Testimony Before the Chairman, 

Committee on Banking, Housing and 

Urban Affairs, U.S. Senate 

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Tuesday, October 18, 2005 FEDERAL EMERGENCY 

MANAGEMENT AGENCY 

Challenges Facing the 

National Flood Insurance 

Program 

Statement of William O. Jenkins, Jr., Director, Homeland 

Security and Justice Issues 

GAO-06-174T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-174T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William O. 

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

jenkinswo@gao.gov. 

Highlights of GAO-06-174T, a testimony 

before the Chairman, Banking, Housing, 

and Urban Affairs Committee, U.S. Senate 

October 2005

FEDERAL EMERGENCY MANAGEMENT 

AGENCY 

Challenges Facing the National Flood 

Insurance Program 

As GAO has reported, the NFIP, by design, is not actuarially sound. The 

program does not collect sufficient premium income to build reserves to 

meet long-term future expected flood losses, in part because Congress 

authorized subsidized insurance rates to be made available for some 

properties. FEMA has generally been successful in keeping the NFIP on a 

sound financial footing, but the catastrophic flooding events of 2004 

(involving four separate hurricanes) required FEMA, as of August 2005, to 

borrow $300 million from the U.S. Treasury to help pay an estimated $1.8 

billion on flood insurance claims. Following Hurricane Katrina in August 

2005, legislation was enacted to increase FEMA’s borrowing authority from 

$1.5 billion to $3.5 billion through fiscal year 2008. 

Properties that suffer repeated flooding but generally pay subsidized flood 

insurance rates—so-called repetitive-loss properties—constitute a 

significant drain on NFIP resources. These properties account for roughly 

1 percent of properties insured under the NFIP, but account for 25 percent 

to 30 percent of all claim losses. The Flood Insurance Reform Act of 2004 

established a pilot program requiring owners of repetitive-loss properties to 

elevate, relocate, or demolish houses, with NFIP bearing some of those 

costs. Future studies of the NFIP should analyze the progress made to 

reduce the inventory of subsidized repetitive-loss properties, and determine 

whether additional regulatory or congressional action is needed. 

In 1973 and again in 1994, legislation was enacted requiring the mandatory 

purchase of NFIP policies by some property owners in high-risk areas. In 

June 2002, GAO reported that the extent to which lenders were required to 

enforce mandatory purchase requirements was unknown. While FEMA 

officials believed that many lenders often were noncompliant, neither side 

could substantiate its claims regarding compliance. 

FEMA did not use a statistically valid method for sampling files to be 

reviewed in its monitoring and oversight activities. As a result, FEMA 

cannot project the results of these reviews to determine the overall accuracy 

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

of insurance companies and their adjusters in fulfilling responsibilities for 

the NFIP—actions necessary for FEMA to have reasonable assurance that 

program objectives are being achieved. 

FEMA has not yet fully implemented provisions of the Flood Insurance 

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

coverage and the claims process to policyholders when they purchase and 

renew policies, establish an appeals process for claimants, and provide 

insurance agent education and training requirements. The statutory deadline 

for implementing these changes was December 30, 2004, and as of 

September 2005 FEMA had not developed documented plans with 

milestones for meeting the provisions of the act. 

The disastrous hurricanes that have

struck the Gulf Coast and Eastern 

seaboard in recent years—

including Katrina, Rita, Ivan, and 

Isabel—have focused attention on 

federal flood management efforts. 

The National Flood Insurance 

Program (NFIP), established in 

1968, provides property owners 

with some insurance coverage for 

flood damage. The Federal 

Emergency Management Agency 

(FEMA) within the Department of 

Homeland Security is responsible 

for managing the NFIP. 

This testimony offers information 

from past GAO work on (1) the 

financial structure of the NFIP; (2) 

why the NFIP insures properties 

for repetitive flood losses and the 

impact on NFIP resources; and (3) 

compliance with requirements for 

mandatory purchase of NFIP 

policies. The testimony also 

discusses recommendations from a 

report GAO is issuing today on 

FEMA’s oversight and management 

of the NFIP. 

What GAO Recommends

In the report released today, GAO 

is recommending, among other 

things, that FEMA and its partners 

use a statistically valid approach to 

sample NFIP insurance claim files 

for quality assurance purposes, and 

that DHS and FEMA develop and 

document plans for implementing 

requirements of the Flood 

Insurance Reform Act of 2004, 

which reauthorized the NFIP. 

FEMA disagreed with those 

recommendations. 
Page 1 GAO-06-174T 

Mr. Chairman and Members of the Committee: 

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

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

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

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

The NFIP combines property insurance for flood victims, mapping to 

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

incentives for communities to adopt and enforce floodplain management 

regulations and building standards to reduce future flood damage. The 

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

to achieve its goals of: 

• providing property flood insurance coverage for a high proportion of 

property owners who would benefit from such coverage; 

• through this insurance coverage reducing taxpayer-funded disaster 

assistance when flooding strikes, and 

• reducing flood damage through flood plain management and the 

enforcement of building standards (such as elevating structures). 

The Federal Emergency Management Agency (FEMA) within the 

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

and management of the program.1

 Under the program, the federal 

government assumes the liability for the insurance coverage and sets rates 

and coverage limitations, among other responsibilities. 

Floods are the most common and destructive natural disaster in the 

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

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

generally excluded from homeowner policies that typically cover damage 

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

catastrophic nature of flooding and the inability to adequately predict 

 1

In March 2003, FEMA and its approximately 2,500 staff became part of the Department of 

Homeland Security (DHS). Most of FEMA—including its Mitigation Division, which is 

responsible for administering the NFIP—is now part of the department’s Emergency 

Preparedness and Response Directorate. However, FEMA retained its name and individual 

identity within the department. Under a reorganization plan proposed by the current 

Secretary of DHS, the Emergency Preparedness and Response Directorate would be 

abolished, and FEMA would report directly to the Undersecretary and Secretary of DHS. 
Page 2 GAO-06-174T 

flood risks, private insurance companies have largely been unwilling to 

underwrite and bear the risk of flood insurance. 

Congress established the NFIP pursuant to the National Flood Insurance 

Act of 19682

 to provide policyholders with some insurance coverage for 

flood damage, as an alternative to disaster assistance, and to try to reduce 

the escalating costs of repairing flood damage. In creating the NFIP, 

Congress found that a flood insurance program with “large-scale 

participation of the Federal Government and carried out to the maximum 

extent practicable by the private insurance industry is feasible and can be 

initiated.”3

 In keeping with this purpose, FEMA has contractual 

agreements with 95 private insurance company partners to sell policies 

and adjust and process claims. 

As of August 2005, the NFIP was estimated to have approximately 4.6 

million policyholders in about 20,000 communities. Since its inception, the 

program has paid about $14.6 billion in insurance claims, primarily from 

policyholder premiums that otherwise would have been paid through 

taxpayer-funded disaster relief or borne by home and business owners 

themselves. According to FEMA, every $3 in flood insurance claims 

payments saves about $1 in disaster assistance payments, and the 

combination of flood plain management and mitigation efforts save about 

$1 billion in flood damage each year. 

The unprecedented damage wrought by Hurricanes Katrina and Rita are 

also likely to result in unprecedented claims on the NFIP. GAO is 

beginning a body of work on the preparation for, response to, and 

recovery from Hurricanes Katrina and Rita. As GAO moves forward with 

this work, we will continue to work with this and other congressional 

committees and the accountability community—federal inspector 

generals, state and city auditors—regarding the scope of our future work 

on emergency management issues, including the NFIP. Our goal is to apply 

our resources and expertise to address long-term concerns, such as those 

we are discussing today, and to avoid duplicating the work of others. 

Currently, we have teams in the Gulf Coast states collecting data and 

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

 2

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

4129. 

3

42 U.S.C. 4001(b)(2). 
Page 3 GAO-06-174T 

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

devastating hurricanes, including the flooding they caused. 

Past experience can provide context for considering future policy options. 

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

done over the past several years before the nation began the struggle to 

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

Gulf Coast states. This prior work has addressed the issues of the 

program’s structure and financing, repetitive loss properties, mandatory 

and voluntary purchase of flood insurance, and revising and improving the 

nation’s flood maps. Together they provide information useful in assessing 

efforts over the NFIP’s history to enhance the program’s financial stability 

and effectiveness. Today, we are also releasing a report on FEMA’s 

management and oversight of the flood insurance program that includes 

several recommendations for improvement.4

 This report was mandated by 

the Flood Insurance Reform Act of 2004.5

 It includes recommendations 

on two pre-Hurricane Katrina flood-insurance related issues that pose a 

challenge for FEMA. These are (1) improving FEMA’s management and 

oversight of the NFIP and (2) FEMA’s implementation of provisions of the 

Flood Insurance Reform Act of 2004 to provide policyholders a flood 

insurance claims handbook that meets statutory requirements, to establish 

a regulatory appeals process, and to ensure that flood insurance agents 

meet minimum NFIP education and training requirements. 

The report we are releasing today is based on interviews with FEMA 

officials, documentation of its monitoring and oversight processes, and 

our field observations of FEMA’s monitoring and oversight activities. In 

addition, we analyzed the National Flood Insurance Act of 1968, as 

amended, its legislative history, and FEMA’s implementing regulations, 

and we examined documentation and interviewed officials about FEMA’s 

efforts to comply with provisions of the 2004 Flood Insurance Reform Act. 

We did our work from December 2004 to August 2005 in accordance with 

generally accepted government auditing standards. 

 4

GAO, Federal Emergency Management Agency: Improvements Needed to Enhance 

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

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

5

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

118 Stat. 712, 727 (2004). 
Page 4 GAO-06-174T 

A key characteristic of the NFIP is the extent to which FEMA must rely on 

others to achieve the program’s goals. FEMA’s role is principally one of 

establishing policies and standards that others generally implement on a 

day-to-day basis and providing financial and management oversight of 

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

responsibilities include ensuring that property owners who are required to 

purchase flood insurance do so, enforcing flood plain management and 

building regulations, selling and servicing flood insurance policies, and 

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

have identified several major challenges facing the NFIP: 

• Reducing losses to the program resulting from policy subsidies and 

repetitive loss properties.

6

 The program is not actuarially sound 

because of the number of policies in force that are subsidized—about 29 

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

policyholders pay premiums that represent about 35-40 percent of the true 

risk premium. Moreover, at the time of our 2004 report, there were about 

49,000 repetitive loss properties—those with two or more losses of $1,000 

or more in a 10-year period—representing about 1 percent of the 4.4 

million buildings insured under the program. From 1978 until March 2004, 

these repetitive loss properties represented about $4.6 billion in claims 

payments. 

• Increasing property owner participation in the program. As little as 

half of eligible properties may participate in the flood insurance program. 

Moreover, the extent of noncompliance with the mandatory purchase 

requirement by affected property owners is unknown. 

• Developing accurate, digital flood maps.

7

 In our report on the NFIP’s 

flood map modernization program, we discussed the multiple uses and 

benefits of accurate, digitized flood plain maps. However, the NFIP faces a 

major challenge in working with its contractor and state and local partners 

of varying technical capabilities and resources to produce accurate, digital 

flood maps. In developing those maps, we recommended that FEMA 

develop and implement data standards that will enable FEMA, its 

 6

 GAO, Flood Insurance: Challenges Facing the National Flood Insurance 

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

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

March 25, 2004). 

7

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

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

Major Program 

Issues—A Summary 
Page 5 GAO-06-174T 

contractor, and its state and local partners to identify and use consistent 

data collection and analysis methods for developing maps for communities 

with similar flood risk. 

• Providing effective oversight of flood insurance operations. In the 

report we are releasing today, we note that FEMA faces a challenge in 

providing effective oversight of the 95 insurance companies and thousands 

of insurance agents and claims adjusters who are primarily responsible for 

the day-to-day process of selling and servicing flood insurance policies. 

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

and flood insurance claims with premiums collected on flood insurance 

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

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

subsidized insurance rates to be made available for policies covering some 

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

program does not collect sufficient premium income to build reserves to 

meet the long-term future expected flood losses.8

 FEMA has statutory 

authority to borrow funds from the Treasury to keep the NFIP solvent.9

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

keeping the NFIP on sound financial footing. It had exercised its authority 

to borrow from the Treasury three times in the last decade when losses 

were heavy and repaid all funds with interest. As of August 2005, the 

program had borrowed $300 million to cover an estimated $1.8 billion in 

claims from the major disasters of 2004, including hurricanes Charley, 

Frances, Ivan, and Jean, which hit Florida and other East and Gulf Coast 

states. The large number of claims arising from Hurricanes Katrina and 

Rita will require FEMA to borrow heavily from the Treasury, because the 

NFIP does not have the financial reserves necessary to offset heavy losses 

in the short-term. Following Hurricane Katrina in August 2005, legislation 

was enacted that increased FEMA’s borrowing authority from $1.5 billion 

to $3.5 billion through fiscal year 2008.10 Additional borrowing authority 

may be needed to pay claims arising from Hurricanes Katrina and Rita. 

 8

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

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

9

See 42 U.S.C. 4016. 

10The National Flood Insurance Program Enhanced Borrowing Authority Act of 2005, Pub. 

L. No. 109-65 (Sept. 20, 2005). 

The NFIP Pays 

Expenses and Claims 

with Premiums, but 

Its Financial Structure 

Is Not Designed to be 

Actuarially Sound 
Page 6 GAO-06-174T 

In reauthorizing the NFIP in 2004, Congress noted that “repetitive-loss 

properties”—those that had resulted in two or more flood insurance 

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

drain on the resources of the NFIP. 11 These repetitive loss properties are 

problematic not only because of their vulnerability to flooding but also 

because of the costs of repeatedly repairing flood damages. While these 

properties make up only about 1 percent of the properties insured under 

the NFIP, they account for 25 to 30 percent of all claims losses. At the time 

of our March 2004 report on repetitive loss properties, nearly half of all 

nationwide repetitive loss property insurance payments had been made in 

Louisiana, Texas, and Florida. According to a recent Congressional 

Research Service report, as of December 31, 2004, FEMA had identified 

11,706 “severe repetitive loss” properties defined as those with four or 

more claims or two or three losses that exceeded the insured value of the 

property.12 Of these 11,706 properties almost half (49 percent) were in 

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

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

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

driving force for improving the NFIP today, devastating natural disasters 

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

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

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

heavy flooding occurred on the upper Mississippi River. In studying 

insurance alternatives to disaster assistance for people suffering property 

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

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

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

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

premiums because these structures were built before the flood risk was 

known and identified on flood insurance rate maps.13 Owners of structures 

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

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

to pay full actuarial rates.14 Because many repetitive loss properties were 

 11Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 2(3),(4), (5), 118 Stat. 

712, 713 (2004). 

12Congressional Research Service, Federal Flood Insurance: The Repetitive Loss Problem, 

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

1342 U.S.C. 4014(a)(2), 4015(a), (b). 

1442 U.S.C. 4014(a)(1), 4015(c) 

Premium Subsidies and 

Repetitive-Loss Properties 

Affect NFIP’s Actuarial 

Soundness 
Page 7 GAO-06-174T 

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

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

premium rates under provisions of the National Flood Insurance Act of 

1968. 

The provision of subsidized premiums encouraged communities to 

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

community floodplain management regulations to reduce future flood 

damage. In April 2005, FEMA estimated that floodplain management 

regulations enforced by communities participating in the NFIP have 

prevented over $1.1 billion annually in flood damage. However, some of 

the properties that had received the initial rate subsidy are still in 

existence and subject to repetitive flood losses, thus placing a financial 

strain on the NFIP. 

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

number of repetitive loss properties in the NFIP. In a 2004 testimony, we 

noted that congressional proposals have been made to phase out coverage 

or begin charging full and actuarially based rates for repetitive loss 

property owners who refuse to accept FEMA’s offer to purchase or 

mitigate the effect of floods on these buildings.15 The 2004 Flood Insurance 

Reform Act created a 5-year pilot program to deal with repetitive-loss 

properties in the NFIP. In particular, the act authorized FEMA to provide 

financial assistance to participating states and communities to carry out 

mitigation activities or to purchase “severe repetitive loss properties.”16

During the pilot program, policyholders who refuse a mitigation or 

purchase offer that meets program requirements will be required to pay 

increased premium rates. In particular, the premium rates for these 

policyholders would increase by 150% following their refusal and another 

150% following future claims of more than $1,500.17 However, the rates 

charged cannot exceed the applicable actuarial rate. 

 15GAO, National Flood Insurance Program: Actions to Address Repetitive Loss 

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

16Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 102(b), (c), 118 Stat. 

712, 714 (2004). The act defines a “severe repetitive loss property” to mean single-family 

properties that have received at least $20,000 in flood insurance payments based on 4 or 

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

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

17Id., section 102(h)(1), (2), (3). 
Page 8 GAO-06-174T 

It will be important in future studies of the NFIP to continue to analyze 

data on progress being made to reduce the inventory of subsidized NFIP 

repetitive loss properties, how the reduction of this inventory contributes 

to the financial stability of the program, and whether additional FEMA 

regulatory steps or congressional actions could contribute to the financial 

solvency of the NFIP, while meeting commitments made by the 

authorizing legislation. 

In 1973 and 1994, Congress enacted requirements for mandatory purchase 

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

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

purchase of flood insurance was voluntary. However, because voluntary 

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

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

required the mandatory purchase of flood insurance to cover some 

structures in special flood hazard areas of communities participating in the 

program. Homeowners with mortgages issued by federally-regulated 

lenders on property in communities identified to be in special flood hazard 

areas are required to purchase flood insurance on their dwellings for the 

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

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

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

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

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

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

FEMA determines flood risk and actuarial ratings on properties through 

flood insurance rate mapping and other considerations including the 

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

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

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

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

are in zone with the highest expectation for flood loss. 

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

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

lenders and regulators did not appear to strongly enforce the mandatory 

Data Inconclusive on 

Compliance with 

Requirements for 

Mandatory Purchase 

of NFIP Policies 
Page 9 GAO-06-174T 

flood insurance purchase requirements.18 According to a recent 

Congressional Research Service study,19 the Midwest flood of 1993 

highlighted this problem and reinforced the idea that reforms were needed 

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

response, Congress passed the National Flood Insurance Reform Act of 

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

coverage, lenders were required to purchase flood insurance on their 

behalf and then bill the property owners. Lenders became subject to civil 

monetary penalties for not enforcing the mandatory purchase requirement. 

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

the mandatory purchase requirement was unknown. Officials involved 

with the flood insurance program developed contrasting viewpoints about 

whether lenders were complying with the flood insurance purchase 

requirements primarily because the officials used differing types of data to 

reach their conclusions. Federal bank regulators and lenders based their 

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

requirements on regulators’ examinations and reviews conducted to 

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

that many lenders frequently were not complying with the requirements, 

which was an opinion based largely on noncompliance estimates 

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

limited studies on compliance; and anecdotal evidence indicating that 

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

was able to substantiate its differing claims with statistically sound data 

that provide a nationwide perspective on lender compliance. 20

 18The federal entities for lending regulation are the Board of Governors of the Federal 

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

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

Administration, and the Farm Credit Administration. 

19Congressional Research Service, Federal Flood Insurance: The Repetitive Loss Problem 

(June 30, 2005). 

20GAO, Flood Insurance: Extent of Noncompliance with Purchase Requirements is 

Unknown, GAO-02-396 (Washington, D.C: June 21, 2002). 
Page 10 GAO-06-174T 

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

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

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

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

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

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

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

minimum building standards for new construction within the maps’ 

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

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

lenders to identify those property owners who are statutorily required to 

purchase federal flood insurance. Under the NFIP, property owners whose 

properties are within the designated “100-year floodplain” and have a 

mortgage from a federally regulated financial institution are required to 

purchase flood insurance in an amount equal to their outstanding 

mortgage balance (up to the statutory ceiling of $250,000). 

FEMA expects that by producing more accurate and accessible digital 

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

communities can use more accurate digital maps to reduce flood risk 

within floodplains by more effectively regulating development through 

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

the Internet will facilitate the identification of property owners who are 

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

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

and local officials to accurately locate infrastructure and transportation 

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

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

man-made. 

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

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

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

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

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

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

commensurate with communities’ relative flood risks. Not every 

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

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

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

communities of a similar risk level. In its November 2004 Multi-Year Flood 

Hazard Identification Plan, FEMA discussed the varying types of data 

Accurate, Updated 

Flood Maps Are The 

Foundation of the 

NFIP 
Page 11 GAO-06-174T 

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

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

3,146 counties. 

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

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

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

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

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

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

modernization. 

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

periodic operational reviews of the 95 private insurance companies that 

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

check the accuracy of claims settlements by doing quality assurance 

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

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

companies’ NFIP underwriting and claims settlement processes and 

internal controls, including checking a sample of claims and underwriting 

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

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

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

conducting quality assurance reinspections of a sample of claims 

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

whether an insurer allowed an uncovered expense, or missed a covered 

expense in the original adjustment. 

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

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

identifying and resolving specific problems that may occur in individual 

insurance companies’ processes for selling and renewing NFIP policies 

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

number of operational reviews completed between 2000 and August 2005 

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

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

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

reviews and quality assurance reinspections of claims adjustments met our 

internal control standard for monitoring federal programs. 

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

operational reviews and the process its program contractor used to select 

Monitoring and 

Oversight of NFIP 

Identifies Specific 

Problems, but Does 

Not Provide 

Comprehensive 

Information on 

Overall Program 

Performance 
Page 12 GAO-06-174T 

a sample of adjustments for reinspections were not randomly chosen or 

statistically representative of all claims. We found that the selection 

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

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

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

the results of these monitoring and oversight activities to determine the 

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

overall performance of insurance companies and their adjusters in 

fulfilling their responsibilities for the NFIP—actions necessary for FEMA 

to meet our internal control standard that it have reasonable assurance 

that program objectives are being achieved and that its operations are 

effective and efficient. 

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

we are recommending in today’s report that FEMA use a methodologically 

valid approach for sampling files selected for operational reviews and 

quality assurance claims reinspections. 

As of September 2005, FEMA had not yet fully implemented provisions of 

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

requires FEMA to provide policyholders a flood insurance claims 

handbook; to establish a regulatory appeals process for claimants; and to 

establish minimum education and training requirements for insurance 

agents who sell NFIP policies.21 The 6-month statutory deadline for 

implementing these changes was December 30, 2004. 

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

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

appealing a claim through an informal appeals process, which FEMA 

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

However, because the handbook does not contain information regarding 

the appeals process that FEMA is statutorily required to establish through 

regulation, it does not yet meet statutory requirements. With respect to 

this appeals process, FEMA has not stated how long rulemaking might 

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

work, such as filing requirements, time frames for considering appeals, 

and the composition of an appeals board. Therefore, it remains unclear 

how or when FEMA will establish the statutorily required appeals process. 

 21Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, sections 204, 205, and 207. 

FEMA Has Not Fully 

Implemented NFIP 

Program Changes 

Mandated by the 

Flood Insurance 

Reform Act of 2004 
Page 13 GAO-06-174T 

With respect to minimum training and education requirements for 

insurance agents who sell NFIP policies, FEMA published a Federal 

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

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

establish separate and perhaps duplicative requirements from those that 

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

to implement the NFIP requirements through already established state 

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

when states were to begin implementing the NFIP training and education 

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

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

because changes to the program could have broad reaching and significant 

effects on policyholders and private-sector stakeholders upon whom 

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

approach to addressing the changes mandated by Congress. Nonetheless, 

without plans with milestones for completing its efforts to address the 

provisions of the act, FEMA cannot hold responsible officials accountable 

or ensure that statutorily required improvements are in place to assist 

victims of future flood events. 

We are recommending in today’s report that FEMA developed documented 

plans with milestones for implementing requirements of the Flood 

Insurance Reform Act of 2004 to provide policyholders a flood insurance 

claims handbook that meets statutory requirements, to establish a 

regulatory appeals process, and to ensure that flood insurance agents meet 

minimum NFIP education and training requirements. 

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

sampling methodology of selecting a sample based on knowledge of the 

population to be sampled was more appropriate for identifying problems 

than the statistically random probability sample we recommended. 

Although FEMA’s current nonprobability sampling strategy may provide 

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

management with the information needed to assess the overall 

performance of private insurance companies and adjusters participating in 

the program—information that FEMA needs to have reasonable assurance 

that program objectives are being achieved. 

FEMA also disagreed with our characterization of the extent to which 

FEMA has met provisions of the Flood Insurance Reform Act of 2004. We 

believe that our description of those efforts and our recommendations 

with regard to implementing the Act’s provisions are valid. For example, 

although FEMA commented that it was offering claimants an informal 
Page 14 GAO-06-174T 

appeals process in its flood insurance claims handbook, it must establish 

regulations for this process, and those are not yet complete. 

The most immediate challenge for the NFIP is processing the flood 

insurance claims resulting from Hurricanes Katrina and Rita. Already, 

according to FEMA, the NFIP has received about twice as many claims in 

2005 as it did in all of 2004, which was itself a record year. The need for 

effective communication and consistent and appropriate application of 

policy provisions will be particularly important in working with anxious 

policyholders, many of whom have been displaced from their homes. 

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

assessing potential changes to the program that would improve its 

financial stability, increase participation in the program by property 

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

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

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

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

reduce voluntary participation in the program or encourage those who are 

required to purchase flood insurance to limit their coverage to the 

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

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

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

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

and analysis and the cooperation and participation of many stakeholders. 

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

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

Committee Members may have. 

Contact points for our Office of Congressional Relations and Public Affairs 

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

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

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

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

Christopher Keisling. Key contributors were Amy Bernstein, 

Christine Davis, Deborah Knorr, Denise McCabe, and Margaret Vo. 

Concluding 

Observations 

GAO Contacts and 

Staff 

Acknowledgments 

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