subcommittee on Military Personnel, Committee on National
Security, House of Representatives

For release on Delivery
Expected at
10:00 a.m., EDT,
Thurdsay,
May 8, 1997

RESERVE FORCES - OBSERVATIONS ON
THE READY RESERVE MOBILIZATION
INCOME INSURANCE PROGRAM

Statement of Mark E.  Gebicke, Director, Military Operations and
Capabilities Issues, National Security and International Affairs
Division

GAO/T-NSIAD-97-154

GAO/NSIAD-97-154T

Reserve Forces

(703203)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  DODIG - department of Defense Inspector General
  IG -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the Ready Reserve
Mobilization Income Insurance Program and the Department of Defense
Inspector General's (DOD IG) review of that program.  Reserve forces
are recognized as essential to the nation's defense, as evidenced by
the increased use of these forces over the past several years. 
Because of this increased use, the Congress and DOD have been
concerned about the potential adverse impacts of financial losses
that some reservists endure when activated and the ability of DOD to
continue recruiting and retaining the quantity and quality of people
needed to maintain readiness in the reserve components.  These
concerns led to the development of the insurance program to help
protect reservists and their families against financial losses
resulting from extended mobilizations. 

Let me first provide a short overview of our role and some
observations about the program at this time, and then go back to
provide more details. 


   SUMMARY OF OUR EFFORTS TO DATE
---------------------------------------------------------- Chapter 0:1

As agreed with the Subcommittee, we have not independently reviewed
the Ready Reserve Mobilization Income Insurance Program or met with
DOD officials to verify the accuracy of the IG's work.  Rather, our
role has been to help ensure that the IG's examination of the program
adequately addressed the Subcommittee's concerns.  To that end, we
reviewed the IG's audit plan, obtained background information and key
documents related to the program, observed several DOD working group
meetings where problems in the program were discussed, and obtained
two briefings from the IG staff. 

The IG staff incorporated several of our suggestions into their audit
plan, and we believe that they used a reasonable methodology in their
review to address the Subcommittee's concerns.  The IG staff briefed
us on their preliminary results, and they seem to address the
Subcommittee's concerns.  However, we also told the IG staff that we
could not offer a final opinion until we have had an opportunity to
review their report, which they have not yet completed. 

Because of our limited work, we can make only a few observations
about the program. 

  DOD estimated that about 40 percent of the eligible reservists
     would enroll in the program, but less than 3 percent actually
     did.  The low enrollment rate raises a key question about the
     extent of the need for the program.  Although previous studies
     showed that many reservists suffered economic losses and would
     be interested in an income insurance program, very few actually
     enrolled when the program was offered.  While there is some
     evidence that DOD did not market the program as effectively as
     possible, this alone cannot explain the low enrollment rate. 

  Because of the low enrollment, which limits the amount of premiums
     paid into the insurance fund, and because many of those who did
     enroll suspected, or possibly knew, they would be activated for
     the ongoing Bosnia operation, the program is not
     self-sustaining, as intended.  Many reservists activated for
     duty in Bosnia began to receive benefits almost immediately
     after enrolling in the program.  The program is expected to be
     $72 million in the red by September 1997.  The legislation
     allows DOD to seek a supplemental appropriation from the
     Congress to cover funding shortfalls. 

  Because enrollment in the program is a one-time opportunity that
     most reservists have already declined, the existing program
     cannot significantly improve its viability through increased
     premium income from new enrollees, at least in the near term. 

  The program is not actuarially sound because of the
     unpredictability of future reserve call-ups, including the
     frequency of call-ups, their duration, and the number and types
     of reservists that might be needed. 

Our observations tend to support DOD's recent proposal to suspend the
program and reexamine the need for it and to consider possible
alternatives to meet the needs of reservists and their families. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

According to DOD, a survey of a sample of reservists activated during
Operation Desert Storm indicated that about two-thirds suffered
economic losses.  These losses occurred because (1) military pay was
less than civilian income, (2) additional expenses were incurred by
reservists and their families as a result of the activation, and (3)
financial losses continued after release from active duty due to
erosion of the reservists' businesses or practices.  According to the
survey, economic losses were widespread across all pay grades and
military occupations.  However, health care practitioners,
self-employed professionals, and others with relatively high civilian
incomes were most likely to have suffered income losses. 

Because of concerns over the impact of such losses on reservists and
their families, the Congress, in 1996, directed DOD to establish an
optional, self-funded income insurance program for members of the
Ready Reserve who are ordered involuntarily to active duty for more
than 30 days.\1

DOD implemented the program, called the Ready Reserve Mobilization
Income Insurance Program, on October 1, 1996.  The program is managed
by the Secretary of Defense, and the premiums paid to the Ready
Reserve Income Insurance Fund are administered by the Treasury
Department.  Reservists who elected to enroll in the program during
the one-time, 60-day enrollment period could choose monthly coverage
options ranging from $500 to $5,000 for up to 12 months within an
18-month period.  The monthly premium rate is $12.20 for each $1,000
of insurance coverage purchased. 

Far fewer reservists than DOD expected enrolled in the program.  On
the basis of surveys performed for DOD to assess the need for an
income insurance program, DOD had estimated that 40 percent of
eligible reservists would enroll in the program.  However, less than
3 percent actually enrolled.  Moreover, shortly after signing up for
the insurance, many of those that did enroll were activated for duty
in Bosnia and, therefore, were entitled to almost immediate benefits
from the program.  According to DOD, 65 percent of the reservists
activated for the third rotation to Bosnia purchased the insurance. 
For these reasons, the program did not have sufficient funds to pay
the benefits due to the activated enrollees.  Because the program
precludes deficit spending from the insurance fund, DOD has to date
paid the activated enrollees only about 4 percent of the amount due. 
DOD estimated that about $72 million is required to fund full benefit
payments through the end of fiscal year 1997. 


--------------------
\1 See section 512, the National Defense Authorization Act for Fiscal
Year 1996 (P.  L.  104-106, Feb.  10, 1996). 


   REQUEST TO REVIEW THE PROGRAM
   AND OUR ROLE
---------------------------------------------------------- Chapter 0:3

On January 9, 1997, you asked our office to review this program to
assess the need for the program, DOD's implementation of the program,
and the program's actuarial soundness.  As we began planning for the
review, we learned that the DOD IG had already begun a detailed
examination of the program.  In a meeting on January 24 with the
Subcommittee's staff, DOD IG representatives, and our office, it was
agreed that, to avoid possible duplication, the IG would continue its
review and we would participate, to the extent necessary, to ensure
that the Subcommittee's concerns were addressed. 

On January 28, we completed a memorandum of agreement with the IG
that outlined our respective roles.  Basically, the agreement called
for the IG to perform the review and for us to review their audit
guidelines, receive periodic updates, have access to key documents,
attend key meetings with DOD officials, and review the IG's draft
report when completed.  The essence of the agreement was detailed in
a February 10, 1997, letter to you. 

We and the IG have complied with the agreement.  For example, we
reviewed the IG's proposed audit guidelines and found that they
represented a reasonable approach to addressing the Subcommittee's
concerns.  However, we identified a couple of areas where we believed
additional audit tasks were needed.  For example, we believed that
the IG needed to explore further the need for the program, which
would include an analysis of recruitment and retention statistics in
the reserve components over the past several years.  We also believed
that they needed to do more work than had been planned to document
what went wrong with the program, what were the causes for the
problems, and whether DOD could have done anything differently to
avoid the problems. 

On March 4, we shared our concerns with the IG staff and provided
them a copy of our proposed guidelines.  On March 10, we discussed
the guidelines further, and IG representatives agreed to incorporate
our guidelines into their review. 

During the review, we met twice with the IG staff to be updated on
their progress.  Also, we attended several DOD working group meetings
where DOD officials debated the continued need for the program and
options for making the program more fiscally sound.  In addition, the
IG staff shared with us key DOD documents related to the program. 
When the IG's draft report is completed and made available to us, we
will review it and provide comments.  In keeping with the spirit of
our agreement and also to avoid duplication, we did not independently
meet with DOD officials or other affected parties to verify any data. 
As we deemed appropriate, we raised questions to the IG team and
relied upon their judgment in pursuing the questions with DOD
officials. 


   OUR OBSERVATIONS ABOUT THE
   PROGRAM
---------------------------------------------------------- Chapter 0:4

During the course of our ongoing coordination and consultations with
the IG staff about the program, we have had opportunities to make the
observations that I have already discussed.  I would like to offer
more support for our observations.  For example, two documents we
reviewed in particular impressed me not only as warning DOD of the
potential for program problems, but also as summing up key issues
that must be addressed as the program's future is debated.  These
documents were prepared by the DOD Education Benefits Board of
Actuaries in August 1995 and August 1996.  Minutes of the Board's
August 1995 meeting generally discussed and an August 1996 letter
specifically expressed the following four concerns about the
mobilization income insurance program: 

  Benefit payments are caused by mobilizations that are infrequent
     but that produce large numbers of claims.  The program could
     easily be exhausted by unfavorable experience in the early years
     despite a premium rate that would be adequate over a longer
     period. 

  Mobilizations depend on the changing world situation and the role
     of the reserves, which may vary substantially from previous
     mobilizations that were used to compute premium rates. 

  Because of their military specialty or because activation seems
     likely, reservists who perceive a substantial risk of activation
     will enroll in greater numbers and buy more insurance. 

  The Bosnia call-up appears likely to extend beyond October 1, 1996,
     when the insurance program begins.  Although reservists then on
     active duty are ineligible for the program, others who replace
     them can purchase insurance and trigger substantial benefits in
     fiscal year 1997.  Such outlays may immediately endanger the
     fund. 

Since the enactment of the mobilization insurance program, all of the
Board's concerns have been realized.  Based upon discussions with the
IG staff, we understand that they also believe that because of the
unpredictability of the size and frequency of future reserve
component mobilizations, designing an actuarially sound program may
not be possible.  The IG staff also said that because of the way the
program was structured, there was little, if anything, DOD could have
done to change the adverse outcome. 

We agree that once the program was initiated in October 1996, there
was little DOD could have done to change the outcome.  However, it
appears that the concerns noted in the Board's letters were not fully
addressed.  In view of the Board's concerns, we believe DOD could
have discussed the issues with the Congress prior to program
implementation to determine whether the implementation date or other
provisions in the program needed to be modified.  However, to our
knowledge, this step was not taken. 

As the future of the program is debated, I think several issues need
to be addressed.  One issue is the extent to which the program is
needed.  The information currently available is contradictory.  On
one hand, earlier studies indicated a significant need for a program
to address the economic hardships many reservists endure when called
to active duty.  Previous surveys performed for DOD showed that the
majority of reservists that served in Desert Storm endured economic
losses and were interested in purchasing mobilization income
insurance if such a program were available.  For example, in one
survey, 77 percent indicated that they either were interested or
might be interested in paying for such insurance, even at a cost of
$10 monthly for each $1,000 of coverage.  Also, DOD was concerned
after Desert Storm that many reservists would leave the military
because of the income losses endured during extended mobilizations. 

On the other hand, when the program was offered during the fall of
1996, less than 3 percent of the eligible reservists purchased the
insurance, and many enrolled because they believed, or possibly knew,
that they would be activated for Bosnia and receive almost immediate
benefits from the program.  Furthermore, according to DOD officials,
reserve component recruiting and retention rates have remained stable
since the Persian Gulf War.  Further, the military services have not
voiced strong support for a mobilization income insurance program. 

Assuming there is sufficient reason to have a program addressing the
loss of income for many activated reservists, a second issue is
whether improved marketing of the program can significantly increase
enrollment.  There is some evidence that DOD did not market the
program as effectively as possible.  For example, in telephone
surveys recently done by RAND, as many as 27 percent of the
reservists contacted stated that they were never informed of the
program.  An additional 16 percent stated that they were informed of
the program but did not have sufficient detailed information or time
to make an informed decision about program enrollment. 

With better marketing, more of these reservists might have enrolled
in the program.  However, there is uncertainty that more effective
marketing would result in a sufficient level of voluntary
participation for the program to be self-sustaining.  For example,
the RAND survey data can also be interpreted to indicate that the
majority (57 percent) of eligible reservists were aware of the
program.  Yet, for reasons that have not been determined, only a
small percentage of these individuals--much lower than the 40-percent
estimated--actually enrolled.  To increase participation, DOD has
discussed options to make at least a portion of the program
mandatory.  However, such a step would involve a significant policy
decision, one in which the pros and cons would need to be weighed
very carefully. 

Another issue is whether a mobilization income insurance program can
be actuarially sound.  To be actuarially sound, an insurance program
must contain a large number of enrollees and assurance that a
predictable majority of these enrollees will not incur the losses
that they insure against.  Yet, the current program does not include
a large number of enrollees, and DOD's increased reliance on reserve
component forces in a changing and unpredictable world situation
makes projections of the frequency, duration, and size of future
call-ups exceedingly difficult.  It is also our understanding that
primarily for these reasons, private insurers have stated that they
would not be interested in underwriting the program. 

In conclusion, although we have not done an independent review of the
program, I think it is fair to say that the program is not
self-sustaining under its current design and with its current low
enrollment.  Thus, it seems prudent to suspend the program while DOD
reexamines the need for and possible alternatives to the program. 

This concludes my prepared remarks.  I would be happy to respond to
any questions the Subcommittee might have. 


*** End of document. ***