United States Government Accountability Office

GAO Testimony 

Before the Chairman, Committee on 

Banking, Housing and Urban Affairs, 

 U.S. Senate

FEDERAL EMERGENCY 

MANAGEMENT AGENCY 

Challenges for the National 

Flood Insurance Program 

Statement of David M. Walker, Comptroller General of the 

United States 

For Release on Delivery

Expected at 10:00 a.m. EST 

Wednesday, January 25, 2006 

 

GAO-06-335T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

January 25, 2006

FEDERAL EMERGENCY MANAGEMENT 

AGENCY 

Challenges for the National Flood 

Insurance Program 

Highlights of GAO-06-335T, a testimony to 

the Chairman, Committee on Banking, 

Housing and Urban Affairs, U.S. Senate 

The NFIP, by design, is not actuarially sound. The program does not collect 

sufficient premium income to build reserves to meet long-term future

expected flood losses. In November 2005, FEMA’s authority to borrow from 

the Treasury was increased from $1.5 billion to $18.5 billion through fiscal 

year 2008 to help pay claims from the 2005 hurricane season. It is highly 

unlikely that the NFIP as presently funded could generate sufficient 

revenues to repay a debt of this size. 

One reason the NFIP is not actuarially sound is because a number of its 

policies on dwellings that were built before flood plain management 

regulations were established in their communities are subsidized and pay 

premiums of 35-40 percent of the true risk premium. In January 2006, FEMA 

estimated an annual shortfall in premium income of $750 million because of 

such policy subsidies. Some subsidized properties, called repetitive loss 

properties, also suffer repetitive flood losses, which accounted for about 

$4.6 billion in claims payments from 1978 to March 2004. We need to analyze

the progress made to reduce the inventory of subsidized repetitive-loss 

properties and determine whether additional regulatory or congressional 

action is needed. 

A challenge for FEMA is to expand the NFIP policyholder base by enforcing 

mandatory purchase requirements and encouraging voluntary purchase by 

homeowners who live in areas at lower risk of flooding. The extent of 

noncompliance with current mandatory purchase requirements for property 

owners in special flood hazard areas is unknown. There has been some 

congressional interest in the feasibility of expanding mandatory purchase 

requirements beyond the current special high-risk areas, however, there are 

a number of difficulties to assessing the impacts, effectiveness, and 

feasibility of such a change in the structure of the NFIP, as well as concerns

related to enforcing and assessing compliance. For example, more precise

flood mapping of areas outside the current high-risk areas would be required 

to accurately identify affected property owners. FEMA and its private 

insurance partners also have efforts underway to increase NFIP

participation by marketing policies in areas where purchase is not 

mandatory. 

 

FEMA has not yet fully implemented provisions of the Flood Insurance 

Reform Act of 2004 requiring the agency to develop new materials to explain 

coverage and the claims process to policyholders, establish an appeals 

process for claimants, and provide insurance agent education and training 

requirements. The statutory deadline for implementing these changes was

December 30, 2004, and, as of January 2006, FEMA had not developed 

documented plans with milestones for meeting the provisions of the act, as

recommended by GAO. 

The National Flood Insurance 

Program (NFIP), established in 

1968, provides property owners 

with some insurance coverage for 

flood damage. The Federal

Emergency Management Agency

(FEMA) within the Department of

Homeland Security is responsible 

for managing the NFIP. 

The unprecedented magnitude and 

severity of the flood losses from

hurricanes in 2005 challenged the

NFIP to process a record number 

of claims. These storms also 

illustrated the extent to which the

federal government has exposure 

for claims coverage in catastrophic

loss years. FEMA estimates that 

Hurricanes Katrina, Rita, and 

Wilma will generate claims and 

payments of about $23 billion—far 

surpassing the total claims paid in 

the entire history of the NFIP. 

This testimony provides

information from past and ongoing 

GAO work on issues including: (1)

NFIP’s financial structure; (2) the 

impact of properties with repetitive

flood losses on NFIP’s resources; 

(3) proposals to increase the 

number of policies in force; and (4) 

the status of past GAO 

recommendations. 

What GAO Recommends

In past work, GAO recommended 

that FEMA strengthen its oversight

of the NFIP and develop plans to

implement requirements of the 

Flood Insurance Reform Act of

2004. FEMA disagreed with those

recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-06-335T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William O.

Jenkins, Jr., at (202) 512-8777 or

jenkinswoj@gao.gov. 
Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to participate in today’s hearing on the future

of the National Flood Insurance Program (NFIP) to discuss issues related 

to the future financial stability of the NFIP and recommendations we have 

made for improvements to the management and oversight of the program. 

The NFIP combines property insurance for flood victims, mapping to 

identify the boundaries of the areas at highest risk of flooding, and 

incentives for communities to adopt and enforce floodplain management 

regulations and building standards to reduce future flood damage. The 

effective integration of all three of these elements is needed for the NFIP 

to achieve its goals of: 

• providing property flood insurance coverage for a high proportion of 

property owners who would benefit from such coverage; 

• reducing, through this insurance coverage, taxpayer-funded disaster 

assistance for property damage when flooding strikes; and 

• reducing property flood damage through flood plain management 

based on accurate, useful flood maps and the enforcement of building 

standards (such as elevating structures). 

Hurricanes Katrina and Rita represent a tragedy for hundreds of thousands 

of our fellow Americans. Their lives have been turned upside down, and 

many who would have benefited from flood insurance did not have it. 

This tragedy offers an opportunity to fundamentally rethink the flood 

insurance program and how it can best be structured to provide financial 

protection from flooding for those who need and would benefit from flood 

insurance while enhancing the program’s financial foundation. 

The Federal Emergency Management Agency (FEMA) within the 

Department of Homeland Security (DHS) is responsible for the oversight

and management of the program.1

 Under the program, the federal 

government assumes the liability for the insurance coverage and sets rates 

and coverage limitations, among other responsibilities. 

Floods are the most common and destructive natural disaster in the 

United States. According to NFIP statistics, 90 percent of all natural 

disasters in the United States involve flooding. However, flooding is 

 1

In March 2003, FEMA and its approximately 2,500 staff became part of DHS. FEMA 

retained its name and individual identity within the department. 

Page 1 GAO-06-335T 
generally excluded from homeowner policies that typically cover damage 

from other losses, such as wind, fire, and theft. Because of the 

catastrophic nature of flooding and the inability to adequately predict 

flood risks, private insurance companies have largely been unwilling to 

underwrite and bear the risk of flood insurance.

The NFIP was established by the National Flood Insurance Act of 19682

 to 

provide policyholders with some insurance coverage for flood damage, as

an alternative to disaster assistance, and to try to reduce the escalating

costs of repairing flood damage. In creating the NFIP, Congress found that 

a flood insurance program with “large-scale participation of the Federal

Government and carried out to the maximum extent practicable by the 

private insurance industry is feasible and can be initiated.”3

 In keeping 

with this purpose, FEMA has contractual agreements with 95 private 

insurance company partners to sell policies and adjust and process claims. 

As of November 2005, the NFIP was estimated to have approximately 4.8 

million policyholders in about 20,000 communities. According to FEMA, 

every $3 in flood insurance claims payments saves about $1 in disaster 

assistance payments, and the combination of flood plain management and 

mitigation efforts save about $1 billion in flood damage each year. 

Flood maps identify the boundaries of the areas at the greatest risk of 

flooding. These areas are called special high-risk flood hazard areas, often 

referred to as the 100-year flood plain, that area in which there is a 1 

percent chance of flooding each year, or a 30 percent chance of flooding 

over the period of a 30-year mortgage. Property owners whose properties 

are within the 100-year flood plain, as identified on the flood maps, and 

whose mortgages are from a federally regulated lender, are required to 

purchase flood insurance for the amount of their outstanding mortgage 

balance, up to the maximum policy limit of $250,000 in coverage for single

family homes. The owners of properties with no mortgages or properties 

with mortgages held by lenders who are not federally regulated were not,

and still are not, required to buy flood insurance, even if the properties are 

in the 100-year flood plain. Optional, lower-cost coverage is available 

under the NFIP to protect homes in areas of low to moderate risk that are 

 2

The National Flood Insurance Act of 1968, as amended, is codified at 42 U.S.C. 4001 to 

4129. 

3

42 U.S.C. 4001(b)(2).

Page 2 GAO-06-335T 
outside the 100-year flood plain, but owners of properties in these lowerrisk areas are not required to purchase flood insurance. 

The unprecedented magnitude and severity of the flood losses in 2005 

placed unprecedented challenges on the NFIP to process a record number 

of claims, many in properties flooded by Hurricanes Katrina and Rita that 

were inaccessible for weeks after the flooding occurred. These storms also 

illustrated the extent to which the federal government has exposure for 

claims coverage in catastrophic loss years. From its inception in 1968 until 

August 2005, the NFIP paid about $14.6 billion in insurance claims, 

primarily from policyholder premiums that otherwise would have been 

paid through taxpayer-funded disaster relief or borne by home and 

business owners themselves. As shown in figure 1, FEMA estimates that 

Hurricanes Katrina, Rita, and Wilma are likely to generate claims and 

associated payments of about $23 billion— far surpassing the total about 

$15 billion in claims paid in the entire history of the NFIP up to those 

events. 

Figure 1: NFIP Claims Payments from 1968 to 2004 and Estimated for Hurricanes

Katrina, Rita, and Wilma 

Page 3 GAO-06-335T 
The NFIP cannot absorb the total costs of paying these claims. On 

November 21, 2005, FEMA’s authority to borrow from the Treasury was 

increased from $1.5 billion to $18.5 billion through fiscal year 2008.4

 The 

acting director of FEMA’s Mitigation Division said this borrowing 

authority will pay NFIP claims and expenses into February 2006, when 

additional legislative action to increase the borrowing authority will likely 

be required. He also said that it is highly unlikely that the program could 

generate sufficient revenues to cover a debt of this size. FEMA estimates 

that given its current income—about $2 billion annually---and average 

historical loss levels, it could expect to handle up to about $1.5 billion in 

debt and still have a reasonable chance to repay it within a 3- to 5-year 

time period. 

GAO has a body of work underway on the preparation for, response to, 

and recovery from Hurricanes Katrina and Rita, including how the NFIP 

was implemented. We have had teams in the Gulf Coast states since the 

weeks immediately following the hurricanes collecting data and 

observations from hurricane victims and federal, state, local, and private

participants in the preparation for, response to, and recovery from the 

extensive damages. I have also visited the region and spoken with 

governors in some of the affected states, military and civilian officials 

leading the recovery efforts, and others to help inform our work. One 

objective of the work we have underway on the NFIP is to assess what 

changes, if any, could be made to strengthen the NFIP’s fiscal solvency. To

this end, we will review proposals to increase revenues, reduce costs, or 

otherwise make the NFIP more actuarially sound. We expect to report on 

this matter later this year. 

As GAO moves forward with this work, we will continue to coordinate 

with this and other congressional committees and the accountability 

community—federal inspector generals, state and city auditors—regarding 

the scope of our future work on emergency management issues, including 

the NFIP. Our goal is to apply our resources and expertise to address longterm concerns, such as those we are discussing today, and to avoid 

duplicating the work of others. 

Past experience can provide context for considering future policy options. 

In this spirit, my testimony today is based on a body of work that GAO has 

 4

National Flood Insurance Program Further Enhanced Borrowing Authority Act of 2005, 

Pub. L. No. 109-106, 119 Stat. 2288 (2005). 

Page 4 GAO-06-335T 
done over the past several years before the nation began the struggle to 

respond to the devastating effects of Hurricanes Katrina and Rita in our 

Gulf Coast states, as well as some preliminary results of interviews and 

review of documentation for work in progress on how the NFIP was 

implemented for these storms. Our prior work has addressed the issues of 

the program’s structure and financing, oversight and management, 

repetitive loss properties, mandatory and voluntary purchase of flood 

insurance, and revising and improving the nation’s flood maps. Together 

the prior work and work in process provide information useful in 

assessing efforts over the NFIP’s history to enhance the program’s 

financial stability and effectiveness. Most recently, we issued a report in 

October 2005 on FEMA’s management and oversight of the flood insurance 

program that includes several recommendations for improvement.5

 This 

report was mandated by the Flood Insurance Reform Act of 2004.6

 It 

includes recommendations on two pre-Hurricane Katrina flood-insurance 

related issues that pose a challenge for FEMA. These are (1) improving 

FEMA’s management and oversight of the NFIP and (2) improving FEMA’s 

implementation of provisions of the Flood Insurance Reform Act of 2004 

to provide policyholders a flood insurance claims handbook that meets 

statutory requirements, to establish a regulatory appeals process, and to 

ensure that flood insurance agents meet minimum NFIP education and

training requirements. 

That report was based on interviews with FEMA officials, documentation

of its monitoring and oversight processes, and our field observations of 

FEMA’s monitoring and oversight activities. In addition, we analyzed the

National Flood Insurance Act of 1968, as amended, its legislative history,

and FEMA’s implementing regulations, and we examined documentation 

and interviewed officials about FEMA’s efforts to comply with provisions 

of the 2004 Flood Insurance Reform Act. We did our work from December 

2004 to August 2005 in accordance with generally accepted government 

auditing standards. 

 5

GAO, Federal Emergency Management Agency: Improvements Needed to Enhance 

Oversight and Management of the National Flood Insurance Program, GAO-06-119 

(Washington, D.C.: Oct. 18, 2005). 

6

Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, Pub. L. No. 108-264,

118 Stat. 712, 727 (2004). 

Page 5 GAO-06-335T 
A key characteristic of the NFIP is the extent to which FEMA must rely on 

others to achieve the program’s goals. FEMA’s role for the NFIP is 

principally one of establishing policies and standards that others generally 

implement on a day-to-day basis and providing financial and management 

oversight of those who carry out those day-to-day responsibilities. These 

responsibilities include ensuring that property owners who are required to 

purchase flood insurance do so, enforcing flood plain management and 

building regulations, selling and servicing flood insurance policies, and 

updating and maintaining the nation’s flood maps. In our prior work, we 

have identified several major challenges facing the NFIP: 

Major Program Issues 

–a Summary 

• Reducing losses to the program resulting from policy subsidies and 

repetitive loss properties.

7

 The program is not actuarially sound 

because of the number of policies in force that are subsidized—about 

29 percent at the time of our 2003 report. As a result of these subsidies, 

some policyholders with dwellings that were built before flood plain 

management regulations were established in their communities pay 

premiums that represent about 35 to 40 percent of the true risk 

premium. In January 2006, FEMA estimated a shortfall in annual 

premium income because of policy subsidies at $750 million. Moreover, 

at the time of our 2004 report, there were about 49,000 repetitive loss 

properties—those with two or more losses of $1,000 or more in a 10-

year period—representing about 1 percent of the 4.4 million buildings 

insured under the program. From 1978 until March 2004, these 

repetitive loss properties represented about $4.6 billion in claims 

payments. 

• Increasing property owner participation in the program. The extent of 

noncompliance with current mandatory purchase requirements by 

affected property owners is unknown. Some interest has been 

expressed in Congress in assessing the feasibility of expanding 

mandatory purchase requirements beyond current special high-risk 

flood hazard areas. FEMA and its private insurance partners also have 

efforts underway to increase participation in the NFIP by marketing 

flood insurance policies in areas where purchase is not mandatory. 

 7

GAO, Flood Insurance: Challenges Facing the National Flood Insurance Program, 

(GAO-03-606T (Washington, D.C.: Apr. 1, 2003); National Flood Insurance Program: 

Actions to Address Repetitive Loss Properties, (GAO-04-401T (Washington, D.C.: Mar. 25, 

2004). 

Page 6 GAO-06-335T 
• Developing accurate, digital flood maps.

8

 The impact of Hurricanes 

Katrina, Rita, and Wilma on homeowners has highlighted the 

importance of having accurate, up-to-date flood maps that identify the 

areas at risk of flooding and, thus, the areas in which homeowners 

would benefit from purchasing flood insurance. In our report on the 

NFIP’s flood map modernization program, we discussed the multiple 

uses and benefits of accurate, digital flood plain maps. However, the 

NFIP faces a major challenge in working with its contractor and state 

and local partners of varying technical capabilities and resources to 

produce accurate, digital flood maps. In developing those maps, we 

recommended that FEMA develop and implement data standards that 

will enable FEMA, its contractor, and its state and local partners to 

identify and use consistent data collection and analysis methods for 

developing maps for communities with similar flood risk. 

• Providing effective oversight of flood insurance operations. In our 

October 2005 report, we said that FEMA faces a challenge in providing 

effective oversight of the 95 insurance companies and thousands of 

insurance agents and claims adjusters who are primarily responsible 

for the day-to-day process of selling and servicing flood insurance 

policies. 

To the extent possible, the NFIP is designed to pay operating expenses 

and flood insurance claims with premiums collected on flood insurance 

policies rather than with tax dollars. However, as we have reported, the 

program, by design, is not actuarially sound because Congress authorized 

subsidized insurance rates to be made available for policies covering some 

properties to encourage communities to join the program. As a result, the 

program does not collect sufficient premium income to build reserves to 

meet the long-term future expected flood losses.9

 FEMA has statutory 

authority to borrow funds from the Treasury to keep the NFIP solvent.10

The NFIP Pays 

Expenses and Claims 

with Premiums to the 

Extent Possible, but 

Its Financial Structure 

Is Not Designed to Be 

Actuarially Sound Until the 2004 hurricane season, FEMA had been generally successful in 

keeping the NFIP on sound financial footing, exercising its borrowing 

authority three times in the last decade when losses exceeded available 

 8

GAO, Flood Map Modernization: Program Strategy Shows Promise, but Challenges

Remain, GAO-04-417 (Washington, D.C.: Mar. 31, 2004). 

9

GAO, Flood Insurance: Information on the Financial Condition of the National Flood

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

10See 42 U.S.C. 4016. 

Page 7 GAO-06-335T 
fund balances. In each instance, FEMA repaid the funds with interest. 

According to FEMA officials, as of August 31, 2005, FEMA had outstanding 

borrowing of $225 million with cash on hand totaling $289 million. FEMA 

had substantially repaid the borrowing it had undertaken to pay losses 

incurred for the 2004 hurricane season that, until Hurricane Katrina 

struck, was the worst hurricane season on record for the NFIP. FEMA’s 

current debt with the Treasury is almost entirely for payment of claims 

from Hurricanes Katrina and Rita and other flood events that occurred in

2005. 

Premium Subsidies and 

Repetitive-Loss Properties 

Affect NFIP’s Actuarial 

Soundness 

As the destruction caused by horrendous 2004 and 2005 hurricanes are a 

driving force for improving the NFIP today, devastating natural disasters 

in the 1960s were a primary reason for the national interest in creating a 

federal flood insurance program. In 1963 and 1964, Hurricane Betsy and 

other hurricanes caused extensive damage in the South, and, in 1965, 

heavy flooding occurred on the upper Mississippi River. In studying 

insurance alternatives to disaster assistance for people suffering property 

losses in floods, a flood insurance feasibility study found that premium 

rates in certain flood-prone areas could be extremely high. As a result, the 

National Flood Insurance Act of 1968, which created the NFIP, mandated

that existing buildings in flood-risk areas would receive subsidies on 

premiums because these structures were built before the flood risk was 

known and identified on flood insurance rate maps.11 Owners of structures 

built in flood-prone areas on or after the effective date of the first flood 

insurance rate maps in their areas or after December 31, 1974, would have

to pay full actuarial rates.12 Because many repetitive loss properties were 

built before either December 31, 1974, or the effective date of the first 

flood insurance rate maps in their areas, they were eligible for subsidized 

premium rates under provisions of the National Flood Insurance Act of 

1968. 

The provision of subsidized premiums encouraged communities to 

participate in the NFIP by adopting and agreeing to enforce state and 

community floodplain management regulations to reduce future flood 

damage. In April 2005, FEMA estimated that floodplain management 

regulations enforced by communities participating in the NFIP have 

prevented over $1.1 billion annually in flood damage. 

 1142 U.S.C. 4014(a)(2), 4015(a), (b). 

1242 U.S.C. 4014(a)(1), 4015(c). 

Page 8 GAO-06-335T 
However, the policy subsidies reduce premium income and add risk to the 

NFIP. In January 2006, FEMA estimated an annual shortfall in premium 

income of $750 million because of policy subsidies. FEMA estimated that 

phasing out subsidized rates for non-primary residences and

nonresidential properties alone would affect about 400,000 properties 

currently insured by the NFIP. Some have questioned whether providing 

flood insurance for second homes in high risk areas—such as barrier 

islands—encourages development in areas at high risk of flooding. 

In addition, some of the properties that had received the initial rate 

subsidy are subject to repetitive flood losses, placing added financial 

strain on the NFIP. In reauthorizing the NFIP in 2004, Congress noted that 

“repetitive-loss properties”—those that had resulted in two or more flood 

insurance claims payments of $1,000 or more over 10 years—constituted a 

significant drain on the resources of the NFIP. 13 These repetitive loss 

properties are problematic not only because of their vulnerability to 

flooding but also because of the costs of repeatedly repairing flood 

damages. While these properties make up only about 1 percent of the 

properties insured under the NFIP, they account for 25 to 30 percent of all 

claims losses. At the time of our March 2004 report on repetitive loss 

properties, there were about 49,000 repetitive loss properties, representing 

about $4.6 billion in claims payments from 1978 until March 2004. As of 

March 2004, nearly half of all nationwide repetitive loss property insurance 

payments had been made in Louisiana, Texas, and Florida. According to a 

recent Congressional Research Service report, as of December 31, 2004,

FEMA had identified 11,706 “severe repetitive loss” properties, defined as

those with four or more claims or two or three losses that exceeded the 

insured value of the property.14 Of these 11,706 properties almost half (49 

percent) were in three states—3,208 (27 percent) in Louisiana, 1,573 (13 

percent) in Texas, and 1,034 (9 percent) in New Jersey. A significant 

number of repetitive loss properties were affected by Hurricanes Katrina 

and Rita. According to NFIP statistical data through November 30, 2005,

4,835 repetitive loss properties, including 3,183 in Louisiana, had 

substantial damage from Hurricane Katrina.15 Two hundred and forty-three 

 13Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 2(3),(4), (5), 118 Stat. 

712, 713 (2004). 

14Congressional Research Service, Federal Flood Insurance: The Repetitive Loss Problem, 

RL32972 (Washington, D.C.: June 30, 2005). 

15The term “substantial damage” means the cost of repairing the damaged building exceeds 

50 percent of its market value (or a lower trigger if adopted locally). 

Page 9 GAO-06-335T 
repetitive loss properties had substantial damage from Hurricane Rita. Of 

these properties, 213 were located in Louisiana and 30 were located in 

Texas. 

For over a decade, FEMA has pursued a variety of strategies to reduce the 

number of repetitive loss properties in the NFIP inventory. In a 2004 

testimony, we noted that congressional proposals have been made to 

phase out coverage or begin charging full and actuarially based rates for 

repetitive loss property owners who refuse to accept FEMA’s offer to 

purchase or mitigate the effect of floods on these buildings.16 The 2004 

Flood Insurance Reform Act created a 5-year pilot program to deal with 

repetitive-loss properties in the NFIP. In particular, the act authorized 

FEMA to provide financial assistance to participating states and 

communities to carry out mitigation activities or to purchase “severe 

repetitive loss properties.”17 During the pilot program, policyholders who 

refuse a mitigation or purchase offer that meets program requirements will 

be required to pay increased premium rates. Specifically, the premium 

rates for these policyholders would increase by 150 percent following their 

refusal and another 150% following future claims of more than $1,500.

18

However, the rates charged cannot exceed the applicable actuarial rate. 

Because of the financial drain that repetitive loss properties have posed

for the program, it will be important in future studies of the NFIP to 

continue to analyze data on progress being made to reduce the inventory 

of subsidized NFIP properties, particularly those with repetitive losses; 

how the reduction of this inventory contributes to the financial stability of 

the program; and whether additional FEMA regulatory steps or 

congressional actions could contribute to the financial solvency of the 

NFIP, while meeting commitments made by the authorizing legislation. 

 16GAO, National Flood Insurance Program: Actions to Address Repetitive Loss 

Properties, GAO-04-401T (Washington, D.C.: Mar. 25, 2004).

17Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 102, 118 Stat. 712, 714-

721 (2004). The act defines a “severe repetitive loss property” to mean single-family 

properties that have received at least $20,000 in flood insurance payments based on four or 

more claims of at least $5,000 each. The act requires FEMA to define in future regulation 

which multi-family properties constitute “severe repetitive loss properties.” 

18Id., 118 Stat. 712, 717-718 (2004). 

Page 10 GAO-06-335T 
Expansion of the 

NFIP Policyholder 

Base 

Compliance with 

Mandatory Purchase 

Requirements Difficult to 

Determine 

In 1973 and 1994, Congress enacted requirements for mandatory purchase 

of NFIP policies by some property owners in high-risk areas. From 1968 

until the adoption of the Flood Disaster Protection Act of 1973, the 

purchase of flood insurance was voluntary. However, because voluntary 

participation in the NFIP was low and many flood victims did not have 

insurance to repair damages from floods in the early 1970s, the 1973 act 

required the mandatory purchase of flood insurance to cover some 

structures in special flood hazard areas of communities participating in the 

program. Homeowners with mortgages held by federally-regulated lenders 

on property in communities identified by FEMA to be in special flood 

hazard areas are required to purchase flood insurance on their dwellings 

for the amount of their outstanding mortgage balance, up to a maximum of 

$250,000 in coverage for single family homes. The owners of properties 

with no mortgages or properties with mortgages held by lenders who are 

not federally regulated were not, and still are not, required to buy flood 

insurance, even if the properties are in special flood hazard areas—the 

areas NFIP flood maps identify as having the highest risk of flooding. 

FEMA determines flood risk and actuarial ratings on properties through 

flood insurance rate mapping and other considerations, including the 

elevation of the lowest floor of the building, the type of building, the 

number of floors, and whether or not the building has a basement, among 

other factors. FEMA flood maps designate areas for risk of flooding by 

zones. For example, areas subject to damage by waves and storm surge 

are in the zone with the highest expectation for flood loss. 

Between 1973 and 1994, many policyholders continued to find it easy to 

drop policies, even if the policies were required by lenders. Federal agency

lenders and regulators did not appear to strongly enforce the mandatory 

flood insurance purchase requirements.19 According to a recent 

 19The federal entities for lending regulation are the Board of Governors of the Federal 

Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift 

Supervision, the Federal Deposit Insurance Corporation, the National Credit Union 

Administration, and the Farm Credit Administration. 

Page 11 GAO-06-335T 
Congressional Research Service study,20 the Midwest flood of 1993 

highlighted this problem and reinforced the idea that reforms were needed

to compel lender compliance with the requirements of the 1973 Act. In 

response, Congress passed the National Flood Insurance Reform Act of 

1994. Under the 1994 law, if the property owner failed to get the required 

coverage, federally-regulated lenders were required to purchase flood 

insurance on their behalf and then bill the property owners. Lenders 

became subject to civil monetary penalties for not enforcing the 

mandatory purchase requirement. 

In June 2002, we reported that the extent to which lenders were enforcing 

the mandatory purchase requirement was unknown. Officials involved

with the flood insurance program developed contrasting viewpoints about 

whether lenders were complying with the flood insurance purchase 

requirements primarily because the officials used differing types of data to

reach their conclusions. Federal bank regulators and lenders based their 

belief that lenders were generally complying with the NFIP’s purchase 

requirements on regulators’ examinations and reviews conducted to 

monitor and verify lender compliance. In contrast, FEMA officials believed 

that many lenders frequently were not complying with the requirements, 

which was an opinion based largely on noncompliance estimates 

computed from data on mortgages, flood zones, and insurance policies; 

limited studies on compliance; and anecdotal evidence indicating that 

insurance was not always in place where required. Neither side, however, 

was able to substantiate its differing claims with statistically sound data 

that provide a nationwide perspective on lender compliance. 21

Expansion of Mandatory 

Purchase Requirements 

Would Generate More 

Premiums, but 

Implementation Could Be 

Problematic 

Under FEMA’s current Mandatory Purchase of Flood Insurance 

Guidelines, properties in a 100-year flood plain with a statistical 1 in 100 

chance of flooding in any given year or a 30 percent chance of flooding 

during the period of a 30-year mortgage are designated to be in special 

flood hazard areas. Within the boundaries of these areas, homeowners 

with mortgages from federal regulated lenders are required to purchase 

flood insurance for an amount equal to their outstanding mortgage 

balance, up to the maximum policy limit of $250,000 for a single-family 

home. To expand the NFIP policyholder base, there has been some 

 20Congressional Research Service, Federal Flood Insurance: The Repetitive Loss Problem 

(June 30, 2005). 

21GAO, Flood Insurance: Extent of Noncompliance with Purchase Requirements Is

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

Page 12 GAO-06-335T 
congressional interest in the feasibility of extending the current mandatory 

purchase requirement to properties in a 500-year flood plain, which 

statistically have a 1 in 500 chance of flooding in any given year.22 FEMA 

has estimated that expanding NFIP mandatory purchase requirements to 

include structures in the 500-year flood plain would generate up to $700 

million in additional premiums. The current annual premium for a 

structure in the 500-year flood plain is about $280. However, a FEMA 

official cautioned that the rate of compliance is an important component 

of any estimate of the amount of increase in NFIP premiums that would 

result from expanding mandatory purchase requirements. 

It would be difficult to effectively assess the impacts, effectiveness, and 

feasibility of such a change in the structure of the NFIP. We share FEMA’s 

concerns related to enforcing and assessing compliance. We also believe

that it would be difficult to assess the impacts an expansion in the 

mandatory purchase requirements would have upon a range of 

stakeholders, including not only home and business owners, but lenders, 

mortgage servicers, builders, and local governments, among others. 

We also recognize that it would be difficult and costly to determine the 

additional geographic area that would be encompassed in an expanded 

special flood hazard area. Current flood mapping focuses on the 

boundaries of the 100-year flood plain, and FEMA has not estimated the 

additional cost and time required to complete detailed, digitalized maps of 

areas outside of the current 100-year special flood hazard area. 

FEMA Has a Marketing 

Campaign to Attract New 

Policyholders and Improve 

Rates of Renewal 

In recent years, the number of NFIP policyholders did not grow 

substantially. FEMA officials reported a pattern in which at the start of 

each hurricane season, the number of polices in force was the same or less 

than the number of policies in previous years. During the hurricane 

season, the number of polices in force would increase slightly and then 

level off or decline again at the end of the season.

FEMA has efforts underway to increase NFIP participation by improving 

the quality of information that is available on the NFIP and flood risks and 

by marketing to retain policyholders currently in the program. In October 

2003, FEMA let a contract for a new integrated marketing campaign called 

“FloodSmart.” Marketing elements being used include direct mail, national 

 22National Flood Insurance Program Commitment to Policyholders and Reform Act of 2005,

H.R. 4320, 109th Conress, section 3 (2005). 

Page 13 GAO-06-335T 
television commercials, print advertising, and websites designed for 

consumers and insurance agents. According to FEMA officials, in a little 

more than 2 years since the contract began, net policy growth was a little 

more than 7 percent and policy retention improved from 88 percent to 91

percent. 

Accurate flood maps that identify the areas at greatest risk of flooding are 

the foundation of the NFIP. Flood maps must be periodically updated to 

assess and map changes in the boundaries of floodplains that result from 

community growth, development, erosion, and other factors that affect the 

boundaries of areas at risk of flooding. FEMA has embarked on a multiyear effort to update the nation’s flood maps at a cost in excess of $1 

billion. The maps are principally used by (1) the approximately 20,000 

communities participating in the NFIP to adopt and enforce the program’s 

minimum building standards for new construction within the maps’ 

identified flood plains; (2) FEMA to develop accurate flood insurance 

policy rates based on flood risk; and (3) federal regulated mortgage 

lenders to identify those property owners who are statutorily required to 

purchase federal flood insurance. 

Accurate, Updated 

Flood Maps Are the 

Foundation of the 

NFIP 

FEMA expects that by producing more accurate and accessible digital

flood maps, the NFIP and the nation will benefit in three ways. First, 

communities can use more accurate digital maps to reduce flood risk 

within floodplains by more effectively regulating development through 

zoning and building standards. Second, accurate digital maps available on

the Internet will facilitate the identification of property owners who are 

statutorily required to obtain or who would be best served by obtaining 

flood insurance. Third, accurate and precise data will help national, state, 

and local officials to accurately locate infrastructure and transportation 

systems (e.g., power plants, sewage plants, railroads, bridges, and ports) 

to help mitigate and manage risk for multiple hazards, both natural and 

man-made. 

Success in updating the nation’s flood maps requires clear standards for 

map development; the coordinated efforts and shared resources of federal,

state, and local governments; and the involvement of key stakeholders 

who will be expected to use the maps. In developing the new data system 

to update flood maps across the nation, FEMA’s intent is to develop and 

incorporate flood risk data that are of a level of specificity and accuracy 

commensurate with communities’ relative flood risks. Not every 

community may need the same level of specificity and detail in its new 

flood maps. However, it is important that FEMA establish standards for 

the appropriate data and level of analysis required to develop maps for all 

Page 14 GAO-06-335T 
communities of a similar risk level. In its November 2004 Multi-Year Flood 

Hazard Identification Plan, FEMA discussed the varying types of data 

collection and analysis techniques the agency plans to use to develop flood

hazard data in order to relate the level of study and level of risk for each of 

3,146 counties. 

FEMA has developed targets for resource contributions (in-kind as well as

dollars) by its state and local partners in updating the nation’s flood maps. 

At the same time, it has developed plans for reaching out to and including

the input of communities and key stakeholders in the development of the 

new maps. These expanded outreach efforts reflect FEMA’s understanding 

that it is dependent upon others to achieve the benefits of map 

modernization. 

As I have discussed, it is important when considering any expansion of 

mandatory purchase requirements for NFIP policies to understand that 

implementation would require the development of additional detailed 

flood maps. According to a FEMA official, digital mapping of areas outside 

of special flood hazard areas is currently being considered on only a 

selective basis for reasons such as potential changes in risk level or 

population growth. 

To meet its monitoring and oversight responsibilities, FEMA is to conduct 

periodic operational reviews of the 95 private insurance companies that 

participate in the NFIP. In addition, FEMA’s program contractor is to 

check the accuracy of claims settlements by doing quality assurance 

reinspections of a sample of claims adjustments for every flood event. For 

operational reviews, FEMA examiners are to do a thorough review of the 

companies’ NFIP underwriting and claims settlement processes and 

internal controls, including checking a sample of claims and underwriting 

files to determine, for example, whether a violation of policy has occurred, 

an incorrect payment has been made, and if files contain all required 

documentation. Separately, FEMA’s program contractor is responsible for 

conducting quality assurance reinspections of a sample of claims 

adjustments for specific flood events in order to identify, for example, 

whether an insurer allowed an uncovered expense or missed a covered 

expense in the original adjustment. 

Monitoring and 

Oversight of NFIP 

Identifies Specific 

Problems, but Does 

Not Provide 

Comprehensive 

Information on 

Overall Program 

Performance 

According to FEMA, these monitoring and oversight mechanisms will be in 

place to assess the implementation of the NFIP after Hurricanes Katrina

and Rita. In addition, FEMA plans to do additional oversight of claims for 

these storms that were handled using expedited procedures. To try to 

assist NFIP policyholders despite obstacles in communicating with 

Page 15 GAO-06-335T 
claimants, reaching flooded properties, and locating records, FEMA 

allowed expedited claims processing procedures that were unique to these 

storms. In some circumstances, claims were settled without site visits by 

certified flood claims adjusters. For flooding caused by the failure of the 

levees in the New Orleans area, resulting in flooding from Lake 

Pontchartrain, FEMA allowed the use of flood depth data to identify 

structures that had been severely affected. If data on the depth and 

duration of the water in the building showed that it was likely that covered 

damage exceeded policy limits, claims could be settled without a site visit

by a claims adjuster. Similarly, losses in other areas of Louisiana and 

Mississippi were handled without a site visit where structures were 

washed off their foundations by flood waters and square-foot 

measurements of the dwellings were known. 

The operational reviews and follow-up visits to insurance companies that 

we analyzed during 2005 followed FEMA’s internal control procedures for 

identifying and resolving specific problems that may occur in individual

insurance companies’ processes for selling and renewing NFIP policies 

and adjusting claims. According to information provided by FEMA, the 

number of operational reviews completed between 2000 and August 2005 

were done at a pace that allows for a review of each participating 

insurance company at least once every 3 years, as FEMA procedures 

require. In addition, the processes FEMA had in place for operational 

reviews and quality assurance reinspections of claims adjustments met our 

internal control standard for monitoring federal programs. 

However, the process FEMA used to select a sample of claims files for 

operational reviews and the process its program contractor used to select

a sample of adjustments for reinspections were not randomly chosen or 

statistically representative of all claims. We found that the selection 

processes used were, instead, based upon judgmental criteria including, 

among other items, the size and location of loss and complexity of claims. 

As a result of limitations in the sampling processes, FEMA cannot project 

the results of these monitoring and oversight activities to determine the 

overall accuracy of claims settled for specific flood events or assess the 

overall performance of insurance companies and their adjusters in 

fulfilling their responsibilities for the NFIP—actions necessary for FEMA 

to meet our internal control standard that it have reasonable assurance 

that program objectives are being achieved and that its operations are 

effective and efficient. 

To strengthen and improve FEMA’s monitoring and oversight of the NFIP, 

we recommended that FEMA use a methodologically valid approach for 

Page 16 GAO-06-335T 
sampling files selected for operational reviews and quality assurance 

claims reinspections. We also plan to follow up on the results of the 

monitoring and oversight efforts for claims processed using expedited 

processes in our review of the implementation of the NFIP after 

Hurricanes Katrina and Rita. 

FEMA did not agree with our recommendation. It noted that its current 

sampling methodology of selecting a sample based on knowledge of the 

population to be sampled was more appropriate for identifying problems 

than the statistically random probability sample we recommended. 

Although FEMA’s current nonprobability sampling strategy may provide 

an opportunity to focus on particular areas of risk, it does not provide 

management with the information needed to assess the overall 

performance of private insurance companies and adjusters participating in

the program—information that FEMA needs to have reasonable assurance 

that program objectives are being achieved. 

As of January 2006, FEMA had not yet fully implemented provisions of the 

Flood Insurance Reform Act of 2004. Among other things, the act requires 

FEMA to provide policyholders a flood insurance claims handbook; to 

establish a regulatory appeals process for claimants; and to establish 

minimum education and training requirements for insurance agents who 

sell NFIP policies.23 The 6-month statutory deadline for implementing these 

changes was December 30, 2004. 

In September 2005, FEMA posted a flood insurance claims handbook on 

its Web site. The handbook contains information on anticipating, filing and 

appealing a claim through an informal appeals process, which FEMA 

intends to use pending the establishment of a regulatory appeals process. 

However, because the handbook does not contain information regarding 

the appeals process that FEMA is statutorily required to establish through 

regulation, it does not yet meet statutory requirements. 

FEMA Has Not Fully 

Implemented NFIP 

Program Changes 

Mandated by the 

Flood Insurance 

Reform Act of 2004 

With respect to this appeals process, FEMA has not stated how long 

rulemaking might take to establish the process by regulation, or how the 

process might work, such as filing requirements, time frames for 

considering appeals, and the composition of an appeals board. In January

2006, the acting director of FEMA’s Mitigation Division said that FEMA 

 23 Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, sections 204, 205, and 207. 

Page 17 GAO-06-335T 
had submitted a draft rule to DHS. However, milestones for future actions

were not established. Claimants who wish to appeal decisions made on 

their claims for damage from Hurricanes Katrina and Rita can follow a 

process described by FEMA as an “informal” appeals process. As outlined 

in the Flood Insurance Claims Handbook, to appeal, policyholders are to 

submit statements of their concerns and supporting documentation to the 

director of claims in FEMA’s Mitigation Division, Risk Insurance Branch.

With respect to minimum training and education requirements for 

insurance agents who sell NFIP policies, FEMA published a Federal 

Register notice on September 1, 2005, which included an outline of 

training course materials. In the notice, FEMA stated that, rather than 

establish separate and perhaps duplicative requirements from those that 

may already be in place in the states, it had chosen to work with the states 

to implement the NFIP requirements through already established state 

licensing schemes for insurance agents. The notice did not specify how or 

when states were to begin implementing the NFIP training and education

requirements. Thus, it is too early to tell the extent to which insurance 

agents will meet FEMA’s minimum standards. FEMA officials said that, 

because changes to the program could have broad reaching and significant 

effects on policyholders and private-sector stakeholders upon whom 

FEMA relies to implement the program, the agency is taking a measured 

approach to addressing the changes mandated by Congress. Nonetheless, 

without plans with milestones for completing its efforts to address the 

provisions of the act, FEMA cannot hold responsible officials accountable 

or ensure that statutorily required improvements are in place to assist 

victims of future flood events. 

We recommended that FEMA develop documented plans with milestones 

for implementing requirements of the Flood Insurance Reform Act of 2004 

to provide policyholders a flood insurance claims handbook that meets 

statutory requirements, to establish a regulatory appeals process, and to 

ensure that flood insurance agents meet minimum NFIP education and

training requirements. We will continue to monitor progress being made. 

FEMA disagreed with our recommendation and characterization of the 

extent to which FEMA has met provisions of the Flood Insurance Reform

Act of 2004. We believe that our description of those efforts and our 

recommendations with regard to implementing the act’s provisions are 

valid. For example, although FEMA commented that it was offering 

claimants an informal appeals process in its flood insurance claims 

handbook, it must establish regulations for this process, and those are not

yet complete. 

Page 18 GAO-06-335T 
The most immediate challenge for the NFIP is processing the flood 

insurance claims resulting from Hurricanes Katrina and Rita. Progress is 

being made in that area. In December 2005, according to FEMA, more than 

70 percent of Hurricane Katrina claims had been paid, totaling more than 

$11 billion, some of them using expedited procedures to assist 

policyholders who were displaced from their homes. 

In the longer term, Congress and the NFIP face a complex challenge in 

assessing potential changes to the program that would improve its 

financial stability, increase participation in the program by property 

owners in areas at risk of flooding, reduce the number of repetitive loss 

properties in the program, and maintain current and accurate flood plain

maps. These issues are complex, interrelated, and are likely to involve

trade-offs. For example, increasing premiums to better reflect risk may 

reduce voluntary participation in the program or encourage those who are 

required to purchase flood insurance to limit their coverage to the 

minimum required amount (i.e., the amount of their outstanding mortgage 

balance). This in turn can increase taxpayer exposure for disaster 

assistance resulting from flooding. There is no “silver bullet” for improving 

the current structure and operations of the NFIP. It will require sound data 

and analysis and the cooperation and participation of many stakeholders.

Mr. Chairman and Members of the Committee, this concludes my prepared 

statement. I would be pleased to respond to any questions you and the 

Committee Members may have. 

Contact point for our Office of Congressional Relations and Public Affairs 

may be found on the last page of this statement. For further information 

about this testimony, please contact Norman Rabkin at (202) 512-8777 or 

rabkinn@gao.gov, or William O. Jenkins Jr. at (202) 512-8757 or 

jenkinswo@gao.gov. This statement was prepared under the direction of 

Christopher Keisling. Key contributors were John Bagnulo, Christine 

Davis, and Deborah Knorr. 

Concluding 

Observations 

GAO Contact and 

Staff 

Acknowledgments 

Page 19 GAO-06-335T (440477) 
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