FLOOD INSURANCE

Review of FEMA

Study and Report on 

Community-Based 

Options

Report to Congressional Committees 

August 2016

GAO-16-766

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-766, a report to 

congressional committees. 

August 2016

FLOOD INSURANCE 

Review of FEMA Study and Report on 

Community-Based Options

What GAO Found

The Federal Emergency Management Agency (FEMA) used reasonable

objectives and methodology for its study on community-based flood insurance 

(CBFI)—flood insurance that a community would purchase to cover all properties 

located within it. FEMA contracted with the National Academy of Sciences (NAS) 

to conduct the study, and worked with NAS to design a study that would provide 

a high-level, independent discussion of issues related to CBFI. According to 

FEMA officials, such a study would help FEMA decide whether CBFI should be 

implemented, an important step before developing any plans to implement CBFI. 

Once the study was designed, NAS conducted the study independently, using

input obtained from an expert committee that met twice in early 2015. The 

members of the committee represented academia, the private sector, and state 

and federal government. GAO determined that the study objectives were 

designed to meet FEMA’s needs, the methodology supported the objectives, and 

alternative methodologies that were considered would have faced various

limitations.

In its report submitted to Congress, which contained the study, FEMA concluded 

that it should not conduct further related research or implement CBFI.

Specifically, it concluded that the challenges outlined in the study outweigh any 

potential benefit when considered against limited community interest. FEMA 

officials further cited the need to dedicate FEMA’s resources to effective National

Flood Insurance Program (NFIP) reform. Based on the factors cited by FEMA 

officials, and the consistency of these factors with findings in prior GAO reports 

on NFIP, GAO determined that FEMA’s conclusion was reasonable. For 

example, prior GAO work has highlighted challenges FEMA faces in balancing 

reform efforts with limited resources.

In prior work, GAO identified four public policy goals for federal involvement in 

natural catastrophe insurance and used them to evaluate changes to NFIP.

While the FEMA study did not use these goals, as part of its assessment GAO 

evaluated relevant elements of the study against them. For example, one of 

these goals is charging premium rates that fully reflect actual risk, and the study 

discussed innovative uses of CBFI that could help NFIP charge such rates.

Another goal is encouraging private markets to provide natural catastrophe 

insurance, and the study discusses ways in which CBFI could encourage private 

market participation in flood insurance markets, as well as challenges that CBFI 

would pose to private insurers.

View GAO-16-766-For more information, 

contact Alicia Puente Cackley at (202) 512-

8678 or cackleya@gao.gov

Why GAO Did This Study

Floods are the most common and 

destructive natural disaster in the 

United States. The National Flood 

Insurance Program, which FEMA

administers, has struggled financially 

to both pay for flood losses and keep 

rates affordable. To address these and 

other challenges, Congress has 

passed legislation including the 

Homeowners Flood Insurance 

Affordability Act of 2014 (HFIAA). 

HFIAA included provisions for FEMA to 

conduct a study and submit a report 

that assesses and recommends

options, methods, and strategies for 

making CBFI available through NFIP.

FEMA presented the study and related 

report to Congress in March 2016. 

HFIAA also includes a provision for 

GAO to review the FEMA report, which 

is to include the study and submit a 

related report to Congress. To review 

the study and report FEMA submitted 

to Congress, GAO analyzed the FEMA 

study’s objectives, methodology, and 

findings, and evaluated the FEMA 

report’s conclusions.

GAO analyzed the appropriateness of 

the objectives, the reasonableness of 

the methodology, and the extent to 

which the conclusions were supported 

by the findings. GAO also evaluated 

relevant study findings against public 

policy goals for federal involvement in 

catastrophe insurance previously

identified by GAO, and interviewed 

FEMA and NAS officials.

GAO is not making 

recommendations in this report.
Page i GAO-16-766 Community-Based Flood Insurance

Letter 1

Background 4

FEMA’s Study and Report Provided Relevant Information and 

Concluded that FEMA Should Not Implement CBFI 9

Agency Comments 18

Appendix I GAO Contact and Staff Acknowledgments 19

Figures

Figure 1: Number of National Flood Insurance Program Policies in 

Force, by State, as of March 2016 7

Figure 2: Number of Communities Participating in the National 

Flood Insurance Program, by State, as of March 2016 8

Figure 3: Federal Emergency Management Agency CommunityBased Flood Insurance Study Statement of Task 10

Abbreviations

Biggert-Waters Act Biggert-Waters Flood Insurance Reform Act

CBFI community-based flood insurance

FEMA Federal Emergency Management Agency

HFIAA Homeowners Flood Insurance Affordability Act

NAS National Academy of Sciences

NFIP National Flood Insurance Program

NRC National Research Council

SFHA Special Flood Hazard Areas

Treasury Department of the Treasury

Contents

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Page 1 GAO-16-766 Community-Based Flood Insurance

441 G St. N.W.

Washington, DC 20548

August, 24, 2016

The Honorable Richard Shelby

Chairman

The Honorable Sherrod Brown

Ranking Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Jeb Hensarling

Chairman

The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

House of Representatives

Floods are the most common and destructive natural disaster in the 

United States. The National Flood Insurance Program (NFIP) makes 

federally backed flood insurance available to property owners in 

participating communities and is the only source of insurance against 

flood damage for most residents of flood-prone areas. NFIP is 

administered by the Federal Emergency Management Agency (FEMA).

Since 2000, NFIP has experienced several years with catastrophic 

losses, primarily from Hurricane Katrina and the other 2005 storms and 

Superstorm Sandy in 2012. Since then, FEMA has needed to borrow 

money from the U.S. Department of the Treasury (Treasury) to cover 

claims in some years. As of March 2016, FEMA owed Treasury $23 

billion. As a result of the program’s importance, level of indebtedness to 

Treasury, and substantial financial exposure for the federal government 

and taxpayers, as well as FEMA’s operating and management 

challenges, NFIP has been on our high-risk list since 2006.1

 1

Every 2 years, we provide Congress with an update on our high-risk program, which 

highlights major areas that are at high risk for fraud, waste, abuse, or mismanagement, or 

that need broad reform. See GAO, High-Risk Series: An Update, GAO-15-290 

(Washington, D.C.: Feb. 11, 2015).

Letter
Page 2 GAO-16-766 Community-Based Flood Insurance

To address certain challenges, Congress has passed legislation including 

the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters 

Act) and the Homeowner Flood Insurance Affordability Act of 2014 

(HFIAA).2 The Biggert-Waters Act sought to strengthen the future 

financial solvency and administrative efficiency of NFIP, but it also raised 

concerns for policyholders whose premiums increased. HFIAA sought to 

address these affordability concerns by repealing or altering some 

Biggert-Waters Act requirements.3

HFIAA also included provisions for the study of voluntary communitybased flood insurance (CBFI). While there is no single generally accepted 

definition for CBFI, the term generally refers to the concept of a single, 

community-wide flood insurance policy that a community would purchase 

to cover all properties located within it.4 Specifically, HFIAA included 

provisions for FEMA to conduct a study and submit a report that assesses 

and recommends options, methods, and strategies for making CBFI 

available through NFIP. In September 2014, FEMA awarded a contract to 

the National Academy of Sciences (NAS) to conduct a study on 

potentially making voluntary CBFI policies available through NFIP.5

Specifically, the study as contracted was to include, but was not limited 

to, discussion of topic areas and questions that would require further 

evaluation in order for FEMA and others to better evaluate strengths and 

weaknesses of providing CBFI. FEMA’s report was to include the results 

and conclusions of the study. NAS completed a pre-publication version of 

the study and submitted it to FEMA in July 2015 and published the final 

 2

Pub. L. No. 112-141, tit. II, 126 Stat. 405, 916 (2012). Pub. L. No. 113-89, 128 Stat. 1020 

(2014). 

3

In 2016, we reported on the affordability challenges related to NFIP. See GAO, National 

Flood Insurance Program: Options for Providing Affordability Assistance, GAO-16-190 

(Washington, D.C.: Feb. 10, 2016).

4

For the purposes of this report, we based this definition on common elements of 

definitions used by other stakeholders including FEMA and the Congressional Research 

Service.

5

NAS is a private, nonprofit society of distinguished U.S. scholars that is charged with 

providing independent, objective advice to the United States on scientific and 

technological matters.
Page 3 GAO-16-766 Community-Based Flood Insurance

version of the study in December 2015.6 FEMA delivered its summary 

report, which included the study and indicated it was FEMA’s final report 

on the topic, to the relevant congressional committees in March 2016.

Additionally, HFIAA included a provision for GAO to review and analyze 

FEMA’s CBFI report, and report to the relevant congressional 

committees. This report analyzes the report FEMA submitted to Congress 

by reviewing the study’s objectives, methodology, and findings and 

describing the FEMA report’s conclusions that were based on the study.

For the purposes of this report, we defined CBFI as the concept of a 

single, community-wide flood insurance policy that a community would 

purchase to cover all properties located within it. To establish this 

definition, we drew upon common elements of definitions used by FEMA 

and other stakeholders.7 Our review included several FEMA and NAS 

documents. These included the prepublication and final versions of the 

NAS study, the FEMA report that included the study, the study’s 

statement of objectives and project management plan, and previous 

FEMA documents related to CBFI. To guide our assessment of the FEMA 

study’s design, execution, and findings, and report’s corresponding 

conclusions, we reviewed FEMA documents, including the study’s 

statement of objectives and project management plan as well as the final 

study and report. We evaluated the study on the clarity and 

appropriateness of the objectives, the consistency of the methodology 

with the objectives, the reasonableness of the methodology, and the 

extent to which the conclusions were supported by the findings. We 

evaluated the FEMA report, which included the study, on the extent to 

 6

The substance of NAS prepublication reports is final, but NAS may make editorial 

changes throughout the text prior to publication. The final version of the study, A 

Community-Based Flood Insurance Option, is available on the NAS website: 

http://dels.nas.edu/Report/Community-Based-Flood-Insurance-Option/21758. 

7

Other stakeholders included Atkins, the Congressional Research Service, and Resources 

for the Future. For further details on these definitions, refer to the relevant reports: Federal 

Emergency Management Agency, NFIP Stakeholder Listening Session: Findings & Next 

Steps, Phase I Report (Washington, D.C. April 2010); Atkins, Community-Based Flood 

Insurance: Impacts on the Flood Hazard Management Cycle, accessed May 20, 2016, 

https://www.floods.org/acefiles/documentlibrary/2012_NFIP_Reform/Flood_Mapping_for_the_Nation_ASFPM_Repor

t_3-1-2013.pdf; Congressional Research Service, The National Flood Insurance Program: 

Status and Remaining Issues for Congress (Washington, D.C.: February 2013); and 

Resources for the Future, A Proposed Design for Community Flood Insurance 

(Washington, D.C.: December 2015).
Page 4 GAO-16-766 Community-Based Flood Insurance

which the conclusions were supported by the findings of the study and 

consistent with findings in prior GAO reports on FEMA’s administration of 

the National Flood Insurance Program. We also analyzed how the study’s 

findings might be used to evaluate CBFI against public policy goals for 

federal involvement in catastrophe insurance identified by GAO in prior 

reports. In addition, we interviewed FEMA officials and the study’s 

authors to develop an in-depth understanding of the design, execution, 

findings, and conclusions of the study and report.

We conducted this performance audit from March 2016 to September 

2016 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

In 1968, Congress created NFIP to address the increasing cost of federal 

disaster assistance by providing flood insurance to property owners in 

flood-prone areas, where such insurance was either not available or 

prohibitively expensive.8 The 1968 law also authorized premium subsidies 

to encourage property owner participation. To participate in the program, 

communities must adopt and agree to enforce floodplain management 

regulations to reduce future flood damage. In exchange, federally backed 

flood insurance is offered to residents in those communities.

NFIP was subsequently modified by various amendments to strengthen 

certain aspects of the program. The Flood Disaster Protection Act of 1973 

made the purchase of flood insurance mandatory for properties in special 

flood hazard areas—areas that are at high risk for flooding—that are 

security for loans from federally regulated lenders and located in NFIP 

 8

The National Flood Insurance Act of 1968 established NFIP. Pub. L. No. 90-448, Tit. XIII, 

§ 1301 et seq., 82 Stat. 476, 572 (1968).

Background

Overview of Key NFIP 

Legislation
Page 5 GAO-16-766 Community-Based Flood Insurance

participating communities.9 This requirement expanded the overall 

number of insured properties, including those that qualified for subsidized 

premiums. The National Flood Insurance Reform Act of 1994 expanded 

the purchase requirement for federally backed mortgages on properties 

located in special flood hazard areas.10

Congress has passed two key pieces of legislation designed to reform 

NFIP. The Biggert-Waters Flood Insurance Reform Act of 2012 (BiggertWaters Act), enacted in July 2012, instituted provisions to help strengthen 

NFIP’s future financial solvency and administrative efficiency. For 

example, it required FEMA to phase out almost all discounted insurance 

premiums and establish a reserve fund.11 As implementation proceeded, 

however, affected communities raised concerns about some BiggertWaters Act requirements. The Homeowner Flood Insurance Affordability 

Act of 2014 was enacted in March 2014 and sought largely to address 

affordability concerns by repealing or altering some Biggert-Waters Act 

requirements. In this context, HFIAA included provisions that FEMA 

produce a study and submit a report that assess and recommend options, 

methods, and strategies for making voluntary CBFI available through 

NFIP.

 9

Pub. L. No. 93-234, 87 Stat. 975 (1973). The 1973 act also prohibited regulated lenders 

from making loans secured by properties in a special flood hazard area in nonparticipating 

communities. The Housing and Community Development Act of 1977 amended the 1973 

act to permit regulated lending institutions to make conventional loans in special flood 

hazard areas of nonparticipating communities. Special flood hazard areas represent the 

land subject to a 1 percent or greater chance of flooding in any given year. 

10Pub. L. No. 103-325, § 522, 108 Stat. 2160, 2257 (1994). 

11Discounted insurance premiums include both subsidized and grandfathered policies. 

Generally, subsidized policies are policies that are sold at highly discounted rates and 

cover properties in high-risk locations known as Special Flood Hazard Areas (SFHA) that 

were built before Flood Insurance Rate Maps became available for the community and the 

flood risk was clearly understood; these properties otherwise would have been charged 

higher premiums. NFIP allows other property owners to continue to pay “grandfathered”

rates, which do not reflect reassessments of their properties’ flood risk that occur when the 

properties are remapped into higher-risk flood zones but whose policies continue to be 

classified with other policyholders from lower-risk zones.
Page 6 GAO-16-766 Community-Based Flood Insurance

According to FEMA, as of March 2016 there were more than 5 million 

NFIP policies in force, which were spread across more than 22,000 

communities throughout the United States and its territories (see figs. 1 

and 2). FEMA defines a community as a political entity that has the 

authority to adopt and enforce floodplain ordinances for the area under its 

jurisdiction which is—in most cases—an incorporated city, town, 

township, borough, village, or an unincorporated area of a county or 

parish. While FEMA could potentially modify this definition to include 

other types of communities for a CBFI option, using the number of 

communities currently participating in NFIP provides one measure of how 

many communities could hypothetically pursue a CBFI option.

NFIP Data on the Number 

of Policies in Force and 

Communities Participating
Page 7 GAO-16-766 Community-Based Flood Insurance

Figure 1: Number of National Flood Insurance Program Policies in Force, by State, as of March 2016
Page 8 GAO-16-766 Community-Based Flood Insurance

Figure 2: Number of Communities Participating in the National Flood Insurance Program, by State, as of March 2016

In 2007, we identified four broad policy goals for federal involvement in 

natural catastrophe insurance: (1) charging premium rates that fully 

reflect actual risks; (2) encouraging private markets to provide natural 

catastrophe insurance; (3) encouraging broad participation in natural 

Policy Goals for Federal 

Involvement in Natural 

Catastrophe Insurance
Page 9 GAO-16-766 Community-Based Flood Insurance

catastrophe insurance programs; and (4) limiting costs to taxpayers 

before and after a disaster.12 We identified these goals by drawing 

insights from a variety of sources: past GAO work, legislative histories of 

laws that changed the roles of state governments and the federal 

government after disasters, bills considered by Congress, interviews with 

public and private sector officials, and articles written by experts in 

insurance economics. We believe that the four goals we identified 

accurately capture the essential concerns of the federal government. We 

have previously used these policy goals to evaluate potential changes to 

NFIP. We believe that they are still relevant and could also be used to 

evaluate a CBFI option.13

We determined that the CBFI study objectives and methodology agreed 

upon by FEMA and NAS were reasonable. The objectives were clearly 

stated and designed to provide relevant, high-level considerations that 

could help FEMA decide whether CBFI should be implemented before 

determining how it should be implemented, which FEMA officials said was 

an important step. The methodology was consistent with the study’s 

objectives and was reasonable given the limitations identified by FEMA: 

short time frames, the need to obtain informed opinions, and unavailable 

data. As a result, the study included findings that helped FEMA draw 

 12GAO, Natural Disasters: Public Policy Options for Changing the Federal Role in Natural 

Catastrophe Insurance, GAO-08-7 (Washington, D.C.: Nov. 26, 2007). 

13GAO, Flood Insurance: Public Policy Goals Provide a Framework for Reform, 

GAO-11-670T (Washington, D.C.: June 23, 2011), Flood Insurance: Strategies for 

Increasing Private Sector Involvement, GAO-14-127 (Washington, D.C.: Jan. 22, 2014), 

and GAO-16-190.

FEMA’s Study and 

Report Provided 

Relevant Information 

and Concluded that 

FEMA Should Not 

Implement CBFI

The Design of FEMA’s 

Study Was Reasonable, 

with Methodology 

Supporting Study 

Objectives
Page 10 GAO-16-766 Community-Based Flood Insurance

conclusions about whether and how to implement CBFI, if it chose to do 

so.

FEMA and NAS took several steps to design the objectives and 

methodology of the CBFI study. FEMA initially provided NAS with 

documents that included background information on the purpose of the 

study and proposed a methodology and objectives. Then, NAS officials 

responded with minor modifications that reflected what NAS could do to 

meet FEMA’s needs. FEMA and NAS officials told us that they held two 

meetings and communicated via email before agreeing to the 

methodology, objectives, and time frames (see fig. 3).

Figure 3: Federal Emergency Management Agency Community-Based Flood 

Insurance Study Statement of Task

According to FEMA and NAS officials, FEMA and NAS agreed that the 

study’s objectives were to examine future prospects for CBFI by 

identifying and discussing issues that would require further evaluation in 
Page 11 GAO-16-766 Community-Based Flood Insurance

order for FEMA and others to better evaluate CBFI’s strengths and 

weaknesses. According to FEMA officials, the agreed-upon objectives 

met their needs.

To execute the CBFI study, NAS convened an expert committee to 

produce a report using a consensus report process.14 The committee was 

composed of 12 members that represented academia, the private sector, 

and state and federal government. The committee met twice: the January 

2015 meeting featured guest presentations, and the March 2015 meeting 

was convened in a workshop-type format with multiple panels of external 

speakers. Following these meetings, the NAS study director, committee 

chair, and other committee members developed sections of the study and 

all committee members signed off on the full study. Prior to publication, 

NAS conducted an independent external peer review by experts who 

NAS recruited based on their technical expertise and breadth of 

perspectives.

NAS and FEMA officials explained that they decided to use the 

consensus report process because it offered several benefits and did not 

face the same limitations that other methodologies would have faced. 

According to NAS officials, because consensus reports modulate different 

perspectives and identify new concepts and approaches, this approach 

was appropriate to meet the study’s objectives. FEMA officials explained 

that they requested a consensus report methodology because it would 

provide independent, creative, and unbiased ideas from experts who 

already had a deep contextual knowledge of NFIP. Further, FEMA 

officials said that alternative approaches they considered would have 

faced various limitations. They stated that community-based surveys or 

listening sessions, for example, would have taken more time and might 

not have reached audiences that could provide well-informed opinions. 

Data analysis was not considered a viable option because FEMA does 

not have the data it would need to determine hypothetical costs for 

participating communities, homeowners, and FEMA. For example, as we 

have previously reported, FEMA does not collect all information 

 14According to NAS officials, the NAS consensus report process consists of four main 

steps, which NAS followed for the CBFI study: (1) defining the study; (2) selecting and 

approving the committee; (3) holding committee meetings, gathering information, 

deliberating, and drafting the report; and (4) reviewing the report.
Page 12 GAO-16-766 Community-Based Flood Insurance

necessary to determine flood risk, which is a key factor for determining 

NFIP premiums for individual policyholders or, potentially, communities.15

We determined that FEMA’s study provided relevant information for 

evaluating the advisability of implementing CBFI. The study identified and 

discussed seven main areas for further consideration in designing a CBFI 

option for potential implementation.

• Risk bearing and sharing—A CBFI option could conceivably shift riskbearing to communities, private insurers, or individuals depending on 

how it is structured.

• Responsibilities for writing policies and loss adjustments—

Participating insurance agents write policies and collect premiums 

under NFIP, but CBFI policies could be written at the community level.

• Coverage limits, standards, and compliance—Movement to a CBFI 

policy option could provide a community with an opportunity to 

reconsider flood exposures, such as extending the exposure beyond 

individual homes to public infrastructure.

• Underwriting, pricing, and allocation of premium costs—Several 

complex considerations could fall under this topic, including methods 

used in setting premiums, the extent to which catastrophic losses 

would be reflected, and the allocation of premium costs among 

homeowners.

• Administrative capabilities—Communities would likely not have 

expertise for undertaking the administration of CBFI policies, but 

depending on how a community is defined, it could have the means 

for collecting funds to pay for CBFI premiums.

• Confirming compliance with mandatory purchase requirements—A 

community-based policy might have to maintain some aspect of 

individual property coverage in order to satisfy mandatory flood 

 15We have recommended that FEMA collect such data, but FEMA has yet to implement 

our recommendations as of June 2016. See GAO, Flood Insurance: More Information 

Needed on Subsidized Properties, GAO-13-607 (Washington, D.C.: July 3, 2013), Flood 

Insurance: Forgone Premiums Cannot Be Measured and FEMA Should Validate and 

Monitor Data System Changes, GAO-15-111 (Washington, D.C.: Dec. 11, 2014), and 

National Flood Insurance Program: Options for Providing Affordability Assistance, 

GAO-16-190 (Washington, D.C.: Feb. 10, 2016).

FEMA’s Study Provided 

Relevant Information for 

Evaluating the Advisability 

of Implementing CBFI
Page 13 GAO-16-766 Community-Based Flood Insurance

insurance purchase requirements, which could be administratively 

burdensome.

• Pricing expertise, including valuation of mitigation measures—Pricing 

of CBFI policies would need to account for the risk underwritten and 

the savings expected from mitigation measures.

The study also provided other relevant information related to CBFI, such 

as discussion of potential benefits and challenges, a conceptual rationale 

for identifying cases in which CBFI may or may not be a good option, and 

considerations for defining “community” in the context of CBFI. For 

example, the study reports that benefits could include reduced 

administrative and transaction costs, increased take-up rates, and 

promotion of mitigation efforts and floodplain management. The study 

also reports that challenges could include lack of community interest; 

limited implementation capability; likely need to create many approaches 

given variation in population size, geography, and authority to regulate 

land use and collect revenue; and political obstacles. Additionally, the 

study developed a conceptual rationale for identifying cases in which 

CBFI may or may not be desirable, and also identified several factors that 

could make CBFI more or less desirable than individual flood insurance 

policies. In addition, the study notes that FEMA may want to consider 

broadening the current definition of “community” because it may be too 

narrow in the context of CBFI.16 Specifically, the study noted that while a 

town or city would clearly be considered as a community under FEMA’s 

current definition, the status of areas such as business districts or gated 

communities would be unclear and, as a result, it is difficult to say 

whether or not these kinds of areas would be eligible to purchase CBFI 

policies.

To further assess FEMA’s study, we evaluated relevant elements of its 

findings against the four public policy goals for federal involvement in 

natural catastrophe insurance that we have previously identified. The 

public policy goals, along with examples of elements from the study, 

follow.

 16FEMA defines a community as a political entity that has the authority to adopt and 

enforce floodplain ordinances for the area under its jurisdiction which is—in most cases—

an incorporated city, town, township, borough, village, or an unincorporated area of a 

county or parish.
Page 14 GAO-16-766 Community-Based Flood Insurance

1. Charging premium rates that fully reflect actual risks. Our prior work 

has shown that charging rates that do not fully reflect actual risks 

makes it difficult for FEMA to maintain the financial stability of NFIP, 

sends policyholders inaccurate price signals about their chances of 

incurring losses, and reduces incentives for policyholders to 

undertake mitigation efforts.17 FEMA’s study identified areas for 

further consideration, including several related to charging premium 

rates that fully reflect risks; responsibility for bearing and sharing risk; 

responsibility for writing policies and loss adjustments; underwriting, 

pricing, and allocation of premium costs; and pricing expertise, 

including valuation of mitigation measures. The study also outlined 

concepts for innovative uses of CBFI that could help NFIP charge fullrisk rates, such as requiring communities interested in CBFI to provide 

comprehensive analysis of flood risk in their communities, which 

would enhance NFIP’s knowledge of flood risk at the community level.

2. Encouraging private markets to provide natural catastrophe 

insurance. Our prior work has shown that covering flood-related 

losses through NFIP involves significant federal expense, and 

Congress has shown interest in reducing the federal government’s 

role in flood insurance by transferring its exposure to the private 

sector.18 While the private sector has not historically been willing to 

participate in the flood insurance market, facilitating certain conditions 

could help increase private sector involvement. FEMA’s study 

discusses ways in which CBFI could encourage or discourage private 

market participation in flood insurance markets. For example, the 

study suggests that CBFI could encourage private sector involvement 

if NFIP offered it in either of two forms. First, CBFI could be offered as 

a way to insure all properties at a base level of coverage, providing 

the private sector with an opportunity to offer supplementary 

insurance above this base level of coverage. Second, CBFI could be 

offered as coverage for residual risk properties—the highest-risk 

 17See, for example, GAO, National Flood Insurance Program: Options for Providing 

Affordability Assistance, GAO-16-190 (Washington, D.C.: Feb. 10, 2016), National Flood 

Insurance Program: Continued Progress Needed to Fully Address Prior GAO 

Recommendations on Rate-Setting Methods, GAO-16-59 (Washington, D.C.: Mar. 17, 

2016), GAO-15-111, and Overview of GAO’s Past Work on the National Flood Insurance 

Program, GAO-14-297R (Washington, D.C.: Apr. 9, 2014).

18See, for example, GAO, Flood Insurance: Strategies for Increasing Private Sector 

Involvement, GAO-14-127 (Washington, D.C.: Jan. 22, 2014).
Page 15 GAO-16-766 Community-Based Flood Insurance

properties that the private sector would not want to insure—allowing 

the private sector to insure all other properties.19

However, the study also suggests several challenges that may 

outweigh these potential benefits. For example, private insurers would 

need to acquire the information and expertise to price CBFI policies in 

line with actuarial standards and would have difficulty diversifying their 

risk pool—issues we have previously identified as key private sector 

concerns about offering flood insurance.20 Additionally, CBFI may 

discourage private sector participation because servicing CBFI 

policies after a disaster could be difficult, as the damage would be 

concentrated in a set geographic area.

3. Encouraging broad participation in natural catastrophe insurance 

programs. Our prior work has shown that nationwide flood insurance 

penetration rates are estimated to be low and information on 

compliance with the mandatory purchase requirement is limited.21 The 

study provided some discussion of how potential benefits and 

challenges of CBFI could relate to increasing NFIP participation. For 

example, the study notes that CBFI could help increase take-up rates 

and encourage compliance with mandatory purchase requirements, 

but it also noted that there may be challenges related to requiring all 

community members to participate in CBFI and some communities 

would not be able to oversee compliance with mandatory purchase 

requirements (unless that responsibility remained with the lender).

4. Limiting costs to taxpayers before and after a disaster. Our prior work 

has shown that the losses already generated by NFIP, as well as the 

potential for future losses, have created substantial financial exposure 

 19In 2014, we reported that NFIP could act as a residual insurer. This strategy would give 

private insurers the opportunity to provide flood insurance to most property owners who 

desire it, and the federal government would offer coverage only to the highest-risk 

properties that private insurers were unwilling to underwrite. See GAO-14-127.

20 In 2014, we found that insurers cited three main conditions that needed to be present to 

increase private sector involvement in the sale of flood insurance. In addition to being able 

to charge premium rates that reflect the full estimated risk of potential flood losses while 

still allowing the companies to make a profit, insurers said that they need to be able to 

accurately assess risk to determine premium rates and need a sufficient level of consumer 

participation for insurers to properly manage and diversify their risk. See GAO-14-127.

21See, for example, GAO-14-297R and Flood Insurance: Options for Addressing the 

Financial Impact of Subsidized Premium Rates on the National Flood Insurance Program, 

GAO-09-20 (Washington, D.C.: Nov. 14, 2008).
Page 16 GAO-16-766 Community-Based Flood Insurance

for the federal government and NFIP likely will not generate sufficient 

premium revenue to repay the billions of dollars borrowed from 

Treasury.22 The study provided some discussion of how CBFI could 

potentially limit costs to taxpayers by encouraging communities to 

pursue mitigation options that reduce risk of flood damage and result 

in lower premiums, or by potentially reducing administrative and 

transaction costs. However, the study also said that—given 

administrative costs required to design and set up the program—

these cost savings could be limited if few communities decide to 

enroll.

Finally, FEMA officials said that the CBFI study’s findings met their needs. 

According to the officials, the study’s broad discussion of areas for further 

research as well as potential benefits and challenges of CBFI informed 

their opinion on the prospects for CBFI.

The FEMA report, which included the study, provides a brief set of related 

conclusions from FEMA, including that FEMA should not implement CBFI. 

FEMA officials explained that, after reviewing the results of the study, 

they concluded that FEMA should not conduct further related research or 

implement CBFI for several reasons:

• The challenges outlined in the study—such as administrative burden 

on communities and FEMA, unavailable data, unclear cost distribution 

among community members, and potential legislative requirements—

are significant and likely outweigh the benefits.

• A limited number of communities would be likely to participate in a 

CBFI option, as only one community expressed positive interest in 

CBFI after FEMA presented the idea during previous NFIP reform 

listening sessions.23

• Dedicating FEMA’s resources to other potential NFIP reforms and 

strengthening existing programs would be a better use of these 

resources.

 22See, for example, GAO-14-297R and High-Risk Series: An Update, GAO-15-290 

(Washington, D.C.: Feb. 11, 2015).

23In 2009, NFIP held listening sessions to collect input from stakeholders in the public, 

private, and non-profit sectors on the focus and direction of NFIP reform efforts.

FEMA’s Report Concludes 

that CBFI Should Not Be 

Implemented
Page 17 GAO-16-766 Community-Based Flood Insurance

Based on the factors cited by FEMA officials and our prior work, we agree 

that FEMA’s conclusion that it was not advisable to implement CBFI at 

this time was reasonable. We have previously reported on how some of 

the challenges that the CBFI study outlined apply to NFIP more broadly. 

For example, we have previously reported that FEMA’s resource 

constraints may jeopardize potential NFIP reform efforts. In 2008, we 

reported that implementing a combined federal flood and wind program 

could make addressing existing management challenges even more 

difficult, given the resources that would be required to administer and 

oversee a new program. In 2015 we reported that while FEMA had begun 

taking some actions to improve its capacity to administer NFIP, it was 

unclear whether FEMA had the resources required to complete its efforts 

to implement both the Biggert-Waters Act and HFIAA reforms.24 Also, 

starting in 2013, we have stated in multiple reports that FEMA does not 

collect some data necessary to determine flood risk—a key factor for 

determining NFIP premiums for individual policyholders or, potentially, 

communities.25 In addition, we have reported that some communities may 

face challenges administering NFIP and flood mitigation programs. In 

2013, we reported that communities such as Indian tribes may lack the 

resources and administrative capacity needed to administer NFIP 

requirements, and in 2014 we reported that experts claim that some 

communities—especially rural ones—may lack the expertise and 

administrative capabilities to apply for and administer grants for mitigation 

activities.26

 24GAO, Natural Catastrophe Insurance: Analysis of a Proposed Combined Federal Flood 

and Wind Insurance Program, GAO-08-504 (Washington, D.C.: Apr. 25, 2008), Flood 

Insurance: Status of FEMA’s Implementation of the Biggert-Waters Act, as Amended, 

GAO-15-178 (Washington, D.C.: Feb. 19, 2015), and High-Risk Series: An Update, 

GAO-15-290 (Washington, D.C.: Feb. 11, 2015).

25GAO recommended in July 2013 that FEMA collect information from all policyholders 

necessary to determine flood risk. FEMA agreed with the recommendation but—as of 

June 2016—had taken limited action to implement it, citing the considerable time and cost 

involved in obtaining the information. See GAO-13-607, GAO-15-111, and GAO-16-190. 

26GAO, Flood Insurance: Participation of Indian Tribes in Federal and Private Programs, 

GAO-13-226 (Washington, D.C.: Jan. 4, 2013) and National Flood Insurance Program: 

Additional Guidance on Building Requirements to Mitigate Agricultural Structures’ Damage 

in High-Risk Areas Is Needed, GAO-14-583 (Washington, D.C.: June 30, 2014).
Page 18 GAO-16-766 Community-Based Flood Insurance

We provided a draft of this report to FEMA for its review. FEMA did not 

provide formal comments, and did not have any technical comments.

If you or your staff have any questions concerning this report, please 

contact me at (202) 512-8678 or cackleya@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix I.

Alicia Puente Cackley

Director, Financial Markets and Community Investment

Agency Comments
Appendix I: GAO Contact and Staff 

Acknowledgments

Page 19 GAO-16-766 Community-Based Flood Insurance

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov.

In addition to the contact named above, Patrick Ward (Assistant Director); 

Chloe Brown and Tarik Carter (Analysts-in-Charge); Namita BhatiaSabharwal; and Jennifer Schwartz made key contributions to this report. 

Also contributing to this report were David Dornisch; Jessica Sandler; and 

Jena Sinkfield.

Appendix I: GAO Contact and Staff 

Acknowledgments

Contact

Acknowledgments

(100623)
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