Information on Proposed Changes to the National Flood Insurance Program
Gao ID: GAO-09-420R February 27, 2009The National Flood Insurance Program (NFIP) was created in 1968 and currently has more than 5.6 million policyholders that are insured for about $1.1 trillion. The program collects about $2.9 billion in annual premiums. As of January 2009, NFIP owed approximately $19.2 billion to the U.S. Treasury, primarily as a result of loans that the program received to pay claims from the 2005 hurricane season. According to the Federal Emergency Management Agency (FEMA) of the Department of Homeland Security (DHS), which administers the program, this debt is greater than the sum of all previous losses since the program's inception in 1968. While FEMA officials told us that interest payments are estimated to be lower in 2010, as of October 2008, NFIP owed interest payments of $730 million a year to Treasury and has had to borrow more from the Treasury to make these payments. As a result, it is unlikely that NFIP will ever be able to repay the entire debt. Because of NFIP's financial situation, in 2006 GAO placed the program on the high-risk list. In 2008, GAO issued three reports covering issues directly related to NFIP. NFIP is subject to periodic reauthorization and its current authorization has been extended until March 2009. As Congress considers reauthorization of NFIP and potential reforms to the program, Congress asked us to provide a briefing on (1) the percentage and geographic distribution of policyholders that purchase the maximum NFIP coverage, (2) the availability of private commercial and residential flood insurance, (3) the potential effect of adding business interruption coverage to commercial flood insurance, particularly for small and medium-sized businesses, and (4) the challenges and issues surrounding the potential creation of an NFIP loss fund.
Approximately 36 percent of NFIP policyholders nationwide buy the maximum amount of insurance that NFIP offers. The percentages vary across states but are highest in southern and coastal states and in areas with high median home values, which are often coastal areas. (The sole exception is the District of Columbia, which has the highest percentage of maximum-coverage policies.) The state with the lowest percentage of maximum-coverage policies is West Virginia, with 4 percent. As well as the District of Columbia, states with a high percentage of these policies include Hawaii (55 percent) and South Carolina (56 percent). The percentage of policies sold at maximum coverage limits appears to be related not to flood losses in a particular state but to property values. For example, in Louisiana and Texas, where cumulative NFIP flood losses have been higher than in most other states but property values are lower, the percentage of policies sold at the maximum coverage limits has remained below the national average. Aggregate information is not available on the precise size of the private flood insurance markets for residential and commercial properties, but according to industry experts these markets are considered relatively small. According to a 2007 study commissioned by FEMA, an estimated 180,000 to 260,000 primary and excess coverage flood insurance policies were in effect. A small number of insurance companies provide private policies, which are generally marketed to wealthy homeowners. Private flood insurance can be significantly more expensive than NFIP insurance for similar levels of coverage. For example, one insurer told us that the cost for a specified level of residential coverage could be as low as $500 from NFIP and as high as $900 from a private insurer. For contents insurance, the cost averages around $350 from NFIP but around $600 in the private market. Private insurers generally market to clients with homes worth at least $1 million--far above NFIP policy limits---and generally sell "excess coverage" above NFIP policy limits. Large companies are the primary purchasers of private commercial flood insurance, and several insurers and industry officials we spoke with said that private flood insurance for small to medium-sized businesses was prohibitively expensive, although no data on the costs were available. According to one insurer, up to 80 percent of private policies provide excess coverage above the NFIP maximum and are purchased together with NFIP policies, and the remaining 20 percent is considered first dollar coverage. Generally, the NFIP policy covers the deductible on the private policy--commercial policies often set the deductible at NFIP policy limits--and some private insurers told us that they would raise their deductible amounts if NFIP raised the coverage limits. Insurers also told us that they generally determined their premium rates using NFIP rates, data, and flood maps as a starting point and adjusting rates upward according to their own risk analysis. Private business interruption coverage for flood damage is expensive and is generally purchased by only large companies. According to industry officials, coverage for small and medium-size businesses is also generally prohibitively expensive.
GAO-09-420R, Information on Proposed Changes to the National Flood Insurance Program
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GAO-09-420R:
United States Government Accountability Office:
Washington, DC 20548:
February 27, 2009:
The Honorable Barney Frank:
Chairman:
Committee on Financial Services:
House of Representatives:
Subject: Information on Proposed Changes to the National Flood
Insurance Program:
Dear Mr. Chairman:
The National Flood Insurance Program (NFIP) was created in 1968 and
currently has more than 5.6 million policyholders that are insured for
about $1.1 trillion. The program collects about $2.9 billion in annual
premiums. As of January 2009, NFIP owed approximately $19.2 billion to
the U.S. Treasury, primarily as a result of loans that the program
received to pay claims from the 2005 hurricane season.[Footnote 1]
According to the Federal Emergency Management Agency (FEMA) of the
Department of Homeland Security (DHS), which administers the program,
this debt is greater than the sum of all previous losses since the
program‘s inception in 1968. While FEMA officials told us that interest
payments are estimated to be lower in 2010, as of October 2008, NFIP
owed interest payments of $730 million a year to Treasury and has had
to borrow more from the Treasury to make these payments. As a result,
it is unlikely that NFIP will ever be able to repay the entire debt.
Because of NFIP‘s financial situation, in 2006 GAO placed the program
on the high-risk list. In 2008, GAO issued three reports covering
issues directly related to NFIP:
* Analysis of a Combined Federal Flood and Wind Insurance Program, GAO-
08-504 (Washington D.C.: Apr. 25, 2008);
* FEMA‘s Rate-Setting Process Warrants Attention, GAO-09-12
(Washington, D.C.: Oct. 31, 2008); and;
* Options for Addressing the Financial Impact of Subsidized Premium
Rates on the National Flood Insurance Program, GAO-09-20 (Washington
D.C.: Nov. 14, 2008).
NFIP is subject to periodic reauthorization and its current
authorization has been extended until March 2009. As Congress considers
reauthorization of NFIP and potential reforms to the program, we have
been asked us to provide a briefing on (1) the percentage and
geographic distribution of policyholders that purchase the maximum NFIP
coverage, (2) the availability of private commercial and residential
flood insurance, (3) the potential effect of adding business
interruption coverage to commercial flood insurance, particularly for
small and medium-sized businesses, and (4) the challenges and issues
surrounding the potential creation of an NFIP loss fund.
On January 28, 2009, we briefed your office on the results of this
work. This letter summarizes the briefing, and the enclosure contains
the full briefing slides. In response to questions asked during the
briefing, we have added clarifying information to the briefing slides.
We conducted our work from November 2008 through February 2009 in
accordance with all sections of GAO‘s Quality Assurance Framework that
are relevant to our objectives. The framework requires that we plan and
perform the engagement to obtain sufficient and appropriate evidence to
meet our stated objectives and to discuss any limitations in our work.
We believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions.
Background:
Congress created NFIP in 1968 so that property owners in participating
communities could purchase insurance against the loss of flooding.
Since its inception, Congress has several times enacted legislation to
strengthen certain aspects of the program:
* The 1973 Flood Disaster Protection Act made flood insurance mandatory
for owners of properties in vulnerable areas who had mortgages from
federally regulated lenders. The act also provided additional
incentives for communities to join the program.
* The National Flood Insurance Reform Act of 1994 strengthened the
mandatory purchase requirement for federally backed mortgages of
properties located in the special flood hazard areas (SFHA).
* Finally, the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act
of 2004 established a pilot program to mitigate properties that
continually suffered from repeated flood losses. Owners of these
’repetitive loss“ properties who do not mitigate face higher premiums.
In 2007, both the U.S. Senate and House of Representatives introduced
legislation aimed at reforming certain aspects of NFIP. While these
bills differ in several particulars including providing for required
mapping of the 500 year floodplain to to creating a catastrophic loss
fund, both bills generally are aimed at improving the viability of the
program.
As we found in our previous reports, NFIP‘s debt has resulted in part
from the program‘s inability to charge premiums that are sufficient to
build the capital that most private insurers have to offset losses or
purchase private reinsurance. Under its authorizing legislation, NFIP
must offer subsidized flood insurance premiums along with its full-risk
premiums. The subsidized premiums, which represent only about 35 to 40
percent of the cost of covering the full risk of flood damage to the
properties, account for about 23 percent of all active residential NFIP
policies. In addition, NFIP‘s full-risk rates are currently based on
outdated information and processes, so even these rates may not
accurately reflect the full risk of flooding.
Summary:
Approximately 36 percent of NFIP policyholders nationwide buy the
maximum amount of insurance that NFIP offers. The percentages vary
across states but are highest in southern and coastal states and in
areas with high median home values, which are often coastal areas. (The
sole exception is the District of Columbia, which has the highest
percentage of maximum-coverage policies.) The state with the lowest
percentage of maximum-coverage policies is West Virginia, with 4
percent. As well as the District of Columbia, states with a high
percentage of these policies include Hawaii (55 percent) and South
Carolina (56 percent). The percentage of policies sold at maximum
coverage limits appears to be related not to flood losses in a
particular state but to property values. For example, in Louisiana and
Texas, where cumulative NFIP flood losses have been higher than in most
other states but property values are lower, the percentage of policies
sold at the maximum coverage limits has remained below the national
average.
Aggregate information is not available on the precise size of the
private flood insurance markets for residential and commercial
properties, but according to industry experts these markets are
considered relatively small. According to a 2007 study commissioned by
FEMA, an estimated 180,000 to 260,000 primary and excess coverage flood
insurance policies were in effect.[Footnote 2] A small number of
insurance companies provide private policies, which are generally
marketed to wealthy homeowners. Private flood insurance can be
significantly more expensive than NFIP insurance for similar levels of
coverage. For example, one insurer told us that the cost for a
specified level of residential coverage could be as low as $500 from
NFIP and as high as $900 from a private insurer. For contents
insurance, the cost averages around $350 from NFIP but around $600 in
the private market. Private insurers generally market to clients with
homes worth at least $1 million”far above NFIP policy limits-”and
generally sell ’excess coverage“ above NFIP policy limits. Large
companies are the primary purchasers of private commercial flood
insurance, and several insurers and industry officials we spoke with
said that private flood insurance for small to medium-sized businesses
was prohibitively expensive, although no data on the costs were
available. According to one insurer, up to 80 percent of private
policies provide excess coverage above the NFIP maximum and are
purchased together with NFIP policies, and the remaining 20 percent is
considered first dollar coverage. Generally, the NFIP policy covers the
deductible on the private policy”commercial policies often set the
deductible at NFIP policy limits”and some private insurers told us that
they would raise their deductible amounts if NFIP raised the coverage
limits. Insurers also told us that they generally determined their
premium rates using NFIP rates, data, and flood maps as a starting
point and adjusting rates upward according to their own risk analysis.
Private business interruption coverage for flood damage is expensive
and is generally purchased by only large companies. According to
industry officials, coverage for small and medium-size businesses is
also generally prohibitively expensive. Further, business interruption
coverage for flood losses is generally available only if the purchaser
also has a property-casualty policy that includes flood coverage.
Insurers told us that underwriting this type of coverage was complex
and that properly pricing the risk required an extensive evaluation of
a company‘s business model and cash flow to determine the kinds of
losses that a business interruption might cause. Adjusting business
interruption claims is also complex and often contentious, because the
extent of business losses depends on the nature of the business and the
circumstances surrounding the loss. Adding business interruption
insurance to NFIP could help small businesses obtain coverage that they
could not obtain in the private market. However, in general NFIP
currently lacks resources and expertise in this area, and adding
business interruption insurance could be difficult, adding to NFIP‘s
existing debt and potentially to its ongoing management and financial
challenges. As they do with private flood insurance, large companies
would likely use NFIP business interruption coverage to cover
deductibles on private policies.
A catastrophic loss fund would create a cash surplus that NFIP could
use to pay larger-than-average annual losses without borrowing, as
private insurers do, through premium rate increases; creating such a
fund would be challenging, for several reasons. First, unless NFIP‘s
current debt were forgiven, even with significant premium increases
NFIP probably could not collect enough to pay the $766 million in
annual interest and also contribute to a loss fund. Second, a
catastrophic loss fund might not eliminate NFIP‘s need to borrow funds
for larger-than-expected losses that occurred before the fund had been
built up. Further borrowing would require either a longer period to
rebuild the loss fund or more debt forgiveness from Congress. Third,
even if NFIP‘s debt were forgiven, building a catastrophic loss fund
could require significant premium rate increases. Higher rates could
reduce participation in the NFIP, but without them it could take at
least 10 years to fully fund a catastrophic loss fund equal to 1
percent of NFIP‘s total loss exposure. We calculated three loss fund
scenarios (with and without catastrophic losses and with an earlier
date for full funding) using a number of assumptions”stable policy
levels, debt forgiveness, a 4 percent annual return on investments, no
catastrophic losses before the fund was fully established, and full
funding by 2020. Under the first two scenarios (with no catastrophic
losses and with them), premium costs approximately tripled by 2020; in
the third (full funding by 2016), subsidized rates tripled by 2016, and
full-risk rates increased nearly fourfold.
Objectives, Scope, and Methodology:
To analyze the number of policies sold with maximum coverage limits and
trends in those policies, we analyzed data on NFIP policies and Census
data on 2007 median property values. We assessed the reliability of the
NFIP data and determined that they were sufficiently reliable for the
purposes of this report.
To obtain information on the cost and complexity of obtaining private
flood and business interruption insurance and the types of coverage
provided, we interviewed property owners, underwriters, and insurance
brokers. To gather information on the overall market for private flood
and business interruption insurance, we interviewed insurance industry
officials, including those from the Insurance Information Institute,
American Insurance Association, and National Lenders Insurance Council.
We also analyzed publicly available studies on NFIP and the private
flood insurance market to gather information on the size and extent of
the private market and the range of coverage that private flood
insurers provide.
To understand the implications of creating a catastrophic loss fund
within NFIP, we developed potential scenarios using NFIP premium and
loss data, reviewed analyses by the Congressional Budget Office and
interviewed insurance company and other industry officials.[Footnote 3]
For each scenario, we estimated future claims and operating costs to
determine the premium revenues and premium rates that would be needed
to both cover costs and produce surpluses necessary to fully fund an
$18 billion catastrophic loss fund. We assumed that the number of NFIP
policies in force would remain constant over the funding period. We
estimated future claims and operating costs by identifying trends in
NFIP‘s inflation-adjusted historical data from 1978 through 2007. As
part of these analyses, we developed two estimates of future claims
costs”one that incorporated the catastrophic claim losses from the 2005
hurricanes and the other that excluded those losses.
Agency Comments:
We provided a draft of this letter and the attached briefing to FEMA
for a technical review. FEMA provided technical comments, which we
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 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].
If you or your staffs have any questions about this report, please
contact me at (202) 512-8678, or williamso@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report were
Patrick Ward, Assistant Director; Nima Patel Edwards; Melvin Thomas;
Richard LaMore; and Thomas Taydus.
Sincerely,
Signed by:
Orice M. Williams:
Director, Financial Markets and Community Investment:
Enclosure:
[End of section]
Enclosure: Information on Proposed Changes to the National Flood
Insurance Program:
Briefing to the House Committee on Financial Services:
January 28, 2009:
Overview:
* Introduction:
* Objectives:
* Summary of Findings:
* Background:
* Scope and Methodology:
* Discussion of Findings:
Introduction:
The National Flood Insurance Program (NFIP) was created in 1968 and
currently has over 5.5 million policyholders that are insured for about
$1.1 trillion. It collects about $2.9 billion in annual premiums.
Extensive losses have raised questions about the financial viability of
the program.
* NFIP owes around $19.2 billion to the U.S. Treasury Department,
primarily because of losses from the 2005 hurricane season.
* In general, the program was not designed to collect sufficient
premium income to cover flood losses.
In the 110th Congress, both the House and the Senate have proposed
separate bills containing a number of changes to the program that are
aimed at improving its viability, including a Senate provision
potentially forgiving NFIP‘s debt.
In September 2008, Congress extended the program‘s authorization until
March 2009.
In 2008, GAO issued three reports covering issues directly related to
NFIP:
* Analysis of a Combined Federal Flood and Wind Insurance Program (GAO-
08-504),
* FEMA‘s Rate-Setting Process Warrants Attention(GAO-09-12),
* Options for Addressing the Financial Impact of Subsidized Premium
Rates on the National Flood Insurance Program(GAO-09-20).
In addition, two reviews are currently in process, one examining the
Federal Emergency Management Agency‘s (FEMA) oversight of WYO insurers
and the costs of using those insurers, the other examining the adequacy
of financial reporting and internal controls during the 2005 hurricane
season.
Objectives:
1. Identify the percentage and geographic distribution of policyholders
that purchase the maximum coverage that NFIP offers;
2. Analyze the availability of commercial and residential private flood
insurance;
3. Identify the potential effects of adding business interruption
coverage to commercial flood insurance, particularly for small and
medium-size businesses; and;
4. Identify and analyze challenges and issues surrounding the potential
creation of an NFIP loss fund.
Summary of Findings:
Approximately 36 percent of NFIP policies have the maximum coverage
limits, with higher percentages in areas with higher median home
values, such as coastal areas.
The private market for residential flood insurance is small and focuses
on homes with values over $1 million. The private commercial market is
also relatively small, focusing on larger companies that use NFIP
coverage to pay the deductible on private policies. Little information
is available on the size of either market.
Adding business interruption coverage would further strain FEMA‘s
resources and expertise.
* NFIP lacks the resources and expertise to undertake the complex
underwriting normally associated with business interruption coverage,
and unless it is underwritten and priced properly, such coverage could
increase NFIP‘s loss exposure.
* Private business interruption coverage for flooding is expensive, and
generally only large companies can afford it. An NFIP policy could be
the only way for smaller businesses to obtain such coverage.
Creating a catastrophic loss fund would involve several challenges
including:
* forgiving NFIP‘s current $19 billion debt to the Treasury;
* significantly increasing premium rates, a change that could
negatively impact participation rates and necessitate further rate
adjustments; and;
* reaching the target funding level despite the possibility of larger-
than-average expected losses, such as those that have occurred in 2 of
the past 4 years.
Background:
Congress created the NFIP in 1968 so property owners in participating
communities could purchase insurance against losses from flooding.
Under the Flood Disaster Protection Act of 1973, owners of properties
lying within vulnerable areas who have mortgages from federally
regulated lenders must buy flood insurance. The act also provided
additional incentives for communities to join the program.
The National Flood Insurance Reform Act of 1994 strengthened the
mandatory purchase requirement for federally backed mortgages of
properties located in special flood hazard areas (SFHA).
The Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004
established a pilot program to mitigate properties that continually
suffered from repeated flood losses. Owners of these ’repetitive loss“
properties who do not mitigate may face higher premiums.
NFIP is not authorized to charge premiums that are sufficient to build
the capital that most private insurers have to offset losses or
purchase reinsurance in the private global market. The program was
enacted to encourage property owners in vulnerable areas to join the
program and maximize the number of participants.
NFIP offers two types of flood insurance premiums: subsidized and full
risk. Congress authorized the use of subsidized premiums to encourage
homeowners and communities to join the program.
Subsidized properties account for about 23 percent of all active
residential NFIP policies. The subsidized rates are not based on flood
risk and, according to FEMA, represent only about 35 to 40 percent of
that risk.
Property owners who are required to purchase an NFIP policy but do not
may be automatically put in to ’force placed“ insurance, primarily
through private flood insurance but also through the NFIP‘s Mortgage
Portfolio Protection Program (MPPP). It is used only as a last resort
and only on mortgages whose owners have failed to purchase flood
insurance.
* Policyholders in this program usually pay more for flood coverage.
Methodology:
To determine the number of NFIP policies sold with maximum coverage
limits, we analyzed data on NFIP policies and on median property values
by state.
To analyze the private markets for flood and business interruption
insurance, we:
* Analyzed publicly available studies on NFIP and the private flood
insurance market;
* Interviewed officials from insurance companies that sell private
flood insurance, including American International Group, the Chubb
Company, and Lloyds of London;
* Interviewed property owners, underwriters, and insurance brokers;
and;
* Interviewed insurance industry officials, including those from the
Insurance Information Institute, American Insurance Association, and
National Lenders Insurance Council.
To understand the implications of creating a catastrophic loss fund
within NFIP, we developed potential scenarios using NFIP premium and
loss data to roughly estimate future revenues, expenses, and potential
loss fund contributions. These estimates required us to make a number
of assumptions, which are detailed later in this briefing. We also
reviewed analyses by the Congressional Budget Office (CBO), and
interviewed insurance company and other industry officials.
Objective 1: Coverage Limits and Geographic Distribution:
The percentage of NFIP policies at coverage limits varies across states
but is highest in southern and coastal regions.
Nationally, about 36 percent of NFIP policies, on average are sold at
the maximum coverage limits (see table 1). The percentages range from a
low of less than 4 percent in West Virginia to a high of almost 63
percent in the District of Columbia.
Coverage amounts are generally related to median home values (i.e., the
higher the median home value, the higher the percentage of policies at
the maximum coverage level.)
In coastal states, where home values are generally higher, a greater
percentage of NFIP policies were sold at the maximum coverage limits as
compared with noncoastal states. For example, with the exception of the
District of Columbia, the states with the greatest percentage of
policies with maximum coverage were the coastal states.
The percentage of policies sold at maximum coverage limits did not
appear to be related to the NFIP losses experienced by a particular
state.
* For example, in Louisiana and Texas, where cumulative NFIP flood
losses were higher than in most other states, the percentage of
policies sold at the maximum coverage limits was below the national
average.
Table 1. Median Home Values, Percentage of NFIP Residential Policies at
Maximum Coverage, Median NFIP Residential Coverage, and Cumulative NFIP
Losses for Selected States:
State: District of Columbia;
Region of country: Northeast;
2007 median home value: $450,900;
2007 percentage of NFIP policies at maximum coverage limit: 66.0%
2007 median coverage for NFIP residential policies: $250,000;
Cumulative NFIP losses from 1978 through April 2008: $1,464,954.
State: South Carolina;
Region of country: Southeast;
2007 median home value: $133,900;
2007 percentage of NFIP policies at maximum coverage limit: 56.3%;
2007 median coverage for NFIP residential policies: $250,000;
Cumulative NFIP losses from 1978 through April 2008: $426,503,587.
State: Hawaii;
Region of country: West;
2007 median home value: $555,400;
2007 percentage of NFIP policies at maximum coverage limit: 56.2%;
2007 median coverage for NFIP residential policies: $250,000;
Cumulative NFIP losses from 1978 through April 2008: $64,361,397.
State: New York;
Region of country: Northeast;
2007 median home value: $311,000;
2007 percentage of NFIP policies at maximum coverage limit: 54.6%;
2007 median coverage for NFIP residential policies: $250,000;
Cumulative NFIP losses from 1978 through April 2008: $591,624,352.
State: Delaware;
Region of country: Northeast;
2007 median home value: $239,700;
2007 percentage of NFIP policies at maximum coverage limit: 54.2%;
2007 median coverage for NFIP residential policies: $250,000;
Cumulative NFIP losses from 1978 through April 2008: $50,307,086.
State: California;
Region of country: West;
2007 median home value: $532,000;
2007 percentage of NFIP policies at maximum coverage limit: 52.8%;
2007 median coverage for NFIP residential policies: $250,000;
Cumulative NFIP losses from 1978 through April 2008: $478,381,093.
State: Connecticut;
Region of country: Northeast;
2007 median home value: $309,200;
2007 percentage of NFIP policies at maximum coverage limit: 51.7%;
2007 median coverage for NFIP residential policies: $250,000;
Cumulative NFIP losses from 1978 through April 2008: $129,127,513.
State: New Jersey;
Region of country: Northeast;
2007 median home value: $372,300;
2007 percentage of NFIP policies at maximum coverage limit: 49.2%;
2007 median coverage for NFIP residential policies: $243,000;
Cumulative NFIP losses from 1978 through April 2008: $846,602,284.
State: Maryland;
Region of country: Northeast;
2007 median home value: $347,000;
2007 percentage of NFIP policies at maximum coverage limit: 46.6%;
2007 median coverage for NFIP residential policies: $221,200;
Cumulative NFIP losses from 1978 through April 2008: $235,070,005.
State: Rhode Island;
Region of country: Northeast;
2007 median home value: $292,800;
2007 percentage of NFIP policies at maximum coverage limit: 46.2%;
2007 median coverage for NFIP residential policies: $220,000;
Cumulative NFIP losses from 1978 through April 2008: $34,218,508.
State: Florida;
Region of country: Gulf Coast;
2007 median home value: $230,400;
2007 percentage of NFIP policies at maximum coverage limit: 41.5%;
2007 median coverage for NFIP residential policies: $203,500;
Cumulative NFIP losses from 1978 through April 2008: $3,455,637,659.
State: Texas;;
Region of country: Gulf Coast;
2007 median home value: $120,900;
2007 percentage of NFIP policies at maximum coverage limit: 29.4%;
2007 median coverage for NFIP residential policies: $150,000;
Cumulative NFIP losses from 1978 through April 2008: $2,972,450,276.
State: Alabama;
Region of country: Gulf Coast;
2007 median home value: $115,600;
2007 percentage of NFIP policies at maximum coverage limit: 25.5%;
2007 median coverage for NFIP residential policies: $137,800;
Cumulative NFIP losses from 1978 through April 2008: $921,030,437.
State: Louisiana;
Region of country: Gulf Coast;
2007 median home value: $126,800;
2007 percentage of NFIP policies at maximum coverage limit: 22.0%;
2007 median coverage for NFIP residential policies: $133,100;
Cumulative NFIP losses from 1978 through April 2008: $15,460,316,885.
State: Mississippi;
Region of country: Gulf Coast;
2007 median home value: $96,000;
2007 percentage of NFIP policies at maximum coverage limit: 20.4%;
2007 median coverage for NFIP residential policies: $125,000;
Cumulative NFIP losses from 1978 through April 2008: $2,796,352,288.
State: South Dakota;
Region of country: North;
2007 median home value: $118,700;
2007 percentage of NFIP policies at maximum coverage limit: 10.4%;
2007 median coverage for NFIP residential policies: $97,900;
Cumulative NFIP losses from 1978 through April 2008: $16,327,652.
State: Ohio;
Region of country: Midwest;
2007 median home value: $137,800;
2007 percentage of NFIP policies at maximum coverage limit: 10.2%;
2007 median coverage for NFIP residential policies: $91,300;
Cumulative NFIP losses from 1978 through April 2008: $229,348,581.
State: Nebraska;
Region of country: Midwest;
2007 median home value: $122,200;
2007 percentage of NFIP policies at maximum coverage limit: 9.9%;
2007 median coverage for NFIP residential policies: $99,000;
Cumulative NFIP losses from 1978 through April 2008: $21,604,709.
State: Kansas;;
Region of country: Midwest;
2007 median home value: $121,200;
2007 percentage of NFIP policies at maximum coverage limit: 8.3%;
2007 median coverage for NFIP residential policies: $75,000;
Cumulative NFIP losses from 1978 through April 2008: $73,166,027.
State: Missouri;
Region of country: Midwest;
2007 median home value: $138,600;
2007 percentage of NFIP policies at maximum coverage limit: 8%;
2007 median coverage for NFIP residential policies: $76,000;
Cumulative NFIP losses from 1978 through April 2008: $454,726,075.
State: Indiana;
Region of country: Midwest;
2007 median home value: $122,900;
2007 percentage of NFIP policies at maximum coverage limit: 7.9%;
2007 median coverage for NFIP residential policies: $96,000;
Cumulative NFIP losses from 1978 through April 2008: $100,878,929.
State: Arkansas;
Region of country: South;
2007 median home value: $101,000;
2007 percentage of NFIP policies at maximum coverage limit: 7.4%;
2007 median coverage for NFIP residential policies: $66,000;
Cumulative NFIP losses from 1978 through April 2008: $42,320,712.
State: Kentucky;
Region of country: Midwest;
2007 median home value: $114,300;
2007 percentage of NFIP policies at maximum coverage limit: 6.8%;
2007 median coverage for NFIP residential policies: $77,600;
Cumulative NFIP losses from 1978 through April 2008: $204,835,788.
State: Iowa;
Region of country: Midwest;
2007 median home value: $117,900;
2007 percentage of NFIP policies at maximum coverage limit: 4.8%;
2007 median coverage for NFIP residential policies: $75,000;
Cumulative NFIP losses from 1978 through April 2008: $65,914,642.
State: West Virginia;
Region of country: Midwest;
2007 median home value: $96,000;
2007 percentage of NFIP policies at maximum coverage limit: 3.8:
2007 median coverage for NFIP residential policies: $56,000;
Cumulative NFIP losses from 1978 through April 2008: $259,776,598.
Source: GAO analysis of FEMA and state census data.
[End of table]
Objective 2: Private Flood Insurance:
While aggregate information is not available on the precise size of the
private flood insurance market, it is considered relatively small.
* A 2007 Rand study commissioned by FEMA estimated that between 180,000
to 260,000 insurance policies for both primary and gap coverage were in
effect.
Four large insurance companies provide almost all of the private flood
insurance:
* American International Group,
* Chubb,
* Fireman‘s Fund, and,
* Lloyds of London.
Private flood insurance policies are generally purchased in conjunction
with NFIP policies, with the NFIP policy covering the deductible on the
private policy. Private insurers told us that they would raise the
deductible amounts if NFIP raised its coverage limit.
Private insurers we spoke to told us that NFIP premiums are generally
less expensive than premiums for private flood insurance for similar
coverage.
* One insurer told us that for a specified amount of coverage for flood
damage to a structure, an NFIP policy might be as low as $500, and a
private policy as high as $900. Similar coverage for flood damage to
contents might be $350 for an NFIP policy but around $600 for a private
policy.
The Residential Market:
Private insurers generally market to clients with a high net worth and
insure homes valued at least $1 million.
Coverage can be provided alone or as part of a homeowners policy that
covers multiple perils.
Policies are generally written to provide coverage above NFIP policy
limits (excess coverage).
* According to one insurer, around 80 percent of their company‘s
policies provide coverage above NFIP coverage limits (excess flood
coverage), while 20 percent are primary insurance policies.
* Some insurers will write primary coverage, but it is more expensive
than excess insurance because primary coverage exposes the insurer to
the first loss position and most flood-related losses are less than the
NFIP coverage limits. This means that excess coverage is tapped only
for losses above the NFIP coverage limit.
Insurers generally determine their premium rates using NFIP rates,
information and flood maps as a starting point and then adjusting these
rates using their own risk analyses. As noted previously, the rates are
usually adjusted upward.
The Commercial Market:
Private commercial flood insurance is generally purchased by large
companies as excess coverage above NFIP policy limits.
* Many companies purchase NFIP policies to cover the deductible on
their private flood policy, which is usually set at the NFIP policy
limit.
Private insurance can be purchased alone or included as part of a
multiperil property-casualty policy.
While no aggregate data are available, some industry officials we spoke
with said that private flood insurance for small and medium-size
businesses was generally prohibitively expensive.
Objective 3: Business Interruption Coverage:
Private business interruption insurance for flood damage is expensive
and is generally purchased only by large companies. According to
insurance officials we spoke with, coverage for small and medium-size
businesses is generally prohibitively expensive.
Business interruption coverage for flood losses is available only if
flood coverage is included in the property-casualty policy.
According to officials, underwriting business interruption is complex
and requires extensive evaluation of business models and cash flows to
determine probable losses (i.e., the losses that a business would
likely incur from an interruption in business.)
Adjusting business interruption claims is also very complex and often
contentious, because the extent of business losses depends on the
nature of the business and the circumstances surrounding the loss.
Adding Business Interruption Coverage to NFIP:
Adding business interruption insurance to the NFIP could help small
businesses obtain coverage that would be difficult and expensive to
obtain in the private market. As they do with private flood insurance,
large companies would likely use NFIP business interruption coverage to
cover deductibles on private policies.
However, business interruption insurance is complex to underwrite, and
unless it were sold at a price adequate to cover the expected losses,
it could increase the federal government‘s exposure to flood losses.
Business interruption insurance can also be difficult to adjust and
could lead to disputed claims that NFIP or the WYO insurers that sell
and service flood insurance would need to resolve.
* Due to the complexity of underwriting and adjusting business
interruption claims, it is not clear that WYO insurers would want to
participate in such a program.
NFIP generally lacks resources and expertise in this area, and adding a
new program could be difficult, given ongoing management and financial
challenges.
Objective 4: Catastrophic Loss Fund:
The purpose of a catastrophic loss fund would be to create a surplus of
funds that would enable NFIP to pay larger-than-average losses,
especially catastrophic losses, without borrowing.
* Insurance companies generally use reinsurance to ensure that they are
able to pay such losses and include the cost of reinsurance in premium
rates.
Creating a catastrophic loss fund would involve several challenges.
Challenge 1:
Creating a catastrophic loss fund would likely require forgiving NFIP‘s
current debt but the fund still might not be sufficient.
* Practically, it might not be feasible to create a catastrophic loss
fund without forgiving NFIP‘s current $19.2 billion debt to the
Treasury because, unless NFIP immediately increased premium rates by a
significant amount, premiums collected would likely be insufficient to
pay the $730 million in annual interest payments and contribute to the
loss fund.
* Even if this debt was forgiven, a catastrophic loss still might occur
that is beyond the amount in the loss fund, even if it was fully
funded.
Challenge 2:
A catastrophic loss fund might not eliminate NFIP‘s need to borrow
funds to pay losses.
* NFIP could experience losses that are both larger than and smaller
than expected average losses. While a loss fund could enable NFIP to
pay the larger-than-average losses without borrowing from the Treasury,
it could do so only if those losses occurred after the fund had been
built up.
* Catastrophic losses could also occur over several years, allowing
insufficient time for NFIP to rebuild the fund.
* If the fund were not adequate to pay losses, NFIP would need to
borrow more funds from the Treasury. Repaying those borrowed funds
would lengthen the time required to rebuild the loss fund.
Alternatively, Congress would have to forgive this future NFIP debt.
Challenge 3:
Building a catastrophic loss fund could require NFIP to significantly
increase premium rates.
* Current rates might not be sufficient to cover expected losses and
contribute to the fund. Therefore, higher NFIP premium rates could be
required. One way to address this would be to increase subsidized
premium rates to more fully reflect the underlying risk of loss.
* However, increased premium rates could decrease policyholder
participation, which could require further premium rate adjustments to
build the reserve.
* When rates were aggressively increased in 1982, participation fell
did not recover until 1986.
Challenge 4:
Without immediate, significant premium rate increases, it would likely
take at least 10 years to fully fund a catastrophic loss fund equal to
1 percent of NFIP‘s total loss exposure.
* If larger-than-expected average losses occurred, the period of time
required to reach the target funding level would be further extended.
* Such a scenario would also require forgiving NFIP‘s current debt.
A (CBO) analysis estimated that NFIP‘s total loss exposure would reach
about $1.8 trillion by 2017.
* The total exposure was estimated at approximately $1.2 trillion at
the end of 2008.
* The CBO estimate assumes that increases in the number of NFIP
policies would continue, but also that increased premium rates would
cause some policyholders to discontinue coverage.
* CBO‘s estimate does not include potential increases in NFIP policy
limits.
A loss fund equal to 1 percent of total NFIP exposure would require
approximately $18 billion in funding.
* Total NFIP flood losses in 2005, including Hurricanes Katrina and
Rita, were about $17.6 billion. The 2008 full year flood losses are not
yet available but are expected to be above average.
Analyzing Loss Funding Scenarios:
Analyzing any loss funding scenario requires estimating future losses,
and the potential for catastrophic losses makes estimating losses
complex and difficult.
It also requires making a number of assumptions. For our analysis we
assumed that:
* The number of NFIP policies would remain at 2007 levels,
* Congress would forgive the current $19 billion in debt,
* NFIP would earn a 4 percent annual investment yield on contributions,
* No catastrophic losses would occur before the fund was fully funded,
* The target would be a catastrophic loss fund of $18 billion no
earlier than 2020.
Because no commonly agreed upon methodology exists for incorporating
losses from the 2005 Hurricanes into estimates of future losses, we
analyzed two scenarios; one in which losses are not incorporated and
one in which they are incorporated. We also analyzed a scenario where
the goal was to fully fund a catastrophic loss fund more quickly.
In each case, we estimated future revenues, expenses, and potential
contributions to the building of a catastrophic loss fund.
Figure 2. Rough Estimate of Expected Average Annual NFIP Losses, with
and without Incorporating 2005 Losses:
[Refer to PDF for image: vertical bar graph]
Year: 1980;
Historical average paid: $579.4 billion.
Year: 1981;
Historical average paid: $434.6 billion.
Year: 1982;
Historical average paid: $431.7 billion.
Year: 1983;
Historical average paid: $552.3 billion.
Year: 1984;
Historical average paid: $543.4 billion.
Year: 1985;
Historical average paid: $571 billion.
Year: 1986;
Historical average paid: $523.6 billion.
Year: 1987;
Historical average paid: $482.2 billion.
Year: 1988;
Historical average paid: $438.5 billion.
Year: 1989;
Historical average paid: $505 billion.
Year: 1990;
Historical average paid: $483.2 billion.
Year: 1991;
Historical average paid: $487.6 billion.
Year: 1992;
Historical average paid: $530.6 billion.
Year: 1993;
Historical average paid: $560.1 billion.
Year: 1994;
Historical average paid: $561 billion.
Year: 1995;
Historical average paid: $635.9 billion.
Year: 1996;
Historical average paid: $662.7 billion.
Year: 1997;
Historical average paid: $663 billion.
Year: 1998;
Historical average paid: $686.3 billion.
Year: 1999;
Historical average paid: $698.4 billion.
Year: 2000;
Historical average paid: $679.3 billion.
Year: 2001;
Historical average paid: $715.6 billion.
Year: 2002;
Historical average paid: $705.5 billion.
Year: 2003;
Historical average paid: $710.1 billion.
Year: 2004;
Historical average paid: $775.6 billion.
Year: 2005
Estimate of future average in Rita and Katrina are included: $788.7
billion;
Historical average paid: $653.9 billion.
Year: 2006
Estimate of future average in Rita and Katrina are included: $802.2
billion;
Historical average paid: $610.5 billion.
Year: 2007
Estimate of future average in Rita and Katrina are included: $815.8
billion;
Historical average paid: $565.7 billion.
Year: 2008
Estimate of future average in Rita and Katrina are included: $829.7
billion;
Estimate of future average in Rita and Katrina are not included: $575.3
billion.
Year: 2009
Estimate of future average in Rita and Katrina are included: $843.8
billion;
Estimate of future average in Rita and Katrina are not included: $585.1
billion.
Year: 2010
Estimate of future average in Rita and Katrina are included: $858.1
billion;
Estimate of future average in Rita and Katrina are not included: $595.1
billion.
Year: 2011
Estimate of future average in Rita and Katrina are included: $872.7
billion;
Estimate of future average in Rita and Katrina are not included: $605.2
billion.
Year: 2012
Estimate of future average in Rita and Katrina are included: $887.5
billion;
Estimate of future average in Rita and Katrina are not included: $615.5
billion.
Year: 2013
Estimate of future average in Rita and Katrina are included: $902.6
billion;
Estimate of future average in Rita and Katrina are not included: $625.9
billion.
Year: 2014
Estimate of future average in Rita and Katrina are included: $918
billion;
Estimate of future average in Rita and Katrina are not included: $636.6
billion.
Year: 2015
Estimate of future average in Rita and Katrina are included: $933.6
billion;
Estimate of future average in Rita and Katrina are not included: $647.4
billion.
Year: 2016
Estimate of future average in Rita and Katrina are included: $949.4
billion;
Estimate of future average in Rita and Katrina are not included: $658.4
billion.
Year: 2017
Estimate of future average in Rita and Katrina are included: $965.6
billion;
Estimate of future average in Rita and Katrina are not included: $669.6
billion.
Year: 2018
Estimate of future average in Rita and Katrina are included: $982
billion;
Estimate of future average in Rita and Katrina are not included: $681
billion.
Year: 2019
Estimate of future average in Rita and Katrina are included: $998.7
billion;
Estimate of future average in Rita and Katrina are not included: $692.6
billion.
Year: 2020
Estimate of future average in Rita and Katrina are included: $1015.7
billion;
Estimate of future average in Rita and Katrina are not included: $704.3
billion.
Source: GAO Analysis of NFIP Data.
[End of figure]
Results under scenario 1: losses from 2005 hurricanes not included:
* From 2009 to 2020, the average subsidized premium would increase from
$840 to more than $2,116, while average full-risk premium would rise
from $358 to around $902.
* The fund could reach the target of approximately $18 billion in 2020
by increasing premium rates by, on average, about 8 percent annually,
assuming no larger than average expected losses.
* NFIP could begin making limited contributions to the fund in 2009,
but premiums would not be high enough for at least several years to
make the proposed annual 7.5 percent contribution and pay expected
losses.
Results under scenario 2: losses from 2005 hurricanes included:
* From 2009 to 2020, the average subsidized premium would increase from
around $840 to $2,696, and the average full-risk premium would rise
from around $358 to $1,149.
* The fund could reach the target of approximately $18 billion in 2020
by increasing premium rates by, on average, about 15 percent in the
first 3 years, 14 percent in year 4, and 8 percent thereafter, assuming
no larger than average expected losses.
* As with scenario 1, NFIP could begin making limited contributions to
the fund in 2011, but premiums would not be high enough for at least
several years to make the proposed annual 7.5 percent contribution and
pay expected losses.
Results under scenario 3: catastrophic loss fund fully funded by 2016,
losses from 2005 hurricanes included:
* Subsidized premiums would increase 25 percent annually until reaching
full-risk rates, and full-risk rates would increase by 15 percent a
year (the maximum allowable rate under proposed legislation).
* It would take approximately 7 years to reach the loss fund total in
2016.
* From 2009 to 2016, subsidized and full-risk rates would increase from
$840 to $3,577 and $358 to $953 in 2016 respectively.
[End of section]
Footnotes:
[1] The full losses from 2008 are not available.
[2] Dixon, L.; Clancy, N.; Bender B.; and Ehler, P. ’The Lender-Placed
Flood Insurance Market for Residential Properties.“ Prepared for the
Mitigation Division of the Federal Emergency Management Agency, by the
Rand Corporation, Santa Monica, Calif. 2007).
[3] CBO Cost Estimate, Flood Insurance Reform and Modernization Act of
2007, as ordered, reported by the Senate Committee on Banking, Housing,
and Urban Affairs (Washington, D.C.: Oct. 17, 2007).
[End of section]
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