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Testimony:

Before the Subcommittee on Housing and Community Opportunity, Committee 

on Financial Services, House of Representatives:

United States General Accounting Office:

GAO:

Not to be Released before:

2:00 p.m. EST:

Tuesday, April 1, 2003:

Flood Insurance:

Challenges Facing the National Flood Insurance Program:

Statement for the Record by:

JayEtta Z. Hecker, Director

Physical Infrastructure:

GAO-03-606T:

GAO Highlights:

Highlights of GAO-03-606T, testimony for the Subcommittee on Housing 

and Community Opportunity, Committee on Financial Services, House of 

Representatives

Why GAO Did This Study:

Floods have been, and continue to be, the most destructive natural 

hazard in terms of economic loss to the nation. The National Flood 

Insurance Program is a key component of the federal governments 

efforts to minimize the damage and financial impact of floods. The 

program identifies flood-prone areas of the country, makes flood 

insurance available in the nearly 20,000 communities that participate 

in the program, and encourages flood-plain management efforts. Since 

its inception in 1969, the National Flood Insurance has provided $12 

billion in insurance claims to owners of flood-damaged properties, and 

its building standards are estimated to save $1 billion annually. The 

program has been managed by the Federal Emergency Management Agency, 

but along with other activities of the agency, it was recently placed 

into the Department of Homeland Security. GAO has issued a number of 

reports on the flood insurance program and was asked to discuss the 

current challenges to the widespread success of the program.

What GAO Found:

The program faces the following challenges in operating the program 

effectively and protecting property owners from loss from floods.

* Improving information on the programs financial condition. Cash-

based budgeting, which focuses on the amount of funds that go in and 

out of a program in a fiscal year, obscures the programs costs and 

does not provide information necessary to signal emerging problems, 

such as shortfalls in funds to cover the programs risk exposure. 

Accrual-based budgeting better matches revenues and expenses, 

recognizes the risk assumed by the government, and has the potential to 

overcome the deficiencies of cash-based budgeting. 

* Reducing losses to the program resulting from policy subsidies and 

repetitive loss properties. The program has lost money and is not 

actuarially sound because about 29 percent of the policies in force are 

subsidized but appropriations are not provided to cover the subsidies. 

Owners of structures built before the flood zone was included in the 

program pay reduced premiums that represent only about 35-40 percent of 

the true risk premium. Further, repetitive loss propertiesproperties 

with two or more losses in a 10-year periodadd to program losses as 

they represent 38 percent of claims losses but account for 2 percent of 

insured properties.

* Increasing property owner participation in the program. The 

administration has estimated that less than 50 percent of eligible 

properties in flood plains participate in the program. Additionally, 

even when the purchase of insurance is mandatory, the extent of 

noncompliance with the mandatory purchase requirement is unknown and 

remains a concern.

Actions have been initiated or proposed by the administration or in the 

Congress to address some of the challenges. However, the affect of some 

actions on the program is not clear. For example, reducing subsidies 

may cause some policyholders to cancel their policies, reducing program 

participation and leaving them vulnerable to financial loss from 

floods. Further, placement of the program within the Department of 

Homeland Security has the potential to decrease the attention, 

visibility, and support the program receives.

www.gao.gov/cgi-bin/getrpt?GAO-03-606T.

To view the full testimony, click on the link above. For more 

information, contact JayEtta Z. Hecker, (202) 512-2834, 

Heckerj@gao.gov.

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to submit this statement for the record on 

the National Flood Insurance Program and challenges to its success. 

Floods have been, and continue to be, the most destructive natural 

hazard in terms of economic loss to the nation. The flood insurance 

program, which has been administered by the Federal Emergency 

Management Agency (FEMA), has been a key component of the federal 

governments efforts to minimize the impact of floods and to provide 

flood-related disaster relief. For example, the program has been 

credited by the administration with saving a billion dollars annually 

by improving flood plain management and setting building standards--

such as one to elevate properties--that have reduced potential losses. 

Additionally, the approximately $12 billion paid in insurance claims 

from 1969 through 2002 to policyholders has been funded primarily by 

policyholders premiums, thus saving the federal government from paying 

all damage-related expenses in the aftermath of floods.

Nevertheless, the flood insurance program faces challenges. In reports 

published within the last few years, FEMAs Inspector General and we 

have identified a number of concerns with the programs financial 

viability and with the extent to which flood insurance policies have 

been purchased for structures in flood-prone areas. In addition, the 

administration noted in its fiscal year 2004 budget request that the 

program is only moderately effective; it and the Congress have proposed 

measures to improve the programs effectiveness. With the creation of 

the Department of Homeland Security (DHS) and the inclusion of FEMAs 

functions within it, the program--along with its associated problems 

and improvement measures--has now become the responsibility of the new 

department.

My statement today is based primarily on our past work and on 

preliminary results from ongoing work that we are conducting for the 

Subcommittee examining flood zone remapping efforts. I will provide a 

perspective on (1) the programs presentation of financial information, 

(2) the major causes of losses in the program, (3) the extent of 

property owner participation in the program, and (4) recent actions 

taken or proposed to improve the program. In summary:

* The flood insurance programs use of cash-based budgeting may present 

misleading information on the programs financial condition. Cash-based 

budgeting, which focuses on the amount of funds into and out of the 

program in a fiscal year, can obscure the programs costs because the 

time between the extension of insurance, the receipt of premiums, the 

occurrence of insured events, and payment of claims may extend over 

several fiscal years. Further, this form of budgeting may not provide 

the information necessary to signal emerging problems, such as 

shortfalls in funds to cover the programs risk exposure. The use of 

accrual-based budgeting--which, among other things, better matches 

revenues and expenses and recognizes the liability for future insurance 

claim payments--has the potential to overcome a number of the 

deficiencies in cash-based budgeting.

:

* Subsidies on certain policies and so-called repetitive loss 

properties--properties that have experienced two or more losses greater 

than $1,000 in a 10-year period--have been the principal causes of the 

flood insurance programs long-term losses. About 29 percent of all 

policies in force are subsidized, and on average the premiums for these 

policies are only about 35-40 percent of--and about $500 million 

annually less than--the true risk premium for those properties. 

Additionally, about 38 percent of all program claims have been the 

result of repetitive loss properties, at a cost of about $200 million 

annually.

:

* Flood insurance program participation--the percentage of structures 

in designated flood zones that are insured--may be low, resulting in 

many property owners being at risk of financial loss due to flooding. 

The administration estimates that less than half of the eligible 

properties in flood plains participate in the program. Further, even 

when the purchase of flood insurance is mandatory--properties in flood 

zones with mortgages from federally regulated lenders are required to 

have flood insurance--the extent of noncompliance with this requirement 

is unknown and remains a concern.

:

* Recent actions have been taken or proposed by the administration and 

the Congress that may affect the program. These include actions to 

eliminate the premium subsidy on properties that are second homes or 

vacation properties, to phase out coverage or begin charging full and 

actuarially based rates for repetitive loss properties, and to 

undertake an expanded program to update flood maps upon which the 

program bases its insurance rates and mandatory purchase requirements. 

While these actions will address some of the challenges in the program, 

certain actions may have adverse implications--for example, increasing 

premiums to subsidized policyholders may cause some to cancel their 

insurance and remapping flood zones may bring into the program more 

properties that could be subsidized. Moreover, action has not been 

taken to move the program to accrual-based budgeting. Finally, the 

placement of the program--which is not directly security related--into 

the new Department of Homeland Security may affect the amount of 

attention the program receives as it pursues nonsecurity-related goals 

in a department that is under tremendous pressure to succeed in its 

primary mission of securing the homeland.

Before I discuss these issues in greater detail, I would like to 

briefly explain the National Flood Insurance Program and its importance 

to the federal flood management effort.

The National Flood Insurance Program Has Sought to Minimize Flood-

Related Losses:

In 1968, in recognition of the increasing amount of flood damage, the 

lack of readily available insurance for property owners, and the cost 

to the taxpayer for flood-related disaster relief, the Congress enacted 

the National Flood Insurance Act (P.L. 90-448) that created the 

National Flood Insurance Program. Since its inception, the program has 

sought to minimize flood-related property losses by making flood 

insurance available on reasonable terms and encouraging its purchase by 

people who need flood insurance protection--particularly those living 

in flood-prone areas known as special flood hazard areas. The program 

identifies flood-prone areas in the country, makes flood insurance 

available to property owners in communities that participate in the 

program,[Footnote 1] and encourages floodplain management efforts to 

mitigate flood hazards. The program has paid about $12 billion in 

insurance claims, primarily from policyholder premiums that otherwise 

would, to some extent, have increased taxpayer-funded disaster relief.

Under the program, flood insurance rate maps (FIRM) have been prepared 

to identify special flood hazard areas--also known as 100-year 

floodplains--that have a 1-percent or greater chance of experiencing 

flooding in any given year. For a community to participate in the 

program, any structures built within a special flood hazard area after 

the FIRM was completed must be built according to the programs 

building standards that are aimed at minimizing flood losses. A key 

component of the programs building standards that must be followed by 

participating communities is a requirement that the lowest floor of the 

structure be elevated to or above the base flood level--the highest 

elevation at which there is a 1-percent chance of flooding in a given 

year. The administration has estimated that the programs standards for 

new construction are saving about $1 billion annually in flood damage 

avoided.

When the program was created, the purchase of flood insurance was 

voluntary. To increase the impact of the program, however, the Congress 

amended the original law in 1973 and again in 1994 to require the 

purchase of flood insurance in certain circumstances. Flood insurance 

was required for structures in special flood hazard areas of 

communities participating in the program if (1) any federal loans or 

grants were used to acquire or build the structures or (2) the 

structures are secured by mortgage loans made by lending institutions 

that are regulated by the federal government. Owners of properties with 

no mortgages or properties with mortgages held by unregulated lenders 

were not, and still are not, required to purchase flood insurance, even 

if the properties are in special flood hazard areas.

The National Flood Insurance Reform Act of 1994 that amended the 

program also reinforced the objective of using insurance as the 

preferred mechanism for disaster assistance. The act expanded the role 

of federal agency lenders and regulators in enforcing the mandatory 

flood insurance purchase requirements. It prohibited further flood 

disaster assistance for any property where flood insurance was not 

maintained even though it was mandated as a condition for receiving 

prior disaster assistance. Regarding the prohibition on further flood 

disaster assistance, the act prohibits borrowers who have received 

certain disaster assistance, and then failed to obtain flood insurance 

coverage, from receiving future disaster aid.

FEMAs Federal Insurance and Mitigation Administration has been 

responsible for managing the flood insurance program. However, the 

Homeland Security Act of 2002[Footnote 2] transferred this 

responsibility to the Department of Homeland Security (DHS). As part of 

the largest reorganization of the federal government in over 50 years, 

the legislation combined about 170,000 federal employees, 22 agencies, 

and various missions--some that have not traditionally been considered 

security related--into the new department. FEMAs responsibilities, 

including the flood insurance program, were placed in their entirety 

into DHS, effective March 1, 2003. Responsibility for the flood 

insurance program now resides in DHSs Emergency Preparedness and 

Response Directorate.

Cash-Basis Budgeting Does Not Provide All Needed Information on Flood 

Insurance Programs Financial Condition:

Historically, federal government programs, including the National Flood 

Insurance Program, report income and expenditures on a cash basis--

income is recorded when received and expenditures are recorded when 

paid. Over the years, the annual reporting of the programs premium 

revenues and its claims losses and expenses has shown wide fluctuations 

in cash-based operating net income or losses. For example, for fiscal 

year 2002, the program had a net income of $755 million, but in the 

previous year it had a net loss of $518 million. For the life of the 

program, the program has shown a net loss of $531 million. The program 

has, on numerous occasions, borrowed from the U.S. Treasury to fund 

claims losses.

This cash-based budgeting, although useful for many government 

programs, may present misleading financial information on the flood 

insurance program. In 1997 and again in 1998, [Footnote 3] we reported 

that cash-based budgeting has shortcomings for federal insurance 

programs. Specifically, its focus on single period cash flows can 

obscure the programs cost to the government and thus may (1) distort 

the information presented to policymakers, (2) skew the recognition of 

the programs economic impact, and (3) cause fluctuations in the 

deficit unrelated to long-term fiscal balance. The focus on annual cash 

flows--the amounts of funds into and out of a program during a fiscal 

year--may not reflect the governments cost because the time between 

the extension of the insurance, the receipt of premiums, the occurrence 

of an insured event, and the payment of claims may extend over several 

fiscal years.

For the flood insurance program, cash-based budgeting may not provide 

the information necessary to signal emerging problems, make adequate 

cost comparisons, or control costs. For example, under its current 

practices, the program provides subsidized policies without explicitly 

recognizing the potential cost to the government. Under current policy, 

the Congress has authorized subsidies to be provided to a significant 

portion of the total policies in force, without providing annual 

appropriations to cover the potential cost of these subsidies. The 

program, as designed, does not charge a premium sufficient to cover its 

multiyear risk exposure. As a result, not only is the program 

actuarially unsound, but also the size of the shortfall is unknown. 

This is a concern that the administration has recognized and identified 

as a financial challenge to the flood insurance program.

The use of accrual-based budgeting for the flood insurance program has 

the potential to overcome a number of the deficiencies in cash-based 

budgeting. Accrual-based budgeting (1) recognizes transactions or 

events when they occur, regardless of cash flows; (2) matches revenues 

and expenses whenever it is reasonable and practicable to do so; (3) 

recognizes the cost for future insurance claim payments when the 

insurance is extended; and (4) provides a mechanism for establishing 

reserves to pay those costs. In short, because of the time lag between 

the extension of an insurance commitment, the collection of premiums, 

and the payment of claims, measuring the financial condition of the 

flood insurance program by comparing annual premium income and losses 

creates a budgetary distortion. That distortion, together with the 

misinformation it conveys, could be reduced or eliminated by accrual-

based budgeting.

In our 1997 report, we pointed out that developing accrual-based 

budgets would be challenging, requiring the development of models to 

generate reasonably reliable cost estimates of the risks assumed by 

federal insurance programs. Nevertheless, the potential benefits to the 

flood insurance program, as well as other federal insurance programs, 

warrant the effort to develop these risk-assumed cost estimates. We 

suggested that the Congress consider encouraging the development and 

subsequent reporting of annual risk-assumed cost estimates for all 

federal insurance programs. At this time, the flood insurance program 

is still using cash-based budgeting for reporting its financial 

performance. We continue to believe that the development of accrual-

based budgets for the flood insurance program would be a valuable step 

in developing a more comprehensive approach for reporting on the 

operations and real costs of this program.

Policy Subsidies and Payments for Repetitive Losses Contribute to 

Program Losses:

The National Flood Insurance Program has raised financial concerns 

because, over the years, it has lost money and at times has had to 

borrow funds from the U.S. Treasury.[Footnote 4] Two reasons--policy 

subsidies and payments for repetitive losses--have been consistently 

identified in our past work and by FEMA to explain financial challenges 

in the National Flood Insurance Program. First, the flood insurance 

program has sustained losses, and is not actuarially sound, largely 

because many policies in the program are subsidized. The Congress 

authorized the program to make subsidized flood insurance rates 

available to owners of structures built before a communitys FIRM was 

prepared.[Footnote 5] For a single-family pre-FIRM property, subsidized 

rates are available for the first $35,000 of coverage, although any 

insurance coverage above that amount must be purchased at actuarial 

rates. These pre-FIRM structures are generally more likely to sustain 

flood damage than later structures because they were not built 

according to the programs building standards. The average annual 

premium for a subsidized policy is $637, representing about 35-40 

percent of the true risk premium for these properties.

According to flood insurance program officials, about 29 percent of the 

4.4 million policies in force are currently subsidized. Although this 

percentage of subsidized policies is substantially lower than it was in 

the past, it still results in a significant reduction in revenues to 

the program. Program officials estimate that the total premium income 

from subsidized policyholders is currently about $500 million per year 

less than it would be if these rates had been actuarially based and 

participation remained the same. Originally, funds to support 

subsidized premiums were appropriated for the flood insurance program; 

however, since the mid-1980s no funds have been appropriated, and the 

losses resulting from subsidized policies must be borne by the program.

As we reported in July 2001,[Footnote 6] increasing the premiums 

charged to subsidized policyholders to improve the programs financial 

health could have an adverse impact. Elimination of the subsidy on pre-

FIRM structures would cause rates on these properties to rise, on 

average, to more than twice the current premium rates. Program 

officials estimate that elimination of the subsidy would result in an 

annual average premium of about $1,300 for pre-FIRM structures. This 

would likely cause some pre-FIRM property owners to cancel their flood 

insurance.[Footnote 7] Cancellation of policies on these structures--

which are more likely to suffer flood loss--would in turn increase the 

likelihood of the federal government having to pay increased costs for 

flood-related disaster assistance to these properties. The effect on 

the total federal disaster assistance costs of phasing out subsidized 

rates would depend on the number of policyholders who would cancel 

their policies and the extent to which future flood disasters affecting 

those properties occurred. Thus, it is difficult to estimate whether 

the increased costs of federal disaster relief programs would be less 

than, or more than, the cost of the programs current subsidy.

In addition to revenue lost because of subsidized policies, significant 

costs to the program result from repetitive loss properties. According 

to FEMA, about 38 percent of all claims historically, and about $200 

million annually, represent repetitive losses--properties having two or 

more losses greater than $1,000 within a 10-year period. About 45,000 

buildings currently insured under the program have been flooded on more 

than one occasion and have received flood insurance claims payments of 

$1,000 or more for each loss. Over the years, the total cost of these 

multiple-loss properties to the program has been about $3.8 billion.

Although repetitive loss properties represent about one-third of the 

historical claims, these properties make up a small percentage of all 

program policies. A 1998 study by the National Wildlife Federation 

noted that repetitive loss properties represented only 2 percent of all 

properties insured by the program, but they tended to have damage 

claims that exceeded the value of the insured structure and most were 

concentrated in special flood hazard areas. For example, nearly 1 out 

of every 10 repetitive loss homes has had cumulative flood loss claims 

that exceeded the value of the house. Furthermore, over half of all 

nationwide repetitive loss property insurance payments had been made in 

Louisiana and Texas. About 15 states accounted for 90 percent of the 

total payments made for repetitive loss properties.

Participation in the Program May Be Low:

Not only does the National Flood Insurance Program face challenges with 

its financial condition, but also in achieving one of the purposes for 

which it was created--to make flood insurance the mechanism for 

property owners to cover flood losses. Participation rates--the 

percentage of structures in special flood hazard areas that are 

insured--provide a measure to indicate the degree to which the owners 

of properties vulnerable to flooding are protected from financial loss 

through insurance, the financial risk to the government from flood-

related disaster assistance is decreasing, and the program is obtaining 

high levels of premium income. The rate of participation in the 

program, however, may be low. In its fiscal year 2004 budget request, 

the administration noted that less than half of the eligible properties 

in flood areas participate in the program, a participation rate that 

was significantly lower than the nearly 90 percent participation rate 

for wind and hurricane insurance in at-risk areas.

No comprehensive data are available to measure nationwide participation 

rates. However, various studies have identified instances where low 

levels of participation existed. For example:

* A 1999 DeKalb County, Georgia, participation study determined that of 

over 17,000 structures in the special flood hazard areas, about 3,100-

-18 percent--had flood insurance.

:

* A 1999 FEMA post-disaster study of 11 counties in Vermont found that 

16 percent of homes sampled in the special flood hazard areas had flood 

insurance.

:

* A 1999 study by the Strategic Advocacy Group of two counties in 

Kentucky that had experienced flood disasters found that flood 

insurance was in force for 52 percent of homes mortgaged since 1994 and 

was in force for 30 percent of homes mortgaged before 1994.

:

* An August 2000 FEMA Inspector General study that noted that 

statistics from North Carolina showed that of about 150,000 structures 

in special flood hazard areas, 33 percent were covered by flood 

insurance.

:

FEMA estimates that one-half to two-thirds of those structures in 

special flood hazard areas do not have flood insurance coverage, 

because the uninsured owners either are not aware that homeowners 

insurance does not cover flood damage or do not perceive the serious 

flood risk to which they are exposed.

One area of flood insurance participation that should not be of 

concern, yet is, are those properties for which the purchase of flood 

insurance is mandatory. Flood insurance is required for properties 

located in flood-prone areas of participating communities for the life 

of mortgage loans made or held by federally regulated lending 

institutions, guaranteed by federal agencies, or purchased by 

government-sponsored enterprises.[Footnote 8] No definitive data exist 

on the number of mortgages meeting these criteria; however, according 

to program officials, most mortgages made in the country meet the 

criteria, and for those in a special flood hazard area, the property 

owners would have to purchase and maintain flood insurance over the 

life of the loan.

The level of noncompliance with this mandatory purchase requirement is 

unknown. As we reported in June 2002,[Footnote 9] federal banking 

regulators and government-sponsored enterprises believe noncompliance 

is very low on the basis of their bank examinations and compliance 

reviews. Conversely, flood insurance program officials view 

noncompliance with the mandatory purchase requirement to be 

significant, based on aggregate statistics and site-specific studies 

that indicate that noncompliance is occurring. Neither side, however, 

is able to substantiate its differing claim with statistically sound 

data that provide a nationwide perspective on noncompliance.

Data we collected and analyzed for our June 2002 report help address 

some concerns with the issue of noncompliance, but the issue remains 

unresolved. We analyzed available flood insurance, mortgage purchase, 

and flood zone data to determine whether noncompliance was a concern at 

the time of loan origination. Our analysis of mortgage and insurance 

data for 471 highly flood-prone areas in 17 states showed that, for 

most areas, more new insurance policies were purchased than mortgages 

issued, which suggests noncompliance was not a problem in those areas 

at the time of loan origination.

However, data to determine whether insurance is retained over the life 

of loans are unavailable, and this issue remains unresolved. There are 

indications that some level of noncompliance exists. For example, an 

August 2000 study by FEMAs Office of Inspector General examined 

noncompliance for 4,195 residences in coastal areas of 10 states and 

found that 416--10 percent--were required to have flood insurance but 

did not. Flood insurance program officials continue to be concerned 

with required insurance policy retention and are working with federal 

banking regulatory organizations and government-sponsored enterprises 

to identify actions that can be taken to better ensure borrowers are 

required to renew flood insurance policies annually.

The Administration and the Congress Have Proposed and Initiated Actions 

to Improve the Program:

The administration and the Congress have recognized the challenges 

facing the flood insurance program and have proposed actions to improve 

it. These actions include the following:

* Reducing or eliminating subsidies for certain properties. In the 

fiscal year 2004 budget request, the administration proposed ending 

premium subsidies for second homes and vacation properties. According 

to flood insurance program officials, this change would affect 30 

percent of the properties currently receiving subsidized premiums and 

would increase revenue to the program by $200 million annually. 

Additionally, program officials plan to increase the rates on all 

subsidized properties by about 2 percent in May 2003.

:

* Changing premium rates for repetitive loss properties. Two bills--

H.R. 253 and H.R. 670--have been introduced to amend the National Flood 

Insurance Act of 1968 that would, among other things, change the 

premiums for repetitive loss properties. Under these bills, premiums 

charged for such properties would reflect actuarially based rates if 

the property owner has refused a buyout, elevation, or other flood 

mitigation measure from the flood insurance program or FEMA.

:

* Improving efforts to increase program participation. The 

administration has identified three strategies it intends to use to 

increase the number of policies in force: expanded marketing, program 

simplification, and increasing lender compliance. With regard to lender 

compliance, DHS plans to conduct an education effort with financial 

regulators about the mandatory flood insurance requirements for 

properties with mortgages from federally regulated lenders. 

Additionally, DHS plans to evaluate the programs incentive structure 

to attract more participation in the program.

:

* Conducting a remapping of the nations flood zones. Many of the 

nations FIRMs are old and outdated, and for some communities FIRMs 

have never been developed. The administration has initiated a 

multiyear, $1 billion effort to map all flood zones in the country and 

reduce the average age of FIRMs from 13 to 6 years.

While we have not fully analyzed these actions, on the basis of a 

preliminary assessment, they appear to address some of the challenges 

to the flood insurance program, including two of the key challenges--

the programs financial losses and the perceived low level of 

participation in the program by property owners in flood-prone areas. 

Reducing subsidies and repetitive loss properties has the potential to 

help improve the programs financial condition, and increasing program 

participation would better protect those living in at-risk areas and 

potentially lower federal cost for disaster assistance after flood 

events. However, as mentioned earlier, actions such as increasing 

premiums to subsidized policyholders could cause some of these 

policyholders to cancel their flood insurance, resulting in lower 

participation rates and possibly raising federal disaster assistance 

costs.

The remapping of flood zones could potentially affect both 

participation rates and the programs financial condition. Remapping 

could identify additional properties in special flood hazard areas that 

do not participate in the program and for which DHS will need to 

undertake efforts to encourage their participation in the program. 

Further, these additional properties may not meet the programs 

building standards since they were built before the FIRM that included 

properties in the special flood hazard area was developed. This could 

cause the program to offer subsidized insurance rates for these 

properties, potentially exacerbating the losses to the program 

resulting from subsidized properties. At the Subcommittees request, we 

have begun a review to examine the remapping effort and its effects, 

and will report on the results later this year.

None of these proposals, however, addresses the need to move the 

programs current cash-based budgeting for presenting the programs 

financial condition to accrual-based budgeting. As we noted earlier, 

the current method of budgeting does not accurately portray the 

programs financial condition and does not allow the program to create 

reserves to cover catastrophic losses and be actuarially sound. If a 

catastrophic loss occurs, this may place the program in the position of 

again having to borrow substantial sums from the Treasury in order to 

satisfy all claims losses.

One additional challenge facing the flood insurance program relates to 

its placement in DHS. As we discussed in a January 2003 report on 

FEMAs major management challenges and program risks,[Footnote 10] the 

placement in DHS of FEMA and programs such as flood insurance that have 

missions not directly related to security represents a significantly 

changed environment under which such programs will be conducted in the 

future. DHS is under tremendous pressure to succeed in its primary 

mission of securing the homeland, and the possibility exists that the 

flood insurance program may not receive adequate attention, visibility, 

and support as part of the department. For the flood insurance program 

to be fully successful, it will be important for DHS management to 

ensure that sufficient management capacity and accountability are 

provided to achieve the objectives of the program. In this regard, the 

Presidents fiscal year 2004 budget request notes that additional 

reforms to the flood insurance program are being deferred until the 

program is incorporated into DHS. This incorporation has now occurred, 

and congressional oversight--such as through hearings like this one 

today--should help to ensure that DHS maintains appropriate focus on 

managing and improving the flood insurance program and championing the 

reforms necessary to achieve the programs objectives.

Contacts and Acknowledgments:

For further information on this testimony, please contact JayEtta Z. 

Hecker at (202) 512-2834 or William O. Jenkins at (202) 512-8777. 

Individuals making key contributions to this testimony included 

Christine E. Bonham, Lawrence D. Cluff, Kirk Kiester, John T. McGrail, 

and John R. Schulze.

[End of section]

Related GAO Products:

Major Management Challenges and Program Risks: Federal Emergency 

Management Agency. GAO-03-113. Washington, D.C.: January 2003.

Flood Insurance: Extent of Noncompliance with Purchase Requirements Is 

Unknown. GAO-02-396. Washington, D.C.: June 21, 2002.

Flood Insurance: Information on the Financial Condition of the National 

Flood Insurance Program. GAO-01-992T. Washington, D.C.: July 19, 2001.

Flood Insurance: Emerging Opportunity to Better Measure Certain Results 

of the National Flood Insurance Program. GAO-01-736T. Washington, D.C.: 

May 16, 2001.

Budget Issues: Budgeting for Federal Insurance Programs. GAO/T-AIMD-98-

147. Washington, D.C.: April 23, 1998.

Budget Issues: Budgeting for Federal Insurance Programs. GAO/AIMD-97-

16. Washington, D.C.: September 30, 1997.

FOOTNOTES

[1] Nearly 20,000 communities across the United States currently 

participate in the program, including Puerto Rico and the Virgin 

Islands.

[2] P.L. 107-296, Nov. 25, 2002.

[3] U.S. General Accounting Office, Budget Issues: Budgeting for 

Federal Insurance Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 

1997) and Budget Issues: Budgeting for Federal Insurance Programs, GAO/

T-AIMD-98-147 (Washington, D.C.: Apr. 23, 1998).

[4] At this time, all funds borrowed from the U.S. Treasury have been 

repaid.

[5] Owners of post-FIRM structures pay actuarial rates for flood 

insurance.

[6] U.S. General Accounting Office, Flood Insurance: Information on the 

Financial Condition of the National Flood Insurance Program, 

GAO-01-992T (Washington, D.C.: July 19, 2001).

[7] Owners of pre-FIRM properties required to maintain flood insurance 

(i.e. properties with mortgages made or held by federally regulated 

lending institutions) would not be able to cancel their policies.

[8] A government-sponsored enterprise is a privately owned, federally 

chartered corporation that serves a public purpose.

[9] U.S. General Accounting Office, Flood Insurance: Extent of 

Noncompliance with Purchase Requirements Is Unknown, GAO-02-396 

(Washington, D.C.: June 21, 2002).

[10] U.S. General Accounting Office, Major Management Challenges and 

Program Risks: Federal Emergency Management Agency, GAO-03-113 

(Washington, D.C.: January 2003).