Federal Emergency Management Agency
Ongoing Challenges Facing the National Flood Insurance Program Gao ID: GAO-08-118T October 2, 2007The 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. Given the challenges facing the NFIP and the need for legislative reform to ensure the financial stability and ongoing viability of this program, GAO placed the NFIP on its high-risk list in March 2006. This testimony updates past work and provides information about ongoing GAO work on issues including (1) NFIP's financial structure, (2) the extent of compliance with mandatory requirements, (3) the status of map modernization efforts, and (4) FEMA's oversight of the NFIP. Building on our previous and ongoing work on the NFIP, GAO collected data from FEMA to update efforts, including information about claims, policies, repetitive loss properties, and mitigation efforts.
The most significant challenge facing the NFIP is the actuarial soundness of the program. As of August 2007, FEMA owed over $17.5 billion to the U.S. Treasury. FEMA is unlikely to be able to pay this debt, primarily because the program's premium rates have been set to cover an average loss year, which until 2005 did not include any catastrophic losses. This challenge is compounded by the fact that some policyholders with structures that were built before floodplain management regulations were established in their communities generally pay premiums that represent about 35 to 40 percent of the true risk premium. Moreover, about 1 percent of NFIP-insured properties that suffer repetitive losses account for between 25 and 30 percent of all flood claims. FEMA is also creating a new generation of "grandfathered" properties--properties that are mapped into higher-risk areas but may be eligible to receive a discounted premium rate equal to the nonsubsidized rate for their old risk designation. Placing the program on a more sound financial footing will involve trade-offs, such as charging more risk-based premiums and expanding participation in the program. The NFIP also faces challenges expanding its policyholder base by enforcing compliance with mandatory purchase requirements and promoting voluntary purchase by homeowners who live in areas that are at less risk. One recent study estimated that compliance with the mandatory purchase requirement was about 75 to 80 percent but that penetration elsewhere in the market was only 1 percent. Since 2004, FEMA has implemented a massive media campaign called "FloodSmart" to increase awareness of flooding risk nationwide by educating everyone about the risks of flooding and encouraging the purchase of flood insurance. While the numbers of policyholders increased following Hurricane Katrina, it is unclear whether these participants will remain in the program as time goes on. The impact of the 2005 hurricanes highlighted the importance of up-to-date flood maps that accurately identify areas at greatest risk of flooding. These maps are the foundation of the NFIP. In 2004 FEMA began its map modernization efforts, and according to FEMA, about 34 percent of maps have been remapped. Completing the map modernization effort and keeping these maps current is also going to be an ongoing challenge for FEMA. Finally, FEMA also faces significant challenges in providing effective oversight over the 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. As GAO recommended in a an interim report issued in September 2007, FEMA needs to take steps to ensure that it has a reasonable estimate of actual expenses that the insurance companies incur to help determine whether payments for services are appropriate and that required financial audits are performed. GAO, in its ongoing work, plans to further explore FEMA oversight of the private insurance companies and the cost of selling and servicing NFIP flood policies.
GAO-08-118T, Federal Emergency Management Agency: Ongoing Challenges Facing the National Flood Insurance Program
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Testimony:
Before the Committee on Banking, Housing and Urban Affairs, U.S.
Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:30 a.m. EDT:
Tuesday, October 2, 2007:
Federal Emergency Management Agency:
Ongoing Challenges Facing the National Flood Insurance Program:
Statement of Orice Williams, Director:
Financial Markets and Community Investments:
Flood Insurance:
GAO-08-118T:
GAO Highlights:
Highlights of GAO-08-118T, a testimony before the 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.
Given the challenges facing the NFIP and the need for legislative
reform to ensure the financial stability and ongoing viability of this
program, GAO placed the NFIP on its high-risk list in March 2006. This
testimony updates past work and provides information about ongoing GAO
work on issues including (1) NFIP‘s financial structure, (2) the extent
of compliance with mandatory requirements, (3) the status of map
modernization efforts, and (4) FEMA‘s oversight of the NFIP.
Building on our previous and ongoing work on the NFIP, GAO collected
data from FEMA to update efforts, including information about claims,
policies, repetitive loss properties, and mitigation efforts.
What GAO Found:
The most significant challenge facing the NFIP is the actuarial
soundness of the program. As of August 2007, FEMA owed over $17.5
billion to the U.S. Treasury. FEMA is unlikely to be able to pay this
debt, primarily because the program‘s premium rates have been set to
cover an average loss year, which until 2005 did not include any
catastrophic losses. This challenge is compounded by the fact that some
policyholders with structures that were built before floodplain
management regulations were established in their communities generally
pay premiums that represent about 35 to 40 percent of the true risk
premium. Moreover, about 1 percent of NFIP-insured properties that
suffer repetitive losses account for between 25 and 30 percent of all
flood claims. FEMA is also creating a new generation of ’grandfathered“
properties”properties that are mapped into higher-risk areas but may be
eligible to receive a discounted premium rate equal to the
nonsubsidized rate for their old risk designation. Placing the program
on a more sound financial footing will involve trade-offs, such as
charging more risk-based premiums and expanding participation in the
program.
The NFIP also faces challenges expanding its policyholder base by
enforcing compliance with mandatory purchase requirements and promoting
voluntary purchase by homeowners who live in areas that are at less
risk. One recent study estimated that compliance with the mandatory
purchase requirement was about 75 to 80 percent but that penetration
elsewhere in the market was only 1 percent. Since 2004, FEMA has
implemented a massive media campaign called ’FloodSmart“ to increase
awareness of flooding risk nationwide by educating everyone about the
risks of flooding and encouraging the purchase of flood insurance.
While the numbers of policyholders increased following Hurricane
Katrina, it is unclear whether these participants will remain in the
program as time goes on.
The impact of the 2005 hurricanes highlighted the importance of up-to-
date flood maps that accurately identify areas at greatest risk of
flooding. These maps are the foundation of the NFIP. In 2004 FEMA began
its map modernization efforts, and according to FEMA, about 34 percent
of maps have been remapped. Completing the map modernization effort and
keeping these maps current is also going to be an ongoing challenge for
FEMA.
Finally, FEMA also faces significant challenges in providing effective
oversight over the 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. As
GAO recommended in a an interim report issued in September 2007, FEMA
needs to take steps to ensure that it has a reasonable estimate of
actual expenses that the insurance companies incur to help determine
whether payments for services are appropriate and that required
financial audits are performed. GAO, in its ongoing work, plans to
further explore FEMA oversight of the private insurance companies and
the cost of selling and servicing NFIP flood policies.
What GAO Recommends:
In past work, GAO recommended that FEMA strengthen its oversight of the
NFIP and insurance companies responsible for selling and servicing
flood policies, among other things. FEMA generally agreed with our
recommendations.
To view the full product, including the scope and methodology, click on
GAO-08-118T.
For more information, contact Orice M. Williams at (202) 512-8678 or
williamso@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to participate in today's hearing on the
National Flood Insurance Program (NFIP) and the challenges facing the
Federal Emergency Management Agency (FEMA), which oversees it. As you
know, the NFIP has been on GAO's high-risk list since March 2006, and
my statement today focuses on the ongoing challenges facing the
program. Over the past three decades, we have identified numerous
challenges to the program that affect its day-to-day operations and
future financial stability. Recently, we reported on NFIP's
unprecedented financial and regulatory strains in the aftermath of the
2005 hurricane season.[Footnote 1] As a result, the program has had to
borrow extensively from the U.S. Treasury in order to pay claims and
expenses. With the current program expiring next September, this and
other issues warrant review and debate, including how best to structure
the NFIP so that it provides financial protection for those who need
and would benefit from flood insurance while enhancing the program's
financial foundation.
My testimony today will revisit and update the four major challenges
facing the NFIP:
* Reducing losses to the program from policy subsidies and repetitive
loss properties--that is, properties in high-risk areas that flood
repeatedly and that make repeated claims on the NFIP;
* Increasing property owner participation in the program to include not
only homeowners in high-risk areas, but also those who live in less
flood-prone areas that are still at risk of experiencing losses from
flooding;
* Developing accurate, digital flood maps that can provide the
information the program needs to determine which areas are most at risk
of flooding; and:
* Providing effective oversight of flood insurance operations to ensure
that the NFIP is making appropriate payments to the insurance
companies, insurance agents, and claims adjusters responsible for the
day-to-day process of selling and servicing flood insurance policies.
My statement is based largely on completed work on the 2005 claims
process and subsequent payments to insurance companies for services
rendered and ongoing work on subsidized properties; the rate-setting
process for flood insurance premiums; financial and statistical
information on the NFIP from a variety of sources; and the Write-Your-
Own (WYO) program, under which insurance companies enter into
agreements with FEMA to sell and service flood insurance policies and
adjust claims after flood losses; and FEMA's oversight. In conducting
our work, we collected relevant data from FEMA; analyzed statutes,
regulations, and payment data relevant to the NFIP; and interviewed
FEMA officials, FEMA contractors, insurance company officials, and
state and local officials to obtain information relevant to their
experience with NFIP. Some of the work was also based on interviews
with individual policyholders, insurance agents, and claims adjusters,
and on audits of private insurance companies that sell and service
flood insurance on behalf of FEMA. We performed our work in accordance
with generally accepted government auditing standards.
In summary:
One of the biggest challenges facing the NFIP is the actuarial
soundness of the program. As of August 2007, FEMA owed over $17.5
billion to the U.S. Treasury, largely resulting from losses during the
2005 hurricanes. FEMA is unlikely to be able to pay this debt primarily
because many of the program's premium rates have been set to cover
losses in an average historical year based on program experience that
did not include any catastrophic losses. To keep the cost of flood
insurance affordable, Congress included premium subsidies, and as a
result the program does not take in as much in premiums as it pays out
in claims. With these subsidies, some policyholders with structures
that were built before floodplain management regulations were
established in their communities pay premiums that represent about 35
to 40 percent of the true risk premium. Moreover, about 1 percent of
NFIP-insured properties that suffer repetitive losses account for
between 25 and 30 percent of all flood claims. FEMA is also creating a
new generation of "grandfathered" properties that are mapped into
higher-risk areas and that have an existing policy or purchase a new
flood insurance policy prior to the adoption of new maps. The
properties may be eligible to receive a discounted or "grandfathered"
premium rate equal to the nonsubsidized rate for their old risk
designation. Placing the program on more sound financial footing will
involve trade-offs in how best to balance the need for charging higher
premiums, which would put the program on a sounder financial basis
while continuing to encourage participation in the program.
The NFIP also faces challenges expanding its policyholder base by
enforcing compliance with mandatory purchase requirements and promoting
voluntary purchase by other homeowners, some of whom live in areas that
are at less risk. While flood insurance is mandatory for homeowners who
live in certain high-risk areas and have mortgages held by federally
regulated financial institutions, determining the extent of compliance
can be complicated. One recent study estimated that compliance with the
mandatory purchase requirement was about 75 to 80 percent but that the
penetration elsewhere in the market was only 1 percent. Moreover, since
2004, FEMA has implemented a mass media campaign called "FloodSmart" to
educate the public about the risks of flooding and to encourage the
purchase of flood insurance. While the numbers of policyholders has
increased following Hurricane Katrina, it is unclear whether these
policyholders will remain in the program as time goes on.
The impact of the 2005 hurricanes highlighted the importance of having
accurate, up-to-date flood maps that identify areas that are at risk of
flooding and thus the areas where property owners would benefit from
purchasing flood insurance. While requirements for purchasing flood
insurance apply only to certain properties in high-risk areas,
according to FEMA about half of all flood damage occurs outside of
areas currently mapped as high-risk areas. In response to
recommendations from Congress, GAO, and others, FEMA has taken steps to
adjust its map modernization efforts by changing its mapping standards
and guidelines and adjusting risk-based mapping priorities. However,
managing its relationship with its contractor and with state and local
partners--all with varying technical capabilities and resources--to
produce accurate digital flood maps is an ongoing challenge. Likewise,
assuring that map standards are consistently applied across communities
once the maps are created is a similar challenge.
FEMA, which oversees the NFIP program, also faces significant
challenges in providing effective oversight over the insurance
companies and thousands of insurance agents and claims adjusters that
are primarily responsible for the day-to-day process of selling and
servicing flood insurance policies. In response to our recommendations
an interim report issued in September 2007, FEMA has agreed to take
steps to ensure that it has a reasonable estimate of the actual
expenses the insurance companies incur to help determine whether
payments for services are appropriate and to ensure that required
financial audits are performed.[Footnote 2]
Background:
The NFIP provides property insurance for flood victims, maps the
boundaries of the areas at highest risk of flooding, and offers
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. These include:
* providing property flood insurance coverage for the many property
owners who would benefit from such coverage;
* reducing taxpayer-funded disaster assistance for property damage when
flooding strikes; and:
* reducing flood damage to properties through floodplain management
that is based on accurate, useful flood maps and the enforcement of
relevant building standards.
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. Our analysis of FEMA
data found that over the past 25 years, about 97 percent of the U.S.
population lived in a county that had at least one declared flood
disaster, and 45 percent lived in a county that that had six or more
flood disaster declarations.[Footnote 3] However, flooding is generally
excluded from homeowner insurance policies that typically cover damage
from other losses, such as wind, fire, and theft. Because of the
catastrophic nature of flooding and the difficulty of adequately
predicting flood risks, as well as the fact that those who are most at
risk are the most likely to buy coverage, private insurance companies
have largely been unwilling to underwrite and bear the risk of flood
insurance.[Footnote 4]
The NFIP was established by the National Flood Insurance Act of 1968 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.[Footnote 5] In creating the
NFIP, Congress found that a flood insurance program with the "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 6] In keeping with this
purpose, 92 private insurance companies were participating in the WYO
program as of September 2007. NFIP pays these insurers fees to sell and
service policies and adjust and process claims. FEMA, which is within
the Department of Homeland Security (DHS), is responsible for the
oversight and management of the NFIP. We reported in September 2007
that about 68 FEMA employees, assisted by about 170 contract employees,
manage and oversee the NFIP and the National Flood Insurance Fund, into
which premiums are deposited and claims and expenses are paid. As of
April 2007, the NFIP was estimated to have over 5.4 million policies in
about 20,300 communities.[Footnote 7] To ensure that NFIP can cover
claims after catastrophic events, FEMA has statutory authority to
borrow funds from the Treasury to keep the program solvent.[Footnote 8]
According to FEMA, an estimated $1.2 billion in flood losses are
avoided annually because communities have implemented the NFIP's
floodplain management requirements. Flood maps identify the boundaries
of the areas that are most at risk of flooding. Property owners whose
properties are within special flood hazard areas and who have mortgages
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 for single-family homes. According
to FEMA, Excess Flood Protection coverage above these amounts is
available in the private insurance markets. Personal property coverage
is available for contents, such as furniture and electronics, for an
additional $100,000. Business owners may purchase up to $500,000 of
coverage for buildings and $500,000 for contents. The owners of
properties with no mortgages or properties with mortgages held by
lenders who are not federally regulated are not required to buy flood
insurance, even if the properties are in a special flood hazard area.
Optional lower-cost coverage is available under the NFIP to protect
homes in areas of low to moderate risk.
The NFIP's 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 for policies covering some
properties in order to encourage communities to join the
program.[Footnote 9] As a result, the program does not collect
sufficient premium income to build capital to cover long-term future
flood losses. Moreover, the premiums collected are often not sufficient
to pay for losses even in years without catastrophic flooding. This
shortfall is exacerbated by repetitive loss properties that file
repeated claims with NFIP.
FEMA's current debt to the Treasury--over $17.5 billion--is almost
entirely for payment of claims from the 2005 hurricanes. Legislation
increased FEMA's borrowing authority from a total of $1.5 billion prior
to Hurricane Katrina to $20.8 billion in March 2006. As we have
testified previously, it is unlikely that FEMA will be able to repay a
debt of this size and cover future claims, given that the program
generates premium income of about $2 billion a year, which must first
cover ongoing loss and expenses.[Footnote 10]
To date, the program has gone through almost two full seasons without a
major hurricane, and according to FEMA about $524 million of premium
income has been used to pay interest on the debt owed to the Treasury
in 2006. FEMA officials also noted that because fiscal year 2007 had
been a relatively low flood loss year, the agency should be able to pay
its next scheduled interest payment from premium income and would not
have to borrow additional funds from Treasury to pay interest on its
outstanding debt.[Footnote 11] Attention has been focused on the extent
of the federal government's exposure for claims payments in future
catastrophic loss years and on ways to improve the program's financial
solvency.[Footnote 12] For example, some in Congress have recommended
phasing in actuarial rates for vacation homes and nonresidential
properties.[Footnote 13]
Policy Subsidies Significantly Reduce NFIP's Income from Premiums:
About 25 percent of NFIP's over 5.4 million policies have premiums that
are substantially less than the true risk premiums. Properties
constructed before their communities joined the NFIP and were issued a
Flood Insurance Rate Map (or FIRM), which shows the community's flood
risk, are eligible for subsidized rates. These policyholders typically
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. In response to concerns
about the historical basis for the subsidies and questions about the
characteristics of the homes receiving subsidies, we were asked by the
Ranking Member of this committee to collect certain demographic
information about the portfolio of subsidized properties and property
owners. This work will provide information on residential pre-FIRM
subsidized properties in selected counties of the country.[Footnote 14]
To the extent that reliable data is available, we plan to capture the
variations that exist by type of flooding (e.g., coastal or riverine),
fair market values for subsidized and nonsubsidized properties in each
location, average income levels for each county, claims data for
subsidized and nonsubsidized properties in each location, and the
mitigation efforts being used. Our work will build upon the work of the
Congressional Budget Office on values of properties in the
NFIP.[Footnote 15]
As part of this review, we are also examining the extent to which
FEMA's nonsubsidized rates are truly actuarially based. We will assess
how NFIP sets rates for its nonsubsidized and subsidized premiums,
determine the total premiums the NFIP collects, and compare that amount
to claims and related costs. Our analysis of FEMA's premiums and claims
data should help provide insights into how FEMA sets rates.
We also have work under way that will provide a description of
financial and statistical trends, by flood zone, for the past 10 years.
Specifically, we have been asked to describe average premium and claim
amounts by flood zone, FEMA's estimates of likely losses, and the
extent to which losses are attributable to repetitive loss properties
or hurricanes. We will also describe the extent to which flood-damaged
properties have been purchased through NFIP-funded mitigation programs.
However, our ability to report on these issues will depend on the
quality of FEMA's claims data. Finally, we are evaluating the adequacy
of FEMA's procedures for monitoring selected contracts that support the
NFIP.
Repetitive Loss Properties Continue to be a Drain on 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 16] 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.[Footnote 17] Although these properties account
for only about 1 percent of NFIP-covered properties, they account for
between 25 and 30 percent of claims. As of September 2007 over 70,000
repetitive loss properties were insured by the NFIP.
The 2004 Flood Insurance Reform Act authorized a 5-year pilot program
to encourage mitigation efforts on severe repetitive loss properties in
the NFIP.[Footnote 18] According to FEMA, as of September 2007 about
8,100 properties insured by the NFIP were categorized as severe
repetitive loss properties. Under the pilot, FEMA is required to adjust
its rules and rates to ensure that homeowners pay higher premiums if
they refuse an offer to mitigate the property. The pilot program was
funded in fiscal year 2006, and according to FEMA officials, FEMA has
not yet developed the regulations, guidance, and administrative
documents necessary for implementation.
Remapping Is Creating A New Generation of Properties That May Not Pay
Risk-based Premiums:
FEMA is also creating a new generation of properties that may not pay
risk-based premiums. Properties that are remapped into higher flood
risk areas may be able to keep or "grandfather" the nonsubsidized rates
associated with their risk level prior to being remapped into a higher
flood risk area. As a result, eligible property owners who have an
existing policy or who purchase new flood insurance policies before
they are mapped into higher-risk areas will go on paying the same
nonsubsidized premium rate.[Footnote 19] Moreover, these grandfathered
rates can be permanent. Although this option is a major selling point
of encouraging broader participation in the program, such actions may
further erode the actuarial soundness and financial stability of the
program.
FEMA Has Expanded Participation in the NFIP, but Ensuring Compliance
with Requirements Need Ongoing Attention:
From 1968 until the adoption of the Flood Disaster Protection Act of
1973, buying flood insurance was voluntary. However, voluntary
participation in the NFIP was low, and many flood victims did not have
insurance to repair damages from floods in the early 1970s. In 1973 and
again in 1994, Congress enacted laws requiring that some property
owners in special flood hazard areas buy NFIP insurance. The owners of
properties with no mortgages or properties with mortgages held by
lenders that were not federally regulated were not, and still are not,
required to buy flood insurance, even if the properties are in special
flood hazard areas.
As we have reported in the past, viewpoints differ about whether
lenders were complying with the flood insurance purchase requirements,
primarily because the officials we spoke with did not use the same
types of data to reach their conclusions.[Footnote 20] For example,
federal bank regulators and lenders based their belief that lenders
were generally complying with the NFIP's purchase requirements on
regulators' examinations and reviews that were conducted to monitor and
verify lender compliance. In contrast, FEMA officials believed that
many lenders frequently were not complying with the requirements, an
opinion that they based largely on estimates computed from data on
mortgages, flood zones, and insurance policies; limited studies on
compliance; and anecdotal evidence indicating that insurance was not
always purchased when it was required. At the time of our report in
2002, neither side was able to substantiate these claims with
statistically sound data. However, a FEMA-commissioned study of
compliance with the mandatory purchase requirement estimated that
compliance with purchase requirements, under plausible assumptions, was
75 to 80 percent in special flood hazard areas for single-family homes
that had a high probability of having a mortgage.[Footnote 21] The
analysis conducted did not provide evidence that compliance declined as
mortgages aged. At the same time, the study showed that about half of
single-family homes in special flood hazard areas had flood insurance.
The 2006 study also found that while one-third of NFIP policies were
written outside of special flood hazard areas, the market penetration
rate was only about 1 percent. Yet according to FEMA about half of all
flood damage occurs outside of high risk areas. FEMA has efforts under
way to increase participation by improving the quality of information
that is available on the NFIP and on flood risks and by marketing to
retain policyholders currently in the program. In October 2003, FEMA
contracted for a new integrated mass marketing campaign called
"FloodSmart" to educate the public about the risks of flooding and to
encourage the purchase of flood insurance. Marketing elements being
used include direct mail, national television commercials, print
advertising, and Web sites that are designed for communities,
consumers, and insurance agents. According to FEMA officials, in the
little more than 3 years since the contract began, net policy growth
has been almost 24 percent, and policy retention has improved from 88
percent to almost 92 percent. However, the success of the program will
be measured by retention rates as policyholders' memories of the
devastation from Hurricane Katrina begin to fade over time.
FEMA Faces Challenges in Producing Accurate, Updated Flood Maps:
Accurate flood maps that identify the areas that are at greatest risk
of flooding are the foundation of the NFIP. These maps, which show the
extent of flood risk across the country, allow the program to determine
high-risk areas for designation both as special hazard zones and as
areas that can benefit the most from mitigation. Flood maps must be
periodically updated to assess and capture changes in the boundaries of
floodplains resulting from community growth, development, erosion, and
other factors that affect the boundaries of areas at risk of flooding.
The maps are principally used by (1) the communities participating in
the NFIP, to adopt and enforce the program's minimum building standards
for new construction within the maps' identified floodplains; (2) FEMA,
to develop 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. As we
reported in 2004, FEMA has embarked on a multiyear effort to update the
nation's flood maps at a cost in excess of $1 billion.[Footnote 22] At
that time we noted that NFIP faced major challenges in working with its
contractor and state and local partners to produce accurate digital
flood maps.
FEMA has taken steps to improve these working relationships by
developing a number of guidelines and procedures. According to FEMA,
the agency has developed a plan for prioritizing and delivering
modernized maps nationwide, including developing risk-based mapping
priorities. Moreover, FEMA has recognized that a maintenance program
will be needed to keep the maps current and relevant. For example,
several strategies are under consideration for maintaining map
integrity, including reviewing the flood map inventory every 5 years,
as required by law; updating data and maps more regularly, as needed;
addressing any unmet flood mapping needs and assessing the quality and
quantity of maps; and examining risk management more broadly.[Footnote
23] However, the effectiveness of these strategies will depend on
available funding and FEMA's ongoing commitment to ensuring the
integrity of the maps. As of September 2007 FEMA had remapped 34
percent of its maps.[Footnote 24]
FEMA's Monitoring and Oversight Have Identified Specific Problems but
Have Not Produced Comprehensive Information on Overall Program
Performance:
To meet its monitoring and oversight responsibilities, FEMA is required
to conduct periodic operational reviews of the private insurance
companies that participate in the WYO program. In addition, FEMA's
program contractor is required 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 must thoroughly examine 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 procedures has occurred, an incorrect payment
has been made, or a file does not 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, among other things,
expenses that were paid that were not covered and covered expenses that
were not paid. In our December 2006 report, we found that a new claims
handling process aided the claims handling following the 2005 hurricane
season and resulted in few complaints. As a result, 95 percent of
claims were closed by May 2006, a time frame that compared favorably
with those of other, smaller recent floods.[Footnote 25] However, we
noted that FEMA had not implemented a recommendation from a prior
report that it do quality reinspections based on a random sample of all
claims.[Footnote 26] We also found that FEMA had not analyzed the
overall results of the quality reinspections following the 2005
hurricane season. In response, FEMA has agreed to (1) analyze the
overall results of the reinspection reports on the accuracy of claims
adjustments for future events, and (2) plan its reinspections based on
a random sample of claims.
FEMA faces challenges in providing effective oversight of the insurance
companies and thousands of insurance agents and claims adjusters that
are primarily responsible for the day-to-day process of selling and
servicing flood insurance policies. For example, as we reported in
September 2007, 94 WYO insurance companies had written 96 percent of
the flood insurance policies for the NFIP as of December 2006, up from
the 48 companies that were writing 50 percent of the policies in
1986.[Footnote 27] We also reported that for fiscal years 2004 through
2006, total operating costs that FEMA paid to the WYO insurance
companies ranged from $619 million to $1.6 billion, or from more than a
third to almost two-thirds of the total premiums paid by policyholders
to the NFIP, as a result of unprecedented flood losses caused by the
2005 hurricanes. FEMA regulations require each participating company to
arrange and pay for audits by independent certified public accounting
firms. However, many WYO insurance companies have not complied with the
schedule in recent years. For example, for fiscal years 2005 and 2006,
5 of 94 participating companies had biennial financial statement audits
performed. In response to our recommendations, FEMA has agreed to take
steps to ensure that it has reasonable estimates of the actual expenses
that WYO insurance companies incurred to help determine whether
payments for services are appropriate and that required financial
audits are performed.
Building on this body of work, we are beginning a follow-up engagement
that will analyze the expenses WYO insurance companies incur from
selling and servicing NFIP policies and determine whether the total
operating costs paid to the companies are equitable relative to those
costs. We will also examine how FEMA oversees the WYO program,
including reinspecting claims and performing operational reviews.
Finally, we will evaluate alternatives for selling and servicing flood
insurance policies and processing claims.
We are also completing an engagement that looks at the inherent
conflict of interest that exists when a WYO insurance company sells
both property-casualty and flood policies to a single homeowner who is
subject to a multiple peril event such as a hurricane. We testified
before the House Committees on Financial Services and Homeland Security
in June 2007 about our preliminary views on the sufficiency of data
available to and collected by FEMA to ensure the accuracy of claims
payments.[Footnote 28] FEMA has determined that it does not have the
authority to collect wind damage claims data from WYO insurance
companies, even when the insurer services both the wind and flood
policies on the same property. Hence, FEMA generally does not know the
extent to which wind may have contributed to total property damages.
However, FEMA officials do not believe that the agency needs to know
the dollar amount of wind damages paid by a WYO insurance company to
verify the accuracy of a flood claim. While they may not need this
information for many flood claims, the inherent conflict of interest
that exists when a single WYO insurance company is responsible for
adjusting both the wind and flood claim on a single property calls for
the institution of strong internal controls to ensure the accuracy of
FEMA's claims payments. Without internal controls that include access
to the entire claim file for certain properties (both wind and flood),
FEMA's ability to confirm the accuracy of certain flood claims may be
limited. While the DHS Inspector General is currently examining this
issue by reviewing both wind and flood claims on selected properties.
Its interim report, issued in July 2007, was generally
inconclusive.[Footnote 29]
Concluding Observations:
As our prior work reveals, FEMA faces a number of ongoing challenges in
managing the NFIP that, if not addressed, will continue to threaten the
program's financial solvency even if the program's current debt is
forgiven. As we noted when we placed the NFIP on the high-risk list in
2006, comprehensive reform will likely be needed to stabilize the long-
term finances of this program. Our ongoing work is designed to provide
FEMA and Congress with useful information to help assess ways to
improve the sufficiency of NFIP's financial resources and its current
funding mechanism, mitigate expenses from repetitive loss properties,
increase compliance with mandatory purchase requirements, and expedite
FEMA's flood map modernization efforts.
As you well know, placing the program on more sound financial footing
involves a set of highly complex, interrelated issues that are likely
to involve many trade-offs. For example, increasing premiums to better
reflect risk would put the program on a sounder financial footing but
could also 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). As a result, taxpayer exposure for
disaster assistance resulting from flooding could increase. As we have
said before, meeting the NFIP's current challenges 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 Orice M. Williams at
(202) 512-8678 or williamso@gao.gov. This statement was prepared under
the direction of Andy Finkel. Key contributors were Emily Chalmers,
Martha Chow, Nima Patel Edwards, Grace Haskins, Lisa Moore, and Roberto
Pinero.
[End of section]
Footnotes:
[1] GAO, National Flood Insurance Program: New Process Aided Hurricane
Katrina Claims Handling, but FEMA's Oversight Should Be Improved, GAO-
07-169 (Washington, D.C.: Dec. 15, 2006).
[2] GAO, National Flood Insurance Program: FEMA's Management and
Oversight of Payments for Insurance Company Services Should Be
Improved, GAO-07-1078 (Washington D.C.: Sept. 5, 2007).
[3] GAO, Natural Hazard Mitigation: Various Mitigation Efforts Exist,
but Federal Efforts Do Not Provide a Comprehensive Strategic Framework,
GAO-07-403 (Washington, D.C.: Aug. 22, 2007).
[4] According to FEMA, many private insurers offer Excess Flood
Protection, which provides higher limits of coverage than the NFIP, in
the event of catastrophic loss by flooding.
[5] The National Flood Insurance Act of 1968, as amended, is codified
at 42 U.S.C. §§ 4001 et seq.
[6] 42 U.S.C.§ 4001(b).
[7] FEMA defines a community as, any state or area or political
subdivision thereof, or any Indian tribe or authorized tribal
organization, which has authority to adopt and enforce floodplain
management regulations for the areas within its jurisdiction. 44 C.F.R.
§ 59.1 . In most cases, a community is an incorporated city, town,
township, borough, or village, or an unincorporated area of a county or
parish.
[8] See 42 U.S.C. 4016.
[9] GAO, Flood Insurance: Information on the Financial Condition of the
National Flood Insurance Program, GAO-01-992T (Washington, D.C.: July
2001).
[10] GAO, Federal Emergency Management Agency: Challenges for the
National Flood Insurance Program, GAO-07-335T (Washington, D.C.: Jan.
25, 2006).
[11] According to FEMA officials, the next scheduled payment is October
1, 2007.
[12] See, e.g., S. 3589, § 11, 109th Cong. (2006).
[13] H.R.3121, §121,110th Cong. (2007).
[14] Our key criteria for selecting the case study counties include
high number and/or percent of subsidized policies, repetitive loss
properties, and number of claims paid; the type of flooding experienced
by the community (e.g., coastal, riverine); geographic location (urban/
rural, east and west coast, inland/coastal); population demography
(racial/ethnic groups and income levels); availability of digitally
enhanced-FIRM maps to enable us to overlay on Census maps; and
availability of electronic county tax assessment data to enable us to
match with NFIP database by property.
[15] CBO, Value of Properties in the National Flood Insurance Program
(Washington, D.C.: June 2007).
[16] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section
2(3),(4), (5), 118 Stat. 712, 713 (2004).
[17] GAO, National Flood Insurance Program: Actions to Address
Repetitive Loss Properties, GAO-04-401T (Washington, D.C.: Mar. 25,
2004).
[18] A severe repetitive loss property is defined as a single family
property or a multifamily property that is covered under flood
insurance by the NFIP and has incurred flood-related damage for which 4
or more separate claims payments have been paid under flood insurance
coverage, with the amount of each claim payment exceeding $5,000 and
with cumulative amount of such claims payments exceeding $20,000; or
for which at least 2 separate claims payments have been made with the
cumulative amount of such claims exceeding the reported value of the
property. 42 U.S.C. § 4102a(b)
[19] Generally, post-Flood Insurance Rate Map (Post-FIRM) buildings
built in compliance with the floodplain management regulations will
continue to have favorable rate treatment even though higher base flood
elevations or more restrictive, greater risk zone designations result
from Flood Insurance Rate Map revisions. Property owners can also
purchase policies after they are remapped by proving that the property
was previously mapped.
[20] GAO, Flood Insurance: Extent of Noncompliance with Purchase
Requirements Is Unknown, GAO-02-396 (Washington, D.C: June 21, 2002).
[21] RAND Corporation, The National Flood Insurance Program's Market
Penetration Rate: Estimates and Policy Implications, 2006. This range
is based on calculations, using estimates from a stratified random
sample of data from 2004. Given the nature of the sample the estimates
cannot be extrapolated to communities excluded from NFIP, New York
City, and communities in Puerto Rico, Virgin Islands, Guam, and
American Samoa. Assumptions made in calculating compliance rate were:
(1) The number of policies underwritten by private insurers is 7
percent of the number in Special Flood Hazard Areas (SFHA) by NFIP; (2)
85 percent of mortgages in SFHAs are subject to the mandatory purchase
requirement; and (3) The market penetration rates for homes that have
mortgages but are not subject to the mandatory purchase requirement is
38 percent (the market penetration rate for homes where the probability
of a mortgage is low or uncertain). As with any statistical sample
there is error associated with the estimates. Certain regions included
estimates with considerable uncertainty, and a larger sample size would
be needed to make more definitive conclusions.
[22] GAO, Flood Map Modernization: Program Strategy Shows Promise, but
Challenges Remain, GAO-04-417 (Washington, D.C.: Mar. 31, 2004).
[23] National Flood Insurance Reform Act of 1994, § 575. 42 U.S.C.
§4101.
[24] According to FEMA, the almost 34 percent includes both new
preliminary and effective maps.
[25] GAO-07-169.
[26] GAO, Federal Management 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).
[27] GAO-07-1078.
[28] GAO, National Flood Insurance Program: Preliminary Views on FEMA's
Ability to Ensure Accurate Payments on Hurricane-Damaged Properties,
GAO-07-991T (Washington, D.C.: June 2007).
[29] Department of Homeland Security, Office of Inspector General,
Interim Report: Hurricane Katrina: A Review of Wind Versus Flood
Issues, OIG-07-62. (Washington, D.C.: July 2007).
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