Flood Insurance

The National Flood Insurance Program, a key component of federal flood disaster relief, was always intended to be subsidized. Yet overall premium income for the program is not enough to build reserves that can cover anticipated flood losses. Forty-one percent of the program's policies are subsidized, and it is inevitable that claims losses and program expenses will at some point exceed program funds. In the event of a catastrophe, not even the Federal Emergency Management Agency's borrowing authority would be enough to cover potential claims. Raising premiums would improve the program's financial health but could lead to canceled policies, creating a future burden on other flood relief programs. On the other hand, greater program participation by property owners, although likely to cut the cost of other federal disaster assistance programs, would place a greater financial burden on the National Flood Insurance Program because of the need to cover additional subsidized properties.

GAO found that: (1) the flood insurance program is not actuarially sound because Congress authorized subsidized insurance rates for policies covering certain structures; (2) although current premium income is sufficient to cover recent flood losses, it is not sufficient to build reserves for future catastrophic flood losses; (3) increasing premiums for subsidized policies could cause some policyholders to cancel their flood insurance policies and have an adverse impact on other federal disaster-related relief costs; (4) expanding participation will increase the program's potential liability; (5) actuarial rates are based on actual risk exposures; and (6) subsidized insurance rates are set by administrative and legislative procedures.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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