Flood Insurance

Floods continue to be the most destructive natural hazard in terms of economic losses to the nation. The national flood insurance program run by the Federal Emergency Management Agency (FEMA) paid about $7 billion in insurance claims between 1986 and 1998, primarily from premiums collected from program policyholders. Claims paid by the program have risen in recent years because of a series of storms, including the 1997 floods in the Red River Valley that devastated Minnesota and the Dakotas. These claims have drained the program's cash reserves. This testimony discusses the (1) financial results of the program's operations since fiscal year 1993, (2) major factors contributing to the financial difficulties faced by the program, and (3) steps taken or planned by the Federal Insurance Administration that may affect the program's financial health.

GAO noted that: (1) in March 1994, GAO reported that while sufficient to cover flood losses experienced at that time, overall income from the program's premiums was not sufficient to build reserves to meet future expected flood losses; (2) therefore, GAO concluded that it was inevitable that losses from claims and the program's expenses would exceed the funds available to the program in some years; (3) in this regard, during the 6-year period from fiscal years 1993 through 1998, the program experienced losses from floods that were greater than the premiums collected from policyholders; (4) cumulative operating losses to the program totalled about $1.6 billion during the 6-year period; (5) to finance these losses, the Federal Insurance Administration has periodically borrowed from the U.S. Treasury; (6) about $738 million was owed by the program to the U.S. Treasury as of May 31, 1999; (7) the program is not actuarially sound because it does not collect sufficient premium income to build reserves to meet the long-term future expected flood losses; (8) the cost of multiple-loss properties to the program is large--about 36 percent of all claims paid historically, currently about $200 million annually; (9) the program is not actuarially sound because Congress authorized subsidized insurance rates to be made available for policies covering certain structures to encourage communities to join the program; (10) because about 30 percent of the policies were subsidized as of 1998, overall premium income is not sufficient to build reserves to meet future expected flood losses; (11) the Federal Insurance Administration's annual target for the program's overall premium income is at least the amount of loss and expenses in an average historical loss year, which approximates the average annual loss experienced under the program since 1978; (12) since no catastrophic loss years have occurred since 1978, collecting premiums that are based on an average historical loss year does not enable the program to build sufficient reserves to cover a possible catastrophic loss year in the future; (13) because the program does not collect sufficient premium income to build reserves to meet the long-term future expected flood losses, including catastrophic losses, it is inevitable that losses from claims and the program's expenses will exceed the funds available to the program in some years; and (14) the Federal Insurance Administration has studies under way and has taken other actions that may affect the program's financial health.