NOVEMBER 2009

The National Flood 

Insurance Program: 

Factors Affecting 

Actuarial Soundness

CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

P A P E R

CBO
Pub. No. 4008
The Congress of the United States O Congressional Budget Office

A

PAPER

CBO

The National Flood Insurance Program: 

Factors Affecting Actuarial Soundness

November 2009
CBO

Note

The cover photograph shows a home in Bird Island, Florida, threatened by flooding from 

Tropical Storm Fay in August 2008. (Federal Emergency Management Agency/Barry Bahler)
Preface

CBO

The vast majority of homes and small commercial buildings that are insured against flood 

damage in the United States are covered by the National Flood Insurance Program (NFIP), 

which is administered by the Federal Emergency Management Agency (FEMA) in the 

Department of Homeland Security. Although the flood insurance program had been largely 

self-sustaining in the past, it had to borrow about $17 billion from the federal Treasury to pay 

claims after the catastrophic hurricanes of 2005. That borrowing has highlighted questions 

about the program’s financial health, including the actuarial soundness of the premium rates 

charged on policies that are not explicitly subsidized and the cost of paying claims for properties that have suffered multiple flood losses.

This Congressional Budget Office (CBO) paper—prepared at the request of the Ranking 

Member of the Senate Committee on Banking, Housing, and Urban Affairs—explains how 

FEMA sets “full-risk” (actuarially based) premium rates for the flood insurance program. The 

paper then discusses various reasons for concern that those rates may not be adequate to cover 

the total expected costs associated with the program’s full-risk policies. The report also 

addresses other aspects of the NFIP, including the impact of insured properties that have 

flooded more than once and the U.S. market for flood insurance from private companies. In 

keeping with CBO’s mandate to provide objective, impartial analysis, this report makes no 

recommendations.

Perry Beider of CBO’s Microeconomic Studies Division wrote the paper, under the guidance 

of Joseph Kile and David Moore, with contributions from Craig Cammarata (formerly of 

CBO), Robert Shackleton, and David Torregrosa. Thomas Hayes and many other staff members at FEMA provided most of the information and data on which this analysis is based. 

Bruce Bender of Bender Consulting Services provided helpful information about private companies that offer flood insurance. Kim Cawley, Robert Dennis, Daniel Hoople, Jeffrey Kling, 

and Allison Percy of CBO offered useful comments on various drafts of the paper, as did 

Kevin Bingham of Deloitte Consulting, Gerald E. Galloway of the University of Maryland, 

and Howard C. Kunreuther of the University of Pennsylvania. (The assistance of outside 

participants implies no responsibility for the final product, which rests solely with CBO.)
Chris Howlett edited the manuscript, and Leah Mazade proofread it. Judith Cromwell prepared early drafts. Maureen Costantino prepared the report for publication and produced the 

cover. Lenny Skutnik produced the printed copies, Linda Schimmel coordinated the print 

distribution, and Simone Thomas prepared the electronic version for CBO’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf

Director

November 2009
Contents

CBO

Introduction and Summary 1

Actuarially Sound Versus Subsidized Premium Rates 3

Subsidies in the NFIP 3

The Meaning of “Actuarial Soundness” 6

An Overview of the NFIP’s Full-Risk Rates 7

Geographic Zones 7

Estimating Expected Losses 9

Translating Expected Losses into Premium Rates 10

Premiums Versus Claims Over Time 12

Issues Regarding the Soundness of the NFIP’s Full-Risk Rates 13

Outdated Flood Maps 14

Climate Change 17

Options to Address Concerns About the NFIP’s Full-Risk Rates 20

NFIP Properties That Have Experienced Multiple Floods 21

The Number and Effects of Repetitive-Loss Properties 21

FEMA’s Treatment of Repetitive-Loss Properties 24

Appendix A: Further Details About the NFIP’s Full-Risk Rates 29

Appendix B: Residual Risk Behind Levees and Other Cross-Subsidized Risks 35

Appendix C: The Heinz Center’s Study of Erosion Risks 39

Selected Bibliography 43
VI THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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Tables

1. The NFIP’s Experience with Full-Risk Policies, by Risk Zone 12

2. Statistics on Insured Properties with Multiple Flood Claims 24

3. Average Annual Premiums, by Risk Zone, for All Properties and for 

Multiple-Loss Properties 25

A-1. Distribution of Full-Risk Flood Insurance Policies by Zone 30

C-1. Illustrative Rate Increases to Price Erosion Risks 41

Figures

1. The NFIP’s Net Profit or Loss on Insurance Operations, 1978 to 2007 2

2. Currently Insured Repetitive-Loss Properties, by Number of Claims Paid 23

3. Growth in the Number of Repetitive-Loss Properties and Total NFIP 

Policies Since 2000 26

4. Annual Changes in the Number of Insured Repetitive-Loss Properties 27

Boxes

1. Other Flood-Related Federal Programs 4

2. Flood Insurance from Private Companies 8

3. Questions for Further Research on the Demand for Flood Insurance 22
CBO

The National Flood 

Insurance Program: 

Factors Affecting Actuarial Soundness

Introduction and Summary

The main source of insurance against flood damage in the 

United States is the National Flood Insurance Program 

(NFIP), administered by the Federal Emergency Management Agency (FEMA). Some 21,000 communities, covering about 98 percent of the U.S. population, participate in the program. Almost all buildings in participating 

communities are eligible to be insured through the NFIP, 

except for structures that are built entirely over water or 

largely below ground. Certain buildings, such as those 

with a mortgage from a federally regulated lender, must 

be insured if they are located in areas at high risk of flooding, though compliance with that requirement is incomplete. In all, the NFIP had 5.6 million policies in force as 

of July 31, 2009, with a total insured value of $1.2 trillion and total annual premiums of $3.1 billion.1

The program encompasses three main activities: 

B Offering insurance for flood risks—coverage is available in amounts up to $350,000 for residential properties ($250,000 for the structure and $100,000 for 

the contents) and up to $1 million for nonresidential 

properties ($500,000 each for the structure and 

contents); 

B Mapping flood hazards—for each participating community, FEMA creates a flood insurance rate map that 

documents areas at risk of flooding; and 

B Setting minimum requirements for building codes 

and floodplain management practices in participating 

communities. 

Together, those components of the NFIP address the 

interrelated goals of reducing exposure to flood damage, 

allowing floodplains to play their natural beneficial roles, 

making it easier for flood victims to recover when damage 

occurs, and reducing federal costs (by charging premiums 

for flood insurance rather than providing disaster aid after 

a flood at no charge to the recipients).

Most NFIP policies are issued at “full-risk” premium rates 

that FEMA considers actuarially sound—that is, sufficient on average to cover the total flood claims and 

administrative costs for those policies based on the 

agency’s maps and its estimates of the frequency of different size floods. However, for more than 1 million policies—about one-fifth of the total—premium rates are 

explicitly subsidized. Those policies mainly cover older 

structures in areas at high risk of flooding.

The subsidized policies give the NFIP a built-in actuarial 

deficit, which the Congressional Budget Office (CBO) 

currently estimates at about $1.3 billion per year. That 

actuarial deficit was somewhat obscured for many years 

by the program’s operating results. In 2005, however, the 

NFIP experienced an unprecedented volume of claims 

resulting from Hurricanes Katrina, Rita, and Wilma. 

Total payments on those claims were greater than the 

total for all of the program’s previous years combined and 

1. Figures are from Federal Emergency Management Agency, Community Status Book Report: Nation (October 14, 2009), available at 

www.fema.gov/cis/nation.pdf; personal communication from Dan 

R. Spafford of FEMA, June 19, 2007; and Bureau Net, National 

Flood Insurance Program, “Policy Statistics Countrywide as of 

July 31, 2009,” available at http://bsa.nfipstat.com/reports/

1011.htm.
2 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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Figure 1.

The NFIP’s Net Profit or Loss on Insurance Operations, 1978 to 2007

(Billions of nominal dollars)

Source: Congressional Budget Office based on Thomas L. Hayes and D. Andrew Neal, Actuarial Rate Review: In Support of the Recommended May 1, 2009, Rate and Rule Changes (Federal Emergency Management Agency, National Flood Insurance Program, August 

2009), Exhibit B1, available at www.fema.gov/library/viewRecord.do?id=3742.

Notes: NFIP = National Flood Insurance Program. 

These data exclude the federal policy fee paid by policyholders and the expenses covered by the fee. The data also exclude about 

$1.5 billion in payments for principal and interest on the program’s debt since 2005.

led the NFIP to borrow about $17 billion from the Treasury, an amount roughly equal to the program’s net loss 

on insurance operations for that year (see Figure 1).

The 2005 loss highlighted a number of factual and policy 

questions about the NFIP’s financial position. This CBO 

paper addresses two sets of factual questions.

First, does evidence suggest that the program’s full-risk premium rates are actuarially sound, or does it suggest that those 

rates implicitly carry hidden subsidies from taxpayers?

Historically, the NFIP’s full-risk premiums have been too 

low to cover the flood claims and administrative costs of 

the policies insured at those rates. Even before the 2005 

hurricanes, the program’s total claims and expenses on 

full-risk policies since 1978 exceeded its total premium 

income from those policies by about 5 percent. Taking 

into account the large 2005 losses, cumulative costs on 

those policies are almost twice the size of total income 

from the policies. That experience does not directly imply 

that current premium rates are too low, however, because 

rates have risen over time and because the frequency of 

future catastrophic years like 2005 is highly uncertain. In 

part because of that uncertainty, CBO does not have 

enough information about the current distribution of 

flood risks to calculate whether the present full-risk 

premiums are actuarially adequate.

Analyzing the methods that FEMA uses to set the fullrisk rates does not yield definitive answers either. Some 

aspects of those methods tend to contribute to an actuarial surplus—the primary one being the additional 10 percent that FEMA includes in the rates in high-risk areas 

(20 percent in some high-risk coastal areas) as a safety 

margin for uncertainty. Other aspects of the agency’s ratesetting methods tend to contribute to an actuarial deficit. 

FEMA is not reviewing its flood maps every five years as 

required by law, and some older maps do not reflect significant changes in local conditions that tend to increase 

the risk of flooding, such as coastal erosion, increases in 

sea level, land development, and reductions in the capacity of river channels. In addition, evidence suggests that 

climate change has increased the risk of flooding from 

rivers and perhaps also from coastal storms, making 

FEMA’s models of flood frequencies out of date. Those 

issues may warrant attention regardless of the overall 

adequacy of the program’s full-risk rates.

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 3

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Second, to what extent are the NFIP’s losses attributable to 

properties that have experienced multiple floods? How is 

FEMA responding to the risks posed by such properties?

Currently insured repetitive-loss properties (RLPs)—

defined by FEMA as properties that have been the subject 

of two or more flood-claims payments greater than 

$1,000 apiece in any 10-year period—account for 2 percent of current policies and 3 percent of current premiums but about 12 percent of total claims since 1978. 

More than half of the roughly 71,000 RLPs that are now 

insured have had only two losses leading to such payments, and their experience may reflect random chance 

rather than truly above-average risks. However, about 

23,000 RLPs nationwide have been the subject of at least 

four claims payments while insured, and 10,000 of those 

properties have prompted six or more payments.

FEMA’s approach to reducing the cost of repetitive-loss 

properties focuses more on taking steps to mitigate the 

worst flood risks—such as elevating, relocating, floodproofing, or demolishing properties—than on charging 

higher premiums for flood insurance. Indeed, more than 

half of the policies covering RLPs in high-risk areas have 

rates that are explicitly subsidized. Policies covering RLPs 

in low- to moderate-risk areas do have higher average premiums than non-RLPs in those areas (because they are 

ineligible for the lower-priced “preferred-risk policy” rates 

that FEMA charges on most policies in those areas). Even 

those higher average rates, however, are not based directly 

on the claims experience of individual properties or of 

repetitive-loss properties as a whole.

Actuarially Sound Versus Subsidized 

Premium Rates

When lawmakers created the NFIP, they faced a trade-off 

in deciding whether the premiums charged for flood 

insurance should be actuarially sound—that is, high 

enough to cover the full expected value (the average of all 

possible outcomes, weighted by their probabilities) of 

flood claims and administrative expenses for the insured 

properties—or subsidized. Premiums that were actuarially sound would be unattractively high for many properties that were built before the extent of their flood risk 

was documented, especially for properties that face 

repeated flooding. High premiums for such properties 

might discourage communities from joining the NFIP. 

Conversely, subsidized premiums would produce a cumulative deficit for the NFIP, meaning that the program 

would not be self-sustaining. Lower premiums could 

encourage more property owners to buy flood insurance 

and thus help reduce federal spending on disaster aid 

after floods. But total federal costs related to floods could 

increase if the NFIP’s cumulative deficit exceeded the savings on disaster aid. (For more information about other 

federal programs related to flood prevention or recovery, 

see Box 1.)

Subsidies in the NFIP

The decision that lawmakers incorporated into the 

NFIP’s founding legislation, the National Flood Insurance Act of 1968, was to subsidize the premiums charged 

for policies covering certain structures in high-risk flood 

areas. (Subsidized rates also apply to policies covering 

only the contents of those structures.) Program designers 

expected that the subsidized structures would be replaced 

over time as they became damaged or aged past their useful life. The proportion of policies that are subsidized has 

indeed gradually declined, but it is still about one-fifth.2

More than 90 percent of those policies are for structures 

that were built before their community’s flood insurance 

rate map (FIRM) was created or before 1975, whichever 

is later.3

 Such properties remain eligible for the so-called 

pre-FIRM subsidy if they are bought or sold, but they 

lose that eligibility if they experience flood damage worth 

at least 50 percent of their value or if improvements are 

made that increase their value by 50 percent or more. 

2. Thomas L. Hayes and Dan R. Spafford, Actuarial Rate Review: In 

Support of the May 1, 2008, Rate and Rule Changes (Federal Emergency Management Agency, National Flood Insurance Program, 

August 2008), p. 34, available at www.fema.gov/library/ 

viewRecord.do?id=3430.

3. About 8 percent of subsidized policies cover properties in four 

other categories: properties in communities for which flood maps 

have not yet been completed; properties subject to coastal flooding that were built between 1975 and 1981, when FEMA incorporated new information about wave heights and revised its newconstruction standards; properties that will have flood protection 

when a structural project such as a levee is completed, provided 

that the project is currently at least 50 percent complete; and 

properties in areas that are protected by flood-control structures 

that FEMA now deems insufficient, provided that there is a repair 

or upgrade plan in place that meets specific standards.
4 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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Continued

Box 1.

Other Flood-Related Federal Programs

The National Flood Insurance Program (NFIP) is 

one of many federal programs, both within and outside the Federal Emergency Management Agency 

(FEMA), that focus on preventing floods or helping 

people recover from flood damage. FEMA administers several grant programs that offer funding to state, 

local, and tribal governments for planning and carrying out flood-mitigation projects.1

Two of the FEMA programs apply to all types of 

natural disasters: 

B The Hazard Mitigation Grant Program provides 

funding to states that have experienced an event 

that the President has officially declared a major 

disaster. The amount of funding is determined as 

a percentage of the total sum allocated for public 

and individual assistance after the disaster.

B The Pre-Disaster Mitigation Program awards 

funds primarily on the basis of a nationwide 

competition for proposed projects and planning 

activities.

Three other FEMA programs focus specifically on 

mitigating flood risks: 

B The Flood Mitigation Assistance Program allocates funding to states on the basis of how many 

NFIP policies and repetitive-loss properties they 

have.

B The Repetitive Flood Claims Grant Program 

focuses on states and communities that do not 

participate in the Flood Mitigation Assistance 

Program because they lack the required matching 

funds or the capacity to manage the activities.

B The Severe Repetitive Loss Program allocates 

funds mainly on the basis of the number of severe 

repetitive-loss properties in each state.2

1. For an overview, see Federal Emergency Management 

Agency, Mitigation Grant Programs Fact Sheet (April 2009), 

available at www.fema.gov/library/viewRecord.do?id=2065, 

and FY 2010 Hazard Mitigation Assistance Unified Guidance 

(June 2009), available at www.fema.gov/library/viewRecord. 

do?id=3649. The effectiveness of projects funded by FEMA 

to mitigate risks from floods, earthquakes, or windstorms 

(including hurricanes) is discussed in Congressional Budget 

Office, Potential Cost Savings from the Pre-Disaster Mitigation 

Program (September 2007).

2. Repetitive-loss properties (RLPs) are ones that have been the 

subject of at least two flood-claims payments exceeding 

$1,000 apiece in any 10-year period. The Severe Repetitive 

Loss Program focuses on the subset of RLPs that are residential properties and have prompted at least four claims payments of more than $5,000 each, or two or more payments 

that together exceed the property’s value, with at least two of 

the payments occurring within 10 years of each other.
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 5

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Box 1. Continued

Other Flood-Related Federal Programs

FEMA also provides recovery aid to public and private entities affected by Presidentially declared disasters. Funds for individuals—which are currently 

capped at $30,300 per household (an amount that is 

adjusted annually for inflation)—may be used for 

things such as temporary housing, home repair, moving and storage costs, and medical expenses. However, most federal disaster assistance to individuals 

and businesses takes the form of low-interest loans 

from the Small Business Administration (SBA). The 

loans are available in the event of a disaster declaration by the President or the SBA. The availability of 

both FEMA grants and SBA loans depends on Congressional appropriations.

From the point of view of flood victims, NFIP coverage has three advantages over federal disaster aid. It is 

available in larger amounts than the individual assistance from FEMA; it covers events that are not the 

subject of a disaster declaration; and unlike SBA 

loans, flood-claims payments do not have to be 

repaid. However, NFIP coverage requires premium 

payments, and benefits are limited by the terms of the 

insurance policy.

Flood insurance and disaster assistance both serve the 

basic purpose of helping flood victims recover. Thus, 

the two approaches substitute for each other to some 

extent—indeed, one of the rationales for the NFIP 

is that it helps reduce the demand for disaster assistance. Conversely, the expectation that aid will be 

provided in the event of a flood (whether by the government or by other entities, such as the Red Cross) 

may decrease the demand for NFIP coverage. That 

effect is an example of the broader problem that 

disaster assistance lessens the economic incentives to 

reduce one’s exposure to disaster losses—in other 

words, it subsidizes risky behavior. Various features 

of the NFIP attempt to limit the adverse effects of 

that subsidy: Participating communities must meet 

the program’s minimum requirements for floodplain 

management and building codes, and the owner of a 

property in a high-risk flood zone who receives federal disaster aid after a flood must buy and maintain 

NFIP coverage to remain eligible for assistance after a 

future flood.

Besides FEMA and the SBA, other federal agencies 

involved in flood prevention or recovery include the 

Army Corps of Engineers, which builds levees and 

other flood-control structures, and the Department 

of Agriculture, whose Federal Crop Insurance Program covers farmers against losses from floods, pest 

infestations, droughts, and other natural disasters.
6 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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On average, the premiums charged for subsidized policies 

are about 35 percent to 40 percent of their full-risk level, 

FEMA estimates.4 The actuarial shortfall that results 

from those subsidies (currently about $1.3 billion a year) 

has drawn greater scrutiny following the program’s 

unprecedented losses in 2005. Previously, the NFIP had 

been able to cover its costs, borrowing relatively small 

amounts from the Treasury on a few occasions to pay 

claims and then quickly repaying the loans with interest. 

But the $17 billion it borrowed from the Treasury in 

response to the surge in claims from the 2005 hurricanes 

is more than five times the program’s annual income from 

premiums. The NFIP can pay interest or even repay principal on that debt when it experiences a year with low 

claims; indeed, it has made $2.9 billion in interest and 

principal payments since 2005. Nonetheless, it is very 

unlikely to be able to retire the debt without substantially 

raising premiums. The debt grew to $19 billion by the 

end of fiscal year 2009, and given the actuarial deficit 

built into the NFIP, that figure can be expected to continue growing over the long term. Even if the program 

managed to generate large surpluses during an extensive 

run of low-claims years, using those surpluses to retire the 

debt instead of accumulating them as reserves would 

make it more likely that the program would have to 

borrow again in the future.

Subsidized rates for flood insurance have implications not 

only for the federal budget but also for the expected 

amount of flood losses. The program’s explicit subsidies 

lower the cost of living in high-risk properties. Moreover, 

they undermine the incentives for policyholders to carry 

out mitigation measures—such as flood-proofing or elevating properties—because the subsidized rates are not 

affected by such measures.5

 The explicit subsidies do not 

encourage development in risky areas because they are 

not available for new construction. However, any implicit 

(that is, unacknowledged) subsidies that may exist in the 

full-risk rates if FEMA underestimates the actual risk of 

flooding may lead to excessive development in risky areas. 

(The same may be true for the expectation that disaster 

assistance will be available after a major flood; see Box 1.) 

Besides explicit and possibly implicit subsidies from taxpayers, a third type of subsidy in the NFIP is the “crosssubsidy” to some policyholders from others who are 

charged premiums above their full-risk rates (see 

Appendix B). If cross-subsidies completely balance out, 

they do not create financial risk for taxpayers. But like the 

other types of subsidies, cross-subsidies distort the perceived riskiness of the properties involved. Moreover, 

the rates that are raised to provide cross-subsidies may 

discourage some potential policyholders from buying 

coverage.

The Meaning of “Actuarial Soundness”

Actuarial soundness and actuarial adequacy are common 

concepts in the insurance industry, but their specific definition can vary depending on the context. In this report, 

both terms refer to the ability of premiums to cover the 

expected value of flood claims and administrative costs, 

and the NFIP is considered subsidized by taxpayers to the 

extent that premiums fall short of that amount. Those 

definitions do not account for any economic value associated with the risk that is transferred from policyholders to 

taxpayers, but they are consistent with the current cashbased treatment of the NFIP in the federal budget.6

4. Hayes and Spafford, Actuarial Rate Review, p. 4. That estimate 

assumes that if full-risk premiums were charged for those policies, 

they would include proportionately higher allowances paid to the 

private insurance companies that sell and service almost all NFIP 

policies under FEMA’s Write Your Own (WYO) program. (Of the 

$3.1 billion in total premiums for policies in force as of July 31, 

2009, about $0.9 billion went to WYO companies.) However, 

FEMA and the companies might agree not to increase the WYO 

allowances proportionately because there would be no proportional increase in actual sales expenses. In that case, premiums for 

subsidized policies would not have to rise as much to reach the 

full-risk level. Under the polar opposite assumption that the total 

allowance would remain constant, current subsidized premiums 

would be about 55 percent to 60 percent of their full-risk level, on 

average, rather than 35 percent to 40 percent. Regardless of the 

assumption about the allowances, the effect of subsidized rates on 

the funds available to the NFIP to pay claims—and hence on the 

program’s actuarial balance—is the same.

5. Even when premium rates are actuarially sound and incentives are 

undiminished, policyholders may fail to take cost-effective mitigation measures because they perceive the risk of flooding as too 

small or too distant in time, or they consider the measures unaffordable. For example, see Howard C. Kunreuther and others, At 

War with the Weather: Managing Large-Scale Risks in a New Era of 

Catastrophes (Cambridge, Mass.: MIT Press, 2009), pp. 256–261.

6. The federal budget displays the operations of insurance programs 

on a cash basis. Federal loan programs, by contrast, are presented 

on a credit reform basis. Under credit reform, the costs of a loan 

program (excluding administrative costs) are measured by the discounted present value of any subsidies in the loans’ interest rates 

and the expected defaults. For federal insurance programs, no 

explicit estimate of the annual subsidy from taxpayers—even on 

the flood insurance policies that are explicitly priced below the 

full-risk level—appears in the federal budget.
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 7

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The definition of actuarial soundness used here has three 

noteworthy implications:

B The NFIP must cover not only costs directly related to 

insurance policies and claims but also costs for flood 

insurance studies, floodplain management, and 

administrative personnel. The Omnibus Budget 

Reconciliation Act of 1990 directed FEMA to charge 

policyholders a fee to cover those and other implementation costs of the program.7 Currently, that fee is 

$35 per year for most policyholders and yields about 

$140 million annually.8

 The rule that policyholders be 

charged for implementation costs has one current 

exception: The Map Modernization program, a multiyear effort to convert FEMA’s flood maps to digital 

form, is funded mainly from separate appropriations. 

This CBO paper focuses on FEMA’s methods for estimating the costs of claims; it does not explore the 

accuracy of FEMA’s estimates for other administrative 

or program costs.

B Proposals to increase the amounts or types of coverage 

available under the NFIP (for example, by raising policy limits or offering coverage for wind damage) and 

pricing the additional coverage to recover its full costs 

would not improve the program’s actuarial soundness 

as defined here. Successfully implementing such proposals would reduce the program’s actuarial deficit as a 

percentage of its premium income—a factor that 

would be relevant to a private insurer because it could 

reduce the risk of bankruptcy. But doing so would not 

directly decrease the NFIP’s actuarial deficit as measured in dollars.9

 That deficit can be decreased in only 

two ways: by reducing the extent to which some coverage is sold at premiums below the full-risk level or by 

increasing the extent to which some coverage is sold at 

premiums above the full-risk level (that is, by increasing cross-subsidies from some policyholders to others).

B Rates that were actuarially sound as defined here 

would not be high enough, in general, to allow private 

insurers to compete with the NFIP. Unlike the NFIP’s 

rates, actuarially sound premiums in the private sector 

need to reflect the cost of capital—that is, to compensate investors for the use of their funds and the risk 

they are accepting. Nonetheless, some flood insurance 

in the United States is provided by private insurers, 

generally in ways that complement rather than substitute for coverage offered under the NFIP (see Box 2).

An Overview of the NFIP’s 

Full-Risk Rates

In setting full-risk (or actuarially based) premium rates 

for flood insurance, FEMA groups together properties in 

geographic zones based on the risk of flooding. For each 

zone, the agency estimates the expected annual flood 

losses on an insured property as a percentage of the property’s value, using data (where available) on floodwater 

flows, water heights, and damage from water at that 

height and taking into account estimated probabilities of 

very large floods that have not yet occurred. FEMA then 

determines premiums on the basis of those expected 

losses, after adjusting for deductibles and other factors. 

Between 1978 and 2004, the total amount of premiums 

that the NFIP collected on full-risk policies roughly 

equaled the total amount of claims it paid. But claims 

from hurricanes in 2005 have left the program with a 

large debt.

Geographic Zones

The methods that FEMA uses to calculate full-risk rates 

vary by zones—areas shown on the agency’s flood insurance rate maps that are defined by the degree or type of 

flood risk and the amount of information available. 

7. 42 U.S.C. 4014, 104 Stat. 1388-24.

8. Hayes and Spafford, Actuarial Rate Review, pp. 15–16. The federal 

policy fee is $13 for policies written at preferred-risk rates in lowand moderate-risk areas. For condominium policies, the fee 

depends on the number of units in the building. The fee is not 

considered part of the premium for the purpose of calculating the 

allowance paid to Write Your Own companies.

9. Expanding the types of coverage sold by the NFIP could have 

other benefits, however. To the extent that the new types of coverage were not already provided by private insurers, they could help 

alert property owners to the risks they face and reduce federal 

spending for disaster assistance. Adding coverage for wind damage, which is part of standard homeowner’s insurance, could 

potentially reduce claims-adjustment costs and possibly improve 

the NFIP’s actuarial balance (if allegations that claims adjusters 

report some wind damage as flood damage are true). However, 

adding wind coverage would entail significant administrative 

costs. And setting actuarially sound premiums could be difficult, 

particularly if the policyholders who shifted from private or state 

wind coverage to federal coverage were disproportionately those 

whose properties were at higher risk.
8 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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Continued

The labels used on the FIRMs have changed over time. 

Today, the major categories are A zones, V zones, and 

Zone X:

B A zones include all 100-year floodplains—that is, 

areas where the risk of flooding is thought to be at 

least 1 percent annually—with the exception of areas 

designated as V zones. 

B V (for “velocity wave action”) zones are coastal areas in 

100-year floodplains where waves add at least three 

feet to the water level that would be reached during a 

100-year flood in the absence of wave action.10

B Zone X includes essentially all areas outside 100-year 

floodplains. (The exceptions are areas where no 

analysis of flood hazards has been conducted. Such 

areas, which are labeled Zone D, are rare and account 

for very few properties insured by the NFIP.)

FEMA divides the A and V zones into a variety of subcategories, which are described in Appendix A.

Properties covered by the NFIP are concentrated in 

coastal areas. In a sample of 20,000 properties that

Box 2.

Flood Insurance from Private Companies

Private firms provide relatively little flood insurance 

in the United States, and information about private 

flood insurance is spotty. What is known, however, is 

that private companies rarely compete directly with 

the National Flood Insurance Program (NFIP). Most 

private policies address special needs that the NFIP 

does not serve as well or at all.

One market for private flood insurance consists of 

property owners who need coverage above the 

amounts available in the NFIP (a maximum of 

$250,000 for a residential structure, $100,000 for 

its contents, and $500,000 each for a nonresidential 

structure and its contents). For example, private 

insurers dominate the market for flood coverage on 

large commercial properties (excluding those that are 

self-insured). Data on that coverage are not readily 

available, in part because such insurance is typically 

provided as part of some broader coverage—either 

overall commercial insurance, often using the NFIP 

limits as the deductible, or “difference in conditions” 

coverage that insures against losses from a variety of 

disasters. For residential properties, a 2008 survey by 

an industry consulting firm indicates that in that 

year, 13 private sources offered “excess-layer” policies 

to insure residential properties against flood damage 

above the amount covered by a primary policy 

(whether from the NFIP or elsewhere). Those private 

sources consisted of seven companies that issue the 

policies they sell and six brokerage firms that represent other companies, mostly Lloyd’s of London.1

Primary flood coverage for residential properties was 

available from three companies and three brokerages, 

according to the 2008 survey. The companies selling 

their own flood policies focused on clients with high 

net worth for whom they were already writing homeowner’s insurance; such coverage was offered only for 

homes in areas at low-to-moderate risk of flooding. 

Some of the policies sold by brokers were for properties on coastal barrier islands where NFIP insurance is 

prohibited under the Coastal Barrier Resource Act or 

in communities that did not participate in the NFIP. 

Other policies were sold in conjunction with excesslayer coverage on high-value homes.

1. Bruce A. Bender, “Alternatives to the NFIP” (unpublished 

table, Bender Consulting Services, May 2008). Homeowners 

typically have fewer than 13 private companies to choose 

from, however, and some have none at all. Some of the companies do not offer flood coverage in all states, and most of 

them are selective about the properties they insure, rejecting 

those that face the highest risks.

10. The definition of V zones reflects the fact that “a three-foot wave 

generally carries enough energy to break a wall panel away from a 

floor to which it has been nailed”; see Federal Emergency Management Agency, Managing Floodplain Development Through the 

National Flood Insurance Program (undated), p. 3-25, available at 

www.fema.gov/library/viewRecord.do?id=2108.
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 9

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FEMA analyzed for CBO (including those insured at 

both subsidized and actuarially based rates), about 

40 percent were in zip codes containing at least one 

V-zone property. However, only 1 percent were in the 

V zones; the rest were far enough from the shore not to 

be susceptible to damage from three-foot waves during a 

100-year flood.11 Thus, the A zones and Zone X contain 

nearly all of the properties insured at full-risk rates (the 

A zones currently account for half of full-risk policies, 

and Zone X accounts for just under half). Even if coastal 

properties lie outside the V zones, they may face higher 

flood risks, on average, than their inland counterparts, for 

reasons discussed below.

Estimating Expected Losses

Expected losses for properties in 100-year floodplains 

(A and V zones) are generally calculated using three types 

of information:

B Local data on the frequency of floodwater flows of different sizes;

B Representative topographic profiles to convert floodwater flows to water heights (which are greater, for any 

given volume of water, in a narrow valley than on a 

broad plain); and

B Damage functions that specify the percentage damage 

a given depth of flooding does to a particular type of 

structure. (The functions differ by zone type because 

Box 2. Continued

Flood Insurance from Private Companies

The best-studied segment of the U.S. market for private flood insurance is the market for policies that 

mortgage lenders buy on behalf of homeowners who 

are required to carry flood insurance but have not 

purchased it themselves. That requirement applies to 

any property in a 100-year floodplain that carries a 

mortgage from a federally regulated lender or a mortgage that is insured or purchased by Fannie Mae, 

Freddie Mac, or another government-sponsored 

enterprise or federal agency. Although lenders can 

choose to purchase such coverage from the NFIP, 

they rarely do so, according to a report by the RAND 

Corporation. Instead, they typically buy private 

insurance policies that have certain features tailored 

to meet the lenders’ needs: For example, policies purchased from private insurers take effect on the date 

the lender sends a letter to a homeowner noting the 

requirement for flood insurance coverage.2

 Using 

data from various sources for different periods from 

mid-2004 to early 2006, the RAND study estimated 

that private insurers had roughly 130,000 to 190,000 

lender-placed residential policies in effect at any one 

time, compared with the NFIP’s 5 million or so residential policies. The number of lender-placed residential policies written during a year may be much 

higher than the above range, however, because few of 

those policies remain in effect for a full year. Property 

owners, to whom the costs of the policies are passed 

on, typically replace them with less expensive coverage from the NFIP.3

The fact that the market for private flood insurance is 

small does not indicate that the NFIP’s full-risk premium rates are too low to cover the flood risks and 

associated administrative costs. Private insurers must 

set their rates high enough to cover their cost of capital (including reserves for losses incurred but not yet 

reported), and that cost would be influenced by the 

high variability of flood losses. Thus, the NFIP’s rates 

could be actuarially sound as the term is used here 

and still be too low for private insurers to compete 

with them.

2. A lender can also buy an automatic coverage endorsement 

that allows the insurance to take effect even earlier—for 

example, on the date the lender refers the property to a tracking firm for verification of its flood insurance status; Lloyd 

Dixon and others, The Lender-Placed Flood Insurance Market 

for Residential Properties (Santa Monica, Calif.: RAND Corporation, 2007), pp. 25–28. 3. Ibid., pp. xiv, xv, 31.

11. Congressional Budget Office, Value of Properties in the National 

Flood Insurance Program (June 2007), p. 4.
10 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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properties in V zones are subject to wave action and 

damage to piers and pilings below the lowest floor.)

Analyzing local data on floodwater flows is complicated 

by the relatively short historical records of floods that 

exist in some inland areas. FEMA has concluded that 

when its analytic methods use data with short records, it 

underestimates flood risks. All else being equal, that factor tends to make the mapped boundaries of 100-year 

floodplains too small and to understate the risks within 

the mapped floodplains. To compensate for the latter 

bias, FEMA includes an adjustment in calculating the 

A-zone rates. However, the adjustment factors have not 

changed since the 1980s, although additional data have 

been collected and maps have been updated, and they are 

now likely to be incorrect. (For details about FEMA’s 

correction for short historical records, see Appendix A.)

FEMA uses the three types of information listed above to 

produce tables for properties in A and V zones that show 

expected percentage losses as a function of a structure’s 

type and of its elevation relative to the 100-year flood 

(known as its base flood elevation). The tables may be 

revised annually as FEMA updates the damage functions 

to reflect its most recent experience with claims.

For properties outside 100-year floodplains (in Zone X), 

two different sets of full-risk premium rates are used. 

Roughly one-fourth of the structures insured at Zone X 

rates are covered under so-called standard rates and threefourths under the rates for preferred-risk policies. Preferred rates are available for a property in Zone X that is 

not grandfathered (see below) and whose past and present 

owners have received no more than two payments of 

NFIP claims or federal disaster aid—and no more than 

one payment exceeding $1,000—for floods that damaged 

the property. Specific combinations of structure and contents coverage and specified amounts of contents-only 

coverage are available, and the premiums are determined 

by the professional judgment of FEMA’s actuaries on the 

basis of claims experience.

For the Zone X properties insured at standard rates, 

FEMA uses estimates of expected annual losses to determine premiums, as it does for properties in the A and 

V zones. However, the agency has no set of estimated 

probabilities of floods of all sizes for Zone X to use in 

estimating expected annual losses. Instead, it extrapolates 

the expected losses for properties insured at standard rates 

from the average losses observed to date on those properties by assuming that the ratio of expected to observed 

losses is the same as in the main A zone. FEMA’s analysts 

make that calculation with and without the losses from 

2005 and use their professional judgment to combine the 

two results. (The agency has commissioned a study to 

provide recommendations on the appropriate treatment 

of the 2005 experience.)

Roughly 20 percent to 25 percent of Zone X standard 

policies cover properties that are actually located in an 

A or V zone—that is, within a 100-year floodplain. 

Those properties were grandfathered at the Zone X standard rate by FEMA after they were remapped from Zone 

X into a high-risk zone. The agency allows such grandfathering partly to hasten the incorporation of new information into communities’ floodplain management efforts 

by reducing property owners’ opposition to the revised 

flood maps. To the extent that flood losses on the grandfathered properties are higher than those on “true” Zone 

X properties paying the standard rate, the grandfathered 

properties are cross-subsidized by the other standard ratepayers, because the higher losses on the grandfathered 

properties contribute to the observed damages on which 

FEMA bases its standard rates. Such grandfathering may 

not undermine the actuarial soundness of the NFIP as a 

whole. But the burden of funding the cross-subsidy may 

discourage owners of some Zone X properties that are 

ineligible for preferred-risk rates from buying or maintaining coverage. (That effect grows larger as the percentage of grandfathered properties increases.)

Translating Expected Losses into Premium Rates

Once it has estimated the expected losses for properties of 

various types and elevations in each flood zone, FEMA 

converts those estimates into premium rates by using 

certain adjustment factors. Four of its general adjustments are noteworthy: 

B All premiums in 100-year floodplains are increased by 

a contingency-loading factor of 10 percent in the 

A zones and 20 percent in the V zones. Contingency 

loads are commonly used in the insurance industry to 

provide a safety margin for uncertainty—such as the 

uncertainty about the assumed frequencies of catastrophic floods.12 FEMA’s current contingency loads 

12. The premium income attributable to contingency loads is not 

directed to any separate reserve fund for catastrophic events. It 

simply increases the funds available to pay claims and expenses.
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 11

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were increased from 5 percent in the A zones and 

10 percent in the V zones; they remain under review.

B The Community Rating System (CRS) gives discounts to policyholders in communities that take 

additional steps to reduce flood hazards. In implementing that system, FEMA scales up its base (undiscounted) rates by a factor calculated to offset the 

discounts and thus keep the CRS program as a whole 

revenue neutral.13 Tailoring the rates more specifically 

to a community’s level of risk should help reduce 

cross-subsidies among communities. Even if the CRS 

creates new cross-subsidies because some of the discounts overstate the effectiveness of the credited activities, it probably has little effect on the overall actuarial 

soundness of the flood insurance program.14

B As needed, FEMA reduces the rates it would otherwise 

charge to avoid annual increases of more than 10 percent. The 10 percent cap is specified in law, and 

FEMA staff interpret it to mean that the premiums for 

a given combination of flood zone and structure type 

should not rise by more than that amount. FEMA also 

interprets the cap as indicating that annual increases in 

specific rates—such as the rate for single-family residences in the main V zone that lie one foot above the 

base flood elevation and are insured to 60 percent of 

their value—should not exceed 10 percent by more 

than a few percentage points. 

B As necessary, FEMA also raises the rates it would 

otherwise charge to ensure that it covers its estimated 

fixed costs on each policy. For instance, the agency’s 

published rates for coverage of a single-family residence do not go below 24 cents per $100 for the basic 

layer of coverage (up to $50,000) or below 8 cents per 

$100 for coverage above that layer.

Other adjustment factors that FEMA uses in converting 

estimated losses into premium rates—such as for deductibles, loss-adjustment expenses, and underinsurance—

reflect standard practices in the insurance industry.15

(More specifics about FEMA’s rate-setting methods are 

provided in Appendix A.)

In most recent years, FEMA has made an additional 

adjustment in the rates for full-risk properties in coastal 

zones, scaling up the rates determined by the above 

methods as much as possible within the constraints of the 

10 percent cap.16 Those increases are FEMA’s response to 

a combination of two factors: coastal erosion and the cap 

itself. As discussed in more detail below, erosion increases 

flood depths in coastal areas relative to the depths shown 

on flood maps. Thus, policies on structures in an area 

subject to coastal erosion tend to become increasingly 

underpriced as time passes since the last remapping. 

Moreover, because development tends to be denser the 

farther one goes from the shoreline, the number of properties affected by such underpricing increases over time as 

erosion continues to claim the less developed shore land.

FEMA staff expect the erosion problem to grow to the 

point where the premiums charged in V zones would 

have to rise much more than 10 percent per year to keep 

pace. Because the cap will preclude such increases if it 

remains in force, FEMA is raising current rates above the 

levels it believes are necessary to cover today’s risks in 

order to prefund future risks and allow for higher rates in 

the future.

13. The discounts range from 5 percent to 45 percent and are determined according to a system of points awarded for various types 

of risk-reduction activities. FEMA estimated that in 2006, CRS 

communities accounted for two-thirds of NFIP policyholders, 

and their average discount was 13 percent. Those figures imply 

that the base rate from which discounts are taken was scaled up by 

about 9.5 percent.

14. If anything, the CRS program may have a small positive impact: 

If it induces communities to reduce their exposure to flood hazards in ways beyond those captured in FEMA’s rate-setting models, claims payments by the NFIP could decline without a 

corresponding decrease in premium income.

15. A structure is underinsured if it is insured for less than its full 

value. All else being equal, $100,000 of coverage on a $200,000 

structure costs FEMA more in claims payments than does 

$100,000 of coverage on a $100,000 structure. The reason is that 

the same event generally causes similar proportions of damage to 

both structures, and hence, the dollar costs will be higher for the 

more costly structure. In the NFIP, underinsurance can affect the 

value of a flood claim. Damage to a single-family dwelling that is a 

principal residence and is insured for at least 80 percent of its full 

replacement cost (or to the maximum amount available under the 

NFIP) is valued on the basis of replacement cost. Damage to a 

structure that does not meet those criteria is valued on the basis of 

replacement cost minus physical depreciation at the time of the 

loss.

16. FEMA applies the same scaling factor to all full-risk V-zone rates. 

Therefore, it holds the average increase below 10 percent if necessary to avoid increases in specific rates that it considers too far 

above 10 percent.
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Table 1.

The NFIP’s Experience with Full-Risk Policies, by Risk Zone

(Billions of dollars)

Source: Congressional Budget Office based on data from the Federal Emergency Management Agency.

Notes: NFIP = National Flood Insurance Program; * = between -$50 million and $50 million.

V zones are coastal areas subject to waves of three feet or more during a 100-year flood; A zones consist of all other coastal or inland 

areas within 100-year floodplains; and Zone X comprises areas outside 100-year floodplains.

a. Net adjusted profit is the cumulative profit from past years adjusted for inflation and for changes in the number of policies and the mix of 

policies by zone, but not for changes in premium rates (other than inflation). Net adjusted profit represents the cumulative profit or loss 

in real dollars that the NFIP would have experienced if it had insured the current number and mix of policies each year at historical premium rates (adjusted for inflation). Adjusted profit does not provide a direct measure of the soundness of current rates, however. Some 

past rates were significantly lower than current rates, especially in the early years of the period.

Premiums Versus Claims Over Time

Historically, premium income from the NFIP’s full-risk 

policies fell short of the total costs of those policies even 

before the catastrophic losses of 2005. Between 1978 and 

2004, premiums for such policies totaled $10.2 billion in 

nominal dollars, while claims and expenses totaled 

$10.7 billion (see Table 1). The result was a loss of 

$0.5 billion over that period on policies with full-risk 

rates. Adding in data for 2005 and 2006 brings total premiums to $12.6 billion and total claims and expenses to 

$24.2 billion. Thus, with the large losses of 2005 factored 

in, the NFIP ran a loss on full-risk policies over the whole 

1978–2006 period of $11.6 billion in nominal dollars or 

$12.3 billion adjusted for inflation and for changes in the 

number and mix of policies.17 The latter measure corrects for the effects of general price inflation and program 

growth that would otherwise make later years more 

important than earlier years to the NFIP’s actuarial 

performance during that period.

On the surface, the program’s loss over the 1978–2006 

period might suggest that the full-risk premiums were 

only about half as large as needed. However, those figures 

cannot be taken at face value in evaluating the adequacy 

of the actuarially based rates because flood losses on the 

scale seen in 2005 are expected to recur much less often 

Number of Policy-Years 28,710,924 442,585 24,834,155 53,987,664

Number of Claims 225,072 7,225 263,574 495,871

Gross Premiums 6.5 0.5 5.6 12.6

Gross Claims and Expenses 13.8 0.5 9.9 24.2

Net Profit -7.3 * -4.3 -11.6

Net Adjusted Profita -6.9 0.2 -5.6 -12.3

Number of Policy-Years 24,565,935 362,880 21,727,759 46,656,574

Number of Claims 138,736 5,149 215,547 359,432

Gross Premiums 5.2 0.3 4.6 10.2

Gross Claims and Expenses 4.8 0.3 5.6 10.7

Net Profit 0.4 * -0.9 -0.5

Net Adjusted Profita 1.3 0.2 -2.1 -0.5

A Zones V Zones Zone X Total

1978–2006

1978–2004

(Full period of data)

(Omitting catastrophic losses of 2005) 

17. The adjustment for inflation uses cost factors provided by FEMA. 

The mix of policies refers to their distribution by zone and, for 

Zone X, by rate class (standard or preferred-risk policies). 
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 13

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than once in 29 years. (The true “return interval” is 

highly uncertain, but future catastrophes on that scale are 

far from impossible: A sufficiently powerful storm striking Miami or Houston could lead to even larger losses for 

the NFIP.) 

Moreover, the profit figures shown in Table 1 are 

backward-looking and thus do not provide direct evidence of an actuarial shortfall in current rates. Specifically, the figures are not adjusted for changes in premium 

rates other than inflation, so they reflect FEMA’s experience with the rates it charged (in nominal or real dollars) 

over the years, not the results it would have gotten with 

current rates. Many premiums were much lower in the 

first several years of the period than they are today: 

roughly 50 percent lower for the A zones, on average, and 

one-third to two-thirds lower for Zone X (although that 

may reflect differences in the amount of coverage as well 

as in the premium rates). With the early years of that 

period omitted, the NFIP ran an adjusted net profit of 

$0.6 billion on its full-risk policies over the two decades 

from 1985 to 2004.

Although Table 1 cannot settle the question of the actuarial adequacy of the program’s full-risk premiums, it does 

provide some useful insights. One notable fact is that 

more claims have been paid on fewer total policy-years 

in Zone X (outside 100-year floodplains) than in the 

A zones (within those floodplains). The rate of claims in 

the A zones is less than 1 per 100 policies per year, in part 

because of the building codes and floodplain management practices adopted by participating communities, 

which are designed to reduce the rate of flood damage. In 

contrast, the claims rate in Zone X is over 1 percent per 

year for the full 1978–2006 period and nearly that high 

without 2005 and 2006. One reason is that a small fraction of those policies cover properties that are actually 

inside a 100-year floodplain: They have been remapped 

into an A or V zone but remain classified as Zone X 

because they have been grandfathered to stay eligible for 

coverage at Zone X premiums, which are generally lower. 

The high claims rates for that zone also suggest that the 

floodplain boundaries on FEMA’s maps may tend to be 

too small. That is particularly likely for floodplains in 

communities with short historical records of floods (see 

Appendix A).

The table also highlights the fact that, to date, the NFIP 

has not lost money on properties in V zones, even after 

the four hurricanes that struck Florida in 2004 and the 

unprecedented losses of 2005. That result reflects the narrow definition of V zones: Only a small share of properties in coastal areas are thought to be subject to storm 

waves of three feet or higher in a 100-year flood. Thus, 

the limited data available suggest that if the NFIP has any 

problem adequately pricing the risks of coastal flooding, 

the problem is concentrated not in the V zones but in the 

A and X zones in coastal areas.

Issues Regarding the Soundness of the 

NFIP’s Full-Risk Rates

CBO cannot determine whether the full-risk premiums 

currently used in the flood insurance program are actuarially adequate on the whole. Some aspects of FEMA’s 

rate-setting methods tend to promote an actuarial surplus 

on the full-risk policies, whereas others tend to produce a 

deficit. The historical data are insufficient to support a 

more definitive conclusion, particularly because estimates 

of the frequency of catastrophic floods are so uncertain 

and because flood risks may be changing over time. Over 

a period of 30 years, the full-risk premiums could be adequate or too high and still yield occasional deficits and 

even large cumulative debts after rare catastrophic floods. 

Conversely, those premiums could be too low and still 

yield surpluses in most years. One would need to analyze 

data spanning many decades (or even centuries, if the distribution of floods is changing over time) to distinguish 

between those two cases with confidence from the data 

alone.

Analysis of FEMA’s rate-setting methods identifies some 

aspects that err on the side of creating an actuarial surplus. Of those, probably the most important are the contingency loads (safety margins) included in the premiums 

for properties in 100-year floodplains: 10 percent in the 

A zones and 20 percent in the V zones. The fact that 

V-zone rates are set higher than they would be otherwise 

in anticipation of future increases in erosion risk also 

tends to create a surplus in the short run—although 

FEMA expects those rates to be inadequate in the future 

when the rise in erosion risk outpaces the 10 percent 

annual limit on rate increases. A third possible source of 

surplus is overcompensation for bias in estimates of risks
14 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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in areas with short historical records of floods (see 

Appendix A).18

Despite those factors, FEMA’s full-risk rates may be too 

low overall because the agency uses some outdated or 

incomplete information in its rate-setting—specifically, 

in its maps of areas at risk of flooding and its models of 

flood frequency and severity. Many flood maps are too 

old to reflect recent erosion of coastlines, decreases in permeable ground area because of wetland loss and economic development, or increases in sea level. FEMA’s 

policy of grandfathering properties in a previous zone or 

elevation class can also be seen as a case of basing rates on 

information that is out of date. Moreover, FEMA’s models of flood frequency and severity may understate actual 

risks because they do not reflect the effects of global climate change. (Less important, the models also neglect the 

effects of storm-water flooding—flooding from water 

that has not yet entered a river, stream, or other channel—and the damage caused by debris carried by 

floodwaters.)

The factors mentioned above that tend to create an actuarial surplus in FEMA’s full-risk rates offset the financial 

effect of the weaknesses in the flood maps and models to 

some unknown degree—partially, fully, or more than 

fully. Even in the unlikely case that the two sets of factors 

exactly balance each other out for the program as a whole, 

the effects on rates paid by individual policyholders will 

not all balance out. Rather, the result will be hidden 

cross-subsidies, with some policyholders paying more 

than the actuarially fair level for their coverage and others 

paying less. Other cross-subsidies in the NFIP are more 

easily identified (see Appendix B). In particular, properties grandfathered at Zone X standard rates and those in 

areas that are classified as Zone X because they are protected by levees or other flood-control structures (notwithstanding their additional risks from failure of those 

structures) are both cross-subsidized by other Zone X 

policyholders. In both cases, the higher risks faced by 

those properties contribute to the observed damages that 

FEMA uses in determining the Zone X standard rates for 

all properties. That full averaging of the higher and lower 

risks makes the net impact on the program’s actuarial 

balance small or zero. (Grandfathered properties in the 

A and V zones are not directly cross-subsidized and do 

contribute to a shortfall, as explained at the end of the 

next section.) 

Of course, actuarial soundness—that is, avoiding an 

implicit subsidy from taxpayers—is not the only goal set 

for the NFIP. The program is also intended to reduce 

flood losses and federal costs for disaster assistance and to 

facilitate recovery when floods occur. On those terms, the 

information gaps that lend a downward bias to the rates 

could be problematic even if the rates are not too low 

overall because of cross-subsidies. As noted above, rates 

that are below the actuarially fair level can lessen incentives for policyholders to reduce their flood risks (whereas 

rates above that level, serving as a source of crosssubsidies, may discourage some potential policyholders 

from buying coverage). At the same time, rates that are 

too low actuarially can also encourage communities to 

participate in the NFIP and thereby reduce federal 

disaster aid.

Outdated Flood Maps

In general, topographic information that is not up to date 

lends a downward bias to estimates of flood risks and thus 

contributes to the likelihood of an actuarial shortfall. By 

law, FEMA is required to review all of its flood maps on a 

five-year cycle; to date, it has not met that requirement, at 

least partly because it has lacked the resources to do so. 

Keeping the maps relatively current will be easier once 

FEMA completes its multiyear Map Modernization program, in which the agency is both updating maps and 

switching them from paper to digital form. The digitized 

maps can be made available over the Internet and are 

more precise and less costly to update.

How current are the maps used in the NFIP? Different 

estimates measure currentness in different ways. According to the Government Accountability Office (GAO), 

50 percent of the program’s roughly 106,000 maps were 

more than 15 years old in April 2008, and another 8 percent were 10 to 15 years old.19 For its part, FEMA says 

18. In addition, a problem identified by the Government Accountability Office with the quality of the data that FEMA uses in 

deriving the damage functions could contribute to an upward 

bias in flood premiums. See Government Accountability Office, 

Flood Insurance: FEMA’s Rate-Setting Process Warrants Attention, 

GAO-09-12 (October 31, 2008), pp. 14–16, 35, 43; also see 

Appendix A of this CBO report. In the absence of a comprehensive review of all of the data used in the NFIP, however, CBO does 

not infer too much from this one known problem, which could be 

offset (or reinforced) by other data-quality issues.

19. Government Accountability Office, Flood Insurance: FEMA’s RateSetting Process Warrants Attention, p. 18.
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 15

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that “68 percent of the nation’s population has already 

received updated maps that meet, exceed, or at least 

approach the map quality targets of Map Modernization,” and another 27 percent of the population has 

updated preliminary maps (those not yet approved by the 

local communities).20 For purposes of actuarial soundness, the share of the population covered by up-to-date 

maps is more meaningful than the percentage of maps 

themselves, so GAO’s figures may overstate the extent of 

the problem associated with outdated maps. However, 

FEMA’s figures focusing on map quality do not address 

the concern that older maps fail to reflect changes over 

time in geographic factors that may tend to increase flood 

risks. Moreover, FEMA staff report that the majority of 

coastal maps are based on outdated analyses and some 

were drawn under an earlier set of specifications for analyzing the particular characteristics of coastal flood 

hazards.21

One factor that causes older maps to understate flood 

risks is shoreline erosion. When FEMA updates a map of 

an area subject to such erosion, the mapped flood depths 

take into account the erosion that could occur during a 

significant storm; accordingly, the insurance premiums 

are higher than they would be without the erosion risk. 

Once such a storm occurs and causes erosion, however, 

the mapped coastline and flood depths are no longer 

accurate. According to a 2000 study conducted for 

FEMA by the Heinz Center, losses of 50 to 100 feet of 

shoreline over 30 years (or 20 to 40 inches per year) are 

“fairly common” on the coasts of the Atlantic Ocean and 

the Gulf of Mexico.22 The study estimated that without 

additional measures to protect coasts, about 25 percent of 

structures within 500 feet of the Atlantic, Pacific, Gulf, or 

Great Lakes shoreline and outside major cities—or about 

87,000 structures in all, assuming no new development—will be lost to erosion within 60 years. At the projected rates of erosion, about 10,000 of those structures 

will be lost within 10 years. Using observed participation 

rates in the NFIP, the study estimated that costs to the 

program for erosion losses to insured properties would 

average about $80 million a year over 30 years (or about 

5 percent of 1999 premiums), with costs rising over time.

For now, however, NFIP premiums may be high enough 

to cover the risks associated with the cumulative erosion 

expected between one map review and the next. FEMA 

staff have indicated that the agency does not have legal 

authority to base premiums on such erosion risks. 

Instead, FEMA has been raising rates on all properties in 

V zones as a rough substitute for targeting the specific 

areas with high erosion risks. Between 2000 and 2008, 

full-risk rates in the V zones rose by 78 percent.23 (For 

more discussion of erosion risks in the NFIP, see 

Appendix C.)

Another factor that makes flood maps outdated is the loss 

of wetlands. In coastal areas, wetlands serve as natural 

buffers to storm surges, and in inland areas, they can 

reduce the extent of downstream flooding. As an example 

of their disappearance, coastal Louisiana loses an area of 

wetlands about the size of Manhattan each year, primarily 

because of levees, jetties, canals, and subsidence (land 

sinkage). 

Even when it does not displace wetlands, ongoing 

development—particularly increases in the ground area 

20. Ibid., p. 44. FEMA also says there that “Older maps are not 

always outdated.” Within the 68 percent figure, 21 percent of the 

population is covered by maps that meet or exceed two FEMA 

standards: the floodplain boundary standard, which is aimed at 

ensuring that flood maps match the topographic data on which 

they are based (taking those data as given), and the engineering 

analysis standard, which says that maps should reflect flood data 

and engineering analyses that are new or have been updated or 

validated as adequate for current use. Maps for the other 47 percent of the population satisfy at least part of either the floodplain 

boundary standard or the engineering analysis standard. See 

National Research Council, Committee on FEMA Flood Maps, 

Mapping the Zone: Improving Flood Map Accuracy (Washington, 

D.C.: National Academies Press, 2009), pp. 19–20. For the purposes of this report, CBO assumes that the data on which FEMA 

bases its flood maps and premium rates were measured and 

recorded accurately. However, the National Research Council 

study discusses many sources of uncertainty and possible error in 

the maps. For example, topographic data from the National Elevation Dataset of the U.S. Geological Survey, obtained from airborne and land surveys, is often used in FEMA’s approximate 

studies of river flooding in lower-risk areas, but the uncertainty 

surrounding those data is about 10 times greater than called for by 

FEMA’s accuracy standards (ibid., pp. 30, 36).

21. Information received from FEMA staff during a meeting on October 3, 2007, and in an e-mail dated December 22, 2008.

22. H. John Heinz III Center for Science, Economics, and the Environment, Evaluation of Erosion Hazards (report prepared for the 

Federal Emergency Management Agency, April 2000), p. 115, 

available at www.heinzcenter.org/publications/#majorreports. 

Erosion affects the NFIP not only by hastening the obsolescence 

of flood maps but also by increasing the expected damage for a 

given storm and a given distance from structure to shoreline.

23. Hayes and Spafford, Actuarial Rate Review, pp. 18, 22.
16 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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covered by roads, buildings, and other impermeable 

surfaces—reduces the natural environment’s ability to 

absorb or delay water flows during storms and floods. 

That issue is illustrated by the results of a study, commissioned by FEMA, that looked at selected river segments 

in four communities and examined the effects of planned 

development on the damage expected from a 100-year 

flood. The study found that planned development would 

increase expected damage to current buildings and their 

contents by about 20 percent in the studied area of Fort 

Collins, Colorado; by roughly 100 percent in parts of 

Mecklenburg County, North Carolina, and DuPage 

County, Illinois; and by more than 1,200 percent in the 

studied area of Harris County, Texas.24 Those areas are 

not intended to represent the nation as a whole: They 

were selected for their potential for significant development. Moreover, the estimates assume that development 

occurs without any mitigation efforts, such as on-site 

retention of storm water (which is required in three of the 

four jurisdictions studied). Even so, the examples provide 

qualitative evidence that development can have an impact 

on the depth and coverage area of river flooding. The relevance of those case studies is supported by the view of 

representatives of the Association of State Floodplain 

Managers, who told CBO that the “vast majority” of 

FEMA’s older maps understate current flood risks, in part 

because of increases in impermeable surface area.25

Yet another factor that affects the topographic information shown on FEMA’s maps is climate change. As the 

global climate warms, sea level rises because of the thermal expansion of seawater and the loss of ice sheets in 

Greenland and Antarctica. The ongoing rise in sea level 

shortens the useful life span of flood maps of coastal 

areas. (Climate change may also affect the frequency and 

severity of floods. Those effects are discussed in the next 

section.) According to a working group of the Intergovernmental Panel on Climate Change, “There is strong 

evidence that global sea level gradually rose in the 20th 

century and is currently rising at an increased rate, after a 

period of little change between AD 0 and AD 1900.”26

From 1961 to 2003, sea level rose at an average rate of 

1.8 millimeters (mm) per year. During the last 10 years of 

that period, from 1993 to 2003, the average rate was 

about 3.1 mm per year, although it is unclear whether 

that higher rate marks an increase in the long-term 

trend.27 Even a small rise in sea level can move shorelines 

significantly inward, depending on the local terrain: In 

South Carolina’s low country, for example, one vertical 

inch corresponds to roughly 200 horizontal feet. Besides 

moving shorelines, higher sea level also increases storm 

surges and erosion hazards. 

FEMA staff acknowledge that outdated maps—particularly in areas subject to coastal erosion—pose a problem 

for the actuarial soundness of the flood insurance program.28 The agency has created a five-year plan for flood 

mapping and public awareness of flood risks. Among its 

goals are ensuring that all populated coastal areas have 

updated flood-hazard data and that data for 80 percent of 

all flood hazards are new, updated, or still valid.29 FEMA 

estimates that the plan’s goals could be achieved with 

annual appropriations of $220 million through fiscal year 

2014. FEMA staff are less concerned about maps’ being 

outdated because of man-made changes in floodplains, 

such as new bridges and culverts, partly because federal 

regulations require communities that participate in the 

NFIP to report to FEMA on “physical changes affecting 

flooding conditions” no later than six months “after the

24. Neil C. Blais and others, Managing Future Development Conditions 

in the National Flood Insurance Program (report prepared for the 

Federal Emergency Management Agency, October 2006), available at www.fema.gov/library/viewRecord.do?id=2596. CBO calculated the percentage changes using the estimates shown in 

Tables 4 through 11, pp. 33–58.

25. Personal communication, October 24, 2007.

26. Nathaniel L. Bindoff and others, “Observations: Oceanic Climate 

Change and Sea Level,” Chapter 5 in Climate Change 2007: The 

Physical Science Basis (Cambridge, England: Cambridge University 

Press, 2007), pp. 387–388, available at www.ipcc.ch/pdf/ 

assessment-report/ar4/wg1/ar4-wg1-chapter5.pdf.

27. Sea level has continued to rise at a high rate since 2003 “largely 

due to the growing contribution of ice loss from Greenland and 

Antarctica”; see Katherine Richardson and others, Synthesis Report 

from “Climate Change: Global Risks, Challenges and Decisions, 

Copenhagen 2009, 10–12 March” (Copenhagen: University of 

Copenhagen, 2009), p. 10, available at http://climatecongress. 

ku.dk/pdf/synthesisreport.

28. The statements by FEMA staff referred to in this paragraph are 

from a meeting with CBO staff on October 3, 2007, and e-mails 

dated December 22, 2008, and October 23, 2009.

29. Federal Emergency Management Agency, Risk Mapping, Assessment, and Planning Multi-Year Plan: Fiscal Years 2010–2014

(March 16, 2009), available at www.fema.gov/library/viewRecord. 

do?id=3587.
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date such information becomes available.”30 The agency 

produces an average of about 2,000 Letters of Map Revision per year to incorporate information on significant 

changes.

In the case of grandfathered properties, FEMA has upto-date map information but chooses not to use it in setting premiums. FEMA staff say that most cases of grandfathering probably involve properties that were outside 

the 100-year floodplain and have been remapped inside it 

but are still paying Zone X standard rates rather than an 

A-zone or V-zone rate. Some cases, however, involve 

A-zone properties that would have moved to a V zone, or 

A- or V-zone properties that would have remained in the 

same zone but been reclassified at a lower elevation. 

Assuming everything else is the same, those lowerelevation properties generally face higher flood risks than 

predicted by FEMA’s models for the A and V zones. (The 

exceptions are cases where the lower elevation is still well 

above any level that floodwaters are likely to reach.) 

Because the “excess” flooding that those properties experience does not affect the models—and thus does not feed 

back into higher rates for all properties in those zones, as 

it does in Zone X—they may contribute to an actuarial 

shortfall.

Climate Change

Besides raising sea level, climate change could adversely 

affect the NFIP through such mechanisms as more severe 

rainstorms and increased hurricane activity. A June 2008 

report on climate change that summarized and synthesized many previous scientific studies provided evidence 

of trends in rainfall that could increase losses from river 

flooding.31 It also offered some evidence of adverse trends 

in hurricanes. FEMA has begun studying the implications of climate change for the NFIP and expects to 

complete its analysis in early 2010.32

Effects on Rainstorms. On the basis of several studies, the 

June 2008 report concluded that it is “highly likely” that 

rainfall from severe rainstorms has increased in recent 

decades. One of the studies found a 50 percent increase 

over the past century in the number of days with more 

than four inches of rain in the upper Midwest. Another 

of the studies found statistically significant upward trends 

in the amount of rain falling on the rainiest days (specifically, those in the top 0.3 percent of the distribution) in 

the South, Midwest, and upper Mississippi regions. The 

report’s authors also analyzed 100 years of data on total 

precipitation over 90-day periods, which is relevant to 

efforts to predict the likelihood of major widespread 

(rather than localized) floods. They found that 90-day 

periods with total precipitation in the top 5 percent of 

the distribution occurred 20 percent more often in the 

past 25 years than in earlier 25-year periods.33 Some 

scientists, however, argue that the evidence available to 

date does not show that climate change is affecting river 

flooding.34

Effects on Hurricanes. Researchers generally agree that 

hurricane activity has been greater in recent years than 

it was from 1970 through 1994 (when the number of 

hurricanes reaching the United States was low by historical standards) and that risks remain higher in the near 

30. 44 C.F.R. 65.3.

31. U.S. Climate Change Science Program and the Subcommittee on 

Global Change Research, Weather and Climate Extremes in a 

Changing Climate—Regions of Focus: North America, Hawaii, 

Caribbean, and U.S. Pacific Islands (June 2008), available at 

www.climatescience.gov/Library/sap/sap3-3/final-report/

default.htm.

32. Government Accountability Office, FEMA’s Rate-Setting Process 

Warrants Attention, p. 46.

33. U.S. Climate Change Science Program, Weather and Climate 

Extremes, pp. 46–50.

34. For example, see R.M. Hirsch, “Flood Flows and Climate Variability and Change in the U.S.: An Exploration of the Literature, 

Theory, and Long-Term Flood Records” (abstract H111-01, 

American Geophysical Union, Fall 2008 meeting), available at 

www.agu.org/meetings/fm08/waisfm08.html; and William S. 

Logan and Laura J. Helsabeck, Research and Applications Needs in 

Flood Hydrology Science: A Summary of the October 15, 2008, 

Workshop of the Planning Committee on Hydrologic Science (Washington, D.C.: National Academies Press, 2009).
18 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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term.35 For example, one researcher estimates that the 

Power Dissipation Index for tropical storms—a measure 

that reflects the storms’ frequency, intensity, and duration—tripled over the 30 years from the early 1970s to 

the early 2000s for hurricanes in the North Atlantic.36

Globally, the percentage of storms in a five-year period 

rated as category 4 or 5 on the Saffir-Simpson scale more 

than doubled over roughly the same 30 years, from 

16 percent in the 1970–1974 period to 36 percent in the 

2000–2004 period.37

The key question for the NFIP, however, is not whether 

hurricane risks are higher in the near term (because of 

cyclical factors that may be well-represented in the 

decades of historical data underlying FEMA’s models). 

What matters for the NFIP is whether climate change has 

increased hurricane risks in the long term, averaged over 

cyclical ups and downs. There is less agreement on that 

question.38 On the one hand, data for the North Atlantic 

from 1950 through 2005 show a very strong correlation 

between the Power Dissipation Index and sea surface 

temperatures, and several studies have concluded that 

those temperatures have risen partly because of greater 

concentrations of greenhouse gases in the atmosphere. 

Moreover, statistical analysis suggests significant increases 

in the number of North Atlantic hurricanes if the initial 

year of the period analyzed is between 1881 and 1921, 

suggesting that a long-term trend is at work. On the 

other hand, hurricane counts were also high between 

1851 and 1871, and no strong trends are found in analyses that include those years. Nor is there evidence of a 

trend in the number of hurricanes that make landfall in 

the United States.39

One possible explanation for that lack of clear evidence is 

that climate change has had only a negligible impact, if 

any, on hurricane risks in the United States. Temperatures 

in the North Atlantic—where hurricanes striking the 

U.S. Atlantic and Gulf coasts form—have risen by about 

0.67 degrees Celsius (1.2 degrees Fahrenheit) since 1906, 

researchers estimate. They attribute just over 40 percent 

of that increase to global warming.40 A review of studies 

suggests that for each rise of 1 degree Celsius in average 

sea surface temperature, wind speeds of the strongest hurricanes increase between 1 percent and 8 percent, all 

other things being equal.41 The destructive power of a 

hurricane grows with the cube of the wind speed, so the 

increase of 40 percent of 0.67 degrees Celsius attributable 

to global warming translates to an increase of about 

1 percent to 7 percent in the destructive power of storms. 

That effect is relatively small, and it could be less important than a second, offsetting impact of climate change 

on hurricane formation: an increase in vertical wind shear 

(changes in wind speed or direction as altitude changes). 

Vertical wind shear tends to prevent weak disturbances 

35. Annual hurricane rates for three periods covering 1930 through 

2006 are shown in a report by the catastrophe modeling firm Risk 

Management Solutions, The 2006 RMS Expert Elicitation and 

Atlantic Hurricane Activity Rates Update (white paper, November 

2006), p. 3, available at www.rms.com/Publications/

60HUActivityRates_whitepaper.pdf. Among the scientific papers 

that find an increased risk of hurricanes in the near term are 

Lennart Bengtsson, “Enhanced Hurricane Threats,” and Stanley 

B. Goldenberg and others, “The Recent Increase in Atlantic 

Hurricane Activity: Causes and Implications,” both in Science, 

vol. 293, no. 5529 (July 20, 2001), pp. 440–441 and 474–479. 

After the 2005 season, Risk Management Solutions raised its estimates of hurricane losses across the Gulf Coast, Florida, and the 

Southeast by 45 percent, and its estimates of losses in the MidAtlantic and Northeast coastal regions by 25 percent to 30 percent, relative to those derived from averages for the 1900–2005 

period. The other two leading catastrophe modeling firms—AIR 

Worldwide and EQECAT—also increased their estimates of 

losses, though by smaller amounts; see Howard C. Kunreuther 

and Erwann O. Michel-Kerjan, Climate Change, Insurability of 

Large-Scale Disasters and the Emerging Liability Challenge, Working Paper No. 12821 (Cambridge, Mass.: National Bureau of 

Economic Research, January 2007). Similarly, the companies that 

rate the financial strength of private insurers have raised their standards for the amount of capital that property and casualty insurers 

(whose policies generally cover wind damage but not flood damage) must hold against catastrophic risks.

36. Kerry Emanuel, “Increasing Destructiveness of Tropical Cyclones 

Over the Past 30 Years,” Nature, vol. 436 (August 2005), pp. 686–

688. The Power Dissipation Index is defined as the cubed estimated maximum sustained surface wind speed at six-hour intervals, summed over all tropical cyclones occurring in a given year.

37. P.J. Webster and others, “Changes in Tropical Cyclone Number, 

Intensity, and Duration in a Warming Environment,” Science, 

vol. 309 (September 16, 2005), pp. 1844–1846.

38. Congressional Budget Office, Potential Impacts of Climate Change 

in the United States (May 2009).

39. U.S. Climate Change Science Program, Weather and Climate 

Extremes, pp. 5–6, 56–61, 96.

40. Greg J. Holland and Peter Webster, “Heightened Tropical Cyclone 

Activity in the North Atlantic: Natural Variability or Climate 

Trend?” Philosophical Transactions of the Royal Society, vol. 365 

(1997), pp. 2695–2716.

41. U.S. Climate Change Science Program, Weather and Climate 

Extremes, pp. 6, 110.
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from intensifying into hurricanes and may limit the 

intensity of storms that have already formed.

Another possible explanation for the current inconclusive 

evidence is that climate change is already having an 

important impact on hurricane risks in the United States 

but more data must accumulate before that effect can be 

confirmed statistically.42 In that view, the influence of climate change is being obscured for now by the high variability of hurricane events from year to year and by largescale quasi-periodic oscillations in weather patterns that 

influence hurricane activity in the United States, such as 

El Niño, West African monsoons, and perhaps the Atlantic Multidecadal Oscillation.43

If the various effects of climate change on hurricane risks 

do not neutralize each other, their net impact could 

become more pronounced over time as carbon dioxide 

and other greenhouse gases continue to accumulate in the 

atmosphere. Most global climate models indicate that sea 

surface temperatures and maximum wind speeds will 

continue to rise in the future.44 Many also anticipate 

increases in accompanying rainfall in some areas. William 

Nordhaus has estimated that if the atmospheric concentration of carbon dioxide (or its equivalent in other gases) 

doubled, the mean effect would be to roughly double 

expected U.S. losses from hurricanes—an increase of 

about $8 billion in 2005 dollars.45 Moreover, applying a 

recently developed analytic technique to results from climate models indicates that global warming could reduce 

the frequency of hurricanes worldwide but increase their 

frequency off the southeastern coast of the United 

States.46 That analysis also concluded that the intensity 

of hurricanes could increase in some locations, including 

the North Atlantic. However, even if climate change had 

no significant effect on the number or intensity of hurricanes reaching the United States, it would still increase 

flood risks in coastal areas through its effect on sea level.

Private Insurers’ Response to Climate Change. Some 

support for the view that climate change may have a 

significant impact on flood risks, now or in the future, 

comes from the concern seen among private insurers who 

provide coverage for flood or wind damage in areas subject to hurricanes (see Box 2 on page 8). For example, a 

coalition of insurance companies, environmental groups, 

and other organizations recently issued a report on risks 

to U.S. coastal communities that said, “Changing climatic conditions pose an unprecedented threat to U.S. 

coastlines. . . . Current flood, shoreline and inundation 

maps, used for land use and infrastructure planning and 

mortgage due diligence, do not accurately reflect current 

risks, let alone future risks.”47 A 2006 report from insurer 

Lloyd’s said, “Insurers should plan for increased flood risk 

in areas expected to suffer greater rainfall.”48

42. Available data are particularly scant in the case of hurricanes that 

make landfall in the United States because those storms represent 

a small fraction of all North Atlantic hurricanes. Summarizing the 

state of knowledge, the U.S. Climate Change Science Program’s 

report says, “It is very likely that the human-induced increase in 

greenhouse gases has contributed to the increase in sea surface 

temperatures in the hurricane formation regions. . . . However, a 

confident assessment of human influence on hurricanes will 

require further studies using models and observations” (Weather 

and Climate Extremes, p. 97).

43. The Atlantic Multidecadal Oscillation is an ongoing pattern of 

long-duration changes in sea surface temperatures in the North 

Atlantic. Its significance is under debate: Compare National Oceanic and Atmospheric Administration, Atlantic Oceanographic 

and Meteorological Laboratory, “Frequently Asked Questions 

About the Atlantic Multidecadal Oscillation” (January 13, 2006), 

available at www.aoml.noaa.gov/phod/d2m_shift/amo_faq.php;

and M.E. Mann and K.A. Emanuel, “Atlantic Hurricane Trends 

Linked to Climate Change,” Eos, vol. 87, no. 24 (June 13, 2006), 

pp. 233–241, available at http://holocene.meteo.psu.edu/shared/

articles/MannEmanuelEos06.pdf. Climate change could have an 

impact on the large-scale oscillations themselves, but any such 

effect is highly uncertain at present.

44. Swiss Re, Influence of Global Warming on Tropical Cyclones, Hurricanes, and Typhoons (Zurich: Swiss Reinsurance Company, October 2006). 

45. That estimate does not account for any accompanying rise in sea 

level. See William D. Nordhaus, The Economics of Hurricanes in 

the United States, Working Paper No. 12813 (Cambridge, Mass.: 

National Bureau of Economic Research, December 2006).

46. Kerry Emanuel, Ragoth Sundararajan, and John Williams, “Hurricanes and Global Warming: Results from Downscaling IPCCC 

AR4 Simulations,” Bulletin of the American Meteorological Society, 

vol. 89 (March 2008), pp. 347–367, available at ftp://texmex.mit. 

edu/pub/emanuel/PAPERS/Emanuel_etal_2008.pdf. 

47. The group included Fireman’s Fund, Lloyd’s, and Travelers insurance companies, reinsurer Swiss Re, and the Reinsurance Association of America. See H. John Heinz III Center for Science, 

Economics, and the Environment and Ceres, Resilient Coasts: A 

Blueprint for Action (2009), pp. 3–4, available at www.ceres.org/

Document.Doc?id=435.

48. Lloyd’s, Climate Change: Adapt or Bust (London: Society of 

Lloyd’s, 2006), p. 17, available at www.lloyds.com/NR/rdonlyres/

38782611-5ED3-4FDC-85A4-5DEAA88A2DA0/0/

FINAL360climatechangereport.pdf.
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What private insurers are already doing to respond to the 

effects of climate change is largely unknown. For a 2007 

report, the Government Accountability Office contacted 

representatives of 11 large property casualty insurers; all 

11 said their firms were using models that predicted 

greater frequency and intensity of hurricanes in the near 

term, but they did not attribute those effects to climate 

change.49 Two industry sources told CBO that some private flood insurers have tightened their eligibility criteria 

for various combinations of reasons, which may include 

climate change. However, a representative of a firm that 

produces flood maps in Europe told CBO that the company does not yet have enough data to justify specific 

changes to its models of flood frequency and severity.

Options to Address Concerns About the NFIP’s 

Full-Risk Rates

Various lawmakers and interest groups have proposed 

changes to the policies governing the NFIP. Some proposals would address the sources of actuarial weakness that 

CBO has identified; others would not. 

With regard to the problem that FEMA’s older maps may 

understate the damages expected from a given weather 

event, possible responses include providing more funds to 

speed the agency’s Map Modernization program or to 

shorten the interval between map reviews once the modernization effort is completed. Updating flood maps more 

often would allow the rates charged on new policies to 

reflect more-current floodplain boundaries and base flood 

elevations. (Under FEMA’s present grandfathering policy, 

new information would not alter the rates charged on 

existing policies.) Another option would be to let FEMA 

base its rates not on currently observed conditions—such 

as land use, location of shoreline, and so forth—but on 

the average conditions expected between one map review 

and the next.

FEMA is conducting an analysis to address whether its 

estimates of flood frequencies are too low because they do 

not account for the effects of climate change. The agency 

hopes to finish that analysis early next year. Depending 

on the conclusions of the study, it may seem worthwhile 

to establish a regular periodic review so that FEMA can 

stay abreast of the latest research findings on climate 

change.

To address concerns about FEMA’s ability to respond 

quickly to new data showing higher flood risks, the 10 

percent cap on annual premium increases could be lifted. 

At present, the cap is rarely a binding constraint on the 

rates that FEMA’s actuaries would choose to set to cover 

current flood risks. As explained above, current rates in 

the V zones are actually higher because of the cap than 

they would be otherwise. However, lifting the cap could 

help improve the NFIP’s financial position in the future if 

FEMA’s analysis of the effects of climate change indicates 

a need for large increases in some rates or if erosion leads 

to rapid growth in the risks to coastal properties.

Another concern is the grandfathering of properties that 

otherwise would have moved from a regular 100-year 

floodplain (A zone) to an area subject to velocity wave 

action (V zone) or that would have been reclassified at a 

lower elevation relative to the base flood. Lawmakers 

could address that issue by prohibiting such grandfathering. Alternatively, they could require FEMA to track the 

premium income lost through that practice and offset it 

by raising rates elsewhere, thus creating a cross-subsidy. 

Grandfathering properties that had been in Zone X could 

also be prohibited, but doing so would have little or no 

impact on the NFIP’s actuarial balance, because those 

properties are already cross-subsidized. The same is true 

of policy actions to reduce the residual risks to properties 

protected by levees (see Appendix B) or to adjust the 

floodplain boundaries on FEMA’s maps to correct for 

small-sample bias in communities with relatively short 

data records (see Appendix A).

Some other common proposals also would not address 

the sources of actuarial weakness in the NFIP’s rates. An 

example is proposals to expand the program’s coverage—

for instance, by raising coverage limits or by adding coverage for wind damage. Proposals envision offering the 

additional coverage at actuarially neutral rates, but meeting that goal would be difficult, as it is for the program’s 

current coverage. Raising coverage limits, for instance, 

would disproportionately affect properties in coastal 

states; therefore, the actuarial balance of the premiums 

49. Of the 11 firms, six attributed the changes to the Atlantic Multidecadal Oscillation and five did not specify any causes; Government Accountability Office, Climate Change: Financial Risks to 

Federal and Private Insurers in Coming Decades Are Potentially 

Significant, GAO-07-285 (March 2007), p. 32.
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would be particularly sensitive to any weakness in 

FEMA’s modeling of hurricanes.50 Even if the premiums 

for the new coverage were actuarially fair, the program’s 

overall actuarial balance would remain the same in dollar 

terms.51

A full analysis of policy options for the NFIP is beyond 

the scope of this report, and it should be noted that actuarial soundness is not the only goal policymakers have set 

for the program. Even from the standpoint of federal 

spending, the effect of the program depends not only on 

its own financial position but also on its interaction with 

federal disaster assistance: The more properties that are 

adequately insured by the NFIP, the fewer applications 

will be filed for disaster assistance from FEMA or lowcost loans from the Small Business Administration after 

the President declares a flooding disaster. Quantifying the 

extent of that effect is one of several research goals that 

could help inform future policy choices about the NFIP 

(see Box 3).

Beyond its federal fiscal impact, the NFIP is important 

for its effects on environmental protection, public safety, 

and economic efficiency. Expanding floodplain boundaries where needed to correct for small-sample bias would 

be desirable on some of those grounds, because applying 

the program’s minimum-elevation requirements for new 

construction as well as other land-use standards would 

decrease future flood damage. Reducing cross-subsidies 

could also be beneficial if policyholders reacted to rates 

that reflected their properties’ true risks by taking costeffective actions to mitigate those risks. In both cases, 

however, the benefits could be reduced if participation in 

the program fell.

NFIP Properties That Have 

Experienced Multiple Floods

Another concern that some observers of the NFIP have 

raised is the impact of insured properties that have 

flooded more than once. Such properties are responsible 

for only a small share of claims paid by the NFIP, but 

they impose a disproportionate burden on the program’s 

finances.

The Number and Effects of Repetitive-Loss 

Properties

About 71,000 properties insured by the NFIP as of January 31, 2009, meet FEMA’s definition of repetitive-loss 

properties—that is, they have been the subject of two or 

more flood-claims payments greater than $1,000 each in 

any 10-year period.52 Nearly 32,000, or 45 percent, of 

those RLPs have prompted three or more such payments 

while insured by the program, and a few thousand have 

had losses leading to least 10 payments (see Figure 2). 

Properties with the largest numbers of claims payments 

typically experience minor damage, such as ruined carpeting, each time. Thus, of the almost 23,000 properties 

that have prompted at least four payments, only about 

10,000 meet FEMA’s criteria for a severe repetitive-loss 

property (SRLP)—that is, they have been the subject of 

at least four payments of more than $5,000 each, or two

50. According to the Government Accountability Office, 36 percent 

of NFIP policies for residential structures carry the maximum coverage of $250,000. That share is above 50 percent in six coastal 

states and the District of Columbia and is 41.5 percent in Florida, 

which accounts for almost 40 percent of NFIP policies nationwide. See Government Accountability Office, Information on Proposed Changes to the National Flood Insurance Program, GAO-09-

420R (February 27, 2009). Many of the policyholders who carry 

the maximum coverage from the NFIP would benefit from higher 

coverage limits. Those few who carry additional private insurance 

above the limits—so-called excess-layer coverage—would have the 

opportunity to replace some or all of it with additional federal 

insurance, which could be expected to cost less (see Box 2 on page 

8). Policyholders without supplemental insurance would be able 

to increase the total coverage on their property; many would presumably choose to raise their coverage up to the new limits or the 

value of their property, whichever was less. Increasing the limits 

might also affect the market for private primary (or first-dollar) 

flood insurance. However, many properties carrying that coverage 

are ineligible for NFIP insurance or are insured for $1 million or 

more.

51. New coverage priced at break-even premiums would affect the 

program’s actuarial balance in percentage terms: Relative to total 

premiums, any actuarial deficit (or surplus) would be smaller. For 

private insurers, adding new types of coverage that are not too 

highly correlated with existing coverage (which these might well 

be, especially in the case of increased coverage limits) is beneficial. 

Thanks to “the law of large numbers,” such a change reduces the 

variability of companies’ losses and thus the relative amount of 

capital they must maintain to keep the risk of bankruptcy below 

some acceptable threshold. For the NFIP, which does not rely on 

its own capital to sustain operations, the relevant figure is the 

annual expected loss (or gain) in dollar terms, not in percentage 

terms.

52. The data analyzed in this section were provided to CBO by 

FEMA. 
22 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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Box 3.

Questions for Further Research on the Demand for Flood Insurance

If the premium rates charged on some or all groups of 

policies in the National Flood Insurance Program 

(NFIP) are too low to cover their expected costs, raising those rates would improve the program’s actuarial 

soundness and lessen the need for future borrowing 

from the federal Treasury. Raising rates, however, 

would have other effects that can be described in 

qualitative terms but are not well understood quantitatively. Improved answers to the following questions 

could help the Congress make more informed policy 

decisions about the NFIP:

B To what extent would raising premiums reduce 

the number of policies in force or the amount of 

coverage per policy?

B To what extent would raising premiums increase 

expected losses per policy by disproportionately 

reducing the demand for coverage of lower-risk 

properties?

B To what extent would raising premiums lead to 

greater mitigation—for example, by encouraging 

policyholders to elevate their properties or move 

to less risky locations?

B To what extent would raising premiums increase 

federal costs for disaster assistance?

There are few empirical studies of the demand for 

flood insurance, and none of them provide definitive 

answers. The best available evidence suggests that 

raising premium rates by 10 percent lowers the number of policies by 1 percent and the amount of coverage per policy by 9 percent. However, those estimates 

were derived from an analysis of aggregate state-level 

data from 1984 through 1993.1

 Thus, they do not 

reflect the effects of the changes made by the 

National Flood Insurance Reform Act of 1994 to the 

requirement for flood coverage of certain structures 

in high-risk areas. (Under that law, federally regulated 

mortgage lenders and government-sponsored enterprises such as Fannie Mae and Freddie Mac must put 

NFIP premium payments in escrow for any loan that 

has an escrow account for other purposes.) Moreover, 

the degree to which premium rates affect the demand 

for flood insurance may be different at the current 

rates than it was during the 1984–1993 period.

Another study used 1997 NFIP data on 62 coastal 

communities in 16 counties to analyze the percentage 

of properties covered in each community. It did not 

find statistically significant evidence that the average 

price of NFIP insurance has any effect on the extent 

of coverage, perhaps because most covered properties 

were subject to the mandatory-purchase requirement.2 A third study was commissioned by the Federal Emergency Management Agency to analyze the 

potential effects of eliminating the explicit subsidy 

for structures built before their community’s flood 

insurance rate map was created. However, the methodology of that study focused on surveying structures 

in a nationwide sample of communities with highrisk flood zones; it did not include any new analysis 

of how the demand for flood insurance is affected by 

price, instead relying on a single 1983 report by the 

Government Accountability Office.3

1. Mark J. Browne and Robert E. Hoyt, “The Demand for 

Flood Insurance: Empirical Evidence,” Journal of Risk and 

Uncertainty, vol. 20, no. 3 (2000), pp. 291–306.

2. Craig Landry and Warren Kreisel, “Modeling the Decision to 

Buy Flood Insurance: An Empirical Analysis for Coastal 

Areas” (paper presented at the American Agricultural Economics Association annual meeting, Tampa, July 30–

August 2, 2000), available at http://purl.umn.edu/21880.

3. PricewaterhouseCoopers, Study of the Economic Effects of 

Charging Actuarially Based Premium Rates for Pre-FIRM 

Structures (report prepared for the Federal Emergency Management Agency, May 14, 1999), available at www.fema.gov/

library/viewRecord.do?id=2555. The 1983 report used in 

that study was General Accounting Office (now Government 

Accountability Office), The Effect of Premium Increases on 

Achieving the National Flood Insurance Program’s Objectives,

GAO/RCED-83-107 (February 28, 1983). Also see Congressional Budget Office, letter to the Honorable Rick A. Lazio 

regarding CBO’s review of a study of the economic effects of 

charging actuarially based premium rates for federal flood 

insurance, September 22, 2000.
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 23

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Figure 2.

Currently Insured Repetitive-Loss Properties, by Number of Claims Paid

(Number of properties)

Source: Congressional Budget Office based on data from the Federal Emergency Management Agency as of January 31, 2009.

a. Includes only payments that exceed $1,000.

or more payments that cumulatively exceed the property’s 

value.53

The 71,000 currently insured RLPs are covered by a total 

of about 110,000 policies, or 2 percent of the 5.6 million 

NFIP policies nationwide (see Table 2).54 RLPs account 

for 3 percent of current NFIP premiums, indicating that 

the rates on individual policies tend to be 50 percent 

higher than the national average. However, currently 

insured repetitive-loss properties account for 12 percent 

of the total number of claims paid by the NFIP since 

1978 and 16 percent of total claims payments (in nominal dollars). SRLPs have an even more disproportionate 

impact on the program’s actuarial balance: They represent 

just 0.3 percent of current policies and 0.5 percent of current premiums, but 3 percent of claims and 5 percent of 

payments since 1978.

Looking only at the losses to date on currently insured 

RLPs may understate the significance of the repetitiveloss problem. Over time, the current set of properties will 

experience some additional losses, and additional properties will become RLPs. Another way to measure the 

impact of repetitive-loss properties is to include former 

RLPs—those that are no longer insured or are no longer 

considered active RLPs because they have undergone mitigation to reduce their risks. Including those properties 

raises RLPs’ share of total claims since 1978 from 12 percent to 22 percent and their share of total payments from 

16 percent to 24 percent.55

2 3 4 or 5 6 to 9 10 or More

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Number of Claims Paid Since 1978a

39,301

8,967

12,561

7,585

2,667

53. The definitions of both RLPs and SRLPs require that at least two 

of the payments occur within 10 years of each other. The criteria 

for SRLPs were originally established for residential properties 

housing one to four families. They appear in section 102 of the 

Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 

2004 (42 U.S.C. 4001, 118 Stat. 712), available at www.fema. 

gov/pdf/nfip/fira2004.pdf. FEMA later used the same criteria to 

define larger residential SRLPs. Nonresidential properties are not 

eligible for mitigation assistance under the pilot program created 

by the 2004 Flood Insurance Reform Act, but the same criteria 

can be applied to them as well. The roughly 10,000 properties 

identified here as SRLPs include 8,859 residential properties and 

1,195 nonresidential properties. 

54. Like other insured properties, RLPs and SRLPs may be covered by 

more than one policy contract. For example, a rental property may 

have a contract covering the structure and another covering the 

contents, purchased by the landlord and tenant, respectively. 

Moreover, for contracts bought by condominium associations, 

FEMA attributes one policy to each condo unit.

55. The share of total payments attributable to current and former 

RLPs was closer to one-third before 2005, a year that was comparatively less catastrophic for RLPs than for NFIP properties as a 

whole. That year’s losses account for one-quarter of total payments to RLPs since 1978 but nearly one-half of payments to all 

insured properties.
24 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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Table 2.

Statistics on Insured Properties with 

Multiple Flood Claims

Source: Congressional Budget Office based on data from the 

Federal Emergency Management Agency as of 

January 31, 2009, and on Thomas L. Hayes and 

Dan R. Spafford, Actuarial Rate Review: In Support 

of the May 1, 2008, Rate and Rule Changes (Federal 

Emergency Management Agency, National Flood Insurance Program, August 2008).

Notes: Repetitive-loss properties (RLPs) are properties that have 

been the subject of at least two flood-claims payments 

of more than $1,000 each in any 10-year period. (The numbers shown here for RLPs include severe repetitive-loss 

properties.)

Severe repetitive-loss properties (SRLPs) are RLPs that have 

prompted four or more flood-claims payments greater than 

$5,000 each, or two or more payments that together exceed 

the property’s value. (The numbers shown here for SRLPs 

include 1,195 nonresidential properties, although such properties are not defined as SRLPs for purposes of mitigation 

assistance under the pilot program created by the Flood 

Insurance Reform Act of 2004.)

a. Current premiums are shown because data on cumulative premiums are not available.

b. Cumulative data for January 1, 1978, through January 31, 2009.

c. The analogous figure for the flood insurance program as a 

whole is 35.4 percent.

d. V zones are coastal areas subject to waves of three feet or more 

during a 100-year flood. The analogous figure for the flood 

insurance program as a whole is about 2 percent.

In high-risk zones, RLPs are much more likely than all 

NFIP properties (56 percent versus 35 percent) to be 

insured at subsidized rates. That situation reflects the fact 

that properties eligible for subsidies are older ones that 

were built before communities joined the NFIP and had 

to meet the program’s standards for building codes and 

floodplain management. Also, policies on RLPs are about 

four times as likely as all policies to cover properties in 

V zones. For SRLPs, the contrasts are sharper still.

The apparent imbalance for repetitive-loss properties 

between current premiums and cumulative claims, however, cannot be taken at face value as indicating the effect 

of an individual RLP on the actuarial soundness of the 

NFIP. A property that has experienced two floods in a 

10-year period may indeed be at a higher risk of future 

flooding, or it may simply have been subject to a run of 

bad luck despite having an average or below-average level 

of risk. One cannot assume that the owners of such properties would pay higher actuarially sound premiums any 

more than one can assume that the owners of properties 

that have experienced no losses over 10 years face no 

flood risks. The statistics for SRLPs are more meaningful: 

A series of four claims payments of more than $5,000 

each (or two to three payments that together exceed the 

property’s value) is unlikely to reflect merely a run of bad 

luck.56

FEMA’s Treatment of Repetitive-Loss Properties

In dealing with RLPs, FEMA’s main focus is on efforts to 

reduce their risk of future flooding, not on their premiums. NFIP premiums are not based on the loss experience of individual properties, and most RLPs are not 

targeted for special rates as a group. Although the average 

premium paid on policies that insure RLPs is higher than 

in the NFIP as a whole, that is mainly because those policies are more concentrated in the high-risk coastal and

71,081 10,054

109,842 17,814

2.0 0.3

3.1 0.5

12.5 3.3

15.7 5.1

That Are Subsidizedc 56.2 62.3

8.3 9.7

Currently Insured

Properties

RLPs SRLPs

Number of Properties

Number of Policies

Percentage of Current Policies

Percentage of Current Premiumsa

Percentage of Cumulative Claimsb

Percentage of Cumulative Claims Paymentsb

Percentage of Policies in High-Risk Zones 

Percentage of Policies in V Zonesd

56. To illustrate, the probability that a property with a flood risk of 

1 percent per year will experience two or more floods in 25 years is 

2.6 percent. But the probability that such a property will flood 

four or more times over that period is 0.01 percent (1 in 10,000). 

For six or more losses, the probability is less than 0.00002 percent 

(2 in 10 million).
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 25

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Table 3.

Average Annual Premiums, by Risk Zone, for All Properties and for 

Multiple-Loss Properties 

(Dollars)

Source: Congressional Budget Office based on data from the Federal Emergency Management Agency.

Note: Repetitive-loss properties (RLPs) are properties that have been the subject of at least two flood-claims payments of more than $1,000 

each in any 10-year period. Severe repetitive-loss properties (SRLPs) are RLPs that have prompted four or more flood-claims payments greater than $5,000 each, or two or more payments that together exceed the property’s value.

a. Approximation based on Thomas L. Hayes and Dan R. Spafford, Actuarial Rate Review: In Support of the May 1, 2008, Rate and Rule 

Changes (Federal Emergency Management Agency, National Flood Insurance Program, August 2008). Subsidized rates are available only 

in high-risk zones, not in Zone X.

subsidized categories.57 RLPs’ loss experience affects their 

rates in one case, however: Repetitive-loss properties 

located in Zone X are ineligible for the discounted 

preferred-risk policy premiums that apply to most 

properties outside 100-year floodplains. Thus, RLPs in 

Zone X are insured at premium rates well above average 

for their area (see Table 3).

Conversely, among properties in V zones that are insured 

at full-risk rates, RLPs and SRLPs pay premiums that are 

much lower than average. That situation may result from 

the greater prevalence of condominium policies among 

multiple-loss properties; such policies can be less costly 

because the risk is shared among a larger number of 

owners.58

An RLP’s risk of future flooding may be mitigated in 

several ways: by elevating the structure; by acquiring the 

structure, relocating or demolishing it, and converting 

the land to open-space uses; and, in some cases, by dry 

flood-proofing (sealing the exterior walls to prevent water 

from entering) or building localized physical floodcontrol measures (levees or floodwalls). FEMA provides 

grants to help state and local governments reduce flood 

risks through several programs that have varying eligibilities and requirements, including the Hazard Mitigation 

Grant Program, the Flood Mitigation Assistance Program, and the Pre-Disaster Mitigation Program (see 

Box 1 on page 4).

Legislation enacted in 2004 established two additional 

programs focusing on RLPs: the Repetitive Flood Claims 

(RFC) Grant Program and the Severe Repetitive Loss 

Program.59

B RFC grants are targeted to state or local governments 

that lack the financial or managerial capacity to take

A Zones (High risk: annual flooding probability of 1 percent or more) 430 467 484

V Zones (High risk coastal, subject to 3-foot waves in a 100-year flood) 2,270 1,389 950

Zone X (Low to moderate risk) 394 640 504

A Zones (High risk: annual flooding probability of 1 percent or more) 980 a 1,140 1,024

V Zones (High risk coastal, subject to 3-foot waves in a 100-year flood) 1,500 a 1,506 1,253

All Properties RLPs SRLPs

Full-Risk Premium Rates

Subsidized Premium Rates

57. Even with their discounted rates, subsidized properties in highrisk A zones are subject to higher premiums, on average, than their 

unsubsidized counterparts are. The reason is that the subsidized 

properties are at much greater risk because they predate their community’s entry into the NFIP, with the accompanying changes in 

floodplain management and building codes.

58. Whereas the “policy” and the “contract” are the same thing for 

most NFIP coverage, when condominium associations purchase 

contracts, FEMA attributes one policy to each condo unit. Thus, 

the higher ratios of policies to contracts—3.5 for RLPs and 4.5 for 

SRLPs in V zones compared with the average of 2.2 for all full-risk 

policies in those zones—indicates a greater prevalence of condominium policies.

59. See the Bunning-Bereuter-Blumenauer Flood Insurance Reform 

Act of 2004, 42 U.S.C. 4001, 118 Stat. 712.
26 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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Figure 3.

Growth in the Number of 

Repetitive-Loss Properties and 

Total NFIP Policies Since 2000

(Index, 2000=100)

Source: Congressional Budget Office based on data from the Federal Emergency Management Agency.

Notes: NFIP = National Flood Insurance Program.

Repetitive-loss properties are properties that have been the 

subject of two or more flood-claims payments greater than 

$1,000 each in any 10-year period.

a. Data for 2008 include January 2009.

part in the Flood Mitigation Assistance Program. 

Those grants do not require any local sharing of costs. 

Through December 2007, 66 repetitive-loss properties had been mitigated via RFC grants, and another 

13 projects had been approved but not completed. 

B The Severe Repetitive Loss Program includes both a 

carrot and a stick. An SRLP insured at subsidized rates 

can receive mitigation assistance under the program, 

but if the property owner rejects the mitigation offer, 

the NFIP premium rises by 50 percent at the next policy renewal and by another 50 percent after each subsequent flood claim, until the full-risk rate is reached. 

FEMA first issued guidance for the new program in 

January 2008. As of September 30, 2008, grants had 

been awarded for mitigation of 168 properties, 132 of 

them in Texas. Mitigating all of the residential SRLPs 

in the nation by acquiring them—the typical method 

for such properties—would cost $1.8 billion (including a nonfederal cost share of 10 percent to 25 percent), according to the Department of Homeland 

Security.60 That estimate was based on 8,040 residential SRLPs as of December 2007. The comparable 

figure for the end of January 2009 is $2.0 billion—

nearly 10 times the total appropriations for the Severe 

Repetitive Loss Program through fiscal year 2009.

Despite mitigation efforts by FEMA and state and local 

governments, the number of repetitive-loss properties 

insured by the NFIP has grown by more than 50 percent 

in this decade: from 45,783 at the beginning of 2000 to 

71,081 as of January 31, 2009. Annual growth rates for 

such properties have been roughly consistent with growth 

in the total number of NFIP policies, except in 2004 and 

2005 (see Figure 3). The more rapid growth of RLPs in 

those years is largely associated with the effects of the hurricanes of 2004 and 2005. Annual growth is measured as 

the difference between the number of insured properties 

that newly meet the definition of an RLP and the number of properties that cease to be insured (because they 

have been destroyed or abandoned or the policyholder 

has dropped coverage) or that have undergone mitigation 

and are therefore not considered active RLPs.61 The 

number of properties leaving the active list fell sharply in 

2005 and 2006—perhaps because public efforts were 

focused on short-term cleanup and restoration after the 

hurricanes rather than on mitigation—but rose again in 

2007 and 2008 (see Figure 4).

2000 2001 2002 2003 2004 2005 2006 2007 2008

0

80

100

120

140

160

Repetitive-Loss Properties

Total NFIP Policies

a

60. See Department of Homeland Security, Office of Inspector General, FEMA’s Implementation of the Flood Insurance Reform Act of 

2004, OIG-09-45 (March 2009), pp. 5, 8, 16; and Federal Emergency Management Agency, “FY 2009 SRL Allocations and Set 

Aside” (March 9, 2009), available at www.fema.gov/government/

grant/srl/fy_2009_srl_allocations_and_set_aside.shtm.

61. A mitigated RLP that experiences a subsequent insured flood loss 

is put back on the active list.
THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 27

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Figure 4.

Annual Changes in the Number of Insured Repetitive-Loss Properties

(Number of properties)

Source: Congressional Budget Office based on data from the Federal Emergency Management Agency.

Note: Repetitive-loss properties (RLPs) are properties that have been the subject of two or more flood-claims payments greater than $1,000 

each in any 10-year period.

a. Data for 2008 include January 2009.

2000 2001 2002 2003 2004 2005 2006 2007 2008a

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

New RLPs

Mitigated, Abandoned, Destroyed, or No Longer Insured RLPs

Net Increase

APPENDIX

CBO

A

Further Details About the 

NFIP’s Full-Risk Rates

This appendix presents supplementary information 

about the zone system and rate-setting methods used in 

the National Flood Insurance Program (NFIP).

Classification of High-Risk 

Flood Zones

In drawing up its flood insurance rate maps, the Federal 

Emergency Management Agency (FEMA) delineates 

three major types of flood zones. Most coastal or inland 

areas in 100-year floodplains—that is, places where the 

annual probability of flooding is at least 1 percent—are 

labeled A zones. However, coastal areas where a 100-year 

flood would include three-foot waves on top of the 

storm surge itself are labeled V zones (for “velocity wave 

action”). Areas outside 100-year floodplains are designated Zone X.1

FEMA’s rate structure can be more detailed in areas for 

which it has more information, so the agency breaks 

down its zone categories further according to the level 

of analysis it has performed. In the V zones, more than 

99 percent of policies with full-risk premiums cover properties in areas for which detailed analyses are available. 

Under an older rating system, those areas carried various 

numbers from V1 through V30, but now they are all 

labeled Zone VE. The relatively few V-zone areas that 

have been mapped more approximately are labeled Zone 

V—sometimes referred to as “unnumbered Zone V” to 

avoid confusion between that label and the larger V-zone 

category (see Table A-1).

Areas in the A zones are similarly classified according to 

the level of information available, and FEMA also distinguishes areas that are subject only to shallow flooding. In 

particular, Zone AE (formerly Zones A1 through A30) 

refers to areas studied in more detail, and (“unnumbered”) Zone A is the label used for areas subject to normal (not merely shallow) flooding that have been mapped 

more approximately. In addition, Zone AH designates 

areas where flooding takes the form of shallow ponding—

for example, on a plateau where flood waters can reach 

only one foot before they start spilling off the plateau. 

Zone AO covers other areas that are subject to shallow 

flooding, usually in the form of sheet flow (shallow flow 

over a wide area) on sloping terrain. Among all full-risk 

policies in those four A zones, roughly 75 percent cover 

properties in Zone AE, 5 percent in Zone A, and 20 percent in Zone AH or AO.2

As discussed below, FEMA uses models to set full-risk 

rates for policies that cover properties in Zones VE and 

AE, where it has more-detailed information about flood 

risks. The agency has less-detailed information about 

risks in Zones V, A, AH, and AO, so its rate setting for 

those areas relies more on professional judgment. For the 

relatively few properties in unnumbered Zone V, FEMA’s 

actuaries determine premium rates on a case-by-case

1. The very few areas for which FEMA has not yet analyzed flood 

hazards are labeled Zone D.

2. FEMA uses two other labels in the A-zone category, but all of the 

properties in those areas are insured at subsidized rates rather than 

full-risk ones. Zone A99 and Zone AR refer to areas where the 

annual chance of flooding will be less than 1 percent upon completion of a structural flood-control project, such as a levee. Zone 

A99 designates an area where a new project is under way and more 

than half finished. Zone AR designates an area where an existing 

flood-control project is now considered insufficient and where the 

schedule and plan for making repairs or upgrades meet specific 

standards.
30 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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Table A-1. 

Distribution of Full-Risk Flood Insurance Policies by Zone

Source: Congressional Budget Office based on estimates for 2008 to 2009 in Thomas L. Hayes and D. Andrew Neal, Actuarial Rate Review: In 

Support of the Recommended May 1, 2009, Rate and Rule Changes (Federal Emergency Management Agency, National Flood Insurance Program, August 2009), p. 35.

Note: * = less than 0.05 percent.

basis.3 For unnumbered Zone A, three sets of rates are 

used. One set applies to buildings whose position relative 

to the base flood elevation (BFE)—that is, the height of 

water reached during the local 100-year, or base, flood—

has been certified.4 A second set of rates applies to structures for which the elevation relative to the adjacent grade 

(ground level) is specified. A third set applies to buildings 

for which no elevation information is available. FEMA’s 

actuaries calculate those three sets of rates using Zone AE 

rates as a benchmark. For example, the BFE-rated schedule is somewhat higher than the comparable schedule in 

Zone AE, and the adjacent-grade-rated schedule assumes 

that the ground level is two to three feet below BFE. For 

areas subject only to shallow flooding (Zones AH and 

AO), actuaries use a different set of rates; for any given 

type of structure, those rates depend only on whether the 

structure is certified as lying above the community’s BFE.

The Role of Representative 

Topographic Profiles

Ideally, the full-risk rates charged in Zones AE and VE, 

where FEMA has the most detailed information, would 

reflect not only each structure’s type and its location 

Major

Zone Subzone Description

 V Coastal areas subject to waves of three feet

or more during a 100-year flood

VE V-zone areas mapped using detailed methods 1.3

V (or "unnumbered V") V-zone areas mapped using approximate methods * ___

Total V 1.3

 A All other coastal and inland areas in 

100-year floodplains

AE A-zone areas mapped using detailed methods 37.2

A (or "unnumbered A") A-zone areas subject to more than shallow flooding

and mapped using approximate methods 2.2

AH, AO Areas subject to shallow ponding (AH) or

other shallow flooding (AO) 10.6

____

Total A 50.0

 X (No subzones) Areas outside 100-year floodplains 48.8

Share of Full-Risk Policies

(Percent)

3. Case-by-case rating is also used for properties in A or V zones that 

were built after the community’s flood insurance rate map (FIRM) 

was created and that lie below the base flood elevation. Such properties are very rare because communities that participate in the 

NFIP must implement zoning rules and building codes that 

require all new (post-FIRM) structures in the identified 100-year 

floodplains to be built at or above the base flood elevation. Thus, 

post-FIRM properties that do not meet that requirement can exist 

only through implementation errors or enforcement problems.

4. More precisely, the base flood is the one for which the annual 

probability of a flood that large or larger is 1 percent. Similarly, the 

10-year flood is the one that has a 10 percent (1/10) chance of 

occurring or being exceeded in any given year.
APPENDIX A THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 31

CBO

relative to the base flood elevation but also its local topography. Depending on local conditions, structures at the 

same elevation relative to BFE—and hence exposed to 

roughly the same depth of water (if any) in a 100-year 

flood—may face different risks from floods of other sizes. 

For instance, a house that is one foot above BFE may be 

safe from all floods smaller than a 300-year event if it is 

located in a broad, shallow floodplain, where the water 

does not rise much higher in a rare large flood than in a 

more common small one. Conversely, a house located 

one foot above BFE in a narrow, steep valley, where the 

difference in water heights between rare and common 

floods is greater, may suffer damage in all floods larger 

than a 130-year event.

Basing flood insurance rates on each structure’s local 

topography is not currently feasible, however, because of 

the information requirements and administrative complexity involved. Instead, FEMA uses estimates of average 

topographic conditions to set uniform nationwide rates 

for Zone AE and for Zone VE. The agency derives those 

rates by averaging six representative topographic profiles, 

summarized by “probability of elevation” (PELV) curves. 

Each PELV curve shows the relationship for a particular 

topography between flood recurrence intervals (the 

reciprocals of the annual probabilities) and flood heights, 

which are expressed relative to BFE (for example, BFE +2 

feet). All six curves intersect at the common point (100, 

BFE)—because the base flood is the 100-year flood by 

definition—but they differ in how steeply or gradually 

they slope away from that point. In particular, each curve 

shows a different height below BFE for a 10-year flood. 

Indeed, FEMA derived the curves by analyzing the flood 

exceedence probabilities for a sample of communities 

whose 10-year floods share the same relative height.5

To determine how to weight the six curves in calculating 

the national averages, FEMA uses state-by-state data on 

the distribution of 10-year flood heights relative to BFE 

for some of its insured properties. (Initially, FEMA’s maps 

for the A and V zones showed subzones that indicated the 

relative height of the 10-year flood at each location, but 

current maps do not always include that information.) 

For instance, if 19 percent of the properties for which 

FEMA has data in a given state are located in places 

where the 10-year flood has a height of about BFE 

-3 feet, the agency assumes that the locations of 19 percent of all insured properties in that state fit the topographic profile represented by the PELV curve that 

includes the point (10, BFE -3).

The PELV curves therefore allow FEMA to reduce its 

information requirements, generalizing from data on the 

relative height of 10-year floods to the heights of floods of 

all recurrence intervals—or conversely, to the exceedence 

probabilities for floods of all relative heights. Combining 

the probabilities using each state’s share of insured properties and the respective weights for each PELV curve in 

the state yields a set of average probabilities for the nation 

as a whole. FEMA can then estimate expected percentage 

losses for each zone (AE or VE), structure type, and structure elevation relative to BFE by combining those average 

probabilities of flood heights with a set of damage functions—one for each zone and structure type—that relate 

the depth of flooding in a structure to an estimated percentage loss. The damage functions are zone-specific 

because the function for Zone VE takes account of wave 

action and effects on piers and pilings below the lowest 

floor.6

FEMA bases the damage functions on a combination of 

models from the Army Corps of Engineers and its average

5. The Government Accountability Office has expressed concern 

that FEMA has not updated its PELV curves since the early 1980s; 

see Government Accountability Office, Flood Insurance: FEMA’s 

Rate-Setting Process Warrants Attention, GAO-09-12 (October 31, 

2008), pp. 13–14, 34. The concern is that the shape of individual 

PELV curves may have changed in the past 25 years. In other 

words, although they remain anchored at the same relative heights 

for the 10-year and 100-year floods, some of them may now curve 

more or less sharply between or outside their two anchor points 

than they did before. CBO believes that changes in the precise 

shape of the six curves are a smaller source of potential error in 

FEMA’s rates than changes in the BFEs themselves and changes in 

the distributions of the 10-year flood heights relative to BFE 

(which determine the relative weights of the six curves in the 

national averages).

6. However, FEMA uses the same damage function for inland and 

coastal areas in Zone AE. A given depth of flooding tends to do 

more damage in coastal areas (even outside V zones), so using a 

single average damage function for Zone AE results in a crosssubsidy. FEMA is currently studying that issue.
32 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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claims experience.7 In calculating its average experience, 

the agency applies a weight of 1 percent to the data from 

2005 and a weight of 99 percent to the average of all 

other years, on the grounds that the long-duration flooding of 2005 was highly unusual and should not excessively influence future expectations. Because FEMA now 

has about 30 years of claims data, going back to 1978, 

those weights have the effect of reducing the impact of 

the 2005 experience from about 3 percent (1/30) to 

1 percent—in effect, treating 2005 as a 1-in-100-year 

event. The agency has commissioned a study to provide 

recommendations on the appropriate treatment of the 

2005 experience.

FEMA’s Correction for Short Historical 

Records in Zone AE

In some cases, the method outlined above for calculating 

expected percentage losses underestimates the actual risks: 

A small-sample bias exists whenever the length of available data is short relative to the return period of the risks 

being studied. For example, FEMA estimates that for a 

location with 25 years of data, a 100-year flood estimated 

without correcting for sample bias can be expected to 

have a true return interval of 63 years—or, in other 

words, to have an annual exceedence probability of 

1.59 percent (1/63) instead of the intended 1 percent. 

The many small samples that exist nationwide include 

representative numbers of small and large floods. But the 

errors in estimated flood risks—with some estimates 

being too high and some too low—do not cancel each 

other out. FEMA uses flood records and a statistical 

model of flood flow in a local area to calculate an 

exceedence probability. Graphically, that probability is a 

decreasing and concave function of flood flow for rare 

floods. In FEMA’s modeling, areas that have belowaverage flood experience exert disproportionate influence 

on the estimated national average probability compared 

with areas that have above-average flood experience. 

Intuitively, for a true exceedence probability of 1 percent, 

for example, estimation errors from small samples resulting in low estimates must be between zero and 1 percent, 

while errors resulting in high estimates may be much 

greater than 1 percent—and the average of the high and 

low estimates will be greater than 1 percent. A second but 

smaller source of bias from short historical records is 

downward bias in estimates of sample standard deviations.8

Since the late 1980s, FEMA has compensated for smallsample bias in its estimates for Zone AE by conducting 

the above analysis again using a second set of elevation 

probability curves that incorporate a correction for small 

samples.9 Those curves, called PELV(500) curves, assume 

that the short data records cover 25 years.10 FEMA combines the results obtained using the two sets of PELV 

curves; in doing so, it uses weights of 20 percent for the 

PELV(500) results and 80 percent for the regular PELV 

results, based on its original estimate that 20 percent of 

the NFIP’s policies were in communities with short 

records.

If those weights produced the right amount of correction 

for small-sample bias when FEMA first implemented the 

approach in the late 1980s, they may be leading to overcompensation now and thus contributing to an actuarial 

surplus on policies in Zone AE (and by extension in 

unnumbered Zone A). One reason is that the percentage 

of the NFIP’s exposure that is in communities with relatively short records has declined in the past two decades 

as the program’s policies have become increasingly 

7. The Government Accountability Office has also questioned the 

reliability of the data FEMA uses in deriving the damage functions; ibid., pp. 14–16. It found evidence that many entries in the 

claims database show a flood depth of zero feet (FEMA’s classification for depths of a few inches) not because the adjustors who 

filed the claims actually reported zero feet but because they 

reported no depth figure at all. Misattributing damage caused by 

deeper flooding to shallower flooding, which occurs more frequently, should contribute an upward bias to FEMA’s estimates of 

future claims. However, CBO does not know of any comprehensive review of the data that underpin the NFIP, and the program 

could have other data-quality problems that have the opposite 

effect.

8. See Clayton H. Hardison and Marshall E. Jennings, “Bias in 

Computed Flood Risk,” Journal of the Hydraulics Division: Proceedings of the American Society of Civil Engineers, vol. 98 (March 

1972), pp. 415–427.

9. According to FEMA staff, the need to correct for small-sample 

bias does not arise in Zone VE because coastal communities tend 

to have longer records of floods. The correction also does not 

apply in Zone X because, as mentioned above, rates for that zone 

are set on the basis of professional judgment, informed by the program’s actual experience of losses, not on the basis of estimated 

event frequencies.

10. See Howard Leikin and Saul Singer, “National Flood Insurance 

Program Rate Review Process,” in NFIP Interactive Rate Model 

Documentation (June 1987), p. 3.
APPENDIX A THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 33

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concentrated in coastal areas, where flood records tend to 

be longer. Another reason is that over the same period, 

communities with shorter records have accumulated 

additional data, some of which have been incorporated 

into FEMA’s models when flood maps have been revised. 

FEMA’s approach to the problem of small-sample bias 

has some important limitations. First, it creates a crosssubsidy because it raises the rates charged on all Zone AE 

policies nationwide, not just on those in communities 

with short flood records. Second, small-sample bias is a 

factor that shrinks the areas mapped as 100-year floodplains and reduces the estimated depth of flooding in 

communities with short historical records. All else being 

equal, in a community that has 25 years of data, what 

appears to be a 1-in-100 chance of flooding on the basis 

of those data can be expected, on average, to be a 1-in-63 

chance. For such a community, therefore, the mapped 

100-year floodplain could actually be a 63-year floodplain, making the annual risk of flooding in Zone X 

just outside the floodplain boundary not 1 percent but 

1.59 percent. Some other factors in FEMA’s mapping 

process, however, also have not been updated for many 

years.11 Those factors could exacerbate or offset the effect 

of the small-sample bias.

Undersized floodplains and underestimated flood depths 

in communities with short historical records would negatively affect the NFIP’s floodplain management goals by 

reducing the effectiveness of the program’s elevation 

requirements for new construction in 100-year floodplains. Specifically, when floodplains are mapped too 

small, the requirements do not apply in some areas where 

they would otherwise; and where they do apply, the 

requirements are lower than intended. 

The mapped errors, however, probably have little or no 

adverse impact on the actuarial soundness of the NFIP. 

One reason is that the “additional” floods that affect 

properties in the mapped A zones because the elevation 

requirements are too low should be offset (or more than 

offset) by the higher premium rates that result from the 

PELV(500) adjustment. As for the properties that lie outside a mapped floodplain even though their true flood 

risk exceeds 1 percent, they are insured at rates that generally do not cover their full expected costs, but the difference is funded largely or entirely through cross-subsidies 

from other Zone X policyholders, not taxpayers. As discussed in the main text, the starting point for FEMA’s 

estimate of expected losses for structures insured at Zone 

X standard rates is the observed losses on those policies 

(which FEMA then multiplies by the ratio of estimated 

to observed losses for Zone AE). Therefore, if higher 

flood risks for properties outside an undersized floodplain 

lead to greater losses on those properties, they drive up 

the rates paid by all Zone X standard policyholders. The 

connection between undersized floodplains and higher 

rates is less automatic for preferred-risk policies in Zone 

X, because FEMA’s actuaries do not set those rates 

according to a simple formula. Nevertheless, a connection between greater risks and higher rates is likely to 

occur over time as the actuaries apply their professional 

judgment to the available data. (For more details about 

cross-subsidies in the NFIP, see Appendix B.)

Converting Expected Percentage 

Losses into Premium Rates

For insured properties in Zone AE, after estimating 

expected percentage losses using the PELV and 

PELV(500) curves discussed above, FEMA converts those 

loss estimates into premium rates by using several adjustment factors. In keeping with standard insurance practices, some of the adjustments take into account administrative expenses, optional deductibles, loss-adjustment 

expenses, and underinsurance (that is, coverage for less 

than the full value of the insured property). In addition, 

FEMA includes a contingency loading of 10 percent to 

provide a safety margin for uncertainty, and it offsets the 

discounts given under the Community Rating System 

(CRS) by scaling the base (undiscounted) rates upward 

so as to keep the CRS program revenue neutral. Those 

various adjustment factors, other than the contingency 

loading, are reviewed by FEMA each year and revised as 

necessary.12

FEMA also adjusts the rates as necessary to keep them 

between certain lower and upper bounds. Specifically, it 

ensures that rates do not fall below minimum levels chosen to cover the agency’s fixed expenses per policy and 

11. For example, guidelines for mapping areas with short historical 

records specify that regional data should be averaged with local 

data for part of the analysis (estimating skewness). See Interagency 

Advisory Committee on Water Data, Guidelines For Determining 

Flood Flow Frequency, Bulletin 17B of the Hydrology Subcommittee (Department of the Interior, March 1982). The primary 

source for regional data included in Bulletin 17B has not been 

updated since 1972, which could be causing upward or downward 

bias.
34 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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that average rates for each type of structure do not rise by 

more than 10 percent a year. 

For properties in Zone VE, FEMA uses the same process 

to convert expected percentage losses into premium rates, 

with two exceptions. First, it currently applies a contingency loading of 20 percent, not 10 percent. Second, 

since 2001, FEMA has generally added one more step to 

scale the rates upward to the extent allowed by the 10 

percent cap on annual increases.13 As discussed in the 

main text, that extra step is the agency’s response to the 

costs associated with coastal erosion and to the cap itself. 

Erosion-related costs are expected to rise so rapidly in the 

future as shorelines continue to move inward, toward 

areas of denser development, that the 10 percent cap 

would not allow FEMA’s premium income from Zone 

VE to keep pace. Raising current rates above the levels 

thought to be sufficient to cover current costs prefunds 

some of the future risk. It also allows future rate increases 

to be larger in dollar terms than they would be otherwise 

because the 10 percent cap will apply to a higher base.

12. Of the factors used in calculating the expected losses themselves, 

generally only the damage functions that relate water height in a 

structure to percentage damage change from year to year. FEMA 

updates those functions annually using actuarial credibility analyses of its accumulated loss experience and studies by the Army 

Corps of Engineers. FEMA occasionally reviews how its exposure 

is distributed among the six topographic profiles, on a state-bystate basis, and revises the weights as needed.

13. In practice, the increases may average significantly less than 

10 percent. As noted in the main text, FEMA interprets the 

10 percent cap on average increases to mean that it should not 

raise the rates on particular groups of properties by much more 

than 10 percent. That interpretation can constrain the average 

increase in full-risk rates in Zone VE because the agency scales all 

of those rates upward by the same proportion. To illustrate, suppose the previous steps in the rate-setting process would lead to 

increases of 2.5 percent for 60 percent of the full-risk policies in 

Zone VE, 6 percent for 30 percent of the policies, and 7 percent 

for the other 10 percent of the policies, yielding an average 

increase of 4 percent. Multiplying each of the increases by a scaling factor of 2.5 to achieve an average rise of 10 percent would 

produce an increase of 17.5 percent on some policies. If FEMA 

decided that the maximum allowable increase on those policies 

was 14 percent, then the scaling factor would be 2 rather than 2.5, 

and the average increase for all policies would be 8 percent.
APPENDIX

CBO

B

Residual Risk Behind Levees and 

Other Cross-Subsidized Risks

A cross-subsidy in insurance coverage exists 

whenever the rates charged on some policies exceed the 

expected cost of the claims and expenses on those policies 

(including the return on capital) while the rates charged 

on other policies fall below their expected cost. In practice, no insurance program can be completely free of 

cross-subsidies because insurers cannot collect information on all of the myriad factors that influence the level of 

risk. When rates are based on past claims, every omitted 

factor that increases risk creates a cross-subsidy from the 

policyholders who do not have that factor to those who 

do (and conversely for omitted factors that reduce risk). 

In the case of the National Flood Insurance Program 

(NFIP), unpriced risk factors create cross-subsidies to the 

extent that they affect flood risks to properties outside 

100-year floodplains (that is, in Zone X) or affect the 

damage caused by a given depth of flooding in any 

zone—both of which the Federal Emergency Management Agency (FEMA) estimates on the basis of the 

program’s experience.1

Cross-subsidies do not necessarily undercut the actuarial 

soundness of the NFIP, but they can decrease economic 

efficiency. Policyholders who pay rates that do not fully 

reflect their risks have less financial incentive to take costeffective actions to reduce those risks. That effect applies 

whether or not the reduced rates are cross-subsidized. 

The other adverse impact of cross-subsidies is that potential policyholders who face premiums that are higher than 

they would be otherwise may choose to buy less coverage 

or forgo it entirely. Conceivably, the incentives to reduce 

or avoid those higher rates could also encourage some 

property owners to take excessive measures (ones whose 

costs exceed the expected benefits) to reduce their risks if 

doing so would lower their premiums.

An important cross-subsidy in the NFIP involves policies 

that cover properties in areas protected by levees, dams, 

walls, or other flood-control structures. (For simplicity, 

such structures are referred to collectively as levees hereafter.) This appendix explains the cross-subsidy to those 

properties, outlines some options for reducing the risk of 

flooding in those areas, and briefly reviews the other 

cross-subsidies in the flood insurance program.

Residual Risk Behind Levees

NFIP premium rates provide a cross-subsidy to policyholders whose properties are in areas protected by levees 

that have been certified as capable of withstanding a 100-

year flood. The cross-subsidy arises because the same 

Zone X rates apply to those areas as to areas that naturally 

lie outside 100-year floodplains, even though actual risks 

in the levee-protected areas tend to be higher.2

That difference in risks—called residual risk—occurs for 

two reasons. First, levees may fail to provide the expected 

1. More precisely, such factors create a pure cross-subsidy, on 

average, over the long run but may result in a mixture of crosssubsidies and taxpayer subsidies in the short run. If the observed 

losses associated with a particular unpriced risk are below their 

long-run expected average, then experienced-based premiums do 

not reflect the full additional risk, and taxpayers implicitly bear 

some of the risk. That would be the case if, for example, experience before Hurricane Katrina did not reveal the full extent of the 

residual risk to areas protected by levees.

2. The premium rates distinguish levee-protected areas in two special 

cases. Explicitly subsidized rates are available for properties that 

will be considered protected against a 100-year flood when a 

half-finished levee or other structure is completed. Properties in 

areas that were protected by structures that FEMA now deems 

insufficient are also eligible for subsidized coverage, provided the 

plan and schedule for making repairs or upgrades meet specific 

standards.
36 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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level of protection because they subside (settle), deteriorate from tree growth, or experience other maintenance 

problems. The NFIP does not require periodic inspection 

or recertification of levees, and in its remapping program, 

FEMA has identified many levees that no longer comply 

with its regulations and should be decertified.3

 Second, 

even if levees perform as advertised against events up to 

and including a 100-year flood, the damage that results 

from a larger flood could be greater than in other nonfloodplain areas—for example, if levees are not just 

overtopped but breached.

The significance of residual risk for the NFIP is illustrated by the losses that New Orleans suffered from Hurricane Katrina, in which levee failure played a major role. 

Likewise, Sacramento could experience billions of dollars 

of losses if a major flood overtopped the levees in California’s Central Valley.

Reducing Flood Risks to Areas 

Behind Levees

The interest of policymakers and analysts in levees and 

other flood-control structures focuses less on those structures’ implications for the NFIP than on the adequacy of 

the protection they provide. The two issues are related, 

however. Currently, the NFIP treats areas behind levees 

built to protect against 100-year floods and areas that 

naturally lie outside 100-year floodplains the same for 

regulatory as well as rate-setting purposes. Thus, such 

levee-protected locales are not subject to the land-use 

restrictions that apply inside floodplains, and property 

owners in those areas do not have to meet the mandatorypurchase requirement that would otherwise apply to 

properties with federally insured or federally regulated 

mortgages.4 As early as 1980, FEMA found that 

communities were building levees to the 100-year standard to avoid those requirements.5

 The result may be to 

encourage development in risky areas without encouraging mitigation measures beyond the levees themselves.

Some observers have proposed making changes to the 

NFIP to reduce flood damage in areas behind levees. 

One proposal would authorize or direct FEMA to take 

account of residual risk in setting premiums for structures 

in those areas. Besides improving the actuarial soundness 

of the NFIP, accounting for that residual risk in premium 

rates could help make property owners more aware of the 

limitations of the protection that levees provide. By itself, 

however, that approach would not affect the regulatory 

status of the protected areas.

A second option would be to increase the level of protection a levee must provide in order for the protected area 

to be exempt from the mandatory-purchase and floodplain management requirements. Some U.S. analysts 

have called for the exemption standard to be increased 

from 100-year protection to 500-year protection, at least 

in urban areas.6

Other proposals to lessen flood damage in areas protected 

by levees would not involve the NFIP. An example is the 

call by some experts for more systematic inspection and 

maintenance of levees to better ensure that they will 

perform as designed.7

3. Interagency Levee Policy Review Committee, The National Levee 

Challenge: Levees and the FEMA Flood Map Modernization Initiative (September 2006), available at www.fema.gov/library/

viewRecord.do?id=2677.

4. Properties inside floodplains are required to carry NFIP coverage 

if they have a mortgage from a lender primarily regulated by a federal agency or a mortgage that is insured or purchased by a federal 

agency or government-sponsored enterprise such as Fannie Mae or 

Freddie Mac. Also, property owners who receive certain types of 

federal disaster aid after a flood must purchase and maintain NFIP 

coverage to remain eligible for such assistance after subsequent 

floods.

5. Gerald E. Galloway and others, Assessing the Adequacy of the 

National Flood Insurance Program=s 1 Percent Flood Standard,

report prepared as part of the 2001–2006 evaluation of the 

National Flood Insurance Program (Washington, D.C.: American 

Institutes for Research, October 2006), available at www.fema. 

gov/library/viewRecord.do?id=2595.

6. Interagency Levee Policy Review Committee, The National Levee 

Challenge. In the Netherlands, levees and other forms of flood 

protection are built to protect against 10,000-year storms in 

coastal areas and 1,250-year floods along major rivers. In Japan, 

voluntary standards call for protection against 10,000-year events 

in heavily populated coastal areas and 200-year events in riverside 

population centers; Galloway and others, Assessing the Adequacy of 

the National Flood Insurance Program=s 1 Percent Flood Standard, 

pp. 69–71.

7. Association of State Floodplain Managers, Levees: The DoubleEdged Sword (April 17, 2007), available at www.floods.org/PDF/

ASFPM_Levee_Policy_Challenges_White_Paper.pdf.
APPENDIX B THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 37

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Other Cross-Subsidies in the Flood 

Insurance Program

Residual risk behind levees has drawn particular attention 

from policymakers in part because of the catastrophic 

results of levee failures in New Orleans. However, 

other cross-subsidies exist under the NFIP’s current 

rate structure.

Besides areas protected by levees, another part of Zone X 

that faces unpriced above-average risks is 100-year floodplains smaller than one square mile. Those areas are generally included with nonfloodplain locations in Zone X 

because identifying and mapping such small areas would 

be prohibitively expensive.8 Another source of crosssubsidies in the NFIP is the equal treatment of Zone AE 

properties in inland and coastal areas. Those coastal properties tend to experience more damage for a given depth 

of flooding (though less than properties in Zone VE, 

which are exposed to waves of three feet or more during a 

100-year flood), but that difference is not factored into 

premiums. The effect is to raise the estimates of damage 

as a function of depth that FEMA uses for all Zone AE 

structures, resulting in a cross-subsidy.

Grandfathering properties at lower rates than they would 

otherwise be eligible for is another type of unpriced 

risk—though one driven by FEMA policy rather than by 

legal constraints or data limitations. Most of the properties that are grandfathered after a flood map is revised are 

Zone X properties that would have been reclassified into 

an A or V zone.9 Continuing to include those properties 

in the group insured at the Zone X standard rate makes 

the average losses in the group higher than they would be 

otherwise, creating a cross-subsidy from owners of “true” 

Zone X properties. Although such grandfathering 

encourages the policyholders who provide the crosssubsidy to reduce or drop their coverage (an incentive 

that grows stronger as the percentage of grandfathered 

properties increases), FEMA allows grandfathering in 

order to hasten the incorporation of new information 

into communities’ floodplain management efforts by 

reducing property owners’ opposition to the revised 

maps. 8. Personal communication, representatives of the Association of 

State Floodplain Managers, October 24, 2007. In addition, 

FEMA’s rates do not account for the risk of stormwater flooding 

(flooding from water that has not yet entered a river, stream, or 

other channel). In Zone AE, stormwater flooding contributes to 

an actuarial shortfall because such flooding is not included in the 

modeled flood frequencies on which rates for that zone are based. 

In Zone X, the result may be a cross-subsidy to owners of properties that are subject to stormwater flooding if they face higher risks 

overall—for example, if their risks of regular flooding are average 

and the stormwater risks are on top of that average risk.

9. As noted in the main text, however, some grandfathered properties 

are A-zone properties that would have moved to a V zone, or A- or 

V-zone properties that would have remained in the same zone but 

been reclassified at a lower elevation. Because the “excess” flooding 

experienced by such properties does not feed back into higher 

rates for all properties in those zones—as it does for grandfathered 

properties in Zone X—the result is an implicit subsidy from taxpayers rather than a cross-subsidy.

APPENDIX

CBO

C

The Heinz Center’s Study of 

Erosion Risks

Coastal erosion of beaches, bluffs, and cliffs is a 

complex phenomenon, influenced by both natural factors 

and human activities. Areas subject to erosion pose two 

special challenges to the efforts of the Federal Emergency 

Management Agency (FEMA) to map flood risks. 

FEMA’s maps reflect the fact that such areas may experience more damage from a given storm if it washes away 

the land beneath buildings’ foundations. However, the 

maps do not reflect the fact that erosion moves the coastline inward, leaving properties closer to shore and hence 

at greater risk. For example, homes that were previously 

classified as outside the coastal flood zone—defined as 

the area exposed to damage from waves of three feet or 

higher in a 100-year flood—may be exposed to such 

waves after erosion occurs.

The Scope of the Erosion Problem

In 2000, the Heinz Center produced a study for FEMA 

on erosion issues in the National Flood Insurance Program (NFIP).1

 The study reached several conclusions:

B NFIP policies cover most erosion damage, but the 

program does not explicitly include the risk of such 

damage in its premium rates.2 Moreover, it does not 

map existing erosion-hazard areas, so flood insurance 

maps may be misleading.

B On average, the risk of damage from erosion is almost 

equal to that from flooding along the Atlantic and 

Gulf coasts, where losses of roughly two to three feet 

of shoreline per year are common. In the next 60 

years, about 25 percent of homes within 500 feet of 

the coast (outside major cities, which are well protected against erosion) will be lost nationwide because 

of erosion-related damage. That estimate translates to 

about 1,500 homes per year. However, not all coastal 

regions are subject to erosion, and loss rates vary considerably among communities.

B Over the next 60 years, erosion will cost the NFIP an 

average of $80 million more per year in claims, assuming no new development, changes in participation 

rates, or additional actions to protect shorelines. Of 

that $80 million, the Atlantic coast will account for 

$70 million and the Gulf coast for $10 million.3

(Losses on the Pacific and Great Lakes coasts are 

expected to be fairly small.)

B FEMA estimates that a nationwide program to map 

erosion-hazard areas would cost about $44 million—

or less than $5 million a year over the 10-year useful 

life of erosion maps. Such mapping would be costeffective if it discouraged even a small fraction of current development or encouraged mitigation of existing 

properties. 

1. H. John Heinz III Center for Science, Economics, and the Environment, Evaluation of Erosion Hazards (report prepared for the 

Federal Emergency Management Agency, April 2000), available at 

www.heinzcenter.org/publications/#majorreports.

2. The program’s definition of a flood includes “the collapse or subsidence of land . . . as a result of erosion or undermining caused by 

waves or currents of water exceeding anticipated cyclical levels or 

suddenly caused by an unusually high water level in a natural 

body of water”; ibid., p. 45. Excluding wet-weather erosion from 

NFIP coverage would be impractical because it is usually impossible to distinguish between losses from erosion and losses from 

flooding in such cases. In contrast, dry-weather collapse of a 

building because of erosion is not covered under the NFIP.

3. Ibid., Table S.2, p. xxix. Surveys indicate that only about half of 

the houses in high-erosion areas on the Atlantic and Gulf coasts 

have flood insurance. 
40 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

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B FEMA has responded to erosion risks by raising rates 

in all V zones, but those uniform increases create 

cross-subsidies within the zones from policyholders 

whose properties do not face such risks.

In principle, the risk of erosion would not be a source of 

additional costs to the NFIP if maps and premium rates 

could be updated after each change in a shoreline. In 

practice, however, flood insurance maps are not revised 

that often. And even when an area is remapped, FEMA 

generally grandfathers the existing properties, continuing 

to insure them at rates that ignore any changes in their 

zone classification or elevation relative to the base flood 

level.

FEMA believes it would need authorization and funding 

from the Congress for erosion mapping before it could 

impose additional charges in erosion-hazard areas. Lacking such authorization, FEMA began a multiyear plan in 

May 2001 to increase rates for all policies in coastal zones 

above currently required levels. Boosting premiums now 

has two advantages for the agency: It prefunds some 

future erosion costs, and it provides a higher base from 

which future premiums can grow at the maximum statutory rate of 10 percent a year. Over the first eight years of 

the plan, the cumulative increase for full-risk policies in 

coastal zones averaged 78.2 percent.4

Including Erosion Risks in NFIP 

Premiums

Such large rate increases, and the need for continued 

increases in the future, heighten questions about the efficiency and fairness of the NFIP’s current rate structure. 

Large cross-subsidies undermine mitigation incentives for 

policyholders who receive the subsidies and encourage 

policyholders who provide them to drop out of the program. If the goal were to set actuarially fair rates to protect taxpayers and to keep one class of policyholders from 

subsidizing another, then erosion risks would be mapped 

and separately priced.

The Heinz Center’s study included estimates of the 

increases needed to price erosion risks under various 

approaches that draw the risk classes more or less finely. 

In particular, the study estimated rates for the following 

scenarios:

B Replace the existing coastal zones with a new coastal 

high-hazard zone that includes the current areas plus 

any areas subject to erosion within the next 60 years.

B Establish a new 60-year erosion-hazard zone, which 

would overlap but be distinct from the existing coastal 

zones. (About two-thirds of insured properties in the 

existing zones do not face erosion risks, according to 

the study.)

B Establish new erosion-hazard zones that classify the 

risks more finely, such as one zone for areas subject to 

erosion within the next 20 years and a second zone for 

areas expected to erode between 20 and 60 years from 

now.

The specific estimates from the Heinz study are no longer 

meaningful because they do not reflect the large rate 

increases that FEMA has already imposed since 2001. 

However, the relative magnitudes still help to illustrate 

the contrasts among the approaches. In particular, the 

rate increase for a one- to four-family home that would 

apply in a separate 20-year erosion zone is more than 

10 times the increase that would apply if the burden of 

paying for erosion risk was shared evenly throughout a 

coastal high-hazard zone: $11.40 per $100 of coverage 

versus $0.90 (see Table C-1).5

The choice of how broadly or narrowly to define risk 

classes entails a trade-off. On the one hand, average 

4. In May 2008, rates for both full-risk and subsidized coastal-zone 

policies grew by roughly the maximum of 10 percent. Thomas L. 

Hayes and Dan R. Spafford, Actuarial Rate Review: In Support of 

the May 1, 2008, Rate and Rule Changes (Federal Emergency Management Agency, National Flood Insurance Program, August 

2008), pp. 18 and 22, available at www.fema.gov/library/

viewRecord.do?id=3430.

5. If the Congress chose to maintain the current proportional subsidies for older properties (primarily ones built before 1975 or 

before the local community joined the NFIP), those increases in 

premiums would range from $0.35 to $4.35 per $100 of coverage. 

CBO estimates that about half of the policies in coastal zones 

are explicitly subsidized (that estimate is based on Hayes and 

Spafford, Actuarial Rate Review, p. 34). As originally defined by 

the Heinz Center, the scenario involving two erosion-hazard zones 

applied the erosion premiums only to new structures (whose owners could decide to build outside the 0- to 20-year erosion zone to 

avoid the higher premiums there); older subsidized properties 

would not be affected. The figures used here are for one- to fourfamily homes. Other types of properties would face analogous 

increases.
APPENDIX C THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS 41

CBO

Table C-1. 

Illustrative Rate Increases to Price Erosion Risks

(Dollars per $100 of coverage for a 1- to 4-family residence)

Source: Congressional Budget Office based on H. John Heinz III Center for Science, Economics, and the Environment, Evaluation of Erosion 

Hazards (report prepared for the Federal Emergency Management Agency, April 2000), Table 6.10, p. 181.

Notes: EHAs = erosion-hazard areas; n.a. = not applicable.

These estimates assume that the National Flood Insurance Program pays 85 percent of damages from hurricanes, that it has overhead 

costs of 35 percent, and that premiums for subsidized structures are about 38 percent of full-risk rates.

pricing is simpler and distributes the burden of risk more 

broadly, thereby minimizing the required increases. 

(According to an estimate in the Heinz study, few people 

are likely to purchase erosion coverage voluntarily at rates 

above $5.00 per $100.)6

 On the other hand, pricing that 

is based on narrow risk classes minimizes cross-subsidies 

and thus avoids discouraging participation by people 

whose risks are lower than average. Such pricing also 

sends the most accurate signals of the true costs of developing or maintaining property in high-risk areas.

Besides charging full-risk insurance premiums, another 

way to limit erosion risks is by restricting land use. 

According to the Heinz study, most of the nation’s 

30 coastal states already impose setback requirements to 

prohibit new construction close to the shoreline, but the 

specific requirements vary widely. Seven states define the 

setback in terms of the area expected to be exposed to the 

risk of erosion within a certain period (typically 30 years 

for houses and 60 years for larger structures); other states 

define it as a certain distance (typically 25 to 100 feet) 

from some measure of the shoreline.7

 FEMA could set 

community standards that incorporate erosion risks, as it 

already does for flood risks. Two other approaches are to 

spend more money on shoreline-protection measures 

(such as beach replenishment, dune restoration, and 

shoreline hardening) or on buyouts or similar inducements to encourage existing owners to relocate.

0.90 0.90 0.35 0.35

n.a. 2.45 n.a. 0.95

0- to 20-year EHAs n.a. 11.40 n.a. 4.35

20- to 60-year EHAs n.a. 1.75 n.a. 0.65

Increase in Unsubsidized Rates

Coastal Flood Zone

That Is Not an

Erosion-Hazard Area

For a Residence in an

Erosion-Hazard Area

For a Residence in a

For a Residence in an

Erosion-Hazard Area

Increase in Subsidized Rates

For a Residence in a

Coastal Flood Zone

That Is Not an

Policy Option Erosion-Hazard Area

Zones

Introduce Two Erosion-Hazard 

Combine Coastal Flood and 

Coastal High-Hazard Zone

Introduce an Erosion-Hazard 

Zone for 0- to 60-year EHAs

Erosion Risks into a

6. Heinz Center, Evaluation of Erosion Hazards, p. 160. 7. Ibid., p. xxxviii. 

CBO

Selected Bibliography

The following publications provide further information 

about the National Flood Insurance Program and related 

issues:

Blais, Neil C., and others. Managing Future Development 

Conditions in the National Flood Insurance Program.

Report prepared for the Federal Emergency Management Agency. October 2006. www.fema.gov/library/

viewRecord.do?id=2596.

Congressional Budget Office. Value of Properties in the 

National Flood Insurance Program. June 2007.

———. Potential Cost Savings from the Pre-Disaster Mitigation Program. September 2007.

Department of Homeland Security, Office of Inspector 

General. FEMA’s Implementation of the Flood Insurance 

Reform Act of 2004. OIG-09-45. March 2009.

Dixon, Lloyd, and others. The National Flood Insurance 

Program’s Market Penetration Rate: Estimates and Policy 

Implications. Santa Monica, Calif.: RAND Corporation. 2006. www.fema.gov/business/nfip/nfipeval. 

shtm.

Federal Emergency Management Agency. Managing 

Floodplain Development Through the National Flood 

Insurance Program. Undated. www.fema.gov/library/

viewRecord.do?id=2108.

———. “Repetitive Loss Corner: Frequently Asked 

Questions.” May 26, 2008. http://fema.nfipnextgen. 

com/rl_corner.html.

———. Risk Mapping, Assessment, and Planning MultiYear Plan: Fiscal Years 2010–2014. March 16, 2009. 

www.fema.gov/library/viewRecord.do?id=3587.

———. “Mitigation Fact Sheets.” June 4, 2009. 

www.fema.gov/media/fact_sheets/mitigation.shtm.

Galloway, Gerald E., and others. Assessing the Adequacy of 

the National Flood Insurance Program’s 1 Percent Flood 

Standard. Report prepared for the Federal Emergency 

Management Agency. Washington, D.C.: American 

Institutes for Research. October 2006. www.fema.gov/

library/viewRecord. do?id=2595.

Government Accountability Office. Flood Insurance: 

FEMA’s Rate-Setting Process Warrants Attention.

GAO-09-12. October 31, 2008.

———. Information on Proposed Changes to the National 

Flood Insurance Program. GAO-09-420R. February 

27, 2009.

Hayes, Thomas L., and others, Actuarial Rate Review.

Federal Emergency Management Agency, National 

Flood Insurance Program. Various years. www.fema. 

gov/business/nfip/actuarial_rate.shtm.

H. John Heinz III Center for Science, Economics, and 

the Environment. Evaluation of Erosion Hazards. 

Report prepared for the Federal Emergency Management Agency. April 2000. www.heinzcenter.org/

publications/#majorreports.

Interagency Levee Policy Review Committee. The 

National Levee Challenge: Levees and the FEMA Flood 

Map Modernization Initiative. September 2006. 
44 THE NATIONAL FLOOD INSURANCE PROGRAM: FACTORS AFFECTING ACTUARIAL SOUNDNESS

CBO

National Research Council, Committee on FEMA Flood 

Maps. Mapping the Zone: Improving Flood Map Accuracy. Washington, D.C.: National Academies Press. 

2009.

Tobin, Richard J., and Corinne Calfee. The National 

Flood Insurance Program’s Mandatory Purchase 

Requirement: Policies, Processes, and Stakeholders. 

Report prepared for the Federal Emergency Management Agency. Washington, D.C.: American Institutes 

for Research. March 2005. www.fema.gov/business/

nfip/nfipeval. shtm.