Chairman, Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, U.S. House of 

Representatives 

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 10:00 a.m. EST 

Thursday, October 20, 2005 FEDERAL EMERGENCY 

MANAGEMENT AGENCY 

Oversight and Management 

of the National Flood 

Insurance Program 

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

Security and Justice Issues 

GAO-06-183T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-183T.

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-06-183T, a testimony 

before the Subcommittee on Housing and 

Community Opportunity, Committee on 

Financial Services, U.S. House of 

Representatives 

October 2005

FEDERAL EMERGENCY MANAGEMENT 

AGENCY 

Oversight and Management of the 

National Flood Insurance Program 

The amount of insurance coverage available to homeowners under the NFIP 

is limited by requirements set forth in statute and FEMA’s implementing 

regulations, which include FEMA’s standard flood insurance policy. As a 

result of these limitations, insurance payments to claimants for flood 

damage may not cover all of the costs of repairing or replacing flooddamaged property. For example, homes that could sustain more than 

$250,000 in damage cannot be insured to their full replacement cost, thus 

limiting claims to this statutory ceiling. In addition, NFIP policies cover only 

direct physical loss by or from flood. Therefore, losses resulting primarily 

from a preexisting structural weakness in a home, or losses resulting from 

events other than flood such as windstorms, are not covered by NFIP 

policies. 

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, and 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. FEMA did not use a 

statistically valid method for sampling files to be reviewed in these 

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 provide policyholders with a 

flood insurance claims handbook that meets statutory requirements, to 

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

meet minimum education and training requirements. The statutory deadline 

for implementing these changes was December 30, 2004. Efforts to 

implement the provisions are under way, but have not yet been completed. 

FEMA has not developed plans with milestones for assigning accountability 

and projecting when program improvements will be made, so that 

improvements are in place to assist victims of future flood events. 

As GAO has previously 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 major 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. 

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. 

GAO issued a report earlier this 

week that was mandated by the 

Flood Insurance Reform Act of 

2004. This testimony discusses 

findings and recommendations 

from that report and information 

from past GAO work. Specifically, 

the testimony discusses (1) the 

statutory and regulatory limitations 

on coverage for homeowners under 

the NFIP; (2) FEMA’s role in 

monitoring and overseeing the 

NFIP; (3) the status of FEMA’s 

implementation of provisions of the 

Flood Insurance Reform Act of 

2004. It also offers observations on 

broader issues facing the NFIP 

including its financial structure and 

updating flood maps. 

What GAO Recommends

GAO recommended that FEMA use 

a statistically valid method to 

select claims for review and 

establish milestones for meeting 

provisions of the Flood Insurance 

Reform Act. FEMA expressed 

concerns about findings related to 

its management. 
Page 1 GAO-06-183T National Flood Insurance Program 

Mr. Chairman and Members of the Subcommittee: 

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

National Flood Insurance Program (NFIP) to discuss the Federal 

Emergency Management Agency’s (FEMA) role in the management and 

oversight of the NFIP. The NFIP combines property insurance for flood 

victims, mapping to identify the boundaries of the areas at 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 are 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 

flood risks, private insurance companies have largely been unwilling to 

underwrite and bear the risk of flood insurance. 

 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-06-183T National Flood Insurance Program 

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. Flood insurance is available to owners and 

occupants of insurable property in flood-prone areas. Our work focused 

on insurance coverage for homeowners. However, coverage is also 

available for other structures, such as apartment buildings, schools, 

churches, businesses, cooperative associations, and condominium 

associations. 

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

million policyholders in about 20,000 communities with $828 billion of 

insurance in force. 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 saves about $1 billion in flood damage each year. 

As we finalized the report released this week, the exact extent of the 

devastation from Hurricanes Katrina and Rita in August and September 

2005 was still being assessed; however, the acting director of FEMA’s 

Mitigation Division testified on October 18, 2005 that the NFIP would pay 

$15 to 25 billion in claims for damage resulting from these two storms. As 

of October 13, 2005, FEMA had received 192,809 flood insurance claims 

and the NFIP had paid nearly $1.3 billion to settle 7,664 of these claims. 

The number of claims filed is more than twice as many as were filed in all 

of 2004, itself a record year. Clearly, these two disasters will challenge the 

NFIP with demands the program has never before faced in its more than 

35 year history. Already, a record number of flood insurance claims have 

 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-06-183T National Flood Insurance Program 

been filed in 2005, and Congress has increased the NFIP’s authority to 

borrow from the United States Treasury from $1.5 billion to $3.5 billion. 

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 

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

devastating hurricanes, including the flooding they caused. 

My testimony today discusses the report we issued on October 18, 2005 

that discusses FEMA’s management and oversight of the flood insurance 

program.4

 This report was mandated by the Flood Insurance Reform Act of 

2004.5

 It includes recommendations on two pre-Hurricane Katrina floodinsurance 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 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 

 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-06-183T National Flood Insurance Program 

2004 to August 2005 in accordance with generally accepted government 

auditing standards. 

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. We have issued reports 

and testified before this and other congressional committees on these and 

other issues related to the program.6

 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. 

My testimony today addresses four topics: 

• insurance coverage available under the NFIP, including coverage 

limitations; 

• FEMA’s role in monitoring and oversight of the program; 

• FEMA’s progress in implementing the requirements of the National 

Flood Insurance Reform Act of 2004; and 

• Some broader challenges facing the program. 

 6

See, for example, the following GAO reports and testimonies: Flood Insurance: Extent of 

Noncompliance with Purchase Requirements Unknown, GAO-02-326 (Washington, D.C.: 

June 21, 2002); National Flood Insurance Program: Actions to Address Repetitive Loss 

Properties, GAO-04-401T (Washington, D.C.: March 25, 2004); Flood Map Modernization: 

Program Strategy Shows Promise, but Challenges Remain, GAO-04-117 (Washington, 

D.C.: March 31, 2004); Federal Emergency Management Agency: Challenges Facing the 

National Flood Insurance Program, GAO-06-174T (Washington, D.C.: Oct. 18, 2005). 
Page 5 GAO-06-183T National Flood Insurance Program 

The amount of insurance coverage available to homeowners under the 

NFIP is limited by requirements set forth in statute and regulation. As a 

result of these limitations, insurance payments to claimants for flood 

damage may not cover all the costs of repairing or replacing flooddamaged property. For example, there is a $250,000 statutory ceiling on 

the amount of flood insurance homeowners can purchase for the building 

structure and a $100,000 ceiling on the amount they can purchase for 

certain personal property. Thus, homes that might sustain more than 

$250,000 in damage cannot be insured to their full replacement cost. 

In addition, to the statutory limitations on coverage amounts, Congress 

also gave FEMA broad authority to issue regulations establishing “the 

general terms and conditions of insurability,” 7

 including the classes, types, 

and locations of properties that are eligible for flood insurance; the nature 

and limits of loss that may be covered, the classification, limitation, and 

rejection of any risks that FEMA considers advisable; and the amount of 

appropriate loss deductibles. Pursuant to this delegation of authority, 

FEMA has issued regulations, including a “Standard Flood Insurance 

Policy,” that further delineate the scope of coverage.8

 All flood insurance 

made available under the NFIP is subject to the express terms and 

conditions of the statute and regulations, including the standard policy.9

The Federal Insurance Administrator within FEMA is charged with 

interpreting the scope of coverage under the standard policy.10

In addition, NFIP policies cover only direct physical loss by or from flood. 

Therefore, losses resulting primarily from a preexisting structural 

weakness in a home or prior water damage, and losses resulting from 

events other than flood, such as windstorms or or earth movements, are 

not covered by the NFIP. Personal property is covered, with certain 

limitations, only if the homeowner has purchased separate NFIP personal 

property insurance in addition to coverage for the building. Finally, the 

method of settling losses affects the amount recovered. For example, 

homes that qualify only for an actual cash value settlement—which 

 7

42 U.S.C. 4013(a). 

8

The insurance coverage regulations appear at 44 C.F.R. Part 61, and the Standard Flood 

Insurance Policy is an appendix to these regulations, set forth at 44 C.F.C. Part 61, 

appendix A(1), “Standard Flood Insurance Policy Dwelling Form.” 

9

44 C.F.R. 61.4. 

10Id. 61.4(b), 61.14. 

Available Insurance 

Coverage and 

Limitations Under the 

NFIP 
Page 6 GAO-06-183T National Flood Insurance Program 

represents the cost to replace damages property, less the value of physical 

depreciation—would presumably receive payments that are less than 

homes that qualify for a replacement cost settlement, which does not 

deduct for depreciation. Finally, the amount recoverable under the SFIP is 

limited to the amount that exceeds the applicable deductible.11 Our report 

discusses the limitations on coverage and recoverable losses in greater 

detail. 

About 40 FEMA employees, assisted by about 170 contractor employees, 

are responsible for managing the NFIP. Management responsibilities 

include establishing and updating NFIP regulations, administering the 

National Flood Insurance Fund, analyzing data to actuarially determine 

flood insurance rates and premiums, and offering training to insurance 

agents and adjusters. In addition, FEMA and its program contractor are 

responsible for monitoring and overseeing the quality of the performance 

of the write-your-own companies to assure that the NFIP is administered 

properly. 

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. 

Operational reviews of flood insurance companies participating in the 

NFIP that are conducted by FEMA staff are FEMA’s primary internal 

 11SFIP section VI, Deductibles. Applicable deductible amounts are not listed in the SFIP 

itself, but are shown on the Declarations Page, a computer-generated summary of the 

information provided by the insured in the insured’s application. This page is part of each 

insured’s flood insurance policy. 

Monitoring and 

Oversight of NFIP 

Identifies Specific 

Problems, but Does 

Not Provide 

Comprehensive 

Information on 

Overall Program 

Performance 
Page 7 GAO-06-183T National Flood Insurance Program 

control mechanism for monitoring, identifying, and resolving problems 

related to how insurers sell and review NFIP policies and adjust claims. 

For all aspects of operational reviews, the examiners are to determine 

whether files are maintained in good order, whether current forms are 

used and whether staff has a proficient knowledge of requirements and 

procedures to properly underwrite and process flood claims. Examiners 

are also to look at internal controls in place at each company. When 

problems are identified, examiners are to classify the severity of the 

errors. Each file reviewed is to be classified as satisfactory or 

unsatisfactory. Unsatisfactory files contain either a critical error (e.g., a 

violation of policy or an incorrect payment) or three non-critical errors 

(e.g., violations of procedures that did not delay actions or claims). 

Write-your-own companies with error rates of 20 percent or higher of the 

total number of files reviewed for the specific underwriting or claims 

operation review would always receive an unsatisfactory designation. In 

such cases, FEMA requires that the company develop an action plan to 

correct the problems identified and is to schedule a follow-up review in 6 

months to determine whether progress has been made. 

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. 

In addition to operational reviews done by FEMA staff, FEMA’s program 

contractor conducts quality assurance reinspections of claims for specific 

flood events. The program contractor employs nine general adjusters who 

conduct quality assurance reinspections of a sample of open claims for 

each flood event.12 Procedures for the general adjusters to follow are 

 12In addition to doing reinspections, these general adjusters are responsible for estimating 

damage from flood events, coordinating claims adjustment activities at disaster locations, 

and conducting adjuster training. 

Program Contractor 

Reinspections of NFIP 

Claims 
Page 8 GAO-06-183T National Flood Insurance Program 

outlined in FEMA’s Write Your Own Financial Control Plan. According to 

the general adjusters we interviewed, in addition to preparing written 

reports of each reinspection, general adjusters discuss the results of the 

reinspections they perform with officials of write-your-own companies 

that process the claims. If a general adjuster determines that the insurance 

company allowed an expense that should not have been covered, the 

company is to reimburse the NFIP. Conversely, if a general adjuster finds 

that the private-sector adjuster missed a covered expenses in the original 

adjustment, the general adjuster is to take steps to provide additional 

payment to the policyholder. 

An instructor at an adjuster refresher training session, while observing 

that adjusters had performed very well overall during the 2004 hurricane 

season, cited several errors that he had identified in reinspections of 

claims, including improper room dimension measurements and improper 

allocation of costs caused by wind damage (covered by homeowners’ 

policies) versus costs caused by flood damage. In addition, the instructor 

identified as a problem poor communication with homeowners on the 

processes followed to inspect the homeowner’s property and settle the 

claim. Overall error rates for write-your-own companies are monitored. 

Procedures require additional monitoring, training, or other action if error 

rates exceed 3 percent. According to the general adjusters we interviewed 

and FEMA’s program contractor, qualify assurance reinspections are 

forwarded from general adjusters to the program contractor where results 

of reinspections are to be aggregated in a reinspection database as a 

method of providing for broad-based oversight of the NFIP as its services 

are delivered by the write-your-own companies, adjusting firms and 

independent flood adjusters. 

The process FEMA used to select a sample of claims files for operational 

reviews and the process its program contractor used to select 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 

Sampling Methods Used to 

Conduct Operational 

Reviews and Quality 

Assurance Reinspections 

Do Not Provide 

Management Information 

On Overall Performance 
Page 9 GAO-06-183T National Flood Insurance 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.13 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. 

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 

 13Flood 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 10 GAO-06-183T National Flood Insurance Program 

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 develop 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 for both its sampling 

methodology and implementation of the requirements of the Flood 

Insurance Reform Act of 2004. 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 

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

regulations for this process, and those are not yet complete. 
Page 11 GAO-06-183T National Flood Insurance Program 

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.14 FEMA has statutory 

authority to borrow funds from the Treasury to keep the NFIP solvent.15

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 more than $1.8 billion in 

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

Frances, Ivan, and Jeanne, 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 2008.16 Additional borrowing authority 

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

 14GAO, Flood Insurance: Information on the Financial Condition of the National Flood 

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

15See 42 U.S.C. 4016. 

16The National Flood Insurance Program Enhanced Borrowing Authority Act of 2005, Pub. 

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

Some Broader Issues 

Facing the NFIP 

The NFIP Pays Expenses 

and Claims with 

Premiums, but Its 

Financial Structure Is Not 

Designed to be Actuarially 

Sound 
Page 12 GAO-06-183T National Flood Insurance Program 

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. 17 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.18 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.19 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.20 Because many repetitive loss properties were 

 17Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 2(3),(4), (5), 118 Stat. 

712, 713 (2004). 

18Congressional Research Service, Federal Flood Insurance: The Repetitive Loss Problem, 

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

1942 U.S.C. 4014(a)(2), 4015(a), (b). 

2042 U.S.C. 4014(a)(1), 4015(c). 

Some Repetitively-Flooded 

Properties Are Subsidized 

under Provisions of 

Authorizing Legislation 

and Continue to 

Financially Strain the 

Program 
Page 13 GAO-06-183T National Flood Insurance Program 

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.21 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.”22

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 

 21GAO, National Flood Insurance Program: Actions to Address Repetitive Loss 

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

22Flood Insurance Reform Act of 2004, 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.” 
Page 14 GAO-06-183T National Flood Insurance Program 

150% following future claims of more than $1,500.23 However, the rates 

charged cannot exceed the applicable actuarial rate.24

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 from 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 

 23Id., , 118 Stat. 712, 717-718 (2004). 

24DHS’ proposed appropriation for fiscal year 2006 includes $40 million to carry out the 

pilot program. Both houses of Congress passed the bill, and it was presented to the 

President on October 14, 2005, but, as of October 17, 2005, the President had not signed the 

legislation. Department of Homeland Security Appropriations Act, 2006, H.R. 2360, 109th 

Cong., title III (2005). 

Data Inconclusive on 

Compliance with 

Requirements for 

Mandatory Purchase of 

NFIP Policies 
Page 15 GAO-06-183T National Flood Insurance Program 

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 zones 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 

flood insurance purchase requirements.25 According to a recent 

Congressional Research Service study,26 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, 

 25The 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. 

26Congressional Research Service, Federal Flood Insurance: The Repetitive Loss Problem 

(June 30, 2005). 
Page 16 GAO-06-183T National Flood Insurance Program 

was able to substantiate its differing claims with statistically sound data 

that provide a nationwide perspective on lender compliance. 27

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 

 27GAO, Flood Insurance: Extent of Noncompliance with Purchase Requirements is 

Unknown, GAO-02-396 (Washington, D.C: June 21, 2002). 

Accurate, Updated Flood 

Maps Are The Foundation 

of the NFIP 
Page 17 GAO-06-183T National Flood Insurance Program 

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 

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. 

The most immediate challenge for the NFIP is processing the flood 

insurance claims resulting from Hurricanes Katrina and Rita. FEMA 

reported, as of October 13th, that it had received 192,809 flood insurance 

claims and had paid nearly $1.3 billion to settle 7,664 of these claims. The 

number of claims is more than twice as many as were filed in all of 2004, 

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 

Concluding 

Observations 
Page 18 GAO-06-183T National Flood Insurance Program 

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. 

GAO Contacts and 

Staff 

Acknowledgments 

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