FLOOD INSURANCE

Strategies for 

Increasing Private 

Sector Involvement

Report to Congressional Committees

January 2014

GAO-14-127

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-127, a report to 

congressional committees

January 2014

FLOOD INSURANCE

Strategies for Increasing Private Sector Involvement

Why GAO Did This Study

NFIP has accrued $24 billion in debt, 

highlighting structural weaknesses in 

the program and increasing concerns 

about its burden on taxpayers. As a 

result, some have suggested shifting 

exposure to the private sector and

eliminating subsidized premium rates, 

so individual property owners—not 

taxpayers—would pay for their risk of 

flood loss. NFIP was created, in part,

because private insurers were 

unwilling to insure against flood 

damage, but new technologies and a 

better understanding of flood risks may 

have increased their willingness to 

offer flood coverage.

The Biggert-Waters Flood Insurance 

Reform Act of 2012 moves NFIP 

toward charging more full-risk rates. It

also mandates that GAO conduct a

study on increasing private sector 

involvement in flood insurance. This 

report addresses (1) the conditions 

needed for private sector involvement 

in flood insurance and (2) strategies for 

increasing private sector involvement.

To do this work, GAO reviewed 

available documentation and hosted a 

roundtable in August 2013 that 

included stakeholders from FEMA, the 

insurance and reinsurance industries, 

and state insurance regulators, among 

others. GAO also interviewed other 

similar stakeholders.

What GAO Recommends

While GAO makes no new 

recommendations in this report, GAO 

reiterates its previous suggestion from 

a June 2011 report (GAO-11-297) that

Congress consider eliminating

subsidized rates, charge full-risk rates 

to all policyholders, and appropriate 

funds for premium assistance to 

eligible policyholders to address 

affordability issues. 

What GAO Found

According to stakeholders with whom GAO spoke, several conditions must be 

present to increase private sector involvement in the sale of flood insurance.

First, insurers need to be able to accurately assess risk to determine premium 

rates. For example, stakeholders told GAO that access to National Flood 

Insurance Program (NFIP) policy and claims data and upcoming improvements 

in private sector computer modeling could enable them to better assess risk. 

Second, insurers need to be able to charge premium rates that reflect the full 

estimated risk of potential flood losses while still allowing the companies to make 

a profit, as well as be able to decide which applicants they will insure. However, 

stakeholders said that such rates might seem unaffordable to many 

homeowners. Third, insurers need sufficient consumer participation to properly 

manage and diversify their risk, but stakeholders said that many property owners 

do not buy flood insurance because they may have an inaccurate perception of 

their risk of flooding.

Stakeholders identified several strategies that could help create conditions that 

would promote the sale of flood insurance by the private sector. For example, 

 NFIP charging full-risk rates. Congress could eliminate subsidized rates, 

charge all policyholders full-risk rates, and appropriate funding for a direct 

means-based subsidy to some policyholders. Stakeholders said full-risk NFIP 

rates would encourage private sector participation because they would be 

much closer to the rates private insurers would need to charge. The explicit 

subsidy would address affordability concerns, increase transparency, and 

reduce taxpayer costs depending on the extent and amount of the subsidy.

The Biggert-Waters Act eliminates some subsidized rates, but some have 

proposed delaying these rate increases. Doing so could address affordability 

concerns, but would also delay addressing NFIP’s burden on taxpayers.

 NFIP providing residual insurance. The federal government could also 

encourage private sector involvement by providing coverage for the highestrisk properties that the private sector is unwilling to insure. Providing residual 

coverage could increase the program’s exposure relative to the number of 

properties it insured, but NFIP would be insuring fewer properties, and 

charging adequate rates could reduce taxpayer costs. 

 NFIP as reinsurer. Alternatively, the federal government could serve as a 

reinsurer, charging a premium for assuming the risk of catastrophic losses. 

However, the cost of reinsurance premiums would likely be passed on to 

consumers, with higher rates potentially decreasing consumer participation.

Stakeholders identified other strategies including mandatory coverage 

requirements to ensure broad participation, NFIP purchasing reinsurance from 

the private sector rather than borrowing from the U.S. Treasury, and NFIP 

issuing catastrophe bonds to transfer risk to private investors. As the private 

sector increases its role in providing flood coverage, the federal government 

could collaborate with state and local governments to focus on other important

roles, including promoting risk awareness among consumers, encouraging 

mitigation, enforcing building codes, overseeing land use agreements, and 

streamlining insurance regulations.

View GAO-14-127. For more information, 

contact Alicia Puente Cackley at (202) 512-

8678 or cackleya@gao.gov.
Page i GAO-14-127 Flood Insurance

Letter 1

Background 3

Stakeholders Identified Several Conditions That Must Exist to 

Encourage Private Sector Involvement in Flood Insurance 10

Several Strategies Could Encourage Private Sector Involvement, 

but a Governmental Role Would Likely Be Required 17

Concluding Observations 25

Agency Comments 25

Appendix I Objectives, Scope, and Methodology 27

Appendix II GAO Contact and Staff Acknowledgments 29

Abbreviations

Biggert-Waters Act Biggert-Waters Flood Insurance Reform Act of 

2012

FEMA Federal Emergency Management Agency

FIRM Flood Insurance Rate Map

HUD U.S. Department of Housing and Urban 

Development

NFIP National Flood Insurance Program

SFHA Special Flood Hazard Area

Treasury U.S. Department of the Treasury

Contents

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Page 1 GAO-14-127 Flood Insurance

441 G St. N.W.

Washington, DC 20548

January 22, 2014

The Honorable Tim Johnson

Chairman

The Honorable Mike Crapo

Ranking Member

Committee on Banking, Housing and Urban Affairs

United States Senate

The Honorable Jeb Hensarling

Chairman

The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

House of Representatives

The National Flood Insurance Program (NFIP) is the key component of 

the federal government’s efforts to minimize the damage floods cause 

and the resulting financial impact and is the only source of insurance 

against flood damage for most residents of flood-prone areas. Since 

2000, NFIP has experienced several years with catastrophic losses, 

primarily from Hurricane Katrina and the other 2005 storms and 

Superstorm Sandy in 2012. Since then, the Federal Emergency 

Management Agency (FEMA), which administers NFIP, has needed to 

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

cover claims in some years. As of September 2013, FEMA owed 

Treasury $24 billion—up from $17.8 billion prior to Superstorm Sandy—

and had not repaid any principal on its loans since 2010.1 NFIP is unlikely 

to be able to repay this debt in the near future, if ever.2 Because of its 

 1

FEMA has authority to borrow money from Treasury to pay losses that exceed premium 

revenue and any accumulated surplus. Treasury charges FEMA interest on the 

outstanding debt. Before Superstorm Sandy, this borrowing authority stood at $20.725 

billion. In January 2013, Congress passed and the President signed into law a $9.7 billion 

increase in this authority to pay flood claims related to Superstorm Sandy, raising FEMA’s 

borrowing authority to a total of $30.425 billion. Pub. L. No. 113-1, § 1(a), 127 Stat. 3, 3 

(2013). 

2

The Biggert-Waters Flood Insurance Reform Act of 2012 mandates that FEMA develop a 

plan for repaying its debt to Treasury. Pub. L. No. 112-141, Div. F, Tit. II, Subtit. A, § 

100213(a) , 126 Stat. 405, 923 (codified at 42 U.S.C. § 4016(c)).
Page 2 GAO-14-127 Flood Insurance

recurring financial and management challenges, NFIP has been on our 

high-risk list since March 2006.3

NFIP’s growing debt has highlighted structural weaknesses in the 

program and increased concerns about its burden on taxpayers. As a 

result, Congress has shown increased interest in reducing the federal 

government’s role in flood insurance by transferring its exposure to the 

private sector. Flood insurance reform involves the question of who 

should be responsible for paying to insure against the flood risk that 

arises from living in a particular location—the individual property owners 

themselves, taxpayers, or some combination of the two. Unlike private 

insurance, which makes individuals responsible for their own risk through 

premiums that reflect that risk, NFIP relies in part on taxpayer money. 

Historically, NFIP was not designed to be actuarially sound, so premiums 

do not cover the program’s costs. The National Flood Insurance Act of 

1968 authorized subsidized rates to encourage participation in NFIP, 

especially for properties in high-risk locations that were built before Flood 

Insurance Rate Maps (FIRM) became available and the level of risk was 

clearly understood.4 Without the subsidies, these properties would have 

been charged significantly higher premiums. FEMA estimates that about 

1.1 million of 5.5 million NFIP policies—about 20 percent—have 

subsidized rates. The discounted premiums encourage property owners 

to join the program but do not provide enough revenue to cover potential 

losses, and many subsidized policies have had high losses.5

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

Act) reauthorized NFIP through 2017 and made some significant 

changes, such as eliminating the subsidies for certain properties, creating 

a reserve fund, and eliminating the grandfathering of properties at old 

 3

See GAO, High-Risk Program, GAO-06-497T (Washington, D.C.: Mar. 15, 2006); and 

High-Risk Series: An Update, GAO-13-359T (Washington, D.C.: Feb. 13, 2013). 

4

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

5

These properties generally have higher loss rates than unsubsidized properties. In 2008, 

we reported that subsidized properties accounted for the majority of repetitive loss 

properties—properties that have experienced multiple flood losses—and made up around 

1 percent of the total policies but 30 percent of the claims dollars paid. See GAO, 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 3 GAO-14-127 Flood Insurance

rates after remapping.6 These changes are important steps in putting 

NFIP on the path toward financial solvency, but a number of policies will 

continue to receive subsidized rates. This report addresses one of several 

GAO mandates in the Biggert-Waters Act: to assess a broad range of 

options, methods, and strategies for privatizing NFIP.7 The report 

discusses (1) conditions needed for private sector involvement in flood 

insurance and (2) strategies for increasing such involvement.

To address these objectives, we reviewed NFIP laws, regulations, and 

history, FEMA reports, academic studies, our prior work on NFIP, and 

other documentation and reports. We also interviewed a variety of 

stakeholders and held a roundtable in August 2013 to obtain views on 

increasing private sector involvement in flood insurance. Stakeholders 

participating in interviews and the roundtable included representatives 

from FEMA, the Federal Insurance Office, private insurers, reinsurers, 

state residual insurance programs, state insurance regulators, actuaries, 

insurance adjusters, insurance agents, a catastrophe modeling firm, 

consumer advocates, floodplain managers, mortgage bankers, realtors, 

an academic, and other experts.

We conducted this performance audit from March 2013 to January 2014 

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.

Floods are the most common and destructive natural disaster in the 

United States. However, flooding is generally excluded from homeowners 

insurance policies, which typically cover damages from other losses, such 

as wind, fire, and theft. Because of the catastrophic nature of flooding, the 

difficulty of adequately predicting flood risks, and uncertainty surrounding 

 6

Pub. L. No. 112-141, Div. F, Tit. II, Subtit. A, 126 Stat. 405, 916 (2012). Prior to the 

Biggert-Waters Act, FEMA could “grandfather” properties that were already in the program 

when new flood maps placed them in higher-risk zones, allowing some property owners to 

pay premium rates that applied to the previous lower-risk zone.

7

Pub. L. No. 112-141, § 100232(a).

Background
Page 4 GAO-14-127 Flood Insurance

the possibility of charging actuarially sound premium rates, private 

insurance companies have historically been largely unwilling to 

underwrite flood insurance. NFIP, which makes federally backed flood 

insurance available to residential property owners and businesses, was 

intended to reduce the federal government’s escalating costs for repairing 

flood damage after disasters. Under NFIP, the federal government 

currently assumes the liability for the insurance coverage and sets rates 

and coverage limitations, among other responsibilities, while private 

insurers sell the policies and administer the claims for a fee determined 

by FEMA. NFIP is managed by FEMA’s Federal Insurance and Mitigation 

Administration, which is responsible for administering programs that 

provide assistance for mitigating future damages from natural hazards. 

Some private insurers provide coverage for flood insurance above the 

limit of NFIP coverage, generally referred to as excess flood insurance.8

Further, NFIP policies do not provide coverage for business interruption 

or additional living expenses, which currently are available through some 

private insurers.

Community participation in NFIP is voluntary, but communities must join 

NFIP and adopt and enforce FEMA-approved building standards and 

floodplain management strategies in order for their residents to purchase 

flood insurance through the program. Additionally, communities in Special 

Flood Hazard Areas (SFHA)—areas subject to a 1 percent or greater 

chance of flooding in any given year—must participate in NFIP for 

property owners to be eligible for any aid in connection with a flood, 

including disaster assistance loans and grants for acquisition or 

construction purposes. Participating communities agree to enforce 

regulations for land use and new construction in high-risk flood zones and 

to adopt and enforce state and community floodplain management 

regulations to reduce future flood damage. Participating communities can 

receive discounts on flood insurance if they establish floodplain 

management programs that go beyond NFIP’s minimum requirements.9

 8

See GAO, Flood Insurance: Implications of Changing Coverage Limits and Expanding 

Coverage, GAO-13-568 (Washington, D.C.: July 3, 2013).

9

To be eligible for these discounts, communities must participate in the Community Rating 

System, a voluntary program established in 1990 to encourage community floodplain 

management activities that exceed the minimum NFIP standards. Under the Community 

Rating System, flood insurance premium rates are discounted to reward community 

actions that meet three goals: (1) reduce flood damage to insurable property, (2) 

strengthen and support the insurance aspects of NFIP, and (3) encourage a 

comprehensive approach to floodplain management.
Page 5 GAO-14-127 Flood Insurance

FEMA can suspend communities that do not comply with the program, 

and communities can withdraw from it by submitting a copy of a 

legislative action stating its desire to withdraw from NFIP. As of May 

2013, about 22,000 communities voluntarily participated in NFIP.10

NFIP has mapped flood risks across the country, assigning flood zone 

designations based on risk levels, and these designations are a factor in 

determining premium rates. To help reduce or eliminate the long-term risk 

of flood damage to buildings and other structures insured by NFIP, FEMA 

has used a variety of mitigation efforts, such as elevation, relocation, and 

demolition. Despite these efforts, the number of repetitive loss 

properties—generally, those that have had two or more flood insurance 

claims payments of $1,000 or more over 10 years—has continued to 

grow.11

NFIP policies have what FEMA describes as either subsidized or full-risk 

premiums. The type of policy and the subsequent rate a policyholder pays 

depend on several property characteristics—for example, whether the 

structure was built before or after a community’s FIRM was issued and 

the location of the structure in the floodplain. Structures built after a 

community’s FIRM was published must meet FEMA building standards, 

and the property owner must pay full-risk rates, which reflect FEMA’s 

estimates of the actual risk of flooding. Post-FIRM structures are 

generally less flood prone than pre-FIRM properties because they have 

been built to flood-resistant building codes or mitigation steps have been 

taken to reduce flood risks.

Subsidized rates do not reflect the estimated total flood risk and instead 

are highly discounted. Even with highly discounted rates, subsidized 

premiums are, on average, higher than full-risk premiums because 

subsidized pre-FIRM structures generally are more prone to flooding (that 

is, riskier) than other structures. In general, pre-FIRM properties were not 

 10Not all participating NFIP communities have residents or businesses with policies.

11The Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 amended the 

existing definition of the term “repetitive loss structure” to the current one—a structure 

covered by a contract for flood insurance that (a) has incurred flood-related damage on 

two occasions resulting in repair costs that, on average, equaled or exceeded 25 percent 

of the structure’s value, and (b) at the time of the second incidence, the contract for flood 

insurance must contain increased cost of compliance coverage. 42 U.S.C. § 4121(a)(7).

Subsidized Premium 

Rates
Page 6 GAO-14-127 Flood Insurance

constructed according to the program’s building standards or were built 

without regard to base flood elevation—the level relative to mean sea 

level at which there is an estimated 1 percent or greater chance of 

flooding in a given year. For example, the average annual subsidized 

premium with October 2011 rates for pre-FIRM subsidized properties was 

about $1,224, while the average annual premium for post-FIRM 

properties paying full-risk rates was about $492.

Flooding disasters of the 1920s and 1930s led to federal involvement in 

protecting life and property from flooding, with the passage of the Flood 

Control Act of 1936.12 Generally, the only available financial recourse to 

assist flood victims was postdisaster assistance. When flood insurance 

was first proposed in the 1950s, 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.13

In 1965 Congress passed the Southeast Hurricane Disaster Relief Act 

that provided financial relief for victims of flooding.14 In addition, the act 

mandated a feasibility study of a national flood insurance program, which 

helped provide the basis for the National Flood Insurance Act of 1968 that 

created NFIP.15 From 1969 through 1977, the Department of Housing and 

Urban Development (HUD), which administered NFIP at the time, had an 

agreement with a consortium of private insurers known as the National 

Flood Insurers Association. Under this agreement, HUD reimbursed the 

association of insurers for operating costs and provided an annual 

operating allowance equal to 5 percent of policyholders’ premiums. HUD 

ended the partnership in 1978 and converted NFIP to a governmentoperated program because it could not come to an agreement with the 

private insurers on issues such as HUD’s right to approve their operating 

budgets and its authority over policy decisions and regulations. HUD also 

 1249 Stat. 1570 (1936).

13Federal Emergency Management Agency, National Flood Insurance Program: Program 

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

14Pub. L. No. 89-339, 79 Stat. 1301 (1965). 

15Pub. L. No. 89-339, § 5 (mandating feasibility study); National Flood Insurance Act of 

1968, Pub. L. No. 90-448, Title XIII, 82 Stat. 476, 572.

Program History
Page 7 GAO-14-127 Flood Insurance

estimated $15 million in cost savings by ending the partnership. The

insurers wanted to continue the partnership, but the HUD Secretary 

decided to use her statutory authority to convert NFIP to a government 

program. In 1978, we determined that the partnership had not reached a 

last resort status and that the potential for a new agreement existed.16

The Flood Disaster Protection Act of 1973 made the purchase of flood 

insurance mandatory for owners of properties in special flood hazard 

areas that are secured by mortgages from federally regulated lenders and 

provided additional incentives for communities to join the program.17 The 

National Flood Insurance Reform Act of 1994—which amended the 1968 

act and the 1973 act—strengthened the mandatory purchase 

requirements for owners of properties located in SFHAs with mortgages 

from federally regulated lenders.18 The Bunning-Bereuter-Blumenauer 

Flood Insurance Reform Act of 2004 authorized a pilot program to 

encourage owners of properties that suffer from repeated flood losses to 

take steps to reduce the risk of damage, known as mitigation.19 Owners of 

these “severe repetitive loss” properties who refuse an offer to mitigate 

the risks face higher premiums.

Finally, in 2012 the Biggert-Waters Act reauthorized the program through 

2017 and removed subsidized rates for a number of insured properties, 

such as residential properties that are not an individual’s primary 

residence, severe repetitive loss properties, business properties, and 

properties that had received payments for flood-related damage that 

 16GAO, Economic Development: HUD’s Determination to Convert from Industry to 

Government Operation of the National Flood Insurance Program, CED-78-122

(Washington, D.C.: May 31, 1978).

17Pub. L. No. 93-234, 87 Stat. 975 (1973).

18Pub. L. No. 103-325, Tit. V, 108 Stat. 2160, 2255 (1994).

19Pub. L. No. 108-264, Tit. I, § 102, 118 Stat. 712, 714 (2004). According to FEMA, the 

key mitigation steps for residential properties are elevating a building to or above the 

area’s base flood elevation, relocating the building to an area with lower flood risk, or 

demolishing the building and turning the property into green space. A community can also 

take steps to reduce flood risk to an area by diverting the flow of water through welldesigned channels and retaining walls or by containing the water through ponds and 

green space. 
Page 8 GAO-14-127 Flood Insurance

cumulatively equaled or exceeded the property’s fair market value.20 The 

Biggert-Waters Act also included several other provisions, such as the 

following.

• Rates that fully reflect flood risk for specified properties are to be 

phased in over several years—with increases of 25 percent each 

year—until the average risk premium rate for these properties equals 

the average of the full-risk premium rates for all properties in that risk 

classification.21

• Properties will no longer qualify for subsidies if the policyholder has 

deliberately chosen to let the policy lapse and if a prospective insured 

refuses to accept any offer of mitigation assistance (including 

relocation) following a major disaster.22

• Properties that did not have NFIP insurance when the act was 

enacted and properties purchased after that date will not receive 

subsidies. Subsidized properties that are sold will lose their 

subsidies.23

• FEMA must adjust rates to accurately reflect the current risk of 

flooding to properties when an area’s flood map is changed.24 FEMA 

is determining how this provision will affect properties that were 

grandfathered into lower rates.

In addition, the act allows average premium increases of 20 percent 

annually by risk class (the previous cap was 10 percent), establishes 

minimum deductibles, requires FEMA to establish a reserve fund, and 

requires FEMA to include losses from catastrophic years in determining 

premiums that are based on the “average historical loss year,” among 

other things. The potential adverse effects on certain property owners of 

the premium rate increases arising out of the Biggert-Waters Act and the 

 20Pub. L. No. 112-141, §§ 100203, 100205. For single-family properties, severe repetitive 

loss properties are those that have incurred at least four NFIP claims payments exceeding 

$5,000 each, with the cumulative amount of such claims payments exceeding $20,000; or 

at least two separate claims payments with a cumulative total that exceeds the property’s 

value. For multifamily properties, FEMA will define the term by regulation. 

21Pub. L. No. 112-141, § 100205(c)(3) (codified at 42 U.S.C. § 4015(e)(2)).

22Pub. L. No. 112-141, § 100205(a)(1)(B) (codified at 42 U.S.C. § 4014(g)(3)-(4)).

23Pub. L. No. 112-141, § 100205(a)(1)(B) (codified at 42 U.S.C. § 4014(g)(1)-(2)).

24Subject to any other statutory provision in 42 U.S.C. ch. 50. Pub. L. No. 112-141, § 

100207 (codified at 42 U.S.C. § 4015(h)).
Page 9 GAO-14-127 Flood Insurance

possibility of delaying some rate increases have been the subject of 

congressional hearings and recent legislative proposals.25

We previously identified goals for federal involvement in natural 

catastrophe insurance programs.

26 These goals can be adapted to help

evaluate strategies for increasing private sector involvement in flood 

insurance. The goals include:

• charging premium rates that fully reflect estimated risks,

• encouraging private markets to provide flood insurance,

• encouraging property owners to buy flood insurance, and

• limiting costs to taxpayers before and after a flood.

The four-goal framework captures the public policy goals for providing 

insurance against natural catastrophes such as flooding. Stakeholders

with whom we spoke generally agreed that these goals were 

appropriate.27

 25See, e.g., Homeowner Flood Insurance Affordability Act of 2013, S. 1610, 113th Cong. 

(2013); Homeowner Flood Insurance Affordability Act of 2013, H.R. 3370, 113th Cong. 

(2013); a bill to improve the National Flood Insurance Program, and for other purposes, S. 

996, 113th Cong. (2013); Flood Insurance Premium Relief Act of 2013, H.R. 1267, 113th

Cong. (2013); and Flood Victim Premium Relief Act of 2013, H.R. 960, 113th Cong. (2013).

26See GAO, Natural Disasters: Public Policy Options for Changing the Federal Role in 

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

27We obtained views from stakeholders through a roundtable discussion as well as 

individual interviews. References to stakeholders throughout this report refer to 

information obtained either through our roundtable discussion, individual interviews, or 

both. Further, information attributed to stakeholders does not imply an agreement among 

all stakeholders with whom we spoke, but instead indicates something mentioned by 

multiple stakeholders.

Policy Goals Framework
Page 10 GAO-14-127 Flood Insurance

Stakeholders with whom we spoke or who participated in our roundtable 

discussion identified several conditions that would be needed to increase 

private sector involvement in flood insurance. First, private insurers would 

have to perceive floods as an insurable risk that they could profitably 

cover—that is, they would need to be able to estimate both the frequency 

and severity of future losses with some accuracy. Second, they would 

need the freedom to charge adequate rates and decide which applicants 

they would insure. Third, private insurers would need adequate consumer 

participation in order to manage and diversify their risk.

Private insurers generally cover only what they see as insurable risks 

whose frequency and severity they can estimate with some accuracy. 

Being able to calculate the average frequency and severity of future 

losses enables insurers to set premium rates that are likely to be 

sufficient to pay all claims and expenses and yield a profit. For this 

reason, homeowners policies do not cover a variety of risks, such as 

flooding, which tend to occur unexpectedly and can cause a devastating 

amount of damage.28 NFIP was created in part because the catastrophic 

nature of flooding made it difficult for private insurance companies to 

develop an actuarial rate structure that could adequately reflect the risks 

to flood-prone properties.29 The program is the only provider of affordable 

flood insurance for most U.S. homeowners.

Stakeholders indicated that private insurers would need more information 

and more sophisticated modeling to assess flood risk before they could 

begin providing flood insurance.30 Risk modelers with whom we spoke 

questioned the reliability of FEMA’s flood risk zones, which in many 

areas, such as along coastlines, were determined using a less 

sophisticated methodology than what is available today. For example, 

one risk modeler said that FEMA’s base flood elevations were likely too 

 28George E. Rejda, Principles of Risk Management and Insurance, 8th ed. (Boston, Mass.: 

Pearson Education, Inc, 2003).

29Federal Emergency Management Agency, National Flood Insurance Program: Program 

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

30Modeling companies determine the probability of flooding and the associated cost of 

damage based on an analysis of flood hazards and a building’s exposure and vulnerability 

to those hazards.

Stakeholders 

Identified Several 

Conditions That Must 

Exist to Encourage 

Private Sector 

Involvement in Flood 

Insurance

Private Insurers Must Be 

Able to Accurately Assess 

Flood Risk
Page 11 GAO-14-127 Flood Insurance

low in many places and that many structures across the country were at 

higher flood risk than the flood maps indicated. According to one insurer, 

determining flood risk for commercial policyholders involves reviewing 

specific information, including FEMA flood maps and satellite imagery, to 

determine a structure’s flood zone, proximity to other flood zones, and 

elevation. This insurer uses geographical address information to 

determine flood risk on a building-by-building basis based on a range of 

factors that include the structural elements of a building and its contents. 

One risk modeler suggested that FEMA should design flood risk maps for 

future building stock and should model both current and future flood 

levels; however, the risk modeler said that determining future flood risks 

was a challenge and that the industry lacked consensus on the 

methodology that should be used.31

Stakeholders anticipated that risk modeling firms would be releasing new 

flood models in the next several years, providing the tools that private 

insurers would need to evaluate flood risk. Stakeholders also noted that a 

private market for flood insurance would likely create a market for 

modeling flood risk, attracting many companies to fill that need. 

Stakeholders said that if other conditions for private sector involvement in 

flood insurance were met, more risk-modeling companies or private 

insurers would begin developing models that private insurers could use to 

determine risks more accurately. For example, one risk modeler said risk 

modelers could determine how different bodies of water, such as two 

rivers, would interact and contribute to flood events—information that 

FEMA’s flood maps do not include.

Stakeholders said that in addition to advanced computer modeling, 

access to NFIP policy and claims data would help private insurers assess 

flood risks and determine which properties they might be willing to insure. 

However, FEMA officials said the agency would need to address privacy 

concerns to provide property-level information to insurers, because the 

Privacy Act prohibits the agency from releasing detailed NFIP policy and 

claims data. The Privacy Act governs how federal agencies may use the 

 31The Biggert-Waters Act requires the newly created Technical Mapping Advisory Council 

to develop recommendations for FEMA for future conditions mapping, including the best 

available methodology to consider the impact of the rise in the sea level and future 

development on flood risk, and present its recommendations in a report. FEMA is required 

to implement such future risk assessment recommendations. Pub. L. No. 112-141, § 

100215(d).
Page 12 GAO-14-127 Flood Insurance

personal information that individuals supply when obtaining government 

services or fulfilling obligations.32 FEMA officials said that while the 

agency could release data in the aggregate, some information could not 

be provided in detail. For example, FEMA could provide zip-code level 

information to communities but would need to determine how to release 

property-level information while protecting the privacy of individuals.

Stakeholders said that private insurers would also need to be able to 

charge adequate rates that would reflect the full estimated risk of flood 

loss and allow for profit. In our prior work, one of the public policy goals 

we adapted for evaluating options for increasing private sector 

involvement in flood insurance was charging premium rates that fully 

reflected estimated risks.33 Actuarially sound rates determined by private 

insurers would differ from NFIP rates in that they would be calculated to 

account for potential losses, reflect the cost of capital to cover potential 

catastrophic losses, and provide a reasonable return for investors. As a 

result, these rates would be higher than present NFIP rates for many 

properties and could present affordability challenges for consumers. One 

stakeholder said higher prices could lead some homeowners to purchase 

lower amounts of coverage or choose not to purchase flood insurance at 

all. Further, another stakeholder said higher flood insurance rates could 

affect property owners’ home value and ability to sell their property. For 

example, one stakeholder said that potential buyers might decide not to 

purchase a home in a high-risk area after determining the cost of flood 

insurance for the property.

Stakeholders said that the political environment could prevent insurers 

from setting adequate rates. For example, they expressed concerns that 

efforts to increase flood insurance rates would likely face public 

resistance or be politically unpopular. Stakeholders said it was 

challenging for private insurers to gain enough confidence to enter the 

flood insurance market because they feared not being able to charge 

actuarially sound rates or obtain a reasonable rate of return. For example, 

stakeholders said that state by state approval of flood insurance rates 

 32Pub. L. No. 93-579, 88 Stat. 1896 (1974) (codified, as amended, at 5 U.S.C. § 552a).

33We previously reported that charging full-risk rates would improve NFIP’s financial 

soundness but could reduce property owner participation. See GAO, Flood Insurance: 

Public Policy Goals Provide a Framework for Reform, GAO-11-670T (Washington, D.C.: 

June 23, 2011).

Private Insurers Would 

Need Freedom to Charge 

Adequate Rates and 

Manage Risk
Page 13 GAO-14-127 Flood Insurance

might impede insurers’ ability to obtain adequate rates. An insurer said 

that most state insurance regulators lacked knowledge about flood 

policies, but a state regulation official said that most states took a 

measured approach to rate regulation, with an eye toward allowing 

insurers to earn a reasonable profit. Further, one stakeholder said that 

private insurers would need flexibility to account for potential climate 

change effects when pricing flood, hurricane, and other risks associated 

with sea level rise. Although potential climate change effects would have 

a long time horizon, the stakeholder suggested it was an issue to 

consider regarding the regulatory environment for private insurers.

In addition, stakeholders said that private insurers would need freedom in 

underwriting policies so that they could accept and reject applicants as 

necessary to manage their risk portfolios. Insurable risks have certain 

characteristics that make providing coverage possible. As well as being 

estimable, for example, loss exposure should not be potentially 

catastrophic for the insurer.34 Freedom to manage risk would help 

insurers manage potentially catastrophic losses and further encourage 

their participation in the flood insurance market. For example, insurers 

might determine that they needed to limit the number of policies in a 

geographic area because a single flood event could result in losses on 

many of those policies at the same time. Stakeholders said incentives 

would be needed to encourage insurers to assume greater risk, 

particularly in flood-prone areas. One stakeholder said the political 

environment could limit insurers’ ability to accept and reject applicants as 

necessary to manage their risk exposure. Further, stakeholders said that 

different insurance regulations across states could further complicate 

insurers’ ability to underwrite flood insurance.35 One stakeholder said that 

insurers would need clarity on the political and regulatory environment 

before entering the flood market.

 34Rejda, Principles of Risk Management and Insurance. 

35States, rather than federal government, primarily regulate insurance. See GAO, 

Insurance Markets: Impacts of and Regulatory Response to the 2007-2009 Financial 

Crisis, GAO-13-583 (Washington, D.C.: June 27, 2013).
Page 14 GAO-14-127 Flood Insurance

Insurers need to be able to manage their risk exposure by having a large, 

diverse risk pool with premiums at a level that property owners are willing 

and able to pay.36 Having a large and diversified risk pool would enable 

an insurer to better estimate losses based on loss data it collected over 

time and to spread the losses over a large number of properties. 

Economically feasible premiums would provide an opportunity or 

incentive for property owners to obtain coverage. Further, in our prior 

work, one of the public policy goals we adapted for evaluating strategies 

for increasing private sector involvement in flood insurance was 

encouraging broad consumer participation in the flood insurance market. 

We previously have found that efforts to encourage broader participation 

in NFIP could reduce costs, depending on how they were implemented.37

Likewise, a large risk pool could help private insurers manage their 

exposure.

Broad consumer participation in the market would also be necessary to 

address adverse selection—the phenomenon that occurs when only 

those most in need typically purchase insurance, creating a pool of only 

the highest-risk properties. In this case, insurers must be confident that 

homeowners other than those in the highest-risk areas will obtain flood 

insurance, because adverse selection can hamper an insurer’s efforts to 

manage its risk. A 2006 study estimated that NFIP participation rates 

were as low as 50 percent in SFHAs, where property owners with loans 

from federally insured and regulated lenders were required to purchase 

flood insurance.38 The study also found that participation rates outside of 

SFHAs were as low as 1 percent. Another study found that homeowners 

both within and outside SFHAs who did obtain flood insurance when 

purchasing their homes typically kept it for 2 to 4 years before canceling 

their policies.39 Stakeholders said that homeowners were more likely to 

purchase flood insurance immediately following a flood event and to drop 

it later as their perception of their flood risk decreased.

 36Rejda, Principles of Risk Management and Insurance.

37GAO-11-670T. 

38RAND Corporation, The National Flood Insurance Program’s Market Penetration Rate: 

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

Feb. 2006).

39Erwann 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, (2012). 

Adequate Consumer 

Participation Would Also 

Be Necessary
Page 15 GAO-14-127 Flood Insurance

Homeowners that do not purchase flood insurance, including many 

residing in SFHAs, make that decision for a number of reasons that would 

have to be addressed in order to make private flood insurance possible. 

Stakeholders said that affordability was one of the key challenges to 

providing flood insurance. In addition, stakeholders said that affordability 

could be a particularly difficult issue for low- and moderate-income 

homeowners, as evidenced by complaints surrounding rate increases 

under the Biggert-Waters Act. Further, stakeholders said that not all 

homeowners would be able to afford flood insurance at rates that private 

insurers would consider adequate for reflecting the full estimated risk of 

flood loss and allowing for profit.

Based on our analysis of stakeholder views and other information, many 

property owners may also have an inaccurate perception of their risk of 

flooding and thus do not buy flood insurance. For example, a 2012 study 

suggested that some property owners believe that only properties in 

SFHAs are in a flood zone and that properties located outside of SFHAs 

are not at risk of flooding.40 Stakeholders said that it was difficult to 

convince homeowners to pay for coverage for an unlikely event, despite 

the potential for severe damage. The former definition of SFHAs as a 

“100-year” flood zone has contributed in part to this misperception, given 

the long time horizon, so that some property owners have assumed that 

after experiencing a flood loss, their properties would be free from 

flooding for the next 100 years.41 And one stakeholder indicated that 

many consumers mistakenly assumed that their homeowners insurance 

policies included flood coverage. In addition, a banking association with 

whom we spoke said that some lending institutions did not see flood risk 

as a threat to their safety and soundness and therefore often did not 

require flood coverage at mortgage origination, potentially contributing 

further to homeowners’ misperception of flood risk.

Finally, stakeholders suggested that many consumers did not obtain flood 

insurance because they assumed they would receive federal or state 

disaster assistance after a flood event. However, federal disaster 

assistance to individuals is limited. Disaster assistance is administered 

through several federal programs and is generally made available only 

 40Michel-Kerjan, Lemoyne de Forges, and Kunreuther, “Policy Tenure under NFIP,” 10-12.

41To clarify the perception of risk among homeowners, FEMA revised the definition of 

SFHA to land “subject to a 1 percent or greater chance of flooding in any given year.”
Page 16 GAO-14-127 Flood Insurance

after the President issues a disaster declaration, but homeowners 

seeking such assistance must first seek assistance from their flood 

insurance policy.42 Further, while one federal grant program is available—

the Individuals and Households Program—federal disaster assistance to 

individuals and businesses for the repair or replacement of structures 

consists primarily of federal loan programs. These include loans from the 

U.S. Small Business Administration that are available to all first-time 

applicants but to repeat applicants only if they have flood insurance. 

Homeowners can apply for up to $200,000 in home and property disaster 

loans for the repair or replacement of a primary residence to its 

predisaster condition. Business disaster loans of up to $2 million are the 

primary form of federal assistance for the repair and rebuilding of 

nonfarm, private sector disaster losses.43 One stakeholder said many 

homeowners without flood insurance would not qualify for individual 

assistance or loans from the U.S. Small Business Administration and that 

homeowners might not have options—other than filing for bankruptcy—to 

recover financially from a flood event.44 We previously reported that while 

the federal government has provided significant financial assistance after 

 42GAO, Disaster Assistance: Federal Assistance for Permanent Housing Primarily 

Benefited Homeowners; Opportunities Exist to Better Target Rental Housing Needs, 

GAO-10-17 (Washington, D.C.: Jan. 14, 2010).

43Homeowners may also purchase mortgage insurance through the Mortgage Insurance 

for Disaster Victims Section 203(h) program, administered by HUD, to finance the 

purchase or reconstruction of homes in presidentially designated disaster areas. 

44Other types of federal assistance might be available to qualifying disaster victims 

through programs not specific to disasters. For example, the U.S. Department of 

Agriculture’s Rural Housing Repair Loan and Grant program provides loans of up to 

$20,000 and grants of up to $7,500 to very-low-income homeowners to repair, improve, or 

modernize their dwellings, or remove health and safety hazards, in eligible rural areas. 

Further, individuals or households with very low, low, and moderate incomes can obtain 

loans through the U.S. Department of Agriculture’s Section 502 program to build, repair, 

renovate, or relocate a home in an eligible rural area.
Page 17 GAO-14-127 Flood Insurance

major disasters, the federal role is primarily to assist state and local 

governments, which have the central role in recovery efforts.45

Based on our analysis, all of these issues would need to be addressed to 

create the conditions that would encourage private insurers to consider 

providing flood insurance. Addressing them would be a complex task and 

would require difficult trade-offs. For example, raising rates beyond what 

FEMA currently charges could create significant hardship and put at risk 

the homes of those who could not afford flood insurance. Further, it could 

be a challenge to encourage property owners to purchase flood 

insurance, particularly when many of them do not believe they are 

exposed to the risk of flooding.

Stakeholders with whom we spoke or who participated in our roundtable 

discussion identified several strategies that could be used to help transfer 

some of the responsibility of providing flood insurance from the federal 

government to the private sector. These strategies, or certain aspects of 

them, could be used jointly to promote the conditions that stakeholders 

said would be necessary for private sector involvement—the ability to 

assess risk, the freedom to charge adequate rates and manage risk, and 

adequate consumer participation. These strategies serve only as broad 

potential frameworks, and because of the complexity of providing flood 

insurance, the success of any reform effort would also depend on how it 

is structured and implemented. Further, stakeholders said that any 

strategy will likely require certain roles for federal, state, and local 

government entities.

 45For example, FEMA’s Hazard Mitigation Grant Program provides assistance to states,

local governments, and Indian tribes to implement long-term hazard mitigation measures 

following a major disaster, and the agency’s Flood Mitigation Assistance Program 

provides funds to assist states, local governments, and Indian tribes in implementing

measures that reduce or eliminate the long-term risk of flood damage to buildings, 

manufactured homes, and other structures insured under NFIP. In addition, HUD has 

provided funding to states through the Community Development Block Grant program. 

States have often relied on this program for flexible funding that can be applied to 

disasters to help rebuild communities and, in some cases, make funds or services 

available to residents. See GAO-10-17.

Several Strategies 

Could Encourage 

Private Sector 

Involvement, but a 

Governmental Role 

Would Likely Be 

Required
Page 18 GAO-14-127 Flood Insurance

One strategy stakeholders identified, which we have also mentioned in 

previous reports, would be for Congress to eliminate subsidized rates, 

charge full-risk rates to all policyholders, and appropriate funding for a 

direct means-based subsidy to some policyholders.46 A second strategy 

that stakeholders identified would be for the federal government to 

provide only residual insurance, serving as the insurer of last resort for 

properties that the private sector is unwilling to insure. Alternatively, a 

third strategy would be for the federal government to serve as a reinsurer 

and charge private insurers a premium for the federal government to 

assume risk for losses that exceed a predetermined amount. In addition 

to these strategies, stakeholders proposed others, including mandatory 

coverage, reinsurance for NFIP, and catastrophe bonds.

Stakeholders proposed eliminating all subsidized rates and charging all 

policyholders rates that reflected the full estimated risk of flooding, with 

Congress providing a direct means-based subsidy to some 

policyholders.

47 Stakeholders generally agreed that any subsidies should 

be explicit and provided directly to the policyholder instead of hidden in a 

discounted premium rate, partly because such hidden subsidies conceal 

a property’s actual flood risk and encourage development in high-risk 

areas. While the premium levels may be sufficient to cover claims in 

years with lower losses, the subsidies result in insufficient premium 

revenue over the long term to cover years with higher losses. As a result, 

the cost of subsidies is disguised from taxpayers and evident only in 

FEMA’s need to borrow from Treasury. Making the subsidies explicit 

would require Congress to appropriate funds for them, increasing 

transparency by showing the exact annual cost of the subsidies. Such 

subsidies could require determining eligibility requirements—for example, 

a means test—as well as the amount of subsidies. We suggested that 

Congress consider this approach in a previous report and this strategy 

continues to be an option that could offer benefits to the program and 

could be implemented independent of any increase in private sector 

involvement in flood insurance.48

 46See GAO-09-20 and GAO, FEMA: Action Needed to Improve Administration of the 

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

47Congress could provide such a subsidy in a number of ways including vouchers or tax 

rebates.

48See GAO-11-297.

Several Strategies Could 

Help Create Conditions for 

Private Sector 

Involvement

Full-Risk Rates with Targeted 

Subsidies
Page 19 GAO-14-127 Flood Insurance

Stakeholders said that removing the hidden subsidies and charging fullrisk rates to all policyholders has a number of advantages. For example, 

demonstrating the political will to charge full-risk rates within NFIP could 

signal to private insurers a greater likelihood of being allowed the freedom 

to charge adequate rates in a private flood insurance market, thus 

encouraging their potential participation. However, stakeholders 

expressed concerns over discussions of proposals to delay rate 

increases, specifically those authorized by the Biggert-Waters Act.49

These stakeholders said that such delays would increase private insurers’

skepticism about the feasibility of participating in a private flood insurance 

market. Although raising rates could create affordability concerns for 

some, delaying the increases could reduce the chances of increasing 

private sector involvement in flood insurance, leaving taxpayers to 

continue paying for flood claims through future borrowing from Treasury.

Based on our analysis, providing means-tested subsidies to some 

property owners would allow Congress to address affordability concerns 

associated with premium rate increases. Currently, subsidies are 

available regardless of a property owner’s ability to afford a full-risk 

premium. Means testing the subsidies would ensure that only those who 

could not afford full-risk rates would receive assistance and should 

increase the amount in premiums NFIP collects to cover losses. 

Collecting more in premiums by providing subsidies to fewer 

policyholders would reduce taxpayer costs, one of the goals for reforming 

catastrophe insurance. Finally, charging full-risk rates to all policyholders 

would demonstrate a property’s actual flood risk to property owners, 

discourage further development in high-risk areas, and encourage 

property owners to invest in mitigation to lower their exposure to flood risk 

as well as their premium rate. However, while means-tested subsidies 

could make premium rates more affordable, they could also decrease a 

property owner’s incentive to mitigate.

Stakeholders raised other concerns about increases in flood insurance 

premium rates. One stakeholder noted that rate increases could lower a 

home’s market value because the cost of owning the home would rise. 

Further, stakeholders said that some communities with a high risk of 

flooding could become economically unviable if premium rate increases 

 49As we have discussed, the Biggert-Waters Act eliminates subsidies in a number of 

situations, including for nonprimary residences, severe repetitive loss properties, business 

properties, properties that are sold, and when insurance coverage lapses.
Page 20 GAO-14-127 Flood Insurance

made flood insurance unaffordable for too many residents. For example, 

stakeholders as well as participants in congressional hearings have said 

that rate increases in some high-risk areas could make it unaffordable for 

many homeowners within a community to stay in their homes, which 

could lead to declining property values for homes and businesses. 

Premium rate increases could also cause some property owners to 

cancel their coverage or opt not to purchase it, particularly those who 

were not already mandated to purchase flood insurance.50 Reduced 

participation could negate some of the benefits of providing the targeted 

subsidies. Means-based subsidies could soften some of these potential 

effects, but any solution will need to consider whether other steps would 

be necessary to limit adverse effects on particular communities.

Finally, the Biggert-Waters Act eliminates the transfer of subsidies when 

homes are sold and the renewal of subsidized policies if a policyholder 

deliberately chooses to allow flood coverage to lapse. We previously have 

reported that the continuing implementation of the act is expected to 

decrease the number of subsidized policies.51 As the number of 

subsidized policies falls, NFIP’s premium shortfall will decrease, helping 

its financial condition. Means-based subsidies could provide greater upfront savings by limiting the number of policyholders that would be eligible 

for the subsidies. However, there could be a point when the cost of 

continued means-based subsidies could exceed the level of subsidies 

that will otherwise exist as homes are sold or coverage lapses. Some 

stakeholders suggested that targeted subsidies should be temporary to 

help address this concern.

According to stakeholders, another strategy for increasing the private 

sector’s role in flood insurance is to have the federal government serve as

the insurer of last resort. This strategy would give private insurers the 

opportunity to provide flood insurance to most property owners who 

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

highest-risk properties that private insurers were unwilling to underwrite. 

Stakeholders said that particularly in the early years, private insurers 

 50Regulated lending institutions shall not make, increase, extend, or renew any 

designated loan unless the building or mobile home and any personal property securing 

the loan is covered by flood insurance for the term of the loan. 42 U.S.C. § 4012a.

51See GAO, Flood Insurance: More Information Needed on Subsidized Properties, 

GAO-13-607 (Washington, D.C.: July 3, 2013).

Government as Residual 

Insurer
Page 21 GAO-14-127 Flood Insurance

might be conservative regarding the properties they were willing to insure, 

but many might be willing to insure more properties as they grew 

comfortable with underwriting flood coverage. Some states have similarly 

structured residual insurance programs for other perils that could provide 

insight and offer lessons in structuring such a program for flood 

insurance.52 For example, representatives from state residual insurance 

programs with whom we spoke said their programs charged rates that are 

higher than what would be available in the private market to ensure they 

remain insurers of last resort and discourage property owners from using 

it as an alternative to private sector coverage.

This strategy could help create the conditions we identified earlier in this 

report for increasing private sector involvement. To address private sector 

concerns about being able to accurately set rates, FEMA could grant 

private insurers access to historical claims data. However, as noted 

earlier FEMA would need to ensure that any disclosure complies with the 

Privacy Act. Further, the premium rates for residual coverage should be 

above what private market rates would be for comparable coverage to 

discourage property owners from using it as an alternative to private 

coverage.

Because this strategy would transfer many of NFIP’s policies to the 

private sector, NFIP’s total exposure would likely decrease. To the extent 

that the residual policies sold by NFIP were priced at full-risk rates, longterm taxpayer costs could be reduced. However, while full-risk rates 

would reduce taxpayer costs in the long-term, the average cost and 

volatility of the program’s remaining policies would increase, because 

NFIP would be left with the highest-risk policies. Further, because these 

residual policies would have the highest risk, they would require high 

premium rates to cover their full risk of loss, potentially reducing 

consumer participation. Combining this option with means-based 

subsidies could help address affordability concerns and maintain 

consumer participation.

According to stakeholders, a third strategy for increasing private sector 

involvement in flood insurance would be for the federal government to 

 52See GAO, Natural Catastrophe Insurance Coverage Remains a Challenge for State 

Programs, GAO-10-568R (Washington, D.C., May 17, 2010).

Government as Reinsurer
Page 22 GAO-14-127 Flood Insurance

provide reinsurance to private insurers.53 Specifically, the federal 

government could provide a backstop for private insurers by agreeing to 

pay the difference when total claims exceeded a certain amount within a 

specified period. To fund reinsurance claims for catastrophic losses, the 

federal government could collect premiums from private insurers. Some 

stakeholders said that the private reinsurance industry might be able to 

provide some reinsurance to private insurers, reducing the federal 

government’s potential role in reinsurance. However, other stakeholders 

expressed concerns that private reinsurers might raise premium rates or 

cancel coverage after a catastrophic loss year, creating uncertainty for 

private insurers that could affect their willingness to enter the flood 

insurance market.

Stakeholders said that the risk of insolvency in the event of catastrophic 

flood losses might make some private insurers hesitant to enter the flood 

insurance market and that providing reinsurance could help address 

these concerns and encourage their participation. If the federal 

government collected adequate reinsurance premiums, this strategy 

could also reduce costs to taxpayers, one of the goals for reforming 

natural catastrophe insurance, because most of the flood risk would be 

transferred to the private sector. However, the costs of these reinsurance 

premiums would likely be passed onto the policyholder, and the resulting 

higher rates could reduce consumer participation. Once again, meansbased subsidies could help soften these rate increases and maintain 

consumer participation.

Stakeholders identified several other strategies that could help encourage 

private sector involvement in flood insurance.

Mandatory coverage. In particular, some stakeholders said that a federal 

mandate could help achieve the level of consumer participation 

necessary to make the private sector comfortable with providing flood 

insurance coverage. For example, some stakeholders said that the 

federal government could mandate that homeowners insurance policies 

include flood coverage or that all homeowners purchase flood 

insurance.54 Either mandate could increase the number of homeowners 

 53Reinsurance is insurance for insurers that enables the insurer to transfer some of its risk 

to another insurer, called a reinsurer.

54In a separate report, we are examining perils that are excluded from homeowners 

insurance policies.

Other Strategies
Page 23 GAO-14-127 Flood Insurance

purchasing flood insurance, something that could help private insurers 

diversify and manage the risk of their flood insurance portfolio and 

address concerns about adverse selection. However, the stakeholders 

were also concerned that private companies might oppose a mandate 

that homeowners policies include flood coverage, potentially raising legal 

issues. Further, stakeholders said that some property owners—

particularly those who perceived their flood risk to be low—might also 

resist being required to purchase flood insurance. Finally, as we have 

reported the federal government has faced challenges with enforcing the 

current mandatory purchase requirement for flood insurance, which 

applies to properties in high-risk areas with federally regulated 

mortgages.55 If the federal government faces similar challenges with 

additional mandates, it might not realize the intended benefits of 

increased consumer participation.

Reinsure NFIP. Other stakeholders discussed NFIP purchasing 

reinsurance from the private sector to cover exposure to catastrophic 

losses rather than relying on borrowing from Treasury.56 While doing so 

would increase private sector involvement in flood insurance, the federal 

government would still play an active role in flood insurance, because 

NFIP would still serve as the main provider of primary flood insurance 

coverage. However, the federal government’s exposure to catastrophic 

losses could be reduced. On the other hand, stakeholders noted that 

private companies might cancel reinsurance after a catastrophic loss 

year, leading to uncertainty as to the degree to which the federal 

government’s exposure would be mitigated. Further, stakeholders said 

that NFIP may need to collect additional premiums on its existing policies 

to pay for the reinsurance. However, given that NFIP’s current premium 

levels are insufficient, NFIP may be unable to pay for this additional 

expense.

Catastrophe bonds. Stakeholders said that as an alternative to 

reinsurance, NFIP might be able to limit its exposure to large losses by 

transferring risk to capital markets through insurance-linked securities 

 55See GAO, Federal Emergency Management Agency: Ongoing Challenges Facing the 

National Flood Insurance Program, GAO-08-118T (Washington, D.C.: Oct. 2, 2007).

56The Biggert-Waters Act allows for NFIP to secure private market reinsurance, so FEMA 

would have the authority to do this without additional congressional action. Pub. L. No. 

112-141, § 100232(d).
Page 24 GAO-14-127 Flood Insurance

such as catastrophe bonds. For example, NFIP could issue interestbearing bonds to investors willing to bear the risk of losing some of their 

investment if flood claims exceeded a predetermined amount. Like 

reinsurance, catastrophe bonds could help NFIP manage its risk 

exposure, but again it would need to be able to collect adequate 

premiums to cover any necessary payments of principal or interest. We 

have previously reported that state insurance entities, as well as private 

sector insurers, have used catastrophe bonds to manage their risk.57

Stakeholders with whom we spoke or who participated in our roundtable 

discussion said that no matter which strategies Congress might choose 

for increasing private sector involvement in flood insurance, the federal 

government would likely still have some role. For example, some 

strategies include transforming the federal government’s role from 

primary provider of flood insurance to a residual insurer or a reinsurer. As 

the private sector increases its role in providing flood coverage, various 

government entities could collaborate on other important roles. In 

particular, stakeholders said that it would continue to be important for 

federal, state, and local governments to encourage mitigation through 

direct funding or other less costly strategies and to promote risk 

awareness among consumers. Stakeholders said that government 

entities want to reduce property owners’ current and future exposure to 

flood risk and increase the resiliency of their structures. Stakeholders also 

said that with private flood insurance, both the insurance company and 

the policyholder would have some incentive to mitigate, the insurer to 

reduce its risk exposure and the policyholder to lower the premium rate. 

More generally, stakeholders also said that various government entities 

should continue developing and enforcing building codes and land use 

agreements in order to reduce the flood risk of current structures and 

prevent future development in high-risk areas. Stakeholders also said that 

the federal government should ensure consistent insurance standards 

and regulations across states, in part through streamlined state 

regulations or federal oversight, to allow insurers to charge adequate 

rates.

 57See GAO-10-568R.

A Governmental Role 

Would Remain Even in a 

Private Flood Insurance 

Market
Page 25 GAO-14-127 Flood Insurance

While a number of conditions are important to attract private sector 

participation in the flood insurance market, key among them is the ability 

to charge rates that fully reflect the estimated risk of flooding. The 

Biggert-Waters Act includes a number of provisions that begin moving 

NFIP toward full-risk rates for some properties, a critical first step. 

Delaying or repealing rate increases in the Biggert-Waters Act may 

address affordability concerns but would likely continue to increase 

NFIP’s long-term burden on taxpayers. Further, it may reinforce private 

insurers’ skepticism that they would ever be permitted to charge adequate 

rates and make their participation unlikely in the foreseeable future. As 

debates over the private sector’s role continue, one step to address the 

burden on low- and moderate-income policyholders could be taken 

immediately. As we have suggested previously, Congress could eliminate 

subsidized rates, charge full-risk rates to all policyholders, and 

appropriate funds for a direct means-based subsidy to eligible 

policyholders. The movement to full-risk rates would encourage private 

sector participation, and the explicit subsidy would address affordability 

concerns, raise awareness of the risks associated with living in harm’s 

way, and decrease costs to taxpayers, depending on the extent and 

amount of the subsidy.

We provided a draft of this report to the Federal Emergency Management 

Agency (FEMA) and the Federal Insurance Office for their review and 

comment. FEMA provided technical comments, which we have 

incorporated into the report.

We are sending copies of this report to the appropriate congressional 

committees, FEMA, and the Federal Insurance Office. In addition, the 

report is available at no charge on the GAO website at 

http://www.gao.gov.

Concluding 

Observations

Agency Comments
Page 26 GAO-14-127 Flood Insurance

If you have any questions about 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 key contributions to this report are 

listed in appendix II.

Alicia Puente Cackley

Director, Financial Markets and Community Investment
Appendix I: Objectives, Scope, and 

Methodology

Page 27 GAO-14-127 Flood Insurance

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

Act) mandated that GAO conduct a number of studies, including this 

study on assessing a broad range of options, methods, and strategies for 

privatizing the National Flood Insurance Program (NFIP).1 This report 

discusses (1) conditions needed for private sector involvement in flood 

insurance and (2) strategies for increasing it.

To both identify conditions needed for private sector involvement in flood 

insurance and evaluate the benefits and challenges of strategies for 

increasing private sector involvement, we reviewed the laws, regulations, 

and history of NFIP, Federal Emergency Management Agency (FEMA) 

reports, academic studies, our prior work on NFIP, and other 

documentation and reports. We also held a roundtable in August 2013 

composed of a variety of stakeholders to obtain their views on these 

issues. The 14 stakeholders participating in the roundtable included 

FEMA officials; state insurance regulators; a catastrophe modeling firm; 

an academic; and individuals representing associations of private 

insurers, reinsurers, actuaries, consumers, and floodplain managers. We 

supplemented information obtained through the roundtable with 

interviews with stakeholders representing the groups listed above as well 

as Federal Insurance Office officials; state residual insurance programs; 

and groups representing insurance adjusters, insurance agents, realtors, 

and mortgage bankers. We selected a diverse group of stakeholders for 

the roundtable and interviews based on type of organization, role, and 

membership. In addition, we identified some stakeholders based on work 

conducted from a prior report, and suggestions from other stakeholders. 

The roundtable discussion focused on four broad themes that included:

• a policy goals framework for evaluating options for increasing private 

sector involvement in flood insurance,

• barriers to private sector involvement that would need to be 

overcome,

• options for private sector involvement and associated benefits and 

challenges, and

• the governmental role that would remain in a private flood insurance 

market.

 1

Pub. L. No. 112-141, § 100232(a).

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 28 GAO-14-127 Flood Insurance

We identified four public policy goals to evaluate options for changing the 

federal role in natural catastrophe insurance in a prior report.2 These

goals are generally consistent with the evaluation criteria the stakeholders 

discussed. Roundtable participants and other stakeholders generally 

agreed that these goals were applicable for evaluating options for

increasing private sector involvement in flood insurance.

We conducted this performance audit from March 2013 to January 2014 

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.

 2

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

Natural Catastrophe Insurance, GAO-08-7 (Washington, D.C.: Nov. 26, 2007).
Appendix II: GAO Contact and Staff 

Acknowledgments

Page 29 GAO-14-127 Flood Insurance

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

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

Emily Chalmers; Heather Chartier; William Chatlos; Christopher Forys; 

Patricia Moye; and Carrie Watkins made key contributions to this report.

Appendix II: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(250703)
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