Federal Emergency Management Agency
Challenges for the National Flood Insurance Program Gao ID: GAO-06-335T January 25, 2006The 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. The unprecedented magnitude and severity of the flood losses from hurricanes in 2005 challenged the NFIP to process a record number of claims. These storms also illustrated the extent to which the federal government has exposure for claims coverage in catastrophic loss years. FEMA estimates that Hurricanes Katrina, Rita, and Wilma will generate claims and payments of about $23 billion--far surpassing the total claims paid in the entire history of the NFIP. This testimony provides information from past and ongoing GAO work on issues including: (1) NFIP's financial structure; (2) the impact of properties with repetitive flood losses on NFIP's resources; (3) proposals to increase the number of policies in force; and (4) the status of past GAO recommendations.
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 November 2005, FEMA's authority to borrow from the Treasury was increased from $1.5 billion to $18.5 billion through fiscal year 2008 to help pay claims from the 2005 hurricane season. It is highly unlikely that the NFIP as presently funded could generate sufficient revenues to repay a debt of this size. One reason the NFIP is not actuarially sound is because a number of its policies on dwellings that were built before flood plain management regulations were established in their communities are subsidized and pay premiums of 35-40 percent of the true risk premium. In January 2006, FEMA estimated an annual shortfall in premium income of $750 million because of such policy subsidies. Some subsidized properties, called repetitive loss properties, also suffer repetitive flood losses, which accounted for about $4.6 billion in claims payments from 1978 to March 2004. We need to analyze the progress made to reduce the inventory of subsidized repetitive-loss properties and determine whether additional regulatory or congressional action is needed. A challenge for FEMA is to expand the NFIP policyholder base by enforcing mandatory purchase requirements and encouraging voluntary purchase by homeowners who live in areas at lower risk of flooding. The extent of noncompliance with current mandatory purchase requirements for property owners in special flood hazard areas is unknown. There has been some congressional interest in the feasibility of expanding mandatory purchase requirements beyond the current special high-risk areas, however, there are a number of difficulties to assessing the impacts, effectiveness, and feasibility of such a change in the structure of the NFIP, as well as concerns related to enforcing and assessing compliance. For example, more precise flood mapping of areas outside the current high-risk areas would be required to accurately identify affected property owners. FEMA and its private insurance partners also have efforts underway to increase NFIP participation by marketing policies in areas where purchase is not mandatory. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to develop new materials to explain coverage and the claims process to policyholders, establish an appeals process for claimants, and provide insurance agent education and training requirements. The statutory deadline for implementing these changes was December 30, 2004, and, as of January 2006, FEMA had not developed documented plans with milestones for meeting the provisions of the act, as recommended by GAO.
GAO-06-335T, Federal Emergency Management Agency: Challenges for the National Flood Insurance Program
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Testimony:
Before the Chairman, Committee on Banking, Housing and Urban Affairs,
U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Wednesday, January 25, 2006:
Federal Emergency Management Agency:
Challenges for the National Flood Insurance Program:
Statement of David M. Walker, Comptroller General of the United States:
GAO-06-335T:
GAO Highlights:
Highlights of GAO-06-335T, a testimony to the Chairman, Committee on
Banking, Housing and Urban Affairs, U.S. Senate:
Why GAO Did This Study:
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.
The unprecedented magnitude and severity of the flood losses from
hurricanes in 2005 challenged the NFIP to process a record number of
claims. These storms also illustrated the extent to which the federal
government has exposure for claims coverage in catastrophic loss years.
FEMA estimates that Hurricanes Katrina, Rita, and Wilma will generate
claims and payments of about $23 billion”far surpassing the total
claims paid in the entire history of the NFIP.
This testimony provides information from past and ongoing GAO work on
issues including: (1) NFIP‘s financial structure; (2) the impact of
properties with repetitive flood losses on NFIP‘s resources; (3)
proposals to increase the number of policies in force; and (4) the
status of past GAO recommendations.
What GAO Found:
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 November 2005, FEMA‘s authority to
borrow from the Treasury was increased from $1.5 billion to $18.5
billion through fiscal year 2008 to help pay claims from the 2005
hurricane season. It is highly unlikely that the NFIP as presently
funded could generate sufficient revenues to repay a debt of this size.
One reason the NFIP is not actuarially sound is because a number of its
policies on dwellings that were built before flood plain management
regulations were established in their communities are subsidized and
pay premiums of 35-40 percent of the true risk premium. In January
2006, FEMA estimated an annual shortfall in premium income of $750
million because of such policy subsidies. Some subsidized properties,
called repetitive loss properties, also suffer repetitive flood losses,
which accounted for about $4.6 billion in claims payments from 1978 to
March 2004. We need to analyze the progress made to reduce the
inventory of subsidized repetitive-loss properties and determine
whether additional regulatory or congressional action is needed.
A challenge for FEMA is to expand the NFIP policyholder base by
enforcing mandatory purchase requirements and encouraging voluntary
purchase by homeowners who live in areas at lower risk of flooding. The
extent of noncompliance with current mandatory purchase requirements
for property owners in special flood hazard areas is unknown. There has
been some congressional interest in the feasibility of expanding
mandatory purchase requirements beyond the current special high-risk
areas, however, there are a number of difficulties to assessing the
impacts, effectiveness, and feasibility of such a change in the
structure of the NFIP, as well as concerns related to enforcing and
assessing compliance. For example, more precise flood mapping of areas
outside the current high-risk areas would be required to accurately
identify affected property owners. FEMA and its private insurance
partners also have efforts underway to increase NFIP participation by
marketing policies in areas where purchase is not mandatory.
FEMA has not yet fully implemented provisions of the Flood Insurance
Reform Act of 2004 requiring the agency to develop new materials to
explain coverage and the claims process to policyholders, establish an
appeals process for claimants, and provide insurance agent education
and training requirements. The statutory deadline for implementing
these changes was December 30, 2004, and, as of January 2006, FEMA had
not developed documented plans with milestones for meeting the
provisions of the act, as recommended by GAO.
What GAO Recommends:
In past work, GAO recommended that FEMA strengthen its oversight of the
NFIP and develop plans to implement requirements of the Flood Insurance
Reform Act of 2004. FEMA disagreed with those recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-06-335T.
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 jenkinswoj@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to participate in today's hearing on the
future of the National Flood Insurance Program (NFIP) to discuss issues
related to the future financial stability of the NFIP and
recommendations we have made for improvements to the management and
oversight of the program. The NFIP combines property insurance for
flood victims, mapping to identify the boundaries of the areas at
highest 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 is 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;
* reducing, through this insurance coverage, taxpayer-funded disaster
assistance for property damage when flooding strikes; and:
* reducing property flood damage through flood plain management based
on accurate, useful flood maps and the enforcement of building
standards (such as elevating structures).
Hurricanes Katrina and Rita represent a tragedy for hundreds of
thousands of our fellow Americans. Their lives have been turned upside
down, and many who would have benefited from flood insurance did not
have it. This tragedy offers an opportunity to fundamentally rethink
the flood insurance program and how it can best be structured to
provide financial protection from flooding for those who need and would
benefit from flood insurance while enhancing the program's financial
foundation.
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.
The NFIP was established by 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.
As of November 2005, the NFIP was estimated to have approximately 4.8
million policyholders in about 20,000 communities. 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 save about $1 billion in flood damage each year.
Flood maps identify the boundaries of the areas at the greatest risk of
flooding. These areas are called special high-risk flood hazard areas,
often referred to as the 100-year flood plain, that area in which there
is a 1 percent chance of flooding each year, or a 30 percent chance of
flooding over the period of a 30-year mortgage. Property owners whose
properties are within the 100-year flood plain, as identified on the
flood maps, and whose mortgages are from a federally regulated lender,
are required to purchase flood insurance for the amount of their
outstanding mortgage balance, up to the maximum policy limit 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 the 100-year flood
plain. Optional, lower-cost coverage is available under the NFIP to
protect homes in areas of low to moderate risk that are outside the 100-
year flood plain, but owners of properties in these lower-risk areas
are not required to purchase flood insurance.
The unprecedented magnitude and severity of the flood losses in 2005
placed unprecedented challenges on the NFIP to process a record number
of claims, many in properties flooded by Hurricanes Katrina and Rita
that were inaccessible for weeks after the flooding occurred. These
storms also illustrated the extent to which the federal government has
exposure for claims coverage in catastrophic loss years. From its
inception in 1968 until August 2005, the NFIP 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. As shown in figure 1,
FEMA estimates that Hurricanes Katrina, Rita, and Wilma are likely to
generate claims and associated payments of about $23 billion--far
surpassing the total about $15 billion in claims paid in the entire
history of the NFIP up to those events.
Figure 1: NFIP Claims Payments from 1968 to 2004 and Estimated for
Hurricanes Katrina, Rita, and Wilma:
[See PDF for image]
[End of figure]
The NFIP cannot absorb the total costs of paying these claims. On
November 21, 2005, FEMA's authority to borrow from the Treasury was
increased from $1.5 billion to $18.5 billion through fiscal year
2008.[Footnote 4] The acting director of FEMA's Mitigation Division
said this borrowing authority will pay NFIP claims and expenses into
February 2006, when additional legislative action to increase the
borrowing authority will likely be required. He also said that it is
highly unlikely that the program could generate sufficient revenues to
cover a debt of this size. FEMA estimates that given its current
income--about $2 billion annually---and average historical loss levels,
it could expect to handle up to about $1.5 billion in debt and still
have a reasonable chance to repay it within a 3-to 5-year time period.
GAO has a body of work underway on the preparation for, response to,
and recovery from Hurricanes Katrina and Rita, including how the NFIP
was implemented. We have had teams in the Gulf Coast states since the
weeks immediately following the hurricanes collecting data and
observations from hurricane victims and federal, state, local, and
private participants in the preparation for, response to, and recovery
from the extensive damages. I have also visited the region and spoken
with governors in some of the affected states, military and civilian
officials leading the recovery efforts, and others to help inform our
work. One objective of the work we have underway on the NFIP is to
assess what changes, if any, could be made to strengthen the NFIP's
fiscal solvency. To this end, we will review proposals to increase
revenues, reduce costs, or otherwise make the NFIP more actuarially
sound. We expect to report on this matter later this year.
As GAO moves forward with this work, we will continue to coordinate
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.
Past experience can provide context for considering future policy
options. In this spirit, my testimony today is based on a body of work
that GAO has done over the past several years before the nation began
the struggle to respond to the devastating effects of Hurricanes
Katrina and Rita in our Gulf Coast states, as well as some preliminary
results of interviews and review of documentation for work in progress
on how the NFIP was implemented for these storms. Our prior work has
addressed the issues of the program's structure and financing,
oversight and management, repetitive loss properties, mandatory and
voluntary purchase of flood insurance, and revising and improving the
nation's flood maps. Together the prior work and work in process
provide information useful in assessing efforts over the NFIP's history
to enhance the program's financial stability and effectiveness. Most
recently, we issued a report in October 2005 on FEMA's management and
oversight of the flood insurance program that includes several
recommendations for improvement.[Footnote 5] This report was mandated
by the Flood Insurance Reform Act of 2004.[Footnote 6] 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) improving 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.
That report was 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.
Major Program Issues - a Summary:
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 for the NFIP 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. In our prior work, we have identified several major
challenges facing the NFIP:
* Reducing losses to the program resulting from policy subsidies and
repetitive loss properties.[Footnote 7] The program is not actuarially
sound because of the number of policies in force that are subsidized--
about 29 percent at the time of our 2003 report. As a result of these
subsidies, some policyholders with dwellings that were built before
flood plain management regulations were established in their
communities pay premiums that represent about 35 to 40 percent of the
true risk premium. In January 2006, FEMA estimated a shortfall in
annual premium income because of policy subsidies at $750 million.
Moreover, at the time of our 2004 report, there were about 49,000
repetitive loss properties--those with two or more losses of $1,000 or
more in a 10-year period--representing about 1 percent of the 4.4
million buildings insured under the program. From 1978 until March
2004, these repetitive loss properties represented about $4.6 billion
in claims payments.
* Increasing property owner participation in the program. The extent of
noncompliance with current mandatory purchase requirements by affected
property owners is unknown. Some interest has been expressed in
Congress in assessing the feasibility of expanding mandatory purchase
requirements beyond current special high-risk flood hazard areas. FEMA
and its private insurance partners also have efforts underway to
increase participation in the NFIP by marketing flood insurance
policies in areas where purchase is not mandatory.
* Developing accurate, digital flood maps.[Footnote 8] The impact of
Hurricanes Katrina, Rita, and Wilma on homeowners has highlighted the
importance of having accurate, up-to-date flood maps that identify the
areas at risk of flooding and, thus, the areas in which homeowners
would benefit from purchasing flood insurance. In our report on the
NFIP's flood map modernization program, we discussed the multiple uses
and benefits of accurate, digital flood plain maps. However, the NFIP
faces a major challenge in working with its contractor and state and
local partners of varying technical capabilities and resources to
produce accurate, digital flood maps. In developing those maps, we
recommended that FEMA develop and implement data standards that will
enable FEMA, its contractor, and its state and local partners to
identify and use consistent data collection and analysis methods for
developing maps for communities with similar flood risk.
* Providing effective oversight of flood insurance operations. In our
October 2005 report, we said 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.
The NFIP Pays Expenses and Claims with Premiums to the Extent Possible,
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 9] FEMA has statutory authority to borrow funds from
the Treasury to keep the NFIP solvent.[Footnote 10]
Until the 2004 hurricane season, FEMA had been generally successful in
keeping the NFIP on sound financial footing, exercising its borrowing
authority three times in the last decade when losses exceeded available
fund balances. In each instance, FEMA repaid the funds with interest.
According to FEMA officials, as of August 31, 2005, FEMA had
outstanding borrowing of $225 million with cash on hand totaling $289
million. FEMA had substantially repaid the borrowing it had undertaken
to pay losses incurred for the 2004 hurricane season that, until
Hurricane Katrina struck, was the worst hurricane season on record for
the NFIP. FEMA's current debt with the Treasury is almost entirely for
payment of claims from Hurricanes Katrina and Rita and other flood
events that occurred in 2005.
Premium Subsidies and Repetitive-Loss Properties Affect NFIP's
Actuarial Soundness:
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 11] 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 12] 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, the policy subsidies reduce premium income and add risk to the
NFIP. In January 2006, FEMA estimated an annual shortfall in premium
income of $750 million because of policy subsidies. FEMA estimated that
phasing out subsidized rates for non-primary residences and
nonresidential properties alone would affect about 400,000 properties
currently insured by the NFIP. Some have questioned whether providing
flood insurance for second homes in high risk areas--such as barrier
islands--encourages development in areas at high risk of flooding.
In addition, some of the properties that had received the initial rate
subsidy are subject to repetitive flood losses, placing added financial
strain on the NFIP. 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
13] 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, there were about 49,000
repetitive loss properties, representing about $4.6 billion in claims
payments from 1978 until March 2004. As of March 2004, 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 14] 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. A significant number of repetitive loss properties were
affected by Hurricanes Katrina and Rita. According to NFIP statistical
data through November 30, 2005, 4,835 repetitive loss properties,
including 3,183 in Louisiana, had substantial damage from Hurricane
Katrina.[Footnote 15] Two hundred and forty-three repetitive loss
properties had substantial damage from Hurricane Rita. Of these
properties, 213 were located in Louisiana and 30 were located in Texas.
For over a decade, FEMA has pursued a variety of strategies to reduce
the number of repetitive loss properties in the NFIP inventory. 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 16] 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
17] During the pilot program, policyholders who refuse a mitigation or
purchase offer that meets program requirements will be required to pay
increased premium rates. Specifically, the premium rates for these
policyholders would increase by 150 percent following their refusal and
another 150% following future claims of more than $1,500.[Footnote 18]
However, the rates charged cannot exceed the applicable actuarial rate.
Because of the financial drain that repetitive loss properties have
posed for the program, 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 properties, particularly those with
repetitive losses; 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.
Expansion of the NFIP Policyholder Base:
Compliance with Mandatory Purchase Requirements Difficult to Determine:
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 held by federally-regulated
lenders on property in communities identified by FEMA 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 the zone 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 19] According
to a recent Congressional Research Service study,[Footnote 20] 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, federally-regulated 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 21]
Expansion of Mandatory Purchase Requirements Would Generate More
Premiums, but Implementation Could Be Problematic:
Under FEMA's current Mandatory Purchase of Flood Insurance Guidelines,
properties in a 100-year flood plain with a statistical 1 in 100 chance
of flooding in any given year or a 30 percent chance of flooding during
the period of a 30-year mortgage are designated to be in special flood
hazard areas. Within the boundaries of these areas, homeowners with
mortgages from federal regulated lenders are required to purchase flood
insurance for an amount equal to their outstanding mortgage balance, up
to the maximum policy limit of $250,000 for a single-family home. To
expand the NFIP policyholder base, there has been some congressional
interest in the feasibility of extending the current mandatory purchase
requirement to properties in a 500-year flood plain, which
statistically have a 1 in 500 chance of flooding in any given
year.[Footnote 22] FEMA has estimated that expanding NFIP mandatory
purchase requirements to include structures in the 500-year flood plain
would generate up to $700 million in additional premiums. The current
annual premium for a structure in the 500-year flood plain is about
$280. However, a FEMA official cautioned that the rate of compliance is
an important component of any estimate of the amount of increase in
NFIP premiums that would result from expanding mandatory purchase
requirements.
It would be difficult to effectively assess the impacts, effectiveness,
and feasibility of such a change in the structure of the NFIP. We share
FEMA's concerns related to enforcing and assessing compliance. We also
believe that it would be difficult to assess the impacts an expansion
in the mandatory purchase requirements would have upon a range of
stakeholders, including not only home and business owners, but lenders,
mortgage servicers, builders, and local governments, among others.
We also recognize that it would be difficult and costly to determine
the additional geographic area that would be encompassed in an expanded
special flood hazard area. Current flood mapping focuses on the
boundaries of the 100-year flood plain, and FEMA has not estimated the
additional cost and time required to complete detailed, digitalized
maps of areas outside of the current 100-year special flood hazard
area.
FEMA Has a Marketing Campaign to Attract New Policyholders and Improve
Rates of Renewal:
In recent years, the number of NFIP policyholders did not grow
substantially. FEMA officials reported a pattern in which at the start
of each hurricane season, the number of polices in force was the same
or less than the number of policies in previous years. During the
hurricane season, the number of polices in force would increase
slightly and then level off or decline again at the end of the season.
FEMA has efforts underway to increase NFIP participation by improving
the quality of information that is available on the NFIP and flood
risks and by marketing to retain policyholders currently in the
program. In October 2003, FEMA let a contract for a new integrated
marketing campaign called "FloodSmart." Marketing elements being used
include direct mail, national television commercials, print
advertising, and websites designed for consumers and insurance agents.
According to FEMA officials, in a little more than 2 years since the
contract began, net policy growth was a little more than 7 percent and
policy retention improved from 88 percent to 91 percent.
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.
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 standards. 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 contributions (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.
As I have discussed, it is important when considering any expansion of
mandatory purchase requirements for NFIP policies to understand that
implementation would require the development of additional detailed
flood maps. According to a FEMA official, digital mapping of areas
outside of special flood hazard areas is currently being considered on
only a selective basis for reasons such as potential changes in risk
level or population growth.
Monitoring and Oversight of NFIP Identifies Specific Problems, but Does
Not Provide Comprehensive Information on Overall Program Performance:
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.
According to FEMA, these monitoring and oversight mechanisms will be in
place to assess the implementation of the NFIP after Hurricanes Katrina
and Rita. In addition, FEMA plans to do additional oversight of claims
for these storms that were handled using expedited procedures. To try
to assist NFIP policyholders despite obstacles in communicating with
claimants, reaching flooded properties, and locating records, FEMA
allowed expedited claims processing procedures that were unique to
these storms. In some circumstances, claims were settled without site
visits by certified flood claims adjusters. For flooding caused by the
failure of the levees in the New Orleans area, resulting in flooding
from Lake Pontchartrain, FEMA allowed the use of flood depth data to
identify structures that had been severely affected. If data on the
depth and duration of the water in the building showed that it was
likely that covered damage exceeded policy limits, claims could be
settled without a site visit by a claims adjuster. Similarly, losses in
other areas of Louisiana and Mississippi were handled without a site
visit where structures were washed off their foundations by flood
waters and square-foot measurements of the dwellings were known.
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.
However, 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 recommended that FEMA use a methodologically valid approach for
sampling files selected for operational reviews and quality assurance
claims reinspections. We also plan to follow up on the results of the
monitoring and oversight efforts for claims processed using expedited
processes in our review of the implementation of the NFIP after
Hurricanes Katrina and Rita.
FEMA did not agree with our recommendation. 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 Has Not Fully Implemented NFIP Program Changes Mandated by the
Flood Insurance Reform Act of 2004:
As of January 2006, 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 23] 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. In
January 2006, the acting director of FEMA's Mitigation Division said
that FEMA had submitted a draft rule to DHS. However, milestones for
future actions were not established. Claimants who wish to appeal
decisions made on their claims for damage from Hurricanes Katrina and
Rita can follow a process described by FEMA as an "informal" appeals
process. As outlined in the Flood Insurance Claims Handbook, to appeal,
policyholders are to submit statements of their concerns and supporting
documentation to the director of claims in FEMA's Mitigation Division,
Risk Insurance Branch.
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 recommended 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. We will continue to monitor progress being made.
FEMA disagreed with our recommendation and 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.
Concluding Observations:
The most immediate challenge for the NFIP is processing the flood
insurance claims resulting from Hurricanes Katrina and Rita. Progress
is being made in that area. In December 2005, according to FEMA, more
than 70 percent of Hurricane Katrina claims had been paid, totaling
more than $11 billion, some of them using expedited procedures to
assist policyholders who were 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 Contact and Staff Acknowledgments:
Contact point 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 rabkinn@gao.gov, or William O. Jenkins Jr. at (202) 512-
8757 or jenkinswo@gao.gov. This statement was prepared under the
direction of Christopher Keisling. Key contributors were John Bagnulo,
Christine Davis, and Deborah Knorr.
FOOTNOTES
[1] In March 2003, FEMA and its approximately 2,500 staff became part
of DHS. FEMA retained its name and individual identity within the
department.
[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] National Flood Insurance Program Further Enhanced Borrowing
Authority Act of 2005, Pub. L. No. 109-106, 119 Stat. 2288 (2005).
[5] 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).
[6] Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004,
Pub. L. No. 108-264, 118 Stat. 712, 727 (2004).
[7] GAO, Flood Insurance: Challenges Facing the National Flood
Insurance Program, (GAO-03-606T (Washington, D.C.: Apr. 1, 2003);
National Flood Insurance Program: Actions to Address Repetitive Loss
Properties, (GAO-04-401T (Washington, D.C.: Mar. 25, 2004).
[8] GAO, Flood Map Modernization: Program Strategy Shows Promise, but
Challenges Remain, GAO-04-417 (Washington, D.C.: Mar. 31, 2004).
[9] GAO, Flood Insurance: Information on the Financial Condition of the
National Flood Insurance Program, GAO-01-992T (Washington, D.C.: July
2001).
[10] See 42 U.S.C. 4016.
[11] 42 U.S.C. 4014(a)(2), 4015(a), (b).
[12] 42 U.S.C. 4014(a)(1), 4015(c).
[13] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section
2(3),(4), (5), 118 Stat. 712, 713 (2004).
[14] Congressional Research Service, Federal Flood Insurance: The
Repetitive Loss Problem, RL32972 (Washington, D.C.: June 30, 2005).
[15] The term "substantial damage" means the cost of repairing the
damaged building exceeds 50 percent of its market value (or a lower
trigger if adopted locally).
[16] GAO, National Flood Insurance Program: Actions to Address
Repetitive Loss Properties, GAO-04-401T (Washington, D.C.: Mar. 25,
2004).
[17] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section
102, 118 Stat. 712, 714-721 (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 four 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."
[18] Id., 118 Stat. 712, 717-718 (2004).
[19] 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.
[20] Congressional Research Service, Federal Flood Insurance: The
Repetitive Loss Problem (June 30, 2005).
[21] GAO, Flood Insurance: Extent of Noncompliance with Purchase
Requirements Is Unknown, GAO-02-396 (Washington, D.C: June 21, 2002).
[22] National Flood Insurance Program Commitment to Policyholders and
Reform Act of 2005, H.R. 4320, 109th Conress, section 3 (2005).
[23] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, sections
204, 205, and 207.
