Reserve Forces: Observations on the Ready Reserve Mobilization Income Insurance Program

Published by the Government Accountability Office on 1997-05-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

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

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

                          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

                      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.

                      As agreed with the Subcommittee, we have not independently reviewed
Summary of Our        the Ready Reserve Mobilization Income Insurance Program or met with
Efforts to Date       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

                      Page 1                                        GAO/T-NSIAD-97-154 Reserve Forces
                 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
             •   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.

                 According to DOD, a survey of a sample of reservists activated during
Background       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

                 Because of concerns over the impact of such losses on reservists and their
                 families, the Congress, in 1996, directed DOD to establish an optional,

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                        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

                        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.

                        On January 9, 1997, you asked our office to review this program to assess
Request to Review the   the need for the program, DOD’s implementation of the program, and the
Program and Our Role    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

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

                        Page 3                                                        GAO/T-NSIAD-97-154 Reserve Forces
                    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.

                    During the course of our ongoing coordination and consultations with the
Our Observations    IG staff about the program, we have had opportunities to make the
About the Program   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

                    Page 4                                       GAO/T-NSIAD-97-154 Reserve Forces
    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

    Page 5                                        GAO/T-NSIAD-97-154 Reserve Forces
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

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

Page 6                                        GAO/T-NSIAD-97-154 Reserve Forces
           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.

(703203)   Page 7                                        GAO/T-NSIAD-97-154 Reserve Forces
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