FLOOD INSURANCE

Potential Barriers 

Cited to Increased 

Use of Private 

Insurance

Report to the Chairman, Subcommittee 

on Economic Policy, Committee on 

Banking, Housing, and Urban Affairs, 

U.S. Senate

July 2016

GAO-16-611

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-16-611, a report to the 

Chairman, Subcommittee on Economic Policy, 

Committee on Banking, Housing, and Urban 

Affairs, U. S. Senate

July 2016

FLOOD INSURANCE

Potential Barriers Cited to Increased Use of 

Private Insurance

What GAO Found

Lenders and their regulators have taken some action to implement provisions on 

private flood insurance in the Biggert-Waters Flood Insurance Reform Act of 

2012 (Biggert-Waters Act). Specifically, lenders told GAO they send notifications 

to borrowers that encourage borrowers to compare private and National Flood 

Insurance Program (NFIP) policies. Lenders with whom GAO spoke accepted 

private policies and generally said they used Federal Emergency Management

Agency (FEMA) guidelines and interagency guidance to evaluate private 

policies. Federal regulators (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)

issued interagency questions and answers on private insurance in 2009, which 

cite the FEMA guidelines. However, FEMA rescinded its guidelines in 2013, 

citing a lack of authority to rule on the acceptability of private insurance policies. 

Federal regulators have issued joint proposed rules to implement the BiggertWaters Act definition of private flood insurance, but have not yet finalized them. 

Regulators stated that the information provided in the 2009 Questions and 

Answers remains in effect until final rules implementing the private flood 

insurance provisions of the Biggert-Waters Act are adopted. 

Stakeholders cited a number of challenges as potentially inhibiting the use of 

private flood insurance to satisfy the mandatory purchase requirement. 

• Regulatory uncertainty. Without final regulations implementing the BiggertWaters Act requirement to accept private flood insurance, there was 

uncertainty among stakeholders about which private policies would satisfy 

the mandatory purchase requirement. Many stakeholders, including some 

lenders, emphasized that lenders needed discretion when evaluating policies

and that ensuring policies met the Biggert-Waters Act definition would be 

challenging for lenders, in part due to their lack of insurance expertise.

• Recent NFIP changes. Stakeholders noted that a recent NFIP policy change 

could discourage consumers’ use of private insurance. FEMA recently 

stopped allowing policyholders to obtain a refund of their unused NFIP 

premium if they obtained a non-NFIP policy. FEMA officials stated that, 

based on their recent review of NFIP cancellation policies, this practice was 

not explicitly permitted in the NFIP standard flood insurance policy terms and 

conditions. Due to this change, consumers who wish to obtain private 

coverage would forfeit any unused portion of their premium if they switched 

after the NFIP policy’s effective date. While FEMA’s standard policy terms do 

not specifically address refunds when a non-NFIP policy is obtained, FEMA 

could revise the standard policy to allow for such refunds. Allowing this type 

of refund would be in line with industry practice to allow refunds of paid 

premiums when cancelling insurance policies, as well as Congressional 

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

insurance risk to the private sector.

• Market challenges. Many stakeholders noted that low private sector 

participation in flood insurance was also due to market challenges, some 

citing the inability to compete with discounted NFIP rates as a primary 

barrier—a finding that GAO also reported in previous work (GAO-14-127).

View GAO-16-611. For more information, 

contact Alicia Puente Cackley at (202) 512-

8678 or cackleya@gao.gov.

Why GAO Did This Study

NFIP was created, in part, because 

private insurers historically have been 

unwilling to insure against flood 

damage. The private flood insurance 

market remains small. The 2012

Biggert-Waters Act took steps to 

encourage private-sector participation 

by requiring regulators to direct lenders 

to accept private flood insurance to 

satisfy the mandatory purchase 

requirement—a federal requirement to 

purchase flood insurance on certain 

properties. 

GAO was asked to examine if the 

regulatory environment posed barriers 

to private flood insurance. This report 

describes (1) lender and regulator 

implementation of provisions on private 

flood insurance; and (2) views on 

regulatory, or other, barriers to using 

private flood insurance to satisfy the 

mandatory purchase requirement.

GAO reviewed laws, regulations and 

guidance and interviewed officials from 

FEMA, five federal regulators, 

government-sponsored enterprises, 

and the National Association of 

Insurance Commissioners. GAO 

interviewed various stakeholders, 

selected based on their flood insurance 

experience and size, among other 

factors: a nongeneralizable sample of 

eight lenders; 13 organizations; five

state insurance regulators; and four 

private flood insurers.

What GAO Recommends

GAO recommends that FEMA 

reconsider allowing policyholders who

cancel their NFIP policy to be 

refunded, on a prorated basis, when 

obtaining a non-NFIP policy and take 

any necessary steps to amend the 

NFIP standard policy to do so. FEMA 

agreed with our recommendation.
Page i GAO-16-611 Flood Insurance

Letter 1

Background 5

Lenders’ and Regulators’ Implementation of Provisions Relating to

Private Flood Insurance 14

Regulatory Uncertainty, Certain NFIP Changes, and Market 

Challenges Cited as Potentially Inhibiting Use of Private Flood 

Insurance 22

Conclusions 38

Recommendation 38

Agency Comments 39

Appendix I Objectives, Scope, and Methodology 40

Appendix II Private Flood Insurance Criteria in FEMA’s Guidelines (2007) and the 

Biggert-Waters Act Definition (2012) 44

Appendix III Sample Form of Notice of Special Flood Hazards and Availability of 

Federal Disaster Relief Assistance 46

Appendix IV Comments from the Department of Homeland Security 47

Appendix V Comments from the National Credit Union Administration 49

Appendix VI GAO Contact and Staff Acknowledgments 50

Tables

Table 1: Federal Regulators and the Lending Institutions They 

Supervise for Flood Insurance Activities, 2016 11

Table 2: FEMA’s Criteria for Evaluating Private Flood Insurance 

Policies, 2007 (Rescinded in February 2013) 15

Contents
Page ii GAO-16-611 Flood Insurance

Table 3: Private Flood Insurance Criteria in FEMA Guidelines and 

the Biggert-Waters Act 44

Figures

Figure 1: Selected Flood Legislation, Including that Related to 

Private Flood Insurance, 1965-July 2016 10

Figure 2: Example of Effect of NFIP Continuous Coverage Policy 

on Consumers Who Purchase Private Flood Insurance 28

Figure 3: Comparison of Former and Current Refund Policy for 

When Policyholders Switch from NFIP to a Non-NFIP 

Provider 30

Figure 4: Sample Form of Notice of Special Flood Hazards and 

Availability of Federal Disaster Relief Assistance 46
Page iii GAO-16-611 Flood Insurance

Abbreviations

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

 2012

Fannie Mae Federal National Mortgage Association

FCA Farm Credit Administration

FDIC Federal Deposit Insurance Corporation

FDPA Flood Disaster Protection Act of 1973

Federal Reserve Board of Governors of the Federal Reserve System

FEMA Federal Emergency Management Agency

FHA Federal Housing Administration

FIMA Federal Insurance and Mitigation Administration

Freddie Mac Federal Home Loan Mortgage Corporation

GSE government-sponsored enterprise

HFIAA Homeowner Flood Insurance Affordability Act 

 of 2014

NAIC National Association of Insurance Commissioners

NAPSLO National Association of Professional Surplus 

 Lines Offices

NCUA National Credit Union Administration

NFIP National Flood Insurance Program

OCC Office of the Comptroller of the Currency

RESPA Real Estate Settlement Procedures Act

SFHA special flood hazard area

SFIP Standard Flood Insurance Policy

Treasury Department of the Treasury

VA Department of Veterans Affairs

WYO Write-Your-Own

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Page 1 GAO-16-611 Flood Insurance

441 G St. N.W.

Washington, DC 20548

July 14, 2016

The Honorable Dean Heller

Chairman

Subcommittee on Economic Policy

Committee on Banking, Housing, and Urban Affairs

United States Senate

Dear Chairman Heller:

Floods are the most common and destructive natural disaster in the 

United States. Created by the National Flood Insurance Act of 1968, the 

National Flood Insurance Program (NFIP) is designed to protect 

homeowners from flood losses, minimize the exposure of property to 

flood damage, and alleviate taxpayers’ responsibility for flood losses paid 

out in the form of postdisaster relief.1 NFIP—which is administered by the 

Federal Emergency Management Agency (FEMA)—was created, in part, 

because private insurers historically have been largely unwilling to insure 

against flood damage. As of April 2016, NFIP collected about $3.4 billion 

in annual premiums and insured about $1.2 trillion in property. Congress 

passed the Flood Disaster Protection Act of 1973 (FDPA) to increase 

flood insurance coverage among borrowers and encourage participation 

in NFIP.2 FDPA, as amended, 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 special flood hazard areas (SFHA) in communities 

 1

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

2

Pub. L. No. 93-324, 87 Stat. 975 (1973).

Letter
Page 2 GAO-16-611 Flood Insurance

participating in FEMA’s NFIP purchase and maintain flood insurance 

(mandatory purchase requirement).3

After several years of catastrophic losses, primarily from Hurricane 

Katrina and other 2005 storms and Superstorm Sandy in 2012, NFIP’s 

current debt to the Department of the Treasury (Treasury) was $23 billion 

as of April 2016.

4 Because of its premium structure, NFIP is unlikely to be 

able to repay this debt in the near future, if ever.5 As a result of its 

financial exposure and management challenges, the program has been 

on GAO’s High-Risk list since 2006.6 Furthermore, some members of 

Congress and others have shown increased interest in reducing the 

federal role in flood insurance by transferring its exposure to the private 

sector. In addition, new technologies and a better understanding of flood 

risks may have increased the private sector’s willingness to offer flood 

coverage. The Biggert-Waters Flood Insurance Reform Act of 2012 

 3

The insurance must be in an amount at least equal to the outstanding principal balance of 

the loan or to the maximum limit of coverage made available under the National Flood 

Insurance Act of 1968 (as amended), whichever is less. 42 U.S.C. § 4012a(b)(1)(A). The 

term “federal entity for lending regulation” includes the Board of Governors of the Federal 

Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), 

the Office of the Comptroller of the Currency (OCC), the National Credit Union 

Administration (NCUA), and the Farm Credit Administration (FCA). The term “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. With respect 

to a particular regulated lending institution, the federal entity for lending regulation is the 

entity primarily responsible for the supervision of that institution. 42 U.S.C. § 4003(a).

4

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 increased this authority to enable FEMA 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). 

5

FEMA made a $1 billion principal prepayment at the end of December 2014—its first 

payment since 2010. The Biggert-Waters Flood Insurance Reform Act of 2012 amended 

the National Flood Insurance Act to require FEMA to develop a plan for repaying its debt 

to Treasury. Pub. L. No. 112-141, Div. F, Tit. II, Subtit. A, § 100213(a), 126 Stat. 916, 923 

(2012) (codified at 42 U.S.C. § 4016(c)). In September 2014, FEMA’s largest loan from 

Treasury was refinanced into three smaller loans with higher interest rates, and FEMA will 

have higher payments on its debt. 

6

Every 2 years, we provide Congress with an update on our High-Risk Program, which 

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

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

D.C.: Feb. 11, 2015).
Page 3 GAO-16-611 Flood Insurance

(Biggert-Waters Act) reauthorized NFIP through September 30, 2017, and 

included changes related to the acceptance of private flood insurance to 

satisfy the mandatory purchase requirement.7 In January 2014, we 

reported on conditions needed for private-sector involvement in flood 

insurance and strategies for increasing private-sector involvement.8

You requested that we revisit the issue of the private-sector involvement 

in flood insurance with a focus on the regulatory environment and 

whether it posed any barriers to private flood insurance policies being 

purchased by homeowners to satisfy the mandatory purchase 

requirement. This report describes (1) regulated lending institutions’ and 

federal regulators’ implementation of statutory provisions governing the 

use of private flood insurance to satisfy the mandatory purchase 

requirement; and (2) views on any regulatory, or other, barriers to the 

increased use of private flood insurance to satisfy the mandatory 

purchase requirement.

To address these objectives, we reviewed flood insurance laws and 

regulations, related agency guidance, congressional hearings, and 

studies, as well as past GAO reports on insurance markets and flood 

insurance.9 To address the first objective, we reviewed relevant federal 

flood insurance laws to identify the requirements for federal entities for 

lending regulation (federal regulators) and how each regulator addresses 

the use and acceptability of private flood insurance to fulfill the mandatory 

purchase requirement. The federal regulators involved in implementing 

the provisions of the flood insurance laws governing the mandatory 

purchase requirement are the Office of the Comptroller of the Currency 

(OCC), the Board of Governors of the Federal Reserve System (Federal 

Reserve), the Federal Deposit Insurance Corporation (FDIC), the Farm 

Credit Administration (FCA), and the National Credit Union Administration 

(NCUA). We interviewed officials from each of these agencies, the 

Federal National Mortgage Association (Fannie Mae), Federal Home 

 7

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

8

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

GAO-14-127 (Washington, D.C.: Jan. 22, 2014). 

9

For example, GAO-14-127; Insurance Markets: Impacts of and Regulatory Response to 

the 2007-2009 Financial Crisis, GAO-13-583 (Washington, D.C.: June 27, 2013); and 

Flood Insurance: Extent of Noncompliance with Purchase Requirements Is Unknown, 

GAO-02-396 (Washington, D.C.: June 21, 2002).
Page 4 GAO-16-611 Flood Insurance

Loan Mortgage Corporation (Freddie Mac), and FEMA. We also obtained 

information from the Department of Housing and Urban Development’s 

(HUD) Federal Housing Administration (FHA).

To understand how lenders are fulfilling the requirements, we identified 

and interviewed representatives from a nongeneralizable sample of eight 

mortgage lenders based on their volume of loans in counties with a high 

volume of NFIP policies, size and type of institution, and other factors.10

To better understand how the federal regulators have implemented the 

statutory requirements, we compared their regulations with the statutes. 

We also reviewed guidance provided by the federal regulators and FEMA 

related to the use of private flood insurance to satisfy the mandatory 

purchase requirement. We reviewed and compared each of the 

regulators’ examination manuals and flood insurance modules to 

understand how each examined the regulated lending institutions they 

supervise for compliance. Finally, we reviewed the policies of Fannie 

Mae, Freddie Mac, the Department of Veterans Affairs (VA), and FHA to 

understand their flood insurance requirements for mortgages they either 

purchase or insure.

To address the second objective on any barriers, we interviewed various 

stakeholders in the flood insurance industry: selected lenders (as 

discussed above), organizations in the insurance and lending industries, 

private flood insurance companies, and officials from selected state 

insurance regulatory agencies. We selected 13 organizations to interview 

based on the organization’s type, purpose and relevance to private flood 

insurance, and membership. We identified these organizations based on 

previous and ongoing GAO work on flood insurance, and comment letters 

submitted by interested parties in response to federal regulators’

proposed rules on private flood insurance.11 We also selected and 

interviewed representatives from a nongeneralizable sample of four 

private insurance companies involved in the private market for flood 

insurance. We identified and selected these companies through news 

articles and our interviews with representatives of lenders and state 

 10Our sample included two nonbank mortgage lenders that are not directly subject to the 

requirements of FDPA as they do not fit within the statutory definition of regulated lending 

institutions. For the purposes of this report, we use “lenders” to refer to the eight lenders 

with whom we spoke. We spoke with the nonbank lenders to better understand practices 

related to private flood insurance among the full scope of mortgage market participants.

11See 78 Fed. Reg. 65,108 (Oct. 30, 2013) (joint notice of proposed rulemaking).
Page 5 GAO-16-611 Flood Insurance

regulatory agencies. We also interviewed insurance regulators and their 

representatives from Florida, Louisiana, Pennsylvania, Texas, and West 

Virginia and reviewed selected laws from those states. We selected these 

states based on the volume of NFIP policies written and flood insurance 

regulatory activity in each state. Information provided by the selected 

state insurance regulators is not generalizable to all states. In addition, 

we reviewed 44 comment letters submitted in response to proposed rules 

issued by the federal regulators in October 2013 on the acceptance of 

private flood insurance to satisfy the mandatory purchase requirement in 

order to identify comments pertaining to potential or actual regulatory 

barriers to the use of private flood insurance and potential effects of the 

proposed rules. We conducted a literature search for news articles and 

studies to determine what is known about any regulatory, or other, 

barriers to using private flood insurance to satisfy the mandatory 

purchase requirement. We also interviewed representatives of the 

National Association of Insurance Commissioners (NAIC) and the 

Department of the Treasury’s Federal Insurance Office.12

We conducted this performance audit from May 2015 to July 2016 in 

accordance with generally accepted government auditing standards. 

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

sufficient, appropriate evidence to provide a reasonable basis for our 

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

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

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 1936.13 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 

 12NAIC is the U.S. standard-setting and regulatory support organization created and 

governed by the chief insurance regulators from the 50 states, the District of Columbia 

and the five U.S. territories. Through the NAIC, state insurance regulators establish 

standards and best practices, conduct peer review, and coordinate their regulatory 

oversight. NAIC members, together with the central resources of the NAIC, form the 

national system of state-based insurance regulation in the U.S. 

1349 Stat. 1570 (1936).

Background
Page 6 GAO-16-611 Flood Insurance

consumers could afford, primarily because of the catastrophic nature of 

flooding and the difficulty of determining accurate rates.14 In 1965, 

Congress passed the Southeast Hurricane Disaster Relief Act that 

provided financial relief for victims of flooding and 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

FEMA, through its Federal Insurance and Mitigation Administration 

(FIMA), manages the flood insurance program and sells and services 

NFIP policies primarily through private insurance companies in the WriteYour-Own (WYO) program.16 Program participation takes place at the 

community and the property-owner level. To participate, communities 

must adopt and enforce land use and control measures to mitigate the 

effects of flooding on new or existing homes in SFHAs. Participation for 

property owners (borrowers) in participating communities initially was 

voluntary; however, due in part to low levels of borrower participation; 

Congress established the mandatory purchase requirement for properties 

located in SFHAs in participating communities.

Regulated lending institutions and loan servicers acting on their behalf 

must ensure that borrowers (1) purchase flood insurance for any building 

or a mobile home located or to be located in an SFHA in a participating 

community at the time a mortgage loan for that property is obtained, or at 

the time of increasing, extending or renewing the loan, and (2) maintain 

the insurance through the life of the loan, or add it if the property is 

remapped into an SFHA and the borrower is then required to purchase 

flood insurance under the mandatory purchase requirement.17 Regulated 

 14Federal Emergency Management Agency, National Flood Insurance Program: Program 

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

15Pub. L. No. 89-339, 79 Stat. 1301 (1965); National Flood Insurance Act of 1968, Pub. L. 

No. 90-448, Title XIII, 82 Stat. 476, 572 (1968). 

16Under the WYO program, private insurers sell and service policies and adjust claims for 

NFIP under an arrangement with FEMA. FEMA compensates the insurers for their 

services and also pays bonuses for expanding NFIP’s policy base by increasing the 

number of policies they sell.

17A servicer is the entity responsible for receiving any scheduled, periodic payments from 

a borrower under the terms of a loan, including amounts for taxes, insurance premiums, 

and other charges relating to the property securing the loan, and making payments of 

principal and interest and any other payments with respect to the amounts received from 

the borrower as may be required under the terms of the loan. 42 U.S.C. § 4003(a)(11).

Overview of Mandatory 

Purchase Requirement
Page 7 GAO-16-611 Flood Insurance

lending institutions may not make, increase, extend, or renew any loan 

secured by improved real estate or a mobile home located or to be 

located in an SFHA community participating in NFIP unless the building 

or mobile home and any personal property securing such loan is covered 

by flood insurance for the term of the loan, subject to certain exceptions.18

Although FDPA did not define “flood insurance” to specifically include or 

exclude private insurance, guidance issued by the Federal Insurance 

Administration in 1974 stated that private flood insurance policies could 

satisfy the mandatory purchase requirement as long as they met specified 

criteria.19

The National Flood Insurance Reform Act of 1994 (1994 Act) further 

amended the statutory framework for the mandatory purchase 

requirement and its enforcement by federal regulators.20 The 1994 Act 

directed that federal regulators issue regulations to require regulated 

 18Nonbank entities that provide mortgages to borrowers may not fall within the definition of 

regulated lending institutions for purposes of FDPA. However, these nonbanks may 

choose to comply with the requirements of government-sponsored enterprises (GSE) such 

as Fannie Mae to be able to sell the mortgage to one of the GSEs. As required by statute, 

GSEs have implemented procedures requiring flood insurance for loans that they 

purchase secured by improved real estate or manufactured homes in an SFHA. Nonbanks 

also may choose to require flood insurance to protect the property for which they are 

providing the loan. 

19Mandatory Purchase of Flood Insurance, 39 Fed. Reg. 26,186, 26,190 (July 17, 1974). 

The Housing and Urban Development Act of 1968, of which the National Flood Insurance 

Act of 1968 was a part, created the Federal Insurance Administrator as a position within 

the Department of Housing and Urban Development. Pub. L. No. 90-448, § 1105, 82 Stat. 

476, 567 (1968). In 1979, Executive Order 12127 merged the Federal Insurance 

Administration and a number of other disaster-related responsibilities into the Federal 

Emergency Management Agency. Exec. Order No. 12,127, 44 Fed. Reg. 19,367 (Mar. 31, 

1979). The 1974 guidance stated that any flood insurance policy submitted in purported 

satisfaction of the mandatory purchase requirement should meet the following criteria: (a) 

the insurer is licensed to do business in the jurisdiction where the property is located; (b) 

the policy includes an endorsement that requires the insurer give 30 days written notice to 

both the insured and the lender of cancellation or nonrenewal and guarantees that 

coverage is at least as broad as the coverage offered by NFIP. The guidance also urges 

lenders, when flood insurance other than the Standard Flood Insurance Policy (SFIP) 

under NFIP is offered, to (1) advise borrowers of the availability of flood insurance under 

NFIP so that the borrower can make an appropriate comparison of the premium costs, 

and (2) satisfy themselves that the insurance policy contains a mortgagee interest clause 

similar to that in SFIP. 

20The National Flood Insurance Reform Act of 1994 was passed as Title V of the Riegle 

Community Development and Regulatory Improvement Act of 1994. Pub. L. No. 103-325, 

Tit. V, 108 Stat. 2160, 2255 (1994).
Page 8 GAO-16-611 Flood Insurance

lending intuitions to notify borrowers in SFHAs about the availability of 

flood insurance coverage under NFIP, and that such coverage is also 

available from private insurers.21 Regulations implementing the 1994 Act 

require that regulated lending institutions mail or deliver a written notice to 

the borrower and servicer before completion of the transaction. The 

notice must contain the following information:

• a warning that the building or the mobile home is or will be located in 

an SFHA;

• a description of the flood insurance purchase requirements under 

FDPA, as amended;

• a statement, where applicable, that flood insurance coverage is 

available under NFIP and also may be available from private insurers; 

and

• a statement whether federal disaster relief assistance may be 

available if flooding (from a federally declared disaster) causes 

damage to the building or mobile home.22

The 1994 Act also requires regulators to assess civil monetary penalties 

against regulated lending institutions found to have a pattern or practice 

of violating certain federal flood insurance requirements. It also required 

Fannie Mae and Freddie Mac to implement procedures reasonably 

 21Some lenders do their own servicing, while others sell the servicing rights to loans in 

their portfolio. According to guidance provided by the federal regulators, in the event a 

regulated lender retains ownership of the loan but sells the servicing rights to a 

nonregulated servicer, the regulated lender remains ultimately liable for the fulfillment of 

flood insurance requirements. The federal regulators state that the servicing contract 

should require the servicer to comply with all the requirements that are imposed on the 

regulated lender as owner of the loan. If the regulated lender sells both the loan and the 

servicing rights, however, the lender has no further obligation regarding flood insurance. 

See 74 Fed. Reg. 35,914, 35,942 (July 21, 2009).

2261 Fed. Reg. 45,684 (Aug. 29, 1996). Regulated lending institutions must send the 

servicer the notice as promptly as practicable after it provides notice to the borrower and 

in any event no later than the time the regulated lending institution provides other similar 

notices to the servicer concerning hazard insurance and taxes. Regulated lending 

institutions also may obtain satisfactory written assurance from a seller or lessor that, 

within a reasonable time before the completion of the sale or lease transactions, the seller 

or lessor has provided such notice to the purchaser or lessee. Regulated lending 

institutions are required to retain a record of receipt of the notice by the borrower and the 

servicer, or written assurance from the seller or lessor for the period of time the regulated 

lending institution owns the loan. 
Page 9 GAO-16-611 Flood Insurance

designed to ensure that any mortgage they purchase (secured by 

improved real estate or a mobile home in an SFHA) has flood insurance.

More recently, in 2012, the Biggert-Waters Act reauthorized NFIP through 

September 30, 2017, and made some significant changes to FDPA.23 For 

example, the Biggert-Waters Act increased the maximum penalties that 

may be assessed against a regulated lending institution. The BiggertWaters Act also required regulators to issue regulations directing lending 

institutions to accept private flood insurance (as defined by the act) and 

modified the required notification of borrowers of the availability of private 

flood insurance.24

In 2013, the federal regulators issued a joint notice of proposed 

rulemaking to implement certain provisions of the Biggert-Waters Act, 

including the modified notification and required acceptance of private 

flood insurance.25 In July 2015, the regulators issued a final rule 

implementing the modified notification provision and certain other 

provisions from the Biggert-Waters Act and HFIAA.

26 The July 2015 final 

rule did not include implementation of the Biggert-Waters Act’s 

requirements on private flood insurance; the agencies noted that they 

planned to address those requirements in a separate rulemaking. See 

figure 1 for a summary timeline of selected federal flood insurance 

legislation.

 23Pub. L. No. 112-141, Div. F, Tit. II, Subtit. A, 126 Stat. 916 (2012).

24The Biggert-Waters Act also amended the Real Estate Settlement Procedures Act of 

1974 (RESPA) to mandate a revision to required notices to include a notice to the 

borrower of the availability of flood insurance under NFIP or from a private insurance 

company, whether or not the real estate is located in an area having special flood 

hazards. Pub. L. No. 112-141, § 100222, 126 Stat. 916, 934 (codified at 12 U.S.C. § 

2604(b)(14)). The requirement to revise the notices required under RESPA is the 

responsibility of the Bureau of Consumer Financial Protection. 

2578 Fed. Reg. 65,108 (Oct. 30, 2013). 

26For example, the July 2015 final rule implemented the escrow and detached structure 

provisions of HFIAA and the force-placement provisions of the Biggert-Waters Act. 80 

Fed. Reg. 43,216 (July 21, 2015).
Page 10 GAO-16-611 Flood Insurance

Figure 1: Selected Flood Legislation, Including that Related to Private Flood Insurance, 1965-July 2016

Insurance is primarily regulated by the states, unless federal law 

specifically relates to the business of insurance (as in the cases of flood 

and terrorism insurance).27 Federal regulators generally have authority 

over the activities of regulated lending institutions that relate to the flood 

insurance requirements under FDPA. The Federal Reserve, FDIC, OCC, 

NCUA, and FCA are the regulators responsible for overseeing the federal 

flood insurance requirements, including the mandatory flood insurance 

purchase requirement, for their institutions (see table 1).

 27McCarran-Ferguson Act, 15 U.S.C §§ 1011-1015. Two federal insurance programs are 

the National Flood Insurance Program and the Terrorism Risk Insurance Program.

Overview of Insurance 

Regulation and Markets
Page 11 GAO-16-611 Flood Insurance

Table 1: Federal Regulators and the Lending Institutions They Supervise for Flood Insurance Activities, 2016

Federal agency Regulated entities

Board of Governors of the Federal Reserve System (Federal 

Reserve) 

State-chartered banks that opt to be members of the Federal 

Reserve System, and subsidiaries of those institutions 

Farm Credit Administration (FCA) Farm Credit System institutions 

Federal Deposit Insurance Corporation (FDIC) State-chartered banks that are not members of the Federal 

Reserve System and federally insured state savings banks and 

thrifts 

National Credit Union Administration (NCUA) All federally insured credit unions 

Office of the Comptroller of the Currency (OCC) National banks, federal savings associations, and any service 

corporation thereof, and federal branches or agencies of foreign 

banks 

Source: GAO analysis of agency information. | GAO-16-611

Requirements and processes for regulating insurance may vary from 

state to state, but state regulators generally license insurance companies 

and agents, review insurance products and premium rates, and examine 

insurers’ financial solvency and market conduct. According to NAIC, state 

regulators monitor an insurers’ compliance with laws and regulations, and 

a company’s financial condition through solvency surveillance and 

examination mechanisms. Insurance regulators use insurance 

companies’ financial statements and other information as part of their 

continuous financial analysis, which is performed at least quarterly, to 

identify issues that could affect solvency. State insurance regulators 

typically conduct on-site financial solvency examinations every 3–5 years, 

although they may do so more frequently for some insurers, and may 

perform additional examinations as needed. Through NAIC, the 

regulators also collect financial information from insurers for ongoing 

monitoring of financial solvency.28

Admitted insurers can sell insurance in one or more states but must be 

licensed to operate in every state in which they sell coverage. Admitted 

 28While NAIC does not regulate insurers, according to NAIC officials, it provides services 

designed to make certain interactions between insurers and regulators more efficient. 

According to NAIC, these services include providing detailed insurance data to help 

regulators analyze insurance sales and practices; maintaining a range of databases useful 

to regulators; and coordinating regulatory efforts by providing guidance, model laws and 

regulations, and information-sharing tools. Generally, a model act or law is meant as a 

guide for subsequent legislation. State legislatures may adopt model acts in whole or in 

part, and modify them to fit their needs.

Admitted Insurance Market
Page 12 GAO-16-611 Flood Insurance

insurers can be licensed to sell several lines or types of coverage to 

individuals or families, including personal lines (such as homeowners, 

renters, and automobile insurance) and commercial lines (such as 

general liability, commercial property, and product liability insurance). 

Their activities are regulated primarily by the states. State regulators 

require admitted insurance companies to maintain specific levels of 

capital to continue to conduct business.29

Admitted insurers provide coverage for numerous risks, but they may not 

be willing to cover some risks. These include risks that are difficult to 

assess, occur too frequently to be acceptable to admitted insurers, are 

specialized or unusual, or require coverage that exceeds the capacity of 

admitted carriers. In these cases, potential insureds may turn to the 

nonadmitted market.

The nonadmitted market offers insurance products for risks for which 

coverage is unavailable in the admitted market. Among the nonadmitted 

insurers are surplus lines insurers.30 These insurers provide coverage for 

general, management, and professional liabilities and commercial,

automobile, environmental, and property risks, among other things, and 

tailor their products to meet the needs of the insured. For example, they 

may write policies to cover personal lines of insurance such as 

homeowners insurance in flood-prone areas. In 2014, the total surplus 

 29In addition, in the event that an insurer becomes insolvent, states have guaranty funds to 

help ensure that policyholders continue to receive coverage. Guaranty funds (separate for 

life and property/casualty insurance), are funded by assessments on insurers doing 

business in their state. Guaranty funds pay covered claims within limits set by individual 

state laws and the insurance contract. For instance, the overall benefit cap in most states 

for an individual life or property/casualty policy is $300,000, although some states have 

higher maximums. Certain products, such as some variable annuities, financial guaranty 

insurance, and mortgage guaranty insurance, are not covered by state guaranty funds.

30All states have laws that permit surplus lines insurers to sell coverage in their states, but 

do not cover their policies with state guaranty funds. According to NAIC, while 

policyholders may not have as much protection as they would under a guaranty fund, 

state insurance receivership laws provide a mechanism for marshaling the assets of the 

insurer if the company fails. Also, states generally require a disclosure to policyholders 

that the surplus lines policy is not subject to state guaranty fund coverage. Furthermore, 

according to NAIC, surplus lines insurers are regulated for financial solvency by their state 

of domicile in the same manner as are licensed companies. Congress passed the 

Nonadmitted and Reinsurance Reform Act of 2010, which included regulatory reforms to, 

among other things, make it easier to access the surplus lines market and create uniform 

standards for regulating surplus lines insurers. Pub. L. No. 111-203, Tit. V, Subtit. B, 124 

Stat. 1376, 1589 (2010).

Nonadmitted Market and 

Surplus Lines Insurance
Page 13 GAO-16-611 Flood Insurance

lines direct premiums written in the U.S. market totaled more than $40 

billion.31

While admitted insurers must be licensed in the states in which they sell 

insurance, surplus lines insurers must be licensed in only one state but 

may sell in others in which they are not licensed, provided they are 

eligible according to the states’ surplus lines laws.32 Surplus lines insurers 

also must sell their insurance through a state-licensed broker. The 

brokers typically represent insurance buyers and place coverage with 

surplus lines insurers.33 According to NAIC, on a surplus lines placement, 

the insurance regulator of the policyholder's home state has authority 

over the placement of the insurance by a surplus lines broker and can 

sanction the surplus lines broker, revoke their license, and hold them 

liable for the full amount of the policy. To place coverage in the surplus 

lines market, brokers must follow state due diligence requirements. 

Although they vary from state to state, according to an association 

representing surplus lines insurers and brokers, these requirements 

generally call for a “diligent search” of the admitted market before turning 

to a surplus lines insurer. The diligent search generally requires brokers 

to establish that three admitted companies licensed to write the kind and 

type of insurance being requested had declined to provide it.34

 31A.M. Best, U.S. Surplus Lines: Record Levels Reached (Oldwick, New Jersey: August 

2015).

32Surplus lines coverage is the largest component of the nonadmitted market. An insured 

also can access the nonadmitted market by purchasing insurance out of state from a 

carrier not licensed to sell insurance where the risk is located or through a broker not 

licensed by the jurisdiction where the risk is located. 

33Brokers are responsible for (1) selecting an eligible surplus lines insurer, (2) reporting 

the surplus lines transaction to insurance regulators, (3) remitting the premium tax due on 

the transaction to state tax authorities, and (4) assuring compliance with all the 

requirements of state regulations for the surplus lines.

34For additional information on the admitted and nonadmitted insurance markets and 

regulation, see GAO, Property and Casualty Insurance: Effects of the Nonadmitted and 

Reinsurance Reform Act of 2010, GAO-14-136 (Washington, D.C.: Jan. 16, 2014). 
Page 14 GAO-16-611 Flood Insurance

All eight of the lenders with whom we spoke stated that they accept or 

would accept private flood insurance as satisfaction of the mandatory 

purchase requirement. Moreover, all but one stated that they have 

policies and procedures that use one or more sources of guidance when 

determining if a private policy satisfies the mandatory purchase 

requirement.35 All but one of the lenders referenced the criteria in FEMA’s 

(now rescinded) Mandatory Purchase of Flood Insurance Guidelines

(Guidelines) as one set of guidance—the Guidelines provided lenders 

with six criteria to evaluate private flood insurance policies for compliance 

with the mandatory purchase requirement. The Guidelines also provided 

that to the extent the policy differs from the NFIP standard policy, the 

differences should be examined before the policy is accepted. (See table 

2 and app. II for more detailed information on the criteria.) Half of the 

lenders with whom we spoke also referenced the July 2009 Interagency 

Questions and Answers Regarding Flood Insurance (2009 Questions and 

Answers) provided by the federal regulators, which cite FEMA’s 

Guidelines as criteria for evaluating private flood insurance policies.36

One lender cited the requirements of Fannie Mae and Freddie Mac as a 

primary source of guidance.37 The same lender also added that when 

 35One bank indicated that it had no experience with private flood insurance because, to 

date, none of its customers had attempted to use such insurance to satisfy the mandatory 

purchase requirement. 

3674 Fed. Reg. 35,914 at 35,944 (July 21, 2009).

37Fannie Mae’s and Freddie Mac’s requirements state that the terms and conditions of the 

flood insurance coverage must be at least equivalent to the terms and conditions of 

coverage under a standard NFIP policy for the appropriate property type. The 

requirements also state that any private flood insurance must be written by a carrier that 

meets certain financial strength ratings requirements. For additional information on Fannie 

Mae and Freddie Mac’s requirements, see their respective selling guides. Selling Guide: 

Fannie Mae Single Family, Fannie Mae, June 28, 2016; Single-Family Seller/Servicer 

Guide, Freddie Mac, March 9, 2016.

Lenders Told Us They 

Rely on Existing Guidance 

and Criteria When 

Assessing Private Policies

Lenders’ and 

Regulators’

Implementation of 

Provisions Relating to 

Private Flood 

Insurance
Page 15 GAO-16-611 Flood Insurance

working with loans insured by FHA and VA, they use their requirements 

and guidance on the use of private flood insurance.38

Table 2: FEMA’s Criteria for Evaluating Private Flood Insurance Policies, 2007 (Rescinded in February 2013)

Criteria Summary

Licensure The insurer must be licensed, admitted, or otherwise approved to do business in the jurisdiction where the 

building is located, by the insurance regulator of that jurisdiction, except for surplus lines recognition (see 

next row).

Surplus lines 

recognition

In the case of nonresidential commercial property insurance issued under a policy of difference in 

conditions, multiple peril, all risk, or other blanket coverage, the insurer should be recognized, or not 

disapproved, as a surplus lines insurer by the insurance regulator of the jurisdiction where the building is 

located.

Requirement of 45-day 

cancellation/nonrenewal 

notice 

The policy should include a requirement for the insurer to give 45 days’ written notice of cancellation or 

nonrenewal of flood insurance coverage to the insured, with respect to the flood insurance coverage. The 

policy should also state that, to be effective, such notice must be mailed to both the insured and the 

lender or federal agency lender, and must include information about the availability of NFIP insurance. 

The policy should be as restrictive in its cancellation provisions as the NFIP standard policy.

Breadth of policy 

coverage

The policy must guarantee that the flood insurance coverage, considering deductibles, exclusions, and 

conditions offered by the insurer, is at least as broad as the coverage under the NFIP standard policy.

Strength of mortgage 

interest clause

Lenders must ensure that the private policy contains a mortgage interest clause similar to that contained 

in the general conditions section of the NFIP standard policy.

Legal recourse The policy must contain a provision that the insured must file suit within 1 year after the date of written 

denial of all or part of the claim.

Legend:

FEMA – Federal Emergency Management Agency

NFIP – National Flood Insurance Program

Source: FEMA’s Mandatory Purchase of Flood Insurance Guidelines. | GAO-16-611

FEMA issued Guidelines in 1989 to promote greater uniformity and 

understanding of the requirements of mandatory purchase provisions 

among federal regulators of lenders, government-sponsored enterprises 

(such as Fannie Mae or Freddie Mac), federal agency lenders, and 

 38FHA is not a federal agency lender and therefore is not directly subject to the BiggertWaters Act requirement for federal agency lenders. Currently, its Single Family Handbook 

states that properties in SFHAs are only eligible for FHA insurance if NFIP insurance is 

obtained. However, FHA has determined that revisions to its Handbook are necessary and 

plans to go through the rulemaking process to revise its regulations to allow for the 

acceptance of private flood insurance for FHA-insured loans. VA is a federal agency 

lender and is therefore subject to the Biggert-Waters Act provisions on private insurance 

for federal agency lenders. VA regulations provide that when making, increasing, 

extending, or renewing loans, it must provide the borrower a notice that includes the 

statement that flood insurance may be available from private insurers that do not 

participate in NFIP.
Page 16 GAO-16-611 Flood Insurance

applicable lending institutions.39 In February 2013, FEMA rescinded the 

Guidelines, stating that the six elements listed in the guidance were 

intended to provide assistance to regulated lending institutions in 

determining the acceptability of private flood insurance and were not 

meant to be exclusive. Furthermore, FEMA stated, as it had in the 

Guidelines, that it had no authority to rule on the acceptability of private 

insurance policies.40

However, federal regulators told us that until they finalize regulations 

requiring regulated lending institutions to accept private flood insurance 

under the Biggert-Waters Act, regulated lending institutions should 

continue to use the 2009 Questions and Answers as guidance when 

determining if a private flood insurance policy satisfies the purchase 

requirement.41 In these Questions and Answers, the regulators state that 

a private flood insurance policy may be an adequate substitute for an 

NFIP policy if it meets the criteria set forth by FEMA in its Guidelines.42

The 2009 Questions and Answers also state that regulated lending 

institutions may rely on a private policy that does not meet the FEMA 

 39FEMA officials told us that the earliest documentation of the Guidelines that they were 

able to find was from 1989 but could not confirm this was the earliest version of the 

Guidelines. 

40In the Guidelines, FEMA stated that the Guidelines are intended to augment, not 

replace, a review of the applicable statutes and regulations, and that FEMA does not have 

statutory responsibility for enforcing the mandate to purchase flood insurance. FEMA also 

states that the implementation of the mandatory purchase requirements is the 

responsibility of the federal agencies that oversee lenders.

41More specifically, regulators stated that regulated lending institutions should continue to 

use the requirements set forth in the answers to questions 63 and 64 when determining if 

a private flood insurance policy meets the regulated lending institutions’ obligations.

42FCA also issued an Informational Memorandum stating that, pending issuance of a 

regulation on private insurance, FCA will not bring an enforcement action against any 

institution that accepts a private flood insurance policy in satisfaction of the mandatory 

purchase requirement, provided the policy meets certain minimum criteria set forth in the 

memorandum. 
Page 17 GAO-16-611 Flood Insurance

criteria only in limited circumstances.43 Officials for each of the regulators 

acknowledged that the 2009 Questions and Answers cite the rescinded 

FEMA Guidelines but stated that the overall guidance remains in effect. 

They noted that regulated lending institutions continue to have discretion 

in determining whether a private flood insurance policy meets regulated 

lending institutions’ obligations under the mandatory purchase 

requirement.

Furthermore, in their interagency statement as well as their 2013 joint 

notice of proposed rulemaking, the regulators stated that the BiggertWaters Act provision requiring the acceptance of private flood insurance, 

as defined by the act, will be implemented through rulemaking. Both

documents noted that the regulators considered this provision not 

effective until final regulations are issued.

44 The 2013 joint notice of 

proposed rulemaking further stated that regulated lending institutions 

currently continue to have the discretion to accept flood insurance issued 

by private insurers.45 According to federal regulators, while they are 

working on finalizing these regulations, they currently do not have a 

timetable for issuing final regulations implementing these requirements.

According to most of the lenders with whom we spoke, each exercises 

some level of discretion when determining whether a private policy meets 

the guidance they currently follow. For example, two lenders stated that if 

a private policy does not exactly match the FEMA criteria, they use their 

judgement in determining if the policy provides sufficient protection under 

the law. Four lenders stated that if a policy does not meet the criteria they 

may determine not to accept the policy or ask the borrower to obtain a 

policy that more closely meets the criteria. Most lenders described 

 43For example, the 2009 questions and answers state that when force placing a policy, 

regulated lending institutions may not rely on a private insurance policy that does not meet 

the criteria set forth by FEMA on an ongoing basis. Force-placed insurance, also known 

as “lender-placed” or “creditor-placed” insurance, is an insurance policy purchased by a 

mortgage lender or servicer on a home to ensure continuous coverage when the 

borrower’s homeowners or flood insurance lapses or otherwise becomes inadequate. 

GAO, Lender-Placed Insurance: More Robust Data Could Improve Oversight, 

GAO-15-631 (Washington, D.C.: Sept. 8, 2015). 

44Joint notice of proposed rulemaking, 78 Fed. Reg. 65,108, 65,110 (Oct. 30, 2013); 

“Interagency Statement on the Impact of Biggert-Waters Act,” CA 13-2 (Federal Reserve), 

FIL 14-2013 (FDIC), Bulletin 2013-10 (OCC), 13-RA-03 (NCUA), Informational 

Memorandum (FCA) (Mar. 29, 2013).

4578 Fed. Reg. at 65,114 (Oct. 30, 2013).
Page 18 GAO-16-611 Flood Insurance

currently having procedures for evaluating a private flood insurance policy 

that generally require greater judgement and resources than required 

when the borrower presents an NFIP policy. For example, half of the 

lenders stated that procedures for assessing a private flood insurance 

policy generally include obtaining the entire policy and evaluating it 

against the FEMA Guidelines. In contrast, one lender stated that the 

company only obtains the NFIP policy declaration page. A representative 

of another lender said the company has specialists to conduct reviews of 

private flood insurance policies and a centralized flood insurance function 

that reviews NFIP policies.

Finally, according to most of the lenders with whom we spoke, they deal 

with a relatively small number of private policies. For example, while most 

of the lenders did not specifically track data on the use of private flood 

insurance, six of the eight lenders roughly estimated that less than 5 

percent of the residential mortgages in their portfolios that require flood 

insurance were insured by a private policy. While stakeholders with whom 

we spoke did not have data on the use of private flood insurance, they 

generally agreed that most private flood insurance written is in the surplus 

lines market for commercial properties or for coverage in excess of what 

NFIP offers.46 We were not able to identify any currently available 

information on the amount of flood insurance written by admitted carriers. 

According to NAIC officials, NAIC has begun to collect information on 

private flood insurance from various associations to inform state 

insurance regulators of the current interest and activity in the private 

market for flood insurance. NAIC also has been developing a requirement 

for insurance companies to include a line item in their annual financial 

statements that highlights their private flood insurance activity.

 46One trade association estimates that in 2014 total surplus lines flood insurance 

premiums (commercial and residential) in six states that collect such data (California, 

Florida, Mississippi, New York, Texas, and Utah), were $126.6 million. Of this total, they 

estimate that 8 percent ($9.9 million) was in primary residential, and 59 percent ($74.4 

million) was in primary commercial. In the same year, NFIP total residential and 

commercial premiums were $3.5 billion.
Page 19 GAO-16-611 Flood Insurance

According to all of the lenders we interviewed, their notices to borrowers 

include language that encourages the comparison of NFIP and private 

insurance policies. More specifically, they said they use sample language 

provided in the final rule that implemented Biggert-Waters Act changes to 

the notification requirement, or something generally similar. (The statutory 

requirements and the sample language are described in more detail 

below.)

All of the lenders with whom we spoke also stated that other than 

providing the required notice to borrowers, they generally did not 

communicate with borrowers about flood insurance, either private or 

NFIP. A few lenders stated that borrowers likely make insurance 

decisions with their insurance agent.

As noted previously, the Biggert-Waters Act amended the notification 

requirement in the 1994 Act to revise and add information pertaining to 

private flood insurance.47 The Biggert-Waters Act requires that regulated 

lending institutions disclose to a borrower that

• flood insurance is available from private insurance companies that 

issue standard flood insurance policies on behalf of NFIP or directly 

from NFIP;

• flood insurance that provides the same level of coverage as a 

standard flood insurance policy under NFIP may be available from a 

private insurance company that issues policies on behalf of the 

company; and

• the borrower is encouraged to compare the flood insurance coverage, 

deductibles, exclusions, conditions, and premiums associated with 

flood insurance policies issued on behalf of NFIP and policies issued 

on behalf of private insurance companies and to direct inquiries on the 

availability, cost, and comparisons of flood insurance coverage to an 

insurance agent.

In July 2015, the federal regulators issued a final rule that provides that 

the revised and additional disclosures be included in the notification to 

 47Pub. L. No. 112-141, § 100239(a)(4), 126 Stat. 916, 958 (2012) (codified as amended at 

42 U.S.C. § 4012a(b)(6)).

Lenders Told Us They 

Send Notifications to 

Borrowers That Include 

Language Encouraging 

Comparison of NFIP and 

Private Insurance
Page 20 GAO-16-611 Flood Insurance

borrowers.48 The regulators also amended an existing sample form 

(Sample Form of Notice of Special Flood Hazards and Availability of 

Federal Disaster Relief Assistance) with language to reflect the additional 

disclosures (see app. III). Since the sample form was first provided in 

1996, regulations have provided that a regulated lending institution will be 

considered in compliance with the notice requirement if the regulated 

lending institution provides a written notice to the borrower containing the 

language found in the sample form (within a reasonable time before the 

completion of the transaction).

Our review of the regulations issued to implement the various flood 

insurance statutes found that since the passage of the 1994 Act, as 

amended, the federal regulators have issued joint regulations 

implementing most of the statutory requirements.

Most recently, in July 2015 the regulators issued final rules implementing 

numerous provisions of the Biggert-Waters Act and the Homeowner 

Flood Insurance Affordability Act of 2014 (HFIAA) related to the escrow of 

flood insurance payments on residential properties, exemptions from the 

mandatory purchase requirement, and, as stated earlier, revised 

disclosures in the notification to borrowers, among other provisions.49 The 

regulators did not implement the Biggert-Waters Act provision requiring 

the acceptance of private flood insurance, as defined by the act.

The federal regulators in our review—FDIC, Federal Reserve, NCUA, 

OCC, and FCA—also have developed consistent examination guidance 

for regulated lending institutions’ activities related to flood insurance. All 

five of the federal regulators currently responsible for lending regulation 

use risk-based examinations in their oversight of their institutions. When 

examining institutions, each has procedures for reviewing a regulated 

lending institution’s compliance with the requirements of the National 

 4880 Fed. Reg. 43,216 (July 21, 2015). Some portions of the final rule became effective on 

October 1, 2015, and the rest on January 1, 2016. 

4980 Fed. Reg. 43,216 (July 21, 2015). HFIAA amended some of the changes mandated 

by the Biggert-Waters Act, but did not revise the private flood insurance requirements. 

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

Federal Regulators Have 

Jointly Implemented Flood 

Insurance Regulations
Page 21 GAO-16-611 Flood Insurance

Flood Insurance Act, as amended.50 To assist examiners in executing 

these examinations, each federal regulator has developed a general 

examination manual that details examination policies and procedures as 

well as flood insurance examination procedures that were developed on 

an interagency basis under the direction of the Federal Financial 

Institutions Examination Council.51 According to federal regulators’

examination guidance, an examination team is to review a regulated 

lending institution’s policies, procedures, and controls for ensuring 

compliance with the flood insurance requirements. Two federal regulators 

stated and the other three regulators’ examination guidance states that 

examiners generally review a sample of loans to determine compliance 

with regulatory requirements, potentially including flood insurance 

requirements.

We reviewed the examination manuals and flood insurance modules or 

checklists for each of the federal regulators and found that the relevant 

flood insurance portions of each manual were substantially similar and 

addressed the flood insurance-related requirements for the regulated 

lending institutions.52 For example, all five regulators’ modules or 

checklists include, reviewing loan documentation to ensure that a flood 

zone determination was made, notices were provided to the borrower and 

servicer, premiums were properly escrowed, and the property was 

covered by an insurance policy in the appropriate amount. Based on our 

review, the flood insurance examination procedures did not differentiate 

between private flood insurance policies and NFIP policies. The focus of 

the manuals was to assist examiners in assessing regulated lending 

 50For every examination, examiners are required to determine whether the regulated 

lending institution is complying with the federal flood insurance statutes. 12 U.S.C. §§ 

1784(e), 1820(d), (i), 2254(a). 

51According to FCA officials, while FCA is not a member of, or subject to the direction of, 

the Federal Financial Institutions Examination Council, FCA does look to it for guidance on 

matters involving flood insurance.

52We reviewed regulators’ examination procedures, available as of May 2016. In April 

2016, the Federal Financial Institutions Examination Council approved revised 

examination procedures for FDPA. The procedures reflect the July 2015 interagency 

rulemaking addressing force placement of flood insurance, escrow of flood insurance 

premiums and fees, and the exemption to the mandatory purchase of flood insurance 

requirement for certain detached structures. As of May 2016, the Federal Reserve and 

FDIC had updated their individual examination procedures to reflect the new procedures. 

Officials from NCUA, OCC, and FCA stated they were in the process of doing so.
Page 22 GAO-16-611 Flood Insurance

institutions’ compliance with flood insurance requirements, including 

notice and mandatory purchase of flood insurance.

Stakeholders cited regulatory uncertainty, such as the lack of final 

implementing regulations and the scope of the definition of private flood 

insurance in the Biggert-Waters Act, as some of the potential barriers 

lenders may face in fulfilling their responsibilities regarding private flood 

insurance and the mandatory purchase requirement. Stakeholders also 

cited recent changes made by FEMA to certain NFIP policies as potential 

barriers to consumers’ use of private flood insurance. Finally, 

stakeholders identified certain market challenges as barriers to increased 

use of private insurance. Congress has been considering legislation to 

address some of the concerns raised by stakeholders and some states 

have enacted legislation to make private flood insurance more accessible.

Stakeholders cited the lack of final implementing regulations, the scope of 

the Biggert-Waters Act definition of private flood insurance, and limited 

insurance expertise as potential barriers lenders face to evaluating and 

accepting private policies in satisfaction of the mandatory purchase 

requirement. The Biggert-Waters Act requires regulators to issue 

regulations requiring that regulated lending institutions accept private 

flood insurance, as defined in the statute, to meet the mandatory 

purchase requirement; however, regulators have yet to issue the final 

regulations to make this provision effective.53

Lack of final rules. Various stakeholders with whom we spoke cited the 

lack of final rules as creating regulatory uncertainty among lenders and 

insurers about the use of private flood insurance to satisfy the mandatory 

purchase requirement. For example, one association noted that while a 

law has been passed requiring regulated lending institutions to accept 

private flood insurance, without final rules implementing this requirement, 

it is unknown what the regulations will be and how lenders and private 

insurers will comply. Officials from two lenders also stated that the lack of 

 53Pub. L. No. 112-141, § 100239, 126 Stat. 916, 958 (2012); 78 Fed. Reg. 65,108 (Oct. 

30, 2013) (joint notice of proposed rulemaking).

Regulatory 

Uncertainty, Certain 

NFIP Changes, and 

Market Challenges 

Cited as Potentially 

Inhibiting Use of 

Private Flood 

Insurance

Lack of Final Regulations 

and Scope of Statutory 

Definition of Private Flood 

Insurance Cited by 

Stakeholders as Potential 

Barriers for Lenders
Page 23 GAO-16-611 Flood Insurance

final regulations and the lenders’ reliance on FEMA guidance puts them in 

an uncertain and uncomfortable position, as this guidance has been 

rescinded and is not current. Furthermore, according to a private insurer 

with whom we spoke, there is uncertainty about whether private policies 

that lenders have accepted as satisfying the mandatory purchase 

requirement, may retroactively be deemed noncompliant if they do not 

meet the requirements of the new regulations, after they are finalized. 

This insurer added that the issuance of final rules on the acceptance of 

and definition of private flood insurance would lead to more clarity. They 

added that public acceptance and use of private flood insurance also may 

increase. Finally, a state insurance regulator and federal regulator noted 

that the lack of final rules has led to uncertainty among lenders about 

which private policies should be accepted.

Scope of definition and flexibility. Stakeholders we interviewed, as well 

as many comment letters in response to the regulators’ October 2013 

proposed rules on private flood insurance, expressed concerns about the 

scope of the definition of private flood insurance in the Biggert-Waters 

Act, also discussed later in this section.54 They also noted the need for 

regulated lending institutions to retain some discretion when evaluating 

private flood policies. The Biggert-Waters Act codified the rescinded 

FEMA criteria (which the regulators and lenders considered as guidance), 

into law as the definition of private flood insurance. See app. II for a sideby-side comparison of the FEMA criteria and the Biggert-Waters Act 

definition.

According to some stakeholders, to be compliant with the Biggert-Waters 

Act provisions, regulated lending institutions only may be able to accept 

private policies meeting all the criteria in the law. They added that 

evaluating private policies to meet all elements of the statutory definition 

would reduce the discretion regulated lending institutions currently have 

when evaluating and accepting private policies. As discussed previously, 

some lenders stated that they currently use their judgement in 

determining whether to accept a private policy even if it does not meet all 

the criteria but still covers their risk. Furthermore, two lenders stated that, 

under the Biggert-Waters Act requirement, their evaluation of private 

policies would focus on compliance with the statutory definition, as 

 54We analyzed 44 comment letters submitted by interested parties on the regulators’

October 2013 joint proposed rules, as of May 2016.
Page 24 GAO-16-611 Flood Insurance

opposed to focusing on ensuring the policies met the lender’s own risk 

requirements. These lenders, as well as associations and lenders that 

submitted comment letters, emphasized the need for regulated lending 

institutions to have a certain level of flexibility and discretion in evaluating 

and accepting policies.

Importance of guidance. Comment letters and representatives of 

banking trade associations with whom we spoke also stated their desire 

for additional guidance on how to evaluate private flood insurance policies 

once the final rule is implemented. Some stakeholders want additional 

guidance because regulated lending institutions could face civil monetary 

penalties (for noncompliance) for policies that did not meet the statutory 

criteria.55 A few lenders we interviewed and comment letters to the 

proposed rules also noted that additional guidance that clearly states 

what is required of private flood insurance policies to comply with the 

Biggert-Waters Act would make lenders more comfortable in reviewing 

and accepting such policies. Citing a need for clear and comprehensive 

guidance, several stakeholders urged the federal regulators and FEMA to 

work together to update and reinstate FEMA’s rescinded Guidelines to 

reflect changes from the Biggert-Waters Act. In addition, in their comment 

letters, a few stakeholders noted that additional guidance would help 

promote uniformity across mortgage lenders and the private flood 

insurance industry.

Lender expertise. Some lenders and other stakeholders from the 

insurance and banking industries stated their concern about evaluating 

policies for compliance with one criterion in particular: that private flood 

insurance provide coverage be “at least as broad as” the coverage NFIP 

 55The National Flood Insurance Act, as amended, provides that any regulated lending 

institution found to have a pattern or practice of committing certain violations, including 

violations of regulations (when implemented) requiring the acceptance of private flood 

insurance, shall be assessed a civil monetary penalty by the appropriate federal entity for 

lending regulation. Prior to the Biggert-Waters Act, the maximum civil monetary penalty 

that could be assessed for each violation was $350, with an annual cap of $135,000. The 

Biggert-Waters Act increased the maximum civil monetary penalty for each violation to 

$2,000 and eliminated the annual penalty cap. Pub. L. No. 112-141, § 100208, 126 Stat. 

916, 919 (2012) (codified as amended at 42 U.S.C. § 4012a(f)).
Page 25 GAO-16-611 Flood Insurance

offers.56 A lender, two insurers, FEMA officials, and a regulatory official all 

noted that matching the elements of a private policy to an NFIP policy 

would be difficult. For example, FEMA officials said that NFIP’s policy 

terms and rates do not reflect prior flood losses and that private insurers 

likely would not be able to develop their rates without taking prior losses 

into consideration. Two private insurers told us that in their experience, 

some lenders find it difficult to compare private policies with NFIP 

policies. One insurer added that if a lender was not familiar with private 

flood insurance, the company would need to educate the lender on their 

policy’s coverage and show how it matched that of an NFIP policy. More 

generally, some lenders and banking associations with whom we spoke,

as well as many comment letters on the proposed rule, noted that lenders 

might not have the expertise to evaluate private flood policies against the 

statutory criteria. In addition, a FEMA-commissioned study on 

privatization concluded that an increased use of private insurance would 

necessitate increased resources on the part of regulated lending 

institutions to assess whether private policies complied with the 

mandatory purchase requirement and met their needs.57

In their October 2013 proposed rule, the federal regulators acknowledged 

concerns about the ability of regulated lending institutions to evaluate 

whether private policies met the statutory definition because some 

regulated lending institutions lacked the necessary technical expertise. 

Recognizing that regulating insurance is generally the domain of state 

regulators, the regulators suggested that the state regulators might be the 

appropriate parties to determine whether a flood insurance policy met all 

the criteria in the statutory definition of private flood insurance. Therefore, 

the proposed rule includes a safe harbor to allow regulated lending 

institutions to rely on a written determination of the state insurance 

regulator that a policy issued by a private insurer met the federal statutory 

definition of private flood insurance.

 56Specifically, under the Biggert-Waters Act definition, a private flood insurance policy 

must provide “flood insurance coverage which is at least as broad as the coverage 

provided under a standard flood insurance policy under the national flood insurance 

program, including when considering deductibles, exclusions, and conditions offered by 

the insurer.” 42 U.S.C. § 4012a(b)(7)(B). 

57Federal 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). This report was compiled pursuant to requirements in 

the Biggert-Waters Act. Pub. L. No. 112-141, § 100232(a), (c), 126 Stat. 916, 953 (2012).
Page 26 GAO-16-611 Flood Insurance

Concerns about state interpretations. While some comment letters and 

stakeholders with whom we spoke acknowledged that state insurance 

regulators have authority and experience in approving and overseeing 

property/casualty insurance, and can do the same with private flood 

insurance, some also noted challenges with the proposed safe harbor. 

Specifically, in their comment letters, NAIC and other stakeholders 

questioned the authority and ability of state insurance regulators to be 

solely responsible for interpreting or enforcing federal law generally, and 

in particular, the federal statutory definition of private flood insurance. 

Representatives of one state insurance regulator with whom we spoke 

noted that even with their experience and regulatory structure for 

approving insurance policies, state regulators would find it challenging to 

determine if private policies were at least as broad as NFIP policies.

FEMA’s report on privatization acknowledges that with greater use of 

private flood insurance, state insurance regulators would have an 

increased role and need to become more familiar with how flood 

insurance is modeled, priced, and managed. The FEMA report also noted 

that the involvement of different state regulators could result in many 

different regulatory systems. Some comment letters also raised this 

concern, and added that varying state laws could result in inconsistencies 

in states’ determinations of acceptable flood insurance policies. Due to 

the challenges with the statutory definition of private flood insurance 

described earlier, comment letters from some lenders and banking 

associations, and a few lenders with whom we spoke, noted the need for 

an additional option for a safe harbor provision (that is, in addition to the 

one discussed in the proposed rule), which they could rely on for 

approving private policies as meeting the statutory criteria. They 

suggested that insurance companies provide their own written 

determination that their policy complies with the definition of private flood 

insurance in the Biggert-Waters Act. One private insurer we interviewed 

has been asked by lenders to attest in writing that its flood insurance 

policy meets the requirements in the Biggert-Waters Act.

Stakeholders cited certain changes made by FEMA to NFIP policies on 

flood insurance, which may affect consumers financially, as potential 

barriers to consumers’ ability or willingness to switch from NFIP and use 

private flood insurance to satisfy the mandatory purchase requirement.

Continuous coverage. NAIC and stakeholders cited FEMA’s 

interpretation of the continuous coverage requirement in connection with 

private flood insurance and the effect on consumers’ ability to qualify for 

Recent NFIP Policy 

Changes May Discourage 

Consumers’ Use of Private 

Flood Insurance
Page 27 GAO-16-611 Flood Insurance

NFIP discounted rates. Effective April 1, 2016, FEMA prohibits the use of 

discounted rates (subsidized or “grandfathered” rates) for policies when 

there has been a lapse in NFIP coverage of more than 90 days (see 

fig. 2).58 FEMA officials noted that excluding non-NFIP policies from 

constituting continuous coverage was due to FEMA’s interpretation of the 

HFIAA provision on policy lapses.59

 58Effective April 1, 2016, FEMA prohibits the use of discounted rates for policies that 

reinstate coverage for buildings previously insured by NFIP when the NFIP coverage is 

reinstated by means of a payment 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. Generally, subsidized policies cover 

properties in high-risk locations that otherwise would have been charged higher premiums 

and that were built before Flood Insurance Rate Maps became available and their flood 

risk was clearly understood. Further, NFIP allows other property owners to continue to pay 

“grandfathered” rates. These rates do not reflect reassessments of properties’ flood risk 

that occur when the properties are remapped into higher-risk flood zones; instead the

policies continue to be classified with other policies from lower-risk zones.

59Section 1307(g) of the 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 policy holder 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 28 GAO-16-611 Flood Insurance

Figure 2: Example of Effect of NFIP Continuous Coverage Policy on Consumers Who Purchase Private Flood Insurance

Note: Discounted insurance premiums (rates) include both subsidized and grandfathered NFIP 

policies.

Some stakeholders, including private insurers, noted that FEMA’s 

decision to exclude private flood insurance policies from constituting 

continuous coverage could have financial repercussions for consumers 

seeking to reinstate their previously discounted NFIP coverage (after 

using a private policy to insure their properties from flood losses). So, if a 

NFIP policyholder who qualified for subsidized rates switched to a private 

flood policy, and then switched back to an NFIP policy, the policyholder

would no longer qualify for subsidized rates and would be charged fullrisk rates based on the elevation of the property. A single-family primary 

residence with $200,000 in building coverage and $50,000 in contents 

coverage would pay a subsidized premium of $2,880, but their full-risk 

rate would be based on elevation. For example if this building’s elevation 

was 1 foot below base flood elevation, the full-risk premium would be 
Page 29 GAO-16-611 Flood Insurance

$4,650. If it was 2 feet below, the full-risk premium would be $6,890.60

Two private insurers and an association representing insurers told us that 

due to the risk of losing their discounted NFIP rates, consumers may 

avoid the private market as an option to insure against flood losses.

Narrowed opportunities for premium refunds. According to NAIC and 

the private flood insurance companies with whom we spoke, another 

recent regulatory change—a FEMA guidance revision related to policy 

cancellations—could discourage the use of private flood insurance by 

consumers. FEMA allows NFIP coverage to be terminated in accordance 

with its stated cancellation reasons. If coverage is terminated for a valid 

cancellation reason, the insured may be entitled to a full or partial refund 

of the paid NFIP premium. Effective November 1, 2015, FEMA no longer 

allows policyholders to cancel their NFIP policy and obtain a refund if they 

obtained a non-NFIP policy (private flood insurance policy).61 However, 

FEMA had allowed for refunds under this scenario previously (see fig. 3). 

According to NAIC officials, if the reason for cancellation of an insurance 

policy is the request of the policyholder, the policyholder generally would 

receive a refund of the paid premium, which may be less than the 

prorated premium, if stipulated by the insurance policy. Two organizations 

that represent private insurers also stated that policyholders generally 

would receive a refund of their paid premium when cancelling a policy 

after the effective date of the policy. FEMA officials told us that this 

change came about due to a review of cancellation allowances conducted 

to incorporate any necessary changes from flood insurance legislation 

(Biggert-Waters Act and HFIAA). Specifically, FEMA officials said that 

FEMA only can allow cancellation of policies and refunds according to the 

terms and conditions of NFIP’s Standard Flood Insurance Policy (SFIP). 

They stated that while the NFIP policy allows for the cancellation of a 

policy and refund of a premium, on a prorated basis, when a duplicate 

NFIP policy is obtained on the same property, there is not a similar 

 60If the building was above base elevation, the full-risk premium would be significantly 

lower than the subsidized premium. We based this example on a single-family primary 

residence in flood zone AE with no basement or enclosure and no deductible or discounts. 

See Federal Emergency Management Agency, NFIP Flood Insurance Manual, RATING, 

(April 2016).

61Federal 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 WYOs and NFIP servicing agents stating that the insured 

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

cancellation reason. 
Page 30 GAO-16-611 Flood Insurance

provision when a non-NFIP policy is obtained. FEMA did not provide any 

additional analysis or offer further explanation for this change. However, 

FEMA could have taken steps to revise the SFIP to allow for such 

refunds. 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 

insurance risk to the private sector.

Figure 3: Comparison of Former and Current Refund Policy for When Policyholders Switch from NFIP to a Non-NFIP Provider

According to most of the private flood insurers with whom we spoke, this 

change to the cancellation policy further complicates the situation for 

consumers who wish to opt for private flood insurance when coupled with 

the requirement that regulated lending institutions establish escrow 

accounts for flood insurance premiums and fees for loans made after 

January 1, 2016.62 Generally, according to some insurers with whom we 

spoke, lenders will use escrow accounts to pay for flood insurance from 

30 to 90 days in advance of the effective date of insurance policies. The 

combination of factors may present a challenge to consumers because 

 62See 42 U.S.C. § 4012a(d); 80 Fed. Reg. 43,216 (July 21, 2015). Prior to the 

implementation of the escrow requirement from the Biggert-Waters Act and HFIAA, the 

regulators’ escrow provisions provided that each regulated lending institution was required 

to escrow all premiums and fees for required flood insurance if the institution required the 

escrow of taxes, insurance premiums, fees, or other charges. Amended regulations 

implementing the statutory requirements to require regulated lending institutions, or 

servicers acting on their behalf, to escrow premiums and fees for flood insurance, subject 

to exception, became effective on December 31, 2015. 
Page 31 GAO-16-611 Flood Insurance

they may not know when escrowed payments are made or because of the 

limited time frame in which they could cancel their NFIP policies to avoid 

forfeiting their premium, which could result in the following scenarios.

• According to one private insurer, policyholders may not be aware that 

the bank already renewed their NFIP policy and made the payment 

from the escrow account. Because FEMA will no longer refund 

premiums to policyholders who switch to a non-NFIP policy, 

consumers must cancel their NFIP policy in advance of their NFIP 

renewal date to avoid forfeiting their premium.

• A representative of another private insurer added that consumers who 

wish to obtain a private insurance policy must consider making this 

change well in advance of the NFIP policy effective date (or renewal 

date) and that generally consumers do not address their insurance 

needs that far in advance or realize when their insurance has been 

paid from their escrow account.

Many stakeholders with whom we spoke said that low private-sector 

participation in the flood insurance market also was due to certain market 

challenges that presented barriers to the private sector such as NFIP’s 

discounted rates, a topic on which we reported previously and also have 

ongoing work.63 For example, in our January 2014 report, we noted that 

according to stakeholders, insurers needed to be able to charge premium 

rates that reflect the full risk of potential flood losses, but with NFIP 

charging rates that were not actuarially sound, private companies found it 

difficult to compete in the market.64 Stakeholders with whom we spoke for 

this report (including insurance trade associations, several state 

 63For GAO-14-127, we hosted a roundtable in August 2013 that included stakeholders 

from FEMA, the insurance and reinsurance industries, and state insurance regulators. 

64Actuarial Standards of Practice note that “actuarial soundness” has different meanings in 

different contexts, and these practices state that if an actuary identifies a process or result 

as actuarially sound, the actuary should define the meaning of actuarially sound in that 

context. In referring to NFIP as not actuarially sound, we mean that its aggregate 

premiums, after providing for program expenses, are not at a sufficient level to cover 

actuarial estimates of the program’s long-term expected losses. For more information on 

FEMA’s methods for setting NFIP rates, see GAO, NFIP: Continued Progress Needed to 

Fully Address Prior GAO Recommendations on Rate-Setting Methods, GAO-16-59

(Washington, D.C.: Mar. 17, 2016). For more information on affordability issues related to 

NFIP rate increases, see GAO, NFIP: Options for Providing Affordability Assistance, 

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

Limited Use of Private 

Flood Insurance Also Due 

to Market Challenges
Page 32 GAO-16-611 Flood Insurance

insurance regulatory agencies, and another organization with flood 

insurance expertise) also noted this concern. Several stakeholders, 

including private insurers, and NAIC emphasized that having to compete 

with NFIP’s discounted rates is one of the primary barriers to increased 

use of private flood insurance rather than any regulatory issues. Similarly, 

our review of literature related to the involvement of the private sector in 

flood insurance found that the ability to charge actuarially sound rates 

was a strong factor in market participation.65

Many stakeholders (including insurance trade associations, a private 

insurer, and officials from two state regulatory agencies) also noted the 

lack of access to NFIP data on flood losses and claims as a barrier to 

more private companies offering flood insurance. Stakeholders added 

that access to such data would allow private insurance companies to 

better estimate losses and price flood insurance premiums. In our 

previous work, stakeholders told us that access to NFIP policy and claims 

data would help private insurers assess flood risks and determine which 

properties they might be willing to insure.66

However, in our previous report we also noted that according to FEMA 

officials, 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 personal 

information that individuals supply when obtaining government services or 

fulfilling obligations.67 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. FEMA officials 

added that recent data breaches in the federal government’s information 

technology controls have led to additional concerns about the secure 

 65For example, Carolyn Kousky and Leonard Shabnam, “Pricing Flood Insurance: How 

and Why the NFIP Differs from a Private Insurance Company,” Resources for the Future

(October 2014); and Erwann O. Michel-Kerjan, “Catastrophe Economics: The National 

Flood Insurance Program,” Journal of Economic Perspectives, vol. 24, no. 4 (Fall 2010): 

165–186.

66GAO-14-127.

67Pub. L. No. 93-579, 88 Stat. 1896 (1974) (codified, as amended, at 5 U.S.C. § 552a).
Page 33 GAO-16-611 Flood Insurance

storage and sharing of NFIP data. According to NAIC officials, after 

receiving a request from a state insurance regulator for NFIP data on 

flood losses and claims in their state, FEMA officials approached NAIC to 

discuss options for sharing such data. NAIC officials told us that its 

catastrophe insurance working group is coordinating with FEMA actuaries 

to determine how FEMA could share specific data with states, without 

disclosing personally identifiable information.

Our previous work on private-sector involvement in flood insurance also 

cited other concerns raised by stakeholders.68 Stakeholders we 

interviewed for that work noted several conditions that must be present to 

increase private-sector involvement in the sale of flood insurance, 

including that insurers need sufficient consumer participation to properly

manage and diversify their risk. They also identified several strategies 

that could help create conditions that would promote the sale of flood 

insurance by the private sector, such as Congress eliminating discounted 

rates and NFIP charging full-risk rates, or NFIP providing residual 

insurance. In addition, we have an ongoing review examining the policy 

goals that have led to NFIP’s debt to Treasury—for example, providing 

subsidies to certain policyholders—and how the program can be reformed 

under different circumstances (for example, if there is increased 

participation in flood insurance by the private sector.)

Finally, some stakeholders also told us that certain FEMA restrictions on 

WYOs may be an impediment to increasing the availability of private flood

insurance in the market. Specifically, the NFIP Financial 

Assistance/Subsidy Arrangement (Arrangement) with WYOs restricts 

WYOs from selling stand-alone flood insurance coverage outside of 

NFIP.69 Officials from two state insurance agencies and one insurance 

trade association said that the FEMA restriction limits 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 

 68GAO-14-127. 

69Financial Assistance/Subsidy Arrangement, Art. XIII (Oct. 1, 2015) (codified at 44 C.F.R. 

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

WYOs are not restricted from selling flood insurance as part of multiple peril policies or 

policies that are over and above the limits NFIP allows.
Page 34 GAO-16-611 Flood Insurance

company is a WYO, the parent company could offer stand-alone flood 

coverage. Alternatively the WYO could offer flood coverage as part of a 

multiperil policy.

Since the passage of the Biggert-Waters Act, new legislation has been 

introduced in Congress that could help address some of the regulatory 

issues and a recent change made to NFIP that stakeholders cited as 

barriers. The proposed legislation would amend the statutory definition of 

private flood insurance that would satisfy the mandatory purchase 

requirement.70 That is, the definition of private flood insurance in the 

proposed legislation would replace the specific criteria in the BiggertWaters Act and instead define private flood insurance as an insurance 

policy that 

(1) is issued by an insurance company that is 

(I) licensed, admitted, or otherwise approved to engage in the 

business of insurance in the state in which the insured building is located, 

by the insurance regulator of that state; or 

(II) eligible as a nonadmitted insurer to provide insurance in the 

home state of the insured;

(2) is issued by an insurance company that is not otherwise disapproved 

as a surplus lines insurer by the insurance regulator of the state in which 

the property to be insured is located; and 

(3) provides flood insurance coverage that complies with the laws and 

regulations of that state.

Some stakeholders with whom we spoke supported the proposed 

legislation because it relies on the expertise of state insurance regulators 

rather than individual regulated lending institutions. According to these 

stakeholders, the changes to the statutory definition of private flood 

insurance clarify that flood insurance approved by state insurance 

regulators is acceptable in satisfying the mandatory purchase 

 70Flood Insurance Market Parity and Modernization Act, H.R. 2901, 114th Cong. (2015) 

(as passed by House, Apr. 28, 2016).

Recent Legislative 

Proposals to Amend the 

Biggert-Waters Act and 

State Actions to Help 

Increase Accessibility of 

Private Flood Insurance
Page 35 GAO-16-611 Flood Insurance

requirement. But according to a consumer advocate’s January 2016 

testimony to Congress, facilitating the sale of flood insurance by surplus 

lines carriers could create problems for consumers because surplus lines 

policies are subject to fewer consumer protections than admitted policies. 

For example, surplus lines policies are not backed by state guaranty 

funds and states do not regulate surplus lines policy forms, which may 

contain exclusions that regulators would not approve for an admitted 

carrier.71 At the same hearing, NAIC stated its support for the proposed 

legislation and noted that as the private flood insurance market grew, they 

expected state insurance regulation would continue to evolve to meet the 

size of the market as well as the needs of consumers.72 NAIC officials 

also told us that the proposed legislation would alleviate their concerns 

that the Biggert-Waters Act allows federal regulators to regulate the 

solvency of private flood insurers. However, Fannie Mae officials stated 

that the proposed legislation (H.R. 2901 as adopted by the House on April 

28, 2016) would weaken its risk-management practices to the extent that 

it would impair Fannie Mae from maintaining or taking prudent actions to 

protect homeowners and collateral.

73 Furthermore, while noting that 

creating a viable private flood insurance market is in the interest of the 

housing finance system and taxpayers, Freddie Mac officials stated that 

they have concerns that the proposed legislation could shift the risk of 

 71Birny Birnbaum, Executive Director, Center for Economic Justice, How to Create a More 

Robust and Private Flood Insurance Market Place, testimony before the House 

Subcommittee on Housing and Insurance, Committee on Financial Services, 114th Cong., 

January 13, 2016.

72Teresa D. Miller, Commissioner, Pennsylvania Insurance Department, on behalf of the 

National Association of Insurance Commissioners, How to Create a More Robust and 

Private Flood Insurance Market Place, testimony before the House Subcommittee on 

Housing and Insurance, Committee on Financial Services, 114th Cong., January 13, 2016.

73Fannie Mae also stated that the legislation could adversely affect existing contractual 

rights in Uniform Security Instruments. Uniform Security Instruments are Fannie Mae’s 

and Freddie Mac’s standard contracts recommended to be used by lenders when 

originating single-family residential mortgage loans whenever possible, and required for 

mortgages the GSEs purchase.
Page 36 GAO-16-611 Flood Insurance

flood loss to Freddie Mac; they have been addressing these concerns 

with the Federal Housing Finance Agency.74

The proposed legislation also would amend the flood insurance statute to 

explicitly allow for private flood insurance coverage to satisfy any 

continuous coverage requirements, reversing a recent change that FEMA 

made to NFIP (coverage is not considered continuous if supplied through 

a non-NFIP policy for more than 90 days). As discussed earlier, some 

stakeholders cited FEMA’s change to this policy as a potential barrier to 

the use of private insurance. Specifically, the proposed legislation states 

that any period during which a property was continuously covered by 

private flood insurance, as defined by the proposed legislation, should be 

considered to be a period of continuous coverage for purposes of 

applying any statutory, regulatory, or administrative continuous coverage 

requirement. However, the proposed legislation does not directly address 

NFIP’s recent change in cancellation reasons, which can preclude 

refunds of premiums when coverage was supplied by a non-NFIP policy, 

or the restriction on WYOs offering stand-alone flood insurance products.

Whether a state permits a particular private flood insurance policy to be 

offered to consumers is a different question from whether the regulated 

lending institution or federal regulator finds the private policy sufficient to 

satisfy the mandatory purchase requirement. More specifically, regulated 

lending institutions and federal regulators, rather than states, are 

responsible for ensuring compliance with the mandatory purchase 

requirements under federal law. However, according to the state officials 

with whom we spoke, states have the authority to regulate the flood 

insurance offered by private insurance companies in their states and 

some have taken steps to try to make private flood insurance more 

accessible.

For example, Florida and West Virginia recently passed legislation that 

outlines the regulatory structure for insurance companies that choose to 

sell private flood insurance in those states.75 Specifically,

 74The Housing and Economic Recovery Act of 2008 established the Federal Housing 

Finance Agency (FHFA) as an independent agency to supervise and regulate Fannie 

Mae, Freddie Mac, and the Federal Home Loan Bank System. FHFA has a statutory 

responsibility to ensure that Fannie Mae and Freddie Mac operate in a safe and sound 

manner and that the operations and activities of each regulated entity foster liquid,

efficient, competitive, and resilient national housing finance markets. Pub. L. No. 110-289, 

§ 1101, 122 Stat. 2654, 2661 (codified at 12 U.S.C. § 4511).
Page 37 GAO-16-611 Flood Insurance

• Both states allow insurance companies to write flood insurance 

policies in a more customized way and charge rates in accordance 

with state laws.76

• Both state laws reduce the barriers to accessing the surplus lines 

market for some flood insurance by not requiring an agent to attempt 

to place a policy with an admitted company or attempt to find a 

comparable admitted product.77 Before the enactment of these laws, 

the agent would have had to make a “diligent effort” to seek such 

coverage in the admitted market before placing a flood insurance 

policy with a surplus lines carrier.

According to officials from both states, these laws were not necessarily 

needed to allow private insurers to offer flood insurance as officials from 

both states believed prior statutes permitted the state insurance regulator 

to allow for flood insurance. However, officials noted that these laws 

publicly encourage private companies to sell flood insurance in these 

states, with the intent of offering consumers more options.

Similarly, according to the National Association of Professional Surplus 

Lines Offices (NAPSLO), 18 states have made private flood insurance 

more accessible by providing for easier access to the surplus lines 

insurance market.78 Furthermore, 12 of these states allow direct access to 

the surplus lines market with no restrictions for flood, which means that 

generally an insurance agent would not need to perform a diligent search. 

According to representatives of NAPSLO, this generally includes not 

having to first seek coverage with NFIP. NAPSLO officials also stated that 

 752014 Fla. Laws ch. 80 (codified as amended at FLA. STAT. § 627.715); 2014 W. Va. Acts 

ch. 96 (codified at W. VA. CODE § 33-49-1 to 33-49-10).

76In addition to the legislation passed in 2014, in 2015 Florida passed legislation that 

amended its statute to (1) allow insurers to issue flood insurance policies on a flexible 

flood insurance basis, and (2) allow an insurer to request from Florida’s Office of 

Insurance Regulation a certification that acknowledges that the insurer provides a policy, 

contract, or endorsement for flood insurance that provides coverage equaling or 

exceeding the flood coverage offered by the NFIP. 2015 Fla. Laws ch. 69. 

77West Virginia’s allowance for accessing the surplus lines market directly is restricted to 

flood coverage of $1 million or more and expires on July 1, 2019. W. Va. Code § 33-49-

3(b). The Florida allowance does not contain that restriction, but expires on July 1, 2017. 

Fla. Stat. § 627.715(4). 

78According to NAPSLO officials, in the remaining 32 states and the District of Columbia, 

flood insurance can only be placed with the surplus lines market after the diligent search

requirements are met.
Page 38 GAO-16-611 Flood Insurance

the other six states allow for access to the surplus lines insurance market 

under specific circumstances, such as when a community does not 

participate in NFIP.

The Biggert-Waters Act took steps to encourage greater participation by 

the private sector in flood insurance, but aspects of the act’s provisions 

on private flood insurance have created some regulatory uncertainty 

among insurers and lenders. As a result, Congress has been considering 

some steps designed to address potential regulatory barriers to the use of 

private-sector insurance to satisfy the mandatory purchase requirement, 

including considering legislation that would amend the statutory definition 

of private flood insurance. The proposed legislation also would explicitly 

allow for private flood insurance coverage to satisfy any continuous 

coverage requirements, reversing a recent change that FEMA made to 

NFIP cited by some stakeholders as a potential barrier to the use of 

private insurance.

However, a recent policy change made by FEMA might discourage the 

use of private flood insurance. FEMA no longer allows policyholders to 

cancel their NFIP policy and obtain a refund, on a prorated basis, if they 

obtained a non-NFIP policy (private flood insurance policy). FEMA made 

the change based on a review of its policies brought about by the 

enactment of the Biggert-Waters Act and HFIAA. FEMA officials stated 

that FEMA can only allow the cancellation of policies and refunds 

according to the terms and conditions of NFIP’s standard policy, which 

does not directly address the refunds of premiums when a non-NFIP 

policy is obtained. However, FEMA could have taken steps to revise the 

SFIP to allow for such refunds. It is generally industry practice to refund 

policyholders a portion of premium that is unused if they decide to cancel 

their insurance policies. Allowing this type of refund would be in line with 

congressional interest in transferring some of the federal government’s 

exposure to flood insurance risk to the private sector.

To address a potential challenge for consumers who wish to opt for 

private flood insurance and who must have insurance under the 

mandatory purchase requirement, we recommend that the FEMA 

Administrator should consider reinstating the cancellation reason code 

allowing policyholders to cancel their NFIP policy and be eligible for 

premium refunds, on a prorated basis, if they obtain a non-NFIP policy 

after their NFIP policy became effective. If changes are needed to NFIP’s 

Conclusions

Recommendation
Page 39 GAO-16-611 Flood Insurance

standard flood insurance policy to allow such refunds, FEMA should take 

the necessary steps to amend its standard flood insurance policy.

We provided a draft of this report to FCA, FDIC, Federal Reserve, FEMA 

within the Department of Homeland Security, HUD, NCUA, OCC, 

Treasury, Fannie Mae, Freddie Mac, and NAIC for review and comment.

FCA, FDIC, Federal Reserve, OCC, Fannie Mae, Freddie Mac, and NAIC 

provided technical comments, which we incorporated, as appropriate. 

DHS provided a written response, reproduced in appendix IV, in which 

FEMA agreed with our recommendation and plans to reinstate their 

previous policy allowing policyholders to cancel their NFIP policy and 

obtain a prorated refund if they obtain a comparable non-NFIP policy. The 

response also stated that the policy change will be included in an April 

2017 program bulletin, with an effective date of October 1, 2017, and 

followed up with a subsequent rulemaking. NCUA also provided written 

comments, reproduced in appendix V, in which agency officials stated 

that the agency plans to, as noted in the report, update examination 

policies and procedures to reflect recent changes in flood insurance 

regulation and work with the other regulators to finalize private flood 

insurance regulations.

We are sending copies of this report to the appropriate congressional 

committee, and other interested parties. In addition, the report is available 

at no charge on the GAO website at http://www.gao.gov.

If you or your staff 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 VI.

Sincerely yours,

Alicia Puente Cackley

Director, Financial Markets

 and Community Investment

Agency Comments
Appendix I: Objectives, Scope, and 

Methodology

Page 40 GAO-16-611 Flood Insurance

We were asked to revisit the issue of the private-sector involvement in 

flood insurance with a focus on the regulatory environment and whether it

posed any barriers to private flood insurance policies being purchased by 

homeowners to satisfy the mandatory purchase requirement. This report 

describes (1) regulated lending institutions’ and federal regulators’

implementation of statutory provisions governing the use of private flood 

insurance to satisfy the mandatory purchase requirement; and (2) views 

on any regulatory, or other barriers, to the increased use of private flood 

insurance to satisfy the mandatory purchase requirement. To address 

these objectives, we reviewed flood insurance laws and regulations, 

related agency guidance, congressional hearings, and studies, as well as 

past GAO reports on insurance markets and flood insurance.1

We reviewed relevant federal flood insurance laws, including the Flood 

Disaster Protection Act, National Flood Insurance Reform Act, BiggertWaters Flood Insurance Reform Act, and the Homeowner Flood 

Insurance Affordability Act, to identify requirements placed on federal 

entities responsible for lending regulation (federal regulators) and how 

each has addressed the use and acceptability of private flood insurance 

to fulfill the mandatory purchase requirement. The federal regulators 

involved in implementing the provisions of the flood insurance laws 

governing the mandatory purchase requirement are the Office of the 

Comptroller of the Currency (OCC), Board of Governors of the Federal 

Reserve System (Federal Reserve), Federal Deposit Insurance 

Corporation (FDIC), Farm Credit Administration (FCA), and National 

Credit Union Administration (NCUA). We also reviewed the rules 

implementing these statutes to determine what requirements are placed 

on regulated lending institutions.

To understand how lenders have been fulfilling the requirements, we 

interviewed representatives from eight lending institutions consisting of 

banks and nonbanks. To identify lenders likely to have experience with 

private flood insurance, we used National Flood Insurance Program 

(NFIP) and SNL’s Mortgage Market Share data to identify the largest 

 1

For example, GAO, Flood Insurance: Strategies for Increasing Private Sector 

Involvement, GAO-14-127 (Washington, D.C.: Jan. 22, 2014); Insurance Markets: Impacts 

of and Regulatory Response to the 2007-2009 Financial Crisis, GAO-13-583 (Washington, 

D.C.: June 27, 2013); and Flood Insurance: Extent of Noncompliance with Purchase 

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

Appendix I: Objectives, Scope, and 

Methodology

Regulator and Lender 

Implementation
Appendix I: Objectives, Scope, and 

Methodology

Page 41 GAO-16-611 Flood Insurance

lenders (by volume of mortgages originated) in those counties with the 

largest number of NFIP flood insurance policies. To further categorize the 

lending institutions, we then used criteria such as the type of institution, 

regulatory agency responsible for supervising the institution, and size by 

total assets (selecting lenders from large, medium, and small asset 

categories). We selected a purposive sample of eight lenders with one or 

two institutions supervised by each regulator and took care to ensure a 

balanced representation of the different types and sizes of institutions. 

For the purposes of this report we use the term “lenders” to refer to the 

eight lenders with whom we spoke. Our sample included two nonbank 

mortgage lenders that are not directly subject to the requirements of the 

Flood Disaster Protection Act as they do not fit within the statutory 

definition of regulated lending institutions. We spoke with these nonbank 

lenders to better understand practices related to private flood insurance 

among the full scope of mortgage market participants. This selection of 

mortgage lenders is not generalizable to all mortgage lenders. We 

determined that the data used were reliable for the purpose of identifying 

and selecting mortgage lenders for a nongeneralizable sample.

To better understand how the federal regulators have implemented the 

statutory requirements, we compared their regulations with the statutes. 

We also reviewed guidance provided by the federal regulators and the 

Federal Emergency Management Agency (FEMA) related to the use of 

private flood insurance to satisfy the mandatory purchase requirement. 

We reviewed and compared each of the regulator’s examination manuals 

and flood insurance modules to understand how they examined the 

regulated lending institutions they supervise for compliance. For example, 

we reviewed each regulator’s flood insurance examination module to 

determine what specific aspects of the regulations examiners were 

reviewing. We also interviewed officials from OCC, Federal Reserve, 

FDIC, FCA, NCUA, and FEMA. Finally, we reviewed the policies of the 

Federal National Mortgage Association (Fannie Mae), Federal Home 

Loan Mortgage Corporation (Freddie Mac), Department of Veterans 

Affairs, and Federal Housing Administration to understand their flood 

insurance requirements for mortgages they either purchase or insure. We 

also followed up with the Department of Housing and Urban 

Development’s Federal Housing Administration to understand any 

potential changes to its policies.

We interviewed various stakeholders—including selected lenders, 

organizations in the insurance and lending industries, private flood 

insurance companies, and state insurance regulatory agencies—about 

Regulatory and Other 

Barriers
Appendix I: Objectives, Scope, and 

Methodology

Page 42 GAO-16-611 Flood Insurance

any regulatory barriers to the increased use of private flood insurance. 

We interviewed representatives of the eight selected lenders on barriers 

they encounter in evaluating and accepting private flood insurance 

policies and their views on enacted and proposed legislation on private 

flood insurance. To obtain other views on private flood insurance, we 

selected a diverse group of 13 organizations to interview based on the 

type of organization, the organization’s purpose and relevance to private 

flood insurance, and membership. We identified these organizations 

based on previous and ongoing GAO work on flood insurance and 

comment letters submitted in response to federal regulators’ proposed 

rules on private flood insurance.

We also selected and interviewed representatives of four private 

insurance companies involved in the private market for flood insurance. 

To identify these companies, we reviewed news articles; interviewed 

selected lenders, state insurance officials, and other industry 

stakeholders; reviewed comment letters submitted in response to 

proposed rules issued by the federal regulators on private flood 

insurance; and reviewed prior GAO work. To select the insurance 

companies to interview, we focused on those that were identified as 

currently writing flood insurance in the admitted or nonadmitted insurance 

markets. This selection of private insurance companies is not 

generalizable to all private insurance companies.

To understand selected states’ regulation of flood insurance and obtain 

the perspectives of state insurance regulators on regulatory barriers 

related to private flood insurance, we interviewed insurance regulators 

and their representatives from Florida, Louisiana, Pennsylvania, Texas, 

and West Virginia and reviewed selected laws from Florida and West 

Virginia. We selected these states based on the volume of NFIP policies 

written and flood insurance regulatory activity in each state. The 

information provided by the representatives of the state insurance 

regulators is not generalizable to how all states oversee flood insurance.

We also reviewed comment letters submitted to the regulators (OCC, 

Federal Reserve, FDIC, FCA, and NCUA) in response to proposed 

federal rules on the acceptance of private flood insurance. We obtained 

these comment letters by downloading each from www.regulations.gov, 

docket ID OCC-2013-0015. We analyzed 44 comment letters submitted 

by interested parties regarding the regulators’ joint proposed rules as of 
Appendix I: Objectives, Scope, and 

Methodology

Page 43 GAO-16-611 Flood Insurance

May 2016.2 We reviewed each comment letter to identify comments 

pertaining to potential or actual regulatory barriers to the use of private 

flood insurance and effects of the proposed rules. One analyst created a 

summary of common themes from the comment letters, which were 

verified by a second analyst.

We also conducted a literature search for news articles and studies to 

determine what is known about any regulatory barriers to using private 

flood insurance to satisfy the mandatory purchase requirement. To 

identify news articles and studies, we conducted searches of various 

databases, such as EconLit and ProQuest, using search terms such as 

“private” and “flood insurance.” From these searches, we identified and 

reviewed 19 studies and articles since 2005 that were relevant to barriers 

to private flood insurance. We reviewed these studies and articles to 

identify regulatory barriers to the use of private flood insurance. We found 

that these studies and articles generally did not identify regulatory barriers 

but identified other relevant barriers related to increasing involvement of 

the private sector in flood insurance.3

We also interviewed representatives from the Department of the 

Treasury’s Federal Insurance Office and the National Association of 

Insurance Commissioners (NAIC) to obtain their views on regulatory 

barriers, enacted and proposed legislation and regulations, and NAIC’s 

views on states’ laws and regulations related to private flood insurance.

 2

Forty-four comment letters were submitted in response to the October 2013 joint 

proposed rules; four comment letters contained no comments related to the private 

insurance provisions of the proposed rule and were excluded from our analysis. 

3

Our previous work on the conditions needed for private-sector involvement in flood 

insurance and strategies for increasing private-sector involvement addressed some of 

these other relevant barriers. See GAO-14-127. 
Appendix II: Private Flood Insurance Criteria in 

FEMA’s Guidelines (2007) and the BiggertWaters Act Definition (2012)

Page 44 GAO-16-611 Flood Insurance

The following table compares the guidance provided by Federal 

Emergency Management Agency (FEMA) in the 2007 Mandatory 

Purchase of Flood Insurance Guidelines (rescinded in February 2013) for 

use of private flood insurance to satisfy the mandatory purchase 

requirement with the statutory definition of private flood insurance in the 

Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act). 

Table 3: Private Flood Insurance Criteria in FEMA Guidelines and the Biggert-Waters Act

Policy areas FEMA guidelines Biggert-Waters Act definition

The Guidelines state a private flood insurance 

policy that meets all six of the FEMA criteria 

conforms to the mandatory flood insurance 

purchase requirements of the 1994 Act. The 

Guidelines further provide that to the extent that 

the private policy differs from the NFIP standard 

flood insurance policy, the differences should be 

carefully examined before the policy is accepted 

as sufficient protection under the law.

The term “private flood insurance” means an 

insurance policy that:

Licensure The insurer must be licensed, admitted, or 

otherwise approved to do business in the 

jurisdiction where the building is located, by the 

insurance regulator of that jurisdiction, except 

for surplus lines recognition, below.

Is issued by an insurance company that is 

licensed, admitted, or otherwise approved to 

engage in the business of insurance in the state 

or jurisdiction in which the insured building is 

located, by the insurance regulator of that state 

or jurisdiction, or surplus lines recognition, 

below.

Surplus lines recognition In the case of nonresidential commercial 

property insurance issued under a policy of 

difference in conditions, multiple peril, all risk, or 

other blanket coverage, the insurer should be 

recognized, or not disapproved, as a surplus 

lines insurer by the insurance regulator of the 

jurisdiction where the building is located.

In the case of a policy of difference in 

conditions, multiple peril, all risk, or other 

blanket coverage insuring nonresidential 

commercial property, is recognized, or not 

disapproved, as a surplus lines insurer by the 

insurance regulator of the state or jurisdiction 

where the property to be insured is located.

Requirement of 45-day 

cancellation/nonrenewal notice 

The policy should include a requirement for the 

insurer to give 45 days’ written notice of 

cancellation or nonrenewal to the insured with 

respect to the flood insurance coverage. The 

policy should also state that to be effective, 

such notice must be mailed to both the insured 

and the lender or federal agency lender, and 

must include information about the availability of 

NFIP flood insurance. The policy should be as 

restrictive in its cancellation provisions as the 

NFIP standard policy.

Includes a requirement for the insurer to give 45 

days’ written notice of cancellation or 

nonrenewal of flood insurance coverage to the 

insured and the regulated lending institution or 

federal agency lender.

Includes information about the availability of 

flood insurance coverage under NFIP.

Contains cancellation provisions that are as 

restrictive as the provisions contained in a 

standard flood insurance policy under NFIP.

Appendix II: Private Flood Insurance Criteria

in FEMA’s Guidelines (2007) and the 

Biggert-Waters Act Definition (2012)
Appendix II: Private Flood Insurance Criteria in 

FEMA’s Guidelines (2007) and the BiggertWaters Act Definition (2012)

Page 45 GAO-16-611 Flood Insurance

Policy areas FEMA guidelines Biggert-Waters Act definition

Breadth of policy coverage The policy must guarantee that the flood 

insurance coverage, considering deductibles,

exclusions, and conditions offered by the 

insurer, is at least as broad as the coverage 

under the NFIP standard flood insurance policy.

Provides flood insurance coverage that is at 

least as broad as the coverage provided under 

a standard flood insurance policy under NFIP, 

including when considering deductibles, 

exclusions, and conditions offered by the 

insurer.

Strength of mortgage interest 

clause

Lenders must ensure that the private policy 

contains a mortgage interest clause similar to 

that contained in the general conditions section 

of the NFIP standard flood insurance policy.

Includes a mortgage interest clause similar to 

the clause contained in a standard flood 

insurance policy under NFIP.

Legal recourse The policy must contain a provision that the 

insured must file suit within 1 year after the date 

of written denial of all or part of the claim.

Includes a provision requiring an insured to file 

suit not later than 1 year after date of a written 

denial of all or part of a claim under the policy.

Legend:

1994 Act – National Flood Insurance Reform Act of 1994

Biggert- Waters Act – Biggert-Waters Flood Insurance Reform Act of 2012

FEMA – Federal Emergency Management Agency

NFIP – National Flood Insurance Program

Source: FEMA and Biggert-Waters Act, Pub. L. No. 112-141, § 100239(a)(4), 126 Stat. 916, 960 (codified at 42 U.S.C. § 4012a(b)(7)). | GAO-16-611
Appendix III: Sample Form of Notice of Special 

Flood Hazards and Availability of Federal 

Disaster Relief Assistance

Page 46 GAO-16-611 Flood Insurance

The following sample notice is included as an appendix in the regulators’ 

respective flood insurance regulations.1

Figure 4: Sample Form of Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance

 1

12 C.F.R. pt. 22, app. A (OCC); 12 C.F.R. § 208.25, app. A (Federal Reserve); 12 C.F.R. 

pt. 339, app. A (FDIC); 12 C.F.R. pt. 614, subpt. S, app. A (FCA); 12 C.F.R. pt. 760, app. 

A (NCUA).

Appendix III: Sample Form of Notice of 

Special Flood Hazards and Availability of 

Federal Disaster Relief Assistance
Appendix IV: Comments from the Department 

of Homeland Security

Page 47 GAO-16-611 Flood Insurance

Appendix IV: Comments from the 

Department of Homeland Security
Appendix IV: Comments from the Department 

of Homeland Security

Page 48 GAO-16-611 Flood Insurance
Appendix V: Comments from the National 

Credit Union Administration

Page 49 GAO-16-611 Flood Insurance

Appendix V: Comments from the National 

Credit Union Administration
Page 50 GAO-16-611 Flood Insurance

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

In addition to the contact named above, Allison Abrams (Assistant 

Director), Anar Jessani (Analyst-in-Charge), Pamela Davidson, Matthew 

Keeler, Marc Molino, Patricia Moye, and Barbara Roesmann made key 

contributions to this report.

Appendix VI: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100117)
Page 51 GAO-16-611 Flood Insurance

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