FLOOD INSURANCE

Comprehensive 

Reform Could 

Improve Solvency and 

Enhance Resilience

Report to Congressional Addressees

April 2017

GAO-17-425

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-425, a report to 

congressional addressees

April 2017

FLOOD INSURANCE

Comprehensive Reform Could Improve Solvency and 

Enhance Resilience

What GAO Found

Based on discussions with stakeholders and GAO’s past work, reducing federal 

exposure and improving resilience to flooding will require comprehensive reform 

of the National Flood Insurance Program (NFIP) that will need to include

potential actions in six key areas (see figure below). Comprehensive reform will 

be essential to help balance competing programmatic goals, such as keeping 

flood insurance affordable while keeping the program fiscally solvent. Taking 

actions in isolation may create challenges for some property owners (for 

example, by reducing the affordability of NFIP policies) and therefore these 

consequences also will need to be considered. Some of the potential reform

options also could be challenging to start or complete, and could face resistance, 

because they could create new costs for the federal government, the private 

sector, or property owners. Nevertheless, GAO’s work suggests that taking 

actions on multiple fronts represents the best opportunity to help address the 

spectrum of challenges confronting NFIP.

Six Areas That Constitute Comprehensive Flood Insurance Reform

Through its work, GAO identified the following interrelationships and potential 

benefits and challenges associated with potential actions that could be taken to 

reform NFIP in the six areas:

• Outstanding debt. The Federal Emergency Management Agency (FEMA), 

which administers NFIP, owed $24.6 billion as of March 2017 to the 

Department of the Treasury (Treasury) for money borrowed to pay claims

and other expenses, including $1.6 billion borrowed following a series of 

floods in 2016. FEMA is unlikely to collect enough in premiums to repay this 

debt. Eliminating the debt could reduce the need to raise rates to pay interest 

and principal on existing debt. However, additional premiums still would be 

needed to reduce the likelihood of future borrowing in the long term. Raising 

premium rates could create affordability issues for some property owners and 

discourage them from purchasing flood insurance, and would require other 

potential actions to help mitigate these challenges.

View GAO-17-425. For more information, 

contact Alicia Puente Cackley at (202) 512-

8678 or cackleya@gao.gov.

Why GAO Did This Study

Congress created NFIP to reduce the 

escalating costs of federal disaster 

assistance for flood damage, but also 

prioritized keeping flood insurance 

affordable, which transferred the 

financial burden of flood risk from 

property owners to the federal 

government. In many cases, premium 

rates have not reflected the full risk of 

loss, so NFIP has not had sufficient 

funds to pay claims. As of March 2017, 

NFIP owed $24.6 billion to Treasury. 

NFIP’s current authorization expires in 

September 2017.

In this report, GAO focuses on 

potential actions that can help reduce 

federal fiscal exposure and improve 

resilience to flood risk. GAO reviewed 

laws, GAO reports, and other studies. 

GAO interviewed officials from FEMA

and other agencies. GAO also solicited 

input from industry stakeholders 

(including insurers, reinsurers, and 

actuaries) and nonindustry 

stakeholders (including academics,

consumer groups, and real estate and 

environmental associations) through 

interviews, a nongeneralizable 

questionnaire, and four roundtable 

discussions.

What GAO Recommends

To improve NFIP solvency and 

enhance national resilience to floods, 

Congress should consider 

comprehensive reform covering six 

areas: (1) outstanding debt, (2) 

premium rates, (3) affordability, (4) 

consumer participation, (5) barriers to 

private-sector involvement, and (6) 

NFIP flood resilience efforts.
Highlights Page 2

• Premium rates. NFIP premiums do not reflect 

the full risk of loss, which increases the federal 

fiscal exposure created by the program, 

obscures that exposure from Congress and 

taxpayers, contributes to policyholder 

misperception of flood risk (they may not fully 

understand the risk of flooding), and 

discourages private insurers from selling flood 

insurance (they cannot compete on rates). 

Eliminating rate subsidies by requiring all rates 

to reflect the full risk of loss would address an

underlying cause of NFIP’s debt and minimize

federal fiscal exposure. It also would improve 

policyholder understanding of flood risk and 

encourage private-sector involvement. 

However, raising rates makes policies less 

affordable and could reduce consumer 

participation. The decreases in affordability

could be offset by other actions such as

providing means-based assistance.

• Affordability. Addressing the affordability 

issues that some consumers currently face, or

might face if premium rates were raised, could

help ensure more consumers purchase 

insurance to protect themselves from flood 

losses. GAO previously recommended that 

any affordability assistance should be funded 

with a federal appropriation (rather than 

through discounted premiums) and should be 

means-tested. Means-testing the assistance 

could help control potential costs to the federal 

government, and funding with an appropriation 

would increase transparency of the federal 

fiscal exposure to Congress. Many industry 

and nonindustry stakeholders with whom GAO 

spoke said affordability assistance should 

focus on helping to pay for mitigation—such as

elevating buildings—because mitigation

permanently reduces flood risk (thus reducing 

premium rates). Mitigation efforts can have 

high up-front costs, and may not be feasible in 

all cases, but many stakeholders suggested 

that federal loans could be used to spread

consumer costs over time.

• Consumer participation. According to many

industry and nonindustry stakeholders with 

whom GAO spoke, some consumers might not 

purchase flood insurance because they 

misperceive their flood risk. For example, 

consumers located outside of the highest-risk 

areas, who are not required to purchase flood 

insurance, may mistakenly perceive they are 

not at risk of flood loss. Consumers also may 

choose not to purchase flood insurance

because they overestimate the adequacy of 

federal assistance they would expect to 

receive after a disaster. Expanding the 

mandatory purchase requirement beyond 

properties in the highest-risk areas is one 

option for encouraging consumer participation

in flood insurance. However, doing so could 

face public resistance and create affordability 

challenges for some, highlighting the 

importance of an accompanying affordability 

assistance program. Increasing consumer 

participation could help ensure more 

consumers would be better protected from the 

financial risk of flooding.

• Other barriers to private-sector 

involvement. Industry and nonindustry 

stakeholders with whom GAO spoke cited 

regulatory uncertainty and lack of data as 

barriers to their ability to sell flood insurance, in 

addition to the less than full-risk rates charged 

by FEMA. For example, some industry and 

nonindustry stakeholders told GAO that while

lenders must enforce requirements that certain 

mortgages have flood insurance, some lenders 

are uncertain whether private policies meet the 

requirements. Clarifying the types of policies 

and coverage that would do so could reduce 

this uncertainty and encourage the use of 

private flood insurance. In addition, some 

stakeholders said that access to NFIP claims 

data by the insurance industry could allow 

private insurers to better estimate losses and 

price policies. FEMA officials said they would 

need to address privacy concerns to provide 

such information but have been exploring ways 

to facilitate more data sharing.

• NFIP flood resilience efforts. Some industry 

and nonindustry stakeholders told GAO that

greater involvement by private insurers could

reduce funding available for some NFIP flood

resilience efforts (mitigation, mapping, and 

community participation). For example, some 

of these stakeholders said that as the number 

of NFIP policies decreased, the policy fees 

FEMA used to help fund mitigation and flood 

mapping activities also would decrease.

Potential actions to offset such a decrease 

could include appropriating funds for these 

activities or adding a fee to private policies.

This would allow NFIP flood resilience efforts 

to continue at their current levels as privatesector involvement increased.
Page i GAO-17-425 Flood Insurance

Letter 1

Background 3

Potential Comprehensive Reform of NFIP Would Require Actions 

in Six Key Areas 14

Conclusions 42

Matter for Congressional Consideration 43

Agency Comments 44

Appendix I Objectives, Scope, and Methodology 46

Appendix II Additional Reforms That Are Contingent on the Development 

of the Private Flood Insurance Market 49

Appendix III GAO Contact and Staff Acknowledgments 52

Tables

Table 1: Selected Requirements from the Biggert-Waters Act and 

HFIAA 10

Table 2: Policy Goals for Evaluating Options for Reforming Flood 

Insurance 13

Figure

Figure 1: National Flood Insurance Program Annual Year-End 

Outstanding Debt to Treasury, Fiscal Years 1995–2017 8

Contents
Page ii GAO-17-425 Flood Insurance

Abbreviations

Biggert-Waters Act Biggert-Waters Flood Insurance Reform Act 

of 2012

FEMA Federal Emergency Management Agency

HFIAA Homeowners Flood Insurance Affordability Act 

of 2014

NFIP National Flood Insurance Program

SFHA special flood hazard area

Treasury Department of the Treasury

WYO Write Your Own

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Page 1 GAO-17-425 Flood Insurance

441 G St. N.W.

Washington, DC 20548

April 27, 2017

Congressional Addressees

The National Flood Insurance Program (NFIP) plays a critical role in 

federal efforts to improve resilience to flooding (the ability to absorb and 

recover from such events), but as we have previously reported, it faces a 

number of financial and management challenges.1 Competing aspects of 

NFIP—keeping flood insurance affordable while making the program 

fiscally solvent—have made it challenging to reform the program. 

Specifically, it has been challenging to promote participation in the 

program while at the same time attempting to fund claim payments with 

premiums paid by NFIP policyholders. For example, to help promote the 

purchase of flood insurance, Congress has authorized the program to 

charge discounted premium rates to many policyholders but no 

appropriations have been made available to make up for that discount. As 

a result, premium revenue has been insufficient to pay claims over the 

long term, and the Federal Emergency Management Agency (FEMA) has 

had to borrow from the Department of the Treasury (Treasury) to pay 

losses resulting from major natural disasters (such as Hurricanes Katrina, 

Rita, and Wilma in 2005 and Superstorm Sandy in 2012).2 As of March 

2017, NFIP was $24.6 billion in debt to Treasury.

At different points, FEMA, which administers NFIP, and Congress 

focused on making the program more fiscally self-sustaining but have 

made limited progress in achieving this goal. For example, in 1983 we 

reported that FEMA had set a goal of making the program self-sustaining 

by 1988.3 Subsequently in 2012, the Biggert-Waters Flood Insurance 

Reform Act of 2012 (Biggert-Waters Act) required FEMA to phase out 

 1

GAO, High-Risk Series: Progress on Many High-Risk Areas, While Substantial Efforts 

Needed on Others, GAO-17-317 (Washington, D.C.: Feb. 15, 2017); Overview of GAO’s 

Past Work on the National Flood Insurance Program, GAO-14-297R (Washington, D.C.:

Apr. 9, 2014); and FEMA: Action Needed to Improve Administration of the National Flood 

Insurance Program, GAO-11-297 (Washington, D.C.: June 9, 2011).

2

Larger than expected catastrophic losses can also contribute to a need to borrow from 

Treasury to pay claims.

3

GAO, National Flood Insurance Program: Major Changes Needed If It Is to Operate 

without a Federal Subsidy, GAO/RCED-83-53 (Washington, D.C.: Jan. 3, 1983).

Letter
Page 2 GAO-17-425 Flood Insurance

almost all discounted insurance premiums and establish a reserve fund.4

But the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA) 

reinstated certain subsidies removed by the Biggert-Waters Act and 

generally limited yearly premium rate increases.5

While the volatile nature of flooding makes it difficult to predict the losses 

the program might experience in the future, we have stated in past 

reports that FEMA is unlikely to be able to repay its current debt, primarily 

because premium rates charged to many policyholders do not reflect the 

full risk of loss.6 Insurance companies, academics, consumer advocates, 

and others have proposed a number of options for reforming NFIP. These 

options include changes to NFIP premium rates, increased involvement of 

private-sector insurers, new roles for the federal government, and 

revisions to requirements for the purchase of flood insurance. Currently, 

owners of properties in special flood hazard areas (SFHA) that are 

secured by federally backed mortgages or mortgages obtained from 

federally regulated institutions generally must purchase flood insurance.7

In September 2017, NFIP’s current authorization will expire. We 

performed our work under the authority of the Comptroller General in light 

of congressional interest in flood insurance and NFIP’s impending 

reauthorization. This report examines actions Congress and FEMA could 

take to reduce federal fiscal exposure and improve resilience to flood 

damage. We specifically focused our review on potential actions in six 

key areas: (1) outstanding debt, (2) premium rates, (3) affordability, (4) 

consumer participation, (5) barriers to private-sector involvement, and (6) 

NFIP flood resilience efforts.

To address this objective, we reviewed our prior related reports and other 

studies, analyzed relevant laws, and conducted semi-structured 

 4

Pub. L. No. 112-141, §§100205,100207, 100212, 126 Stat. 405, 917, 919, 922 (2012), 

codified as amended at 42 U.S.C. § 4014(a)(2) and (g), 42 U.S.C. § 4015, 42 U.S.C. § 

4017a.

5

Pub. L. No. 113-89, 128 Stat. 1020 (2014).

6

GAO, Flood Insurance: Potential Barriers Cited to Increased Use of Private Insurance, 

GAO-16-611 (Washington, D.C.: July 14, 2016); and National Flood Insurance Program: 

Continued Progress Needed to Fully Address Prior GAO Recommendations on RateSetting Methods, GAO-16-59 (Washington, D.C.: Mar. 17, 2016).

7

SFHAs, which are depicted on NFIP maps, represent the land areas that would be 

submerged by the floodwaters of the “base flood” or a flood that has a 1 percent chance of 

being equaled or exceeded in any given year.
Page 3 GAO-17-425 Flood Insurance

interviews with relevant stakeholder groups.8 We also sent a 

questionnaire to more than 100 stakeholders, judgmentally selected to 

include a broad range of perspectives, including state and federal 

officials, insurers, reinsurers, catastrophe modelers, academics, and 

consumer advocates. We obtained a response rate of 76 percent and 

used the results to gather stakeholder input on options for reforming NFIP 

and policy goals for evaluating those options. We also conducted four 

web-based roundtables with a total of 43 stakeholders judgmentally 

selected to represent diverse groups with flood insurance knowledge to 

further identify and analyze flood insurance reform options. We discuss 

our scope and methodology in more detail in appendix I.

We conducted this performance audit from September 2015 to April 2017 

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.

Congress first proposed providing flood insurance in the 1950s, after it 

became clear that private insurance companies could not profitably 

provide flood coverage at a price that consumers could afford, primarily 

because of the catastrophic nature of flooding and the difficulty of 

determining accurate rates.9 In 1968, Congress created NFIP to help 

reduce escalating costs of providing federal flood assistance to repair 

damaged homes and businesses.10 According to FEMA, NFIP also was 

designed to address the policy objectives of identifying flood risk, offering 

affordable insurance premiums to encourage program participation, and 

promoting community-based floodplain management. To meet these 

policy objectives, NFIP has four key elements: identifying and mapping 

 8

Industry stakeholders include insurers, insurer associations, reinsurers, reinsurer 

associations, insurance agents, insurance agent associations, insurance adjuster 

associations, actuary associations, and catastrophe modelers. Nonindustry stakeholders 

include academics, consumer advocates, environmental associations, federal agencies, 

lender associations, mitigation associations, real estate associations, state insurance 

programs, state insurance regulators, and think tanks.

9

Federal Emergency Management Agency, National Flood Insurance Program: Program 

Description (Washington, D.C.: Aug. 1, 2002).

10Pub. L. No. 90-448, Tit. XIII, 82 Stat. 476, 572 (1968). 

Background
Page 4 GAO-17-425 Flood Insurance

flood risk, floodplain management, flood insurance, and incentivizing risk 

reduction through grants and premium discounts.

Through NFIP, FEMA maps floodplain boundaries and requires 

participating communities to adopt and enforce floodplain management 

regulations that mitigate the effects of flooding and reduce overall costs. 

According to FEMA, floodplain management standards are designed to 

prevent new development from increasing the flood threat and to protect 

new and existing buildings from anticipated flooding.11 FEMA has a 

division responsible for flood mapping activities and policy and guidance, 

but stakeholders from all levels of government and the private sector 

participate in the mapping process. For instance, FEMA relies on local 

governments to provide notice of changes in communities that can pose 

new or changed flood hazards and works with localities to collect the 

information needed to update flood maps.

FEMA’s Flood Insurance Rate Maps serve several purposes. They 

provide the basis for setting insurance rates and identifying properties 

whose owners are required to purchase flood insurance. For example, 

since the Flood Disaster Protection Act of 1973, as amended, 

homeowners with federally backed mortgages or mortgages held by 

federally regulated lenders on property in an SFHA are required to 

purchase flood insurance.12 Others may purchase flood insurance 

voluntarily if they live in a participating community. The maps also provide 

the basis for establishing floodplain management standards that 

communities must adopt and enforce as part of their NFIP participation. 

As of February 2017, 22,235 communities across the United States and 

its territories voluntarily participated in NFIP by adopting and agreeing to 

 11Federal Emergency Management Agency, Answers to Questions about the NFIP, FEMA 

F-084 (Washington, D.C.: March 2011).

12Federal law requires each federal entity for lending regulation to direct regulated lending 

institutions to ensure that borrowers with mortgages held by regulated lending institutions 

and secured by properties located in SFHAs in communities participating in NFIP 

purchase and maintain flood insurance (mandatory purchase requirement). 42 U.S.C. § 

4012a(a). “Federal entity for lending regulation” refers to the Board of Governors of the 

Federal Reserve System, Federal Deposit Insurance Corporation, Office of the 

Comptroller of the Currency, National Credit Union Administration, and Farm Credit 

Administration. “Regulated lending institution” means any bank, savings and loan 

association, credit union, farm credit bank, federal land bank association, production credit 

association, or similar institution subject to the supervision of a federal entity for lending 

regulation (that is, the federal entity primarily responsible for supervising the institution). 

42 U.S.C. § 4003(a). 

NFIP Flood Hazard 

Mapping and Mitigation
Page 5 GAO-17-425 Flood Insurance

enforce flood-related building codes and floodplain management 

regulations.

FEMA has stated that resilience to flooding is a key objective of NFIP. 

Broadly speaking, resilience is the ability to prepare and plan for, absorb, 

recover from, and more successfully adapt to actual or potential adverse 

events. Resilience is closely linked with flood mitigation activities. For 

example, FEMA estimated that its floodplain management efforts resulted 

in avoidance of $1.87 billion in flood losses annually, and FEMA officials 

said they expect this amount to increase over time as additional new 

construction is built to increasingly better standards.

FEMA supports a variety of flood mitigation activities that are designed to 

reduce flood risk and thus NFIP’s financial exposure. These activities, 

which are implemented at the state and local levels, include hazard 

mitigation planning; the adoption and enforcement of floodplain

management regulations and building codes; and the use of hazard 

control structures such as levees, dams, and floodwalls or natural 

protective features such as wetlands and dunes. FEMA provides 

community-level mitigation funding through grant programs. At the 

individual property level, mitigation options include elevating a building, 

relocating the building to an area with lower flood risk, or purchasing and 

demolishing a building and turning the property into green space.

Another tool FEMA uses to incentivize efforts to reduce flood risk is the 

Community Rating System. The Community Rating System is a voluntary 

incentive program that recognizes and encourages community floodplain 

management activities that exceed the minimum NFIP requirements. As a 

result, flood insurance premium rates are discounted to reflect the 

reduced flood risk resulting from community actions that meet the three 

goals of reducing flood damage to insurable property, strengthening and 

supporting the insurance aspects of NFIP, and encouraging a 

comprehensive approach to floodplain management.
Page 6 GAO-17-425 Flood Insurance

Insurance offered through NFIP includes different coverage levels and 

premium rates, which are determined by factors that include property 

characteristics, location, and statutory provisions. NFIP coverage limits 

vary by program (regular or emergency) and building occupancy (for 

example, residential or nonresidential).13 In NFIP’s regular program, the 

maximum coverage limit for 1-4 family residential policies is $250,000 for 

buildings and $100,000 for contents. For nonresidential or multifamily 

policies, the maximum coverage limit is $500,000 per building and 

$500,000 for the building owner’s contents. Separate coverage is 

available for contents owned by tenants.

To set premium rates, FEMA considers several factors including location 

in flood zones, elevation of the property relative to the community’s base 

flood elevation, and characteristics of the property such as building type, 

number of floors, presence of a basement, and the year a structure was 

built relative to the year of a community’s original flood map. Additionally, 

FEMA allows policyholders to pay lower premiums if they opt for higher 

deductible amounts. Most NFIP policies are deemed by FEMA to be fullrisk rates, while some are less than full-risk (subsidized).

• FEMA defines full-risk rates as those charged to a class of policies 

that generate premiums sufficient to pay the group’s anticipated 

losses and expenses.14 According to FEMA, these rates are based on 

the probability of a range of possible floods, damage estimates based 

on that level of flooding, and accepted actuarial principles. FEMA staff 

noted that approximately 80 percent of FEMA’s policyholders pay fullrisk rates.

• Subsidized rates do not fully reflect the risk of flooding but are 

intended to provide policyholders with more affordable premiums 

while encouraging floodplain management in communities and the 

widespread purchase of flood insurance.15 Generally, subsidized 

 13The Emergency Program is the initial phase of a community’s participation in NFIP 

before flood maps are available. FEMA makes available to community residents a limited 

amount of flood insurance coverage at less than actuarial rates and requires the 

community to adopt minimum floodplain management standards. When flood maps are 

completed, communities are converted to the Regular Program, under which higher 

amounts of flood insurance coverage are provided and more comprehensive floodplain 

management requirements are required.

14As we discuss later, FEMA generally does not consider grandfathered premium rates as 

being subsidized.

15FEMA defines subsidized rates as those charged to a group of policies that result in 

aggregate premiums insufficient to pay for anticipated losses and expenses. 

NFIP Coverage, Premium 

Rates, and Rate Setting
Page 7 GAO-17-425 Flood Insurance

policies cover properties in high-risk locations that otherwise would 

have been charged higher premiums and that were built before flood 

maps became available and their flood risk was clearly understood. 

FEMA staff said they had begun increasing rates for certain 

subsidized properties as prescribed under the Biggert-Waters Act and 

HFIAA. This included increased rates for subsidized policies covering 

businesses, nonprimary residences, severe repetitive loss properties, 

and substantially damaged/substantially improved properties as 

required by the Biggert-Waters Act. In addition, HFIAA required 

increased rates for subsidized policies covering primary residences. 

When setting subsidized rates for individual properties, FEMA staff 

said they also consider flood risk, previous rate increases, and 

statutory limits on rate increases.16

FEMA also allows some policyholders to receive grandfathered premium 

rates, which allows policyholders who have been mapped into higher-risk 

flood zones to pay lower premiums associated with their previous lowerrisk flood zone. FEMA officials said that in the aggregate, policy classes 

that contain grandfathered policies collect enough in premiums to reflect 

the full risk of loss for that class, but as we have previously reported, 

FEMA does not yet possess the data necessary to verify this.17

FEMA funds NFIP primarily through the insurance premiums paid by 

policyholders. In addition to covering insurance claims, NFIP premiums 

also are intended to cover outreach, research, and operating expenses. 

FEMA also charges a Federal Policy Fee on NFIP policies that helps fund 

efforts that include mitigating flood risk on properties covered by NFIP 

policies and developing and maintaining flood maps.18 In addition, FEMA 

received appropriations of $190 million in fiscal year 2016 for mapping 

and other specified statutory requirements.

 16HFIAA generally established caps on the yearly percentage rate increases for rate 

classes and individual properties. Pub. L. No. 113-89, § 5, 128 Stat. 1020, 1022 (2014).

17GAO, Flood Insurance: FEMA’s Rate-Setting Process Warrants Attention, GAO-09-12 

(Washington, D.C.: Oct. 31, 2008) and GAO-14-297R.

18In addition to supporting floodplain management and flood mapping, FEMA uses 

Federal Policy Fee revenue to fund insurance operations and NFIP management. Most 

policies have a $45 fee, but preferred risk policies have a $22 fee. Preferred risk policies 

offer lower-cost protection for homes and apartments in areas of low-to-moderate flood 

risk.

NFIP Funding and 

Borrowing Authority
Page 8 GAO-17-425 Flood Insurance

Congress authorized FEMA to borrow from Treasury when needed, up to 

a preset statutory limit. Originally, Congress authorized a borrowing limit 

of $1 billion and increased it to $1.5 billion in 1996. Following the 

catastrophic hurricanes of 2005, Congress amended FEMA’s borrowing 

authority three more times to more than $20 billion. After Superstorm 

Sandy in 2012, Congress increased FEMA’s borrowing authority to 

$30.425 billion. In January 2017, FEMA borrowed an additional $1.6 

billion, increasing the total debt to $24.6 billion. Before 2005, NFIP was 

mostly self-sustaining, only using its borrowing authority intermittently and 

repaying the loans.19 Figure 1 shows outstanding debt from 1995 through 

2017.

Figure 1: National Flood Insurance Program Annual Year-End Outstanding Debt to Treasury, Fiscal Years 1995–2017

 19Congress appropriated funds to retire NFIP’s approximately $200 million debt to 

Treasury in 1985. NFIP also had intermittent debt in the 1990s, reaching nearly $1 billion 

in 1997, but paid off the debt in subsequent years.
Page 9 GAO-17-425 Flood Insurance

The Biggert-Waters Act affected many aspects of NFIP. For example, it 

required FEMA to

• increase rates at 25 percent per year until full-risk rates were reached 

for certain subsidized properties, including secondary residences, 

businesses, and severe repetitive loss properties;

• increase rates over a 5-year period to phase out grandfathered policy 

rates;

• prohibit subsidized rates for properties purchased after, or not 

insured, as of July 6, 2012;

• create a reserve fund that would maintain at least 1 percent of the 

total annual potential loss exposure faced by NFIP based on 

outstanding flood insurance policies in force in the prior fiscal year;20

• improve flood risk mapping; and

• develop new methods related to compensation for companies that 

sell, write, and service flood insurance policies; that is, Write Your 

Own (WYO) insurers.

However, concern over rapid rate increases led to the passage of HFIAA 

in 2014, which repealed or altered portions of the Biggert-Waters Act. 

HFIAA reinstated certain rate subsidies removed by the Biggert-Waters 

Act, including those for properties purchased after, or not insured, as of 

July 6, 2012. For these properties, and certain others, rates would rise by 

at least 5 percent per year. HFIAA also established a new subsidy for 

properties that are newly mapped into higher-risk zones. The subsidy is 

phased out for individual properties over time. HFIAA also restored 

grandfathered rates and generally limited yearly increases in propertyspecific rates to 18 percent. In addition, HFIAA created a premium 

surcharge that would be deposited into the reserve fund (generally, $25 

 20The reserve fund is to be phased in over time, with at least 7.5 percent of the total 

required by statute added yearly, but FEMA is not permitted to exceed annual rate 

increase caps to build up or maintain the reserve fund. NFIP’s exposure was $1.24 trillion 

as of February 2017, meaning the reserve fund eventually would need to hold $12.4

billion, and FEMA would have to collect approximately $930 million annually (7.5 percent 

of $12.4 billion) to meet statutory targets.

Recent Legislative 

Reforms to NFIP
Page 10 GAO-17-425 Flood Insurance

for primary residences and $250 for others).21 As of November 2015, the 

last time we reviewed the implementation of these acts, FEMA estimated 

that it had met the requirements for almost two-thirds of the BiggertWaters Act provisions and about half of the HFIAA provisions and was 

taking actions on others. Table 1 provides additional detail of some of the 

selected requirements of the two laws.

Table 1: Selected Requirements from the Biggert-Waters Act and HFIAA

Biggert-Waters Act HFIAA

Premium guidelines – Minimum and maximum annual premium increase

Generally, within any rate class the premium may not be 

increased by an amount that would result in an average yearly 

rate increase of more than 20 percent. (100205(c)(2)).

Within any rate class, generally, the average yearly premium rate 

increases cannot be greater than 15 percent. (Sec. 5(6)).

Generally, the risk premium rate for a specific property may not 

increase by more than 18 percent per year. (Sec. 5(5)).

Certain pre-FIRM rate classes must increase by not less than 5 

percent. (Sec. 5(5)).

Premium guidelines — Premium as a percentage of coverage

N/A HFIAA encourages FEMA to strive to minimize the number of 

policies in which premiums exceed 1 percent of the coverage 

amount, and requires FEMA to report such policies to Congress. 

(Sec. 7).

Grandfathering

Properties remapped to higher-risk flood zones but paying 

lower-risk premium rates because of grandfathering will now 

pay the premium rate charged for current risk of flood to the 

property, as phased in over 5 years. (100207).

Repeals the Biggert-Waters Act provision that terminated 

grandfathering. (Sec. 4). If the property is sold, grandfathered 

status will be passed on to the new owners.

When the property is newly designated as within a special flood 

hazard area and the premium rate is calculated as a full-risk rate, 

a preferred risk premium is permitted for the first year. Thereafter, 

in accordance with premium rate increase guidelines, the 

property’s final rate is phased in. (Sec. 6).

 21HFIAA requires FEMA to add an annual surcharge of $25 for all NFIP policies covering 

primary residences (owner-occupied, single-family detached buildings and individual 

condominium units) and $250 for policies for all other buildings, the proceeds of which are 

deposited in the reserve fund. In addition to these surcharges, FEMA uses reserve fund 

assessments to help build the reserve fund. The reserve fund assessments are based on 

the underlying premium rate and are therefore subject to annual rate increase caps. 

However, the surcharges are flat amounts not related to the underlying premium rate and 

are not subject to rate-change caps.
Page 11 GAO-17-425 Flood Insurance

Biggert-Waters Act HFIAA

Subsidies

The Biggert-Waters Act excludes or removes subsidies for 

certain properties, including

• properties purchased after July 6, 2012;

• properties not insured as of July 6, 2012 or those with 

lapsed insurance coverage as a result of a deliberate 

choice of the policyholder;

• secondary residences;

• business properties; and

• severe repetitive loss properties. (100205).a

• Rates for subsidy removal for certain properties (such as 

secondary residences, business properties, and severe 

repetitive loss properties) shall be increased by 25 percent 

per year until the average risk premium rate of the 

properties is equal to the full-risk rate.

HFIAA generally

• repealed the property sales trigger for automatic full-risk 

rates and allows home buyers to assume flood insurance at 

the same risk rate;

• prohibited FEMA from immediately removing subsidies 

specifically because any property was not insured by the 

flood insurance program as of July 6, 2012; and

• retained the Biggert-Waters Act’s phase-out of subsidies for 

certain property classes (secondary residences, business 

properties, and severe repetitive loss properties) and 

maintained the 25 percent increase per the Biggert-Waters 

Act. (Sec. 3).

Refunds

N/A FEMA must issue refunds directly to those who paid NFIP 

premiums under the Biggert-Waters Act in excess of rates set 

under HFIAA. Refunds apply to policyholders who (1) purchased 

property after July 6, 2012; (2) were not insured prior to but 

purchased insurance after July 6, 2012; and (3) let their policy 

lapse (certain policyholders). (Sec. 3(a)(4)).

Reserve fund and premium surcharges

FEMA must create a reserve fund that maintains at least 1

percent of the total annual potential loss exposure. The fund 

will be phased in over time with at least 7.5 percent of the total 

added yearly, but FEMA is not permitted to exceed annual rate 

increase caps to build up or maintain the reserve fund. (100212).

Adds a premium surcharge, all of which must be deposited in the 

reserve fund. Generally, a policy for a primary residence will 

include a $25 surcharge and all other policies will include a $250 

surcharge. (Sec. 8).

Debt reporting

FEMA must issue a report to Congress setting forth options to 

repay FEMA’s total debt to Treasury within 10 years. The report 

was due by January 2013. After borrowing funds, FEMA must 

report to Congress and the Department of the Treasury every 6 

months on the progress of the payments. (100213).

N/A
Page 12 GAO-17-425 Flood Insurance

Biggert-Waters Act HFIAA

Notification

N/A Requires FEMA, at least 6 months prior to implementation of rate 

changes as a result of this act, to make publicly available the rate 

tables and underwriting guidelines that provide the basis for the 

change. (Sec. 31(a)). By June 2014, FEMA was supposed to

submit to Congress a report on the feasibility of releasing 

property-level policy and claims data for flood insurance 

coverage and establishing guidelines for releasing property-level 

policy and claims data in accordance with the Privacy Act of 

1974. (Sec. 31(b)).

FEMA must clearly communicate full flood risk determinations to 

individual property owners regardless of whether premium rates 

are full actuarial rates. (Sec. 28).

Legend: Biggert-Waters Act = Biggert-Waters Flood Insurance Reform Act of 2012; FEMA = Federal Emergency Management Agency; FIRM = Flood Insurance Rate Map; HFIAA = Homeowners Flood 

Insurance Affordability Act of 2014; N/A = Not applicable; and NFIP = National Flood Insurance Program.

Source: GAO analysis of the Biggert-Waters Act and HFIAA. | GAO-17-425

a

The complete list covers any property that incurred flood-related damage in which the cumulative 

amounts of payments under NFIP equaled or exceeded the fair market value of the property; any 

property which on or after July 6, 2012, experienced or sustained substantial damage exceeding 50 

percent of the property fair market value or substantial improvement exceeding 30 percent of the 

property fair market value; and any prospective insured who refuses to accept any offer for mitigation 

assistance from FEMA, including an offer for mitigation assistance following a major disaster or in 

connection with a repetitive loss property or a severe repetitive loss property. (Biggert-Waters Act

100205

Using the input of stakeholders and based on our prior work, we identified 

five policy goals for the flood insurance program: (1) promoting flood risk 

resilience, (2) minimizing fiscal exposure to the federal government, (3) 

requiring transparency of the federal fiscal exposure, (4) encouraging 

consumer participation in the flood insurance market, and (5) minimizing 

transition and implementation challenges.22 For each goal we identified 

several characteristics that illustrate how potential reform proposals might 

help meet the objective of the goal (see table 2).

 22GAO, Flood Insurance: Strategies for Increasing Private-Sector Involvement, 

GAO-14-127 (Washington, D.C.: Jan. 22, 2014); Federal User Fees: A Design Guide, 

GAO-08-386SP (Washington, D.C.: May 29, 2008); and Natural Disasters: Public Policy 

Options for Changing the Federal Role in Natural Catastrophe Insurance, GAO-08-7 

(Washington, D.C.: Nov. 26, 2007). Also see Federal Emergency Management Agency, 

National Flood Insurance Program: Report to Congress on Reinsuring NFIP Insurance 

Risk and Options for Privatizing the NFIP (Washington, D.C.: Aug. 13, 2015).

Policy Goals for 

Evaluating Potential 

Options for Reforming 

Flood Insurance
Page 13 GAO-17-425 Flood Insurance

Table 2: Policy Goals for Evaluating Options for Reforming Flood Insurance

Goals Characteristics

Promote flood risk resilience Encourages and enables property-level mitigation efforts to reduce the risk of damage from 

flooding

Encourages and enables community-level mitigation efforts to reduce the risk of damage from 

flooding

Encourages sound floodplain management and building codes, and discourages development 

in high-risk areas

Promotes a more realistic perception and understanding of risk by, among other things, 

charging premium rates that reflect the full risk of loss and informing the uninsured

Enables property owners and communities to more easily and effectively recover after a flood

Minimize fiscal exposure to the 

federal government

Minimizes overall costs to the federal government of providing coverage, premium assistance, 

mitigation funding, etc. to make the program as self-sustaining as possible given other goals

Minimizes administrative costs of running the program

Minimizes adverse effects on other federal programs, such as disaster assistance

Encourages the private sector to assume greater financial responsibility for managing flood 

risk

Encourages states and communities to assume greater financial responsibility for managing 

flood risk

Require transparency of federal fiscal 

exposure

Encourages better estimation of all potential federal costs

Ensures all estimated federal costs are appropriately reflected in the federal budget

Allows for appropriate congressional oversight and public scrutiny over federal fiscal exposure

Encourage consumer participation in 

the flood insurance market

Provides incentives for property owners to purchase an appropriate amount of insurance

Addresses affordability challenges to property owners by accounting for their ability to pay

Provides incentives for insurers to offer insurance coverage

Reduces risk to insurers by expanding the pool of insureds (by number covered and types of 

risks covered)

Ensures coverage is available to those who need or want it

Minimize transition and 

implementation challenges

Minimizes and manages costs and disruptions associated with any transitions from the current 

flood insurance market

Considers the complexity of implementation and ensures proper and adequate communication 

of changes and other information to affected stakeholders

Considers the risk of unintended consequences and the long-term viability of the system

Minimizes any legal, regulatory, or statutory barriers to reform

Source: GAO. | GAO-17-425
Page 14 GAO-17-425 Flood Insurance

Our review of literature and prior GAO reports and interviews, a 

questionnaire, and roundtable discussions with industry and nonindustry 

stakeholders identified a number of potential reform actions that can be 

considered to improve NFIP’s solvency and enhance the nation’s 

resilience to flood risk. These potential reform actions fall into the 

following six areas: (1) outstanding debt, (2) premium rates, (3) 

affordability, (4) consumer participation, (5) barriers to private-sector 

involvement, and (6) NFIP flood resilience efforts. However, actions for 

reform in one area have implications that could affect reform actions in 

other areas. Therefore, it is necessary to consider flood insurance reform 

comprehensively. In the following sections, we present information for 

each of the six areas, including why reform is needed, the potential 

actions we identified from our review, and the potential implications of 

each of these reform actions that will need to be considered.

According to industry and nonindustry stakeholders with whom we spoke, 

potential reform actions will need to address the $24.6 billion debt to 

Treasury. Servicing the debt puts a strain on NFIP operations and 

burdens current policyholders. If the debt were eliminated, FEMA could 

reallocate funds used for debt repayment for other purposes such as 

building a reserve fund and program operations. Any reforms related to 

the debt also have potential implications for issues such as premium rates 

and consumer participation. These implications are discussed in the 

following relevant sections.

Why Reform Is Needed

Outstanding debt. FEMA’s $24.6 billion outstanding debt, as of March 

2017, represents a significant financial obligation for the program and 

making principal and interest payments on that debt has tied up funds 

that might otherwise have been used for program operations. Since 

FEMA initially borrowed $17.5 billion to pay losses from the 2005 

catastrophic flood events, FEMA has paid about $6.3 billion in principal 

and interest on its outstanding balance. However, since 2005 FEMA has 

Potential 

Comprehensive 

Reform of NFIP 

Would Require 

Actions in Six Key 

Areas

First Reform Area

Eliminating Outstanding 

Debt
Page 15 GAO-17-425 Flood Insurance

had to borrow additional funds from Treasury (following Superstorm 

Sandy in 2012 and a series of floods in 2016).23

In prior reports, we found that while Congress has directed FEMA to 

provide subsidized premium rates for policyholders meeting certain 

requirements, it has not provided FEMA with funds to offset these 

subsidies, which has contributed to FEMA’s need to borrow.24 Despite 

these requirements and the resulting insufficiency in premiums, current 

law requires FEMA to repay its borrowing from Treasury.25 However, we 

reported that FEMA is unlikely to be able to repay this debt, and some 

industry and nonindustry stakeholders with whom we spoke said that 

Congress should eliminate it, as Congress has done when FEMA accrued 

NFIP debt in the past.26 Eliminating the debt would require Congress to 

either appropriate funds for FEMA to repay the debt, or change the law to 

eliminate the requirement that FEMA repay the accumulated debt.

Since 2010, NFIP has benefited from low interest rates. For example, 

interest rates on the debt during fiscal years 2013–2015 ranged from 

0.125 percent to 2.5 percent.27 As of March 2017, FEMA estimated that 

NFIP’s $24.6 billion debt would require annual interest-only payments of 

nearly $400 million. If interest rates increased, FEMA’s annual interest 

payments could rise significantly. As such, FEMA may not be able to 

retire any of its debt, even in low-loss years.

 23NFIP borrowed $17.5 billion for claims related to Hurricanes Katrina, Rita, and Wilma in 

2005; $6.25 billion for claims related to Superstorm Sandy in 2012; and $1.6 billion for 

claims related to a series of floods in 2016.

24GAO, 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); GAO-16-59; and GAO-09-12. 

2542 U.S.C. § 4016.

26In fiscal year 1985, Congress appropriated approximately $200 million to repay the debt 

to Treasury that NFIP accrued. Department of Housing and Urban Development –

Independent Agencies Appropriation Act, 1985. Pub. L. No. 98-371, 98 Stat. 1213, 1224 

(1984).

27As of January 17, 2017, FEMA had six outstanding notes to Treasury, with loan 

amounts, interest rates, and maturity dates as follows: $2 billion at 0.625 percent due on 

December 31, 2017; $4 billion at 1.125 percent due on December 31, 2018; $7 billion at 

1.625 percent due on October 31, 2019; $3 billion at 1.125 percent due on December 31, 

2019; $1.6 billion at 1.375 percent due on December 31, 2019; and $7 billion at 2.5 

percent due on December 31, 2024.
Page 16 GAO-17-425 Flood Insurance

Charging current policyholders to repay past debt. In the BiggertWaters Act, Congress set an expectation that FEMA would repay its debt 

through funds collected from current and future policyholders. That is, in 

addition to charging policyholders enough to pay for their current risk of 

flood losses (provisions subsequently revised under HFIAA), FEMA also 

must collect a surcharge from all NFIP policyholders to help repay 

program debt, among other things.28 This creates a potential inequity 

because policyholders would not only be charged for the flood losses they 

are expected to incur, but also losses incurred by past policyholders. 

Such surcharges could discourage some homeowners from purchasing 

flood insurance from NFIP.

Charging current policyholders to pay for debt incurred in past years is 

contrary to actuarial principles and insurers’ pricing practices, as 

described by industry stakeholders with whom we spoke, and could 

encourage some low-risk policyholders to leave NFIP. According to 

actuarial principles, a premium rate is based on the risk of future losses 

and does not include past costs. For example, if in prior years an insurer’s 

claim payments had exceeded the premiums collected, it would not 

recoup those payments from current or future policyholders because 

those claims payments would have resulted from risks faced by past 

policyholders. According to one industry stakeholder, any shortfall in 

premiums needed to pay claims would be made up by using funds from 

the insurance company’s surplus.29

• Congress could eliminate FEMA’s debt to Treasury.

• Eliminating the debt would allow FEMA to take funds currently used 

for principal and interest payments and reallocate them for other 

purposes such as building a reserve fund or financing program 

operations. It also would be more equitable for current policyholders 

and consistent with actuarial principles.

 28The Biggert-Waters Act required FEMA to create a reserve fund to help meet expected 

future obligations including payment of claims, claims adjustment expenses, and the 

repayment of debt. To fund the reserve fund and repay its debt, FEMA implemented 

surcharges and assessments on NFIP policyholders. HFIAA required FEMA to institute a 

premium surcharge of $25 or $250, depending on the type of property, to help fund the 

reserve fund.

29Surplus is the amount by which assets exceed liabilities.

Potential Reform Actions

Implications of Potential 

Reform Actions
Page 17 GAO-17-425 Flood Insurance

Eliminating the debt in concert with other actions mentioned in this report 

would be important because eliminating the debt without addressing an 

underlying cause of the debt—insufficient premium rates—would keep in 

place an unsustainable system. That is, NFIP likely would need to rely on 

new borrowing from Treasury to help pay claims for future flood losses 

because of its premium structure.

As we previously reported, challenges resulting from NFIP’s current rate 

structure include fiscal unsustainability, policyholder misperception of 

flood risk, limits to competition from private-sector insurance, and limited 

transparency of federal fiscal exposure.30 Reforming rates so that they 

reflect the full risk of loss would address several of the policy goals we 

identified for NFIP because a reformed rate structure would place the 

program on a more financially sustainable path and policyholders could 

better understand their flood risk. Additionally, a reformed rate structure 

would encourage more private insurers to enter the flood insurance 

market, and Congress and taxpayers would be better informed about 

federal fiscal exposure. However, it is important to remember that this 

reform action could affect the implementation of other reform actions such 

as eliminating the debt, expanding requirements to purchase flood 

insurance, removing barriers to private-sector involvement, and funding 

for NFIP mitigation and mapping. These implications are discussed in 

each of the sections related to the other reform actions.

Why Reform Is Needed

Insufficient premiums. As previously discussed—and as we have been 

reporting since as early as 1983—NFIP’s premium rates do not reflect the 

full risk of loss because of various legislative requirements, which 

exacerbates the program’s fiscal exposure. For example, in a December 

2014 report we estimated that the legislative requirements for subsidized 

premium rates left FEMA with a premium shortfall of $11–$17 billion for 

the period from 2002 to 2013.31 Subsidized premium rates and several 

years with catastrophic losses have led to the need for NFIP to borrow 

from Treasury to pay claims. While actuarially sound premium rates that 

reflect the full risk of loss would reduce the likelihood of future borrowing, 

they would not fully eliminate it. Because of the highly variable nature of 

 30GAO-16-611; GAO-16-59; GAO-14-127; GAO-13-607; and GAO-09-12.

31GAO-15-111.

Establishing Premium 

Rates That Reflect the Full 

Risk of Loss

Second Reform Area
Page 18 GAO-17-425 Flood Insurance

flood risk, the chance exists that adverse loss experience over a relatively 

short period could require borrowing if a sufficient reserve had not yet 

been accumulated.32 As noted earlier, the Biggert-Waters Act required 

FEMA to phase out subsidized and grandfathered rates, both of which 

allowed premium rates that did not reflect the full risk of loss. However, 

due to concerns that increased premiums created affordability concerns 

for some policyholders, HFIAA slowed the phase-out of subsidized 

premium rates and reinstated grandfathered rates for most properties.

Elevation certificates. As we previously reported, the Biggert-Waters Act 

also required FEMA to phase in full-risk rates, but FEMA does not have 

data that would allow it to determine full-risk rates for currently subsidized 

policies.33 Specifically, according to FEMA, it lacked elevation information 

for 97 percent of subsidized policies as of February 2017.34 In 2016, 

FEMA said that obtaining data for the approximately 1 million subsidized 

policies could take considerable time and cost several hundred million 

dollars. According to FEMA, obtaining an elevation certificate typically 

would cost a policyholder from $500 to $2,000 or more; however, some 

nonindustry stakeholders with whom we spoke said that the cost for some 

certificates could be below this range.35 According to FEMA, some 

policyholders already have paid to obtain the certificates because doing 

so could enable them to receive lower premium rates and that they 

expected more policyholders to do so as rate increases continued. This 

property-level information is necessary for FEMA to determine the 

difference between subsidized and full-risk rates and to determine when 

full-risk rates have been reached. Thus, the incomplete information on 

rates prevents Congress and the public from understanding the amount of 

unfunded subsidization within the program, and therefore the federal 

fiscal exposure it creates.

 32Due to the highly uncertain nature of flood risk, the risk of long-term debt accumulation 

would remain even if full-risk premium rates were charged for all policies. Although 

unsubsidized premiums would significantly reduce the risk of long-term debt, the rates still 

would be based on estimated losses, which could prove to be lower than actual losses.

33GAO-13-607. 

34Surveyors calculate the elevation of the first level of a structure in relation to the 

expected flood level, or base flood elevation. 

35According to some nonindustry stakeholders, the costs can vary across the country and 

by type of structure, such as rural and urban, and pre-existing homes and new 

construction. 
Page 19 GAO-17-425 Flood Insurance

Reinsuring for catastrophic risk. To reflect the full risk of loss, premium 

rates need to account for the risk of catastrophic losses—large aggregate 

losses resulting from relatively infrequent phenomena. Many private 

insurers purchase reinsurance to mitigate the risk of such large financial 

losses. In January 2017, FEMA executed a 1-year agreement with a 

consortium of 25 private reinsurers, transferring more than $1 billion of its 

flood risk exposure to the private reinsurance market.36 FEMA officials 

said that this reinsurance not only will protect the program from some 

financial risk, but also help FEMA gain experience purchasing 

reinsurance and the private sector gain experience insuring flood risk. 

Based on our analysis, reinsurance could be beneficial because it would 

allow FEMA to recognize some of its flood risk and the associated costs 

up front through the premiums it must pay to the reinsurers rather than 

after the fact in borrowing from Treasury. However, because reinsurers 

must charge FEMA premiums to compensate for the risk they assume, 

reinsurance’s primary benefit would be to transfer and manage risk rather 

than to reduce NFIP’s expected long-term fiscal exposure. Furthermore, if 

FEMA did not charge its policyholders for the cost of reinsurance 

premiums—and more broadly, implement full-risk rates for all 

policyholders—it could continue to face challenges relating to the 

transparency of NFIP’s federal fiscal exposure and the sustainability of its 

program.

Effects on private sector and consumer perception of risk. Industry 

and nonindustry stakeholders with whom we spoke said that it is difficult 

for private insurers to compete with NFIP premium rates that do not 

reflect the full risk of loss. To remain solvent, private insurers must charge 

premium rates that are adequate to cover long-term estimated losses and 

associated expenses. If NFIP rates were not set similarly, they would be 

below what private insurers would need to charge, and the private 

insurers would be unable to compete for these policies based on price.37

 36Under the agreement, the reinsurers agreed to indemnify FEMA for flood claims paid 

during 2017 on an occurrence basis. The reinsurance is structured to cover 26 percent of 

losses between $4 billion and $8 billion (a combined total of $1.042 billion of NFIP’s flood 

risk).

37Private insurers also must build in other costs, such as the cost of capital to protect 

against unexpectedly large losses, into their premium rates, while NFIP does not have 

similar costs, as its “capital” is mostly provided by Treasury. However, NFIP premiums are 

also used to fund activities (such as developing flood maps) private insurers do not 

perform.
Page 20 GAO-17-425 Flood Insurance

As a result, the private market for flood insurance would continue to be 

limited.

We also have previously concluded, and many industry and nonindustry 

stakeholders with whom we spoke affirmed, that because NFIP premium 

rates do not reflect the full risk of loss, consumers may not understand 

the risk of flood loss associated with a particular property.38 HFIAA 

requires FEMA to clearly communicate flood risk to individual property 

owners regardless of whether their premiums are based on full actuarial 

rates.39 FEMA officials said they had begun implementing this 

requirement by notifying policyholders receiving a subsidy that their 

premium rates do not reflect the full risk of loss. However, we previously 

reported that FEMA officials noted that determining a full-risk rate would 

require elevation information, which FEMA does not have for most 

subsidized properties.40 Without the appropriate information on a 

property’s potential for flood damage, consumers may not be discouraged 

from purchasing homes in risky areas or they may not take actions to 

mitigate potential flood damage, which would undermine the nation’s 

resilience to flood risk and also potentially increase NFIP’s fiscal 

exposure.

Basis for surcharges. Similarly, the surcharges used to build the reserve 

fund are not charged based on the risk of the individual properties. For 

example, owners of properties used as second homes pay a significantly 

higher policy surcharge—$250, compared to $25 for primary 

residences—regardless of the risk of flood loss that each property faces. 

State regulations regarding rate setting by private insurers generally 

stipulate that premium rates should reflect the underlying risk insured by 

the policy and not be excessive, inadequate, or unfairly discriminatory. 

However, NFIP’s surcharges are flat and not risk-based. Furthermore, 

NFIP surcharges, particularly the $250 surcharge, can be significant 

when compared with the annual premium rate and might affect 

policyholder behavior. For example, according to FEMA officials, as of 

February 2017, the average annual premium (including all surcharges 

 38GAO-15-511.

39Pub. L. No. 113-89, § 28, 128 Sta. 1020, 1033 (2014).

40GAO-13-607.
Page 21 GAO-17-425 Flood Insurance

and fees) for NFIP policies subject to the $250 surcharge was $1,791.41

Some industry and nonindustry stakeholders told us that the surcharges 

could cause certain NFIP policyholders to discontinue their NFIP policies, 

and they might or might not purchase private flood insurance instead.

Grandfathering. NFIP allows some property owners to continue to pay 

grandfathered rates, which do not reflect the most recent reassessments 

of flood risk (which occur when the properties are remapped into higherrisk flood zones). The grandfathered policies continue to pay premium 

rates as if they were still located in lower-risk zones. FEMA does not 

categorize policies with grandfathered rates as subsidized because they 

are within classes of policies that FEMA says are not subsidized as a 

whole. FEMA officials acknowledged that in such classes of policies, 

property owners who obtain grandfathered rates are cross-subsidized by 

other policyholders in the same flood zone. That is, other policyholders 

pay higher rates to cover the shortfall in premiums from grandfathered 

policies.

As a result, both grandfathered policies and the policies that crosssubsidize them do not pay rates in line with the risk of the individual 

property and can send inaccurate risk signals to policyholders. 

Furthermore as we found in prior reports, FEMA does not know how 

many of its current policies pay grandfathered rates, which raises 

questions about its rate-setting process.42 Before 2010, it did not identify 

whether newly issued policies were receiving grandfathered rates.43 As a 

result, it cannot currently verify whether grandfathered policies result in 

premium revenue sufficient to pay for the estimated full long-term risk of 

flood loss. However, FEMA officials said that in April 2016 they had 

begun a phased effort to collect the information necessary to identify and 

analyze grandfathered policies, and that they expect to complete the 

effort by September 2018.

 41Excluding the surcharge, the reserve fund assessment, and the Federal Policy Fee, the 

average premium rate for policyholders subject to the $250 surcharge was $1,280. The 

average premium rate for policyholders not subject to the $250 surcharge was $758 in 

total and $604 excluding surcharges and fees.

42GAO-16-59 and GAO-09-12.

43In GAO-09-12, we found that FEMA did not track the number of grandfathered properties 

or calculate how much lower grandfathered premiums were than rates that fully reflected 

risk. As a result, FEMA did not know the effect of grandfathered properties on the 

program’s total premium collection.
Page 22 GAO-17-425 Flood Insurance

• As we previously recommended, FEMA needs to obtain the 

information necessary to determine full-risk rates for subsidized 

policyholders.44

• As we previously recommended, FEMA needs to collect information 

on the location, number, and losses associated with grandfathered 

policies and analyze the financial effect these properties had on 

NFIP.45

• As we previously suggested, Congress could eliminate subsidized 

premium rates and require FEMA to charge all policyholders premium 

rates that reflect the full risk of loss.46

• In addition, Congress could ensure that premium rates are more 

closely linked to the individual property’s flood risk by eliminating flat 

HFIAA surcharges and requiring FEMA to incorporate necessary 

reserve fund charges into premium rates based on individual property 

risk.

• Requiring FEMA to obtain elevation certificates for subsidized 

policyholders and data on grandfathered policies could address the 

policy goal of making NFIP’s federal fiscal exposure more transparent 

and facilitate congressional oversight. The cost of obtaining elevation 

certificates could be burdensome for some policyholders, but could be 

considered as part of an affordability assistance program (see 

following section) and also could help some policyholders reduce their 

premium rates.

• Eliminating subsidized premium rates and requiring FEMA to charge 

all policyholders premium rates that reflect the full risk of loss could 

reduce fiscal exposure to the federal government and promote flood 

risk resilience, two of the policy goals we identified. Full-risk rates 

would help ensure that premiums collected were sufficient to pay 

claims in the long-term, and therefore reduce the likelihood that the 

program would need to borrow from Treasury. Full-risk rates would 

provide incentives for mitigation measures that would reduce flood 

risk and thus premium rates. Full-risk rates also could allow more 

opportunities for private-sector insurers to enter the flood insurance 

market, transferring federal fiscal exposure to flood risk to the private 

sector.

 44GAO-13-607.

45GAO-09-12.

46GAO-14-127 and GAO-11-297.

Potential Reform Actions

Implications of Potential 

Reform Actions
Page 23 GAO-17-425 Flood Insurance

• Eliminating reserve fund surcharges, and instead charging full-risk 

premium rates based on individual property risk, which would include 

funding a reserve for future adverse experience, could address the 

policy goal of encouraging consumer participation in flood insurance 

for those whom FEMA might be charging premium rates higher than 

appropriate for their flood risk. Doing so also could encourage private 

insurers to compete for more flood insurance policies, rather than only 

for policies in which NFIP premium rates are higher than the 

associated flood risk.

Taking these actions in concert with other actions mentioned in this report 

would be important because implementing full-risk rates will create 

affordability concerns for some consumers, highlighting the need for other 

assistance to help reduce negative consequences on consumer 

participation.

Industry and nonindustry stakeholders with whom we spoke said that rate 

increases associated with the transition to full-risk premium rates can 

raise affordability concerns for some policyholders and create a risk that 

fewer consumers would purchase flood insurance. Some key 

characteristics for designing an affordability assistance program that 

addresses the goals of encouraging consumer participation and 

promoting resilience include providing assistance through appropriations 

rather than through discounted premiums, making it means-based, and 

prioritizing it to mitigate risk. The implementation of affordability reforms 

has implications for other issues such as premium rates, requirements to 

purchase flood insurance, and barriers to private-sector involvement. 

Discussions about these implications are included in each section of this 

report related to those specific areas.

Why Reform Is Needed

Making premium assistance more transparent. As we previously 

reported, subsidized rates are available regardless of a property owner’s 

ability to afford a full-risk premium. Because NFIP offers discounted or 

“subsidized” rates for some policyholders, NFIP collects insufficient 

revenue to fully pay expected claims over the long term, and these costs 

generally remain hidden until NFIP must borrow from Treasury to fund a 

shortfall. This lack of transparency in relation to program costs hinders 

the ability of Congress to oversee the program and the public to scrutinize 

it.

Creating an Affordability 

Assistance Program That 

Is Funded with 

Appropriations, MeansBased, and Prioritized to 

Mitigate Risk

Third Reform Area
Page 24 GAO-17-425 Flood Insurance

As we previously reported, means-testing premium assistance would help 

ensure that only those who could not afford full-risk rates would receive 

assistance and may increase the amount NFIP collects in premiums, thus 

reducing the program’s federal fiscal exposure.47 In our February 2016 

report, we estimated that 47–74 percent of policyholders could be eligible 

for the subsidy, when income eligibility was set at 80 percent or 140 

percent of area median income, respectively.48 Ultimately, the change in 

federal fiscal exposure generated by means-tested premium assistance 

would depend on how the assistance was structured, as illustrated by the 

following examples:

• Higher premiums collected from currently subsidized policyholders 

who can afford the full-risk premium rate could be offset by premium 

assistance to policyholders currently paying full-risk rates and deemed 

eligible for the means-based assistance.

• Savings resulting from restricting premium assistance to those with a 

demonstrated need could be offset by increasing the amount of 

assistance given to each individual eligible recipient.

• If consumer participation increased, the change in fiscal exposure 

also would depend on the extent to which new policyholders were 

eligible for the means-based subsidies.

Limiting potential sources of additional costs (for example, by limiting the 

amount of the subsidy) could help ensure that NFIP’s fiscal exposure 

would be reduced. Some nonindustry stakeholders with whom we spoke 

suggested that any premium assistance should be temporary and only 

used to help policyholders transition to full-risk rates rather than provided 

indefinitely. However, it is important to note that while making premium 

assistance temporary could help reduce fiscal exposure, it also could 

create affordability concerns in future years for some policyholders.

As we previously reported, a premium assistance program could be 

designed to consider effects on the private flood insurance market.49 For 

 47GAO-14-127.

48GAO, National Flood Insurance Program: Options for Providing Affordability Assistance, 

GAO-16-190 (Washington, D.C.: Feb. 10, 2016). In this report, we described options to 

target assistance to policyholders, estimates of eligible policyholders and associated costs 

of these options, and mechanisms for delivering assistance. We also noted that a 

generally recognized definition of affordability did not exist for flood insurance.

49GAO-16-190.
Page 25 GAO-17-425 Flood Insurance

example, if premium assistance were made available only for NFIP 

policies and not for private flood insurance policies, private insurers would 

continue to be at a significant competitive disadvantage, thus hindering 

the growth of the private market. An option for addressing this concern 

would be to make private policies eligible for the same affordability 

assistance. However, during the course of this review, we determined that 

the federal government would have to overcome implementation 

challenges; for example, developing and implementing a program to 

provide assistance for the purchase of private flood insurance policies.

Linking affordability to mitigation. Many industry and nonindustry 

stakeholders with whom we spoke said that instead of premium 

assistance, it would be preferable to address affordability by providing 

assistance for mitigation measures that would reduce the flood risk of the 

property—thus enhancing resilience—and ultimately result in a lower 

premium rate.50 Premium assistance does not reduce a property’s flood 

risk and also reduces incentives for mitigation. Although mitigation 

assistance would entail a larger up-front cost, it would increase resilience 

by reducing the risk of loss and reduce the need for premium assistance. 

Reducing flood risk through mitigation also could reduce the need for 

federal disaster assistance, further deceasing federal fiscal exposure.51

A number of recent studies have proposed linking mitigation assistance to 

premium assistance by requiring mitigation financed through a lowinterest loan and providing a means-tested voucher.52 Many industry and 

 50While there are also a number of community-level mitigation efforts that can be taken to 

reduce the risk of flooding, we focused our discussion on mitigation efforts for individual 

properties.

51As we discuss later, many consumers have the false perception that individual disaster 

assistance will be sufficient to help them recover and rebuild after a flood, leading them to 

not purchase flood insurance. However, much of disaster assistance goes to pay for 

rebuilding public infrastructure and assistance for individuals is limited.

52Carolyn Kousky and Howard Kunreuther, “Addressing Affordability in the National Flood 

Insurance Program,” working paper 2013-12 (Philadelphia, Penn.: The Wharton School, 

University of Pennsylvania, 2013); Wendy Zhao, Howard Kunreuther, and Jeffrey 

Czajkowski, “Affordability of the National Flood Insurance Program: Application to 

Charleston County, South Carolina,” Natural Hazards Review, vol. 17, no. 1 (February 

2016); and National Research Council of the National Academies, Affordability of National 

Flood Insurance Program Premiums – Report 1 (Washington, D.C.: March 2015). The 

Academies issued the second report in December 2015, which proposes procedures with 

which FEMA might analyze those policy options. See National Academies of Sciences, 

Engineering, and Medicine, Affordability of National Flood Insurance Program Premiums –

Report 2 (Washington, D.C.: 2015).
Page 26 GAO-17-425 Flood Insurance

nonindustry stakeholders with whom we spoke said that funding 

mitigation activities through loans would be preferable to funding through 

grants because loans would be repaid by the consumer and represent a 

lower cost to the federal government in the long term. For example, one 

study suggested that the consumer’s total annual cost could be equal to 

the loan servicing cost (interest plus some repayment of principal) plus 

the flood insurance premium, with the premium being lower after 

mitigation efforts were completed and had reduced the risk of flood loss.53

Under one proposal developed by some academics who have conducted 

extensive research on flood insurance, the program would determine the 

annual amount of flood insurance costs the consumer would be able to 

afford (for example, a percentage of annual household income), and the 

annual voucher would be equal to any difference between the consumer’s 

annual cost—post-mitigation premiums and servicing of the mitigation 

loan—and what they were determined to be able to pay.54 The voucher 

would be tied to individuals and their income level but the loan would be 

attached to the property so that it could be transferred if the property were 

sold. Under a related study, for properties for which elevation is not cost 

effective, other mitigation measures, such as modifying the ground floor 

with wet floodproofing and moving habitable areas to the second floor of 

multistory homes, could be helpful.55 As would be the case with premium 

assistance, Congress would need to provide funding for any mitigation 

loan program.

• Building on what we previously recommended, Congress could create 

an affordability assistance program that (1) is funded through an 

appropriation rather than through discounted premiums, (2) is meanstested, (3) considers making any premium assistance temporary, (4) 

considers allowing assistance to be used for private policies, (5) 

 53Kousky and Kunreuther, “Addressing Affordability in the National Flood Insurance 

Program.”

54Kousky and Kunreuther, “Addressing Affordability in the National Flood Insurance 

Program.”

55Zhao, Kunreuther, and Czajkowski, “Affordability of the National Flood Insurance 

Program: Application to Charleston County, South Carolina.” FEMA defines wet 

floodproofing as permanent or contingent measures applied to a structure or its contents 

that prevent or provide resistance to damage from flooding while allowing floodwaters to 

enter the structure. Generally, this includes properly anchoring the structure, using flood

resistant materials below the base flood elevation, and protection of mechanical and utility 

equipment. 

Potential Reform Actions
Page 27 GAO-17-425 Flood Insurance

prioritizes investments in mitigation efforts over premium assistance 

whenever economically feasible, and (6) prioritizes mitigation loans 

over mitigation grants.56

• Providing premium assistance through appropriations rather than 

through discounted premiums would address the policy goal of 

making the fiscal exposure more transparent because any affordability 

discounts on premium rates would be explicitly recognized in the 

budget each year.

• Because current subsidies are not based on the policyholder’s ability 

to pay, means-testing assistance would restrict subsidies to those with 

a demonstrated need, which could lower the number of policyholders 

receiving a subsidy and therefore reduce fiscal exposure while 

maintaining consumer participation (two of the policy goals we 

identified). However, creating and administering a premium 

assistance or mitigation loan program would entail some 

administrative costs. Furthermore, any premium assistance (including 

vouchers) could continue to reduce incentives for mitigation to some 

extent.

• Making premium assistance temporary could help address the policy 

goal of reducing long-term federal fiscal exposure, but could leave 

some affordability concerns unaddressed, thus potentially reducing 

consumer participation.

• Prioritizing mitigation over premium assistance could address the 

policy goal of enhancing resilience because it would involve taking 

steps to reduce the risk of the property, thus reducing the likelihood of 

future flood claims and potentially reducing long-term federal fiscal 

exposure.

• Creating an affordability program would require determining how to 

assess eligibility for the assistance, which also would include the 

collection of consumer data. Some mitigation efforts, such as 

elevating a house, can be expensive and may require significant upfront costs, increasing federal fiscal exposure in the short term. 

However, these costs could be recaptured over time through reduced 

flood exposure in the long term and as policyholders repaid mitigation 

loans.

 56GAO-11-297.

Implications of Potential 

Reform Actions
Page 28 GAO-17-425 Flood Insurance

• Increased consumer participation in NFIP (by making insurance more 

affordable) as well as higher levels of subsidies than currently 

provided could result in higher fiscal exposure.

Taking these actions in concert with other actions mentioned in this report 

would be important because creating a system for providing meansbased assistance without establishing full-risk premium rates for all 

policyholders, or establishing a source of funding for that assistance, 

could increase the fiscal exposure NFIP creates for the federal 

government.

Based on our analysis of stakeholder comments, issues relating to the 

policy goal of encouraging consumer participation include the effects of 

the mandatory purchase requirement and disaster assistance on 

consumer perception of flood risk. If the mandatory purchase requirement 

were expanded to more (or all) mortgage loans made by federally 

regulated lending institutions for properties in communities participating in 

NFIP, consumer participation could increase, more consumers would 

have some protection from the financial effects of flooding, and private 

insurers would have a greater incentive to offer flood insurance coverage. 

Any reforms related to consumer participation will have potential 

implications for full-risk rates, affordability assistance, and barriers to 

private-sector involvement. Discussions about these implications are 

included in each section of this report related to those specific areas.

Why Reform Is Needed

Consumer participation and the mandatory purchase requirement.

As discussed earlier, owners of properties in participating communities in 

SFHAs generally are required to purchase flood insurance if their 

mortgage loans are made by federally regulated lenders (mandatory 

purchase requirement). This requirement was created to increase the 

number of consumers who purchase flood insurance coverage. A number 

of studies have shown that individuals focus on short time horizons and 

have difficulty fully understanding low-probability, high-severity risks such 

as flooding.57 For example, a 1 percent chance of flooding in a single year 

may seem like a low probability to many—despite being FEMA’s defined 

 57For example, see Howard Kunreuther, “Insurance against Extreme Events: Pairing 

Short-Term Incentives with Long-Term Strategies,” Issue Brief, vol. 4, no. 7, October 2016 

(Philadelphia, Penn.: The Wharton School, University of Pennsylvania, 2016). 

Increasing Consumer 

Participation by Expanding 

the Mandatory Purchase 

Requirement and 

Improving Risk 

Communication

Fourth Reform Area
Page 29 GAO-17-425 Flood Insurance

threshold for high risk—and lead homeowners to believe they will never 

experience flooding and that flood insurance coverage is not necessary.58

In addition, many industry and nonindustry stakeholders with whom we 

spoke said that the requirement’s current structure discourages some 

consumers from purchasing coverage. For example, many industry and 

nonindustry stakeholders with whom we spoke (including FEMA 

representatives), described the SFHA designation as an “in or out” line 

that unintentionally gives consumers the false perception that because 

they are not required to purchase flood coverage, they are not at risk of 

flooding and do not need the coverage. While FEMA considers areas 

outside of SFHAs to be at low- to moderate-risk of flooding, it estimated 

that properties outside of SFHAs accounted for about 20 percent of NFIP 

claims from 2006 through 2015.59 But according to a 2006 study, only an 

estimated 1 percent of consumers outside of SFHAs purchase flood 

insurance.60 Moreover, in a 2008 report, we discussed areas of the 

country that appeared to have higher populations and flooding risks 

relative to their policy volumes, thus indicating the potential for an 

increase in the number of consumers with flood insurance coverage.61

Many industry and nonindustry stakeholders with whom we spoke 

suggested eliminating the SFHA designation and expanding the 

mandatory purchase requirement to include more (or all) federally 

regulated mortgages. Some of these stakeholders acknowledged that 

flood insurance coverage, and therefore a purchase requirement, might 

not be as necessary for some consumers with properties at an extremely 

 58See Howard Kunreuther, “Reducing Losses from Catastrophic Risks through Long-term 

Insurance and Mitigation,” working paper 2008-06-10 (Philadelphia, Penn.: The Wharton 

School, University of Pennsylvania, 2008); and Erwann Michel-Kerjan, Sabine Lemoyne 

de Forges, and Howard Kunreuther, “Policy Tenure under the U.S. National Flood 

Insurance Program (NFIP),” Risk Analysis, vol. 32, no. 4 (April 2012).

59The percentage represents the claim count for X-zone preferred policies as a 

percentage of all policies excluding X-zone standard, which were excluded because 

FEMA was unable to determine the SFHA status of these properties because of 

grandfathering. The source of the data is FEMA’s Calendar/Accident Year Report from the 

Actuarial Information System. Using this calculation, the percentage by total claim amount 

paid was 16 percent for properties outside of SFHAs.

60RAND Corporation, The National Flood Insurance Program’s Market Penetration Rate: 

Estimates and Policy Implications (Santa Monica, Calif.: American Institutes for Research, 

February 2006). 

61GAO, 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 30 GAO-17-425 Flood Insurance

low risk of flooding but noted that in those situations, the premium rate 

should be extremely low to reflect the low flood risk of the property.

Limited information is readily available to help inform consumers who may 

be inclined to purchase flood insurance coverage voluntarily. For 

example, mortgage documents inform the borrower if the property is in an 

SFHA and the flood zone in which the property is located. However, for 

most properties outside of SFHAs, the flood zone is listed as “X” without 

any additional information on the property’s risk. As a result, according to 

industry and nonindustry stakeholders with whom we spoke, the borrower 

may be unclear if the property is at moderate risk or at a very low risk for 

flooding.

One nonindustry stakeholder with whom we spoke has proposed 

communicating flood risk to consumers by creating a flood safety score, 

similar to a credit score, that reinforces the idea that flood risk is on a 

continuous spectrum rather than undifferentiated high-risk versus not high 

risk.62 Industry and nonindustry stakeholders with whom we spoke 

generally agreed with the potential merit of such a system, and one also 

highlighted the importance of ensuring that such a system be as public 

and transparent as possible so that consumers would understand it. As

mentioned previously, HFIAA requires FEMA to communicate full flood 

risk to existing policyholders but does not require FEMA to improve 

communication of risk to consumers who lack NFIP coverage. While 

HFIAA does not specifically require a risk score, such a scoring system 

could help communicate risk to all consumers and potentially improve 

consumer participation.

Enforcement of the mandatory purchase requirement. Many industry 

and nonindustry stakeholders with whom we spoke expressed concern 

that the mandatory purchase requirement has not been adequately 

enforced. However, few specific examples of noncompliance exist, so the 

extent of compliance remains unknown. For example, a 2006 study 

estimated that NFIP participation rates were 75–80 percent in SFHAs, in 

which property owners with loans from federally regulated lenders are 

 62Erwann Michel-Kerjan (presentation at the National Flood Conference, Arlington, Va., 

May 15-18, 2016).
Page 31 GAO-17-425 Flood Insurance

required to purchase flood insurance.63 However, FEMA officials said that 

estimates indicate that as little as one-third of residential properties in 

SFHAs have flood insurance coverage. A 2012 study found that 

homeowners both inside and outside SFHAs who obtained flood 

insurance when purchasing their homes typically kept it 2–4 years before 

canceling the policies.64 Furthermore, some industry and nonindustry 

stakeholders with whom we spoke cited recent flooding in Louisiana 

(2016) and South Carolina (2015) and the fact that so few consumers had 

flood insurance as additional evidence that either the enforcement of the 

mandatory purchase requirement needed to be improved or its scope 

needed to be expanded. However, one official from the lending industry 

with whom we spoke noted that federal banking regulators have found 

few examples of noncompliance in lending institutions. The lack of clarity 

on the extent of compliance with the mandatory requirement poses the 

risk that compliance could be low, resulting in actions not being taken to 

address the situation.65

Disaster assistance and consumer participation. Many industry and 

nonindustry stakeholders with whom we spoke, including FEMA 

representatives, said that many consumers have the false perception that 

individual disaster assistance will be sufficient to help them recover and 

rebuild after a flood, leading them to forgo purchasing flood insurance. 

Literature we reviewed has noted that individual assistance is limited and 

means-based, and much of the disaster assistance goes to pay for 

rebuilding public infrastructure, as the following examples illustrate:

• A FEMA official said that homeowners should not rely on potential 

grant programs as an alternative to flood insurance coverage to 

recover after a flood because such assistance is not designed to 

repair and rebuild a property. For example, after the floods in 

Louisiana in 2016, NFIP policyholders received claim payments that 

averaged approximately $86,500, while assistance payments to 

individuals averaged approximately $9,150.

 63The National Flood Insurance Program’s Market Penetration Rate: Estimates and Policy 

Implications. Note that not all homeowners with properties in SFHAs are subject to the 

mandatory purchase requirement, which applies to properties in SFHAs that have a 

federally backed mortgage or a mortgage loan made by a federally regulated lender.

64Michel-Kerjan, Lemoyne de Forges, and Kunreuther, “Policy Tenure under the U.S. 

National Flood Insurance Program (NFIP).”

65Assessing the extent of compliance with and enforcement of the mandatory purchase 

requirement would require a detailed study that was beyond the scope of this report.
Page 32 GAO-17-425 Flood Insurance

• A 2012 study found that public perception of federal post-disaster 

assistance creates a moral hazard that not only discourages 

consumers from purchasing flood insurance but also discourages 

flood risk mitigation and encourages people to live in high-risk 

areas.66 The study concluded that available disaster assistance “is 

relatively small and certainly does not make people whole after 

devastating events.” According to FEMA officials, FEMA provides 

post-disaster grants of up to $33,300 to repair and rebuild, but recent 

payments have averaged around $4,100.67 The Small Business 

Administration also offers loans for repair and rebuilding after a 

disaster, but these are means-tested, and because they must be 

repaid by the homeowner, they do little to protect against the financial 

risk of flooding.68

• Nonindustry stakeholders with whom we spoke said that most disaster 

assistance is provided to state and local governments to repair 

infrastructure rather than to individuals.

• Furthermore, a 2014 study found that when the average individual 

assistance grant increased by $1,000, average flood insurance 

coverage per policy in that community dropped by about $6,400.69

Many industry and nonindustry stakeholders with whom we spoke agreed 

that misperceptions about disaster assistance can negatively affect 

consumer participation in flood insurance, resulting in more exposure to 

financial loss from flooding.

• Congress could expand the mandatory purchase requirement to more 

(or all) mortgage loans made by federally regulated lending 

institutions for properties in communities participating in NFIP.

 66Carolyn Kousky and Leonard Shabman, “The Realities of Federal Disaster Aid: The 

Case of Floods,” Resources for the Future issue brief 12-02 (Washington, D.C.: April 

2012). Moral hazard refers to one party taking on more risk because another party bears 

the cost of that risk.

67Specifically, $33,300 refers to the fiscal year 2017 maximum grant amount for 

assistance to individuals under the Individuals and Households Program, and $4,100 was 

the average grant payment for this program in calendar years 2007–2016.

68Consumers with properties in an SFHA who lack flood insurance coverage when their 

property is flooded generally must purchase flood insurance coverage before they can 

receive loan funds from the Small Business Administration. 

69Carolyn Kousky, Erwann O. Michel-Kerjan, and Paul A. Raschky, “Does Federal 

Assistance Crowd Out Private Demand for Insurance?” working paper 2014-04 

(Philadelphia, Penn.: The Wharton School, University of Pennsylvania, 2014).

Potential Reform Actions
Page 33 GAO-17-425 Flood Insurance

• Congress could require FEMA to explore ways to improve its 

communication of risk to all consumers; for example, through a risk 

scoring system.

• Expanding the mandatory purchase requirement to more (or all) 

mortgage loans made by federally regulated lending institutions in 

communities participating in NFIP (rather than only those in an SFHA) 

could address the policy goal of increasing consumer participation in 

flood insurance.

• Expanded purchase requirements likely would face resistance from 

consumers who do not wish to purchase coverage or who might face 

affordability issues.

• Lenders also may object to being responsible for enforcement of 

mandatory purchase requirements on an expanded number of 

properties.

• Expanded purchase requirements could affect the values of properties 

subject to the new requirement to purchase flood insurance.

• Increased consumer participation would address the goal of 

enhancing resilience by providing consumers with some protection 

from the financial effects of flooding and reduce the need for disaster 

assistance, therefore potentially reducing federal fiscal exposure.

• Increased consumer participation could increase the size and scope 

of NFIP and potentially increase federal fiscal exposure, but this could 

be reduced by implementing full-risk rates and balanced by an 

increasing number of lower-risk properties.

Taking these actions in concert with other actions mentioned in this report 

would be important to address affordability concerns associated with an 

expanded mandatory purchase requirement. Furthermore, accurate, 

property-specific premium rates would be necessary to provide assurance 

that policyholders newly mandated to purchase flood insurance coverage 

would be paying rates based on their risk of flood loss.

Implications of Potential 

Reform Actions
Page 34 GAO-17-425 Flood Insurance

According to some industry and nonindustry stakeholders with whom we 

spoke, private insurer interest in selling flood insurance has been 

increasing. Also, according to industry and nonindustry stakeholders with 

whom we spoke, NFIP’s subsidized premium rates remain the primary 

barrier to private-sector involvement in flood insurance. As we previously 

reported, besides NFIP’s subsidized rates, other barriers to private-sector 

involvement include uncertainty about how private coverage could satisfy 

the mandatory purchase requirement and FEMA policies on continuous 

coverage and premium refunds.70 If such barriers were removed, privatesector involvement in flood insurance could increase, potentially resulting 

in a reduced size and scope for NFIP’s insurance activities and allowing 

FEMA to focus on other activities such as mitigating flood risk and 

developing flood maps. As a result, this could address the policy goal of 

reducing federal fiscal exposure while promoting flood resilience. 

Increased private-sector involvement has implications for other issues 

such as full-risk premium rates, consumer participation, and NFIP flood 

resilience efforts. Discussions about these implications are included in 

each section of this report related to those specific areas.

Why Reform Is Needed

Private-sector coverage and the mandatory purchase requirement. 

Industry and nonindustry stakeholders with whom we spoke cited 

uncertainty among lenders and insurers about regulations specifying how 

private flood insurance policies could satisfy the mandatory purchase 

requirement. The Biggert-Waters Act requires regulated lending 

institutions to accept private flood insurance, but as of March 2017, 

federal banking regulators had not issued final rules with such 

directions.71 As a result, it is not known what the regulations will be and 

how lenders and private insurers ought to comply. Furthermore, some 

 70GAO-16-611 and GAO-14-127.

71In October 2013, the Office of Comptroller of the Currency, Board of Governors of the 

Federal Reserve System, Federal Deposit Insurance Corporation, Farm Credit 

Administration, and National Credit Union Administration issued a proposed rule that 

included regulations to address the private flood insurance requirements of the BiggertWaters Act (for loans in SFHAs). Loans in Areas Having Special Flood Hazards, 78 Fed. 

Reg. 65108 (Oct. 30, 2013). The agencies received comments and finalized parts of the 

proposed rule, but not the provisions regarding private flood insurance. In November 

2016, the same agencies issued another proposed rule regarding private flood insurance. 

Loans in Areas Having Special Flood Hazards – Private Flood Insurance, 81 Fed. Reg. 

78063 (Nov. 7, 2016).

Removing Other Barriers 

to Private-Sector 

Involvement

Fifth Reform Area
Page 35 GAO-17-425 Flood Insurance

industry and nonindustry stakeholders with whom we spoke were 

concerned that private policies lenders had accepted as satisfying the 

mandatory purchase requirement might retroactively be deemed 

noncompliant if they did not meet the requirements of the new 

regulations. The stakeholders added that issuance of final rules on the 

acceptance of and definition of private flood insurance could help provide 

more clarity and could lead to increased private-sector involvement in 

flood insurance.

Continuous coverage, premium refunds, and WYO noncompete 

clause. Some industry and nonindustry stakeholders with whom we 

spoke also cited FEMA’s interpretation of the continuous coverage 

requirement in connection with private flood insurance and the effect on 

consumers’ ability to qualify for NFIP discounted rates as a barrier to 

private-sector involvement in flood insurance. FEMA prohibits the use of 

subsidized rates for policies for which there has been a lapse in NFIP 

coverage of more than 90 days.72 That is, if a NFIP policyholder who 

qualified for a subsidized rate switched to a private flood policy, and then 

switched back to an NFIP policy (more than 90 days after originally 

cancelling the NFIP policy), the policyholder would no longer qualify for 

the subsidized rate.

FEMA officials noted that in these cases they disallowed private coverage 

from constituting continuous coverage because of the agency’s 

interpretation of a HFIAA provision on policy lapses.73 Some industry and 

nonindustry stakeholders with whom we spoke also noted that FEMA’s 

decision to exclude private flood insurance policies in these cases could 

have financial repercussions for some consumers seeking to reinstate 

their previously discounted NFIP coverage. Some of these industry and 

nonindustry stakeholders said that due to the risk of losing their 

 72Effective April 1, 2016, FEMA prohibits the use of discounted rates for policies that 

reinstate coverage for buildings previously insured by NFIP in cases in which the 

reinstatement occurs through payments received more than 90 days after expiration or 

cancellation of the policy. Federal Emergency Management Agency, NFIP Flood 

Insurance Manual, RATE 21 (March 2016). Discounted insurance premiums (rates) 

include both subsidized and grandfathered policies. 

73The National Flood Insurance Act, as amended by HFIAA, states, in part, that “[t]he 

Administrator shall not provide flood insurance to prospective insureds at [subsidized 

rates]... for ... any policy under the flood insurance program that has lapsed in coverage, 

unless the decision of the policyholder to permit a lapse in flood insurance was as a result 

of the property covered by the policy no longer being required to retain such coverage.”

Pub. L. No. 113-89, § 3, 128 Stat. 1020, 1021 (2014) (codified at 42 U.S.C. § 4014(g)). 
Page 36 GAO-17-425 Flood Insurance

discounted NFIP rates, consumers might avoid the private market. 

However, to the extent that reforms result in the elimination of discounted 

rates, this issue could become less of a concern.

Furthermore, some industry and nonindustry stakeholders with whom we 

spoke said that FEMA’s policy related to policy cancellations could 

discourage the use of private flood insurance by consumers. FEMA 

allows full or partial refunds of paid NFIP premiums for coverage 

terminated in accordance with its accepted cancellation reasons, but does 

not allow policyholders to cancel their NFIP policy and obtain a refund if 

they obtained a non-NFIP policy (private flood insurance).74 These 

industry and nonindustry stakeholders said that private insurers typically 

allow refunds to policyholders when switching insurers. FEMA officials 

said that FEMA only can allow cancellation of policies and refunds 

according to its standard policy terms and conditions (which only 

reference cancellations of NFIP policies). However, FEMA previously 

allowed such refunds and could have taken steps to revise guidance to 

allow them. Allowing this type of refund would be in line with industry 

practice to allow for refunds of paid premiums as well as Congress’s 

interest in transferring some of the federal government’s exposure to 

flood risk to the private sector. We previously recommended that FEMA 

consider reinstating the cancellation reason code allowing policyholders 

to be eligible for prorated premium refunds if they obtained a private 

policy and then cancelled their NFIP policy.75 FEMA agreed with our 

recommendation and said it planned to implement the policy change 

effective October 2017.

Some industry and nonindustry stakeholders with whom we spoke also 

told us that certain FEMA restrictions on WYO insurers—private insurers 

that sell and service policies and adjust claims for NFIP—may be an 

impediment to increasing the availability of private flood insurance. 

Specifically, NFIP’s arrangement with the insurers restricts them from 

 74Federal Emergency Management Agency, National Flood Insurance Program: Flood 

Insurance Manual (Washington, D.C.: June 2014, revised November 2015). In May 2015, 

FEMA issued a memorandum to WYO insurers and NFIP servicing agents stating that the 

insured obtaining a non-NFIP policy (private flood insurance policy) no longer represented 

a valid cancellation reason. 

75GAO-16-611.
Page 37 GAO-17-425 Flood Insurance

selling stand-alone flood insurance coverage outside of NFIP.76 The 

stakeholders said that this restriction can limit companies with the most 

experience in flood insurance from entering the private market. FEMA 

officials stated that, despite this restriction, a number of companies have 

found ways to offer flood insurance while remaining compliant with the 

arrangement. For example, if a subsidiary of a large insurance company 

were a WYO, the parent company could offer stand-alone flood coverage. 

Alternatively, the WYO insurer could offer flood coverage as part of a 

multiperil policy.

NFIP claims data. Many industry and nonindustry stakeholders with 

whom we spoke also noted the lack of access to NFIP data on flood 

losses and claims as a barrier to more private companies offering flood 

insurance. In our previous work, industry and nonindustry stakeholders 

said that access to such data would allow private insurance companies to 

better estimate losses, price flood insurance premiums, and determine 

which properties they might be willing to insure.77 According to FEMA 

officials, the agency would need to address privacy concerns to provide 

property-level information to insurers, because the Privacy Act of 1974 

prohibits the agency from releasing detailed NFIP policy and claims 

data.78 FEMA officials said that while the agency could release data in the 

aggregate, some information could not be provided in detail. For example, 

in 2017 FEMA publicly released ZIP code-level data but would need to 

determine how to release property-level information while protecting the 

privacy of individuals. According to officials from the National Association 

of Insurance Commissioners, it is coordinating with FEMA actuaries to 

determine how FEMA could share specific data with states, without 

disclosing personally identifiable information.

 76Federal Emergency Management Agency, Federal Insurance and Mitigation 

Administration, Financial Assistance/Subsidy Arrangement, Art. XIII (codified at 44 C.F.R. 

pt. 62, app. A). This restriction applies solely to policies providing only flood insurance; 

WYO insurers are not restricted from selling flood insurance as part of multiple peril 

policies or policies that are over and above the limits NFIP allows. 

77GAO-16-611 and GAO-14-127.

78Pub. L. No. 93-579, 88 Stat. 1896 (1974) (codified, as amended, at 5 U.S.C. § 552a).
Page 38 GAO-17-425 Flood Insurance

• Congress could amend (or clarify) the statutory definition of private 

flood insurance as it relates to the mandatory purchase requirement.79

• Congress could direct FEMA to allow private coverage to satisfy NFIP 

continuous coverage requirements.

• As we previously recommended, FEMA could reinstate the ability for 

policyholders replacing their NFIP policies with private policies to be 

eligible for prorated refunds.80

• Congress could direct FEMA to eliminate the WYO noncompete

clause.

• Congress could determine the appropriateness of amending the 

privacy law to allow for FEMA to enter into confidentiality agreements 

to share claims data with the insurance industry.

Depending on the extent to which a private flood insurance market

develops over time, other changes to further encourage the private 

market and potentially change the role and structure of NFIP could be 

considered. Such potential actions are discussed in appendix II.

• Increased private-sector involvement could address the policy goal of 

reducing the federal fiscal exposure relating to flood risk by reducing 

the number of properties that NFIP covers with flood insurance.

• Reduced size and scope of NFIP’s insurance activities could free up 

resources and allow FEMA to focus more heavily on other activities 

such as mitigating high-risk properties and developing and 

maintaining flood maps, thus potentially addressing the policy goal of 

enhancing resilience.

• Increased private-sector involvement could make flood insurance 

more attractive to consumers by introducing products more tailored to 

each consumer’s needs.

• Some industry stakeholders with whom we spoke said that private 

insurers would be able to price flood risk more accurately for each 

individual property because they have better flood-loss modeling 

 79On March 8, 2017, Representative Dennis Ross and Senator Dean Heller introduced 

legislative bills (H.R. 1422 and S. 563, respectively) relating to the statutory definition of

private flood insurance and other issues related to private-sector involvement in flood 

insurance. In April 2016, the House of Representatives had unanimously passed a similar 

bill.

80GAO-16-611.

Potential Reform Actions

Implications of Potential 

Reform Actions
Page 39 GAO-17-425 Flood Insurance

capabilities (and thus consumers pay for the risk of their own property 

and do not significantly cross-subsidize other policyholders).

• Increased private-sector involvement could cause a greater portion of 

NFIP’s portfolio to be composed of higher-risk policies.

Taking these actions in concert with other actions mentioned in this 

report, such as addressing NFIP’s subsidized rates, would be key to 

encouraging private-sector involvement because industry and nonindustry 

stakeholders with whom we spoke cited subsidized rates as a significant 

barrier to private-sector entrance into the flood insurance market. And, it 

is unclear how effective these actions would be without addressing 

subsidized rates.

NFIP flood resilience efforts include mitigation, mapping, and floodplain 

management through community participation. Based on our analysis of 

the policy goals we identified, supporting these activities could address 

the policy goal of enhancing resilience by ensuring flood risk was 

identified through mapping and reduced through mitigation and floodplain 

management. Any reforms related to NFIP flood resilience efforts will 

have potential implications for issues such as premium rates, consumer 

participation, and private-sector involvement in flood insurance. 

Discussions about these implications are included in each section of this 

report related to those specific areas.

Why Reform Is Needed

Mitigation and mapping funding. NFIP’s flood resilience efforts 

(mitigation, mapping, and floodplain management through community 

participation) are important and deliver a wide range of benefits. For 

example, a 2005 report estimated that for every $1 spent on mitigation, 

losses were reduced by an average of $4.81 Furthermore, FEMA officials 

said that mitigation programs have saved the American public an 

estimated $3.4 billion annually. Mapping is essential to NFIP rate setting 

and risk identification. If private insurers began to write a significant 

number of flood insurance policies, and NFIP wrote fewer, there would be 

less funding for such resilience efforts.

 81National Institute of Building Sciences, The Multihazard Mitigation Council, Natural 

Hazard Mitigation Saves: An Independent Study to Assess the Future Savings from 

Mitigation Activities (Washington, D.C.: 2005).

Protecting and Enhancing 

NFIP Flood Resilience 

Efforts

Sixth Reform Area
Page 40 GAO-17-425 Flood Insurance

As discussed previously, FEMA charges a fee on NFIP policies that helps 

fund efforts to mitigate flood risk on properties covered by NFIP policies 

and develop and maintain flood maps. While FEMA also received $190 

million in appropriations in fiscal year 2016 to help fund its mapping 

efforts, it expects to collect about $197 million in fee revenue in 2017. As 

a result, to the extent that the private flood insurance market grew and 

policies moved from NFIP to private insurers, FEMA would no longer 

collect fees on those policies.

Nonindustry stakeholders have proposed a number of solutions for 

addressing this issue. For example, the Association of State Floodplain 

Managers proposed requiring an equivalency fee (equal to the Federal 

Policy Fee) on all private flood insurance policies because it would help 

pay for floodplain management and flood mapping services that also 

would benefit private insurance companies.82 For example, flood maps 

are an important source of flood risk data that private insurers could use 

to assess risk, and mitigation helps lower the risk of properties and make 

them more insurable. While other industry and nonindustry stakeholders 

with whom we spoke shared the concern over the effect on fee revenue, 

some instead preferred to compensate for the diminished fee revenue by 

funding mitigation and mapping directly through an appropriation in the 

federal budget because the services benefit all taxpayers.

Community participation. Increased private-sector involvement in flood 

insurance also has the potential to negatively affect flood resilience 

because communities may have less of an incentive to meet floodplain 

management standards. Industry and nonindustry stakeholders with 

whom we spoke said that many of the more than 22,000 communities 

currently participating in NFIP do so primarily because participation 

provides community residents with access to NFIP coverage. In 

exchange, communities must adopt and enforce floodplain management 

standards that help to reduce flood risk.83 According to FEMA, structures 

built to NFIP standards experience 73 percent less damage than 

structures not built to these standards and result in a $1.9 billion annual 

reduction in flood losses. Some nonindustry stakeholders with whom we 

spoke said that the availability of private flood insurance coverage could 

 82Senate Committee on Small Business and Entrepreneurship, No More Hikes: Small 

Business Survival amidst Unaffordable Flood Insurance Rate Increases, 114th Cong., 2nd 

sess., June 30, 2016; testimony of Ceil Strauss, Association of State Floodplain 

Managers.

8344 C.F.R. § 59.2.
Page 41 GAO-17-425 Flood Insurance

lead some communities to drop out of NFIP and rescind some of the 

standards and codes they had adopted. However, rescinding these 

standards could increase the risk of flood damage and therefore the cost 

of flood insurance premiums, which could be an incentive for keeping the 

standards in place. The Association of State Floodplain Managers 

proposed addressing this issue by allowing private flood policies to meet 

the mandatory purchase requirement only if they were sold in 

participating NFIP communities.84

• Congress could establish a fee on private flood insurance policies to 

address the loss in NFIP fee revenue used to fund mitigation and 

mapping activities.

• Alternatively, Congress could appropriate funds for mitigation and 

mapping activities to offset the diminished fee revenue.

• Proactively addressing potential effects on policy fee revenue could 

address the policy goal of enhancing resilience by helping ensure that 

flood risk would be identified through mapping and reduced through 

mitigation activities and floodplain management. In turn, enhancing 

resilience could address the policy goal of reducing federal fiscal 

exposure in the long term because property would be at a lower risk 

of flood loss and therefore less likely to experience flood claims.

• Ensuring that these activities continued even as the number of NFIP 

policies decreased could support the private flood insurance market, 

which in turn could address the policy goal of reducing federal fiscal 

exposure (through transfer to the private market). For example, 

private insurers could use flood maps to assess risk and mitigation 

could make more properties insurable.

• A requirement for a fee on private flood insurance policies could face 

resistance from insurers, and creating a federal appropriation to pay 

for mitigation and mapping would be a new cost. There also could be 

implementation costs and challenges associated with administering a 

fee on private insurers.

Taking these actions in concert with other actions mentioned in this report 

would be important because doing so could ensure that efforts to 

increase private-sector involvement in flood insurance would not harm 

resilience efforts, particularly funding for mitigation and mapping, and 

community participation in NFIP.

 84Senate Committee on Small Business and Entrepreneurship, No More Hikes: Small 

Business Survival amidst Unaffordable Flood Insurance Rate Increases.

Potential Reform Actions

Implications of Potential 

Reform Actions
Page 42 GAO-17-425 Flood Insurance

NFIP has experienced significant challenges because FEMA is tasked 

with pursuing competing programmatic goals—keeping flood insurance 

affordable while keeping the program fiscally solvent. Emphasizing 

affordability has led to premium rates that in many cases do not reflect 

the full risk of loss and produce insufficient premiums to pay for claims. In 

turn, this has transferred some of the financial burden of flood risk from 

individual property owners to taxpayers as a whole and resulted in the 

program owing $24.6 billion to Treasury. Without reforms, the financial 

condition of NFIP could continue to worsen. Shifting the emphasis toward 

fiscal solvency would reduce the burden on the taxpayer, but would 

require increasing premium rates, which could create affordability 

challenges for many policyholders and discourage consumer participation 

in flood insurance.

Private insurers’ interest in selling flood insurance has been increasing, 

which could transfer some risk from the federal government. This 

increased interest, combined with the challenges experienced by the 

program, create an opportunity for Congress to consider potential reforms 

to NFIP as well as the best role for the federal government in relation to 

flood insurance. Regardless of changes in private-sector involvement or 

the government’s role, congressional oversight of the program’s federal 

fiscal exposure will remain important.

Actions in six areas could advance programmatic goals, mitigate some of 

the trade-offs resulting from the competing goals, and reform the flood 

insurance program by (1) promoting flood risk resilience, (2) minimizing 

fiscal exposure to the federal government, (3) requiring transparency of 

the federal fiscal exposure, (4) encouraging consumer participation in the 

flood insurance market, and (5) minimizing transition and implementation 

challenges. However, a piecemeal approach will not address NFIP’s 

ongoing challenges. Rather, taking actions from a comprehensive 

perspective—in all six areas—could help balance or mitigate the various 

trade-offs and challenges.

The sequence of actions for these areas is also important. That is, some 

actions would be more likely to achieve goals if they followed others, 

while some could be taken concurrently. For example, when addressing 

barriers to private-sector involvement, it would be important to protect 

NFIP’s flood resilience activities at the same time. Other important 

reforms such as requiring full-risk rates for all policyholders and 

expanding the mandatory purchase requirement would create affordability 

concerns, so they would warrant having an affordability assistance 

Conclusions
Page 43 GAO-17-425 Flood Insurance

program already in place. Finally, addressing the outstanding debt would 

best be accompanied by premium rate reform to help reduce the 

likelihood of a recurrence of another unpayable debt buildup. Taking 

these factors into consideration will therefore be important for any reform 

decisions made.

We recognize that many of the potential reforms, in and of themselves, 

involve competing goals, and that taking some actions in isolation could 

create challenges for some property owners. We also recognize that 

many reforms can be challenging to start or complete because they could 

involve new programs, new appropriations, and revisions to current law. 

As such, they could face resistance because they could create new costs 

for the federal government, the private sector, or property owners. 

Nevertheless, taking actions on multiple fronts represents the best 

opportunity to help address the spectrum of challenges confronting NFIP, 

advance private-sector participation, reduce federal fiscal exposure, and 

enhance resilience to flood risk.

As Congress considers reauthorizing NFIP, it should consider 

comprehensive reform to improve the program’s solvency and enhance 

the nation’s resilience to flood risk, which could include actions in six 

areas: (1) addressing the current debt, (2) removing existing legislative 

barriers to FEMA’s revising premium rates to reflect the full risk of loss, 

(3) addressing affordability, (4) increasing consumer participation, (5) 

removing barriers to private-sector involvement, and (6) protecting NFIP 

flood resilience efforts. In implementing these reforms, Congress should 

consider the sequence of the actions and their interaction with each other.

Matter for

Congressional 

Consideration
Page 44 GAO-17-425 Flood Insurance

We provided a draft of this report to the Department of Homeland Security 

and the Department of the Treasury for review and comment. Both 

departments provided technical comments, which we incorporated, as 

appropriate.

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 III.

Alicia Puente Cackley

Director, Financial Markets and Community Investment

Agency Comments
Page 45 GAO-17-425 Flood Insurance

List of Addressees

The Honorable Mike Crapo

Chairman

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Robert Menendez

Ranking Member

Subcommittee on Housing, Transportation, and Community Development

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

House of Representatives

The Honorable Scott Perry

Chairman

Subcommittee on Oversight and Management Efficiency

Committee on Homeland Security

House of Representatives
Appendix I: Objectives, Scope, and 

Methodology

Page 46 GAO-17-425 Flood Insurance

In September 2017, the National Flood Insurance Program’s (NFIP) 

current authorization will expire, and reauthorization of the program 

provides Congress with an opportunity to consider options for improving 

the program and changing the federal role in flood insurance. We 

performed our work under the authority of the Comptroller General in light 

of congressional interest in flood insurance and NFIP’s impeding 

reauthorization. This report examines potential reform actions Congress 

and the Federal Emergency Management Agency (FEMA) could take to 

reduce federal fiscal exposure and improve resilience to flood damage.

To identify these actions, we took an iterative multiphase approach that 

included reviewing available information on flood insurance reform; 

obtaining input on potential reform actions from knowledgeable 

stakeholders through semi-structured individual interviews, a 

questionnaire, and a series of roundtables; identifying policy goals for 

flood insurance reform; and evaluating the various actions using these 

policy goals. The information on flood insurance reform that we reviewed 

included prior GAO reports, relevant laws, NFIP history, academic 

papers, and testimonies. We interviewed officials of or representatives 

from FEMA, the Congressional Budget Office, the Federal Insurance 

Office, the National Association of Insurance Commissioners, insurance 

industry associations, catastrophe modelers, state insurance programs, 

an actuarial association, consumer advocacy groups, think tanks, 

academics, and others to gather information on flood reform options. We 

also attended the National Flood Conference in May 2016, which was 

attended by hundreds of flood insurance stakeholders and included 

discussion of a number of topics related to flood insurance reform.

Furthermore, we developed a questionnaire to gather stakeholder input 

on options for reforming NFIP, policy goals for evaluating those options, 

and the roles for the private sector, federal government, and state 

governments in providing flood insurance coverage and managing flood 

risk. Specifically, we judgmentally selected a diverse group of 108 

stakeholders for the questionnaire based on a review of available

literature on flood insurance reform, work conducted for our prior reports 

on flood insurance, and suggestions from stakeholders we interviewed. 

Questionnaire respondents represented a number of stakeholder 

categories: insurers, insurance agents, insurance adjuster associations, 

reinsurers, catastrophe modelers, lender associations, federal agencies, 

state insurance regulators, state residual insurance programs, consumer 

advocates, academics, think tanks, mitigation associations, real estate 

associations, and environmental associations. We conducted the 

questionnaire in June 2016 and received responses from 82 of the 108 

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 47 GAO-17-425 Flood Insurance

questionnaire recipients. The results from the questionnaire are not 

generalizable to the population of respondents and only represent the

opinions of the individuals but provided insights into potential flood 

insurance reforms.

We also conducted four web-based roundtables in August and 

September 2016 with a variety of stakeholders to obtain their views on 

flood insurance reform. The 43 roundtable participants represented the 

same stakeholder categories from which we drew our questionnaire 

respondents as well as FEMA. We judgmentally selected a diverse group 

of stakeholders for the roundtable based on their knowledge of flood 

insurance reform. We used stakeholders’ responses to the questionnaire 

to ensure that each roundtable was balanced with a diverse range of 

perspectives on flood insurance reform. Two of the roundtables focused 

on reforming the flood insurance marketplace and explored several 

topics, including the roles of the private sector and the federal 

government in primary insurance and managing catastrophic risk. The 

other two roundtables focused on promoting flood risk resilience and 

explored several topics, including enhancing resilience for existing 

structures and future development, the roles of mitigation assistance and 

premium assistance, and strategies for encouraging greater consumer 

participation in flood insurance.

We also identified five policy goals for evaluating options for flood 

insurance reform by reviewing prior GAO reports—one of which included 

policy goals for federal involvement in natural catastrophe insurance—

and FEMA’s 2015 report on options for privatizing NFIP.1 We validated 

the goals by discussing them during stakeholder interviews, and obtaining 

input on them in the questionnaire, including asking questionnaire 

respondents to rate the policy goals, provide comments, and suggest 

revisions. We analyzed and incorporated all input as necessary and then 

developed the five following policy goals: (1) promoting flood risk 

resilience, (2) minimizing fiscal exposure to the federal government, (3) 

requiring transparency of the federal fiscal exposure, (4) encouraging 

consumer participation in the flood insurance market, and (5) minimizing 

transition and implementation challenges. Within each of these goals, we 

identified several characteristics to help illustrate how various reform 

 1

GAO-14-127; GAO-08-386SP; and GAO-08-7. Also see Federal Emergency 

Management Agency, National Flood Insurance Program: Report to Congress on 

Reinsuring NFIP Insurance Risk and Options for Privatizing the NFIP (Washington, D.C.: 

Aug. 13, 2015). 
Appendix I: Objectives, Scope, and 

Methodology

Page 48 GAO-17-425 Flood Insurance

proposals might meet each goal. We used these policy goals and the 

information we gathered from the interviews, questionnaire, and 

roundtables to evaluate potential actions for flood insurance reform.

We conducted this performance audit from September 2015 to April 2017 

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.
Appendix II: Additional Reforms That Are 

Contingent on the Development of the Private 

Flood Insurance Market

Page 49 GAO-17-425 Flood Insurance

Based on our review of the literature and discussions with industry and 

nonindustry stakeholders, we identified two other frequently cited 

potential flood insurance reforms: (1) converting the National Flood 

Insurance Program (NFIP) to the insurer of last resort (residual insurer), 

and (2) having NFIP act as a reinsurance backstop to the private flood 

insurance market. However we determined, based on input from industry 

and nonindustry stakeholders with whom we spoke, that implementing 

such reforms now could be premature because they would depend on the 

extent to which a private market for flood insurance developed. Instead, 

these additional reforms could be considered and evaluated once the 

reforms discussed in this report were implemented, and the extent of 

development of a private flood insurance market determined. Because 

these options were widely mentioned in our meetings and discussed in 

the literature we reviewed, we summarized them in this appendix for 

completeness.

Many industry and nonindustry stakeholders with whom we spoke 

believed that as the private sector enters the flood insurance market, 

NFIP could naturally become the insurer of last resort, or residual insurer, 

and that this would be a more appropriate role for the federal government 

in the long term than the current program. However, because the private 

flood insurance market remains in the early stages of development, some

said that it would be preferable to allow the private market to further 

develop before considering whether a structured residual insurance 

program might be needed or how such a program might be structured. 

For example, some state residual insurance programs require their rates 

to be at or above that of the highest private-sector rate to ensure they do 

not compete with private insurers and that they only provide insurance 

coverage to those unable to find it in the private market. If NFIP’s 

premium rates continued to be less than full-risk and impeded privatesector involvement, it might become necessary to create a program to 

transfer policies to the private sector as we have seen with some state 

residual insurance programs. For example, Florida Citizens Property 

Insurance Corporation developed a two-pronged effort that (1) provides 

claims and risk data to private insurers through a confidentiality 

agreement that allows the insurers to determine which policies they would 

like to cover, and (2) allows private insurers to submit an application with 

detailed risk characteristics to a clearinghouse that matches existing 

policies to those characteristics.

Some nonindustry stakeholders with whom we spoke expressed concern 

that private insurers only would offer coverage to NFIP’s lowest-risk 

policies and leave NFIP with the higher-risk policies, increasing the risk 

Appendix II: Additional Reforms That Are 

Contingent on the Development of the 

Private Flood Insurance Market
Appendix II: Additional Reforms That Are 

Contingent on the Development of the Private 

Flood Insurance Market

Page 50 GAO-17-425 Flood Insurance

exposure of the program. Similarly, some nonindustry stakeholders with 

whom we spoke expressed concern that private insurers only would be 

able to compete for those policies that had premium rates higher than 

what the private insurers determine to be necessary to reflect their full risk 

of loss, thus leaving NFIP with policies that had less than full-risk rates. 

As a result, the decrease in premium revenue could outpace the 

decrease in expected flood losses. However, some nonindustry 

stakeholders with whom we spoke that had direct experience with 

residual insurance programs said that they discovered that private 

insurers had been willing to insure much riskier policies than they 

originally expected. One industry stakeholder explained that higher-risk 

policies can be desirable for private insurers because they have the 

potential for higher profit than lower-risk policies, and a private insurer’s 

concern is not so much the risk of the individual properties it insures but 

rather the correlation of risk among those properties. A nonindustry 

stakeholder said that insurers were willing to insure higher-risk properties 

as long as they were geographically diversified and balanced by lowerrisk properties. One industry and one nonindustry stakeholder

acknowledged that there will always be some properties that are too risky 

for the private market, and that these likely would fall to NFIP as a 

residual insurer.

While the average risk of residual policies that remain in NFIP would be 

higher than NFIP’s current average risk level, the aggregate exposure to 

risk could be much lower because of the lower number of policies. Some 

industry and nonindustry stakeholders with whom we spoke also said that 

if NFIP became a smaller program of the highest-risk properties, it would 

be much better positioned to target its mitigation efforts to those 

properties. Furthermore, the concern that a residual flood insurance 

program would have increased fiscal exposure exists primarily because of 

the existence of less than full-risk rates. Therefore, if rates accounted for 

the full risk of loss, the program ought to be collecting sufficient premium 

revenue to pay for the estimated losses associated with the high-risk 

policies over the long term, although with significant uncertainty because 

of the nature of the risk.1

 1

While actuarially sound premium rates that reflect the full risk of loss would reduce the 

likelihood of future borrowing, they would not eliminate it. There would be a chance of 

adverse loss experience over relatively short time periods that could require borrowing if a 

sufficient reserve had not yet been accumulated. Also, due to the large degree of 

uncertainty associated with estimating long-term losses, the risk of debt accumulation over 

the long term would remain.
Appendix II: Additional Reforms That Are 

Contingent on the Development of the Private 

Flood Insurance Market

Page 51 GAO-17-425 Flood Insurance

Many industry and nonindustry stakeholders with whom we spoke agreed 

that the private reinsurance market had a significant capacity to reinsure 

flood risk for private insurance companies, but disagreed on whether the 

federal government also would need to play a role in providing such 

reinsurance. For example, some industry and nonindustry stakeholders 

said that private reinsurers had an abundance of capital available and 

saw flood risk as an attractive option for diversifying their portfolios and 

earning a return on the capital. Some of these industry and nonindustry 

stakeholders said that the private reinsurance market would be sufficient 

to fully reinsure a private flood insurance market.

However, other industry and nonindustry stakeholders with whom we 

spoke said that the federal government would need to act as a backstop 

to reinsure the most catastrophic flood risks (those capable of causing 

losses at levels above which the private market would be unwilling to 

reinsure). Because the private flood insurance market is still developing, it 

is unclear whether such a gap in the market might develop. Thus, it could 

be premature to create a federal reinsurance program, but the issue could 

be revisited after it is seen how the private insurance and reinsurance 

markets developed.
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 52 GAO-17-425 Flood Insurance

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

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

Christopher Forys (Analyst in Charge); Abby Brown; Pamela Davidson; 

Eli Harpst; Carol Henn; Elizabeth Jimenez; John Karikari; Marc Molino; 

Patricia Moye; Carl Ramirez; Oliver Richard; Barbara Roesmann; Jessica 

Sandler; Joe Silvestri; Andrew Stavisky; and Frank Todisco made key 

contributions to this report.

Appendix III: GAO Contact and Staff 

Acknowledgments

Contact

Acknowledgments

(100304)
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