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 
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The program faces the following challenges in operating the program 

effectively and protecting property owners from loss from floods. 

• Improving information on the program’s 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 program’s costs and 

does not provide information necessary to signal emerging problems, 

such as shortfalls in funds to cover the program’s 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 properties—properties 

with two or more losses in a 10-year period—add 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. 

Source: FEMA Photo Library.

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 

government’s 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. 

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. 

Highlights of GAO-03-606T, testimony for 

the Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, House of 

Representatives 

April 1, 2003

FLOOD INSURANCE 

Challenges Facing the National Flood 

Insurance Program 
Page 1 GAO-03-606T 

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 government’s 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, FEMA’s Inspector General and we 

have identified a number of concerns with the program’s 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 

program’s effectiveness. With the creation of the Department of Homeland 

Security (DHS) and the inclusion of FEMA’s 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 program’s 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 program’s use of cash-based budgeting may present 

misleading information on the program’s 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 program’s costs because the time 

between the extension of insurance, the receipt of premiums, the 
Page 2 GAO-03-606T 

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 program’s 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 

program’s 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 
Page 3 GAO-03-606T 

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. 

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 floodprone 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,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 program’s building standards 

that are aimed at minimizing flood losses. A key component of the 

program’s 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 program’s standards for new construction are 

saving about $1 billion annually in flood damage avoided. 

 1

Nearly 20,000 communities across the United States currently participate in the program, 

including Puerto Rico and the Virgin Islands. 

The National Flood 

Insurance Program 

Has Sought to 

Minimize FloodRelated Losses 
Page 4 GAO-03-606T 

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. 

FEMA’s Federal Insurance and Mitigation Administration has been 

responsible for managing the flood insurance program. However, the 

Homeland Security Act of 20022

 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. FEMA’s 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 DHS’s Emergency Preparedness and Response Directorate. 

 2

P.L. 107-296, Nov. 25, 2002. 
Page 5 GAO-03-606T 

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 program’s 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, 3

 we reported that cashbased budgeting has shortcomings for federal insurance programs. 

Specifically, its focus on single period cash flows can obscure the 

program’s cost to the government and thus may (1) distort the information 

presented to policymakers, (2) skew the recognition of the program’s 

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 

government’s 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 

 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). 

Cash-Basis Budgeting 

Does Not Provide All 

Needed Information 

on Flood Insurance 

Program’s Financial 

Condition 
Page 6 GAO-03-606T 

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 accrualbased 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 cashbased 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. 
Page 7 GAO-03-606T 

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.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 community’s FIRM was prepared.5

 For a singlefamily 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 program’s 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 2001,6

 increasing the premiums charged to 

subsidized policyholders to improve the program’s 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 

 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). 

Policy Subsidies and 

Payments for 

Repetitive Losses 

Contribute to 

Program Losses 
Page 8 GAO-03-606T 

elimination of the subsidy would result in an annual average premium of 

about $1,300 for pre-FIRM structures. This would likely cause some preFIRM property owners to cancel their flood insurance.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 program’s 

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. 

 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. 
Page 9 GAO-03-606T 

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 homeowner’s insurance does 

not cover flood damage or do not perceive the serious flood risk to which 

they are exposed. 

Participation in the 

Program May Be Low 
Page 10 GAO-03-606T 

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 floodprone 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.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 2002,9

 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 FEMA’s Office of Inspector General examined 

 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). 
Page 11 GAO-03-606T 

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 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 

program’s incentive structure to attract more participation in the program. 

• Conducting a remapping of the nation’s flood zones. Many of the nation’s 

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. 

The Administration 

and the Congress 

Have Proposed and 

Initiated Actions to 

Improve the Program 
Page 12 GAO-03-606T 

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 

program’s 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 

program’s 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 program’s 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 program’s 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 Subcommittee’s 

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 

program’s current cash-based budgeting for presenting the program’s 

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

current method of budgeting does not accurately portray the program’s 

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 FEMA’s 
Page 13 GAO-03-606T 

major management challenges and program risks,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 President’s 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 program’s objectives. 

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. 

 10U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Federal Emergency Management Agency, GAO-03-113 (Washington, D.C.: January 2003). 

Contacts and 

Acknowledgments 
Page 14 GAO-03-606T 

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-AIMD98-147. Washington, D.C.: April 23, 1998. 

Budget Issues: Budgeting for Federal Insurance Programs. GAO/AIMD97-16. Washington, D.C.: September 30, 1997. 

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