Federal Emergency Management Agency
Oversight and Management of the National Flood Insurance Program Gao ID: GAO-06-183T October 20, 2005The disastrous hurricanes that have struck the Gulf Coast and Eastern seaboard in recent years--including Katrina, Rita, Ivan, and Isabel--have focused attention on federal flood management efforts. The National Flood Insurance Program (NFIP), established in 1968, provides property owners with some insurance coverage for flood damage. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for managing the NFIP. GAO issues a report earlier this week that was mandated by the Flood Insurance Reform Act of 2004. This testimony discusses findings and recommendations from that report and information from past GAO work. Specifically, the testimony discusses (1) the statutory and regulatory limitations on coverage for homeowners under the NFIP; (2) FEMA's role in monitoring and overseeing the NFIP; (3) the status of FEMA's implementation of provisions of the Flood Insurance Reform Act of 2004. It also offers observations on broader issues facing the NFIP including its financial structure and updating flood maps.
The amount of insurance coverage available to homeowners under the NFIP is limited by requirements set forth in statute and FEMA's implementing regulations, which include FEMA's standard flood insurance policy. As a result of these limitations, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing flood-damaged property. For example, homes that could sustain more than $250,000 in damage cannot be insured to their full replacement cost, thus limiting claims to this statutory ceiling. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural weakness in a home, or losses resulting from events other than flood such as windstorms, are not covered by NFIP policies. To meet its monitoring and oversight responsibilities, FEMA is to conduct periodic operational reviews of the 95 private insurance companies that participate in the NFIP, and FEMA's program contractor is to check the accuracy or claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. FEMA did not use a statistically valid method for sampling files to be reviewed in these monitoring and oversight activities. As a result, FEMA cannot project the results of these reviews to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling responsibilities for the NFIP--actions necessary for FEMA to have reasonable assurance that program objectives are being achieved. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to provide policyholders with a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that insurance agents meet minimum education and training requirements. The statutory deadline for implementing these changes was December 30, 2004. Efforts to implement the provisions are under way, but have not yet been completed. DEMA has not developed plans with milestones for assigning accountability and projecting when program improvements will be made, so that improvements are in place to assist victims of future flood events. As GAO has previously reported, the NFIP, by design, is not actuarially sound. The program does not collect sufficient premium income to build reserves to meet long-term future expected flood losses, in part because Congress authorized subsidized insurance rates to be made available for some properties. FEMA has generally been successful in keeping the NFIP on a sound financial footing, but the catastrophic flooding events of 2004 (involving 4 major hurricanes) required FEMA, as of August 2005, to borrow $300 million from the U.S. Treasury to help pay an estimated $1.8 billion on flood insurance claims. Following Hurricane Katrina in August 2005, legislation was enacted to increase FEMA's borrowing authority from $1.5 billion to $3.5 billion through fiscal year 2008.
GAO-06-183T, Federal Emergency Management Agency: Oversight and Management of the National Flood Insurance Program
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Chairman, Subcommittee on Housing and Community Opportunity, Committee
on Financial Services, U.S. House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Thursday, October 20, 2005:
Federal Emergency Management Agency:
Oversight and Management of the National Flood Insurance Program:
Statement of William O. Jenkins, Jr., Director, Homeland Security and
Justice Issues:
GAO-06-183T:
GAO Highlights:
Highlights of GAO-06-183T, a testimony before the Subcommittee on
Housing and Community Opportunity, Committee on Financial Services,
U.S. House of Representatives:
Why GAO Did This Study:
The disastrous hurricanes that have struck the Gulf Coast and Eastern
seaboard in recent years” including Katrina, Rita, Ivan, and
Isabel”have focused attention on federal flood management efforts. The
National Flood Insurance Program (NFIP), established in 1968, provides
property owners with some insurance coverage for flood damage. The
Federal Emergency Management Agency (FEMA) within the Department of
Homeland Security is responsible for managing the NFIP. GAO issued a
report earlier this week that was mandated by the Flood Insurance
Reform Act of 2004. This testimony discusses findings and
recommendations from that report and information from past GAO work.
Specifically, the testimony discusses (1) the statutory and regulatory
limitations on coverage for homeowners under the NFIP; (2) FEMA‘s role
in monitoring and overseeing the NFIP; (3) the status of FEMA‘s
implementation of provisions of the Flood Insurance Reform Act of 2004.
It also offers observations on broader issues facing the NFIP including
its financial structure and updating flood maps.
What GAO Found:
The amount of insurance coverage available to homeowners under the NFIP
is limited by requirements set forth in statute and FEMA‘s implementing
regulations, which include FEMA‘s standard flood insurance policy. As a
result of these limitations, insurance payments to claimants for flood
damage may not cover all of the costs of repairing or replacing
flooddamaged property. For example, homes that could sustain more than
$250,000 in damage cannot be insured to their full replacement cost,
thus limiting claims to this statutory ceiling. In addition, NFIP
policies cover only direct physical loss by or from flood. Therefore,
losses resulting primarily from a preexisting structural weakness in a
home, or losses resulting from events other than flood such as
windstorms, are not covered by NFIP policies. To meet its monitoring
and oversight responsibilities, FEMA is to conduct periodic operational
reviews of the 95 private insurance companies that participate in the
NFIP, and FEMA‘s program contractor is to check the accuracy of claims
settlements by doing quality assurance reinspections of a sample of
claims adjustments for every flood event. FEMA did not use a
statistically valid method for sampling files to be reviewed in these
monitoring and oversight activities. As a result, FEMA cannot project
the results of these reviews to determine the overall accuracy of
claims settled for specific flood events or assess the overall
performance of insurance companies and their adjusters in fulfilling
responsibilities for the NFIP” actions necessary for FEMA to have
reasonable assurance that program objectives are being achieved. FEMA
has not yet fully implemented provisions of the Flood Insurance Reform
Act of 2004 requiring the agency to provide policyholders with a flood
insurance claims handbook that meets statutory requirements, to
establish a regulatory appeals process, and to ensure that insurance
agents meet minimum education and training requirements. The statutory
deadline for implementing these changes was December 30, 2004. Efforts
to implement the provisions are under way, but have not yet been
completed. FEMA has not developed plans with milestones for assigning
accountability and projecting when program improvements will be made,
so that improvements are in place to assist victims of future flood
events. As GAO has previously reported, the NFIP, by design, is not
actuarially sound. The program does not collect sufficient premium
income to build reserves to meet long-term future expected flood
losses, in part because Congress authorized subsidized insurance rates
to be made available for some properties. FEMA has generally been
successful in keeping the NFIP on a sound financial footing, but the
catastrophic flooding events of 2004 (involving four major hurricanes)
required FEMA, as of August 2005, to borrow $300 million from the U.S.
Treasury to help pay an estimated $1.8 billion on flood insurance
claims. Following Hurricane Katrina in August 2005, legislation was
enacted to increase FEMA‘s borrowing authority from $1.5 billion to
$3.5 billion through fiscal year 2008.
What GAO Recommends:
GAO recommended that FEMA use a statistically valid method to select
claims for review and establish milestones for meeting provisions of
the Flood Insurance Reform Act. FEMA expressed concerns about findings
related to its management.
www.gao.gov/cgi-bin/getrpt?GAO-06-183T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact William O. Jenkins, Jr.
at (202) 512-8777 or jenkinswo@gao.gov.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to participate in today's hearing on the
National Flood Insurance Program (NFIP) to discuss the Federal
Emergency Management Agency's (FEMA) role in the management and
oversight of the NFIP. The NFIP combines property insurance for flood
victims, mapping to identify the boundaries of the areas at risk of
flooding, and incentives for communities to adopt and enforce
floodplain management regulations and building standards to reduce
future flood damage. The effective integration of all three of these
elements are needed for the NFIP to achieve its goals of:
* providing property flood insurance coverage for a high proportion of
property owners who would benefit from such coverage;
* through this insurance coverage reducing taxpayer-funded disaster
assistance when flooding strikes, and:
* reducing flood damage through flood plain management and the
enforcement of building standards (such as elevating structures).
The Federal Emergency Management Agency (FEMA) within the Department of
Homeland Security (DHS) is responsible for the oversight and management
of the program.[Footnote 1] Under the program, the federal government
assumes the liability for the insurance coverage and sets rates and
coverage limitations, among other responsibilities.
Floods are the most common and destructive natural disaster in the
United States. According to NFIP statistics, 90 percent of all natural
disasters in the United States involve flooding. However, flooding is
generally excluded from homeowner policies that typically cover damage
from other losses, such as wind, fire, and theft. Because of the
catastrophic nature of flooding and the inability to adequately predict
flood risks, private insurance companies have largely been unwilling to
underwrite and bear the risk of flood insurance.
Congress established the NFIP pursuant to the National Flood Insurance
Act of 1968[Footnote 2] to provide policyholders with some insurance
coverage for flood damage, as an alternative to disaster assistance,
and to try to reduce the escalating costs of repairing flood damage. In
creating the NFIP, Congress found that a flood insurance program with
"large-scale participation of the Federal Government and carried out to
the maximum extent practicable by the private insurance industry is
feasible and can be initiated."[Footnote 3] In keeping with this
purpose, FEMA has contractual agreements with 95 private insurance
company partners to sell policies and adjust and process claims. Flood
insurance is available to owners and occupants of insurable property in
flood-prone areas. Our work focused on insurance coverage for
homeowners. However, coverage is also available for other structures,
such as apartment buildings, schools, churches, businesses, cooperative
associations, and condominium associations.
As of August 2005, the NFIP was estimated to have approximately 4.6
million policyholders in about 20,000 communities with $828 billion of
insurance in force. Since its inception, the program has paid about
$14.6 billion in insurance claims, primarily from policyholder premiums
that otherwise would have been paid through taxpayer-funded disaster
relief or borne by home and business owners themselves. According to
FEMA, every $3 in flood insurance claims payments saves about $1 in
disaster assistance payments, and the combination of flood plain
management and mitigation efforts saves about $1 billion in flood
damage each year.
As we finalized the report released this week, the exact extent of the
devastation from Hurricanes Katrina and Rita in August and September
2005 was still being assessed; however, the acting director of FEMA's
Mitigation Division testified on October 18, 2005 that the NFIP would
pay $15 to 25 billion in claims for damage resulting from these two
storms. As of October 13, 2005, FEMA had received 192,809 flood
insurance claims and the NFIP had paid nearly $1.3 billion to settle
7,664 of these claims. The number of claims filed is more than twice as
many as were filed in all of 2004, itself a record year. Clearly, these
two disasters will challenge the NFIP with demands the program has
never before faced in its more than 35 year history. Already, a record
number of flood insurance claims have been filed in 2005, and Congress
has increased the NFIP's authority to borrow from the United States
Treasury from $1.5 billion to $3.5 billion.
GAO is beginning a body of work on the preparation for, response to,
and recovery from Hurricanes Katrina and Rita. As GAO moves forward
with this work, we will continue to work with this and other
congressional committees and the accountability community--federal
inspector generals, state and city auditors--regarding the scope of our
future work on emergency management issues, including the NFIP. Our
goal is to apply our resources and expertise to address long-term
concerns, such as those we are discussing today, and to avoid
duplicating the work of others. Currently, we have teams in the Gulf
Coast states collecting data and observations from hurricane victims
and federal, state, local, and private participants in the preparation
for, response to, and recovery from these devastating hurricanes,
including the flooding they caused.
My testimony today discusses the report we issued on October 18, 2005
that discusses FEMA's management and oversight of the flood insurance
program.[Footnote 4] This report was mandated by the Flood Insurance
Reform Act of 2004.[Footnote 5] It includes recommendations on two pre-
Hurricane Katrina flood-insurance related issues that pose a challenge
for FEMA. These are (1) improving FEMA's management and oversight of
the NFIP and (2) FEMA's implementation of provisions of the Flood
Insurance Reform Act of 2004 to provide policyholders a flood insurance
claims handbook that meets statutory requirements, to establish a
regulatory appeals process, and to ensure that flood insurance agents
meet minimum NFIP education and training requirements.
The report is based on interviews with FEMA officials, documentation of
its monitoring and oversight processes, and our field observations of
FEMA's monitoring and oversight activities. In addition, we analyzed
the National Flood Insurance Act of 1968, as amended, its legislative
history, and FEMA's implementing regulations, and we examined
documentation and interviewed officials about FEMA's efforts to comply
with provisions of the 2004 Flood Insurance Reform Act. We did our work
from December 2004 to August 2005 in accordance with generally accepted
government auditing standards.
A key characteristic of the NFIP is the extent to which FEMA must rely
on others to achieve the program's goals. FEMA's role is principally
one of establishing policies and standards that others generally
implement on a day-to-day basis and providing financial and management
oversight of those who carry out those day-to-day responsibilities.
These responsibilities include ensuring that property owners who are
required to purchase flood insurance do so, enforcing flood plain
management and building regulations, selling and servicing flood
insurance policies, and updating and maintaining the nation's flood
maps. We have issued reports and testified before this and other
congressional committees on these and other issues related to the
program.[Footnote 6] In the report we are releasing today, we note that
FEMA faces a challenge in providing effective oversight of the 95
insurance companies and thousands of insurance agents and claims
adjusters who are primarily responsible for the day-to-day process of
selling and servicing flood insurance policies.
My testimony today addresses four topics:
* insurance coverage available under the NFIP, including coverage
limitations;
* FEMA's role in monitoring and oversight of the program;
* FEMA's progress in implementing the requirements of the National
Flood Insurance Reform Act of 2004; and:
* Some broader challenges facing the program.
Available Insurance Coverage and Limitations Under the NFIP:
The amount of insurance coverage available to homeowners under the NFIP
is limited by requirements set forth in statute and regulation. As a
result of these limitations, insurance payments to claimants for flood
damage may not cover all the costs of repairing or replacing flood-
damaged property. For example, there is a $250,000 statutory ceiling on
the amount of flood insurance homeowners can purchase for the building
structure and a $100,000 ceiling on the amount they can purchase for
certain personal property. Thus, homes that might sustain more than
$250,000 in damage cannot be insured to their full replacement cost.
In addition, to the statutory limitations on coverage amounts, Congress
also gave FEMA broad authority to issue regulations establishing "the
general terms and conditions of insurability," [Footnote 7] including
the classes, types, and locations of properties that are eligible for
flood insurance; the nature and limits of loss that may be covered, the
classification, limitation, and rejection of any risks that FEMA
considers advisable; and the amount of appropriate loss deductibles.
Pursuant to this delegation of authority, FEMA has issued regulations,
including a "Standard Flood Insurance Policy," that further delineate
the scope of coverage.[Footnote 8] All flood insurance made available
under the NFIP is subject to the express terms and conditions of the
statute and regulations, including the standard policy.[Footnote 9] The
Federal Insurance Administrator within FEMA is charged with
interpreting the scope of coverage under the standard policy.[Footnote
10]
In addition, NFIP policies cover only direct physical loss by or from
flood. Therefore, losses resulting primarily from a preexisting
structural weakness in a home or prior water damage, and losses
resulting from events other than flood, such as windstorms or or earth
movements, are not covered by the NFIP. Personal property is covered,
with certain limitations, only if the homeowner has purchased separate
NFIP personal property insurance in addition to coverage for the
building. Finally, the method of settling losses affects the amount
recovered. For example, homes that qualify only for an actual cash
value settlement--which represents the cost to replace damages
property, less the value of physical depreciation--would presumably
receive payments that are less than homes that qualify for a
replacement cost settlement, which does not deduct for depreciation.
Finally, the amount recoverable under the SFIP is limited to the amount
that exceeds the applicable deductible.[Footnote 11] Our report
discusses the limitations on coverage and recoverable losses in greater
detail.
Monitoring and Oversight of NFIP Identifies Specific Problems, but Does
Not Provide Comprehensive Information on Overall Program Performance:
About 40 FEMA employees, assisted by about 170 contractor employees,
are responsible for managing the NFIP. Management responsibilities
include establishing and updating NFIP regulations, administering the
National Flood Insurance Fund, analyzing data to actuarially determine
flood insurance rates and premiums, and offering training to insurance
agents and adjusters. In addition, FEMA and its program contractor are
responsible for monitoring and overseeing the quality of the
performance of the write-your-own companies to assure that the NFIP is
administered properly.
To meet its monitoring and oversight responsibilities, FEMA is to
conduct periodic operational reviews of the 95 private insurance
companies that participate in the NFIP. In addition, FEMA's program
contractor is to check the accuracy of claims settlements by doing
quality assurance reinspections of a sample of claims adjustments for
every flood event. For operational reviews, FEMA examiners are to do a
thorough review of the companies' NFIP underwriting and claims
settlement processes and internal controls, including checking a sample
of claims and underwriting files to determine, for example, whether a
violation of policy has occurred, an incorrect payment has been made,
and if files contain all required documentation. Separately, FEMA's
program contractor is responsible for conducting quality assurance
reinspections of a sample of claims adjustments for specific flood
events in order to identify, for example, whether an insurer allowed an
uncovered expense, or missed a covered expense in the original
adjustment.
Operational reviews of flood insurance companies participating in the
NFIP that are conducted by FEMA staff are FEMA's primary internal
control mechanism for monitoring, identifying, and resolving problems
related to how insurers sell and review NFIP policies and adjust
claims. For all aspects of operational reviews, the examiners are to
determine whether files are maintained in good order, whether current
forms are used and whether staff has a proficient knowledge of
requirements and procedures to properly underwrite and process flood
claims. Examiners are also to look at internal controls in place at
each company. When problems are identified, examiners are to classify
the severity of the errors. Each file reviewed is to be classified as
satisfactory or unsatisfactory. Unsatisfactory files contain either a
critical error (e.g., a violation of policy or an incorrect payment) or
three non-critical errors (e.g., violations of procedures that did not
delay actions or claims).
Write-your-own companies with error rates of 20 percent or higher of
the total number of files reviewed for the specific underwriting or
claims operation review would always receive an unsatisfactory
designation. In such cases, FEMA requires that the company develop an
action plan to correct the problems identified and is to schedule a
follow-up review in 6 months to determine whether progress has been
made.
The operational reviews and follow-up visits to insurance companies
that we analyzed during 2005 followed FEMA's internal control
procedures for identifying and resolving specific problems that may
occur in individual insurance companies' processes for selling and
renewing NFIP policies and adjusting claims. According to information
provided by FEMA, the number of operational reviews completed between
2000 and August 2005 were done at a pace that allows for a review of
each participating insurance company at least once every 3 years, as
FEMA procedures require. In addition, the processes FEMA had in place
for operational reviews and quality assurance reinspections of claims
adjustments met our internal control standard for monitoring federal
programs.
Program Contractor Reinspections of NFIP Claims:
In addition to operational reviews done by FEMA staff, FEMA's program
contractor conducts quality assurance reinspections of claims for
specific flood events. The program contractor employs nine general
adjusters who conduct quality assurance reinspections of a sample of
open claims for each flood event.[Footnote 12] Procedures for the
general adjusters to follow are outlined in FEMA's Write Your Own
Financial Control Plan. According to the general adjusters we
interviewed, in addition to preparing written reports of each
reinspection, general adjusters discuss the results of the
reinspections they perform with officials of write-your-own companies
that process the claims. If a general adjuster determines that the
insurance company allowed an expense that should not have been covered,
the company is to reimburse the NFIP. Conversely, if a general adjuster
finds that the private-sector adjuster missed a covered expenses in the
original adjustment, the general adjuster is to take steps to provide
additional payment to the policyholder.
An instructor at an adjuster refresher training session, while
observing that adjusters had performed very well overall during the
2004 hurricane season, cited several errors that he had identified in
reinspections of claims, including improper room dimension measurements
and improper allocation of costs caused by wind damage (covered by
homeowners' policies) versus costs caused by flood damage. In addition,
the instructor identified as a problem poor communication with
homeowners on the processes followed to inspect the homeowner's
property and settle the claim. Overall error rates for write-your-own
companies are monitored. Procedures require additional monitoring,
training, or other action if error rates exceed 3 percent. According to
the general adjusters we interviewed and FEMA's program contractor,
qualify assurance reinspections are forwarded from general adjusters to
the program contractor where results of reinspections are to be
aggregated in a reinspection database as a method of providing for
broad-based oversight of the NFIP as its services are delivered by the
write-your-own companies, adjusting firms and independent flood
adjusters.
Sampling Methods Used to Conduct Operational Reviews and Quality
Assurance Reinspections Do Not Provide Management Information On
Overall Performance:
The process FEMA used to select a sample of claims files for
operational reviews and the process its program contractor used to
select a sample of adjustments for reinspections were not randomly
chosen or statistically representative of all claims. We found that the
selection processes used were, instead, based upon judgmental criteria
including, among other items, the size and location of loss and
complexity of claims. As a result of limitations in the sampling
processes, FEMA cannot project the results of these monitoring and
oversight activities to determine the overall accuracy of claims
settled for specific flood events or assess the overall performance of
insurance companies and their adjusters in fulfilling their
responsibilities for the NFIP--actions necessary for FEMA to meet our
internal control standard that it have reasonable assurance that
program objectives are being achieved and that its operations are
effective and efficient.
To strengthen and improve FEMA's monitoring and oversight of the NFIP,
we are recommending in today's report that FEMA use a methodologically
valid approach for sampling files selected for operational reviews and
quality assurance claims reinspections.
FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the
Flood Insurance Reform Act of 2004:
As of September 2005, FEMA had not yet fully implemented provisions of
the Flood Insurance Reform Act of 2004. Among other things, the act
requires FEMA to provide policyholders a flood insurance claims
handbook; to establish a regulatory appeals process for claimants; and
to establish minimum education and training requirements for insurance
agents who sell NFIP policies.[Footnote 13] The 6-month statutory
deadline for implementing these changes was December 30, 2004.
In September 2005, FEMA posted a flood insurance claims handbook on its
Web site. The handbook contains information on anticipating, filing and
appealing a claim through an informal appeals process, which FEMA
intends to use pending the establishment of a regulatory appeals
process. However, because the handbook does not contain information
regarding the appeals process that FEMA is statutorily required to
establish through regulation, it does not yet meet statutory
requirements. With respect to this appeals process, FEMA has not stated
how long rulemaking might take to establish the process by regulation,
or how the process might work, such as filing requirements, time frames
for considering appeals, and the composition of an appeals board.
Therefore, it remains unclear how or when FEMA will establish the
statutorily required appeals process. With respect to minimum training
and education requirements for insurance agents who sell NFIP policies,
FEMA published a Federal Register notice on September 1, 2005, which
included an outline of training course materials. In the notice, FEMA
stated that, rather than establish separate and perhaps duplicative
requirements from those that may already be in place in the states, it
had chosen to work with the states to implement the NFIP requirements
through already established state licensing schemes for insurance
agents. The notice did not specify how or when states were to begin
implementing the NFIP training and education requirements. Thus, it is
too early to tell the extent to which insurance agents will meet FEMA's
minimum standards. FEMA officials said that, because changes to the
program could have broad reaching and significant effects on
policyholders and private-sector stakeholders upon whom FEMA relies to
implement the program, the agency is taking a measured approach to
addressing the changes mandated by Congress. Nonetheless, without plans
with milestones for completing its efforts to address the provisions of
the act, FEMA cannot hold responsible officials accountable or ensure
that statutorily required improvements are in place to assist victims
of future flood events.
We are recommending in today's report that FEMA develop documented
plans with milestones for implementing requirements of the Flood
Insurance Reform Act of 2004 to provide policyholders a flood insurance
claims handbook that meets statutory requirements, to establish a
regulatory appeals process, and to ensure that flood insurance agents
meet minimum NFIP education and training requirements.
FEMA did not agree with our recommendations for both its sampling
methodology and implementation of the requirements of the Flood
Insurance Reform Act of 2004. It noted that its current sampling
methodology of selecting a sample based on knowledge of the population
to be sampled was more appropriate for identifying problems than the
statistically random probability sample we recommended. Although FEMA's
current nonprobability sampling strategy may provide an opportunity to
focus on particular areas of risk, it does not provide management with
the information needed to assess the overall performance of private
insurance companies and adjusters participating in the program--
information that FEMA needs to have reasonable assurance that program
objectives are being achieved.
FEMA also disagreed with our characterization of the extent to which
FEMA has met provisions of the Flood Insurance Reform Act of 2004. We
believe that our description of those efforts and our recommendations
with regard to implementing the Act's provisions are valid. For
example, although FEMA commented that it was offering claimants an
informal appeals process in its flood insurance claims handbook, it
must establish regulations for this process, and those are not yet
complete.
Some Broader Issues Facing the NFIP:
The NFIP Pays Expenses and Claims with Premiums, but Its Financial
Structure Is Not Designed to be Actuarially Sound:
To the extent possible, the NFIP is designed to pay operating expenses
and flood insurance claims with premiums collected on flood insurance
policies rather than with tax dollars. However, as we have reported,
the program, by design, is not actuarially sound because Congress
authorized subsidized insurance rates to be made available for policies
covering some properties to encourage communities to join the program.
As a result, the program does not collect sufficient premium income to
build reserves to meet the long-term future expected flood
losses.[Footnote 14] FEMA has statutory authority to borrow funds from
the Treasury to keep the NFIP solvent.[Footnote 15]
Until the 2004 hurricane season, FEMA had been generally successful in
keeping the NFIP on sound financial footing. It had exercised its
authority to borrow from the Treasury three times in the last decade
when losses were heavy and repaid all funds with interest. As of August
2005, the program had borrowed $300 million to cover more than $1.8
billion in claims from the major disasters of 2004, including
hurricanes Charley, Frances, Ivan, and Jeanne, which hit Florida and
other East and Gulf Coast states. The large number of claims arising
from Hurricanes Katrina and Rita will require FEMA to borrow heavily
from the Treasury, because the NFIP does not have the financial
reserves necessary to offset heavy losses in the short-term. Following
Hurricane Katrina in August 2005, legislation was enacted that
increased FEMA's borrowing authority from $1.5 billion to $3.5 billion
through fiscal year 2008.[Footnote 16] Additional borrowing authority
may be needed to pay claims arising from Hurricanes Katrina and Rita.
Some Repetitively-Flooded Properties Are Subsidized under Provisions of
Authorizing Legislation and Continue to Financially Strain the Program:
In reauthorizing the NFIP in 2004, Congress noted that "repetitive-loss
properties"--those that had resulted in two or more flood insurance
claims payments of $1,000 or more over 10 years--constituted a
significant drain on the resources of the NFIP. [Footnote 17] These
repetitive loss properties are problematic not only because of their
vulnerability to flooding but also because of the costs of repeatedly
repairing flood damages. While these properties make up only about 1
percent of the properties insured under the NFIP, they account for 25
to 30 percent of all claims losses. At the time of our March 2004
report on repetitive loss properties, nearly half of all nationwide
repetitive loss property insurance payments had been made in Louisiana,
Texas, and Florida. According to a recent Congressional Research
Service report, as of December 31, 2004, FEMA had identified 11,706
"severe repetitive loss" properties defined as those with four or more
claims or two or three losses that exceeded the insured value of the
property.[Footnote 18] Of these 11,706 properties almost half (49
percent) were in three states--3,208 (27 percent) in Louisiana, 1,573
(13 percent) in Texas, and 1,034 (9 percent) in New Jersey.
As the destruction caused by horrendous 2004 and 2005 hurricanes are a
driving force for improving the NFIP today, devastating natural
disasters in the 1960s were a primary reason for the national interest
in creating a federal flood insurance program. In 1963 and 1964,
Hurricane Betsy and other hurricanes caused extensive damage in the
South, and, in 1965, heavy flooding occurred on the upper Mississippi
River. In studying insurance alternatives to disaster assistance for
people suffering property losses in floods, a flood insurance
feasibility study found that premium rates in certain flood-prone areas
could be extremely high. As a result, the National Flood Insurance Act
of 1968, which created the NFIP, mandated that existing buildings in
flood-risk areas would receive subsidies on premiums because these
structures were built before the flood risk was known and identified on
flood insurance rate maps.[Footnote 19] Owners of structures built in
flood-prone areas on or after the effective date of the first flood
insurance rate maps in their areas or after December 31, 1974, would
have to pay full actuarial rates.[Footnote 20] Because many repetitive
loss properties were built before either December 31, 1974 or the
effective date of the first flood insurance rate maps in their areas,
they were eligible for subsidized premium rates under provisions of the
National Flood Insurance Act of 1968.
The provision of subsidized premiums encouraged communities to
participate in the NFIP by adopting and agreeing to enforce state and
community floodplain management regulations to reduce future flood
damage. In April 2005, FEMA estimated that floodplain management
regulations enforced by communities participating in the NFIP have
prevented over $1.1 billion annually in flood damage. However, some of
the properties that had received the initial rate subsidy are still in
existence and subject to repetitive flood losses, thus placing a
financial strain on the NFIP.
For over a decade, FEMA has pursued a variety of strategies to reduce
the number of repetitive loss properties in the NFIP. In a 2004
testimony, we noted that congressional proposals have been made to
phase out coverage or begin charging full and actuarially based rates
for repetitive loss property owners who refuse to accept FEMA's offer
to purchase or mitigate the effect of floods on these
buildings.[Footnote 21] The 2004 Flood Insurance Reform Act created a 5-
year pilot program to deal with repetitive-loss properties in the NFIP.
In particular, the act authorized FEMA to provide financial assistance
to participating states and communities to carry out mitigation
activities or to purchase "severe repetitive loss properties."[Footnote
22] During the pilot program, policyholders who refuse a mitigation or
purchase offer that meets program requirements will be required to pay
increased premium rates. In particular, the premium rates for these
policyholders would increase by 150% following their refusal and
another 150% following future claims of more than $1,500.[Footnote 23]
However, the rates charged cannot exceed the applicable actuarial
rate.[Footnote 24]
It will be important in future studies of the NFIP to continue to
analyze data on progress being made to reduce the inventory of
subsidized NFIP repetitive loss properties, how the reduction of this
inventory contributes to the financial stability of the program, and
whether additional FEMA regulatory steps or congressional actions could
contribute to the financial solvency of the NFIP, while meeting
commitments made by the authorizing legislation.
Data Inconclusive on Compliance with Requirements for Mandatory
Purchase of NFIP Policies:
In 1973 and 1994, Congress enacted requirements for mandatory purchase
of NFIP policies by some property owners in high risk areas. From 1968
until the adoption of the Flood Disaster Protection Act of 1973, the
purchase of flood insurance was voluntary. However, because voluntary
participation in the NFIP was low and many flood victims did not have
insurance to repair damages from floods in the early 1970s, the 1973
act required the mandatory purchase of flood insurance to cover some
structures in special flood hazard areas of communities participating
in the program. Homeowners with mortgages from federally-regulated
lenders on property in communities identified to be in special flood
hazard areas are required to purchase flood insurance on their
dwellings for the amount of their outstanding mortgage balance, up to a
maximum of $250,000 in coverage for single family homes. The owners of
properties with no mortgages or properties with mortgages held by
lenders who are not federally regulated were not, and still are not,
required to buy flood insurance, even if the properties are in special
flood hazard areas--the areas NFIP flood maps identify as having the
highest risk of flooding.
FEMA determines flood risk and actuarial ratings on properties through
flood insurance rate mapping and other considerations including the
elevation of the lowest floor of the building, the type of building,
the number of floors, and whether or not the building has a basement,
among other factors. FEMA flood maps designate areas for risk of
flooding by zones. For example, areas subject to damage by waves and
storm surge are in zones with the highest expectation for flood loss.
Between 1973 and 1994, many policyholders continued to find it easy to
drop policies, even if the policies were required by lenders. Federal
agency lenders and regulators did not appear to strongly enforce the
mandatory flood insurance purchase requirements.[Footnote 25] According
to a recent Congressional Research Service study,[Footnote 26] the
Midwest flood of 1993 highlighted this problem and reinforced the idea
that reforms were needed to compel lender compliance with the
requirements of the 1973 Act. In response, Congress passed the National
Flood Insurance Reform Act of 1994. Under the 1994 law, if the property
owner failed to get the required coverage, lenders were required to
purchase flood insurance on their behalf and then bill the property
owners. Lenders became subject to civil monetary penalties for not
enforcing the mandatory purchase requirement.
In June 2002, we reported that the extent to which lenders were
enforcing the mandatory purchase requirement was unknown. Officials
involved with the flood insurance program developed contrasting
viewpoints about whether lenders were complying with the flood
insurance purchase requirements primarily because the officials used
differing types of data to reach their conclusions. Federal bank
regulators and lenders based their belief that lenders were generally
complying with the NFIP's purchase requirements on regulators'
examinations and reviews conducted to monitor and verify lender
compliance. In contrast, FEMA officials believed that many lenders
frequently were not complying with the requirements, which was an
opinion based largely on noncompliance estimates computed from data on
mortgages, flood zones, and insurance policies; limited studies on
compliance; and anecdotal evidence indicating that insurance was not
always in place where required. Neither side, however, was able to
substantiate its differing claims with statistically sound data that
provide a nationwide perspective on lender compliance. [Footnote 27]
Accurate, Updated Flood Maps Are The Foundation of the NFIP:
Accurate flood maps that identify the areas at greatest risk of
flooding are the foundation of the NFIP. Flood maps must be
periodically updated to assess and map changes in the boundaries of
floodplains that result from community growth, development, erosion,
and other factors that affect the boundaries of areas at risk of
flooding. FEMA has embarked on a multi-year effort to update the
nation's flood maps at a cost in excess of $1 billion. The maps are
principally used by (1) the approximately 20,000 communities
participating in the NFIP to adopt and enforce the program's minimum
building standards for new construction within the maps' identified
flood plains; (2) FEMA to develop accurate flood insurance policy rates
based on flood risk, and (3) federal regulated mortgage lenders to
identify those property owners who are statutorily required to purchase
federal flood insurance. Under the NFIP, property owners whose
properties are within the designated "100-year floodplain" and have a
mortgage from a federally regulated financial institution are required
to purchase flood insurance in an amount equal to their outstanding
mortgage balance (up to the statutory ceiling of $250,000).
FEMA expects that by producing more accurate and accessible digital
flood maps, the NFIP and the nation will benefit in three ways. First,
communities can use more accurate digital maps to reduce flood risk
within floodplains by more effectively regulating development through
zoning and building standard. Second, accurate digital maps available
on the Internet will facilitate the identification of property owners
who are statutorily required to obtain or who would be best served by
obtaining flood insurance. Third, accurate and precise data will help
national, state, and local officials to accurately locate
infrastructure and transportation systems (e.g., power plants, sewage
plants, railroads, bridges, and ports) to help mitigate and manage risk
for multiple hazards, both natural and man-made.
Success in updating the nation's flood maps requires clear standards
for map development; the coordinated efforts and shared resources of
federal, state, and local governments; and the involvement of key
stakeholders who will be expected to use the maps. In developing the
new data system to update flood maps across the nation, FEMA's intent
is to develop and incorporate flood risk data that are of a level of
specificity and accuracy commensurate with communities' relative flood
risks. Not every community may need the same level of specificity and
detail in its new flood maps. However, it is important that FEMA
establish standards for the appropriate data and level of analysis
required to develop maps for all communities of a similar risk level.
In its November 2004 Multi-Year Flood Hazard Identification Plan, FEMA
discussed the varying types of data collection and analysis techniques
the agency plans to use to develop flood hazard data in order to relate
the level of study and level of risk for each of 3,146 counties.
FEMA has developed targets for resource contribution (in-kind as well
as dollars) by its state and local partners in updating the nation's
flood maps. At the same time, it has developed plans for reaching out
to and including the input of communities and key stakeholders in the
development of the new maps. These expanded outreach efforts reflect
FEMA's understanding that it is dependent upon others to achieve the
benefits of map modernization.
Concluding Observations:
The most immediate challenge for the NFIP is processing the flood
insurance claims resulting from Hurricanes Katrina and Rita. FEMA
reported, as of October 13th, that it had received 192,809 flood
insurance claims and had paid nearly $1.3 billion to settle 7,664 of
these claims. The number of claims is more than twice as many as were
filed in all of 2004, itself a record year. The need for effective
communication and consistent and appropriate application of policy
provisions will be particularly important in working with anxious
policyholders, many of whom have been displaced from their homes.
In the longer term, Congress and the NFIP face a complex challenge in
assessing potential changes to the program that would improve its
financial stability, increase participation in the program by property
owners in areas at risk of flooding, reduce the number of repetitive
loss properties in the program, and maintain current and accurate flood
plain maps. These issues are complex, interrelated, and are likely to
involve trade-offs. For example, increasing premiums to better reflect
risk may reduce voluntary participation in the program or encourage
those who are required to purchase flood insurance to limit their
coverage to the minimum required amount (i.e., the amount of their
outstanding mortgage balance). This in turn can increase taxpayer
exposure for disaster assistance resulting from flooding. There is no
"silver bullet" for improving the current structure and operations of
the NFIP. It will require sound data and analysis and the cooperation
and participation of many stakeholders.
Mr. Chairman and Members of the Committee, this concludes my prepared
statement. I would be pleased to respond to any questions you and the
Committee Members may have.
GAO Contacts and Staff Acknowledgments:
Contact points for our Office of Congressional Relations and Public
Affairs may be found on the last page of this statement. For further
information about this testimony, please contact Norman Rabkin at (202)
512-8777 or at rabkinn@gao.gov, or William O. Jenkins, Jr. at (202) 512-
8757 or at jenkinswo@gao.gov. This statement was prepared under the
direction of Christopher Keisling. Key contributors were Amy Bernstein,
Christine Davis, Deborah Knorr, Denise McCabe, and Margaret Vo.
FOOTNOTES
[1] In March 2003, FEMA and its approximately 2,500 staff became part
of the Department of Homeland Security (DHS). Most of FEMA--including
its Mitigation Division, which is responsible for administering the
NFIP--is now part of the department's Emergency Preparedness and
Response Directorate. However, FEMA retained its name and individual
identity within the department. Under a reorganization plan proposed by
the current Secretary of DHS, the Emergency Preparedness and Response
Directorate would be abolished, and FEMA would report directly to the
Undersecretary and Secretary of DHS.
[2] The National Flood Insurance Act of 1968, as amended, is codified
at 42 U.S.C. 4001 to 4129.
[3] 42 U.S.C. 4001(b)(2).
[4] GAO, Federal Emergency Management Agency: Improvements Needed to
Enhance Oversight and Management of the National Flood Insurance
Program, GAO-06-119 (Washington, D.C.: Oct. 18, 2005).
[5] Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004,
Pub. L. No. 108-264, 118 Stat. 712, 727 (2004).
[6] See, for example, the following GAO reports and testimonies: Flood
Insurance: Extent of Noncompliance with Purchase Requirements Unknown,
GAO-02-326 (Washington, D.C.: June 21, 2002); National Flood Insurance
Program: Actions to Address Repetitive Loss Properties, GAO-04-401T
(Washington, D.C.: March 25, 2004); Flood Map Modernization: Program
Strategy Shows Promise, but Challenges Remain, GAO-04-117 (Washington,
D.C.: March 31, 2004); Federal Emergency Management Agency: Challenges
Facing the National Flood Insurance Program, GAO-06-174T (Washington,
D.C.: Oct. 18, 2005).
[7] 42 U.S.C. 4013(a).
[8] The insurance coverage regulations appear at 44 C.F.R. Part 61, and
the Standard Flood Insurance Policy is an appendix to these
regulations, set forth at 44 C.F.C. Part 61, appendix A(1), "Standard
Flood Insurance Policy Dwelling Form."
[9] 44 C.F.R. 61.4.
[10] Id. 61.4(b), 61.14.
[11] SFIP section VI, Deductibles. Applicable deductible amounts are
not listed in the SFIP itself, but are shown on the Declarations Page,
a computer-generated summary of the information provided by the insured
in the insured's application. This page is part of each insured's flood
insurance policy.
[12] In addition to doing reinspections, these general adjusters are
responsible for estimating damage from flood events, coordinating
claims adjustment activities at disaster locations, and conducting
adjuster training.
[13] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, sections
204, 205, and 207.
[14] GAO, Flood Insurance: Information on the Financial Condition of
the National Flood Insurance Program, GAO-01-992T (Washington, D.C.:
July 2001).
[15] See 42 U.S.C. 4016.
[16] The National Flood Insurance Program Enhanced Borrowing Authority
Act of 2005, Pub. L. No. 109-65 (Sept. 20, 2005).
[17] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section
2(3),(4), (5), 118 Stat. 712, 713 (2004).
[18] Congressional Research Service, Federal Flood Insurance: The
Repetitive Loss Problem, RL32972 (Washington, D.C.: June 30, 2005).
[19] 42 U.S.C. 4014(a)(2), 4015(a), (b).
[20] 42 U.S.C. 4014(a)(1), 4015(c).
[21] GAO, National Flood Insurance Program: Actions to Address
Repetitive Loss Properties, GAO-04-401T (Washington, D.C.: Mar. 25,
2004).
[22] Flood Insurance Reform Act of 2004, 118 Stat. 712, 714 (2004). The
act defines a "severe repetitive loss property" to mean single-family
properties that have received at least $20,000 in flood insurance
payments based on 4 or more claims of at least $5,000 each. The act
requires FEMA to define in future regulation which multi-family
properties constitute "severe repetitive loss properties."
[23] Id., , 118 Stat. 712, 717-718 (2004).
[24] DHS' proposed appropriation for fiscal year 2006 includes $40
million to carry out the pilot program. Both houses of Congress passed
the bill, and it was presented to the President on October 14, 2005,
but, as of October 17, 2005, the President had not signed the
legislation. Department of Homeland Security Appropriations Act, 2006,
H.R. 2360, 109th Cong., title III (2005).
[25] The federal entities for lending regulation are the Board of
Governors of the Federal Reserve System, the Office of the Comptroller
of the Currency, the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation, the National Credit Union Administration, and
the Farm Credit Administration.
[26] Congressional Research Service, Federal Flood Insurance: The
Repetitive Loss Problem (June 30, 2005).
[27] GAO, Flood Insurance: Extent of Noncompliance with Purchase
Requirements is Unknown, GAO-02-396 (Washington, D.C: June 21, 2002).
