National Flood Insurance Program: New Processes Aided Hurricane Katrina Claims Handling, but FEMA's Oversight Should Be Improved
Published: 2006-12-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In August and September 2005, Hurricanes Katrina and Rita caused unprecedented destruction to property along the Gulf Coast, resulting in billions of dollars of damage claims to the National Flood Insurance Program (NFIP). This report, which we initiated under the authority of the Comptroller General, examines (1) the impact of Hurricanes Katrina and Rita on the NFIP and paid losses by location and property type; (2) the challenges the Federal Emergency Management Agency (FEMA) and others faced in addressing the needs of NFIP claimants and communities; (3) FEMA's methods of monitoring and overseeing claims adjustments; and (4) FEMA's efforts to meet the requirements of the Flood Insurance Reform Act of 2004 to establish policyholder coverage notifications, an appeals process for claimants, and education and training requirements for agents. To conduct these assessments, GAO interviewed FEMA and insurance officials, analyzed claims data, and examined a sample of reports done on the accuracy of claims adjustments.
section_title: What GAO Found
paragraphs: NFIP paid an unprecedented dollar amount for a record number of claims from Hurricanes Katrina and Rita. Congress increased NFIP's borrowing authority with the U.S. Treasury from a pre-Katrina level of $1.5 billion to about $20.8 billion in March 2006, but FEMA will probably not be able to repay this debt on annual premium revenues of about $2 billion. As of May 2006, NFIP had paid approximately 162,000 flood damage claims from Hurricane Katrina and another 9,000 claims from Hurricane Rita. Most paid claims were for primary residences where flood insurance was generally required. FEMA and its private sector partners faced several challenges in processing a record number of flood claims from Hurricanes Katrina and Rita, among them were (1) reaching insured properties in a timely way because of blocked roadways and flood water contamination and (2) identifying badly damaged homes to be inspected in locations where street signs had washed away. Despite these and other obstacles, FEMA reported that over 95 percent of Gulf Coast claims had been closed by May 2006, a time frame comparable to those for closing claims in other, smaller recent floods. To help keep pace with the volume of claims filed, FEMA approved expedited methods for claims processing that were unique to Hurricanes Katrina and Rita. To provide oversight of the claims adjustment process, FEMA's program contractor did quality assurance reinspections of Hurricane Katrina and Rita claims adjustments. FEMA did not adopt our October 2005 recommendation that it select the claims to be reinspected from a random sample of the universe of all closed claims; thus, the results of the reinspections cannot be projected to a universe larger than the 4,316 claims adjustments that were reinspected. FEMA agrees with our prior recommendation and plans to do quality reinspections in future flood events based on a random sample of all claims. FEMA did not analyze the overall results of the quality reinspections for Hurricanes Katrina and Rita. FEMA has made progress but has not fully implemented the NFIP program changes mandated by the Flood Insurance Reform Act. For example, 15 states had adopted minimum education and training requirements for insurance agents who sell NFIP policies, as of October 2006.

section_title: Letter
paragraphs: In late August 2005, Hurricane Katrina came ashore and destroyed or made  In late August 2005, Hurricane Katrina came ashore and destroyed or made  uninhabitable an estimated 300,000 homes along the Gulf Coast of the  uninhabitable an estimated 300,000 homes along the Gulf Coast of the  United States. Hurricane Rita followed a few weeks later, making landfall  United States. Hurricane Rita followed a few weeks later, making landfall  in Texas and Louisiana and adding to the devastation, with Louisiana  in Texas and Louisiana and adding to the devastation, with Louisiana  suffering the most damaging effects from both hurricanes. Much of the  suffering the most damaging effects from both hurricanes. Much of the  damage all along the Gulf Coast was the result of catastrophic flooding. As  damage all along the Gulf Coast was the result of catastrophic flooding. As  a result, the National Flood Insurance Program (NFIP) had a large role to  a result, the National Flood Insurance Program (NFIP) had a large role to  play in the region’s recovery. Federal Emergency Management Agency  play in the region’s recovery. Federal Emergency Management Agency  (FEMA) officials estimate that half of Hurricane Katrina and Rita flood  (FEMA) officials estimate that half of Hurricane Katrina and Rita flood  victims were insured by the NFIP. Those who did have coverage filed  victims were insured by the NFIP. Those who did have coverage filed  more than five times the number of claims, through May 31, 2006, at   more than five times the number of claims, through May 31, 2006, at   10 times the cost of any other prior flood event in NFIP history.  10 times the cost of any other prior flood event in NFIP history.
The NFIP was established in 1968 in part to provide some insurance  The NFIP was established in 1968 in part to provide some insurance  protection for flood victims because private insurers were and are still  protection for flood victims because private insurers were and are still  largely unwilling to bear the economic risks associated with the  largely unwilling to bear the economic risks associated with the  potentially catastrophic impact of flooding. Under statute, homeowners  potentially catastrophic impact of flooding. Under statute, homeowners  may purchase up to $250,000 of NFIP coverage on their dwellings and up  may purchase up to $250,000 of NFIP coverage on their dwellings and up  to an additional $100,000 for coverage of personal property (i.e., furniture  to an additional $100,000 for coverage of personal property (i.e., furniture  and electronic equipment), and business owners may purchase up to  and electronic equipment), and business owners may purchase up to  $500,000 of coverage on their building structures and $500,000 on the  $500,000 of coverage on their building structures and $500,000 on the  contents.  contents.
As of June 2006, the NFIP had a little over 5.1 million policies in force.  As of June 2006, the NFIP had a little over 5.1 million policies in force.  About 3 million of the policies, about 62 percent, were for properties in the  About 3 million of the policies, about 62 percent, were for properties in the  five states affected by Hurricanes Katrina and Rita, and Florida had the  five states affected by Hurricanes Katrina and Rita, and Florida had the  largest number of policies of any state in the nation, with almost   largest number of policies of any state in the nation, with almost   2.1 million. Homeowners are required to purchase flood insurance at least  2.1 million.
Alabama, Florida, Louisiana, Mississippi, and Texas are the five states in which major  disaster declarations were made for Hurricane Katrina or Rita.
The NFIP is intended to pay operating expenses and insurance claims with  flood insurance policy premiums rather than tax dollars, but it has  statutory authority to borrow funds from the U. S. Treasury to keep  solvent in heavy loss years. Historically, the NFIP has been able to repay  funds borrowed from the Treasury to meet its claims obligations.  However, the magnitude and severity of losses from Hurricane Katrina and  other 2005 hurricanes required the NFIP to obtain borrowing authority of  $20.8 billion from the Treasury, an amount the program is unlikely to be  able to repay while paying future claims with its current premium income  of about $2 billion annually. As a result of the catastrophic losses, we  designated the program as a high-risk area in March 2006, and Congress is  considering a number of legislative changes to improve the NFIP’s  financial solvency.
The Federal Emergency Management Agency, within the Department of  Homeland Security, administers the NFIP. FEMA pays 88 private  insurance companies to perform the administrative functions of selling  and servicing flood insurance policies and settling claims, although the  companies do not assume risk for losses. To settle claims, including those  from Hurricanes Katrina and Rita, insurance companies work with  certified flood adjusters who assess damages and estimate losses. The  NFIP pays for adjuster services according to a standard fee schedule. For  example, for the average claims settlement amount for Hurricane Katrina,  $94,803, the NFIP fee schedule authorizes payment of 3 percent of the  claim amount, or $2,844, for adjusting services. FEMA is responsible for  the management and oversight of the NFIP and is assisted in performing  these functions by a program contractor. The NFIP also provides  incentives for communities to adopt and enforce floodplain management  regulations to reduce future flood damage.
After NFIP policyholders cited concerns regarding the processing and  payments of claims after Hurricane Isabel in 2003, Congress passed the  Flood Insurance Reform Act. This act reauthorized the program and  directed FEMA to take actions to provide policyholders with additional  information on their coverage, establish a regulatory appeals process for  those who disagree with actions taken to settle their claims, and establish  minimum education and training requirements for agents that sell policies.  In addition, the Flood Insurance Reform Act authorized a pilot program to  help reduce the inventory of properties that have had repetitive claims for  flood damage.
The unprecedented number of losses from Hurricanes Katrina and Rita  confronted the NFIP with management and accountability challenges  never before faced in its almost 40-year history. This report, prepared  under the authority of the Comptroller General to initiate reviews on his  own, (1) describes the impact of Hurricanes Katrina and Rita on the NFIP  and the extent of the losses paid by location and type of property;   (2) describes the challenges FEMA and its private sector partners faced  and the results of their efforts to process flood claims from Hurricanes  Katrina and Rita and address the needs of NFIP claimants and  communities; (3) assesses FEMA’s method of monitoring and overseeing  claims adjustments and the results of that monitoring and oversight; and  (4) assesses FEMA’s efforts to implement the provisions of the Flood  Insurance Reform Act of 2004 by establishing notifications on coverage to  policyholders, an appeals process for claimants, agent education and  training requirements, and a pilot program to help reduce the number of  insured properties that have sustained repeated severe flood losses.
We have recently completed or have under way several other reports and  testimonies related to FEMA’s administration and management of the  NFIP. In October 2005, we issued a report that reviewed, among other  things, FEMA’s monitoring and oversight of the NFIP and the status of its  implementation of provisions of the Flood Insurance Reform Act of 2004.  In that report, we recommended that FEMA use a statistically valid  method to select claims for review and establish milestones for meeting  provisions of the Flood Insurance Reform Act. We testified on the results  of that work before the Senate Committee on Banking, Housing and Urban  Affairs and the House Financial Services Committee Subcommittee on  Housing and Community Opportunity. In January 2006, we testified again  before the Senate Committee on Banking, Housing and Urban Affairs on  challenges facing the NFIP. In addition, we have work under way to  examine the cost of operating the NFIP, including fees paid for the  services of private insurance companies and claims adjusters. We  anticipate issuing a report on that work in 2007. In other related work on  catastrophe insurance issues, we are reviewing natural hazard loss  mitigation activities and assessments of hurricane damages caused by  wind versus flooding. We also anticipate reporting on this work in 2007.
To describe the impact of Hurricanes Katrina and Rita on the NFIP and the  extent of the losses paid by location and property type, we reviewed  congressional actions to increase the NFIP borrowing authority, and we  interviewed the Director and other officials of FEMA’s Mitigation Division.  We also analyzed data on claims payments from the NFIP management  information system. We tested the reliability of the NFIP database to  assure ourselves that the information we obtained from it was sufficiently  reliable for our reporting purposes.
To describe the challenges FEMA and its private sector partners faced and  the results of their efforts to process flood claims resulting from  Hurricanes Katrina and Rita and address the needs of NFIP claimants and  communities, we interviewed selected headquarters and field officials of  FEMA and its program contractor. We conducted semistructured  interviews with insurance industry officials involved in the recovery effort  selected on the basis of our judgment. Their views are not representative  of the universe of all insurance industry officials involved in the flood  recovery effort. We documented policies and procedures in place for  claimants who disagreed with actions taken to settle their claims, and we  collected and analyzed available NFIP data on complaints and appeals  filed by claimants. We also interviewed selected officials regarding actions  taken to develop and issue advisory opinions on elevations for rebuilding  after the hurricanes in 15 Louisiana and Mississippi communities, and we  reviewed the advisories and analyzed impacts on the communities’  recovery efforts.
To assess FEMA’s role in monitoring and overseeing the NFIP and the  results of that oversight, we examined guidance for the quality assurance  reinspections that FEMA’s program contractor conducts for a sample of  claims adjustments after every flood event and followed up on action  taken on our prior recommendation for improvements in the quality  reinspection program. We interviewed FEMA and program contractor  officials involved in the quality assurance process, and we conducted a  review of a random sample of the quality reinspections done of Hurricane  Katrina and Rita claims adjustments.
To assess the status of FEMA’s efforts to implement provisions of the  Flood Insurance Reform Act of 2004 after Hurricanes Katrina and Rita, we  interviewed FEMA officials and examined documentation of the actions  FEMA took. We assessed FEMA’s actions to comply with the provisions to  determine whether they met the legal requirements of the act. We  performed our work from December 2005 through November 2006 in  accordance with generally accepted government auditing standards. Our  scope and methodology are discussed in greater detail in appendix 1.
subsections: section_title: Background
paragraphs: Ninety percent of all natural disasters in the United States involve  flooding. Although homeowner insurance policies typically cover damage  and losses from fire or theft and often from wind-driven rain, they do not  cover flood damage because private insurance companies are largely  unwilling to bear the economic risks associated with the potentially  catastrophic impact of flooding. To provide some insurance protection for  flood victims, as well as incentives for communities to adopt and enforce  floodplain management regulations to reduce future flood damage, and to  reduce the amount of federal disaster assistance payments, federal law  established the NFIP in 1968. The legislative history of the National Flood  Insurance Act recognized that insurance for existing buildings constructed  before the NFIP was established would be extremely expensive because  most of them were flood prone and did not comply with NFIP floodplain  management standards that went into effect after they were built. The  authorizing legislation included provisions for subsidized insurance rates  to be made available for policies covering certain structures to encourage  communities to join the program. Under the NFIP, the properties are  generally referred to as Pre-FIRM (Flood Insurance Rate Map) buildings.
As shown in figure 1, the NFIP has grown from about 1.5 million policies  in 1978 to 5.1 million policies in July 2006.
subsections: section_title: NFIP Provides Insurance and Maps Flood Risk for Communities That Agree to Enforce Land Use Regulations
paragraphs: More than 20,100 communities nationwide participate in the NFIP. To  participate in the program, communities agree to enforce regulations for  land use and new construction in high-risk flood zones. In exchange, the  NFIP studies and maps flood risks and makes federally backed flood  insurance available to homeowners and other property owners. The maps  identify special high-risk flood hazard areas, also known as the 100-year  floodplain. These areas have a 1 percent chance of being flooded in any  given year or at least a 26 percent chance of being flooded over the 30-year  life of a typical home mortgage.
Property owners in the special high-risk flood hazard areas whose  communities participate in the NFIP and who have mortgages from  federally regulated lenders are required to purchase flood insurance on  their dwellings for at least the outstanding amount of their mortgages up  to the maximum policy limit of $250,000. Optional lower-cost coverage is  also available under the NFIP to protect homes in areas of low to  moderate risk. To insure furniture and other personal property items  against flood damage, homeowners may purchase separate NFIP personal  property coverage. Maximum coverage amounts under the NFIP are  $250,000 for dwellings and $100,000 for personal property.
Accurate flood maps that identify the areas at greatest risk of flooding are  the foundation of the NFIP. Flood maps must be periodically updated to  assess and map changes in the boundaries of floodplains that result from  community growth, development, erosion, and other factors that affect the  boundaries of areas at risk of flooding. FEMA is in the midst of a multi- year effort to update the nation’s flood maps at a cost in excess of   $1 billion. The maps are principally used by (1) more than   20,100 communities participating in the NFIP to adopt and enforce the  program’s minimum building standards for new construction within the  maps’ identified flood plains, (2) FEMA to develop flood insurance policy  rates based on flood risk, and (3) federally regulated mortgage lenders to  identify those property owners who are required to purchase federal flood  insurance.
section_title: Private Insurers Sell Policies and Adjust NFIP Claims under FEMA Oversight and Management
paragraphs: The work of selling, servicing, and adjusting NFIP claims is carried out by  thousands of private sector insurance agents and adjusters who work  independently or are employed by insurance companies, adjusting firms,  or designated subcontractors under the oversight and management of  FEMA within the Department of Homeland Security. According to FEMA,  about 95 percent of the NFIP policies in force are written by insurance  agents who represent 88 private insurance companies that are paid fees  for performing administrative services for the NFIP but do not have  exposure for claims losses. The companies, called write-your-own  companies, receive an expense allowance from FEMA of about one-third  of the premium amounts for their services and are required to remit  premium income in excess of this allowance to the National Flood  Insurance Fund. The write-your-own companies also receive a  percentage fee—about 3.3 percent of the incurred loss—for adjusting and  settling claims.
To settle claims, including those from Hurricanes Katrina and Rita,  insurance companies work with certified flood adjusters. When flood  losses are reported, the write-your-own companies assign a flood adjuster  to assess damages. Flood adjusters may be independent or employed by an  insurance or adjusting company. These adjusters are responsible for  assessing damage, estimating losses, and submitting required reports,  work sheets, and photographs to the insurance company, where the claim  is reviewed and, if approved, processed for payment. Adjusters determine  the price for repairs by reviewing estimates of costs prepared by  policyholders and their contractors, consulting pricing software, and  checking local prices for materials.
Adjusters are paid for their services according to a standard fee schedule  that is paid in addition to the fees paid to the insurance companies.  Adjusters who work for an adjusting company share the fees with the  company in exchange for adjusting assignments and administrative  support. For example, for the average claims settlement amount for  Hurricane Katrina, $94,803, the NFIP fee schedule authorizes payment of   3 percent of the claim amount, or $2,844, for adjusting services. For claims  adjusted under the expedited claims processing procedures that were  introduced after Hurricane Katrina, FEMA authorized payment of $750 for  each claim plus an additional $400 if a site visit was required later in the  claims adjustment process.
Among the requirements for certification as a claims adjuster for the NFIP  are at least 4 consecutive years of full-time property loss adjusting  experience, attendance each year at an NFIP adjuster workshop, and  demonstration of knowledge of the standard flood insurance policy by  passing a written examination. In 2002, FEMA modified the minimum  experience requirement to allow adjusters who do not have the requisite  experience to work with a seasoned flood adjuster until the write-your- own company determines that the adjuster is able to work independently.
Claimants who have questions or concerns about actions taken to resolve  their claims have several avenues of recourse. Claims amounts may be  adjusted after the initial settlement is paid if claimants submit  documentation that some costs to repair or replace damaged items were  higher than estimated. If a claimant is not satisfied with the adjuster’s  answers or does not agree with decisions, the claimant or the write-your- own company can request FEMA’s program contractor for assistance in  reaching a resolution by conducting a special assistance reinspection of  the claim. Also, under provisions of the Flood Insurance Reform Act of  2004, claimants may contact FEMA directly to resolve concerns that were  not addressed through the other channels. Finally, claimants may bring a  claim in federal district court against the insurer.
About 40 FEMA employees, assisted by about 170 contractor employees,  are responsible for managing the NFIP. Management responsibilities  include establishing and updating NFIP regulations, administering the  National Flood Insurance Fund, analyzing data to actuarially determine  flood insurance rates and premiums, and providing training to insurance  agents and adjusters. In addition, FEMA and its program contractor are  responsible for monitoring and overseeing the quality of the performance  of the write-your-own companies to ensure that the NFIP is administered  properly (i.e., appropriate claims settlements are made and program  objectives are achieved).
section_title: Hurricanes Katrina and Rita Had a Far- Reaching Impact on the Financial Solvency of the NFIP
paragraphs: Hurricane Katrina, followed closely by Hurricane Rita, had a far-reaching  impact on the financial solvency of the NFIP. By all measures, the flood  losses were unprecedented in the history of the NFIP. FEMA projects that  when all claims are settled, claims from NFIP policyholders who suffered  flood damage from Hurricanes Katrina and Rita will total more than   $20 billion. In contrast, the NFIP reports that from its inception in 1968  until August 2005, it paid a cumulative total of about $14.6 billion in  claims. In the two largest single flood events prior to Hurricane Katrina,  the NFIP reports that it processed a little more than 30,000 claims after a  Louisiana flood in 1995 and Tropical Storm Allison in 2001. Figure 2  illustrates the magnitude of the flood losses in 2005 compared to losses  over the history of the NFIP.
Not only were the total cost and number of Hurricane Katrina and Rita  claims far greater than in prior flood events, the amount paid per loss was  also greater. As shown in figure 3, the average amounts paid per claim for  Hurricanes Katrina and Rita flood damages—about $94,800 and   $46,000, respectively—were much larger than average claims amounts  reported as paid in the 3 prior years. Average paid losses for Hurricane  Katrina were about three times the average paid losses reported by the  NFIP for damage from flood events in 2004, including Hurricanes Charley,  Ivan, Frances, and Jeanne in Florida and other East Coast and Gulf Coast  states.
As a result of the number and amount of claims for damages from the 2005  hurricane season and particularly Hurricane Katrina, losses to be paid far  exceeded the NFIP’s existing borrowing authority with the U.S. Treasury.  The borrowing authority was subsequently increased from $1.5 billion  before Hurricane Katrina to $18.5 billion in November 2005, and then to  $20.8 billion in March 2006 to pay claims and expenses from Hurricane  Katrina and other 2005 hurricanes. As of September 30, 2006, FEMA’s debt  to the Treasury was $16.9 billion. As we reported in January 2006, it is  unlikely that FEMA will be able to repay a debt of this size and pay future  claims in a program that generated premium income of about $2 billion in  fiscal year 2005.
To the extent possible, the NFIP is designed to pay operating expenses  and flood insurance claims with premiums collected on flood insurance  policies rather than by tax dollars. However, by design, the program is not  actuarially sound because federal law authorized subsidized insurance  rates to be made available for policies covering some properties to  encourage communities to join the program. As a result, the program does  not collect sufficient premium income to build reserves to meet the long- term future expected flood losses.
In November 2006, legislation was pending in both houses of Congress to  reform the NFIP. A Senate provision would forgive the NFIP debt and bills  in both houses had provisions to improve the financial solvency of the  program and reduce the extent of the federal government’s exposure for  losses in catastrophic loss years. For example, proposed legislation in  both the Senate and the House of Representatives contain provisions that  would allow premium increases of up to 15 percent annually on NFIP  policies, up from the current cap of 10 percent on premium increases.  Additionally, legislation in both houses of Congress would phase out  subsidized rates for some properties built before flood insurance rate  maps were put into effect in their communities, including nonresidential  properties and those that are not primary residences. However, none of  the proposals, if enacted, would make changes to the NFIP that would  result in collecting enough premium income to cover losses for any future  flood events of the magnitude of Hurricane Katrina.
Until the 2004 hurricane season, FEMA had been generally successful in  keeping the NFIP on sound financial footing, exercising its borrowing  authority three times in the last decade when losses exceeded available  fund balances. In each instance, FEMA repaid the funds with interest.  According to FEMA officials, as of August 31, 2005, FEMA had outstanding  borrowing of $225 million with cash on hand totaling $289 million. FEMA  had substantially repaid the borrowing it had undertaken to pay losses  incurred for the 2004 hurricane season, which, until Hurricane Katrina  struck, had been the worst hurricane season on record for the NFIP.  FEMA’s current debt with the Treasury is almost entirely for payment of  claims from Hurricanes Katrina and Rita and other flood events that  occurred in 2005.
subsections: section_title: Most NFIP Loss Claims Were in Louisiana for Primary Residences in Special Flood Hazard Areas
paragraphs: As shown in figure 4, the majority of NFIP claims for flood damage from  Hurricane Katrina were in Louisiana, and a large portion of the Louisiana  Hurricane Katrina claims were in New Orleans.
As of May 2006, the NFIP had paid about 162,000 claims for losses from  flood damage from Hurricane Katrina in Alabama, Florida, Louisiana, and  Mississippi. About 135,000 of these losses (about 83 percent) were in  Louisiana.  As of July 2006, about 83,500 Louisiana claims were made for  property damage in the New Orleans area, where flood waters breached  levees and floodwalls. Almost 9,000 additional NFIP claims, over 7,000 of  them from Louisiana, were paid as a result of losses from Hurricane Rita.
Tables 1 and 2 provide a state-by-state breakdown of the number of paid  losses, the number of losses paid at policy limits, and the average payment  amounts per loss for Hurricanes Katrina and Rita, through May 2006.
The majority of Hurricane Katrina and Rita paid losses were for flood  damage to residences. About 96 percent of Hurricane Katrina paid losses  and about 94 percent of Hurricane Rita paid losses were for residential  properties including condominiums, while 4 percent and 6 percent of the  paid losses, respectively, were for nonresidential properties including  businesses and public buildings (i.e., schools and churches).
As shown in figures 5 and 6, the majority of paid losses for  noncondominium residential properties were for principal residences.  About 16 percent of paid claims for residences damaged by Hurricane  Katrina were nonprincipal residences, which include secondary homes.  About 18 percent of paid losses for residences damaged by Hurricane Rita  were for nonprincipal residences. See appendix II for detailed information  on principal and nonprincipal residential paid losses by state.
Most of the paid losses were for properties located within the special flood  hazard areas where homeowners with mortgages from federally regulated  lenders are required to purchase flood insurance on their dwellings for at  least the amount of their outstanding mortgage. As shown in figure 7,  about 78 percent of the paid losses for Hurricane Katrina through May  2006, were in special flood hazard areas subject to flooding or flooding and  wave action where purchase of flood insurance is mandatory on  properties with mortgages from federally regulated lenders. However,  claims were also paid on 36,325 losses (about 22 percent) on properties  outside of the special flood hazard areas where purchase of flood  insurance is optional. As shown in figure 8, of 8,851 paid loses for  Hurricane Rita through May 2006, 6,746 (about 76 percent) were in special  flood hazard areas.
While homeowners who live in specially designated flood hazard areas are  required to purchase NFIP insurance on their dwellings at least for the  amount of any federally regulated mortgage, the purchase of coverage for  the home’s contents, including furniture and personal property, is optional  and may be purchased separately. NFIP policyholders who live in, for  example, rental units, cooperatives, or condominium buildings may elect  to purchase NFIP policies for contents coverage only. Figures 9 and   10 show that most paid Hurricane Katrina and Hurricane Rita residential  losses were for both dwellings and contents. See appendix III for detailed  information on residential paid losses for dwellings and contents by state.
Building only (3,620)
Building and contents (4,264)
section_title: FEMA and Private Sector NFIP Partners Were Challenged to Process a Record Number of Claims and Address the Needs of NFIP Claimants and Communities
paragraphs: The magnitude and severity of the damages from Hurricane Katrina closely  followed by Hurricane Rita presented FEMA and its private sector NFIP  partners with challenges to accurately process a record number of flood  claims in a timely manner under adverse conditions and address other  needs of NFIP claimants and communities.
subsections: section_title: Officials Described Challenges to Processing Flood Claims
paragraphs: “A month after Hurricane Katrina, our adjusters couldn’t get to flooded properties  because roadways were blocked by debris and houses were contaminated by  flood waters. In many cases, adjusters could not even identify the houses they  were trying to inspect because street signs were washed away and houses were  piled on top on one another as a result of the storm surge. Adjusters went to some  addresses only to find nothing left standing but the foundation. Making contact  with claimants was in some cases impossible because they were scattered across  the country and relocating frequently from one temporary address to another. In  many cases, the documentation we normally use to adjust claims no longer  existed. Claimants’ files at local insurance agencies, mortgage records, and other  documents were gone in the flood.”
According to a representative of FEMA’s program contractor on-site in  Hammond, Louisiana, about 8,000 adjusters were working on claims from  Hurricanes Katrina and Rita at the high point, from October through  December 2005. An owner of a firm that specializes in insurance claims  adjustments for catastrophes described the problems he faced in getting  adjusters to the affected areas. The majority of adjusters who worked  under contract for this firm were staying in Mobile, Alabama, a 2½- to   3-hour drive from the New Orleans area. Highways were jammed, and  lodging and fuel were in short supply. The business owner said that he  bought more than 30 houses in the Mobile area, several tanker trucks of  oil, and a gas station to meet adjusters’ housing and transportation needs.
Figure 11 shows photographs of flooded neighborhoods that illustrate  some of the challenges faced by flood adjusters in getting to and  identifying the heavily damaged houses they were assigned to inspect.
section_title: Over 95 Percent of Claims Were Closed within 9 Months with Relatively Few Complaints
paragraphs: Despite the large volume of claims and adverse conditions for settling  them, the NFIP was successful in closing 92 percent of NFIP claims for  Hurricane Katrina and 86 percent for Hurricane Rita by March 2006, about  7½ months after the storms struck. By May 2006, about 9 months after the  storms, FEMA reported that over 95 percent of the Gulf Coast claims were  closed. These time frames for closing claims are comparable to time  frames for closing claims in other, smaller flood events. For example, in  Florida, where the largest number of claims for flood damage were filed in  the 2004 hurricane season, the NFIP closed about 88 percent of the   33,888 claims from Hurricanes Charley, Ivan, Frances, and Jeanne within   7 months and about 92 percent within 9 months.
Concerns from claimants about actions taken to settle their claims were  relatively few in relation to the large number of claims filed. For example,  as of April 2006, 13 appeals had been filed by claimants related to  settlements of their claims for Hurricane Katrina damage, and no appeals  had been filed on claims for damage from Hurricane Rita. In February  2006, FEMA’s program contractor had received about 500 requests for  special assist reinspections. These requests occur when claimants and  insurance companies do not agree on aspects of the claims adjustment and  ask for assistance in reaching a resolution. FEMA was not able to provide  comparison data from prior years or updated information on the number  of appeals filed after April 2006 and the number of special assist  reinspections for Hurricanes Katrina and Rita after February 2006.
section_title: FEMA Approved the Use of Expedited and Square Foot Claims Adjustment Methods Unique to Hurricane Katrina
paragraphs: To try to assist NFIP policyholders despite many obstacles, FEMA  approved expedited claims processing methods that were unique to  Hurricanes Katrina and Rita. In some circumstances, claims could be  adjusted without site visits by certified flood claims adjusters. For flooding  from Lake Pontchartrain in New Orleans caused by the failure of the  levees, FEMA allowed the use of aerial and satellite photography and flood  depth data to identify structures that had been severely affected. If data on  the depth and duration of the water in the building showed that it was  likely that covered damage exceeded policy limits, the claim could be  settled without a site visit by a claims adjuster. Similarly, for some other  losses in Louisiana, Alabama and Mississippi, FEMA authorized claims  adjustments without site visits where structures were washed off of their  foundations by flood waters and square foot measurements of the  dwellings were known. While FEMA authorized the use of these  approaches, the write-your-own companies made the decision on whether  they wished to use expedited processes to adjust claims. In addition,  FEMA authorized the use of a square foot measurement methodology for  homes that had been flooded off of their slabs, pilings, or posts. In those  instances, damages could be calculated by a certified flood adjuster based  on measurements of room dimensions and classification of building  materials as high, medium, or low level, rather than a room-by-room, item- by-item calculation of loss amounts.  FEMA authorized payments to its  private insurance company partners of $750 per expedited claim  adjustment—a lower fee than would have been paid for a more time- consuming room-by-room, line-item-by-line-item visual assessment of  flood damage.
According to the FEMA director of NFIP claims, about 17,200 claims for  damage, mostly from Hurricane Katrina (about 11 percent of all Hurricane  Katrina claims), were adjusted using expedited procedures. Although a  relatively small number of claims were adjusted using expedited  processes, officials of FEMA, its program contractor, representatives of  two of the five private insurance companies we interviewed, and a flood  claims adjusting service official said that having the option to do some  expedited adjustments enabled the NFIP to keep up with demands for  adjuster services and close the claims as quickly as it did.
Representatives of the three insurance companies we visited that did not  use expedited processes to a significant extent said they did not do so for  reasons including concerns over the accuracy of flood depth data, delays  in the availability of flood depth data, and because their companies did not  write homeowners’ policies on the dwellings in question, they lacked  necessary information (i.e., square foot measurements of the home) that  were needed to process claims without site inspections.
According to the FEMA director of NFIP claims, two large write-your-own  insurance companies developed models that were approved by FEMA for  use in making square foot estimates of damage for some claims from  Hurricanes Katrina and Rita instead of sending certified flood adjusters to  the sites to assess and document damage room by room and item by item.  According to the FEMA official, the square foot models paid claims based  on the square footage of the property and a classification of the building  materials as low, middle, or high level. For example, claims paid on a  flooded high-level kitchen would be more than payments for a middle-level  kitchen of the same square footage. If one or two high-end items were in a  middle-level home (i.e., a custom front door or exotic hardwood floors),  an adjustment to the middle-end rate would be made for those specific  items. According to the official, the NFIP had experimented briefly with a  much less sophisticated approach to square foot estimating about 10 years  ago but had not used any form of claims adjusting since that time other  than the traditional approach of sending a certified flood adjuster to the  site to assess damage and estimate losses with required reports, work  sheets, and photographs to document damage room by room and line item  by line item.
The director of NFIP claims said that FEMA did not track the number of  estimates done using the square foot method. He said that FEMA plans to  examine the accuracy of the models carefully and consider using them for  other catastrophic flooding events in the future. Because usage of the  square foot method by the two companies with approved models was not  carefully tracked during Hurricanes Katrina and Rita, FEMA paid the same  fee for square foot adjustments as it did for regular line-item-by-line-item  adjustments that took longer to perform and required more extensive  documentation. However, the director of NFIP claims said that if the  square foot methodology is approved for future use, the fee schedule paid  for these adjustments would probably be lower than the current schedule  for regular claims adjustments, with a resulting savings for the NFIP.
In addition to approving expedited and square foot claims adjusting  methods, FEMA took several other actions to expedite claims adjustments  and meet the needs of claimants in the aftermath of Hurricanes Katrina  and Rita. These were actions that, according to officials, FEMA had also  used to a more limited extent in prior large flood events. Specifically,  FEMA    waived the requirement that property owners furnish proof of loss  statements that list their losses for all Hurricane Katrina and Rita  claims,    allowed telephone adjustments for some claims below $25,000,    established special toll-free telephone lines to assist policyholders  who had questions about filing claims,  liberalized adjuster training requirements to deploy more adjusters  to flood-damaged areas, and    authorized insurance companies and independent flood adjusting  firms to use adjusters who did not meet FEMA’s minimum flood  certification requirements provided that they worked under the  direction of seasoned adjusters until the company certified that they  were trained.
section_title: NFIP Adjustment Process Will Continue with Claims for Help to Elevate or Remove Substantially Damaged Properties
paragraphs: As part of its floodplain management strategy, FEMA policies encourage  the elevation or removal of damaged properties from the floodplain. In  addition to paying claims for flood damage, NFIP policies pay up to  $30,000 to owners of substantially damaged or repetitive loss properties  for the cost of taking mitigation actions such as elevation, floodproofing,  relocation or demolition, in order to comply with state or local floodplain  management laws or ordinances. The payments are made under the  increased cost of compliance (ICC) coverage of the standard flood  insurance policy. As a first step to making claims for this coverage,  adjusters are required to file preliminary damage assessment forms with  FEMA for properties that may be substantially damaged. Figure 12 shows  renovations in process on a New Orleans house that is being elevated to  mitigate against future flood damage using ICC coverage to pay some of  the costs.
As of April 26, 2006, adjusters had completed almost 50,000 preliminary  damage assessment forms for properties flooded by Hurricane Katrina and  a little more than 1,000 forms for properties flooded by Hurricane Rita.  Over 40,000 of the forms for damage in the two storms were for properties  located in Louisiana. Through May 2006, FEMA had made ICC payments of  about $7 million on Hurricane Katrina and Rita claims. Anticipating a large  number of ICC claims as a result of the 2005 hurricane season, FEMA  increased the time frame for property owners to complete the mitigation  actions from 2 years to 4 years after a state or community issued a  substantial damage declaration. In an upcoming revision to the standard  flood insurance policy, FEMA plans to make permanent the increase in  time for property owners to complete work and receive ICC payments.
section_title: FEMA Issued Advisory Base Flood Elevations to Guide Rebuilding Efforts in the Aftermath of Hurricanes Katrina and Rita
paragraphs: In addition to approving new methods for expedited processing of some  NFIP claims after Hurricane Katrina, FEMA also took new steps to guide  communities’ rebuilding efforts. For the first time, FEMA issued advisory  guidance on coastal flood elevations that communities can use in the  reconstruction process until more detailed data become available.   According to FEMA officials, this guidance—called advisory base flood  elevations—was necessary because a risk assessment showed that base  flood elevations in effect for coastal Louisiana and Mississippi did not  reflect the true risk to the areas from flooding. According to a FEMA  official, FEMA expects to have updated rate maps for coastal areas by  early 2007 so that communities can begin the process of considering to  adopt them.
Accurate flood maps that identify the areas at high risk of flooding are the  foundation of the NFIP, and the flood maps for some areas of the Gulf  Coast affected by Hurricanes Katrina and Rita were out of date. The maps  identify base flood elevation levels—the height at which there is a   1 percent chance of a flood occurring in a given year, also known as the  100-year flood. FEMA uses the 100-year flood as the standard for setting  premium rates and requirements for NFIP.
Prior to Hurricanes Katrina and Rita, FEMA was conducting a coastal  study of hurricane storm flooding as a part of its map modernization  program. According to a FEMA official, the agency was about to issue  several new preliminary flood insurance rate maps in the Gulf Coast  region when the storms hit. However, the storm surges from Hurricanes  Katrina and Rita far exceeded the base flood elevations in many areas of  the Gulf Coast, raising questions about the validity of the base flood  elevations and current flood insurance rate maps. In response, FEMA  conducted risk assessments using the most current and accurate flood risk  data available. The analyses incorporated storm data from the past   35 years, including data from Hurricanes Katrina and Rita, tide (water  level) gauge data, and other engineering studies. The analyses showed that  base flood elevations on the flood insurance rate maps in effect for coastal  Louisiana and Mississippi did not reflect the true risk from flooding  because the elevations were between 1 and 9 feet too low. Also, the  analyses showed that higher storm surges and larger waves can be  expected to spread farther inland than previously estimated because of  land subsidence and the loss of the protective coastal barrier over the past  10 to 20 years. On completion of the risk analyses, FEMA issued advisory  base flood elevation maps for 15 parishes in Louisiana and 3 counties in  Mississippi that took into account the more accurate and up-to-date flood  hazard data. (See app. III for a list of the communities for which the  advisories were issued and the status of the communities’ consideration of  their adoption.)
FEMA cannot require communities participating in the NFIP to use the  advisory base flood elevations. According to FEMA, it issued the  advisories to parishes and counties, and individual communities within  those jurisdictions can decide whether or not or to what extent they will  adopt the guidance. For example, the City of Gulfport, Mississippi,  adopted the advisories in September 2006 to protect citizens from future  floods but extended the official adoption of the new elevations to  November 1, 2006, to allow residents wishing to rebuild to less stringent  elevation requirements in effect prior to the adoption of the advisories  adequate time to secure building permits. The New Orleans city council  approved FEMA’s new advisories but made exceptions for properties in  the French Quarter and other national historic structures in the city and  those listed with the Historic Districts Landmarks Commission.  Lafourche Parish, Louisiana, rejected the advisory because the parish  council considered some advisory map data to be wrong, determined that  adopting the advisory would have a high negative economic impact on  homeowners, and noted that the advisory information was intended to be  only advisory and preliminary.
However, FEMA has provided incentives for individual homeowners and  communities to rebuild using the advisory standards. For example, FEMA  requires that rebuilding projects it funds, through public assistance or  mitigation grants, be built to advisory standards. Similarly, FEMA grants  for repairing and rebuilding public infrastructure such as schools,  libraries, and police stations will not be available to communities unless  they rebuild to advisory base flood elevations. NFIP policyholders who  live in communities that have flood plain management standards that  exceed the minimum standard are eligible for discounts on their  premiums. ICC payments to NFIP claimants that take steps to reduce their  risk from future flood damage will help cover the elevation of homes to  the advisory base flood elevation if that standard is adopted by the  community. FEMA has also warned communities that continued use of  flood data on current flood insurance rate maps could result in residential  and commercial buildings that will be vulnerable to flood damage because  they will not be built high enough or have the structural integrity to resist  flood forces that may be encountered in future large events.
According to a FEMA official, the agency expects to have updated,  preliminary flood insurance rate maps for the coastal parishes and  counties in Louisiana and Mississippi by early 2007. However, the maps  will become effective only after a formal appeals process and community  adoption; a process that normally takes a minimum of 2 years to complete.  Once the new flood insurance rate maps are adopted, they will supersede  all advisory base flood elevations issued by FEMA.
section_title: Results of Monitoring and Oversight of Claims Payments Were Inconclusive because FEMA Did Not Reinspect a Statistically Valid Sample of Claims
paragraphs: As in previous flood events, FEMA’s primary method of monitoring and  overseeing claims adjustments and addressing concerns from claimants  was its quality reinspection program. As of August 2006, FEMA’s program  contractor had conducted quality assurance reinspections of   4,316 Hurricane Katrina and Rita claims. In addition, FEMA formed a  special task force to reinspect an additional 1,696 claims that were  adjusted using expedited processes. Because FEMA did not reinspect a  random sample of all claims closed, as we recommended in October 2005,  the results of the reinspections cannot be projected to a population larger  than the 4,316 claims reinspected. As a result, FEMA is unable to  determine the overall accuracy of the claims closed. FEMA’s Deputy  Director of the Mitigation Division said that FEMA agrees with our  recommendation and plans to do quality reinspections in future flood  events based on a random sample of the population of all claims. Neither  FEMA nor its program contractor analyzed the overall results of the   4,316 quality reinspections for Hurricanes Katrina and Rita to identify the  total number of payment errors and the magnitude of those errors. FEMA  did not have a requirement that the overall results of the reinspections for  flood events be analyzed. In our review of a statistically valid sample of  740 of the 4,316 reinspection reports, claims payment errors were  identified in about 14 percent of the Hurricane Katrina reinspections of  claims adjusted using regular processes, in about 1 percent of the  reinspections of Hurricanes Katrina and Rita claims adjusted using  expedited methods of claims adjustments, and 2 percent of Hurricane Rita  reinspections of claims adjusted using regular processes. Because, in the  past, FEMA has had neither an appropriate sampling methodology nor a  requirement that an analysis be done of overall results of claims  adjustments done after every flood event, we do not know how the error  rates we identified compare to adjusting errors in reinspection reports for  other smaller flood events.
subsections: section_title: General Adjusters and Disaster Analysts Did Quality Reinspections of About 2.5 Percent of All Claims and Additional Reinspections of Claims Adjusted Using Expedited Processes
paragraphs: To determine whether claims were correctly adjusted by the large cadre of  adjusters deployed after Hurricanes Katrina and Rita, FEMA’s program  contractor conducted quality assurance reinspections of 4,316 Hurricane  Katrina and Rita claims conducted from January to September 2006. The  number of reinspections done was slightly smaller than the goal  established by FEMA for the percentage of reinspections to be completed.  However, FEMA officials told us in a briefing at the conclusion of our  audit work that 5,198 reinspections had been completed.  FEMA’s director  of NFIP claims said that the program contractor was to reinspect about   3 percent of all claims, about the same percentage of reinspections done  after other flood events. In addition, the contractor was to review at least  10 percent of the expedited claims done by each insurance company that  decided to use expedited processing procedures for some claims.  Reinspection reports completed as of September 2006 represented about  2.5 percent of all Hurricane Katrina and Rita claims that were closed by  May 2006. Reinspection reports were completed for just over 10 percent of  the 17,200 claims closed using expedited processes.
The quality assurance reinspections are a standard oversight procedure  after all flood events and are generally done by general adjusters who, in  addition, are responsible for estimating damage from flood events,  coordinating claims adjustment activities at disaster locations, and  conducting adjuster training. When we did audit work for our October  2005 report, nine general adjusters were employed by FEMA’s program  contractor. Four general adjusters were on board after Hurricanes Katrina  and Rita, according to the general adjuster in charge. According to FEMA,  one reason for the loss of general adjusters was that several left to work as  independent adjusters or for adjusting firms to earn higher pay adjusting  claims for Hurricanes Katrina and Rita. To supplement the general  adjuster workforce, FEMA’s program contractor hired 22 temporary  employees.
In addition to overseeing the regular quality reinspection program of   4,136 reinspections of Hurricanes Katrina and Rita claims adjusted using  regular processes and expedited methods, FEMA formed a special task  force of 15 adjusters and supervisors to review and reinspect additional  claims closed using expedited methods. FEMA officials said that they took  this action because the expedited methods had not been used to adjust  claims in prior flood events, so they wanted to have additional information  on the accuracy of payments made.
section_title: Quality Reinspection Program Does Not Rely on a Statistically Valid Sampling Methodology
paragraphs: FEMA did not adopt our October 2005 recommendation that it select the  claims to be reinspected in its quality reinspection program using a  random sample of the population of all claims. Instead, according to the  general adjuster in charge of Hurricanes Katrina and Rita, selection of  claims to reinspect was based upon judgmental criteria including, among  other items, the size and location of loss and complexity of claims. The  general adjusters used their judgment to select what they thought were the  more challenging claims adjustments for reinspection under the premise  that if difficult adjustments are done accurately, more routine adjustments  should be handled properly, as well.
The process the general adjuster described is a nonprobability sampling  process rather than random sampling. In nonprobability sampling, staff  selected a sample based on their knowledge of the population’s  characteristics. The major limitation of this type of sampling is that the  results cannot be generalized to a larger population, because there is no  way to establish, by defensible evidence, how representative the sample is.  A nonprobability sample is therefore not appropriate to use is to  generalize about the population from which the sample is taken.
After discussion, FEMA agreed with GAO’s recommendation that it  implement an approach for random sampling. The Deputy Director of  FEMA’s Mitigation Division said that FEMA plans to do quality  reinspections in future flood events based on a random sample of the  universe of all claims. The official advised that FEMA was not able to  implement the October 2005 recommendation in the aftermath of  Hurricanes Katrina and Rita because other priorities to meet the needs of  claimants and communities took precedence.
Because the judgmental criteria were used in selecting reinspections to be  done, the results of FEMA’s NFIP quality reinspection program for  Hurricanes Katrina and Rita cannot be projected to a larger universe than  the claims adjustments sampled. As a result, FEMA is unable to determine  the overall accuracy of claims settled for these flood events—an action  that is necessary to meet GAO’s internal control standard that FEMA have  reasonable assurance that program objectives are being achieved and its  operations are effective and efficient.
section_title: Limited Information Available on the Overall Results of the Quality Reinspections
paragraphs: Of FEMA’s 4,316 claims reinspections, 2,565 (about 59 percent) were for  claims adjustments done using regular processes that included on-site  visits by a certified flood adjuster to assess damages, while 1,751 (about   41 percent) were reinspections of claims adjusted using the expedited  methods that FEMA authorized to settle some claims at policy limits  without site visits by flood adjusters. FEMA’s program contractor did not  analyze the overall results of its quality reinspection program for  Hurricanes Katrina and Rita, another action that is necessary to meet our  internal control standard that FEMA have reasonable assurance that  program objectives are being achieved and its operations are effective and  efficient. FEMA’s director of NFIP claims said that FEMA does not  generally require the program contractor to prepare and analyze reports of  the overall results of quality reinspections after flood events. According to  officials of FEMA and its program contractor, in addition to preparing  written reports of each quality assurance reinspection, general adjusters  discuss the results of the reinspections they perform with insurance  company officials that process the claims. If a general adjuster determines  that an expense was allowed that should not have been covered, the  company is to reimburse the NFIP. If a general adjuster finds that the  private sector adjuster missed a covered expense in the original  adjustment, the general adjuster will take steps to provide additional  payment to the policyholder. According to officials of FEMA and its  program contractor, quality assurance reinspections are forwarded from  general adjusters to the program contractor, where results of  reinspections are to be aggregated in a reinspection database and the  resolution of overpayments and underpayments is tracked.
According to the FEMA director of NFIP claims, a special task force of  adjusters and supervisors reinspected 1,696 expedited claims from  Hurricane Katrina in addition to the reinspections conducted in the quality  reinspection program and found a total of 81 erroneous payments (about   5 percent). FEMA will take action to recover overpayments of claims  where it is appropriate to do so. The official also stated that a report on  the results of the task force review was being prepared, but it was not  completed during the course of our review. We did not analyze data from  the special task force as part of our review of a sample of quality  reinspection reports.
Because the NFIP’s quality reinspection program does not rely on a  statistically valid sampling methodology, like FEMA, we are unable to  project the results of our reviews of 740 reinspection reports to the  population of all claims closed. However, because our sample is a  probability sample of all 4,316 reinspections claims, are able to project our  estimates to this population of claims reinspections.
Our review of 320 of the quality reinspection reports done for Hurricane  Katrina regular process claims found that reinspectors identified problems  in 119 instances (about 37 percent). In most instances where quality  reinspections identified problems with the original claims adjustments,  reinspectors determined that the claims payment amounts were correct  but that files did not meet NFIP standards (e.g., they did not include all  supporting documentation). However, 44 of the 320 quality reinspection  reports we reviewed for Hurricane Katrina claims adjustments that used  regular processes (about 14 percent) identified claims overpayments or  underpayments. Payment errors identified in our review included   8 underpayments that ranged from more than $131,000 to $543 and   36 overpayments that ranged from $65,000 to $86. For the expedited  process reinspection reports, we identified problems in about 12 percent  (39 of 320) reports we reviewed. However, reinspectors identified  erroneous overpayments in only 4 of these instances (about 1 percent).  These payment errors were all overpayments that ranged from $40,000 to  $80,000. On the basis of our review of 100 Hurricane Rita reinspections, we  estimate that about 2 percent of the reinspections identified erroneous  payments. These payment errors were between $9,000 and   $10,000. Because, in the past, FEMA has had neither an appropriate  sampling methodology nor a requirement for an overall analysis claims  adjustment done after every flood event, we do not know how the error  rates we identified compare to adjusting errors identified in reinspections  of claims from other smaller flood events. See appendix IV for the  complete results of our review of 740 quality reinspection reports for  claims adjustments after Hurricanes Katrina and Rita.
section_title: FEMA Has Made Progress Implementing NFIP Program Changes in the Flood Insurance Reform Act of 2004
paragraphs: Since we last reported in October 2005, FEMA has moved forward on  implementation of the Flood Insurance Reform Act of 2004. However,  there is still progress to be made. Among other things, the act mandated  FEMA to (1) develop supplemental materials for explaining NFIP coverage  and the claims process to policyholders when they purchase and renew  policies; (2) establish, by regulation, an appeals process for claimants; and  (3) establish minimum training and education requirements for flood  insurance agents in cooperation with the insurance industry, state  insurance regulators, and other interested parties and publish the  requirements in the Federal Register. The statutory deadline for the three  mandates was December 30, 2004. The act also authorized FEMA to create  a pilot program to provide financial assistance to states and communities  to carry out activities including elevating and demolishing structures that  have suffered severe and repeated damage from flooding. The act  authorized the use of funds from the National Flood Insurance Fund for  the pilot program for fiscal years 2005 through 2009. FEMA has fully  implemented the first two requirements to establish notifications on  coverage to policyholders and an appeals process for claimants. With  regard to the training and education requirements, FEMA published  training and education requirements in the Federal Register, stating that it  intended to implement the standards through existing state licensing  schemes for insurance agents. Though FEMA has taken a number of  actions to improve the training and education of agents that sell NFIP  policies, only 15 states implemented mandatory training and education  requirements as of October, 2006 and as we reported in October 2005,  FEMA has not established how or when states are to begin imposing  education and training requirements. Finally, FEMA has not created a pilot  program to mitigate damage to severe repetitive loss properties.
subsections: section_title: Informational Materials to Explain Coverage and the Claims Process Are Completed
paragraphs: For purposes of explaining coverage and the claims process to  policyholders, the Flood Insurance Reform Act of 2004 required FEMA to  develop three types of informational materials. The required materials are  (1) supplemental forms explaining in simple terms the exact coverage  being purchased; (2) an acknowledgment form that the policyholder  received the standard flood insurance policy and any supplemental  explanatory forms, as well as an opportunity to purchase coverage for  personal property; and (3) a flood insurance claims handbook describing  the process for filing and appealing claims. FEMA officials said that  acknowledgment forms and new insurance program forms to explain  coverage to policyholders when they purchase and renew their insurance  were final as of September 2005. FEMA posted a flood insurance claims  handbook, dated July 2005, on its Web site in September 2005. The  handbook contains information on anticipating, filing, and appealing a  claim. The Director of the FEMA Mitigation Division, which oversees the  NFIP, said that FEMA distributed the NFIP Summary of Coverage and  Flood Insurance Claims Handbook to help policyholders affected by  Hurricane Katrina through the claims process. The materials were  available in disaster recovery and flood response offices and were  distributed in town meetings. In addition, according to a representative of  FEMA’s program contractor on-site in Hammond, Louisiana, some flood  adjusters provided copies of the documents to claimants to help to explain  the processes for filing claims and resolve any disagreements about the  claims settlement.
section_title: Formal Appeals Process in Place
paragraphs: An appeals process that FEMA officials described as informal was in place  for claimants after Hurricane Katrina and was described in the Flood  Insurance Claims Handbook that FEMA posted on its Web site in  September 2005. As we have stated in this report, 13 appeals were filed by  claimants related to settlements of their NFIP claims as a result of  Hurricane Katrina damage, and no appeals were filed for damage resulting  from Hurricane Rita, as of April 2006. To establish a formal appeals  process, FEMA published an interim rule in the Federal Register that  became effective in June 2006. Comments made in the Additional Views  section of the Senate report on the Flood Insurance Reform and  Modernization Act of 2006, a bill pending in Congress as of November  2006, outlined concerns that the rule was not specific on the structure of  the appeals process. After a public comment period, a final rule was  published on October 13, 2006. The final rule included more specific  elements on the structure of the appeals process in the final rule than were  contained in the interim rule. For example, the final rule stated that FEMA  will provide policyholders with an acknowledgment of receipt of an  appeal, which will also provide the policyholder with a point of contact  within FEMA to get information on the status of the appeal, and that  FEMA is subject to a 90-day deadline to resolve appeals and issue a  written appeal decision to the policyholder and insurer. The final  regulation also provided examples of the types of documentation that  policyholders should include in their appeals.
section_title: Some States Have Established Minimum Education and Training Requirements
paragraphs: With respect to the requirement that FEMA establish minimum education  and training requirements for agents who sell NFIP policies, the Flood  Insurance Reform Act of 2004 requires FEMA, in cooperation with the  insurance industry, state insurance regulators, and other interested  parties, to establish minimum training and education requirements for all  insurance agents who sell flood insurance policies and to publish the  requirements in the Federal Register. On September 1, 2005, FEMA  published a Federal Register notice in response to this requirement. In  the notice, FEMA stated that rather than establish separate and perhaps  duplicative requirements from those that may already be in place in the  states, it had chosen to work with the states to implement NFIP  requirements through already established state licensing schemes for  insurance agents. To that end, FEMA provided suggested language for  state legislation to require a prelicensing demonstration of knowledge of  flood insurance and a onetime, 3-hour continuing education course  requirement for existing licensees. FEMA further provided a course  outline for flood insurance agents, which consisted of eight sections: an  NFIP Overview; Flood Maps and Zone Determinations, Policies and  Products Available, General Coverage Rules, Building Ratings, Claims  Handling Process, Requirements of the Flood Insurance Reform Act of  2004, and Agent Resources. FEMA also offered incentives to agents who  completed NFIP training to encourage adoption of the minimum  standards.
For fiscal years 2006 and 2007, FEMA adopted performance measures for  meeting “the objective of the mandate that agents selling flood insurance  are trained and provide good information to consumers.” The performance  measures center on FEMA activities to encourage agent training activities,  but do not establish milestones for states to implement the minimum  training requirements. Specifically, the performance measures are to  increase by 7 percent over the previous year the number of  insurance agents who complete the NFIP Bureau’s flood insurance  training, either live or online;    submit a new online training module to states for continuing  education credit approval, with approval by 40 states by fiscal year  2008;    encourage write-your-own companies to do their part to ensure  their agents are sufficiently trained, and  foster state adoption of mandatory agent training requirements  through continued communication with departments of insurance,  offering technical assistance, and so forth.
In working toward the final performance measure, FEMA held meetings  and conferences with state legislators and insurance regulators, as well as  insurance company officials, and worked with the National Association of  Insurance Commissioners to develop a model bulletin that state insurance  commissioners may issue to implement the minimum training  requirements.
As of October 2006, only 15 states had established minimum training and  education requirements for insurance agents that sell NFIP policies. Two  states had issued advisory notices, and 1 state had established standards  for a continuing education course in flood insurance but had not made the  course mandatory. As we reported in October 2005, FEMA has not  developed milestones for state adoption of minimum training and  education requirements. See appendix V for a listing of the state actions  taken.
section_title: FEMA Has Not Established a Pilot Program to Mitigate Damage to Severe Repetitive Loss Properties
paragraphs: As of October 2006, FEMA had not implemented the pilot program  authorized by the act to help reduce the inventory of NFIP properties that  have sustained repeated severe flood losses. As noted in the report of the  Senate Committee on Banking, Housing, and Urban Affairs accompanying  the legislation, an important purpose of the act is to address the problem  of severe repetitive loss properties, which are properties that have been  flooded numerous times and are thus a financial drain on the NFIP. The  act authorizes financial assistance to states and communities that decide  to participate in the pilot program to carry out mitigation activities that  reduce flood damages to severe repetitive loss properties. The act  authorizes the transfer of up to $40 million per fiscal year for fiscal years  2005 through 2009 from the NFIP Fund for the pilot program, and funds  for the program were appropriated in fiscal year 2006. States and  communities may use funds under this program for the mitigation of  severe repetitive loss properties.  Mitigation actions may include purchase,  relocation, demolition, elevation, or flood-proofing structures, as well as  minor physical localized flood control projects. Funds may also be used by  states and communities to purchase severe repetitive loss properties.  FEMA officials noted that they had made progress in developing the  program guidance and implementing regulations for the pilot program and  plan to combine the fiscal years 2006 and 2007 appropriations and begin  funding projects under the pilot program in fiscal year 2007.
section_title: Conclusions
paragraphs: By the measures of number of claims filed, amount of claims paid, losses  per claim, and debt incurred, Hurricane Katrina was an unprecedented  event for the NFIP that created challenges to process a record number of  claims and address needs of claimants and communities that experienced  grave losses. FEMA approved new methods of adjusting some Hurricane  Katrina and Rita claims, issued advisory opinions to aid in rebuilding after  these flood events, and took other actions to address the needs of NFIP  claimants and communities.
However, the importance of FEMA taking additional actions to enhance  the value of its monitoring and oversight processes is also illustrated in the  aftermath of Hurricanes Katrina and Rita. Not only did these flood events  involve billions more dollars and hundreds of thousands more claims for  the NFIP than any previous flood event since the program’s inception, but  they also involved new claims-processing methods that, if proven to result  in accurate claims adjustments, could lower NFIP payments for claims  adjustments as compared to fees paid for the more time-consuming room- by-room, line-item-by-line-item visual assessments of flood damage that  the NFIP had exclusively relied upon for all prior flood events. FEMA’s  current use of quality assurance reinspections to discuss individual results  and specific adjustment errors with insurance company officials and seek  reimbursements for overpayments is too limited to meet our internal  control standard that it have reasonable assurance that program objectives  are being achieved and its operations are effective and efficient. For future  flood events, when FEMA conducts its quality assurance reinspection  program for claims adjustments using the statistically valid sampling  methodology we previously recommended, the agency will be well  positioned to broaden the scope of its analyses to determine the overall  results of claims adjustments done for each future flood event, including  the number and type of claims adjustment errors that occurred.
FEMA made progress in implementing provisions of the Flood Insurance  Reform Act of 2004. However, our recommendation that FEMA establish  milestones for meeting provisions of the act remains open. In October  2005, we recommended that FEMA develop a documented plan with  milestones for ensuring that agents that sell NFIP policies meet minimum  training and education requirements. FEMA has taken a number of  actions, including outreach to the states, to encourage the implementation  of minimum training standards. However, given the somewhat slow  progress among states to adopt mandatory training requirements, we  continue to think that FEMA should elaborate on the state implementation  performance measure by developing a documented plan with milestones  for state adoption of minimum training and education requirements and  our recommendation related to the minimum training and education  requirements remains open.
section_title: Recommendation for Executive Action
paragraphs: To strengthen and improve FEMA’s monitoring and oversight of the NFIP,  including ensuring that claims payments are accurately determined, we are  recommending that for future flood events when FEMA implements our  prior recommendation to do quality assurance reinspections of a  statistically valid sample of claims adjustments, the Secretary of the  Department of Homeland Security also direct the Under Secretary of  Homeland Security, FEMA, to take the following action:    Analyze the overall results of claims adjustments done for each  future flood events to determine the number and type of claims  adjustment errors made and to help determine whether new,  cost-efficient methods for adjusting claims that were  introduced after Hurricane Katrina are feasible to use after  other flood events.
section_title: Agency Comments and Our Evaluation
paragraphs: On December 8, 2006, DHS provided written comments on a draft of this  report.  DHS agreed with our recommendation to improve its quality  reinspection program and stated that it was revising its guidance  accordingly and would use the recommended sampling and reporting  procedures in future flood events.
DHS reiterated a comment made in FEMA’s review of our October 2005  report that we did not review all of the controls and processes that FEMA  has in place to provide oversight for the NFIP.  Most of the additional  oversight and management processes and controls that FEMA has in place  are for financial management—an area not included in the scope of our  work.  Our work focused on program implementation and oversight in the  aftermath of Hurricanes Katrina and Rita.  During our review, FEMA  managers described the quality assurance claims reinspection program as  the primary method for overseeing the accuracy of claims adjustments for  these flood events.  As we have noted in this report, we have work under  way to examine the cost of operating the NFIP, including fees paid for the  services of private insurance companies and claims adjusters. For that  report, to be issued in 2007, we plan to examine the NFIP’s financial  management and controls.
DHS also provided information on how it determines the number of claims  to be reinspected in the NFIP’s quality reinspection program and  additional information on its implementation of the requirement of the  Flood Insurance Reform Act of 2004 to establish minimum training and  education requirements for all insurance agents who sell flood insurance  policies and to publish the requirements in the Federal Register.
We are sending copies of this report to the Secretary of the Department of  Homeland Security, the Director of the Federal Emergency Management  Agency and other interested parties. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.  Please  contact William Jenkins at (202) 512-8757 or jenkinswo@gao.gov if you or  your staff have any questions concerning this report.  Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this report.  Key contributors to this report are listed in  appendix VII.
section_title: Appendix I: Scope and Methodology
paragraphs: To describe the impact of Hurricanes Katrina and Rita on the National  Flood Insurance Program (NFIP) and the extent of the losses paid by  location and property type, we reviewed congressional actions to increase  the NFIP borrowing authority, and we interviewed the Director, Deputy  Director, and other officials of the Federal Emergency Management  Agency’s (FEMA) Mitigation Division on the actions they took to estimate  the amount of funds they needed to borrow from the U.S. Treasury to  cover claims from Hurricanes Katrina and Rita and other 2006 flood  events. We compared claims payments for losses from Hurricanes Katrina  and Rita to payments for losses from past flood events. We also analyzed  statistical data from the NFIP data system on claims payments for  Hurricanes Katrina and Rita. We analyzed the data on losses paid by state,  for principal and nonprincipal residential properties, within and outside of  special flood hazard areas, and by type of coverage (i.e., building,  contents, or both building and contents). We updated our reliability  assessment of the statistical data base reported in October 2005 by  interviewing database managers to discuss any system changes that would  have an impact on data reliability and by replicating statistical analyses by  the NFIP to determine their accuracy. We determined that the database  was sufficiently reliable for our reporting purposes. We did our analyses  and reliability testing of FEMA statistical data that were current through  May 31, 2006, when FEMA reported that over 95 percent of Hurricane  Katrina and Rita claims were closed.
To describe the challenges FEMA and its private sector partners faced and  the results of their efforts to process flood claims resulting from  Hurricanes Katrina and Rita and address the needs of NFIP claimants and  communities, we interviewed headquarters and field officials of FEMA and  its program contractor. We also conducted semistructured interviews  based on our judgment with insurance industry officials involved in the  recovery effort and visited areas impacted by Hurricane Katrina in New  Orleans, Louisiana, and Bayou La Batre, Alabama. Interviewees included  the owner of a firm that specializes in insurance claims adjustments for  catastrophes, representatives of the three insurance companies that closed  the largest number of Hurricane Katrina and Rita NFIP claims, and a  representative of an insurance company that was not a major NFIP insurer  for the Gulf Coast claimants but did process some claims. Their views are  not representative of the universe of all insurance industry officials  involved in the flood recovery effort. We also analyzed statistical data on  the number of appeals filed by claimants and requests made for  reinspections by FEMA’s program contractor to assist claimants and  insurance companies in reaching resolutions on disputes. We reviewed  documentation and talked with officials about new, expedited methods of  claims processing FEMA approved. We examined preliminary data on  claims that may be filed for coverage under the standard flood insurance  policy for up to $30,000 for some property owners to take actions to  reduce their risk of future flood damage. Finally, we examined  documentation and interviewed FEMA officials on the status of efforts to  provide guidance to communities and property owners to assist in  recovery and rebuilding efforts and reviewed documentation on the status  of communities’ actions to adopt FEMA’s advisory base flood elevation  standards.
To assess FEMA’s role in monitoring and overseeing the NFIP and the  results of that oversight, we interviewed officials of FEMA and its program  contractor who were involved in the quality assurance reinspections of  claim adjustments done for Hurricanes Katrina and Rita and documented  the number of reinspections performed and the methodology used to  select claims for reinspection. We reviewed documentation of FEMA’s  procedures for monitoring and overseeing claims adjustments. We  observed a disaster analyst for FEMA’s program contractor performing  several quality assurance reinspections in Bayou La Batre. We followed up  on the status of our prior recommendation for improvements in the quality  assurance reinspection program and discussed actions taken or planned to  implement it. We selected a statistically valid sample of 740 reinspection  reports done for Hurricanes Katrina and Rita to review to determine,  among other things, errors that were identified in the claims adjustments.  Using a data collection instrument, we reviewed the results of these  randomly selected reinspection reports of Hurricane Katrina and Rita  claims to determine whether reinspectors identified errors, including  overpayment, underpayments, or adjustments that did not meet NFIP  standards (i.e. did not contain appropriate documentation).
Table 3 shows the number of quality assurance reinspection reports of  claims adjustments done using regular processes we examined, including  site visits by flood adjusters and expedited methods FEMA approved for  some Hurricane and Rita claims.
To assess the status of FEMA’s efforts to implement provisions of the  Flood Insurance Reform Act of 2004 after Hurricanes Katrina and Rita, we  interviewed officials and examined documentation of the actions FEMA  took. We also analyzed FEMA’s actions to determine whether they met the  legal requirements of the act.
We conducted our work in accordance with generally accepted  government auditing standards from December 2005 through November  2006.
section_title: Appendix II: Statistical Information on NFIP Claims Paid for Hurricanes Katrina and Rita
section_title: Appendix III: Parishes and Counties Where FEMA Issued Advisory Flood Elevation Guidance
paragraphs: At the time of our review, 11 of the 15 Louisiana parishes where FEMA  issued advisory flood elevation guidance had adopted FEMA’s advisories.  Two parishes, St. John the Baptist and Lafourche, had decided not to  adopt the advisories; and two others, Plaquemines and St. Bernard, were  considering them. The Lafourche Parish council rejected the advisory  because it considered some advisory map data to be wrong and  determined that adopting the advisory would have a high negative  economic impact on homeowners. The council also noted that the  advisory information was intended to be only advisory and preliminary.   Fourteen cities within the 3 Mississippi counties where FEMA issued  advisory flood elevation guidance had taken some new action to guide  rebuilding efforts.
section_title: Appendix IV: Results of GAO Review of a Random Selection of Reinspection Reports for Hurricanes Katrina and Rita
section_title: Appendix V: State Actions on Training of Agents That Sell NFIP Policies
subsections: section_title: States That Have Taken Action Regarding Training of Agents that Sell NFIP Policies (as of October 2006)
paragraphs: Department of Insurance required agents authorized to write homeowners or personal lines of insurance to  complete a 2-hour continuing education course on flood insurance and the NFIP.
Commissioner of Insurance required agents who sell flood insurance to comply with the minimum training and  education requirements and demonstrate that compliance upon request of the Commissioner.
Commissioner of Insurance required agents who sell flood insurance to complete a onetime, 3-hour course  related to the NFIP, beginning with license renewals on January 1, 2007.
Office of Insurance issued advisory opinion stating requirement that agents selling NFIP policies complete a  onetime, 3-hour course related to the NFIP.
Legislature required a onetime, 3-hour course on flood insurance to be completed by agents authorized to write  property and casualty lines of insurance for initial licensure and/or license renewal.
Superintendent of Insurance directed licensed insurance agents who sell NFIP policies to comply with the  minimum training and education requirements and demonstrate that compliance upon request of the bureau.
Department of Insurance required property casualty insurance producers who sell flood insurance to complete  at least two of their required continuing education credits in flood insurance by September 30, 2006, regardless  of when their licenses renew, and each renewal period thereafter.
Commissioner of Insurance required agents licensed after April 4, 1983, who sell flood insurance to complete   3 hours of continuing education on flood insurance by December 31, 2006.
Department of Insurance required agents who sell flood insurance to complete at least 3 hours of NFIP-related  training by December 31, 2009.
Department of Insurance required agents who sell flood insurance to complete a onetime, 3-hour course on  flood insurance beginning with license renewals on January 1, 2007.
Commissioner of Insurance directed licensed insurance agents who sell NFIP policies to complete a onetime, 3-  hour course on flood insurance.
Commissioner of Insurance sent letters to insurance agents who met their 2005 continuing education  requirements that encouraged them to take a continuing education course on flood insurance.
Insurance Department issued a notice advising insurance companies and agents of the training and education  requirements and encouraging agents to attend NFIP flood insurance program workshops.
Department of Business Regulation directed licensed insurance agents who sell NFIP policies to comply with  the minimum training and education requirements and demonstrate that compliance upon request of the  department.
Director of the Division of Insurance directed licensed insurance agents who sell NFIP policies to comply with  the minimum training and education requirements and demonstrate that compliance upon request of the  division.
Department of Insurance adopted new sections of its Insurance Code establishing standards for a department- certified continuing education course on the NFIP and flood insurance.
Commissioner of Insurance directed licensed insurance agents who sell NFIP policies to comply with the  minimum training and education requirements and demonstrate that compliance upon request of the  department.
Commissioner of Insurance directed agents who sell flood insurance policies to complete a onetime, 3-hour  course on flood insurance.
section_title: Appendix VI: Comments from the Department of Homeland Security
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: Christoper Keisling, Assistant Director; Richard Ascarate, John Bagnulo,  Amy Bernstein, Christine Davis, Dewi Djunaidy, Wilfred Holloway, Tracey  King, Deborah Knorr, Jan Montgomery, Mark Ramage, and Jesus Ramoz  made significant contributions to this report.