Examination of Financial Statements of the National Flood Insurance Program as of December 31, 1977

Until the end of 1977, the National Flood Insurance Program was a two-part operation. The Federal Insurance Administration (FIA) set policy, established premium rates, designated eligible areas, subsidized the insurance written, and reinsured insurers selling flood insurance. The National Flood Insurers Association (NFIA), a pool of private insurance companies, participated in the program and conducted routine activities, including selling insurance, collecting premiums, and settling claims. The Secretary of Housing and Urban Development (HUD) decided to convert the Program from private to a government operation as of January 1, 1978. GAO had to examine financial statements of both FIA and the Association, since Program financial information was reflected in the records of each body. GAO extended its scheduled 1977 audit of the Program to 1978 to coincide with the conversion to a government operation.

GAO qualified its opinion on the financial statements of HUD and NFIA because a final settlement of program accounts had not yet been reached between them; HUD estimated it would owe NFIA between $.5 million and $1.3 million. NFIA reported an estimated $5.4 million in losses but GAO could not determine the accuracy of the data because of the lack of data from HUD for evaluating the liability; this also affected about $2.6 million in the HUD equalization balance, representing the Department's share of the losses. NFIA statements were further qualified by uncertainty over its federal tax status. The financial statements for 1976 and 1977 were also included.