Federal Emergency Management Agency: Improvements Needed to Enhance Oversight and Management of the National Flood Insurance Program
Published: 2005-10-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In the wake of Hurricane Isabel in 2003, GAO was mandated by the Flood Insurance Reform Act of 2004 to report on issues related to the National Flood Insurance Program (NFIP) and its oversight and management by the Federal Emergency Management Agency (FEMA). Private insurance companies sell NFIP policies and adjust claims, while a private program contractor helps FEMA administer the NFIP. To address this mandate, this report assesses (1) the statutory and regulatory limitations on coverage for homeowners under the NFIP; (2) FEMA's role in monitoring and overseeing the NFIP; (3) FEMA's response to concerns regarding NFIP payments for Hurricane Isabel claims; and (4) the status of FEMA's implementation of provisions of the Flood Insurance Reform Act of 2004. Although impacts from Hurricane Katrina were not part of the report's scope, GAO recognizes that this disaster presents the NFIP with unprecedented challenges.
section_title: What GAO Found
paragraphs: The amount of insurance coverage available to homeowners under the NFIP is limited by requirements set forth in statute and FEMA's regulations, which include FEMA's standard flood insurance policy. As a result of these limitations, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing flood-damaged property. For example, homes that could sustain more than $250,000 in damage cannot be insured to their full replacement cost, thus limiting claims to this statutory ceiling. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural weakness in a home or losses resulting from events other than flood, such as windstorms, are not covered by NFIP policies. To meet its monitoring and oversight responsibilities, FEMA is to conduct periodic operational reviews of the 95 private insurance companies that participate in the NFIP, and FEMA's program contractor is to check the accuracy of claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. FEMA did not use a statistically valid method for sampling files to be reviewed in these monitoring and oversight activities. As a result, FEMA cannot project the results of these reviews to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling responsibilities for the NFIP--actions necessary for FEMA to have reasonable assurance that program objectives are being achieved. In the months after Hurricane Isabel, FEMA took steps intended to address concerns that arose from that flood event. In April 2004, FEMA established a task force to review claims settlements from Hurricane Isabel claimants. As a result of task force reviews, almost half of the 2,294 policyholders who sought a review received additional payments. The additional payment amount averaged $3,300 more than the original settlement--for a total average settlement of about $32,400 per claimant. In most cases, the additional funds were for repairing or replacing buildings or property not included in the initial adjuster's loss determination, or to cover additional material or labor costs. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to provide policyholders with a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that insurance agents meet minimum NFIP education and training requirements. The statutory deadline for implementing these changes was December 30, 2004. Efforts to implement the provisions are under way, but have not yet been completed. FEMA has not developed plans with milestones for assigning accountability and projecting when program improvements will be made, so that improvements are in place to assist victims of future flood events.

section_title: Letter
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,  Congress established the National Flood Insurance Program (NFIP) in  1968. NFIP coverage is available to owners and occupants of insurable  property in flood-prone areas. The Federal Emergency Management  Agency (FEMA) within the Department of Homeland Security is  responsible for, among other things, oversight and management of the  NFIP.
To implement the NFIP, FEMA principally relies on private insurance  companies that sell flood insurance policies and adjust claims from  policyholders after floods occur. FEMA is assisted in its management and  oversight functions by a program contractor. As of August 2005, the NFIP  had about 4.6 million policyholders in about 20,000 communities. As of  August 2005, the program had paid a total of about $14.6 billion in  insurance claims financed primarily by policyholder premiums. Without  the NFIP, the costs to repair damage covered by these claims would  otherwise have been paid through taxpayer-funded disaster relief or by the  flood victims themselves.
Policyholders’ concerns regarding the processing and payments of NFIP  claims after Hurricane Isabel in 2003 focused congressional attention on  the program. Specifically, some policyholders cited inadequate payments  for flood damages they incurred and a lack of clarity regarding their  insurance policies and the procedures for filing and adjusting claims for  flood damage.
The Flood Insurance Reform Act of 2004, which mandated that FEMA  implement new processes and requirements for selling NFIP policies and  adjusting flood insurance claims, also mandated that we study and report  on issues related to the processing of flood insurance claims and FEMA’s  oversight and management of the program. To address this mandate, this  report assesses (1) the statutory and regulatory limitations on  homeowners’ coverage under the NFIP; (2) FEMA’s role in monitoring and  overseeing the NFIP; (3) FEMA’s response to concerns regarding NFIP  payments for claims related to Hurricane Isabel; and (4) the status of  FEMA’s implementation of provisions of the Flood Insurance Reform Act  of 2004.
As we finalized this report, the extent of the devastation from Hurricanes  Katrina and Rita in August 2005 and September 2005 was not yet fully  determined, as the nation struggled to respond to the immediate needs of  populations of entire cities and towns for food, water, shelter, and basic  health care. Although impacts from Hurricane Katrina and Rita were not  part of our mandate for this report, clearly this disaster will challenge the  NFIP with demands the program has never before faced in its more than  30-year history.  Already, a record number of flood insurance claims have  been filed in 2005, and Congress has increased the program’s authority to  borrow from the United States Treasury from $1.5 billion to $3.5 billion.
To determine the statutory and regulatory limitations on homeowners’  coverage under the NFIP, we researched The National Flood Insurance  Act of 1968, as amended, its legislative history, and FEMA’s implementing  regulations, which include FEMA’s “Standard Flood Insurance Policy”  (SFIP). We also discussed the results of our analysis with officials of the  DHS Office of General Counsel. To assess FEMA’s NFIP monitoring and  oversight role, we examined program requirements and reports and  observed NFIP training programs for insurance agents and adjusters. We  also observed a FEMA review of an insurance company’s operations, and  we analyzed reports of the results of all reviews of insurance operations  and follow-up visits at insurance companies where FEMA identified  critical errors over a 10-year period, from 1996 to April 2005—a total  sample of 15 reports. We interviewed officials of FEMA and its program  contractor about their oversight activities and discussed aspects of the  process with private-sector insurance officials from four of the five largest  insurance companies participating in the NFIP based on the number of  claims filed in 2004. We also obtained documentation on how reviews of a  sample of claims adjustments are done after flood events and talked with  staff employed by FEMA’s contractor about how they reinspect the work  of private-sector adjusters who prepare flood damage estimates and how  they select properties to visit for these reviews. We interviewed them  because they had performed quality reinspections of claims adjustments  for damage from Hurricane Isabel, as well as from hurricanes in Florida in  2004.
To determine FEMA’s response to concerns about Hurricane Isabel claims  payments, we discussed the actions FEMA took to address concerns of  Hurricane Isabel claimants with FEMA officials, and we reviewed a  statistically valid sample of 100 files from claimants in Maryland, Virginia,  and North Carolina who were dissatisfied with their initial claims  settlements resulting from Hurricane Isabel and who had their claims  reviewed by a special FEMA task force. We based our analysis of these  claims on the information in the files we reviewed; we did not  independently verify the accuracy of the information in the claims files. To  test the overall reliability of the NFIP database, we reviewed a statistically  valid sample of 250 claims for all flood events that occurred in 2003 and  2004. We conducted this reliability testing to assure ourselves that  information from the NFIP database was sufficiently accurate for our  reporting purposes. To determine the extent to which FEMA implemented  provisions of the Flood Insurance Reform Act of 2004, we examined  documentation of the agency’s efforts and interviewed officials. We  conducted our work from December 2004 through August 2005 in  accordance with generally accepted government auditing standards. Our  scope and methodology are discussed in greater detail in appendix I.
subsections: section_title: Background
paragraphs: Nearly 20,000 communities across the United States and its territories  participate in the NFIP by adopting and agreeing to enforce state and  community floodplain management regulations to reduce future flood  damage. In exchange, the NFIP makes federally backed flood insurance  available to homeowners and other property owners in these  communities. Homeowners with mortgages from federally regulated  lenders on property in communities identified to be in special high-risk  flood hazard areas are required to purchase flood insurance on their  dwellings. 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 must  purchase separate NFIP personal property coverage. Although premium  amounts vary according to the amount of coverage purchased and the  location and characteristics of the property to be insured, the average  yearly premium for a 1-year policy was $446, as of June 2005.
The National Flood Insurance Act of 1968 established the NFIP. Congress  mandated that the NFIP was to be implemented “based on workable  methods of pooling risks, minimizing costs, and distributing burdens  equitably among those who will be protected by flood insurance and the  general public.” To make “flood insurance coverage available on  reasonable terms and conditions to persons who have need for such  protection,” the NFIP strikes a balance between the scope of the coverage  provided and the premium amounts required to provide that coverage.  Coverage limitations arise from statute and regulation, including FEMA’s  standard flood insurance policy (SFIP), which is incorporated in  regulation and issued to policyholders when they purchase flood  insurance.
To the extent possible, the program is designed to pay operating expenses  and flood insurance claims with premiums collected on flood insurance  policies rather than by tax dollars. However, as we have reported, the  program, by design, is not actuarially sound because Congress authorized  subsidized insurance rates to be made available for policies covering  certain structures 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. FEMA has  statutory authority to borrow funds from the Treasury to keep the NFIP  solvent. Following Hurricane Katrina in August 2005, legislation was  enacted that increased FEMA’s borrowing authority from a total of $1.5  billion to $3.5 billion through fiscal year 2008. FEMA has exercised its  borrowing authority four times in the last decade when losses exceeded  available fund balances. For example, as of August 2005, FEMA had  borrowed $300 million in 2005 to pay an estimated $1.8 billion on flood  insurance claims resulting from the 2004 hurricane season. As it has done  when it has borrowed in the past, FEMA intends to repay these funds with  interest, according to agency officials, however, the officials had not yet  estimated NFIP claims amounts anticipated for flood damage from  Hurricane Katrina in August 2005.
subsections: section_title: Participation in the NFIP and Claims Payments Have Grown
paragraphs: As shown in figure 1, the number of NFIP policies in force has grown  steadily over the past 27 years to a total of about 4.6 million policies in  force as of May 31, 2005.
As shown in figure 2, NFIP claims payments have varied widely by year  over the life of the program depending on the number and severity of flood  events; however, as the number of policies in force increased (see fig. 1),  the claims payments have trended upward. Claims paid in 2004 were the  highest amount in the history of the NFIP—more than $1.9 billion for all  flood events.
Tables 1 and 2 provide information on payments by flood event in 2003  and 2004. In 2003, the NFIP paid about $478 million on more than 21,000  claims from 5 named flood events and an additional $287 million on 15,232  claims filed for damage from unnamed floods. Of those claims, more than  half resulted from damage from Hurricane Isabel in six states and  Washington, D.C. Hurricane Isabel was a category 5 hurricane at its peak  with sustained winds in excess of 165 miles per hour. It made landfall on  September 18, 2003, near Drum Inlet, North Carolina, as a category 2  storm. As it traveled across Virginia, Maryland, and Pennsylvania, Isabel  weakened to a tropical storm, but its heavy rains caused storm surge  flooding.
For 2004 flood events, as of April 30, 2005, the NFIP paid more than $1.9  billion on more than 52,785 NFIP claims from storms including Hurricanes  Charley, Frances, Ivan, and Jeanne that caused major damage in Florida  and other East Coast and Gulf Coast states.
section_title: Private Insurers Sell Policies and Adjust NFIP Claims under FEMA Oversight and Management
paragraphs: The work of selling, servicing, and adjusting claims on NFIP policies is  carried out by thousands of private-sector insurance agents and adjusters  who work independently or are employed by insurance companies or their  designated subcontractors. According to FEMA, about 95 percent of the  NFIP policies in force are written by insurance agents who represent 95  private insurance companies that issue policies and adjust flood claims in  their own names. 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. The  insurance companies share the FEMA expense allowance and fee for  claims settlements with insurance agents who sell and service the policies,  a vendor, or subcontractor, if the company has subcontracted with one to  handle all or part of its flood insurance business, and flood claims  adjusters.
Figure 3 shows the key participants in the process: a homeowner; an  insurance agent, an insurance company, and, in many cases, a flood  insurance vendor, or subcontractor, to assist with aspects of the NFIP  business; and a flood adjuster. FEMA and its program contractor manage  and oversee the NFIP and the National Flood Insurance Fund accounts  into which premiums are deposited and claims and expenses paid.
Insurance agents under contract to one or more write-your-own insurance  company are the main point of contact for most policyholders to purchase  an NFIP policy, seek information on coverage, or file a claim. In order to  sell flood insurance, agents must meet basic state insurance licensing  requirements. Based on information the insurance agents submit, the  insurance companies issue policies, collect premiums from policyholders,  deduct an allowance for expenses from the premium, and remit the  balance to the National Flood Insurance Fund. In some cases, insurance  companies hire subcontractors—flood insurance vendors—to conduct  some or all of the day-to-day processing and management of flood  insurance policies.
Insurance companies work with certified flood adjusters to settle NFIP  claims. When flood losses occur, policyholders contact their insurance  agents to report the loss. The agent then contacts the write-your-own  company to report the loss and it assigns a flood adjuster to assess  damages. Flood adjusters may be independentor 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  prices for repairs by reviewing estimates of costs prepared by  policyholders and their contractors, consulting pricing software and  checking local prices for materials. Claims amounts may be adjusted after  the initial settlement is paid if claimants submit documentation that some  costs were higher than estimated.  An adjuster must have a least 4  consecutive years of full-time property loss adjusting experience and have  attended an adjuster workshop, among other requirements, to be certified  by FEMA to work on NFIP claims,. To keep their certifications current,  adjusters are required to take a 1-day refresher workshop each year and  pass a written examination testing their knowledge each year.
Flood claims adjusters employed by write-your-own companies are paid  salaries and sometimes bonuses for working long hours after major flood  events from a percentage fee—about 3.3 percent of the incurred loss,  which the NFIP pays write-your-own companies for settling claims,  according to an NFIP official. Independent adjusters who work for  multiple insurance companies are also paid based on a standard NFIP fee  schedule that varies adjuster compensation according to the size of the  claim. For example, the fee schedule pays $1,000 for a claim settlement of  between $25,000 and $35,000. If the independent adjuster is registered with  an independent adjusting firm, a portion of the fee goes to the adjusting  firm.
About 40 FEMA employees, assisted by about 170 contractor employees,  are responsible for managing the NFIP. Management responsibilities  include establishing and updating NFIP regulations, administering the  National Flood Insurance Fund, analyzing data to actuarially determine  flood insurance rates and premiums, and offering training to insurance  agents and adjusters. In addition, FEMA and its program contractor are  responsible for monitoring and overseeing the quality of the performance  of the write-your-own companies to assure that the NFIP is administered  properly.
section_title: Due to Statutory and Regulatory Limitations, NFIP Payments May Not Cover All Costs to Repair or Replace Flood-Damaged Property
paragraphs: The amount of insurance coverage available to homeowners under the  NFIP is limited, based on requirements set forth in statute and regulation.  First, by statute, there are limitations on the amount of insurance coverage  homeowners may purchase for their dwellings and personal property. In  addition, FEMA has further defined the general terms and conditions of  flood insurance coverage pursuant to a broad grant of congressionally  delegated authority, issuing regulations that include a SFIP. Because of  these statutory and regulatory limitations, insurance payments to  claimants for flood damage may not cover all of the costs of repairing or  replacing damaged property.
In terms of statutory limitations, there is a ceiling on the amount of  insurance coverage available for single-family homes, which is $250,000.  Because of this statutory ceiling, homes that could sustain more than  $250,000 in damage cannot be insured to reflect full replacement costs.  Furthermore, while homes whose full replacement cost is less than  $250,000 may be fully insured, this is not statutorily required. There is a  “mandatory purchase” requirement for homeowners in special high-risk  flood hazard areas who hold mortgages from federally regulated lenders,  but they are only required to insure their homes for the amount of their  mortgages, which may be less than their homes’ full replacement cost.  For homeowners in areas of low- to moderate-flood risk, the purchase and  amount of insurance is optional, up to the $250,000 statutory maximum.  As a result of the $250,000 ceiling and the “mandatory purchase” floor,  insurance on a given home may be less than its full replacement cost.  Homeowners may also separately elect to insure the contents of their  homes under the NFIP, although they are not required to do so. As with  the $250,000 cap on building coverage, there is also a statutory limit on the  amount of personal property coverage homeowners can buy. By statute,  homeowners can purchase no more than $100,000 in personal property  coverage, even if the value of their personal property exceeds this  amount.
In addition to the statutory limitations on coverage amounts, Congress  also gave FEMA broad authority to issue regulations establishing “the  general terms and conditions of insurability,” including the classes, types,  and locations of properties that are eligible for flood insurance; the nature  and limits of loss that may be covered; the classification, limitation, and  rejection of any risks that FEMA considers advisable; and the amount of  appropriate loss deductibles. Pursuant to this delegation of authority,  FEMA has issued regulations, including a “Standard Flood Insurance  Policy,”  that further delineate the scope of coverage. All flood insurance  made available under the NFIP is subject to the express terms and  conditions of the statute and regulations, including the SFIP.
The SFIP is a contractual document that contains the terms of coverage  and is issued to homeowners when they purchase flood insurance. Some  of the principal SFIP limitations concern whether particular events, losses,  building property and personal property are covered, and what deductible  amounts and loss settlement methods apply when an insured files a claim.  While either FEMA or private write-your-own insurance companies may  issue flood insurance policies, FEMA’s regulations prohibit any change to  the SFIP provisions without the express written consent of the Federal  Insurance Administrator, the FEMA official responsible for administering  the NFIP. The Administrator is also charged with interpreting the scope  of coverage under the SFIP.
The SFIP covers only “direct physical loss by or from flood.” It does not  cover losses resulting from events other than flood, such as windstorms or  earth movements. Additionally, if the losses primarily result from  conditions inherent to the dwelling or within the control of the insured,  they are not covered by the SFIP. Nor does the SFIP provide coverage if  the flood is already in progress when the policy begins or when the  insured adds coverage. Finally, the SFIP only covers direct, physical flood  losses, not indirect losses such as loss of revenue or profits, interruption  of business, access to and use of the insured property, or living expenses  incurred while property is uninhabitable.
The SFIP limits what type of building property is covered, considering  such things as the property’s use, permanence, and degree of enclosure.  For coverage purposes, the SFIP defines a “building” as a manufactured  home; a travel trailer affixed to a permanent foundation; or a “structure  with two or more outside rigid walls and a fully secured roof, that is  affixed to a permanent site.” A building under construction may be  covered even if not yet walled or roofed if the construction is underway at  the time the losses are incurred. Detached garages may be covered, but  not if the garage is used for residential, business, or farming purposes, in  which case it must be separately insured.  Certain items of property are  considered part of the building. In general, these are items built in or  affixed to the building, for example, stoves, ovens, refrigerators, central air  conditioners, and permanently installed cabinets and carpets. At the  basement level, building coverage is more limited and does not extend to  finishing materials. For example, whereas the SFIP covers permanently  installed paneling and wallpaper above the basement level, coverage in the  basement is limited to unfinished drywall.
The SFIP only insures for personal property if the homeowner purchases  personal property coverage and the personal property is inside a building.  Personal property includes movable items such as portable microwaves,  window-type air conditioning units, and carpets that are not permanently  installed. In a basement, coverage is limited to certain items installed in  their functioning location and, if necessary for operation, connected to a  power source, for example, portable air conditioning units and clothes  washers and dryers. Certain types of personal property are specially  limited to payment of no more that $2,500, regardless of the magnitude of  the loss. These objects include artwork, collectibles, jewelry, furs, and  property used in any business. Personal property coverage does not  extend to such things as currency, postage, deeds, and other valuable  papers.
Certain types of property are wholly excluded from both building property  and personal property coverage. The first type of excluded properties are  those that are generally separate from the main dwelling, such as  recreational vehicles; self-propelled vehicles and machines; land, plants,  and animals; walkways, driveways, patios; and hot tubs and swimming  pools. The second type of excluded properties are those with a close  relationship with water or that are located below ground, including  buildings and personal property located entirely, in, on, or over water;  boathouses, wharves, piers, and docks; underground structures or  equipment; and buildings and contents where more than 49 percent of the  actual cash value of the building is below ground.
The amount recoverable under the SFIP is limited to the amount that  exceeds the applicable deductible. Applicable deductible amounts are not  listed in the SFIP itself, but are shown on the Declarations Page, a  computer-generated summary of the information provided by the insured  in the insured’s application. The Declarations Page is part of each  insured’s flood insurance policy.
The final type of limitation found in the SFIP derives from the methods of  settling losses. There are three loss settlement methods under the SFIP:  (1) “replacement cost,” which homeowners may only purchase for single- family dwellings in which they principally reside; (2) “special loss  settlement,” which only applies to large manufactured homes; and (3)  “actual cash value,” which applies to any property that does not qualify for  replacement cost or special loss settlement.
The only difference between replacement cost and actual cash value is the  significance attached to the property’s physical depreciation. An actual  cash value loss settlement represents what it would cost to replace  damaged property, less the value of its physical depreciation. Because of  depreciation, actual cash value will presumably be less than the full cost to  repair or replace the damage. A replacement cost loss settlement, on the  other hand, does not deduct for physical depreciation. If replacement cost  coverage applies, the policy will pay the actual amount spent to repair or  replace the damage with materials of like kind and quality, subject to the  applicable deductible and the building’s limit of liability.
Homeowners can only obtain replacement cost coverage for their single- family dwellings, not for multi-family dwellings or items of personal  property, which are subject to actual cash value coverage. In addition, not  all single-family dwellings are eligible for replacement cost coverage. To  qualify for such coverage, a home must be insured for 80 percent or more  of its full replacement cost or the maximum coverage amount of $250,000,  and it must a principal residence. If a home does not meet both criteria,  the policy will pay the actual cash value for the covered damage.
An additional limitation in replacement cost coverage applies when the  full cost of repair or replacement is greater than $1,000 or 5 percent of the  entire amount of insurance on the dwelling. In that case, the SFIP provides  that it “will not be liable for any loss unless and until the actual repair or  replacement is completed,” unless the insured foregoes a replacement cost  settlement and makes a claim for actual cash instead. If the insured  eventually spends more on the repair or replacement than the actual cash  settlement, the individual may file a claim for additional replacement cost  liability, provided he or she provides a notice of intent to do so within 180  days after the date of loss.
We developed the following hypothetical property adjustment example  with the assistance of FEMA’s director of NFIP claims to illustrate how  applicable limitations could reduce coverage for claimants whose property  is damaged by flood:  Hypothetical: A poorly maintained 30-year-old home located in a  designated flood zone was damaged when a nearby river overflowed.  The home’s full replacement cost was $60,000. The homeowner  purchased an NFIP policy for $30,000 in coverage. Although a  contractor estimated it would cost $40,000 to repair damages to the  structure and personal property losses totaled another $10,000, a NFIP  adjuster determined that payment on the claim was $8,000 because:    The homeowner had chosen not to insure his personal property.
The adjuster determined that some problems that needed to be  addressed had not been caused by the flood (e.g., leaking pipes in  the bathroom and preexisting mold in the basement).
The basement of the home, where the largest amount of damage  occurred, was finished, and coverage was limited to drywall  damage.
Actual cash value will be paid for repairs or replacement of damage  to the dwelling because the homeowner did not insure the structure  for at least 80 percent of its full replacement cost. Because the  condition of the home before the flood was poor, the actual cash  value was low. In this hypothetical case, the adjuster determined  that the actual cash value of damaged property covered by the  policy was $9,000.
A $1,000 deductible applied, reducing the $9,000 actual cash value  payment to $8,000.
section_title: Monitoring and Oversight of NFIP Identifies Specific Problems, but Does Not Provide Comprehensive Information on Overall Program Performance
paragraphs: FEMA’s primary method to monitor and oversee the NFIP is to conduct  operational reviews of the 95 write-your-own insurance companies  participating in the NFIP. In addition, FEMA’s program contractor is to  reinspect a sample of claims adjustments for every flood event to identify  errors, among other things. The operational reviews and follow-up visits  we analyzed followed FEMA’s internal control procedures on the  processes for examiners to follow in conducting the reviews and for doing  the reviews at a pace that allows for a review of each write-your-own  company on at least a triennial basis. The processes FEMA followed also  met our internal control monitoring standard that requires federal  agencies to ensure that the findings of audits and other reviews are  promptly resolved. However, in doing these monitoring and oversight  activities, neither FEMA nor its program contractor used a statistically  valid method for sampling files selected for operational reviews or claims  reinspections. As a result, FEMA did not meet our internal control  standard that federal agencies have internal controls in place to provide  reasonable assurance that program objectives are being achieved and that  program operations are effective and efficient. Without a statistically valid  sampling methodology, the agency cannot project the results of these  monitoring and oversight activities to determine the overall accuracy of  claims settled for specific flood events or assess the overall performance  of insurance companies and their adjusters in fulfilling their  responsibilities for the NFIP.
subsections: section_title: FEMA’s Operational Reviews of Insurers We Analyzed Identified and Followed Up on Problems
paragraphs: Operational reviews of flood insurance companies participating in NFIP  that are conducted by FEMA staff are FEMA’s primary internal control  mechanism for monitoring, identifying, and resolving problems related to  how insurers sell and renew NFIP policies and adjust claims. Our analysis  of reports of all 15 operational reviews and follow up visits at companies  that were identified as having critical errors (e.g., incorrect payments)  found that FEMA checked information and conducted file reviews in  accordance with the requirements and procedures outlined in its Write  Your Own Financial Control Plan. In addition, our analysis found that  FEMA followed up at all of the companies where operational reviews had  identified critical errors to monitor the progress these companies made  over time in addressing and resolving critical errors. Monitoring the quality  of performance over time and ensuring that the findings of audits and  other reviews are promptly resolved is an internal control standard that  we have identified for the federal government.
According to the FEMA director of NFIP claims, one or two examiners  from FEMA’s NFIP Claims and Underwriting sections go on-site to review  the operations of the 95 write-your-own companies. If vendors handle all  or part of a company’s NFIP business, operational reviews are conducted  at the vendor locations and reviews of all of the companies doing business  with the vendor can be completed during one visit. Seven FEMA staff in  the Mitigation Division underwriting section and two staff in the claims  section have primary responsibility for conducting operational reviews in  addition to other responsibilities including writing insurance manuals and  regulations, providing technical assistance, and responding to inquiries  from policyholders, Members of Congress and others. As discussed below,  FEMA directs examiners to conduct three steps for each operational  review—a general underwriting review, a specific underwriting review,  and a claims operation review of each insurance company’s NFIP  business. Requirements and procedures for the operational review are  outlined in FEMA’s Write Your Own Financial Control Plan.
In the general underwriting review, examiners are to review how the  company has handled applications for NFIP policies and how policies are  issued and cancelled among other items. The examiners are to check a  sample of files to determine, for example, whether NFIP policies were  renewed using correct payment rates and whether appropriate  documentation was included in the file. In the specific underwriting  review and the claims operation review, examiners are to conduct detailed  examinations of files to check for completeness and accuracy. For  example, they must make sure that elevations are calculated correctly on  new policies and that photographs document damage on flood claims.
For all aspects of the operational reviews, the examiners are to determine  whether files are maintained in good order, whether current forms are  used and whether staff has a proficient knowledge of requirements and  procedures to properly underwrite and process flood claims. Examiners  are also to look at internal controls in place at each company. When  problems are identified, examiners are to classify the severity of the  errors. Each file reviewed is to be classified as satisfactory or  unsatisfactory. Unsatisfactory files contain either a critical error (e.g., a  violation of policy or an incorrect payment) or three non-critical errors  (e.g., violations of procedures that did not delay actions on claims).
Write-your-own companies with error rates of 20 percent or higher of the  total number of files reviewed for the specific underwriting or claims  operation review would always receive an unsatisfactory designation. If a  company receives an unsatisfactory designation, FEMA requires that it  develop an action plan to correct the problems identified and is to  schedule a follow-up review in 6 months to determine whether progress  has been made. The action plans developed by the companies generally  must contain a timetable for addressing deficiencies, including a plan for  making progress reports to FEMA and developing more stringent internal  quality control procedures. If a company continues to have problems and  fails to implement an action plan, it can ultimately be withdrawn from the  NFIP. According to FEMA officials, a company has been required to  withdraw from the NFIP once in the program’s history in part because of  issues raised in operational reviews and in part due to other financial  problems.
In our analysis of reports of all 15 operational reviews and follow-up visits  done at insurance companies that were identified as having critical errors,  we found that examiners checked information and did file reviews in  accordance with the requirements and procedures outlined in the Write  Your Own Financial Control Plan. We also determined that FEMA  followed up to monitor the progress the companies made in addressing  and resolving critical errors. For example, in one instance after a write- your-own company received two unsatisfactory designations, it was  directed by FEMA to rewrite all of its policies to be sure that the correct  premiums were being charged to policyholders. In another instance,  FEMA required a write-your-own company to take more extensive action  than was proposed in its plan to address deficiencies.
In addition, according to information provided by FEMA, operational  reviews completed since 2000 were on pace to meet FEMA’s policy that  each of the 95 write-your-own companies be operationally reviewed at  least once every 3 years. Table 3 shows the number of operational reviews  reported by FEMA from January 2000 through August 2005. FEMA has  scheduled a review of 31 write-your-own companies at a large vendor  location for later in 2005.
section_title: Reinspections of NFIP Claims Conducted by Program Contractor
paragraphs: In addition to operational reviews done by FEMA staff, FEMA’s program  contractor conducts quality assurance reinspections of claims for specific  flood events. The program contractor employs nine general adjusters who  conduct quality assurance reinspections of a sample of open claims for  each flood event. Procedures for the general adjusters to follow in  conducting these reinspections are outlined in FEMA’s Write Your Own  Financial Control Plan. According to the general adjusters we  interviewed, in addition to preparing written reports of each reinspection,  general adjusters discuss the results of the reinspections they perform  with officials of the write-your-own companies that process the claims. If a  general adjuster determines that the insurance company allowed an  expense that should not have been covered, the company is to reimburse  the NFIP. 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. An instructor  at an adjuster refresher training session, while observing that adjusters  had performed very well over all during the 2004 hurricane season, cited  several errors that he had identified in reinspections of claims, including  improper measurement of room dimensions and improper allocation of  costs caused by wind damage (covered by homeowners’ policies) versus  costs caused by flood damage. In addition, the instructor identified a  problem that arose, namely, poor communication with homeowners on the  process followed to inspect the homeowner’s property and settle the  claim. Overall error rates for write-your-own companies are monitored.  Procedures require additional monitoring, training, or other action if error  rates exceed 3 percent. According to the general adjusters we interviewed  and FEMA’s program contractor, quality assurance reinspections are  forwarded from general adjusters to the program contractor where results  of reinspections are to be aggregated in a reinspection database as a  method of providing for broad-based oversight of the NFIP as its services  are delivered by the write-your-own companies, adjusting firms and  independent flood adjusters.
section_title: Sampling Methods Used to Conduct Operational Reviews and Quality Assurance Reinspections Do Not Provide Management Information on Overall Performance
paragraphs: FEMA used nonprobability sampling processes rather than random  sampling to select files for operational reviews and claims for quality  assurance reinspections. In nonprobability sampling, staff select 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 if the objective is to generalize about the  population from which the sample is taken.
For the operational reviews, specific guidance on how to select files for  review is not documented, although guidance is provided on the number  of files to review based on the size of the write-your-own companies’  volume of NFIP business. The process used to select claims for review, as  it is described by FEMA managers who oversee operational reviews,  identifies problems at the write-your-own companies, but it is not designed  to assess overall performance. For the specific underwriting portion of the  review, examiners use a process described by a FEMA official as adverse  selection, or selection of files for review that include the most difficult  new policies that the company underwrote in the period since the last  operational review under the assumption that if the company addresses  difficult underwriting issues correctly, it will also be able to do routine  underwriting issues correctly. According to this official, some examples of  the most difficult underwriting issues are policies covering properties in  the flood hazard areas closest to bodies of water and elevated buildings  that have enclosures underneath them. For the claims operation portion of  the operational review, like the underwriting portion, an examiner said  that FEMA attempts to select the more difficult or potentially troublesome  claims files to review. In addition, files that are closed without payment  and those with particularly large settlements are to be included in the  sample of files reviewed. Thus, the operational reviews provide FEMA  with management information on specific problems that occur at write- your-own companies but, by design, do not assess the overall performance  of the companies.
For quality assurance reinspections, procedures are included in the  written FEMA guidance on the number of claims to sample, but not on the  sample selection process. General adjusters employed by FEMA’s  contractor are to reinspect a sample of properties based on the total  number of claims the write-your-own company is processing for the flood  event. A FEMA official said that this number is up to about 4 percent of  claims for each flood event based on the total number of claims filed for  the flood event. Although the two general adjusters we interviewed said  their inspection sample selection process was random, the selection  process they described involved choosing properties to reinspect based  upon criteria they considered to be important. The general adjusters said  that they generally reinspected the adjustments done on properties from a  variety of neighborhoods that represented different types (i.e., single  family and condominium) and values of houses, and varying flood loss  claims amounts. A FEMA manager said that this process was comparable  to the approach used by all nine of the general adjustors. While these  criteria, if properly applied, would lead to some variety in the selection of  claims to review, the selection process is not random or statistically valid  for purposes of projecting results to overall performance. By exercising a  more rigorous sample selection process, without incurring additional costs  or selecting larger sample sizes, FEMA would improve its internal control  processes.
Because FEMA’s primary means of providing oversight are its operational  reviews and quality assurance reinspections, statistically-valid information  from these oversight activities is essential. However, FEMA’s use of an  approach that lacks statistical validity for selecting files for operational  reviews and claims for reinspections does not provide management with  the information needed to assess the overall performance of the write- your-own companies, including the overall accuracy of the underwriting of  NFIP policies and the adjustment of claims—information that FEMA  needs to have reasonable assurance that program objectives are being  achieved. Without a statistically valid sampling methodology, FEMA did  not meet our internal control standard that federal agencies provide  reasonable assurance that program objectives are being achieved and that  program operations are effective and efficient.
section_title: FEMA Task Force Closed about Half of Hurricane Isabel Claims Reviewed with Additional Payments
paragraphs: FEMA took unique actions to respond to concerns regarding NFIP  payments for Hurricane Isabel flood claims. In April 2004, about 7 months  after Hurricane Isabel, FEMA established a task force to review claims  settlements based on requests by Hurricane Isabel claimants. It was the  first time in the history of the NFIP that a formal review process was  established for NFIP claimants who were not satisfied with actions taken  on their claims. According to an NFIP official, the task force was  comprised of about 50 current and former certified flood adjusters from  various private sector flood insurance adjusting firms, the nine general  adjusters employed by FEMA’s program contractor, and three FEMA staff.  Adjusters were assigned to review claims outside of states where they had  previously adjusted claims for Hurricane Isabel damage, according to the  official.
As shown in figure 4, FEMA officials said they sent notifications to 23,770  Isabel claimants in six states and Washington, D.C., to advise claimants  that they could have their claims reviewed by a special FEMA task force if  they were unhappy with actions taken to settle them. Claimants could  request a review by the FEMA task force in person at a community  meeting, by telephone, mail, or fax. About 10 percent of the claimants who  were notified (2,294)—all with property in Maryland, Virginia, and North  Carolina—responded. In reviewing those claims, the task force  determined that 1,229 of the claims should be closed with no additional  payment and that 1,065 claims should be closed with additional payments.
Based on our review of a statistically representative sample of claims files  selected from the 2,294 claimants that responded to FEMA that they  wanted a task force review of their claims, the task force closed claims  with no additional payment for a variety of reasons. For example:    Task force agreed with the original determination that flood damage to  parts of a basement were not covered.
Task force agreed with the original determination that damage was not  due to flood but to wind-driven rain.
Task force agreed with the original determination that a claimant did  not have coverage for personal property.
Based on our analysis, reviewers allowed additional payments most  frequently to:    Repair or replace building or personal property items that the initial  adjuster did not include in the loss report.
Pay a higher amount for materials, labor, or personal property items  than the original adjuster had allowed.
In more than 90 percent of claims closed by the task force with additional  payment, the reviewer determined that additional payments were due for  one of these two reasons. In 48 percent of the claims, additional  payments were allowed for items that the initial adjuster did not include in  the loss report, and in 43 percent of claims, additional payments were  allowed to pay a higher amount for costs than the original adjuster had  allowed. For example, in one claim we reviewed, the original estimate did  not include coverage for a kitchen countertop and a cable television outlet  that the reviewer included in the final claim settlement. In other claims,  reviewers allowed higher prices for paint, dry wall, insulation, base  molding, ceramic floor tile, and window trim, among other items, than had  been allowed in the initial loss report. One general adjuster for FEMA’s  program contractor said that the original pricing was not an error in many  cases, but that the costs of the materials had increased between the time  of the initial loss and the final settlement offer.
Based on our analysis of the statistically representative sample of 100  claims files reviewed by the FEMA task force, the average amount paid on  claims closed with payments and for which claimants requested a review  by the task force was $32,438. The average additional payment amount  determined by the task force for claims that were closed with an  additional payment was $3,340. In comparison, as illustrated in figure 5,  the average closed payments for 2002, 2003, and 2004 for claims closed  with payment were $16,878, $19,980, and $30,668, respectively.
section_title: FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the Flood Insurance Reform Act of 2004
paragraphs: As of September 2005, FEMA had not fully implemented NFIP program  changes mandated by the Flood Insurance Reform Act of 2004 to (1)  develop supplemental materials for explaining coverage and the claims  process to policyholders when they purchase and renew policies and (2)  establish, by regulation, an appeals process for claimants. The 6-month  statutory deadline for implementing these changes was December 30,  2004. The act also required FEMA to establish minimum training and  education requirements for flood insurance agents and to publish the  requirements in the Federal Register by December 30, 2004. Although  FEMA published a Federal Register notice of its requirements on  September 1, 2005, the notice explained that FEMA intended to work with  the states to implement the minimum NFIP standards through existing  state licensing schemes for insurance agents. Thus, it is too early to tell the  extent to which insurance agents will meet FEMA’s minimum  requirements.
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 acknowledgement form that the policyholder  received the SFIP 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 they had drafted an acknowledgement form  and new insurance program forms to explain coverage to policyholders  when they purchase and renew their insurance. FEMA officials said that  these forms were final as of September 2005, and that they expected  distribution to policyholders to begin in October 2005.  While FEMA  appears to have completed its implementation efforts with respect to the  supplemental and acknowledgement forms, its flood insurance claims  handbook does not yet fully comply with statutory requirements.  FEMA  posted a flood insurance claims handbook, dated July 2005, on its website  in September 2005. The handbook contains information on anticipating,  filing and appealing a claim, but does not include information regarding  the appeals process that FEMA is statutorily required to establish through  regulation.  In its comments on our draft report, FEMA stated that it was  offering claimants an informal appeals process pending the establishment  of a regulatory process, and that the handbook describes this informal  appeals process.  However, by statute, the claims handbook must describe  the regulatory process, which FEMA has yet to establish.
The establishment of a regulatory appeals process is required by section  205 of the Flood Insurance Reform Act of 2004. To address this  requirement, FEMA officials said they had discussed the feasibility of  maintaining a permanent task force to consider appeals—like the one  created to review Hurricane Isabel claims. In commenting on a draft of  this report, the acting director of FEMA’s Emergency Preparedness and  Response Directorate said that FEMA had rejected this plan, but he did  not disclose any alternative plan detailing key elements of an appeals  process such as how to initiate an appeal, time frames for considering  appeals, the size of an appeals board, and the qualifications for  membership, or how long the rulemaking process to provide for appeals  by regulation might take. Therefore, it remains unclear how or when  FEMA will establish the regulatory appeals process, as directed by the  Flood Insurance Reform Act of 2004.
Finally, section 207 of the Flood Insurance Reform Act of 2004 required  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 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 further 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. However, the notice did not specify how or when states  were to begin implementing the NFIP training and education  requirements. Given the recent publication of the Federal Register notice,  and the states’ eventual role in implementing FEMA’s training and  education requirements, it is too early to tell the extent to which insurance  agents will meet FEMA’s minimum standards.
FEMA officials said that developing and implementing changes to the  NFIP can have broad reaching and significant impacts for the millions of  NFIP policyholders, as well as the private sector stakeholders upon whom  FEMA relies to implement the program. As a result, the agency is taking a  measured approach to making the mandated changes to ensure that it  achieves results and minimizes any negative effects on policyholders and  NFIP stakeholders. Nonetheless, without plans with milestones for  completing its efforts to provide policyholders with a flood insurance  claims handbook that meets statutory requirements, to establish a  regulatory appeals process, and to ensure that insurance agents meet  minimum NFIP education and training requirements, FEMA cannot hold  responsible officials accountable and track progress to ensure that these  management improvements are in place to assist victims of future flood  events.
section_title: Conclusions
paragraphs: A key challenge that FEMA faces in its role as coordinator of the federal  disaster response efforts, including the NFIP, is to ensure through its  monitoring and oversight efforts that programs are implemented in  accordance with statutory and regulatory requirements across the nation.  It is a difficult challenge to meet, as services are delivered primarily  through a decentralized system of private-sector contractors, their  employees, and their subcontractors. However, it is increasingly important  that FEMA have assurances that program requirements are followed in  light of the growing participation and increasing costs of its programs.
While FEMA’s NFIP monitoring and oversight processes have identified  specific problems with the delivery of services, the lack of statistically  representative samples for processes to assess the accuracy of claims and  adjustments limits FEMA’s ability to project the results of its analyses in  order to provide management information on the private sector’s overall  implementation of the program. Without such information, the value of  FEMA’s monitoring processes—operational reviews and quality assurance  reinspections—as critical internal control activities is limited. Such  information could also help the agency better identify potential needs for  such things as additional training requirements or clarification of NFIP  coverage and claims guidance, as identified in the Flood Insurance Reform  Act of 2004.
FEMA officials have been working to address the consequences of the  most devastating hurricane season on record, and these efforts have  understandably put pressure on FEMA’s resources, particularly since  claims began to be filed for the damage from Hurricane Katrina.  Nonetheless, the agency may continue to face challenges like those posed  by Hurricane Isabel in implementing the NFIP until plans for addressing  some of the key legislative requirements of the Flood Insurance Reform  Act of 2004 are developed and implemented. Without establishing a  roadmap and a schedule for meeting mandated time frames that have  already elapsed, FEMA is limited in its ability to project when program  improvements will be made.
section_title: Recommendations for Executive Action
paragraphs: To improve FEMA’s oversight and management of the NFIP, we  recommend that the Secretary of the Department of Homeland Security  direct the Under Secretary of Homeland Security for Emergency  Preparedness and Response to take the following two actions:    use a methodologically valid approach to draw statistically  representative samples of claims for underwriting and claims portions  of operational reviews and for quality assurance reinspections of  claims by general adjusters; and    develop documented plans with milestones for implementing  requirements of the Flood Insurance Reform Act of 2004 to provide  policyholders with a flood insurance claims handbook that meets  statutory requirements, to establish a regulatory appeals process, and  to ensure that insurance agents meet minimum NFIP education and  training requirements.
section_title: Agency Comments and Our Evaluation
paragraphs: On October 12, 2005, the Acting Director of FEMA’s Mitigation Division  provided written comments on a draft of this report.  FEMA offered  substantive comments on three issues (App. II).  FEMA offered comments  principally in three areas:  (1) its disappointment that we had not directly  addressed the issue of whether Congress intended the flood insurance  program to restore damaged property to its pre-flood condition; (2) its  view that the method of choosing its sample for operational reviews was  appropriate and that its financial and internal controls are wide-ranging  and include processes that we did not address; and (3) its view that  contrary to the impression given in our draft report, FEMA has worked  diligently to implement the requirements of the Flood Insurance Reform  Act of 2004.
FEMA expressed disappointment that our report made no explicit,  unambiguous statement regarding whether Congress intended flood  insurance to restore damaged property to its pre-flood condition. We  believe we have addressed the issue consistent with our statutory  mandate by explaining the statutory and regulatory provisions that  affect both dollar ceilings and other coverage limitations. Section 208  of the Flood Insurance Reform Act of 2004 mandated GAO to conduct a  study of aspects of the National Flood Insurance Program (NFIP),  including “the adequacy of the scope of coverage provided under flood  insurance policies in meeting the intended goal of Congress that flood  victims be restored to their pre-flood conditions, and any  recommendations to ensure that goal is being met.”  To address this  mandate, it was necessary to consider the legal framework of flood  insurance coverage established by the National Flood Insurance Act of  1968, as amended, and FEMA’s implementing regulations.  The  amounts and limitations of flood insurance policy coverage are  affected by both the statute and the regulations.  In other words, flood  insurance policies can only restore victims to pre-flood conditions  within, but not beyond, the limits established by law and regulation.  To  address our mandate, we therefore explained the statutory and  regulatory provisions that placed limitations on the amount claimants  could recover under their flood insurance policies.  Our April 2005  testimony and this report make clear that the statutory ceilings on the  maximum amount of coverage that can be purchased and the policy  limitations that result from FEMA regulations may result in a  policyholder’s insured structure not being restored to its pre-flood  condition.
FEMA highlights a number of oversight and management procedures  for the program, including those for financial management.  It also  noted that its method of selecting its sample for operational reviews  was more appropriate than the statistically random probability sample  we recommended.  Most of the additional oversight and management  processes and controls FEMA noted in its comments are for financial  management—an area not included in the scope of our work.  Our  work focused on program implementation and oversight.  During our  review, FEMA managers described the operational reviews and claims  inspections as the primary methods FEMA used for monitoring and  overseeing the NFIP.
In support of its current sampling strategy for its operational reviews,  FEMA cites a report it had commissioned in 1999---a report FEMA had  not previously mentioned or provided to us.  Thus, we cannot comment  on that report or its recommendations.  Nevertheless, although FEMA’s  current sampling strategy may provide an opportunity to focus on  particular areas of risk, it does not provide management with the  information needed to assess the overall performance of the write- your-own companies, including the overall accuracy of the  underwriting of NFIP policies and the adjustment of claims— information that FEMA needs to have reasonable assurance that  program objectives are being achieved       With respect to FEMA’s implementation of program changes mandated  by the Flood Insurance Reform Act of 2004, we described several  actions FEMA had taken in its efforts to comply with the Act, while  noting that it had not fully implemented the Act’s requirements.  In its  comments on our draft report, FEMA said that it had been working  diligently to meet the Act’s requirements and had made further  progress on certain initiatives, for example, by finalizing “Summary of  Coverage” forms required by section 202 of the act and distributing  them to policyholders purchasing or renewing their coverage after  September 21, 2005.  We have updated our draft report to reflect the  new status information, but work remains to be done before FEMA  fully implements other requirements of the Flood Insurance Reform  Act of 2004.  As we noted in our report, section 205 of the Act requires  FEMA to establish a claim appeals process by regulation, and section  204 of the Act requires FEMA to describe this regulatory appeals  process in its flood insurance claims handbook.  Although FEMA  commented that it was offering claimants an informal appeals process  pending the establishment of a regulatory process, it must establish the  regulatory process to be in compliance with the informational  requirements of section 204 and the procedural requirements of section  205 of the act.  Finally, although FEMA published minimum education  and training requirements for flood insurance agents in the Federal  Register in September 2005, FEMA has not established how or when  states are to begin imposing these requirements on flood insurance  agents.  Thus, we believe our recommendation that FEMA develop  documented plans with milestones for implementing the requirements  of the Flood Insurance Reform Act of 2004 remains appropriate.
FEMA also offered a number of technical comments that we incorporated  as appropriate.
We are sending copies of this report to the Secretary of the Department of  Homeland Security.  We will also make copies available to others upon  request.  In addition, the report will be available at no charge on GAO’s  Web site at http://www.gao.gov.
If you have any questions, please contact me at (202) 512-8777 or  jenkinswo@gao.gov or Christoper Keisling, assistant director at (404) 679- 1917 or keislingc@gao.gov. Contact points for our offices of Congressional  Relations and Public Affairs may be found on the last page of this report.   GAO staff who made major contributions to this report are listed in  appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To address provisions in the Flood Insurance Reform Act of 2004 for a  GAO study and report on issues related to the processing of flood  insurance claims and the Federal Emergency Management Agency’s  (FEMA) oversight and management of the program, we assessed (1) the  statutory and regulatory limitations on homeowners’ coverage under the  National Flood Insurance Program (NFIP); (2) FEMA’s role in monitoring  and overseeing the NFIP; (3) FEMA’s response to concerns regarding  NFIP payments for Hurricane Isabel claims; and (4) the status of FEMA’s  implementation of requirements of the Flood Insurance Reform Act of  2004.
To determine the statutory and regulatory limitations on homeowners’  coverage under the NFIP, we reviewed the National Flood Insurance Act  of 1968, as amended, its legislative history, and FEMA’s implementing  regulations, including its “Standard Flood Insurance Policy.” We also  discussed our review with officials of DHS Office of General Counsel.
To assess FEMA’s role in monitoring and overseeing the NFIP, we  examined program requirements and reports. We analyzed the results of  15 operational reviews and follow-up visits FEMA completed from 2001  through February 2005 to determine whether they were done in  accordance with requirements and procedures outlined in FEMA’s Write  Your Own Financial Control Plan and GAO’s Standards for Internal  Control in the Federal Government. To determine whether FEMA met the  standard for assessing the quality of performance over time and ensuring  that findings of its operational reviews were addressed, we analyzed  reports of the results of all reviews of insurance operations and follow-up  visits at insurance companies where FEMA identified critical errors over a  10-year period, from 1996 to April 2005—a total of 15 reports. All of the  reviews and visits for this 10-year period occurred from 2001 to April 2005  because for several years prior to 1999, FEMA did not conduct operational  reviews. The reviews were restarted on a “practice” basis in 1999 and a  regular basis in 2000. We also observed FEMA examiners as they  conducted a portion of an operational review at a flood insurance vendor  location and obtained information on the schedule of operational reviews  from 2000 to June 2005. We obtained documentation on how quality  assurance reinspections of claims adjustments are done after flood events  and reviewed copies of several reinspection reports and examples of data  maintained in the NFIP reinspection database, as well as aggregate  information on the number of quality assurance reinspections done from  2000 to June 2005. We interviewed officials of FEMA and its program  contractor about their oversight activities, and we discussed aspects of the  process with private-sector insurance officials from four of the five largest  write-your-own companies in terms of the number of claims filed in 2004.  For example, we talked with FEMA officials about how claims files were  selected for each operational review to examine write your own  companies’ claims underwriting and adjustment activities and talked with  two of the nine general adjusters employed by FEMA’s program contractor  about how they reinspect the work of adjusters who prepare flood damage  estimates and how they select properties to visit. We interviewed these  two general adjusters because they had performed reinspections of claims  adjustments for damage from Hurricane Isabel and from hurricanes in  Florida in 2004. We did not evaluate FEMA’s methodology for selecting  sample sizes for its monitoring and oversight activities.
To determine FEMA’s response to concerns about Hurricane Isabel claims  payments, we reviewed a statistically valid sample of 100 claims files of  claimants in Maryland, Virginia, and North Carolina who were not satisfied  with their initial claims settlements and had their claims reviewed by a  special FEMA task force. The claims files included documentation of  actions taken on the claims by the write-your-own companies and the  FEMA task force, as well as correspondence and documentation provided  by the claimants. For this representative sample of claims, we determined  the average additional amount paid on claims that were closed with an  additional payment; the average amount of claims reviewed by the task  force; and reasons claims were closed by the task force with and without  additional payments. We based our analysis on the information in the files  we reviewed; we did not verify the accuracy of the information in the  claims files. We tested the reliability of claims payments amounts for the  NFIP database on a statistically valid sample of 250 claims for all flood  events in 2003 and 2004. We determined that the NFIP database was  sufficiently reliable for our reporting purposes. We discussed the actions  FEMA took to address concerns of Hurricane Isabel claimants with FEMA  officials, as well as the two general adjusters we interviewed, other  officials of FEMA’s program contractor, and private-sector insurance  officials. We did not interview NFIP policyholders who filed claims for  flood damage after Hurricane Isabel because (1) such interviews would  have provided anecdotal information that could not be used to make  judgments about Hurricane Isabel claimants as a group or any subset of  the group; and (2) we started our review more than a year after Hurricane  Isabel occurred; thus, testimonial information would have been dated.
To determine the extent to which FEMA had implemented provisions of  the Flood Insurance Reform Act of 2004, we examined documentation of  the agency’s efforts, including draft materials FEMA had prepared for  distribution to policyholders. We also interviewed officials to determine  what progress had been made and what milestones, if any, had been  established to meet the legislative mandates.
We conducted our work in accordance with generally accepted  government auditing standards between December 2004 and August 2005.
section_title: Appendix II: Comments from the Federal Emergency Management Agency
section_title: Appendix III: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Amy Bernstein, Christine Davis, Pawnee Davis, Wilfred Holloway,   Deborah Knorr, and Raul Quintero made significant contributions to this  report.