Flood Insurance
Options for Addressing the Financial Impact of Subsidized Premium Rates on the National Flood Insurance Program Gao ID: GAO-09-20 November 14, 2008The Federal Emergency Management Agency (FEMA), the Department of Homeland Security (DHS) agency that administers the National Flood Insurance Program (NFIP), estimates that subsidized properties--those that receive discounted premium rates that do not fully reflect the properties' actual flood risk--experience as much as five times the flood damage as properties that do not qualify for subsidized rates. Almost one in every four residential policies has subsidized rates that are on average 35-40 percent of the full-risk rate. Unprecedented losses from the 2005 hurricane season and NFIP's periodic need to borrow from the Department of the Treasury to pay flood insurance claims has raised concerns about the impact that subsidized premium rates have on the longterm financial solvency of NFIP. GAO designated NFIP as high-risk in March 2006; as of June 2008, NFIP's debt stood at $17.4 billion. This report (1) provides information on NFIP's inventory of subsidized properties and (2) examines NFIP's current approach to subsidized properties and the advantages and disadvantages of options for reducing the costs associated with these properties. To do this work, GAO analyzed data on policies and claims and collected available data about subsidized properties. GAO also reviewed applicable reports and interviewed relevant agency, state, and private sector officials. In its written comments, DHS expounded upon several topics discussed in this report.
While it constitutes a declining percentage of all NFIP policies, the number of properties receiving subsidized premium rates has grown since 1985; by 2007 it was at its highest point in almost 30 years. According to FEMA, this growth resulted from several factors, including a growing number of mortgages with mandatory flood insurance purchase requirements and greater enforcement of these requirements, the longer-than-expected life of the structures that are eligible for subsidies, and increased awareness of the dangers of floods from several major recent disasters and increased NFIP marketing efforts. To date, more than half of the subsidized policies are concentrated in five states with relatively high flood risk--California, Florida, Louisiana, New Jersey, and Texas. Current low participation rates--around 50 percent of single-family homes in high-risk areas--leave room for substantial growth in the number of NFIP policies, many of which would be likely to receive subsidized rates. Because of their relatively high loss experience and lower premium rates, the policies receiving subsidized rates have been a financial burden on the program, with total claims exceeding premiums by $962 million over the period from 1986 through 2004, before the large losses from the 2005 hurricanes. Without changes to the program, the number of subsidized properties will likely continue to grow, increasing the potential for future NFIP operating deficits. As Congress evaluates the impact of subsidized premium rates, it is faced with balancing the public policy goals of charging premium rates that fully reflect actual risks, encouraging broad program participation through affordable rates, and limiting costs to taxpayers. While the current program of propertybased subsidies and voluntary mitigation efforts--steps taken to reduce a property's flood risk such as relocation or elevation--encourages broad program participation, it is unlikely to substantially reduce the adverse financial impact of subsidized properties. GAO identified three options for addressing the financial impact of subsidized properties on the NFIP, each with advantages and disadvantages. One option would be to increase mitigation efforts, including making mitigation mandatory. Mitigation could help reduce flood losses, but the increased funding for such efforts could be high. A second option, eliminating or reducing subsidies, could improve NFIP's financial stability by increasing the number of policies that more accurately reflect the risk of flooding. However, the resulting higher premium rates could reduce NFIP participation and could meet resistance from local communities. A third option would be to target subsidies based on financial need, which could help ensure that only those in need receive subsidies, with the rest paying full-risk rates. However, it could be challenging for FEMA to develop and administer such a program in the midst of ongoing management challenges. While the inherent difficulty in determining premium rates adequate to cover potentially volatile and at times catastrophic flood losses means that the potential for the program to incur future operating deficits will always exist, implementing any or a combination of these options could significantly reduce the adverse financial impact of subsidies on NFIP.
GAO-09-20, Flood Insurance: Options for Addressing the Financial Impact of Subsidized Premium Rates on the National Flood Insurance Program
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Report to the Ranking Member, Committee on Banking, Housing, and Urban
Affairs, U.S. Senate:
United States Government Accountability Office:
GAO:
November 2008:
Flood Insurance:
Options for Addressing the Financial Impact of Subsidized Premium Rates
on the National Flood Insurance Program:
Flood Insurance:
GAO-09-20:
GAO Highlights:
Highlights of GAO-09-20, a report to the Ranking Member, Committee on
Banking, Housing, and Urban Affairs, U.S. Senate.
Why GAO Did This Study:
The Federal Emergency Management Agency (FEMA), the Department of
Homeland Security (DHS) agency that administers the National Flood
Insurance Program (NFIP), estimates that subsidized properties”those
that receive discounted premium rates that do not fully reflect the
properties‘ actual flood risk”experience as much as five times the
flood damage as properties that do not qualify for subsidized rates.
Almost one in every four residential policies has subsidized rates that
are on average 35-40 percent of the full-risk rate. Unprecedented
losses from the 2005 hurricane season and NFIP‘s periodic need to
borrow from the Department of the Treasury to pay flood insurance
claims has raised concerns about the impact that subsidized premium
rates have on the long-term financial solvency of NFIP. GAO designated
NFIP as high-risk in March 2006; as of June 2008, NFIP‘s debt stood at
$17.4 billion.
This report (1) provides information on NFIP‘s inventory of subsidized
properties and (2) examines NFIP‘s current approach to subsidized
properties and the advantages and disadvantages of options for reducing
the costs associated with these properties. To do this work, GAO
analyzed data on policies and claims and collected available data about
subsidized properties. GAO also reviewed applicable reports and
interviewed relevant agency, state, and private sector officials. In
its written comments, DHS expounded upon several topics discussed in
this report.
What GAO Found:
While it constitutes a declining percentage of all NFIP policies, the
number of properties receiving subsidized premium rates has grown since
1985; by 2007 it was at its highest point in almost 30 years. According
to FEMA, this growth resulted from several factors, including a growing
number of mortgages with mandatory flood insurance purchase
requirements and greater enforcement of these requirements, the longer-
than-expected life of the structures that are eligible for subsidies,
and increased awareness of the dangers of floods from several major
recent disasters and increased NFIP marketing efforts. To date, more
than half of the subsidized policies are concentrated in five states
with relatively high flood risk”California, Florida, Louisiana, New
Jersey, and Texas. Current low participation rates”around 50 percent of
single-family homes in high-risk areas”leave room for substantial
growth in the number of NFIP policies, many of which would be likely to
receive subsidized rates. Because of their relatively high loss
experience and lower premium rates, the policies receiving subsidized
rates have been a financial burden on the program, with total claims
exceeding premiums by $962 million over the period from 1986 through
2004, before the large losses from the 2005 hurricanes. Without changes
to the program, the number of subsidized properties will likely
continue to grow, increasing the potential for future NFIP operating
deficits.
As Congress evaluates the impact of subsidized premium rates, it is
faced with balancing the public policy goals of charging premium rates
that fully reflect actual risks, encouraging broad program
participation through affordable rates, and limiting costs to
taxpayers. While the current program of property-based subsidies and
voluntary mitigation efforts”steps taken to reduce a property‘s flood
risk such as relocation or elevation”encourages broad program
participation, it is unlikely to substantially reduce the adverse
financial impact of subsidized properties. GAO identified three options
for addressing the financial impact of subsidized properties on the
NFIP, each with advantages and disadvantages. One option would be to
increase mitigation efforts, including making mitigation mandatory.
Mitigation could help reduce flood losses, but the increased funding
for such efforts could be high. A second option, eliminating or
reducing subsidies, could improve NFIP‘s financial stability by
increasing the number of policies that more accurately reflect the risk
of flooding. However, the resulting higher premium rates could reduce
NFIP participation and could meet resistance from local communities. A
third option would be to target subsidies based on financial need,
which could help ensure that only those in need receive subsidies, with
the rest paying full-risk rates. However, it could be challenging for
FEMA to develop and administer such a program in the midst of ongoing
management challenges. While the inherent difficulty in determining
premium rates adequate to cover potentially volatile and at times
catastrophic flood losses means that the potential for the program to
incur future operating deficits will always exist, implementing any or
a combination of these options could significantly reduce the adverse
financial impact of subsidies on NFIP.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-20]. For more
information, contact Orice Williams at (202) 512-8678 or
williamso@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The Growing Inventory of Subsidized Properties Has Contributed to
NFIP's Operating Losses:
Several Options Exist for Addressing the Financial Impact of Subsidized
Properties on NFIP, but Each Option Involves Trade-offs:
Agency Comment and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Some Areas of the Country That Appear to Have a Potential
for an Increase in the Number of NFIP Policies:
Appendix III: Comments from the Department of Homeland Security:
Appendix IV: GAO Contact and Staff Acknowledgements:
Tables:
Table 1: Overview of the Authorities, Purpose and Funding, and Planning
and Cost-Share Requirements of FEMA Mitigation Assistance Options:
Table 2: Number of Subsidized Policies, Repetitive Loss Properties, and
Properties Mitigated by Program Type, Fiscal Years 1997-2008:
Table 3: Advantages and Disadvantages of Options for Addressing NFIP's
Subsidized Premium Rates:
Table 5: Demographics and Other Characteristics of the Five Counties
Selected for Site Visits:
Table 6: NFIP Policies in Force and Cumulative Claims Paid in the Five
Selected Counties:
Table 7: Comparison of Repetitive Loss Properties Historically (1978-
2007) and Current (as of December 31, 2007) in the Five Selected
Counties:
Figures:
Figure 1: Changes in the Percentage and Number of Residential NFIP-
Subsidized Policies by Year, from 1978 to 2007:
Figure 2: Subsidized and Total Flood Insurance Policies by State as of
December 31, 2007:
Abbreviations:
BFE: base flood elevation:
CBO: Congressional Budget Office:
DHS: Department of Homeland Security:
FEMA: Federal Emergency Management Agency:
FIRM: Flood Insurance Rate Map:
FMA: Flood Mitigation Assistance:
HMGP: Hazard Mitigation Grant Program:
ICC: Increased Cost of Compliance:
PDM: Pre-Disaster Mitigation:
RFC: Repetitive Flood Claims:
NFIP: National Flood Insurance Program:
SBA: Small Business Administration:
SFHA: Special Flood Hazard Area:
SRL: Severe Repetitive Loss Pilot Program:
United States Government Accountability Office:
Washington, DC 20548:
November 14, 2008:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban affairs:
United States Senate:
Dear Senator Shelby:
In 2007, about 1.2 million--or almost one out of four--residential
flood insurance policies covered by the National Flood Insurance
Program (NFIP) continued to be sold at highly discounted rates that did
not fully reflect the actual risk of flood damage (known as subsidized
rates).[Footnote 1] The Federal Emergency Management Agency (FEMA),
which is the Department of Homeland Security agency that administers
NFIP, estimates that properties covered by policies with subsidized
rates experience as much as five times more flood damage than compliant
new structures experience that are charged rates that aim to reflect
the actual risk of flooding (full-risk rates). Given that subsidized
rates average 35 to 40 percent of what full-risk rates would be on the
same properties, these policies represent a financial drain on the
program. Over the years, the program has had to borrow periodically
from the U.S. Treasury. Largely as a result of claims associated with
the 2005 hurricane season, the program's outstanding debt stands at
$17.4 billion as of June 2008.
The National Flood Insurance Act of 1968 authorized subsidized rates to
encourage participation in NFIP.[Footnote 2] Specifically, the act
authorizes subsidized rates for many existing properties in high-risk
locations known as Special Flood Hazard Areas (SFHA) that otherwise
would have been charged higher premiums, with the justification that
these properties were built before Flood Insurance Rate Maps (FIRM)
became available and the level of risk was clearly understood.[Footnote
3] But critics of the subsidies have argued that subsidized rates
should be discontinued for several reasons. Critics argue, for example,
that some of the individuals receiving subsidies may be able to afford
full-risk premiums and that the availability of subsidized rates may
actually create a disincentive for property owners to mitigate their
properties to reduce the risk of flood damage.[Footnote 4]
In March 2006, we designated NFIP as high-risk, in part because of the
program's financial condition and inability to repay funds borrowed
from the U.S. Treasury to cover the catastrophic flood losses resulting
from the 2005 hurricanes. More recent flooding in the Midwest and from
the 2008 hurricane season are likely to reignite persistent questions
about the program's long-term financial solvency and the impact of
subsidized premiums on its long-term financial health. To address these
questions, as agreed with your staff, this study (1) provides
information on NFIP's inventory of subsidized properties and their
financial impact on the program and (2) examines NFIP's current
approach to managing its inventory of subsidized properties and the
advantages and disadvantages of options for reducing or eliminating the
financial impact of properties insured at subsidized rates.
To address these objectives, we analyzed NFIP data on flood insurance
policies, including both subsidized and full-risk premiums and claims.
We assessed the reliability of these data by gathering and analyzing
available information about how the data were created and maintained
and performed electronic tests of required data elements. We determined
that the data were sufficiently reliable for the purposes of this
report. We also analyzed NFIP's legislative history and examined FEMA's
implementation of legislative requirements authorizing subsidized rates
for certain properties in high risk locations. In addition, we
judgmentally selected and visited five counties that experienced
various types of flooding and had large numbers of subsidized
properties in order to more fully understand similarities and
differences in how NFIP operated at the local level.[Footnote 5] During
our site visits we met with local floodplain managers, property tax
assessors, building permit officials, civil engineers, real estate
agents, insurance agents, claims adjusters, and other relevant parties.
We interviewed officials from the five FEMA regional offices
responsible for these counties and spoke with representatives from
private companies that collected and sold data on real estate
transactions and values, for marketing purposes. Finally, we spoke with
Congressional Budget Office (CBO) staff about its study of NFIP
properties and we analyzed various other studies on relevant flood
insurance issues.[Footnote 6] Further details about our scope and
methodology are included in appendix I.
We conducted this performance audit from December 2006 to November 2008
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Results in Brief:
While it constitutes a declining percentage of all NFIP policies, the
number of properties receiving subsidized premium rates has grown
fairly consistently over the last 20 years, and the relatively high
loss experience of these properties has continued to undermine the
financial condition of the program. Despite initial expectations that
the number of properties eligible for subsidized rates would decline
over time, the number of policies with subsidized rates are at their
highest point in almost 30 years. As of December 2007, there were about
1.2 million active residential policies--or almost 23 percent of all
properties covered by NFIP. According to FEMA, the increase in the
number of policies receiving subsidized rates is the result of several
factors, including the following: (1) a growing number of mortgages
with mandatory flood insurance purchase requirements and greater
enforcement of those requirements, (2) the longer-than-expected life of
the structures that are eligible for subsidies, and (3) an increased
awareness in recent years of the dangers of floods following several
major disasters and increased NFIP marketing efforts.[Footnote 7] Of
these approximately 1.2 million policies, 57 percent are located in
five states with relatively high flood risk: California, Florida,
Louisiana, New Jersey, and Texas. In addition, current low program
participation rates leave room for substantial growth in the number of
NFIP policies, including subsidized properties. According to a 2006
study, for instance, only about half of the single-family homes in
SFHAs had flood insurance.[Footnote 8] While it is not clear what
percentage of any new policies might receive subsidized rates, FEMA
officials said that any increase would depend largely on the location
of future policyholders. Policies receiving subsidized rates have been
a financial burden on the program, resulting in an operating deficit of
$962 million for the years 1986 through 2004, a period before the large
losses resulting from the hurricanes of 2005.[Footnote 9] Adding the
2005 hurricanes to this period, the operating deficit for subsidized
policies increased to $6.3 billion. Policies receiving subsidized rates
also account for the majority of repetitive loss properties--properties
that have experienced multiple flood losses--which make up only around
1 percent of the total polices but have accounted for about 30 percent
of claims dollars paid. Without changes to the program, the number of
subsidized properties will likely continue to grow, increasing the
likelihood that NFIP will experience ongoing operating deficits.
As Congress evaluates whether to maintain the current system of NFIP
subsidies or make changes, it is faced with balancing the often
competing public policy goals of charging premium rates that fully
reflect actual risks (and thus helping improve the financial condition
of NFIP), encouraging broad participation in natural catastrophe
insurance programs by maintaining affordable rates, and limiting
taxpayer costs before and after a disaster. While the current system of
subsidies and primarily voluntary mitigation might promote broad
participation, it results in rates that do not reflect the actual risks
of flooding and an inventory of subsidized properties that is not
likely to be reduced in number. We discuss three broad public policy
options for addressing the financial impact of subsidized properties on
the financial solvency of NFIP:
* increase mitigation efforts,
* eliminate or reduce use of subsidies, and:
* target use of subsidies based on the financial need of the property
owner.
Each of the options we identified has both advantages and disadvantages
in terms of the impact on the program's public policy goals and would
involve trade-offs that would have to be weighed. For instance,
substantially expanding mitigation efforts would help reduce losses
from flood damage and could ultimately limit costs to taxpayers by
decreasing the number of subsidized properties, but would require
increased funding for FEMA's mitigation programs. Eliminating or
reducing the subsidies would help ensure that premium rates more
accurately reflect the actual risk of loss, an outcome that could
motivate more homeowners to mitigate. However, the resulting higher
premiums could lead some homeowners to discontinue or not purchase
coverage, thus reducing participation in NFIP and potentially
increasing the costs to taxpayers of providing disaster assistance in
the event of a catastrophe. Targeting subsidies based on need--through
a means test, for example--is an approach used by other federal
programs and could help ensure that those needing the subsidy would
have access to it and retain their coverage. Depending on how such a
program was implemented, NFIP might be able to charge more participants
full-risk rates. However, raising premium rates for some participants
could also decrease program participation, and may discourage low-
income property owners from participating in NFIP if they were required
to prove that they met the requirements for a subsidy. It might also be
a challenge for FEMA to implement this option in the midst of other
ongoing management challenges. While the inherent difficulty in setting
premium rates adequate to cover potentially volatile and at times
catastrophic flood losses means that the potential for the program to
incur future operating deficits will always exist, implementing any or
a combination of these options could significantly reduce the adverse
financial impact of subsidies on NFIP.
We provided a draft of this report to the Department of Homeland
Security (DHS) for comment. It provided written comments that are
reprinted in appendix III. In its written comments, DHS expounded upon
several topics discussed in this report. First, DHS noted that it is
aware of the financial impact of subsidized and repetitive loss
properties on NFIP, and stated that while it has proposed a number of
initiatives through the years, most of these were not welcomed by
stakeholders. Second, DHS noted that amendments to current statutes and
rules would be needed if FEMA were to require mitigation via a grant
program beyond the substantial damage provision that currently is the
only provision that triggers mandatory mitigation. Third, DHS
recognized that a needs-based subsidy could be beneficial, but it
recommended that the burden of making needs-based determinations be
placed on someone other than the insurance agent and that a discussion
be held on how the costs of discounted premiums would be borne. DHS
also provided technical comments, which we have incorporated as
appropriate.
Background:
Flooding is the most widespread natural hazard in the country,
affecting virtually every state. From February 1978 through August
2008, there were 90 significant flood events.[Footnote 10] Since its
inception in 1968, NFIP has sought to have local communities adopt
floodplain management ordinances and offered flood insurance to their
residents in an effort to reduce the need for government assistance
after a flood event. Premium subsidies were seen as a way to achieve
the program's objectives by ensuring that owners of existing properties
in flood zones could afford flood insurance. The authority for
subsidized rates was therefore included in the National Flood Insurance
Act of 1968 as an incentive for communities to join the program by
adopting and enforcing floodplain management ordinances that would
reduce future flood losses, with the intent that the subsidies would be
only a part of an interim solution to long-term adjustments in land
use. The first $35,000 of any subsidized policy for a one-to-four
family residential property, and the first $100,000 of any other
residential property, receives the NFIP subsidy; amounts of insurance
in excess of $35,000 and $100,000, respectively, are charged full-risk
rates.[Footnote 11] On average, the premium for a subsidized policy in
a high-risk flood zone is higher than the premium on a full-risk policy
in the same zone because properties with full-risk rates have either
been built to newer flood-resistant building codes or have been
mitigated to reduce flood risks and thus are generally less flood prone
than properties that are eligible for subsidized rates. For example,
the average annual subsidized premium in 2007 for properties located in
the highest-risk zones was about $880, while the average annual premium
for properties in the same zones paying full-risk rates was about $379.
The program has three components: (1) the provision of flood insurance,
as mentioned above; (2) the requirement that participating communities
adopt and enforce floodplain management regulations; and (3) the
identification and mapping of floodplains. Community participation in
NFIP is voluntary. However, communities must join NFIP and adopt FEMA-
approved building standards and floodplain management strategies in
order for their residents to purchase flood insurance. Participating
communities can receive discounts on flood insurance if they establish
floodplain management programs that go beyond the minimum requirements
of NFIP. FEMA can suspend communities that do not comply with the
program, and communities can withdraw from the program. Currently, more
than 20,000 communities participate in NFIP.
FIRMs, which show the level of flood risk in various areas and assign a
flood zone designation to each area based on its risk level, are used
to set premium rates, among other things.[Footnote 12] The risk levels
range from high to low risk depending on the risk of flooding.[Footnote
13] Structures used to secure loans from a federally regulated lending
institution that are deemed high-risk or high-risk coastal are required
to have flood insurance. For structures deemed to have moderate to low
risk of flooding, the purchase of flood insurance is voluntary. FIRMs
are also used to determine whether a structure is eligible for rate
subsidies. Structures built after a community's FIRM was published must
be built to NFIP building standards and pay full-risk rates.
Communities also use the maps to establish minimum building standards
designed to reduce the impact of flooding, and lenders use them to
identify which property owners are required to purchase flood
insurance.
Once communities join NFIP and are mapped, structures that were built
before the FIRM--pre-FIRM structures--become eligible for subsidized
rates. Pre-FIRM structures generally are at a high risk of flooding
because they are located below the area's base flood elevation (BFE),
which is the computed elevation to which floodwater is anticipated to
rise during a flood that is estimated to have a 1 percent chance of
occurring annually. To lessen the flood risk level, pre-FIRM structures
can be mitigated. FEMA recognizes the following steps for mitigating
residential pre-FIRM structures: (1) elevation of structures to or
above their BFE, (2) relocation of structures to a higher area, or (3)
demolition of structures. Mitigation of pre-FIRM properties is
voluntary unless a property is substantially damaged or the owner
undertakes substantial improvement.[Footnote 14] In these cases, the
structure must be repaired or renovated to meet the same standards as
new construction. Unmitigated existing pre-FIRM properties are eligible
for subsidized rates for the life of the properties. As owners sell
their subsidized properties, the new owners also become eligible for
the subsidized rates, and subsidies apply even if the owners
discontinue their insurance coverage and do not purchase insurance
again until years later.
Mitigation activities have always been part of NFIP, but it was not
until the 1988 passage of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act that FEMA received the authority to fund
mitigation projects for all types of disasters, including
flooding.[Footnote 15] Later, the National Flood Insurance Reform Act
of 1994 gave FEMA the authority to carry out a flood-only mitigation
assistance program to help policyholders reduce the risk of flood
damage to individual properties.[Footnote 16] In 2004, the Bunning-
Bereuter-Blumenauer Flood Insurance Reform Act of 2004 authorized two
additional grant programs specifically for properties that experienced
repetitive flooding and mandated increased premiums if property owners
refused to mitigate.[Footnote 17] Each program has different types of
requirements, purposes, and appropriations. FEMA uses a cost-benefit
analysis to determine the cost-effectiveness of proposed mitigation
projects and to rank the projects in order of priority. Policyholders
can also buy Increased Cost of Compliance (ICC) Coverage--a component
of the standard flood insurance policy--which provides up to $30,000
above the insured policy amount for mitigating flood-damaged properties
that meet certain criteria. Table 1 summarizes the five mitigation
programs and ICC.
Table 1: Overview of the Authorities, Purpose and Funding, and Planning
and Cost-Share Requirements of FEMA Mitigation Assistance Options:
Program: Flood Mitigation Assistance (FMA);
Authorities: Section 1366 of the National Flood Insurance Act of 1968,
as added by the National Flood Insurance Reform Act of 1994;
Purpose and fiscal year 2007 funding levels: To implement cost-
effective measures that reduce or eliminate the long-term risk of flood
damage to buildings, manufactured homes, and other structures insured
under NFIP. Appropriation for fiscal year was $34 million;
Planning requirements: FEMA approved local flood mitigation plan
meeting required prior to award; no state plan required;
Cost-share requirement: Up to 75 percent federal, minimum 25 percent
nonfederal match required. Reduced match (10 percent nonfederal) for
states with approved state mitigation plans meeting hazard mitigation
planning requirements.
Program: Repetitive Flood Claims (RFC);
Authorities: Section 1323 of the NFIA of 1968, as added by the Flood
Insurance Reform Act of 2004;
Purpose and fiscal year 2007 funding levels: To reduce or eliminate the
long-term risk of flood damage to structures insured under NFIP that
have had one or more claim payments for flood damage. Appropriation for
fiscal year 2008 was $10 million;
Planning requirements: FEMA approved State/Tribal Standard or Enhanced
hazard mitigation plan required prior to award; no local plan required;
Cost-share requirement: Up to 100 percent federal funding (no
nonfederal match requirement).
Program: Severe Repetitive Loss Pilot Program (SRL);
Authorities: Section 1361A of the NFIA of 1968, as added by the Bunning-
Bereuter- Blumenauer Flood Insurance Reform Act of 2004;
Purpose and fiscal year 2007 funding levels: To reduce or eliminate the
long-term risk of flood damage to severe repetitive loss residential
properties and the associated drain on the National Flood Insurance
Fund from such properties. Combined appropriation for fiscal year 2006
through FY2008 was $160 million.[A];
Planning requirements: FEMA approved State/Tribal Standard or Enhanced
hazard mitigation plan required prior to award;
Cost-share requirement: Up to 75 percent federal, minimum 25 percent
nonfederal match required. Reduced match (10 percent nonfederal) for
states with approved state mitigation plans meeting hazard mitigation
planning requirements.
Program: Hazard Mitigation Grant Program (HMGP);
Authorities: Section 404 of the Robert T. Stafford Disaster Relief and
Emergency Relief Act;
Purpose and fiscal year 2007 funding levels: To provide funds to
states, territories, Indian Tribal governments, and communities to
reduce or eliminate future risks to lives and property from natural
hazards, in accordance with identified priorities. Appropriation for
fiscal year 2008 was $324.7 million;
Planning requirements: FEMA approved local mitigation plan prior to
award;
Cost-share requirement: Up to 75 percent federal; nonfederal match does
not need to be in cash; in-kind services or materials may be used.
Program: Pre-Disaster Mitigation (PDM);
Authorities: Title I of the Disaster Mitigation Act of 2000;
Purpose and fiscal year 2007 funding levels: To provide funds to
states, territories, Indian Tribal governments, and communities for
hazard mitigation planning and the implementation of mitigation
projects prior to a disaster event. Appropriation for fiscal year 2008
was $114 million;
Planning requirements: FEMA-approved State/Tribal Standard or Enhanced
hazard mitigation plan;
Cost-share requirement: Up to 75 percent federal, minimum 25 percent
nonfederal match required although small, impoverished communities may
be eligible for up to 90 percent federal cost-share.
Program: Increased Cost of Compliance (ICC) Coverage;
Authorities: Section 1304 of the NFIA of 1968, as amended by the
National Flood Insurance Reform Act of 1994;
Purpose and fiscal year 2007 funding levels: To provide up to $30,000
to policyholders to help cover the cost of mitigation measures for
flood-damaged properties. This amount is in addition to building
coverage under the standard flood insurance policy. Funded from
premiums collected;
Planning requirements: Not applicable;
Cost-share requirement: No cost-share requirement. However, ICC may be
used in concert as nonfederal matching funds with the FEMA mitigation
grants.
Source: FEMA.
[A] Fiscal year 2006 and fiscal year 2007 appropriations had not been
used and therefore were combined with fiscal year 2008 appropriations.
[End of table]
The Growing Inventory of Subsidized Properties Has Contributed to
NFIP's Operating Losses:
NFIP's inventory of properties receiving subsidized premium rates has
grown over the past 20 years, hindering the program's ability to pay
claims without borrowing from the Treasury. While the percentage of
policies receiving subsidies has dropped since 1978 to 23 percent of
all policies as of December 2007, the number of subsidized properties
has continued to increase. In addition, despite earlier expectations
that the number of subsidized properties would decrease over time, for
several reasons the number of policies with subsidized rates is at its
highest point since 1980. Further, because of current low NFIP
participation rates, there appears to be room for substantial growth in
the number of NFIP policies, many of which are likely to receive
subsidized premium rates. The properties receiving subsidized rates
have been a financial burden on the program because of their relatively
high loss experience and subsidized rates that do not reflect the
actual risk of flooding.[Footnote 18] Subsidized properties also
account for the majority of repetitive loss properties--properties that
have experienced multiple flood losses--which make up around 1 percent
of the total policies but 30 percent of the claims dollars paid.
The Number of Policies Receiving Subsidized Rates Has Increased due to
a Number of Factors:
While the percentage of residential subsidized properties has dropped
over time, the number of subsidized properties has fluctuated since
NFIP began but has grown fairly consistently over the last 20 years
(see figure 1). Specifically, the percentage of residential subsidized
policies has dropped since the early years of the program from 77
percent in 1978 to 23 percent of all policies as of December 2007.
[Footnote 19] But the number of policies with subsidized rates is
at its highest point since 1978, despite earlier expectations that the
number of subsidized properties would decrease substantially. According
to FEMA, in the early years of the program it used subsidies to
encourage participation in the program, and because of the high number
of pre-FIRM structures, the number of policies with subsidized rates
reached a high of about 1.09 million in 1980. Subsequently, between
1980 and 1985, aggressive annual rate increases for subsidized policies
corresponded with a reduction in the number of subsidized policies,
which fell to a low of about 705,000 in 1985. However, the number of
policies with subsidized rates has increased nearly every year since
1986, reaching a high of almost 1.13 million in 2007.[Footnote 20]
Figure 1: Changes in the Percentage and Number of Residential NFIP-
Subsidized Policies by Year, from 1978 to 2007:
This figure is a combination line graph showing changes in the
percentage and number of residential NFIP-subsidized policies by year,
from 1978 to 2007. The X axis represents the year, and the Y axis
represents number of policies in millions. The lines represent the
number of subsidized residential units (in millions) and percentage of
total units.
Year: 1978;
Number of subsidized residential units (in millions): 0.74;
Percentage of total units: 76.6%.
Year: 1980;
Number of subsidized residential units (in millions): 1.09;
Percentage of total units: 60.2%.
Year: 1985;
Number of subsidized residential units (in millions): 0.71;
Percentage of total units: 39.4%.
Year: 1990;
Number of subsidized residential units (in millions): 0.85;
Percentage of total units: 38.3.
Year: 1995;
Number of subsidized residential units (in millions): 0.99;
Percentage of total units: 32.6%.
Year: 2000;
Number of subsidized residential units (in millions): 1.04;
Percentage of total units: 25.6%.
Year: 2004;
Number of subsidized residential units (in millions): 1.05;
Percentage of total units: 24.4%.
Year: 2005;
Number of subsidized residential units (in millions): 1.07;
Percentage of total units: 24.0%.
Year: 2006;
Number of subsidized residential units (in millions): 1.11;
Percentage of total units: 22.7%.
Year: 2007;
Number of subsidized residential units (in millions): 1.13;
Percentage of total units: 21.7%.
[Refer to PDF for image]
Source: GAO analysis of NFIP data.
Note: Policies measured by earned exposure.
[End of figure]
A number of factors help explain this increase. Specifically, according
to FEMA, there has been an increase in the number of mortgages with
mandatory purchase requirements for flood insurance--that is, mortgages
on structures that are located in SFHAs. The Flood Disaster Protection
Act of 1973 made flood insurance mandatory for mortgages from federally
regulated lenders on buildings located in SFHAs. These lenders are
required to check the current FIRM to determine whether the structure
is in the SFHA at the time a mortgage is made.[Footnote 21] FEMA
officials also told us that since the 1973 act, the increase in the
number of mortgages subject to the flood insurance requirement, coupled
with greater enforcement of this requirement by financial regulators in
recent years, had resulted in an increased number of flood insurance
policies, including policies with subsidized rates. According to FEMA,
many of these mortgages were on buildings that were constructed before
the most recent FIRMs were in place, making the policies eligible for
the subsidized rates. Additionally, the populations of coastal
communities have grown steadily over the last 28 years. These
communities have relatively high concentrations of properties in SFHAs
that are required to have flood insurance, including properties that
qualified for subsidized premiums.
Moreover, FEMA said that the longer-than-expected life of structures
eligible for subsidies has made decreasing the subsidized property
inventory more difficult. Some in Congress, at the time NFIP was
created, assumed that buildings would be torn down as they aged and any
new structures, which would have to meet more strict building codes,
would be ineligible for subsidized rates. However, according to FEMA,
existing structures have been demolished at a much lower rate than
expected and reductions in the overall subsidized property inventory
have not occurred. Moreover, some older structures have been renovated
and thus may retain their subsidies. And because subsidized premiums
are tied to the property and not the policyholder, properties have
retained their subsidies even as ownership has changed.
Other factors have also contributed to the increase in the number of
subsidized properties. For example, FEMA told us that SFHA boundaries
have been modified through its map modernization program, resulting in
more properties in SFHAs, and many of these properties are eligible for
subsidized rates. Moreover, FEMA told us that many homeowners purchased
flood insurance after seeing the devastation caused by the hurricanes
of 2005. FEMA officials commented that many homeowners believed that
there was little to no chance that their homes would be flooded, but
that after the 2005 hurricanes, these homeowners had a better
understanding of the reality of their actual flood risk. FEMA noted
that a community's policy inventory often increases sharply after
experiencing a flood. Another possible reason for the increase is that
disaster assistance for repair or replacement of buildings or
manufactured (mobile) homes and/or personal property in SFHAs can
trigger a requirement to purchase flood insurance. In addition,
according to FEMA, the recent increase in its marketing efforts through
its FloodSmart campaign has contributed to the increase in policies.
[Footnote 22] This program was designed to educate and inform partners,
stakeholders, property owners, and renters about insuring their homes
and businesses against flood damage. In 2004, the year in which
FloodSmart was implemented, NFIP had 1.05 million policies with
subsidized rates. By 2007, this number had increased 8 percent to
almost 1.13 million.[Footnote 23] However, for the reasons discussed
earlier, proving a causal relationship is difficult. According to FEMA
officials, most populated floodplains participate in NFIP, but
communities are still joining.[Footnote 24] For example from 1978 to
2007, the number of communities participating in NFIP has steadily
increased from 15,999 to 20,474. Additionally, FEMA expects as many as
300 new communities to join NFIP in fiscal year 2008, and by the end of
the first quarter, 141 communities had already joined.[Footnote 25]
As of December 31, 2007, NFIP included almost 5.3 million active flood
insurance policies on residential properties, nearly 23 percent (1.19
million) of which were charged subsidized premiums. Figure 2 details
the number of total residential NFIP policies in each state, as well as
the number of those policies that received subsidized premium rates.
Approximately 70 percent (3.69 million) of the total policies were
concentrated in five states: California, Florida, Louisiana, New
Jersey, and Texas. Furthermore, 57 percent (673,964) of the almost 1.2
million residential policies with subsidized premiums were located in
the same five states. Because of the high number of policies, these
states have historically accounted for the majority of claims losses
paid out as well as premium dollars received by the program. According
to FEMA data, these states accounted for 59 percent of claims losses
from 1978 to 2004 and 67 percent of premium dollars. Taking the 2005
hurricanes into account, the same numbers for 1978 to 2007 changed to
70 percent of claims losses and 66 percent of premium dollars.[Footnote
26]
Figure 2: Subsidized and Total Flood Insurance Policies by State as of
December 31, 2007:
This figure is a stacked vertical bar graph showing subsidized and
total flood insurance policies by state as of December 31, 2007, as
follows:
[Refer to PDF for image]
State: Florida;
Total: 2,118,690;
Subsidized: 307,227.
State: Texas;
Total: 638,445;
Subsidized: 62,875.
State: Louisiana;
Total: 470,597;
Subsidized: 121,658.
State: California;
Total: 248,092;
Subsidized: 95,801.
State: New Jersey;
Total: 214,423;
Subsidized: 86,403.
State: South Carolina;
Total: 190,248;
Subsidized: 28,891.
State: New York;
Total: 137,758;
Subsidized: 55,021.
State: North Carolina;
Total: 126,409;
Subsidized: 15,976.
State: Virginia;
Total: 101,020;
Subsidized: 17,226.
State: Georgia;
Total: 84,403;
Subsidized: 16,952.
State: Mississippi;
Total: 71,666;
Subsidized: 15,498.
State: Maryland;
Total: 63,059;
Subsidized: 11,248.
State: Pennsylvania;
Total: 57,149;
Subsidized: 27,403.
State: Hawaii;
Total: 55,163;
Subsidized: 17,689.
State: Alabama;
Total: 51,087;
Subsidized: 9,219.
State: Massachusetts;
Total: 46,141;
Subsidized: 22,646.
State: Illinois;
Total: 44,655;
Subsidized: 28,559.
State: Ohio;
Total: 35,806;
Subsidized: 20,900.
State: Connecticut;
Total: 33,294;
Subsidized: 15,954.
State: Arizona;
Total: 33,284;
Subsidized: 8,788.
State: Washington;
Total: 32,089;
Subsidized: 12,721.
State: Oregon;
Total: 29,137;
Subsidized: 9,280.
State: Indiana;
Total: 26,704;
Subsidized: 18,140.
State: Michigan;
Total: 24,766;
Subsidized: 14,569.
State: Delaware;
Total: 23,334;
Subsidized: 3,472.
State: Tennessee;
Total: 22,233;
Subsidized: 6,065.
State: Missouri;
Total: 19,060;
Subsidized: 10,041.
State: Kentucky;
Total: 19,002;
Subsidized: 10,249.
State: West Virginia;
Total: 18,045;
Subsidized: 10,473.
State: Nevada;
Total: 15,403;
Subsidized: 1,559.
State: Arkansas;
Total: 14,959;
Subsidized: 6,946.
State: Colorado;
Total: 14,879;
Subsidized: 5,507.
State: New Mexico;
Total: 14,490;
Subsidized: 5,982.
State: Oklahoma;
Total: 13,954;
Subsidized: 6,755.
State: Rhode Island;
Total: 13,813;
Subsidized: 6,214.
State: Wisconsin;
Total: 12,165;
Subsidized: 7,235.
State: Nebraska;
Total: 10,469;
Subsidized: 6,061.
State: Kansas;
Total: 10,361;
Subsidized: 5,980.
State: Iowa;
Total: 8,973;
Subsidized: 6,491.
State: Minnesota;
Total: 7,720;
Subsidized: 3,333.
State: Maine;
Total: 7,399;
Subsidized: 2,936.
State: New Hampshire;
Total: 7,384;
Subsidized: 3,449.
State: Idaho;
Total: 6,252;
Subsidized: 1,690.
State: North Dakota;
Total: 4,071;
Subsidized: 1,793.
State: Utah;
Total: 3,820;
Subsidized: 858.
State: Montana;
Total: 3,300;
Subsidized: 1,626.
State: South Dakota;
Total: 2,629;
Subsidized: 1,171.
State: Vermont;
Total: 2,542;
Subsidized: 1,460.
State: Alaska;
Total: 2,395;
Subsidized: 463.
State: Wyoming;
Total: 2,336;
Subsidized: 1,058.
State: District of Colombia;
Total: 1,513;
Subsidized: 101.
Source: GAO analysis of NFIP data.
Note: The numbers in figure 2 represent the number of active policies
(on residential properties only).
[End of figure]
Low Market Penetration Leaves Room for Growth in Policies with
Subsidized Premium Rates:
Low market penetration for NFIP flood insurance policies, particularly
in some areas, leaves room for growth in the number of flood insurance
policies as FEMA continues to encourage participation in NFIP through
FloodSmart. According to a 2006 RAND study commissioned by FEMA, there
were approximately 3.6 million single-family homes in SFHAs nationwide,
half of which had no flood insurance. The study also found that while
about a third of NFIP's policies were for homes outside of SHFAs,
NFIP's market penetration rate for such properties was only about 1
percent. Another indicator of the potential for growth is that,
according to FEMA data, approximately 2,000 communities do not
participate in NFIP, and of the 20,400 that do participate,
approximately 3,500 had no NFIP policies and 1,700 others each had only
one policy.
FEMA is aware of the low market penetration rates and has been making
efforts to increase the number of flood insurance policies, largely
through its FloodSmart campaign. To aid in this effort, FEMA recently
purchased more detailed market penetration data, which could allow FEMA
to target areas with particularly low participation in NFIP. While
these data are not yet finalized, initial calculations suggest that the
actual market penetration rate for SFHA structures could be even lower
than what the RAND study estimated. For example, some areas of the
Midwest and Northeast appear to have considerably lower policy volumes
than other areas of the country, based on their flood declarations,
cumulative flood claims payments, and population. (See app. II for a
more detailed analysis of market penetration.) Similarly, the RAND
study found that the Midwest and Northeast had a much lower market
penetration than other regions of the United States.
While it is uncertain what percentage of any new policies might be
eligible to receive subsidized rates, FEMA officials said that any
increase would largely depend on the location of future program
participants. Because older structures are more likely to be pre-FIRM,
areas of the country with older structures, such as the Midwest, are
more likely to have a higher percentage of potentially subsidized
properties. The lower market penetration in the Midwest, combined with
flood risk awareness resulting from the recent Midwest floods as well
as the FloodSmart campaign, could increase participation in NFIP,
resulting in a higher proportion of subsidized rates than the current
23 percent. On the other hand, FEMA said that areas of the country with
newer structures, such as the Gulf Coast, are likely to have a lower
percentage of subsidized policies. Most recent policy growth has been
in these regions, so if this trend continues, future additional
policies could have a lower proportion of subsidized rates.
Subsidized Properties Have Contributed to NFIP's Historical Operating
Deficits and Account for the Majority of Repetitive Loss Properties:
The large number of subsidized properties has contributed to NFIP's
historical operating losses through its relatively high loss experience
and rates that do not reflect the actual risk of flooding. Therefore,
despite the increase in policies with full-risk rates relative to
policies with subsidized rates, policies with subsidized rates have
continued to be a drain on the program's overall financial condition.
For example, while there have been fewer policies with subsidized rates
than policies with full-risk rates in every year since 1982, subsidized
properties have accounted for more claims payments than properties
paying full-risk premium rates in all but 5 of those years. As
previously mentioned, subsidized premiums average about 35 to 40
percent of the premium that would fully reflect the associated risk of
loss. As a result, NFIP has not collected enough in premiums to cover
the claims that FEMA estimates will be made on these properties in an
average year.[Footnote 27] From 1986 to 2004, policies receiving
subsidized rates resulted in a $962 million operating deficit.[Footnote
28] This deficit occurred despite the fact that in 1986, among other
things, FEMA finished a series of aggressive rate increases on
subsidized properties to ensure that the premiums collected better
reflected expected losses.[Footnote 29] However, in 2005, Hurricanes
Katrina, Rita, and Wilma resulted in claims losses that far exceeded
those in previous years. As a result of these Gulf Coast hurricanes,
FEMA had to borrow $17.5 billion to pay NFIP claims. Moreover, in 2008,
FEMA had to borrow additional funds from the Treasury to pay its
interest payment on its outstanding debt to the Treasury. Prior to
2005, policies with subsidized rates accounted for 58 percent of claims
dollars paid, but because of the extraordinary nature of the 2005
hurricanes, including that many losses occurred on properties that were
located in moderate-to low-risk areas, properties with both subsidized
and full-risk rated policies experienced significant losses. Of the
total losses from the 2005 hurricanes, 29 percent were from claims paid
on subsidized properties, while 71 percent were from full-risk
policies. However, the operating deficit for subsidized policies
increased substantially, to $6.3 billion.
Properties with repetitive losses, the majority of which receive
subsidized premium rates, have also contributed to NFIP's operating
deficit. As previously reported, these properties account for about 1
percent of all policies but are estimated to account for up to 30
percent of all NFIP losses.[Footnote 30] As of March 2008, there were
126,351 repetitive loss properties, just over 60 percent of which had
subsidized rates. Although not all repetitive loss properties are part
of the subsidized property inventory, given that a high proportion of
these properties receive subsidized rates, their propensity for flood
losses contributes to the financial risks faced by NFIP. While Congress
has made efforts to target these properties, the number of subsidized
properties that are also repetitive loss properties has continued to
grow, making them an ongoing challenge to the financial stability of
the program.
Several Options Exist for Addressing the Financial Impact of Subsidized
Properties on NFIP, but Each Option Involves Trade-offs:
Because of the financial condition of NFIP and mounting losses, the
negative financial impact that subsidized premium rates have on the
program continues to be an area warranting ongoing attention, as we
pointed out when placing NFIP on the high-risk list in 2006. As
Congress continues to evaluate the appropriate role of the federal
government in insuring natural catastrophes in light of recent events
in the Gulf Coast region, evaluating whether to maintain the current
system of NFIP subsidies or make changes has been an ongoing part of
the debate, as evidenced by various bills that have been introduced in
Congress. However, balancing the public policy goals of charging
premium rates that fully reflect actual risks, encouraging broad
participation in natural catastrophe insurance programs by maintaining
affordable rates, and limiting taxpayer costs before and after a
disaster will be an ongoing challenge. While the current system of
subsidies and voluntary mitigation might promote broad program
participation, it does create some exposure for taxpayers and allows
rates that do not reflect actual risks. We discuss three broad public
policy options for addressing the financial impact of subsidized
properties on the financial solvency of NFIP:
* increase mitigation efforts,
* eliminate or reduce use of subsidies, and:
* target use of subsidies based on the financial need of the property
owner.
Each of the options has both advantages and disadvantages in terms of
how it affects the program's public policy goals.
The Current System of Subsidies and Limited Mitigation Does Little to
Address the Long-Term Financial Instability of NFIP:
Subsidizing premiums can encourage participation in NFIP, especially
among those who might not be able to afford premium rates that fully
reflect the actual risk of flooding. Some proponents believe that
charging actuarial risk rates could result in some property owners not
buying any flood insurance and NFIP receiving less in total premiums
than it would if it allowed subsidized rates. The proponents also
assert that continuing the subsidies is also preferable to charging
full-risk rates, because while subsidized rates do not cover the actual
risk of loss, they at least offset a portion of the cost of providing
postdisaster assistance to property owners who might otherwise have no
flood insurance and pay no premiums.
One disadvantage of the current approach is that those who receive
subsidies are not paying premium rates that reflect the full risk of
loss from flooding. As noted previously, not charging full-risk rates
contributes to FEMA's challenges in maintaining the financial stability
of NFIP. In addition, charging less than full-risk rates can send
incorrect signals to property owners about the risks associated with
living in certain areas and reduce incentives to undertake mitigation
efforts because subsidized rates may distort a property owners view
about the financial benefits of mitigation. Further, policies with
subsidized rates could result in higher financial losses for NFIP than
policies with full-risk rates.
Another disadvantage of the current approach is that although FEMA has
stated that it is generally cost-beneficial to mitigate properties,
depending on the properties' flooding history and expected future
losses, among others, it faces several limitations in attempting to
reduce the number of properties receiving subsidized premium rates,
including those properties that have the greatest negative financial
impact on NFIP. To begin with, mitigation is generally voluntary,
except when there has been substantial damage to the insured structure,
and participating communities interested in NFIP mitigation funding are
required to compete for available funding through one of the available
mitigation programs. In addition, even when funds are made available to
a community and property owners are interested in mitigating their
properties, the property owners may still have to pay a portion of the
mitigation expenses, a fact that could discourage mitigation among
those unable or unwilling to contribute to the cost of mitigation. For
example, local officials and real estate agents in Sonoma County,
California, told us that ICC was the primary financial tool used by
flooded homeowners to elevate their homes, but because ICC limits
mitigation assistance to $30,000 and the cost of elevating a house in
Sonoma County typically is more than twice that, some residents were
not able to cover the additional cost and therefore could not take
advantage of ICC funds.
In addition, although FEMA has provided communities with information on
which properties have had the most severe repetitive flood losses,
current mitigation efforts in participating communities are not
necessarily targeted at properties receiving subsidized premium rates
that have flooded repeatedly. States and local communities determine
their priorities, and some communities, therefore, may focus their
mitigation efforts on activities that benefit more than one property,
such as regrading the land to control the flow of water and building
retaining ponds.
Finally, although mitigation is mandatory when a property has been
substantially damaged or renovated, mitigation may not always
occur.[Footnote 31] If the cost of repairing a pre-FIRM structure to
its condition before the damage occurred is equal to or greater than 50
percent of that structure's market value before the damage, NFIP
requires that the structure be mitigated. However, participating
communities, not FEMA, are responsible for enforcing compliance with
NFIP regulations and building codes, although FEMA can suspend a
community that is not in compliance with NFIP. According to some local
stakeholders, not all communities enforce or are able to enforce
compliance. For example, local officials in Harris County, Texas,
identified one pre-FIRM property owner in the county who has refused
the county's offers to buy his property despite repeated
offers.[Footnote 32] According to the county tax office, that property
had a market value of $153,330 in 2007. According to NFIP data, that
policyholder had collected over $975,000 in 15 flood claim payments
from 1979 through 2006 for structural damage, ranging from over $3,000
to $185,000 per payment.
In spite of these limitations, existing mitigation efforts have
resulted in the reduced risk of loss for a number of properties.
However, the number of properties mitigated is small compared with the
total number of properties receiving subsidized rates. As shown in
table 2, nearly 30,000 properties have been mitigated with FEMA funds
since fiscal year 1997. However, the number of policies with subsidized
rates still increased during that same period from 1.03 million in 1997
to almost 1.13 million in 2007.[Footnote 33] FEMA officials have
acknowledged that mitigating properties can be difficult, at least in
part due to the cost, time, and resources required. According to FEMA,
the current average cost to mitigate a residential property ranges from
$143,000 for elevating a property to $176,000 for acquiring a property.
Table 2: Number of Subsidized Policies, Repetitive Loss Properties, and
Properties Mitigated by Program Type, Fiscal Years 1997-2008:
Fiscal year: 1997;
Number of repetitive loss properties: 76,202;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
4,843;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
N/A;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 205;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/ A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: N/A.
Fiscal year: 1998;
Number of repetitive loss properties: 77,816;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
1,630;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
N/A;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 189;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/ A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 12.
Fiscal year: 1999;
Number of repetitive loss properties: 86,489;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
2,476;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
N/A;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 248;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 157.
Fiscal year: 2000;
Number of repetitive loss properties: 90,084;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
462;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
N/A;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 187;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 229.
Fiscal year: 2001;
Number of repetitive loss properties: 94,555;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
2,097;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
N/A;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 201;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 189.
Fiscal year: 2002;
Number of repetitive loss properties: 95,160;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
619;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
N/A;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 89;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 222.
Fiscal year: 2003;
Number of repetitive loss properties: 99,429;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
1,069;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
515;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 78;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 492.
Fiscal year: 2004;
Number of repetitive loss properties: 102,789;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
678;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
[Empty];
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 216;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 647.
Fiscal year: 2005;
Number of repetitive loss properties: 112,768;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
684;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
727;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 246;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 866.
Fiscal year: 2006;
Number of repetitive loss properties: 123,927;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
129;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
42;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 244;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): 41;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 1,870.
Fiscal year: 2007;
Number of repetitive loss properties: 127,268;
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
59;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
152;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 352;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): 40;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 4,309.
Fiscal year: 2008;
Number of repetitive loss properties: [Empty];
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
N/A;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
[Empty];
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): N/A;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): [Empty];
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 2,447.
Fiscal year: Total;
Number of repetitive loss properties: [Empty];
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP):
14,746;
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM):
1,436;
Number of Properties Mitigated: Flood Mitigation Assistance (FMA):
2,255;
Number of Properties Mitigated: Repetitive Flood Claims (RFC): 81;
Number of Properties Mitigated: Increased Cost of Compliance Coverage
(ICC)a: 11,440.
Source: GAO analysis of FEMA data.
N/A = not applicable:
[A] Because ICC funds can be used in concert as non-matching Federal
funds with the FEMA mitigation grant programs that require a non-
matching Federal fund, there may be some instances of double-counting
among the ICC and the other programs.
Note: Mitigation projects include elevation, relocation, and
acquisition. HMGP, PDM, and FMA data are as of May 5, 2008. ICC data
are as of February 29, 2008. Fiscal year 2004 and fiscal year 2005 PDM
data were combined into a single application period. The Severe
Repetitive Loss (SRL) Pilot Program is not included because no funding
has been obligated as of May 2008 ($160 million has been appropriated).
Repetitive loss property numbers are as of the end of each fiscal year.
These numbers are slightly different from similar numbers listed in a
prior report (GAO-08-437) because the numbers in the prior report are
as of the end of each calendar year. PDM program started in fiscal year
2003. The first year of RFC appropriations was fiscal year 2006.
[End of table]
After the passage of the Bunning-Bereuter-Blumenauer Flood Insurance
Reform Act of 2004, FEMA officials made mitigating repetitive loss
properties a priority, especially those with severe repetitive losses.
FEMA has identified approximately 7,000 properties as having had
experienced severe repetitive losses. Over 1,400 properties of these
severe repetitive loss properties have received cumulative claims
payments ranging from $200,000 to over several million dollars per
property. Although each property must be subject to an individual cost-
benefit determination to reflect its unique characteristics and
expected future losses, because these aggregate payments were above the
average mitigation costs, mitigation may be cost-effective for many of
them if similar losses were expected in the future. However, FEMA
officials told us that they did not anticipate being able to totally
eliminate severe repetitive loss properties given the current funding
level for the Severe Repetitive Loss Pilot Program of $160 million for
fiscal years 2006 through 2008, and uncertainty over ongoing
appropriations for this program.
Options Exist That Could Help Reduce the Number of Subsidized
Properties and Their Financial Impact on NFIP:
Reducing the financial impact of subsidized properties on NFIP would
generally involve either reducing the number of properties receiving
subsidized premium rates, reducing the losses associated with these
properties, reducing the amount of the subsidy, or some combination of
these approaches. Whether maintaining the current program or making
changes to NFIP subsidies, Congress will be faced with balancing often-
competing public policy goals, which include charging premium rates
that more fully reflect actual flood risks and help better ensure NFIP
solvency, encouraging broad participation in natural catastrophe
insurance programs by offering affordable rates, and limiting taxpayer
costs before and after a disaster.[Footnote 34] We discuss three broad
options that could help address NFIP's financial situation: (1)
increase mitigation efforts, (2) eliminate or reduce use of subsidies,
and (3) target use of subsidies on the financial need of property
owners. Each of the three options has both advantages and disadvantages
in terms of its effect on these public policy goals, which we highlight
in table 4. We also note that the options are not mutually exclusive
and may be used in conjunction with others, and that how an option is
implemented can affect its advantages and disadvantages.
Table 3: Advantages and Disadvantages of Options for Addressing NFIP's
Subsidized Premium Rates:
Option: Increase mitigation efforts;
Advantages:
* Could reduce flood losses, especially by focusing
mitigation efforts on properties with repetitive losses;
* Could increase the number of property owners paying full-risk rates
by denying subsidized rates to those who refuse mitigation offers;
* Could receive support from local communities because of potential
positive effect of mitigation on property values;
Disadvantages:
* Maintaining subsidies could reduce subsidized property
owners' motivation to undertake mitigation efforts that would reduce
their risk of loss and their premium rate;
* Extensive mitigation efforts could be expensive to taxpayers;
* Extensive mitigation efforts could take years to complete and
subsidized rates would continue to negatively affect NFIP's financial
health in the interim;
* Effectiveness of mitigation efforts could be limited by heavy
reliance on local communities with varying resources.
Option: Reduce or eliminate subsidies across the board;
Advantages:
* Would charge more property owners premium rates that more
accurately reflect the risk of flood loss (decrease the inventory of
subsidized properties);
* Higher premium rates could motivate property owners to undertake
mitigation in order to reduce their rates;
* Would provide more accurate information to homeowners about their
risk of flooding;
Disadvantages:
* Increased premium rates could reduce program
participation, both at the policyholder and community level,
potentially resulting in increased costs to taxpayers of providing
disaster assistance for catastrophic events;
* Could be resisted by local communities because of potential negative
impact on residents and local economy.
Option: Base subsidies on the financial need of policyholder;
Advantages:
* Would charge more property owners premium rates that more
accurately reflect the risk of flood loss (decrease the inventory of
subsidized properties);
* Would continue to benefit those in greatest financial need by keeping
rates affordable;
* Higher premium rates for some could motivate property owners to
undertake mitigation in order to reduce their rates;
Disadvantages:
* Increased premium rates for some could reduce program
participation;
* Requiring property owners to apply for subsidies could reduce
participation for those in greatest need;
* Implementing a new program in the midst of existing management and
oversight challenges could pose additional challenges for FEMA and the
insurance companies that sell and service flood insurance.
Source: Summarized views of FEMA officials, state and local officials,
insurance experts, and other stakeholders.
Note: Variations in how each of the options is ultimately implemented
could result in additional advantages and disadvantages.
[End of table]
Expanding Mitigation Efforts Could Reduce the Number of Subsidized
Properties and Associated Losses but Would Be Costly to Taxpayers:
One option to address the financial impact of subsidized premium rates
on NFIP would be to substantially expand flood mitigation efforts,
including targeting those properties that have been most costly to the
program. This option would substantially expand the requirements of the
Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, which
mandated mitigation for insured properties that have received four or
more flood claims payments totaling more than $20,000 or two claims
payments whose total exceeds the value of the property and created the
Severe Repetitive Loss Pilot Program to help carry out such mitigation.
This option would have a more restrictive criterion, which could
increase the number of subsidized properties for which mitigation is
required. Mitigation could be required for all insured properties that
have filed two or more flood claims, irrespective of claims total;
subsidies could be eliminated for property owners who refuse or do not
respond to a mitigation offer; or some combination of these
approaches.[Footnote 35] This option would require increased funding
for mitigation purposes.
This option has several advantages. First, it could reduce flood losses
by ensuring that more homes were better protected from flooding through
mitigation, whether it was through elevation, relocation, or
demolition. Because many repetitive loss properties have subsidized
premiums--that is, rates that do not reflect their actual risk of
flooding--increased mitigation could reduce the claims payments the
program makes on these properties and could ultimately reduce taxpayer
exposure in the long term. As the congressional findings in the Bunning-
Bereuter-Blumenauer Flood Insurance Reform Act of 2004 noted, and as
FEMA officials concurred, mitigating repetitive loss properties through
buyouts, elevations, relocation, flood-proofing, or regrading and other
engineering projects would produce savings for policyholders and for
federal taxpayers through reduced flood insurance losses and federal
disaster assistance. Second, denying subsidies to those who refuse or
do not respond to mitigation offers could increase the number of
property owners paying full-risk rates and encourage mitigation. Third,
FEMA could build upon its existing mitigation programs and thus
continue targeting those properties that have been most costly in terms
of claims paid while maintaining current subsidy rates. As we have
noted, subsidies have been used to encourage participation in the
program. Local officials generally support increased mitigation
efforts. Reducing flood risk generally increases property values and,
as a consequence, the local tax base. And as we have seen,
participation from local communities is critical for successful
mitigation efforts.
However, there are several disadvantages associated with this option.
First, because subsidized rates do not reflect a property's actual
flood risk, subsidized property owners might not be motivated to
undertake mitigation efforts that would reduce the risk of flood and
their premium rate. Second, substantially increasing mitigation efforts
would be costly and would require increased funding for FEMA's
mitigation programs. As stated earlier, about 1.2 million policies
received subsidized rates in 2007, including approximately 7,000 severe
repetitive loss properties. FEMA estimates that the average mitigation
cost would range from about $143,000 to about $176,000 per residential
property. Buyouts and relocations would be more costly in areas of the
country with relatively expensive real estate. Applying FEMA's
mitigation cost range per property to the number of severe repetitive
loss properties results in an estimated cost range of approximately $1
billion to approximately $1.2 billion. Applying the same calculation to
the rest of the repetitive loss properties would add over $17 billion
to over $22 billion to the estimate. However, mitigation costs would
have to be weighed against the possible savings from a decrease in
flood damage that would result from mitigation.[Footnote 36]
Third, the mitigation process is often lengthy, and mitigating a large
number of properties could take a number of years to complete, and
until then, subsidized premium rates would continue to negatively
affect the program's financial health. Fourth, FEMA's reliance on local
communities to undertake and enforce mitigation activities could limit
the effectiveness of these efforts. Despite being a national program,
NFIP relies on state and local communities to ensure the program's
implementation and success. While local communities recognize the
importance of mitigation, not all communities have the staff or
resources to fully carry out current mitigation efforts, meet the cost-
sharing requirement (generally 25 percent of the eligible project
costs, which either the community or the property owner could provide)
that four of the five mitigation programs require, and enforce
noncompliance requirements. Some communities, in fact, require the
homeowner to provide the cost-sharing requirement. Moreover, it is the
responsibility of the local floodplain management agencies to enforce
compliance with the ordinances by, for example, ensuring that property
owners undertake proper mitigation efforts and by issuing appropriate
work permits for the damaged property. Some communities may not have
sufficient resources for expanded efforts in these areas. In addition,
certain types of mitigation, such as relocation or demolition, might be
met with resistance by communities that rely on those properties for
tax revenues, such as coastal communities with significant development
in areas prone to flooding.
Eliminating or Reducing Subsidies Would Ensure That Rates Better
Reflect Actual Risk but Could Reduce Participation:
A second option--eliminating or reducing the subsidies--would meet the
public policy goals of charging premium rates that more fully reflect
actual risks. Because FEMA would be able to charge more policyholders
premium rates that more closely represent actual flood risk, the
premiums collected would more closely reflect the losses that the
agency expected to incur, contributing to the financial health of NFIP.
One way to implement a reduction of the subsidies is to base the rate
on the number and amounts of flood claims per property. In other words,
if a property has a certain number of claims, the subsidy would be
rerated and the policyholder could be required to pay a higher premium.
Another way is to eliminate subsidies for certain categories of
subsidized properties, such as nonprimary residences (vacation homes or
rental properties) or to limit subsidies to existing property owners.
Another advantage to eliminating or reducing subsidies is that the
resulting higher premium rates could motivate property owners to
undertake mitigation efforts in order to reduce those premium rates.
More mitigation could, in turn, result in less flood damage, lower
losses for NFIP, and potentially lower taxpayer exposure. Moreover, by
paying the rate that more closely reflects the actual risk of flooding,
property owners who previously had paid subsidized premiums would
better understand the actual costs and risks associated with living in
certain areas.
However, this option has at least two disadvantages. First, while many
current NFIP policyholders are required by their lenders to maintain
those policies, the elimination of subsidies, according to various
stakeholders and a 1999 study commissioned by FEMA, would on average
more than double these policyholders' premium rates and may result in
reduced participation in NFIP over time as people either dropped their
policies or were priced out of the market. Even reducing subsidies
could increase the financial burden on some existing policyholders--
particularly low-income policyholders--and could cause some of them to
leave the program. As a result, if owners of pre-FIRM structures, which
suffer the greatest flood loss, cancel their insurance policies, the
federal government--and ultimately taxpayers--could likely face
increased costs in the form of FEMA disaster assistance grants and low-
interest disaster loans from the Small Business Administration (SBA) in
future floods.[Footnote 37] To the extent that higher premium rates
would lead some property owners to decide not to purchase flood
insurance, those property owners would not be eligible for NFIP
mitigation assistance, reducing the likelihood that they would
undertake mitigation efforts to reduce their flood risk.[Footnote 38]
Furthermore, some FEMA officials said that a lack of subsidies could
cause communities to drop out of NFIP. These communities would no
longer be eligible for federal mitigation assistance or be subject to
mandatory purchase requirements. Moreover, they would not have to
comply with NFIP floodplain management standards and building codes,
raising the possibility that residents would construct properties that
had a high risk of being damaged by a flood.
Second, we found that some communities might resist the elimination or
reduction of subsidies because of the potential effect on residents.
For example, some officials in one Texas community with a large rental
population and low-income residents said that eliminating or reducing
the subsidy would negatively affect their residents. Premium rate
increases on rental properties likely would be passed to the tenants,
some of whom are low-income tenants, thus creating a potential
hardship. Officials in an Ohio community we visited said that many
businesses would be unable to afford full-risk premiums, which would
have a negative effect on their economy.
Need-Based Subsidies Could Ensure That More Policyholders Paid Full-
Risk Rates but Could Create Implementation Challenges:
A third option would be to target premium rate subsidies to those
policyholders who had the greatest financial need based on a means-
based test. As currently structured, the subsidy is tied to the
property, not the property owner, and any pre-FIRM property located in
an SFHA in a participating community is eligible for a subsidy. And as
mentioned previously, when a pre-FIRM property is sold, the new owner
is also eligible for the subsidy. Additionally, the program does not
take into account any characteristics of the owner, such as income
level, or consider how the property is used--for example, as a
residence, vacation home, or rental. FEMA does currently offer a
temporary subsidized premium rate based on the financial need of the
property owner through its Group Flood Insurance Policy (GFIP) program.
Under that program, property owners in federally declared disaster
areas apply to state based Individual and Family Grant (IFG) programs
and, if accepted based on their financial need, are eligible to receive
a flat premium rate of $200 per year for three years. After the three
year period the rates would be adjusted to the appropriate rate for
that location and property.
This needs-based option would remove the subsidy from the property and
instead attach it to the policyholder on the basis of need as
determined by specified financial requirements and eligibility
criteria. Means-tested programs are not new to the federal government.
Over the years, Congress has established about 80 separate programs to
provide cash and noncash assistance to low-income individuals and
families. Such programs provide a means of delivering assistance to
those in need, and we have made recommendations to simplify the process
for determining financial eligibility for various programs.[Footnote
39]
Depending on how the option was implemented, a potential advantage to
this option would be that more policyholders would have to pay the full-
risk rate and that those eligible for the subsidy would be made aware
of the full-risk rate before applying for the subsidy. As a result,
more policyholders would be aware that they were receiving subsidies
and would better understand the actual costs and risks associated with
living in certain areas. In addition, because some policyholders would
no longer be receiving a subsidy, FEMA would be collecting more in
premiums. Increased premium collection would improve NFIP's ability to
make claims payments, reduce its need to borrow from the U.S. Treasury,
and potentially limit taxpayer exposure. Further, because the only
policyholders who would lose their subsidies generally would be those
who were deemed able to afford full-risk rates, to the extent that
higher rates would negatively affect the program, potentially fewer
property owners may drop their insurance as compared with other
nontargeted options for reducing subsidies. The program would benefit
those in greatest financial need. Finally, charging higher rates that
more accurately reflect the risk of flooding may motivate policyholders
to undertake mitigation to reduce their premium rates.
However, this option has several disadvantages. Eliminating subsidies
and requiring those who are deemed able to afford them to pay full-risk
rates could cause some property owners to stop buying flood insurance.
Even though a means-based test might determine that some property
owners did not qualify for subsidies, the higher cost of the full-risk
rate premiums could lead some to decide not to purchase coverage and
instead rely on federal disaster assistance, which generally requires
that they purchase flood insurance as a condition of the assistance. In
addition, requiring property owners to go through an application
process to receive subsidized premium rates, rather than receiving them
on the basis of their property's characteristics, could discourage some
property owners with limited resources and in greatest need of coverage
from applying for the subsidy.
This option also would involve certain implementation challenges in the
midst of other ongoing management challenges for NFIP. To implement
this option, FEMA first would need to determine how to design the
program and determine how to conduct the means test. Depending on how
the program was designed, FEMA might need to collect or purchase data
on income and wealth of property owners to help determine eligibility
benchmarks. In addition, FEMA would need to devote resources, including
staff, to developing, implementing, and monitoring the means test
program. For example, FEMA would need to develop eligibility benchmarks
and a process for applying for and awarding subsidies. The agency would
need to determine who would conduct the tests and certify the results-
-that is, whether FEMA, state and community officials, the Write-Your-
Own insurance companies that currently serve as the delivery system for
NFIP, or some other entity would perform these activities.[Footnote 40]
FEMA also would need to establish an oversight mechanism to ensure that
the program was operating as intended. Finally, FEMA would have to
ensure that costs of the subsidies and the costs associated with
administering means-based testing did not result in costs that were
larger than the current subsidies. FEMA could use existing programs in
other agencies to formulate a template for means testing in order to
make implementation easier.
Moreover, addressing these challenges could be difficult for the
agency, which is already in the process of addressing management and
oversight challenges. As we have previously reported, FEMA faces
challenges in providing oversight of its contractors, state and local
partners, and Write-Your-Own insurance companies, as well as overseeing
claims adjustments and its map modernization program.[Footnote 41] New
management challenges created by implementing a means-based test could
make addressing these existing challenges more difficult and may
require additional staff.
While any of these options--or a combination of them--could help reduce
the adverse impact of subsidies on the financial health of NFIP, the
potential would still exist for claims to exceed losses in any given
year. As we have seen in 2008, flood losses are volatile and highly
unpredictable, and estimating future losses and determining premium
rates adequate to cover those losses is an inherently difficult
process. In addition, even if subsidized rates were eliminated, the
potential for catastrophic losses could still result in NFIP needing to
borrow from the Treasury to pay losses. Absent a change in the NFIP's
use of subsidized premium rates, however, the subsidies will continue
to hinder the financial stability of the program, and the potential
further increases in the number of properties receiving subsidies could
make the situation worse. Therefore, implementing any or a combination
of these options could significantly reduce the adverse financial
impact of subsidies on NFIP.
Agency Comment and Our Evaluation:
We provided a draft of this report to the Department of Homeland
Security (DHS) for comment. It provided written comments that are
reprinted in appendix III. In its written comments, DHS expounded upon
several topics discussed in the report. First, DHS noted that it is
aware of the financial impact of subsidized and repetitive loss
properties on the NFIP, and stated that while it has proposed a number
of initiatives through the years, most of these were not welcomed by
stakeholders. Second, DHS noted that amendments to current statutes and
rules would be needed if FEMA were to require mitigation via a grant
program beyond the substantial damage provision that currently is the
only provision that triggers mandatory mitigation. We recognize that
some aspects of the options discussed in this report would require
legislative changes. However, we would encourage FEMA to continue to
pursue actions to address the financial drain on NFIP brought about by
subsidized premium rates, such as the planned 2009 increase in the
standard deductible for subsidized policyholders as mentioned in its
comments. Third, DHS recognized that a needs-based subsidy could be
beneficial, but it recommended that the burden of making needs-based
determinations be placed on someone other than the insurance agent and
that a discussion be held on how the costs of discounted premiums would
be borne. We noted in the report that a needs-based program could be
implemented in a number of ways, and agree that careful study would
have to be done before implementing such a program. DHS also described
a current program where some participants receive subsidized premium
rates based on their short-term financial need, with the needs
determination performed by a third party. We have added a discussion of
this program to the report and note that this may provide useful
insights to a broader-based approach. DHS also provided technical
comments, which we have incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution of this report
until 30 days from the report date. At that time, we will provide
copies to the Chairman, Senate Committee on Banking, Housing, and Urban
Affairs; the Chairman and Ranking Member of the Senate Committee on
Homeland Security and Governmental Affairs; the Chairman and Ranking
Member of the House Committee on Financial Services; the Chairman and
Ranking Member of the House Committee on Homeland Security; and other
interested committees. We are also sending a copy of this report to the
Secretary of Homeland Security and other interested parties. In
addition, the report will available at no charge on our Web site at
[hyperlink, http://www.gao.gov]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report.
If you or your staff has any questions about this report, please
contact me at (202) 512-8678 or williamso@gao.gov. GAO contact and
staff acknowledgments are listed in appendix IV.
Sincerely yours,
Signed by:
Orice M. Williams:
Director, Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
To provide information on the National Flood Insurance Program's (NFIP)
inventory of subsidized properties in terms of size, location, and
financial impact on NFIP, we obtained data on policies, claims, and
repetitive losses from the Federal Emergency Management Agency's (FEMA)
private contractor, Computer Sciences Corporation, that maintains
various NFIP databases. We obtained data pertaining to NFIP and NFIP
subsidized and full-risk policies from 1978 through June 2008,
including information on policies, premiums, and claims. We used these
data to analyze the size, growth, costs, geographic distribution, and
market penetration of the subsidized inventory and total inventory
nationwide and for states and counties. We also reviewed relevant FEMA
reports and analysis on these factors. We assessed the reliability of
FEMA's policy and claims data by (1) reviewing existing information
about the data and the system that produced them, (2) interviewing
agency officials knowledgeable about the data, and (3) performing
electronic testing of required data elements. We determined that the
data were sufficiently reliable for the purposes of this report.
Originally, we planned to construct a comprehensive nationwide profile
of subsidized properties and policyholders by merging vendor data
containing market values of subsidized properties and income data of
owners with NFIP policy and claims data. To do this, we met with
private vendors that, for marketing purposes, collect and sell
nationwide statistics on real estate market values and transactions and
household incomes. Specifically, we explored ways to develop nationwide
comparisons of subsidized and full-risk properties--for example,
comparing market values and household income--within and across
geographic areas. However, we were unable to identify data sources that
would enable us to pull statistically valid samples of subsidized
properties and policyholders nationwide that could be projected to the
entire inventory of subsidized and full-risk properties. While we were
able to identify sources that had nationwide data, the vendors we
contacted lacked data on real estate values in certain areas of the
country. The omitted areas not only included rural areas, but also some
areas with large populations, such as parts of Louisiana and Texas--
both of which have large numbers of subsidized properties. We also
determined that matching individual property addresses maintained on an
NFIP database and a vendor database would create inconsistencies that
would prohibit a valid nationwide sample, thereby preventing us from
extrapolating any results nationwide. In 2007, the Congressional Budget
Office (CBO) attempted to produce a similar nationwide profile by
merging vendor and NFIP data, but its match rates for addresses between
databases were too low and thus the results from its study were limited
to the properties that they were able to match and could not be
generalized nationally. We spoke with CBO officials regarding their
study.
As an alternative to the national profile, we planned to construct
profiles for the five counties that we judgmentally selected for site
visits (our methodology and purpose for the site visits are discussed
below). This alternative effort involved matching NFIP data on
individual properties with county tax records, local real estate
listings, and other local sources that might have data on those
properties. However, we determined that this approach also would not
produce match rates high enough to produce countywide profiles for
three of the five counties, and data from the two remaining counties
were not usable for our purposes. For example, we found that
conventions for mailing addresses varied considerably across the five
counties and differed from the NFIP data. While counties and NFIP use
U.S. Postal Service's address standardization format, NFIP also permits
descriptive addresses, such as "Third Cabin on Beulah Lake," "N Side of
Shell Belt Rd," and "5 Houses From Johnson's Seafood," which made
address matching difficult. In addition, we found certain data not to
be useful for our purposes. For example, local property tax records did
not maintain comparable market values of properties. In one county we
found that tax records contained last sale information that, for many
properties, could be several years old if the properties were not sold
annually, and did not reflect current market values of those
properties. In another county, tax records did not have information on
selling prices of properties because state law prohibited public
disclosure of this information. Thus we decided not to pursue this
alternative effort.
Finally, to satisfy the objective, we selected and visited a judgmental
sample of five counties across the country (Sonoma County, California;
Pinellas County, Florida; Jefferson County, Missouri; Washington
County, Ohio; and Harris County, Texas). Our purpose was to obtain
available information on the characteristics of subsidized properties
in these counties (such as types of structures, flooding history, and
market values) and characteristics of their policyholders (such as
income and perceived benefits obtained from subsidized rates). We also
sought to understand similarities and differences in how NFIP is
implemented within each locality. We selected counties with NFIP
communities that had completed NFIP's map modernization in order to
have timely data to help construct profiles of properties in these
counties. We selected a mix of coastal and inland counties in order to
capture coastal and riverine types of flooding. We selected from
counties that had large numbers or percentages of subsidized
properties, large numbers of repetitive loss properties, and large
cumulative historical dollars of claims losses paid in order to capture
areas likely to have had meaningful, if not extensive, experience
dealing with flooding and NFIP. During our visits to the five counties,
we met with local floodplain managers, property tax appraisers and
assessors, building permit officials, civil engineers, real estate
agents, flood insurance agents, flood claims adjusters, and other
relevant parties. We discussed local flooding history, flood plain
management, building standards, flood claims adjusting, and real estate
values and taxes as they pertained to implementation of NFIP generally,
and NFIP subsidized properties in particular. We also spoke with
officials from the five FEMA regional offices responsible for these
counties. Tables 5 through 7 compare the five counties using a number
of factors. While these five counties are not a complete representation
of the entire body of NFIP communities, their diversity across multiple
factors contributed to our understanding of the administration of NFIP
at the local level.
Table 5 compares the five counties by population, area, population
density, housing density, household income and housing values and shows
the ranges in these factors across the counties, as well as the types
of flooding and the percentages of land area in the floodplain.
Table 5: Demographics and Other Characteristics of the Five Counties
Selected for Site Visits:
2006 ACS estimates[A]: County population;
Pinellas County, Florida: 2006 ACS estimates[A]: 924,413;
Harris County, Texas: 2006 ACS estimates[A]: 3,886,207;
Washington County, Ohio: 2006 ACS estimates[A]: 61,867;
Jefferson County, Missouri: 2006 ACS estimates[A]: 216,469;
Sonoma County, California: 2006 ACS estimates[A]: 466,891.
2006 ACS estimates[A]: Median household income;
Pinellas County, Florida: 2006 ACS estimates[A]: $41,945;
Harris County, Texas: 2006 ACS estimates[A]: $47,129;
Washington County, Ohio: 2006 ACS estimates[A]: $34,275;
Jefferson County, Missouri: 2006 ACS estimates[A]: $53,434;
Sonoma County, California: 2006 ACS estimates[A]: $60,821.
2006 ACS estimates[A]: Median value of owner occupied home;
Pinellas County, Florida: 2006 ACS estimates[A]: $205,200;
Harris County, Texas: 2006 ACS estimates[A]: $126,000;
Washington County, Ohio: 2006 ACS estimates[A]: $80,400;
Jefferson County, Missouri: 2006 ACS estimates[A]: $150,900;
Sonoma County, California: 2006 ACS estimates[A]: $618,500.
2000 Census[B]: County population;
Pinellas County, Florida: 2006 ACS estimates[A]: 921,482;
Harris County, Texas: 2006 ACS estimates[A]: 3,400,578;
Washington County, Ohio: 2006 ACS estimates[A]: 63,251;
Jefferson County, Missouri: 2006 ACS estimates[A]: 198,099;
Sonoma County, California: 2006 ACS estimates[A]: 458,614.
2000 Census[B]: Square miles of land;
Pinellas County, Florida: 2006 ACS estimates[A]: 280;
Harris County, Texas: 2006 ACS estimates[A]: 1,729;
Washington County, Ohio: 2006 ACS estimates[A]: 635;
Jefferson County, Missouri: 2006 ACS estimates[A]: 657;
Sonoma County, California: 2006 ACS estimates[A]: 1,576.
2000 Census[B]: Square miles of water;
Pinellas County, Florida: 2006 ACS estimates[A]: 328;
Harris County, Texas: 2006 ACS estimates[A]: 49;
Washington County, Ohio: 2006 ACS estimates[A]: 5;
Jefferson County, Missouri: 2006 ACS estimates[A]: 7;
Sonoma County, California: 2006 ACS estimates[A]: 192.
2000 Census[B]: Population per square mile;
Pinellas County, Florida: 2006 ACS estimates[A]: 3,292;
Harris County, Texas: 2006 ACS estimates[A]: 1,967;
Washington County, Ohio: 2006 ACS estimates[A]: 100;
Jefferson County, Missouri: 2006 ACS estimates[A]: 302;
Sonoma County, California: 2006 ACS estimates[A]: 291.
2000 Census[B]: Housing units per square mile;
Pinellas County, Florida: 2006 ACS estimates[A]: 1,720;
Harris County, Texas: 2006 ACS estimates[A]: 751;
Washington County, Ohio: 2006 ACS estimates[A]: 44;
Jefferson County, Missouri: 2006 ACS estimates[A]: 115;
Sonoma County, California: 2006 ACS estimates[A]: 116.
Other characteristics: County seat or major city[C];
Pinellas County, Florida: 2006 ACS estimates[A]: St. Petersburg;
Harris County, Texas: 2006 ACS estimates[A]: Houston;
Washington County, Ohio: 2006 ACS estimates[A]: Marietta;
Jefferson County, Missouri: 2006 ACS estimates[A]: Arnold (St. Louis
suburb);
Sonoma County, California: 2006 ACS estimates[A]: Santa Rosa.
Other characteristics: Percentage of county's land in floodplain[D];
Pinellas County, Florida: 2006 ACS estimates[A]: 44.50%;
Harris County, Texas: 2006 ACS estimates[A]: 24.50%;
Washington County, Ohio: 2006 ACS estimates[A]: 5.90%;
Jefferson County, Missouri: 2006 ACS estimates[A]: 11.00%;
Sonoma County, California: 2006 ACS estimates[A]: 0.40%.
Other characteristics: Types of flooding[E];
Pinellas County, Florida: 2006 ACS estimates[A]: Coastal, inland;
Harris County, Texas: 2006 ACS estimates[A]: Shallow and flash
flooding, effects from tropical storms;
Washington County, Ohio: 2006 ACS estimates[A]: Convergence of two
Rivers over bank and back-water flooding;
Jefferson County, Missouri: 2006 ACS estimates[A]: Riverine, inland;
Sonoma County, California: 2006 ACS estimates[A]: Russian River over
bank flooding and runoffs from local rivers.
Sources: None listed.
[A] U.S. Census Bureau, 2006 American Community Survey, except for
Washington County, OH, where 2000 ACS data are used.
[B] U.S. Census Bureau, American Fact Finder, Geographic Comparison
Table, United States - County by State, GCT-PH1 - Population, Housing
Units, Area, and Density, Census 2000.
[C] Encyclopedia Britannica Online for four of the counties, and
Jefferson County, Missouri web site [hyperlink,
http://www.jeffcomo.org/clerk/serv/census.html] and Arnold web site
[hyperlink, http://www.arnoldmo.org/] for City of Arnold:
[D] GAO analysis of county digital flood maps from FEMA.
[E] From GAO interviews with flood plain managers and others during
site visits.
[End of table]
Table 6 shows policies in force and cumulative claims paid broken down
by subsidized and total and the percentages for subsidized for the five
counties. In each of the five counties, cumulative claims paid on
subsidized policies were a higher percentage of cumulative total claims
paid than were subsidized policies in force as a percentage of total
policies in force.
Table 6: NFIP Policies in Force and Cumulative Claims Paid in the Five
Selected Counties:
Number of policies in force as of December 31, 2007: Total NFIP
policies;
Pinellas County, Florida: Number of policies in force as of December
31, 2007: 145,409;
Harris County, Texas: Number of policies in force as of December 31,
2007: 141,000;
Washington County, Ohio: Number of policies in force as of December 31,
2007: 870;
Jefferson County, Missouri: Number of policies in force as of December
31, 2007: 1,167;
Sonoma County, California: Number of policies in force as of December
31, 2007: 3,323.
Number of policies in force as of December 31, 2007: Total subsidized
policies;
Pinellas County, Florida: Number of policies in force as of December
31, 2007:: 53,629;
Harris County, Texas: Number of policies in force as of December 31,
2007: 3,886;
Washington County, Ohio: Number of policies in force as of December 31,
2007: 552;
Jefferson County, Missouri: Number of policies in force as of December
31, 2007: 677;
Sonoma County, California: Number of policies in force as of December
31, 2007: 1,432.
Number of policies in force as of December 31, 2007: Subsidized
policies as a percentage of total policies;
Pinellas County, Florida: Number of policies in force as of December
31, 2007: 36.9 %;
Harris County, Texas: Number of policies in force as of December 31,
2007: 2.8%;
Washington County, Ohio: Number of policies in force as of December 31,
2007: 63.4%;
Jefferson County, Missouri: Number of policies in force as of December
31, 2007: 58.0%;
Sonoma County, California: Number of policies in force as of December
31, 2007: 43.1%.
Cumulative claims paid from 1978 through 2007: Total claims paid;
Pinellas County, Florida: Number of policies in force as of December
31, 2007: $274,495,724;
Harris County, Texas: Number of policies in force as of December 31,
2007: $1,054,140,647;
Washington County, Ohio: Number of policies in force as of December 31,
2007: $7,602,961;
Jefferson County, Missouri: Number of policies in force as of December
31, 2007: $55,338,351;
Sonoma County, California: Number of policies in force as of December
31, 2007: $113,781,148.
Cumulative claims paid from 1978 through 2007: Claims paid on
subsidized policies;
Pinellas County, Florida: Number of policies in force as of December
31, 2007: $251,808,017;
Harris County, Texas: Number of policies in force as of December 31,
2007: $380,030,682;
Washington County, Ohio: Number of policies in force as of December 31,
2007: $5,115,876;
Jefferson County, Missouri: Number of policies in force as of December
31, 2007: $51,380,048;
Sonoma County, California: Number of policies in force as of December
31, 2007: $98,258,616.
Cumulative claims paid from 1978 through 2007: Claims from subsidized
properties as a percentage of total claims paid;
Pinellas County, Florida: Number of policies in force as of December
31, 2007: 91.7%;
Harris County, Texas: Number of policies in force as of December 31,
2007: 36.1%;
Washington County, Ohio: Number of policies in force as of December 31,
2007: 67.3%;
Jefferson County, Missouri: Number of policies in force as of December
31, 2007: 92.4%;
Sonoma County, California: Number of policies in force as of December
31, 2007: 86.4%.
Source: GAO analysis of data from FEMA:
[End of table]
Table 7 compares repetitive loss properties across the five counties
using the number of repetitive loss properties still insured versus the
number of repetitive loss properties no longer insured, and the number
and dollars of loss payments for these groups.
Table 7: Comparison of Repetitive Loss Properties Historically (1978-
2007) and Current (as of December 31, 2007) in the Five Selected
Counties:
Number of Repetitive Loss Properties: Total from 1978-2007;
Pinellas County, Florida: Number of Repetitive Loss Properties: 1,502;
Harris County, Texas: Number of Repetitive Loss Properties: 7,904;
Washington County, Ohio: Number of Repetitive Loss Properties: 195;
Jefferson County, Missouri: Number of Repetitive Loss Properties: 589;
Sonoma County, California: Number of Repetitive Loss Properties: 891.
Number of Repetitive Loss Properties: Still insured by NFIP on
12/31/2007[A];
Pinellas County, Florida: Number of Repetitive Loss Properties: 912;
Harris County, Texas: Number of Repetitive Loss Properties: 3,762;
Washington County, Ohio: Number of Repetitive Loss Properties: 146;
Jefferson County, Missouri: Number of Repetitive Loss Properties: 91;
Sonoma County, California: Number of Repetitive Loss Properties: 516.
Number of Repetitive Loss Properties: Percent insured by NFIP on
12/31/2007;
Pinellas County, Florida: Number of Repetitive Loss Properties: 60.7%;
Harris County, Texas: Number of Repetitive Loss Properties: 47.6%;
Washington County, Ohio: Number of Repetitive Loss Properties: 74.9%;
Jefferson County, Missouri: Number of Repetitive Loss Properties:
15.4%;
Sonoma County, California: Number of Repetitive Loss Properties: 57.9%.
Number of Losses: On all repetitive loss properties, 1978-2007;
Pinellas County, Florida: Number of Repetitive Loss Properties: 4,360;
Harris County, Texas: Number of Repetitive Loss Properties: 26,260;
Washington County, Ohio: Number of Repetitive Loss Properties: 472;
Jefferson County, Missouri: Number of Repetitive Loss Properties:
1,904;
Sonoma County, California: Number of Repetitive Loss Properties: 2,826.
Number of Losses: On repetitive loss properties still insured on
12/31/2007;
Pinellas County, Florida: Number of Repetitive Loss Properties: 2,775;
Harris County, Texas: Number of Repetitive Loss Properties: 12,458;
Washington County, Ohio: Number of Repetitive Loss Properties: 363;
Jefferson County, Missouri: Number of Repetitive Loss Properties: 334;
Sonoma County, California: Number of Repetitive Loss Properties: 1,756.
Number of Losses: Percent on properties still insured on 12/31/2007;
Pinellas County, Florida: Number of Repetitive Loss Properties: 63.6%;
Harris County, Texas: Number of Repetitive Loss Properties: 47.4%;
Washington County, Ohio: Number of Repetitive Loss Properties: 76.9%;
Jefferson County, Missouri: Number of Repetitive Loss Properties:
17.5%;
Sonoma County, California: Number of Repetitive Loss Properties: 62.1%.
Dollars of Loss Payments: On all repetitive loss properties, 1978-
2007;
Pinellas County, Florida: Number of Repetitive Loss Properties:
$71,362,594;
Harris County, Texas: Number of Repetitive Loss Properties:
$773,672,643;
Washington County, Ohio: Number of Repetitive Loss Properties:
$11,017,041;
Jefferson County, Missouri: Number of Repetitive Loss Properties:
$25,942,075;
Sonoma County, California: Number of Repetitive Loss Properties:
$64,122,633.
Dollars of Loss Payments: Percent on repetitive loss properties still
insured on 12/31/ 2007[B];
Pinellas County, Florida: Number of Repetitive Loss Properties: 66.7%;
Harris County, Texas: Number of Repetitive Loss Properties: 51.0%;
Washington County, Ohio: Number of Repetitive Loss Properties: 85.8%;
Jefferson County, Missouri: Number of Repetitive Loss Properties:
20.2%;
Sonoma County, California: Number of Repetitive Loss Properties: 68.1%.
Source: GAO analysis of NFIP data from BureauNet.
[A] Repetitive loss properties that have been mitigated through buyout
and demolition are no longer considered insured.
[B] "Still insured" refers to repetitive loss properties insured by
NFIP as of December 31, 2007 either through Write Your Own companies or
Special Direct Facilities.
[End of table]
To evaluate NFIP's existing structure and identify and evaluate options
for reducing or eliminating the costs of properties insured at
subsidized premium rates and the advantages and disadvantages of these
options, we analyzed NFIP's legislative history, which described the
objectives of NFIP overall and NFIP subsidies in particular, and
original expectations about the subsidized inventory. We also reviewed
more recent legislation, including the Robert T. Stafford Disaster
Assistance and Emergency Relief Act and the Bunning-Bereuter-Blumenauer
Flood Insurance Reform Act of 2004, which established the Severe
Repetitive Loss Pilot Program. We discussed nationwide mitigation
strategies and related efforts and costs for repetitive loss
properties, including severe repetitive loss properties with FEMA
officials. In our visits with local entities in the five counties as
noted above, we also obtained available information on resources,
expenditures, and costs of individual mitigation efforts. We also
discussed these issues with FEMA regional offices responsible for the
five counties.
Finally, we analyzed FEMA's statistics on repetitive loss properties
including cumulative historical claims costs and the number of these
properties mitigated in the five counties we visited and nationwide. We
also analyzed relevant information in various other studies, including
two of our studies discussing public policy goals for federal
involvement in catastrophe insurance.[Footnote 42]
We conducted our work between December 2006 and November 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Some Areas of the Country That Appear to Have a Potential
for an Increase in the Number of NFIP Policies:
Recent flooding, especially in the Midwest in 2008, highlights the
devastation that can be caused from flooding. This appendix provides
examples of areas of the country that appear to have higher populations
and flooding risks relative to their policy volumes when compared to
other areas, and thus have the potential for increases in the number of
NFIP policies. As we noted in the report, an increase in market
penetration would also likely bring an increase in the number of
subsidized policies. We identified the examples by comparing the number
of NFIP policies in a given area, as of September 2006, with the total
number of county flood declarations from January 1980 to June 2008,
cumulative flood claims payments from January 1978 to April 2008, and
population as of 2004 for counties and 2005 for states.
Example 1: Some Midwestern and Northeastern states and counties that
appeared to have a higher history of flood losses relative to policy
counts than other areas of the country:
* The five combined states of Iowa, Michigan, Minnesota, Missouri, and
Wisconsin, when compared to Collier County, Florida, had more county
flood disaster declarations (2,092 versus 12), significantly more flood
claims payments ($704,706,000 versus $12,483,000), and a much larger
population (28,906,000 versus 297,000), but a similar number of NFIP
policies (80,572 versus 85,246).
* Maine, when compared to Idaho, had significantly more flood claim
payments ($36,332,000 versus $4,754,000) and county flood disaster
declarations (159 versus 42), but a similar number of NFIP policies
(7,891 versus 7,079). The states also had similar populations:
1,285,000 for Maine and 1,480,000 for Idaho.
* Wisconsin, when compared to Rhode Island, had many more county flood
disaster declarations (276 versus 11), but had similar flood claims
payments ($32,693,000 versus $34,219,000). Even though Wisconsin has a
much larger population (5,479,000 versus 1,012,000), it has a similar
number of NFIP policies (12,945 versus 14,432).
* Iowa, when compared to New Mexico, had almost 10 times more county
flood disaster declarations (558 versus 56), and about eight times more
in flood claims payments ($65.915.000 versus $8,038,000) but almost 30
percent fewer policies (10,185 versus 14,455). Iowa's population was
larger than New Mexico's (2,941,000 versus 2,016,000).
* The four combined states of Kansas, Nebraska, South Dakota, and North
Dakota, when compared to Oregon, had more county flood disaster
declarations (1,346 versus 124) and three times more in flood claims
payments ($244,828,499 vs. $76,727,971), but a similar number of
policies (30,683 versus 29,780) for a much larger population (6,009,000
versus 3,613,000).
Example 2: Counties with flood disaster declarations but no communities
in NFIP:
We found 66 counties that had flood disaster declarations but no
communities that had joined NFIP. Below are selected examples from
those counties.
* Clay County, Alabama (population 14,092) has had seven flood
declarations.
* San Francisco County, California (population 744,230) has had three
flood declarations.
* Henry County, Iowa (population 20,258) has had six flood
declarations.
* Winneshiek County, Iowa (population 21,188) has had seven flood
declarations.
* Adair County, Kentucky (population 17,575) has had six flood
declarations.
* Dallas County, Missouri (population 16,328) has had eight flood
declarations.
Example 3: Counties with flood disaster declarations but very few NFIP
policies:
We found 14 counties, all with populations over 100,000, that had one
or more flood declarations but very few NFIP policies. Below are
selected examples from those counties.
* Potter County, Texas (population 118,000) has had three flood
disaster declarations but had only six policies.
* Bibb County, Georgia (population 155,000) has had four flood disaster
declarations but had only 13 policies.
* Carroll County, Georgia (population 102,000) has had six flood
disaster declarations but had only 83 policies.
[End of section]
Appendix III: Comments from the Department of Homeland Security:
U.S. Department of Homeland Security:
Washington, DC 20528:
Homeland Security:
November 3, 2008:
Ms. Orice M. Williams:
Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G St., NW:
Washington, DC 20548:
Re: GAO-09-20 (250327):
Dear Ms. Williams:
The U.S. Department of Homeland Security (DHS) appreciates the
opportunity to review and comment on the U.S. Government Accountability
Office's (GAO) Draft Report GAO-09-20, Options for Addressing the
Financial Impact of Subsidized Premium Rates on the National Flood
Insurance Program (250327). Technical comments have been provided under
separate cover.
DHS commends the GAO for writing a report that clearly explains the
basis for certain properties being charged less than their full risk
premiums. GAO has also done a commendable job of describing the
demographics of those policyholders as well as investigating the impact
of those policies on the financial integrity of the National Flood
Insurance Program (NFIP) and providing a discussion of several options
to address that impact.
We would like to expound upon several topics cited in this report.
First, as GAO mentions in their report, the U.S. Federal Emergency
Management Agency (FEMA) has been aware of the impact of subsidized
policies on the financial soundness of the Program. In particular, FEMA
has been aware of the outsized impact that repetitive loss properties
have had. Through the years, FEMA has developed a number of initiatives
to address those issues more aggressively. However, we have shared
those proposed initiatives with our stakeholders in the past and they
have not been welcomed -- primarily due to concerns of equity to
existing property owners, their uneven impact on specific communities,
and uncertainty on how they would impact low income individuals. The
one exception was in the early 1980s when FEMA managed to implement a
series of large premium increases to subsidized policyholders. The most
recent proposal was presented to stakeholders in 2000-2001 and
consisted of a seven-step approach of reducing the number of
individuals eligible for subsidized premiums, a series of aggressive
premium increases, coverage restrictions and targeted mitigation
activity. Although at the time the proposal was not received favorably,
with the passage of the Flood Insurance Reform Act of 2004 and the
increased awareness of the flood risk as a result of the 2004 and 2005
hurricane seasons, FEMA has been able to proceed with two aspects of
that proposal: targeted mitigation activity and more aggressive rate
increases. The NFIP will also increase the standard deductible for
subsidized policyholders beginning in May, 2009.
Second, as GAO discusses in the report, targeted mitigation activity
has resulted in the elimination of some subsidized and repetitive loss
properties from the insurance pool. Under current parameters,
participation in the FEMA mitigation grant programs is voluntary on the
part of the property owner, local government, and State government.
Successfully securing a mitigation grant requires capacity and
capability within each of these entities. This capacity includes a
requirement for some non-Federal financial or in-kind contributions to
mandatory mitigation activity. FEMA notes that requiring mitigation via
the mitigation grant programs would represent a shift in current
policies and procedures and require amendments in current statutes and
rules.
FEMA believes that a mandatory mechanism for certain mitigation
activities of pre-Flood Insurance Rate Map (pre-FIRM) properties exists
through the administration of the substantial damage provision of a
local floodplain management ordinance. To facilitate compliance with
the local ordinance, up to $30,000 is typically available to policy
holders undertaking required mitigation activities.
Third, with regard to the GAO discussion of Need-Based Subsides, FEMA
believes that while there is probably merit to such a proposal, the
insurance agents that sell flood insurance policies should not be asked
to do double duty in making "needs-based" determinations. Such
determinations are well outside the scope of their normal activities in
flood insurance or any other line of insurance. FEMA recommends that if
Congress desires to address the flood risk of low income individuals,
they should consider placing the eligibility determination on someone
other than the insurance agent. Further, discussion should be held on
how such discounted premiums would be borne by the NFIP. Would it
simply be revenue foregone by the NFIP (as is the case with current
subsidized policyholders) or should it take the form of General Revenue
funds being transferred to the NFIP?
Finally, there is a group of NFIP policyholders who currently qualify
for heavily discounted premiums as a result of needs-based testing.
These are the Group Flood Insurance Policyholders (GFIP) who were
recipients of Individual Family Grants (IFG). Since IFG recipients must
agree to buy flood insurance for as long as they own or reside at that
property, the NFIP introduced the GFIP to assist these individuals in
meeting that requirement. These recipients are eligible for IFG because
they have suffered a major financial setback. It would be very
difficult for them to be able to pay the required flood insurance
premium in order to satisfy the IFG requirement. In order to resolve
that dilemma, the NFIP has coordinated with the IFG administrators so
that a small amount of the IFG grant is transferred to the NFIP and in
exchange the NFIP issues a three-year group policy for all recipients
following a disaster. We cite the example of the GFIP as one case where
we are able to meet the short-term needs of some low income individuals
by relying on the needs-based determination made by a third party (the
IFG grants personnel).
The U.S. Department of Homeland Security would like to thank you for
the opportunity to provide comments on this draft report. We look
forward to working with you on future homeland security issues.
Sincerely,
Signed by:
Jerald E. Levine:
Director:
Departmental DHS GAO/OIG Liaison Office:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgements:
GAO Contact:
Orice M. Williams, (202) 512-8678, or williamso@gao.gov:
Staff Acknowledgements:
In addition to the contact named above, Patrick Ward, Assistant
Director; Lawrence Cluff, Assistant Director; Tania Calhoun; Emily
Chalmers; William (Rudy) Chatlos; Martha Chow; Nima Patel Edwards;
Christopher Forys; Catherine Hurley; Karen Jarzynka; and Melvin Thomas
made significant contributions to this report.
[End of section]
Footnotes:
[1] Unless otherwise noted, all policy counts referenced in this report
represent only active residential policies as of December 31, 2007. An
insurance premium rate is the price charged for coverage.
[2] National Flood Insurance Act of 1968, Pub. L. No. 90-448, Title
XIII, 82 Stat. 476 (1968).
[3] Buildings eligible for subsidized rates are those that were built
before FIRMs were created, identifying flood-prone areas, and before
participating communities established and enforced NFIP building codes.
Flood-prone areas that are estimated to have a 1 percent chance of
flooding in any given year are also known as Special Hazard Flood Areas
or 100-year flood plains. The 1 percent chance of flood, or 100-year
flood, is also known as the base flood. The FIRMs also identified areas
that are of low or moderate flood risk (such as the 0.2 percent chance
of flooding or the 500-year flood plains). NFIP building codes require,
among other things, that the lowest level of a structure must be at or
above the area's base flood elevation, the land elevation that has a 1
percent chance of flooding.
[4] Steps taken to reduce flood risk are known as mitigation. According
to FEMA, the key mitigation steps for residential properties are
elevating a building to or above the area's base flood elevation,
relocating the building to an area of less flood risk, or demolishing
the building and turning the property into green space. A community can
also take steps to reduce flood risk to an area, by diverting the flow
of water through well designed channels and retaining walls, or by
containing the water, through ponds and green space.
[5] Flooding types include floods from hurricanes, flash floods, and
overland floods.
[6] Congressional Budget Office, Value of Properties in the National
Flood Insurance Program (June 2007).
[7] The Flood Disaster Protection Act of 1973, Pub. L. No. 93-234,
§102, 87 Stat. 975, 978 (1973), mandated that policyholders with
mortgages or loans from federally regulated and insured lending
institutions buy flood insurance for the life of the mortgage or loan.
[8] RAND, The National Flood Insurance Program's Market Penetration
Rate: Estimates and Policy Implications (Santa Monica, California:
2006).
[9] In 1981, FEMA initiated a multiyear series of coverage changes and
large rate increases for all subsidized policies, which FEMA claims
placed NFIP on a financially sound basis by 1986. Therefore, we only
included financial data since 1986 to account for these modifications.
[10] FEMA generally considers a significant flood event as one with
1,500 or more paid losses.
[11] For more information on NFIP rate-setting, see GAO, Flood
Insurance: FEMA's Rate-Setting Process Warrants Attention, GAO-09-12
(Washington, D.C.: Oct. 31, 2008).
[12] For more information on all FEMA flood zones, please see appendix
VII of GAO, National Flood Insurance Program: Financial Challenges
Underscore Need for Improved Oversight of Mitigation Programs and Key
Contracts, [hyperlink, http://www.gao.gov/products/GAO-08-437]
(Washington, D.C.: June 16, 2008).
[13] FEMA also has a category of properties whose flood risk has not
yet been determined but flooding is possible. Mandatory purchase
requirements do not apply.
[14] If the cost of restoring a flood-damaged structure to its
predamage condition or renovating an insured structure is equal to or
greater than 50 percent of that structure's market value before the
damage or renovation, the structure must be mitigated and meet other
applicable local ordinance requirements. See 44 C.F.R. § 9.11
[15] Pub. L. No. 100-707, 102 Stat. 4689 (1988).
[16] Pub. L. No. 103-325, §553, 108 Stat. 2255, 2270 (1994).
[17] Pub. L. No. 108-264, §§ 102, 104, 118 Stat. 712, 714, 722 (2004).
[18] NFIP's overall operating deficit for 1986-2004 was $928 million.
This number is less than the operating deficit for subsidized policies
because that operating deficit was offset by slight operating surpluses
in some policies that were not included in the subsidized or full-risk
categories.
[19] December 2007 number is measured by active residential policies in
force. Because full-risk policies do not collect more in premiums than
their expected average losses over the long term, an increase in the
proportion of full-risk policies to policies with subsidized rates does
not decrease the expected dollar amount of operating deficit caused by
claims on subsidized properties.
[20] We calculated the number of policies using earned exposure, which
is a measure of how many policies were in effect throughout the year
based on the duration of the policy. For example, a 1-year policy that
became effective on December 22, 2006, has an earned exposure for
calendar year 2006 of 10/365, while the earned exposure for 2007 is
355/365.
[21] The Flood Disaster Protection Act of 1973, Pub. L. No. 93-234,
§102, 87 Stat. 975, 978 (1973).
[22] FloodSmart is an integrated mass marketing campaign FEMA launched
in 2004 to educate the public about the risks of flooding and to
encourage the purchase of flood insurance.
[23] The number of policies in force during the year is calculated
based on earned exposure as explained in footnote 20.
[24] Given the voluntary nature of the program, a participating
community may not have any flood insurance policies. Participation
means, among other things, that a community's residents are eligible to
buy flood insurance.
[25] Some newly incorporated communities do not cause an increase in
overall policies because residents had already been participating in
NFIP through their county.
[26] The increase in percentage of claims losses is primarily the
result of the $13.3 billion paid on Louisiana policies in 2005.
[27] In addition to covering claims, premium income is also intended to
cover the costs of administering the program, including costs
associated with servicing policies and processing claims.
[28] NFIP's overall operating deficit for 1986-2004 was $928 million.
This number is less than the operating deficit for subsidized policies
because that operating deficit was offset by slight operating surpluses
in some policies that were not included in the subsidized or full-risk
categories.
[29] During the 1980s and 1990s, FEMA also implemented other measures
that substantially limited the scope of coverage, such as restricting
basement coverage and increasing deductibles.
[30] GAO, National Flood Insurance Program: Financial Challenges
Underscore Need for Improved Oversight of Mitigation Programs and Key
Contracts, [hyperlink, http://www.gao.gov/products/GAO-08-437]
(Washington, D.C.: June 16, 2008).
[31] 44 C.F.R. § 9.11.
[32] According to officials of the Harris County Flood Control
District, while the Control District can spearhead mitigation
activities throughout Harris County, it does not have enforcement
authorities. The floodplain management office for the community in
which a property is located is responsible for ensuring compliance with
NFIP building codes and regulations.
[33] This is the number of subsidized policies measured using earned
exposure.
[34] Over the years Congress has considered a variety of reforms to
NFIP, including targeting subsidized policies. Current bills include
the Flood Insurance Reform and Modernization Act, H.R. 3121, 110th
Cong. (2007) and the Flood Insurance Reform and Modernization Act, S.
2284, 110th Cong. (2007). Our options are not based on any particular
legislation or proposal but rather reflect broad public policy
concepts.
[35] This more restrictive criterion mandating mitigation for
repetitive loss properties was considered by Congress in a bill related
to the legislation that became the Bunning-Bereuter-Blumenauer Act,
which established the current criterion of four or more claims.
[36] In 2000, FEMA estimated that mitigation efforts on all post-FIRM
properties, not just repetitive loss properties, could result in
savings with a present value of $18.7 billion over the period from 2000
to 2010, including savings from locally administered flood mitigation
requirements and NFIP flood mitigation grants.
[37] As mentioned previously, homeowners receiving disaster assistance
are generally required to purchase flood insurance. SBA makes federally
subsidized loans to repair or replace homes, personal property, or
businesses that sustain damages not covered by insurance.
[38] However, they are still eligible for disaster assistance
authorized by the Robert T. Stafford Disaster Relief and Emergency
Assistance Act.
[39] GAO, Means-Tested Programs: Determining Financial Eligibility Is
Cumbersome and Can Be Simplified, [hyperlink,
http://www.gao.gov/products/GAO-02-58] (Washington, D.C.: Nov. 2,
2001).
[40] Write-Your-Own companies are private insurers that sell and
service policies and adjust claims for NFIP.
[41] See [hyperlink, http://www.gao.gov/products/GAO-08-437].
[42] GAO, Natural Disasters: Public Policy Options For Changing The
Federal Role In Natural Catastrophe Insurance, [hyperlink,
http://www.gao.gov/products/GAO-08-7] (Washington, D.C.: Nov. 26,
2007); and Natural Catastrophe Insurance: Analysis of a Proposed
Combined Federal Flood and Wind Insurance Program, [hyperlink,
http://www.gao.gov/products/GAO-08-504] (Washington, D.C.: Apr. 25,
2008)
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