Flood Insurance: Comprehensive Reform Could Improve Solvency and Enhance Resilience
Published: 2017-04-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress created NFIP to reduce the escalating costs of federal disaster assistance for flood damage, but also prioritized keeping flood insurance affordable, which transferred the financial burden of flood risk from property owners to the federal government. In many cases, premium rates have not reflected the full risk of loss, so NFIP has not had sufficient funds to pay claims. As of March 2017, NFIP owed $24.6 billion to Treasury. NFIP's current authorization expires in September 2017.
In this report, GAO focuses on potential actions that can help reduce federal fiscal exposure and improve resilience to flood risk. GAO reviewed laws, GAO reports, and other studies. GAO interviewed officials from FEMA and other agencies. GAO also solicited input from industry stakeholders (including insurers, reinsurers, and actuaries) and nonindustry stakeholders (including academics, consumer groups, and real estate and environmental associations) through interviews, a nongeneralizable questionnaire, and four roundtable discussions.
section_title: What GAO Found
paragraphs: Based on discussions with stakeholders and GAO's past work, reducing federal exposure and improving resilience to flooding will require comprehensive reform of the National Flood Insurance Program (NFIP) that will need to include potential actions in six key areas (see figure below). Comprehensive reform will be essential to help balance competing programmatic goals, such as keeping flood insurance affordable while keeping the program fiscally solvent. Taking actions in isolation may create challenges for some property owners (for example, by reducing the affordability of NFIP policies) and therefore these consequences also will need to be considered. Some of the potential reform options also could be challenging to start or complete, and could face resistance, because they could create new costs for the federal government, the private sector, or property owners. Nevertheless, GAO's work suggests that taking actions on multiple fronts represents the best opportunity to help address the spectrum of challenges confronting NFIP.
Through its work, GAO identified the following interrelationships and potential benefits and challenges associated with potential actions that could be taken to reform NFIP in the six areas:
Outstanding debt. The Federal Emergency Management Agency (FEMA), which administers NFIP, owed $24.6 billion as of March 2017 to the Department of the Treasury (Treasury) for money borrowed to pay claims and other expenses, including $1.6 billion borrowed following a series of floods in 2016. FEMA is unlikely to collect enough in premiums to repay this debt. Eliminating the debt could reduce the need to raise rates to pay interest and principal on existing debt. However, additional premiums still would be needed to reduce the likelihood of future borrowing in the long term. Raising premium rates could create affordability issues for some property owners and discourage them from purchasing flood insurance, and would require other potential actions to help mitigate these challenges.
Premium rates. NFIP premiums do not reflect the full risk of loss, which increases the federal fiscal exposure created by the program, obscures that exposure from Congress and taxpayers, contributes to policyholder misperception of flood risk (they may not fully understand the risk of flooding), and discourages private insurers from selling flood insurance (they cannot compete on rates). Eliminating rate subsidies by requiring all rates to reflect the full risk of loss would address an underlying cause of NFIP's debt and minimize federal fiscal exposure. It also would improve policyholder understanding of flood risk and encourage private-sector involvement. However, raising rates makes policies less affordable and could reduce consumer participation. The decreases in affordability could be offset by other actions such as providing means-based assistance.
Affordability. Addressing the affordability issues that some consumers currently face, or might face if premium rates were raised, could help ensure more consumers purchase insurance to protect themselves from flood losses. GAO previously recommended that any affordability assistance should be funded with a federal appropriation (rather than through discounted premiums) and should be means-tested. Means-testing the assistance could help control potential costs to the federal government, and funding with an appropriation would increase transparency of the federal fiscal exposure to Congress. Many industry and nonindustry stakeholders with whom GAO spoke said affordability assistance should focus on helping to pay for mitigation—such as elevating buildings—because mitigation permanently reduces flood risk (thus reducing premium rates). Mitigation efforts can have high up-front costs, and may not be feasible in all cases, but many stakeholders suggested that federal loans could be used to spread consumer costs over time.
Consumer participation. According to many industry and nonindustry stakeholders with whom GAO spoke, some consumers might not purchase flood insurance because they misperceive their flood risk. For example, consumers located outside of the highest-risk areas, who are not required to purchase flood insurance, may mistakenly perceive they are not at risk of flood loss. Consumers also may choose not to purchase flood insurance because they overestimate the adequacy of federal assistance they would expect to receive after a disaster. Expanding the mandatory purchase requirement beyond properties in the highest-risk areas is one option for encouraging consumer participation in flood insurance. However, doing so could face public resistance and create affordability challenges for some, highlighting the importance of an accompanying affordability assistance program. Increasing consumer participation could help ensure more consumers would be better protected from the financial risk of flooding.
Other barriers to private-sector involvement. Industry and nonindustry stakeholders with whom GAO spoke cited regulatory uncertainty and lack of data as barriers to their ability to sell flood insurance, in addition to the less than full-risk rates charged by FEMA. For example, some industry and nonindustry stakeholders told GAO that while lenders must enforce requirements that certain mortgages have flood insurance, some lenders are uncertain whether private policies meet the requirements. Clarifying the types of policies and coverage that would do so could reduce this uncertainty and encourage the use of private flood insurance. In addition, some stakeholders said that access to NFIP claims data by the insurance industry could allow private insurers to better estimate losses and price policies. FEMA officials said they would need to address privacy concerns to provide such information but have been exploring ways to facilitate more data sharing.
NFIP flood resilience efforts. Some industry and nonindustry stakeholders told GAO that greater involvement by private insurers could reduce funding available for some NFIP flood resilience efforts (mitigation, mapping, and community participation). For example, some of these stakeholders said that as the number of NFIP policies decreased, the policy fees FEMA used to help fund mitigation and flood mapping activities also would decrease. Potential actions to offset such a decrease could include appropriating funds for these activities or adding a fee to private policies. This would allow NFIP flood resilience efforts to continue at their current levels as private-sector involvement increased.
section_title: What GAO Recommends
paragraphs: To improve NFIP solvency and enhance national resilience to floods, Congress should consider comprehensive reform covering six areas: (1) outstanding debt, (2) premium rates, (3) affordability, (4) consumer participation, (5) barriers to private-sector involvement, and (6) NFIP flood resilience efforts.

section_title: Letter
paragraphs: The National Flood Insurance Program (NFIP) plays a critical role in  federal efforts to improve resilience to flooding (the ability to absorb and  recover from such events), but as we have previously reported, it faces a  number of financial and management challenges. Competing aspects of  NFIP—keeping flood insurance affordable while making the program  fiscally solvent—have made it challenging to reform the program.  Specifically, it has been challenging to promote participation in the  program while at the same time attempting to fund claim payments with  premiums paid by NFIP policyholders. For example, to help promote the  purchase of flood insurance, Congress has authorized the program to  charge discounted premium rates to many policyholders but no  appropriations have been made available to make up for that discount. As  a result, premium revenue has been insufficient to pay claims over the  long term, and the Federal Emergency Management Agency (FEMA) has  had to borrow from the Department of the Treasury (Treasury) to pay  losses resulting from major natural disasters (such as Hurricanes Katrina,  Rita, and Wilma in 2005 and Superstorm Sandy in 2012). As of March  2017, NFIP was $24.6 billion in debt to Treasury.
At different points, FEMA, which administers NFIP, and Congress  focused on making the program more fiscally self-sustaining but have  made limited progress in achieving this goal. For example, in 1983 we  reported that FEMA had set a goal of making the program self-sustaining  by 1988. Subsequently in 2012, the Biggert-Waters Flood Insurance  Reform Act of 2012 (Biggert-Waters Act) required FEMA to phase out  almost all discounted insurance premiums and establish a reserve fund.  But the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA)  reinstated certain subsidies removed by the Biggert-Waters Act and  generally limited yearly premium rate increases.
While the volatile nature of flooding makes it difficult to predict the losses  the program might experience in the future, we have stated in past  reports that FEMA is unlikely to be able to repay its current debt, primarily  because premium rates charged to many policyholders do not reflect the  full risk of loss. Insurance companies, academics, consumer advocates,  and others have proposed a number of options for reforming NFIP. These  options include changes to NFIP premium rates, increased involvement of  private-sector insurers, new roles for the federal government, and  revisions to requirements for the purchase of flood insurance. Currently,  owners of properties in special flood hazard areas (SFHA) that are  secured by federally backed mortgages or mortgages obtained from  federally regulated institutions generally must purchase flood insurance.
In September 2017, NFIP’s current authorization will expire. We  performed our work under the authority of the Comptroller General in light  of congressional interest in flood insurance and NFIP’s impending  reauthorization. This report examines actions Congress and FEMA could  take to reduce federal fiscal exposure and improve resilience to flood  damage. We specifically focused our review on potential actions in six  key areas: (1) outstanding debt, (2) premium rates, (3) affordability, (4)  consumer participation, (5) barriers to private-sector involvement, and (6)  NFIP flood resilience efforts.
To address this objective, we reviewed our prior related reports and other  studies, analyzed relevant laws, and conducted semi-structured  interviews with relevant stakeholder groups. We also sent a  questionnaire to more than 100 stakeholders, judgmentally selected to  include a broad range of perspectives, including state and federal  officials, insurers, reinsurers, catastrophe modelers, academics, and  consumer advocates. We obtained a response rate of 76 percent and  used the results to gather stakeholder input on options for reforming NFIP  and policy goals for evaluating those options. We also conducted four  web-based roundtables with a total of 43 stakeholders judgmentally  selected to represent diverse groups with flood insurance knowledge to  further identify and analyze flood insurance reform options. We discuss  our scope and methodology in more detail in appendix I.
We conducted this performance audit from September 2015 to April 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Congress first proposed providing flood insurance in the 1950s, after it  became clear that private insurance companies could not profitably  provide flood coverage at a price that consumers could afford, primarily  because of the catastrophic nature of flooding and the difficulty of  determining accurate rates. In 1968, Congress created NFIP to help  reduce escalating costs of providing federal flood assistance to repair  damaged homes and businesses. According to FEMA, NFIP also was  designed to address the policy objectives of identifying flood risk, offering  affordable insurance premiums to encourage program participation, and  promoting community-based floodplain management. To meet these  policy objectives, NFIP has four key elements: identifying and mapping flood risk, floodplain management, flood insurance, and incentivizing risk  reduction through grants and premium discounts.
subsections: section_title: NFIP Flood Hazard Mapping and Mitigation
paragraphs: Through NFIP, FEMA maps floodplain boundaries and requires  participating communities to adopt and enforce floodplain management  regulations that mitigate the effects of flooding and reduce overall costs.  According to FEMA, floodplain management standards are designed to  prevent new development from increasing the flood threat and to protect  new and existing buildings from anticipated flooding. FEMA has a  division responsible for flood mapping activities and policy and guidance,  but stakeholders from all levels of government and the private sector  participate in the mapping process. For instance, FEMA relies on local  governments to provide notice of changes in communities that can pose  new or changed flood hazards and works with localities to collect the  information needed to update flood maps.
FEMA’s Flood Insurance Rate Maps serve several purposes. They  provide the basis for setting insurance rates and identifying properties  whose owners are required to purchase flood insurance. For example,  since the Flood Disaster Protection Act of 1973, as amended,  homeowners with federally backed mortgages or mortgages held by  federally regulated lenders on property in an SFHA are required to  purchase flood insurance. Others may purchase flood insurance  voluntarily if they live in a participating community. The maps also provide  the basis for establishing floodplain management standards that  communities must adopt and enforce as part of their NFIP participation.  As of February 2017, 22,235 communities across the United States and  its territories voluntarily participated in NFIP by adopting and agreeing to enforce flood-related building codes and floodplain management  regulations.
FEMA has stated that resilience to flooding is a key objective of NFIP.  Broadly speaking, resilience is the ability to prepare and plan for, absorb,  recover from, and more successfully adapt to actual or potential adverse  events. Resilience is closely linked with flood mitigation activities. For  example, FEMA estimated that its floodplain management efforts resulted  in avoidance of $1.87 billion in flood losses annually, and FEMA officials  said they expect this amount to increase over time as additional new  construction is built to increasingly better standards.
FEMA supports a variety of flood mitigation activities that are designed to  reduce flood risk and thus NFIP’s financial exposure. These activities,  which are implemented at the state and local levels, include hazard  mitigation planning; the adoption and enforcement of floodplain  management regulations and building codes; and the use of hazard  control structures such as levees, dams, and floodwalls or natural  protective features such as wetlands and dunes. FEMA provides  community-level mitigation funding through grant programs. At the  individual property level, mitigation options include elevating a building,  relocating the building to an area with lower flood risk, or purchasing and  demolishing a building and turning the property into green space.
Another tool FEMA uses to incentivize efforts to reduce flood risk is the  Community Rating System. The Community Rating System is a voluntary  incentive program that recognizes and encourages community floodplain  management activities that exceed the minimum NFIP requirements. As a  result, flood insurance premium rates are discounted to reflect the  reduced flood risk resulting from community actions that meet the three  goals of reducing flood damage to insurable property, strengthening and  supporting the insurance aspects of NFIP, and encouraging a  comprehensive approach to floodplain management.
section_title: NFIP Coverage, Premium Rates, and Rate Setting
paragraphs: Insurance offered through NFIP includes different coverage levels and  premium rates, which are determined by factors that include property  characteristics, location, and statutory provisions. NFIP coverage limits  vary by program (regular or emergency) and building occupancy (for  example, residential or nonresidential). In NFIP’s regular program, the  maximum coverage limit for 1-4 family residential policies is $250,000 for  buildings and $100,000 for contents. For nonresidential or multifamily  policies, the maximum coverage limit is $500,000 per building and  $500,000 for the building owner’s contents. Separate coverage is  available for contents owned by tenants.
To set premium rates, FEMA considers several factors including location  in flood zones, elevation of the property relative to the community’s base  flood elevation, and characteristics of the property such as building type,  number of floors, presence of a basement, and the year a structure was  built relative to the year of a community’s original flood map. Additionally,  FEMA allows policyholders to pay lower premiums if they opt for higher  deductible amounts. Most NFIP policies are deemed by FEMA to be full- risk rates, while some are less than full-risk (subsidized).
FEMA defines full-risk rates as those charged to a class of policies  that generate premiums sufficient to pay the group’s anticipated  losses and expenses. According to FEMA, these rates are based on  the probability of a range of possible floods, damage estimates based  on that level of flooding, and accepted actuarial principles. FEMA staff  noted that approximately 80 percent of FEMA’s policyholders pay full- risk rates.
Subsidized rates do not fully reflect the risk of flooding but are  intended to provide policyholders with more affordable premiums  while encouraging floodplain management in communities and the  widespread purchase of flood insurance. Generally, subsidized  policies cover properties in high-risk locations that otherwise would  have been charged higher premiums and that were built before flood  maps became available and their flood risk was clearly understood.  FEMA staff said they had begun increasing rates for certain  subsidized properties as prescribed under the Biggert-Waters Act and  HFIAA. This included increased rates for subsidized policies covering  businesses, nonprimary residences, severe repetitive loss properties,  and substantially damaged/substantially improved properties as  required by the Biggert-Waters Act. In addition, HFIAA required  increased rates for subsidized policies covering primary residences.  When setting subsidized rates for individual properties, FEMA staff  said they also consider flood risk, previous rate increases, and  statutory limits on rate increases.
FEMA also allows some policyholders to receive grandfathered premium  rates, which allows policyholders who have been mapped into higher-risk  flood zones to pay lower premiums associated with their previous lower- risk flood zone. FEMA officials said that in the aggregate, policy classes  that contain grandfathered policies collect enough in premiums to reflect  the full risk of loss for that class, but as we have previously reported,  FEMA does not yet possess the data necessary to verify this.
section_title: NFIP Funding and Borrowing Authority
paragraphs: FEMA funds NFIP primarily through the insurance premiums paid by  policyholders. In addition to covering insurance claims, NFIP premiums  also are intended to cover outreach, research, and operating expenses.  FEMA also charges a Federal Policy Fee on NFIP policies that helps fund  efforts that include mitigating flood risk on properties covered by NFIP  policies and developing and maintaining flood maps. In addition, FEMA  received appropriations of $190 million in fiscal year 2016 for mapping  and other specified statutory requirements.
Congress authorized FEMA to borrow from Treasury when needed, up to  a preset statutory limit. Originally, Congress authorized a borrowing limit  of $1 billion and increased it to $1.5 billion in 1996. Following the  catastrophic hurricanes of 2005, Congress amended FEMA’s borrowing  authority three more times to more than $20 billion. After Superstorm  Sandy in 2012, Congress increased FEMA’s borrowing authority to  $30.425 billion. In January 2017, FEMA borrowed an additional $1.6  billion, increasing the total debt to $24.6 billion. Before 2005, NFIP was  mostly self-sustaining, only using its borrowing authority intermittently and  repaying the loans. Figure 1 shows outstanding debt from 1995 through  2017.
section_title: Recent Legislative Reforms to NFIP
paragraphs: The Biggert-Waters Act affected many aspects of NFIP. For example, it  required FEMA to  increase rates at 25 percent per year until full-risk rates were reached  for certain subsidized properties, including secondary residences,  businesses, and severe repetitive loss properties;  increase rates over a 5-year period to phase out grandfathered policy  rates; prohibit subsidized rates for properties purchased after, or not  insured, as of July 6, 2012;  create a reserve fund that would maintain at least 1 percent of the  total annual potential loss exposure faced by NFIP based on  outstanding flood insurance policies in force in the prior fiscal year;  improve flood risk mapping; and develop new methods related to compensation for companies that  sell, write, and service flood insurance policies; that is, Write Your  Own (WYO) insurers.
However, concern over rapid rate increases led to the passage of HFIAA  in 2014, which repealed or altered portions of the Biggert-Waters Act.  HFIAA reinstated certain rate subsidies removed by the Biggert-Waters  Act, including those for properties purchased after, or not insured, as of  July 6, 2012. For these properties, and certain others, rates would rise by  at least 5 percent per year. HFIAA also established a new subsidy for  properties that are newly mapped into higher-risk zones. The subsidy is  phased out for individual properties over time. HFIAA also restored  grandfathered rates and generally limited yearly increases in property- specific rates to 18 percent. In addition, HFIAA created a premium  surcharge that would be deposited into the reserve fund (generally, $25  for primary residences and $250 for others). As of November 2015, the  last time we reviewed the implementation of these acts, FEMA estimated  that it had met the requirements for almost two-thirds of the Biggert- Waters Act provisions and about half of the HFIAA provisions and was  taking actions on others. Table 1 provides additional detail of some of the  selected requirements of the two laws.
section_title: Policy Goals for Evaluating Potential Options for Reforming Flood Insurance
paragraphs: Using the input of stakeholders and based on our prior work, we identified  five policy goals for the flood insurance program: (1) promoting flood risk  resilience, (2) minimizing fiscal exposure to the federal government, (3)  requiring transparency of the federal fiscal exposure, (4) encouraging  consumer participation in the flood insurance market, and (5) minimizing  transition and implementation challenges. For each goal we identified  several characteristics that illustrate how potential reform proposals might  help meet the objective of the goal (see table 2).
section_title: Potential Comprehensive Reform of NFIP Would Require Actions in Six Key Areas
paragraphs: Our review of literature and prior GAO reports and interviews, a  questionnaire, and roundtable discussions with industry and nonindustry  stakeholders identified a number of potential reform actions that can be  considered to improve NFIP’s solvency and enhance the nation’s  resilience to flood risk. These potential reform actions fall into the  following six areas: (1) outstanding debt, (2) premium rates, (3)  affordability, (4) consumer participation, (5) barriers to private-sector  involvement, and (6) NFIP flood resilience efforts. However, actions for  reform in one area have implications that could affect reform actions in  other areas. Therefore, it is necessary to consider flood insurance reform  comprehensively. In the following sections, we present information for  each of the six areas, including why reform is needed, the potential  actions we identified from our review, and the potential implications of  each of these reform actions that will need to be considered.
subsections: section_title: Eliminating Outstanding Debt
paragraphs: According to industry and nonindustry stakeholders with whom we spoke,  potential reform actions will need to address the $24.6 billion debt to  Treasury. Servicing the debt puts a strain on NFIP operations and  burdens current policyholders. If the debt were eliminated, FEMA could  reallocate funds used for debt repayment for other purposes such as  building a reserve fund and program operations. Any reforms related to  the debt also have potential implications for issues such as premium rates  and consumer participation. These implications are discussed in the  following relevant sections.
Outstanding debt. FEMA’s $24.6 billion outstanding debt, as of March  2017, represents a significant financial obligation for the program and  making principal and interest payments on that debt has tied up funds  that might otherwise have been used for program operations. Since  FEMA initially borrowed $17.5 billion to pay losses from the 2005  catastrophic flood events, FEMA has paid about $6.3 billion in principal  and interest on its outstanding balance. However, since 2005 FEMA has  had to borrow additional funds from Treasury (following Superstorm  Sandy in 2012 and a series of floods in 2016).
In prior reports, we found that while Congress has directed FEMA to  provide subsidized premium rates for policyholders meeting certain  requirements, it has not provided FEMA with funds to offset these  subsidies, which has contributed to FEMA’s need to borrow. Despite  these requirements and the resulting insufficiency in premiums, current  law requires FEMA to repay its borrowing from Treasury. However, we  reported that FEMA is unlikely to be able to repay this debt, and some  industry and nonindustry stakeholders with whom we spoke said that  Congress should eliminate it, as Congress has done when FEMA accrued  NFIP debt in the past. Eliminating the debt would require Congress to  either appropriate funds for FEMA to repay the debt, or change the law to  eliminate the requirement that FEMA repay the accumulated debt.
Since 2010, NFIP has benefited from low interest rates. For example,  interest rates on the debt during fiscal years 2013–2015 ranged from  0.125 percent to 2.5 percent. As of March 2017, FEMA estimated that  NFIP’s $24.6 billion debt would require annual interest-only payments of  nearly $400 million. If interest rates increased, FEMA’s annual interest  payments could rise significantly. As such, FEMA may not be able to  retire any of its debt, even in low-loss years.
Charging current policyholders to repay past debt. In the Biggert- Waters Act, Congress set an expectation that FEMA would repay its debt  through funds collected from current and future policyholders. That is, in  addition to charging policyholders enough to pay for their current risk of  flood losses (provisions subsequently revised under HFIAA), FEMA also  must collect a surcharge from all NFIP policyholders to help repay  program debt, among other things. This creates a potential inequity  because policyholders would not only be charged for the flood losses they  are expected to incur, but also losses incurred by past policyholders.  Such surcharges could discourage some homeowners from purchasing  flood insurance from NFIP.
Charging current policyholders to pay for debt incurred in past years is  contrary to actuarial principles and insurers’ pricing practices, as  described by industry stakeholders with whom we spoke, and could  encourage some low-risk policyholders to leave NFIP. According to  actuarial principles, a premium rate is based on the risk of future losses  and does not include past costs. For example, if in prior years an insurer’s  claim payments had exceeded the premiums collected, it would not  recoup those payments from current or future policyholders because  those claims payments would have resulted from risks faced by past  policyholders. According to one industry stakeholder, any shortfall in  premiums needed to pay claims would be made up by using funds from  the insurance company’s surplus.
subsections: section_title: Potential Reform Actions
paragraphs: Congress could eliminate FEMA’s debt to Treasury.
section_title: Implications of Potential Reform Actions
paragraphs: Eliminating the debt would allow FEMA to take funds currently used  for principal and interest payments and reallocate them for other  purposes such as building a reserve fund or financing program  operations. It also would be more equitable for current policyholders  and consistent with actuarial principles.
Eliminating the debt in concert with other actions mentioned in this report  would be important because eliminating the debt without addressing an  underlying cause of the debt—insufficient premium rates—would keep in  place an unsustainable system. That is, NFIP likely would need to rely on  new borrowing from Treasury to help pay claims for future flood losses  because of its premium structure.
section_title: Establishing Premium Rates That Reflect the Full Risk of Loss
paragraphs: As we previously reported, challenges resulting from NFIP’s current rate  structure include fiscal unsustainability, policyholder misperception of  flood risk, limits to competition from private-sector insurance, and limited  transparency of federal fiscal exposure. Reforming rates so that they  reflect the full risk of loss would address several of the policy goals we  identified for NFIP because a reformed rate structure would place the  program on a more financially sustainable path and policyholders could  better understand their flood risk. Additionally, a reformed rate structure  would encourage more private insurers to enter the flood insurance  market, and Congress and taxpayers would be better informed about  federal fiscal exposure. However, it is important to remember that this  reform action could affect the implementation of other reform actions such  as eliminating the debt, expanding requirements to purchase flood  insurance, removing barriers to private-sector involvement, and funding  for NFIP mitigation and mapping. These implications are discussed in  each of the sections related to the other reform actions.
Insufficient premiums. As previously discussed—and as we have been  reporting since as early as 1983—NFIP’s premium rates do not reflect the  full risk of loss because of various legislative requirements, which  exacerbates the program’s fiscal exposure. For example, in a December  2014 report we estimated that the legislative requirements for subsidized  premium rates left FEMA with a premium shortfall of $11–$17 billion for  the period from 2002 to 2013. Subsidized premium rates and several  years with catastrophic losses have led to the need for NFIP to borrow  from Treasury to pay claims. While actuarially sound premium rates that  reflect the full risk of loss would reduce the likelihood of future borrowing,  they would not fully eliminate it. Because of the highly variable nature of  flood risk, the chance exists that adverse loss experience over a relatively  short period could require borrowing if a sufficient reserve had not yet  been accumulated. As noted earlier, the Biggert-Waters Act required  FEMA to phase out subsidized and grandfathered rates, both of which  allowed premium rates that did not reflect the full risk of loss. However,  due to concerns that increased premiums created affordability concerns  for some policyholders, HFIAA slowed the phase-out of subsidized  premium rates and reinstated grandfathered rates for most properties.
Elevation certificates. As we previously reported, the Biggert-Waters Act  also required FEMA to phase in full-risk rates, but FEMA does not have  data that would allow it to determine full-risk rates for currently subsidized  policies. Specifically, according to FEMA, it lacked elevation information  for 97 percent of subsidized policies as of February 2017. In 2016,  FEMA said that obtaining data for the approximately 1 million subsidized  policies could take considerable time and cost several hundred million  dollars. According to FEMA, obtaining an elevation certificate typically  would cost a policyholder from $500 to $2,000 or more; however, some  nonindustry stakeholders with whom we spoke said that the cost for some  certificates could be below this range. According to FEMA, some  policyholders already have paid to obtain the certificates because doing  so could enable them to receive lower premium rates and that they  expected more policyholders to do so as rate increases continued. This  property-level information is necessary for FEMA to determine the  difference between subsidized and full-risk rates and to determine when  full-risk rates have been reached. Thus, the incomplete information on  rates prevents Congress and the public from understanding the amount of  unfunded subsidization within the program, and therefore the federal  fiscal exposure it creates.
Reinsuring for catastrophic risk. To reflect the full risk of loss, premium  rates need to account for the risk of catastrophic losses—large aggregate  losses resulting from relatively infrequent phenomena. Many private  insurers purchase reinsurance to mitigate the risk of such large financial  losses. In January 2017, FEMA executed a 1-year agreement with a  consortium of 25 private reinsurers, transferring more than $1 billion of its  flood risk exposure to the private reinsurance market. FEMA officials  said that this reinsurance not only will protect the program from some  financial risk, but also help FEMA gain experience purchasing  reinsurance and the private sector gain experience insuring flood risk.  Based on our analysis, reinsurance could be beneficial because it would  allow FEMA to recognize some of its flood risk and the associated costs  up front through the premiums it must pay to the reinsurers rather than  after the fact in borrowing from Treasury. However, because reinsurers  must charge FEMA premiums to compensate for the risk they assume,  reinsurance’s primary benefit would be to transfer and manage risk rather  than to reduce NFIP’s expected long-term fiscal exposure. Furthermore, if  FEMA did not charge its policyholders for the cost of reinsurance  premiums—and more broadly, implement full-risk rates for all  policyholders—it could continue to face challenges relating to the  transparency of NFIP’s federal fiscal exposure and the sustainability of its  program.
Effects on private sector and consumer perception of risk. Industry  and nonindustry stakeholders with whom we spoke said that it is difficult  for private insurers to compete with NFIP premium rates that do not  reflect the full risk of loss. To remain solvent, private insurers must charge  premium rates that are adequate to cover long-term estimated losses and  associated expenses. If NFIP rates were not set similarly, they would be  below what private insurers would need to charge, and the private  insurers would be unable to compete for these policies based on price.
As a result, the private market for flood insurance would continue to be  limited.
We also have previously concluded, and many industry and nonindustry  stakeholders with whom we spoke affirmed, that because NFIP premium  rates do not reflect the full risk of loss, consumers may not understand  the risk of flood loss associated with a particular property. HFIAA  requires FEMA to clearly communicate flood risk to individual property  owners regardless of whether their premiums are based on full actuarial  rates. FEMA officials said they had begun implementing this  requirement by notifying policyholders receiving a subsidy that their  premium rates do not reflect the full risk of loss. However, we previously  reported that FEMA officials noted that determining a full-risk rate would  require elevation information, which FEMA does not have for most  subsidized properties. Without the appropriate information on a  property’s potential for flood damage, consumers may not be discouraged  from purchasing homes in risky areas or they may not take actions to  mitigate potential flood damage, which would undermine the nation’s  resilience to flood risk and also potentially increase NFIP’s fiscal  exposure.
Basis for surcharges. Similarly, the surcharges used to build the reserve  fund are not charged based on the risk of the individual properties. For  example, owners of properties used as second homes pay a significantly  higher policy surcharge—$250, compared to $25 for primary  residences—regardless of the risk of flood loss that each property faces.  State regulations regarding rate setting by private insurers generally  stipulate that premium rates should reflect the underlying risk insured by  the policy and not be excessive, inadequate, or unfairly discriminatory.  However, NFIP’s surcharges are flat and not risk-based. Furthermore,  NFIP surcharges, particularly the $250 surcharge, can be significant  when compared with the annual premium rate and might affect  policyholder behavior. For example, according to FEMA officials, as of  February 2017, the average annual premium (including all surcharges  and fees) for NFIP policies subject to the $250 surcharge was $1,791.  Some industry and nonindustry stakeholders told us that the surcharges  could cause certain NFIP policyholders to discontinue their NFIP policies,  and they might or might not purchase private flood insurance instead.
Grandfathering. NFIP allows some property owners to continue to pay  grandfathered rates, which do not reflect the most recent reassessments  of flood risk (which occur when the properties are remapped into higher- risk flood zones). The grandfathered policies continue to pay premium  rates as if they were still located in lower-risk zones. FEMA does not  categorize policies with grandfathered rates as subsidized because they  are within classes of policies that FEMA says are not subsidized as a  whole. FEMA officials acknowledged that in such classes of policies,  property owners who obtain grandfathered rates are cross-subsidized by  other policyholders in the same flood zone. That is, other policyholders  pay higher rates to cover the shortfall in premiums from grandfathered  policies.
As a result, both grandfathered policies and the policies that cross- subsidize them do not pay rates in line with the risk of the individual  property and can send inaccurate risk signals to policyholders.  Furthermore as we found in prior reports, FEMA does not know how  many of its current policies pay grandfathered rates, which raises  questions about its rate-setting process. Before 2010, it did not identify  whether newly issued policies were receiving grandfathered rates. As a  result, it cannot currently verify whether grandfathered policies result in  premium revenue sufficient to pay for the estimated full long-term risk of  flood loss. However, FEMA officials said that in April 2016 they had  begun a phased effort to collect the information necessary to identify and  analyze grandfathered policies, and that they expect to complete the  effort by September 2018.
subsections: section_title: Potential Reform Actions
paragraphs: As we previously recommended, FEMA needs to obtain the  information necessary to determine full-risk rates for subsidized  policyholders.
As we previously recommended, FEMA needs to collect information  on the location, number, and losses associated with grandfathered  policies and analyze the financial effect these properties had on  NFIP.
As we previously suggested, Congress could eliminate subsidized  premium rates and require FEMA to charge all policyholders premium  rates that reflect the full risk of loss.
In addition, Congress could ensure that premium rates are more  closely linked to the individual property’s flood risk by eliminating flat  HFIAA surcharges and requiring FEMA to incorporate necessary  reserve fund charges into premium rates based on individual property  risk.
section_title: Implications of Potential Reform Actions
paragraphs: Requiring FEMA to obtain elevation certificates for subsidized  policyholders and data on grandfathered policies could address the  policy goal of making NFIP’s federal fiscal exposure more transparent  and facilitate congressional oversight. The cost of obtaining elevation  certificates could be burdensome for some policyholders, but could be  considered as part of an affordability assistance program (see  following section) and also could help some policyholders reduce their  premium rates.
Eliminating subsidized premium rates and requiring FEMA to charge  all policyholders premium rates that reflect the full risk of loss could  reduce fiscal exposure to the federal government and promote flood  risk resilience, two of the policy goals we identified. Full-risk rates  would help ensure that premiums collected were sufficient to pay  claims in the long-term, and therefore reduce the likelihood that the  program would need to borrow from Treasury. Full-risk rates would  provide incentives for mitigation measures that would reduce flood  risk and thus premium rates. Full-risk rates also could allow more  opportunities for private-sector insurers to enter the flood insurance  market, transferring federal fiscal exposure to flood risk to the private  sector.
Eliminating reserve fund surcharges, and instead charging full-risk  premium rates based on individual property risk, which would include  funding a reserve for future adverse experience, could address the  policy goal of encouraging consumer participation in flood insurance  for those whom FEMA might be charging premium rates higher than  appropriate for their flood risk. Doing so also could encourage private  insurers to compete for more flood insurance policies, rather than only  for policies in which NFIP premium rates are higher than the  associated flood risk.
Taking these actions in concert with other actions mentioned in this report  would be important because implementing full-risk rates will create  affordability concerns for some consumers, highlighting the need for other  assistance to help reduce negative consequences on consumer  participation.
section_title: Creating an Affordability Assistance Program That Is Funded with Appropriations, Means- Based, and Prioritized to Mitigate Risk
paragraphs: Industry and nonindustry stakeholders with whom we spoke said that rate  increases associated with the transition to full-risk premium rates can  raise affordability concerns for some policyholders and create a risk that  fewer consumers would purchase flood insurance. Some key  characteristics for designing an affordability assistance program that  addresses the goals of encouraging consumer participation and  promoting resilience include providing assistance through appropriations  rather than through discounted premiums, making it means-based, and  prioritizing it to mitigate risk. The implementation of affordability reforms  has implications for other issues such as premium rates, requirements to  purchase flood insurance, and barriers to private-sector involvement.  Discussions about these implications are included in each section of this  report related to those specific areas.
Making premium assistance more transparent. As we previously  reported, subsidized rates are available regardless of a property owner’s  ability to afford a full-risk premium. Because NFIP offers discounted or  “subsidized” rates for some policyholders, NFIP collects insufficient  revenue to fully pay expected claims over the long term, and these costs  generally remain hidden until NFIP must borrow from Treasury to fund a  shortfall. This lack of transparency in relation to program costs hinders  the ability of Congress to oversee the program and the public to scrutinize  it.
As we previously reported, means-testing premium assistance would help  ensure that only those who could not afford full-risk rates would receive  assistance and may increase the amount NFIP collects in premiums, thus  reducing the program’s federal fiscal exposure. In our February 2016  report, we estimated that 47–74 percent of policyholders could be eligible  for the subsidy, when income eligibility was set at 80 percent or 140  percent of area median income, respectively. Ultimately, the change in  federal fiscal exposure generated by means-tested premium assistance  would depend on how the assistance was structured, as illustrated by the  following examples:
Higher premiums collected from currently subsidized policyholders  who can afford the full-risk premium rate could be offset by premium  assistance to policyholders currently paying full-risk rates and deemed  eligible for the means-based assistance.
Savings resulting from restricting premium assistance to those with a  demonstrated need could be offset by increasing the amount of  assistance given to each individual eligible recipient.
If consumer participation increased, the change in fiscal exposure  also would depend on the extent to which new policyholders were  eligible for the means-based subsidies.
Limiting potential sources of additional costs (for example, by limiting the  amount of the subsidy) could help ensure that NFIP’s fiscal exposure  would be reduced. Some nonindustry stakeholders with whom we spoke  suggested that any premium assistance should be temporary and only  used to help policyholders transition to full-risk rates rather than provided  indefinitely. However, it is important to note that while making premium  assistance temporary could help reduce fiscal exposure, it also could  create affordability concerns in future years for some policyholders.
As we previously reported, a premium assistance program could be  designed to consider effects on the private flood insurance market. For  example, if premium assistance were made available only for NFIP  policies and not for private flood insurance policies, private insurers would  continue to be at a significant competitive disadvantage, thus hindering  the growth of the private market. An option for addressing this concern  would be to make private policies eligible for the same affordability  assistance. However, during the course of this review, we determined that  the federal government would have to overcome implementation  challenges; for example, developing and implementing a program to  provide assistance for the purchase of private flood insurance policies.
Linking affordability to mitigation. Many industry and nonindustry  stakeholders with whom we spoke said that instead of premium  assistance, it would be preferable to address affordability by providing  assistance for mitigation measures that would reduce the flood risk of the  property—thus enhancing resilience—and ultimately result in a lower  premium rate. Premium assistance does not reduce a property’s flood  risk and also reduces incentives for mitigation. Although mitigation  assistance would entail a larger up-front cost, it would increase resilience  by reducing the risk of loss and reduce the need for premium assistance.  Reducing flood risk through mitigation also could reduce the need for  federal disaster assistance, further deceasing federal fiscal exposure.
A number of recent studies have proposed linking mitigation assistance to  premium assistance by requiring mitigation financed through a low- interest loan and providing a means-tested voucher. Many industry and  nonindustry stakeholders with whom we spoke said that funding  mitigation activities through loans would be preferable to funding through  grants because loans would be repaid by the consumer and represent a  lower cost to the federal government in the long term. For example, one  study suggested that the consumer’s total annual cost could be equal to  the loan servicing cost (interest plus some repayment of principal) plus  the flood insurance premium, with the premium being lower after  mitigation efforts were completed and had reduced the risk of flood loss.
Under one proposal developed by some academics who have conducted  extensive research on flood insurance, the program would determine the  annual amount of flood insurance costs the consumer would be able to  afford (for example, a percentage of annual household income), and the  annual voucher would be equal to any difference between the consumer’s  annual cost—post-mitigation premiums and servicing of the mitigation  loan—and what they were determined to be able to pay. The voucher  would be tied to individuals and their income level but the loan would be  attached to the property so that it could be transferred if the property were  sold. Under a related study, for properties for which elevation is not cost  effective, other mitigation measures, such as modifying the ground floor  with wet floodproofing and moving habitable areas to the second floor of  multistory homes, could be helpful. As would be the case with premium  assistance, Congress would need to provide funding for any mitigation  loan program.
subsections: section_title: Potential Reform Actions
paragraphs: Building on what we previously recommended, Congress could create  an affordability assistance program that (1) is funded through an  appropriation rather than through discounted premiums, (2) is means- tested, (3) considers making any premium assistance temporary, (4)  considers allowing assistance to be used for private policies, (5)  prioritizes investments in mitigation efforts over premium assistance  whenever economically feasible, and (6) prioritizes mitigation loans  over mitigation grants.
section_title: Implications of Potential Reform Actions
paragraphs: Providing premium assistance through appropriations rather than  through discounted premiums would address the policy goal of  making the fiscal exposure more transparent because any affordability  discounts on premium rates would be explicitly recognized in the  budget each year.
Because current subsidies are not based on the policyholder’s ability  to pay, means-testing assistance would restrict subsidies to those with  a demonstrated need, which could lower the number of policyholders  receiving a subsidy and therefore reduce fiscal exposure while  maintaining consumer participation (two of the policy goals we  identified). However, creating and administering a premium  assistance or mitigation loan program would entail some  administrative costs. Furthermore, any premium assistance (including  vouchers) could continue to reduce incentives for mitigation to some  extent.
Making premium assistance temporary could help address the policy  goal of reducing long-term federal fiscal exposure, but could leave  some affordability concerns unaddressed, thus potentially reducing  consumer participation.
Prioritizing mitigation over premium assistance could address the  policy goal of enhancing resilience because it would involve taking  steps to reduce the risk of the property, thus reducing the likelihood of  future flood claims and potentially reducing long-term federal fiscal  exposure.
Creating an affordability program would require determining how to  assess eligibility for the assistance, which also would include the  collection of consumer data. Some mitigation efforts, such as  elevating a house, can be expensive and may require significant up- front costs, increasing federal fiscal exposure in the short term.  However, these costs could be recaptured over time through reduced  flood exposure in the long term and as policyholders repaid mitigation  loans.
Increased consumer participation in NFIP (by making insurance more  affordable) as well as higher levels of subsidies than currently  provided could result in higher fiscal exposure.
Taking these actions in concert with other actions mentioned in this report  would be important because creating a system for providing means- based assistance without establishing full-risk premium rates for all  policyholders, or establishing a source of funding for that assistance,  could increase the fiscal exposure NFIP creates for the federal  government.
section_title: Increasing Consumer Participation by Expanding the Mandatory Purchase Requirement and Improving Risk Communication
paragraphs: Based on our analysis of stakeholder comments, issues relating to the  policy goal of encouraging consumer participation include the effects of  the mandatory purchase requirement and disaster assistance on  consumer perception of flood risk. If the mandatory purchase requirement  were expanded to more (or all) mortgage loans made by federally  regulated lending institutions for properties in communities participating in  NFIP, consumer participation could increase, more consumers would  have some protection from the financial effects of flooding, and private  insurers would have a greater incentive to offer flood insurance coverage.  Any reforms related to consumer participation will have potential  implications for full-risk rates, affordability assistance, and barriers to  private-sector involvement. Discussions about these implications are  included in each section of this report related to those specific areas.
Consumer participation and the mandatory purchase requirement.  As discussed earlier, owners of properties in participating communities in  SFHAs generally are required to purchase flood insurance if their  mortgage loans are made by federally regulated lenders (mandatory  purchase requirement). This requirement was created to increase the  number of consumers who purchase flood insurance coverage. A number  of studies have shown that individuals focus on short time horizons and  have difficulty fully understanding low-probability, high-severity risks such  as flooding. For example, a 1 percent chance of flooding in a single year  may seem like a low probability to many—despite being FEMA’s defined  threshold for high risk—and lead homeowners to believe they will never  experience flooding and that flood insurance coverage is not necessary.
In addition, many industry and nonindustry stakeholders with whom we  spoke said that the requirement’s current structure discourages some  consumers from purchasing coverage. For example, many industry and  nonindustry stakeholders with whom we spoke (including FEMA  representatives), described the SFHA designation as an “in or out” line  that unintentionally gives consumers the false perception that because  they are not required to purchase flood coverage, they are not at risk of  flooding and do not need the coverage. While FEMA considers areas  outside of SFHAs to be at low- to moderate-risk of flooding, it estimated  that properties outside of SFHAs accounted for about 20 percent of NFIP  claims from 2006 through 2015. But according to a 2006 study, only an  estimated 1 percent of consumers outside of SFHAs purchase flood  insurance. Moreover, in a 2008 report, we discussed areas of the  country that appeared to have higher populations and flooding risks  relative to their policy volumes, thus indicating the potential for an  increase in the number of consumers with flood insurance coverage.  Many industry and nonindustry stakeholders with whom we spoke  suggested eliminating the SFHA designation and expanding the  mandatory purchase requirement to include more (or all) federally  regulated mortgages. Some of these stakeholders acknowledged that  flood insurance coverage, and therefore a purchase requirement, might  not be as necessary for some consumers with properties at an extremely  low risk of flooding but noted that in those situations, the premium rate  should be extremely low to reflect the low flood risk of the property.
Limited information is readily available to help inform consumers who may  be inclined to purchase flood insurance coverage voluntarily. For  example, mortgage documents inform the borrower if the property is in an  SFHA and the flood zone in which the property is located. However, for  most properties outside of SFHAs, the flood zone is listed as “X” without  any additional information on the property’s risk. As a result, according to  industry and nonindustry stakeholders with whom we spoke, the borrower  may be unclear if the property is at moderate risk or at a very low risk for  flooding.
One nonindustry stakeholder with whom we spoke has proposed  communicating flood risk to consumers by creating a flood safety score,  similar to a credit score, that reinforces the idea that flood risk is on a  continuous spectrum rather than undifferentiated high-risk versus not high  risk. Industry and nonindustry stakeholders with whom we spoke  generally agreed with the potential merit of such a system, and one also  highlighted the importance of ensuring that such a system be as public  and transparent as possible so that consumers would understand it. As  mentioned previously, HFIAA requires FEMA to communicate full flood  risk to existing policyholders but does not require FEMA to improve  communication of risk to consumers who lack NFIP coverage. While  HFIAA does not specifically require a risk score, such a scoring system  could help communicate risk to all consumers and potentially improve  consumer participation.
Enforcement of the mandatory purchase requirement. Many industry  and nonindustry stakeholders with whom we spoke expressed concern  that the mandatory purchase requirement has not been adequately  enforced. However, few specific examples of noncompliance exist, so the  extent of compliance remains unknown. For example, a 2006 study  estimated that NFIP participation rates were 75–80 percent in SFHAs, in  which property owners with loans from federally regulated lenders are  required to purchase flood insurance. However, FEMA officials said that  estimates indicate that as little as one-third of residential properties in  SFHAs have flood insurance coverage. A 2012 study found that  homeowners both inside and outside SFHAs who obtained flood  insurance when purchasing their homes typically kept it 2–4 years before  canceling the policies. Furthermore, some industry and nonindustry  stakeholders with whom we spoke cited recent flooding in Louisiana  (2016) and South Carolina (2015) and the fact that so few consumers had  flood insurance as additional evidence that either the enforcement of the  mandatory purchase requirement needed to be improved or its scope  needed to be expanded. However, one official from the lending industry  with whom we spoke noted that federal banking regulators have found  few examples of noncompliance in lending institutions. The lack of clarity  on the extent of compliance with the mandatory requirement poses the  risk that compliance could be low, resulting in actions not being taken to  address the situation.
Disaster assistance and consumer participation. Many industry and  nonindustry stakeholders with whom we spoke, including FEMA  representatives, said that many consumers have the false perception that  individual disaster assistance will be sufficient to help them recover and  rebuild after a flood, leading them to forgo purchasing flood insurance.  Literature we reviewed has noted that individual assistance is limited and  means-based, and much of the disaster assistance goes to pay for  rebuilding public infrastructure, as the following examples illustrate:
A FEMA official said that homeowners should not rely on potential  grant programs as an alternative to flood insurance coverage to  recover after a flood because such assistance is not designed to  repair and rebuild a property. For example, after the floods in  Louisiana in 2016, NFIP policyholders received claim payments that  averaged approximately $86,500, while assistance payments to  individuals averaged approximately $9,150.
A 2012 study found that public perception of federal post-disaster  assistance creates a moral hazard that not only discourages  consumers from purchasing flood insurance but also discourages  flood risk mitigation and encourages people to live in high-risk  areas. The study concluded that available disaster assistance “is  relatively small and certainly does not make people whole after  devastating events.” According to FEMA officials, FEMA provides  post-disaster grants of up to $33,300 to repair and rebuild, but recent  payments have averaged around $4,100. The Small Business  Administration also offers loans for repair and rebuilding after a  disaster, but these are means-tested, and because they must be  repaid by the homeowner, they do little to protect against the financial  risk of flooding.
Nonindustry stakeholders with whom we spoke said that most disaster  assistance is provided to state and local governments to repair  infrastructure rather than to individuals.
Furthermore, a 2014 study found that when the average individual  assistance grant increased by $1,000, average flood insurance  coverage per policy in that community dropped by about $6,400.
Many industry and nonindustry stakeholders with whom we spoke agreed  that misperceptions about disaster assistance can negatively affect  consumer participation in flood insurance, resulting in more exposure to  financial loss from flooding.
subsections: section_title: Potential Reform Actions
paragraphs: Congress could expand the mandatory purchase requirement to more  (or all) mortgage loans made by federally regulated lending  institutions for properties in communities participating in NFIP.
Congress could require FEMA to explore ways to improve its  communication of risk to all consumers; for example, through a risk  scoring system.
section_title: Implications of Potential Reform Actions
paragraphs: Expanding the mandatory purchase requirement to more (or all)  mortgage loans made by federally regulated lending institutions in  communities participating in NFIP (rather than only those in an SFHA)  could address the policy goal of increasing consumer participation in  flood insurance.
Expanded purchase requirements likely would face resistance from  consumers who do not wish to purchase coverage or who might face  affordability issues.
Lenders also may object to being responsible for enforcement of  mandatory purchase requirements on an expanded number of  properties.
Expanded purchase requirements could affect the values of properties  subject to the new requirement to purchase flood insurance.
Increased consumer participation would address the goal of  enhancing resilience by providing consumers with some protection  from the financial effects of flooding and reduce the need for disaster  assistance, therefore potentially reducing federal fiscal exposure.
Increased consumer participation could increase the size and scope  of NFIP and potentially increase federal fiscal exposure, but this could  be reduced by implementing full-risk rates and balanced by an  increasing number of lower-risk properties.
Taking these actions in concert with other actions mentioned in this report  would be important to address affordability concerns associated with an  expanded mandatory purchase requirement. Furthermore, accurate,  property-specific premium rates would be necessary to provide assurance  that policyholders newly mandated to purchase flood insurance coverage  would be paying rates based on their risk of flood loss.
section_title: Removing Other Barriers to Private-Sector Involvement
paragraphs: According to some industry and nonindustry stakeholders with whom we  spoke, private insurer interest in selling flood insurance has been  increasing. Also, according to industry and nonindustry stakeholders with  whom we spoke, NFIP’s subsidized premium rates remain the primary  barrier to private-sector involvement in flood insurance. As we previously  reported, besides NFIP’s subsidized rates, other barriers to private-sector  involvement include uncertainty about how private coverage could satisfy  the mandatory purchase requirement and FEMA policies on continuous  coverage and premium refunds. If such barriers were removed, private- sector involvement in flood insurance could increase, potentially resulting  in a reduced size and scope for NFIP’s insurance activities and allowing  FEMA to focus on other activities such as mitigating flood risk and  developing flood maps. As a result, this could address the policy goal of  reducing federal fiscal exposure while promoting flood resilience.  Increased private-sector involvement has implications for other issues  such as full-risk premium rates, consumer participation, and NFIP flood  resilience efforts. Discussions about these implications are included in  each section of this report related to those specific areas.
Private-sector coverage and the mandatory purchase requirement.  Industry and nonindustry stakeholders with whom we spoke cited  uncertainty among lenders and insurers about regulations specifying how  private flood insurance policies could satisfy the mandatory purchase  requirement. The Biggert-Waters Act requires regulated lending  institutions to accept private flood insurance, but as of March 2017,  federal banking regulators had not issued final rules with such  directions. As a result, it is not known what the regulations will be and  how lenders and private insurers ought to comply. Furthermore, some  industry and nonindustry stakeholders with whom we spoke were  concerned that private policies lenders had accepted as satisfying the  mandatory purchase requirement might retroactively be deemed  noncompliant if they did not meet the requirements of the new  regulations. The stakeholders added that issuance of final rules on the  acceptance of and definition of private flood insurance could help provide  more clarity and could lead to increased private-sector involvement in  flood insurance.
Continuous coverage, premium refunds, and WYO noncompete  clause. Some industry and nonindustry stakeholders with whom we  spoke also cited FEMA’s interpretation of the continuous coverage  requirement in connection with private flood insurance and the effect on  consumers’ ability to qualify for NFIP discounted rates as a barrier to  private-sector involvement in flood insurance. FEMA prohibits the use of  subsidized rates for policies for which there has been a lapse in NFIP  coverage of more than 90 days. That is, if a NFIP policyholder who  qualified for a subsidized rate switched to a private flood policy, and then  switched back to an NFIP policy (more than 90 days after originally  cancelling the NFIP policy), the policyholder would no longer qualify for  the subsidized rate.
FEMA officials noted that in these cases they disallowed private coverage  from constituting continuous coverage because of the agency’s  interpretation of a HFIAA provision on policy lapses. Some industry and  nonindustry stakeholders with whom we spoke also noted that FEMA’s  decision to exclude private flood insurance policies in these cases could  have financial repercussions for some consumers seeking to reinstate  their previously discounted NFIP coverage. Some of these industry and  nonindustry stakeholders said that due to the risk of losing their  discounted NFIP rates, consumers might avoid the private market.  However, to the extent that reforms result in the elimination of discounted  rates, this issue could become less of a concern.
Furthermore, some industry and nonindustry stakeholders with whom we  spoke said that FEMA’s policy related to policy cancellations could  discourage the use of private flood insurance by consumers. FEMA  allows full or partial refunds of paid NFIP premiums for coverage  terminated in accordance with its accepted cancellation reasons, but does  not allow policyholders to cancel their NFIP policy and obtain a refund if  they obtained a non-NFIP policy (private flood insurance). These  industry and nonindustry stakeholders said that private insurers typically  allow refunds to policyholders when switching insurers. FEMA officials  said that FEMA only can allow cancellation of policies and refunds  according to its standard policy terms and conditions (which only  reference cancellations of NFIP policies). However, FEMA previously  allowed such refunds and could have taken steps to revise guidance to  allow them. Allowing this type of refund would be in line with industry  practice to allow for refunds of paid premiums as well as Congress’s  interest in transferring some of the federal government’s exposure to  flood risk to the private sector. We previously recommended that FEMA  consider reinstating the cancellation reason code allowing policyholders  to be eligible for prorated premium refunds if they obtained a private  policy and then cancelled their NFIP policy. FEMA agreed with our  recommendation and said it planned to implement the policy change  effective October 2017.
Some industry and nonindustry stakeholders with whom we spoke also  told us that certain FEMA restrictions on WYO insurers—private insurers  that sell and service policies and adjust claims for NFIP—may be an  impediment to increasing the availability of private flood insurance.  Specifically, NFIP’s arrangement with the insurers restricts them from  selling stand-alone flood insurance coverage outside of NFIP. The  stakeholders said that this restriction can limit companies with the most  experience in flood insurance from entering the private market. FEMA  officials stated that, despite this restriction, a number of companies have  found ways to offer flood insurance while remaining compliant with the  arrangement. For example, if a subsidiary of a large insurance company  were a WYO, the parent company could offer stand-alone flood coverage.  Alternatively, the WYO insurer could offer flood coverage as part of a  multiperil policy.
NFIP claims data. Many industry and nonindustry stakeholders with  whom we spoke also noted the lack of access to NFIP data on flood  losses and claims as a barrier to more private companies offering flood  insurance. In our previous work, industry and nonindustry stakeholders  said that access to such data would allow private insurance companies to  better estimate losses, price flood insurance premiums, and determine  which properties they might be willing to insure. According to FEMA  officials, the agency would need to address privacy concerns to provide  property-level information to insurers, because the Privacy Act of 1974  prohibits the agency from releasing detailed NFIP policy and claims  data. FEMA officials said that while the agency could release data in the  aggregate, some information could not be provided in detail. For example,  in 2017 FEMA publicly released ZIP code-level data but would need to  determine how to release property-level information while protecting the  privacy of individuals. According to officials from the National Association  of Insurance Commissioners, it is coordinating with FEMA actuaries to  determine how FEMA could share specific data with states, without  disclosing personally identifiable information.
subsections: section_title: Potential Reform Actions
paragraphs: Congress could amend (or clarify) the statutory definition of private  flood insurance as it relates to the mandatory purchase requirement.
Congress could direct FEMA to allow private coverage to satisfy NFIP  continuous coverage requirements.
As we previously recommended, FEMA could reinstate the ability for  policyholders replacing their NFIP policies with private policies to be  eligible for prorated refunds.
Congress could direct FEMA to eliminate the WYO noncompete  clause.
Congress could determine the appropriateness of amending the  privacy law to allow for FEMA to enter into confidentiality agreements  to share claims data with the insurance industry.
Depending on the extent to which a private flood insurance market  develops over time, other changes to further encourage the private  market and potentially change the role and structure of NFIP could be  considered. Such potential actions are discussed in appendix II.
section_title: Implications of Potential Reform Actions
paragraphs: Increased private-sector involvement could address the policy goal of  reducing the federal fiscal exposure relating to flood risk by reducing  the number of properties that NFIP covers with flood insurance.
Reduced size and scope of NFIP’s insurance activities could free up  resources and allow FEMA to focus more heavily on other activities  such as mitigating high-risk properties and developing and  maintaining flood maps, thus potentially addressing the policy goal of  enhancing resilience.
Increased private-sector involvement could make flood insurance  more attractive to consumers by introducing products more tailored to  each consumer’s needs.
Some industry stakeholders with whom we spoke said that private  insurers would be able to price flood risk more accurately for each  individual property because they have better flood-loss modeling  capabilities (and thus consumers pay for the risk of their own property  and do not significantly cross-subsidize other policyholders).
Increased private-sector involvement could cause a greater portion of  NFIP’s portfolio to be composed of higher-risk policies.
Taking these actions in concert with other actions mentioned in this  report, such as addressing NFIP’s subsidized rates, would be key to  encouraging private-sector involvement because industry and nonindustry  stakeholders with whom we spoke cited subsidized rates as a significant  barrier to private-sector entrance into the flood insurance market. And, it  is unclear how effective these actions would be without addressing  subsidized rates.
section_title: Protecting and Enhancing NFIP Flood Resilience Efforts
paragraphs: NFIP flood resilience efforts include mitigation, mapping, and floodplain  management through community participation. Based on our analysis of  the policy goals we identified, supporting these activities could address  the policy goal of enhancing resilience by ensuring flood risk was  identified through mapping and reduced through mitigation and floodplain  management. Any reforms related to NFIP flood resilience efforts will  have potential implications for issues such as premium rates, consumer  participation, and private-sector involvement in flood insurance.  Discussions about these implications are included in each section of this  report related to those specific areas.
Mitigation and mapping funding. NFIP’s flood resilience efforts  (mitigation, mapping, and floodplain management through community  participation) are important and deliver a wide range of benefits. For  example, a 2005 report estimated that for every $1 spent on mitigation,  losses were reduced by an average of $4. Furthermore, FEMA officials  said that mitigation programs have saved the American public an  estimated $3.4 billion annually. Mapping is essential to NFIP rate setting  and risk identification. If private insurers began to write a significant  number of flood insurance policies, and NFIP wrote fewer, there would be  less funding for such resilience efforts.
As discussed previously, FEMA charges a fee on NFIP policies that helps  fund efforts to mitigate flood risk on properties covered by NFIP policies  and develop and maintain flood maps. While FEMA also received $190  million in appropriations in fiscal year 2016 to help fund its mapping  efforts, it expects to collect about $197 million in fee revenue in 2017. As  a result, to the extent that the private flood insurance market grew and  policies moved from NFIP to private insurers, FEMA would no longer  collect fees on those policies.
Nonindustry stakeholders have proposed a number of solutions for  addressing this issue. For example, the Association of State Floodplain  Managers proposed requiring an equivalency fee (equal to the Federal  Policy Fee) on all private flood insurance policies because it would help  pay for floodplain management and flood mapping services that also  would benefit private insurance companies. For example, flood maps  are an important source of flood risk data that private insurers could use  to assess risk, and mitigation helps lower the risk of properties and make  them more insurable. While other industry and nonindustry stakeholders  with whom we spoke shared the concern over the effect on fee revenue,  some instead preferred to compensate for the diminished fee revenue by  funding mitigation and mapping directly through an appropriation in the  federal budget because the services benefit all taxpayers.
Community participation. Increased private-sector involvement in flood  insurance also has the potential to negatively affect flood resilience  because communities may have less of an incentive to meet floodplain  management standards. Industry and nonindustry stakeholders with  whom we spoke said that many of the more than 22,000 communities  currently participating in NFIP do so primarily because participation  provides community residents with access to NFIP coverage. In  exchange, communities must adopt and enforce floodplain management  standards that help to reduce flood risk. According to FEMA, structures  built to NFIP standards experience 73 percent less damage than  structures not built to these standards and result in a $1.9 billion annual  reduction in flood losses. Some nonindustry stakeholders with whom we  spoke said that the availability of private flood insurance coverage could  lead some communities to drop out of NFIP and rescind some of the  standards and codes they had adopted. However, rescinding these  standards could increase the risk of flood damage and therefore the cost  of flood insurance premiums, which could be an incentive for keeping the  standards in place. The Association of State Floodplain Managers  proposed addressing this issue by allowing private flood policies to meet  the mandatory purchase requirement only if they were sold in  participating NFIP communities.
subsections: section_title: Potential Reform Actions
paragraphs: Congress could establish a fee on private flood insurance policies to  address the loss in NFIP fee revenue used to fund mitigation and  mapping activities.
Alternatively, Congress could appropriate funds for mitigation and  mapping activities to offset the diminished fee revenue.
section_title: Implications of Potential Reform Actions
paragraphs: Proactively addressing potential effects on policy fee revenue could  address the policy goal of enhancing resilience by helping ensure that  flood risk would be identified through mapping and reduced through  mitigation activities and floodplain management. In turn, enhancing  resilience could address the policy goal of reducing federal fiscal  exposure in the long term because property would be at a lower risk  of flood loss and therefore less likely to experience flood claims.
Ensuring that these activities continued even as the number of NFIP  policies decreased could support the private flood insurance market,  which in turn could address the policy goal of reducing federal fiscal  exposure (through transfer to the private market). For example,  private insurers could use flood maps to assess risk and mitigation  could make more properties insurable.
A requirement for a fee on private flood insurance policies could face  resistance from insurers, and creating a federal appropriation to pay  for mitigation and mapping would be a new cost. There also could be  implementation costs and challenges associated with administering a  fee on private insurers.
Taking these actions in concert with other actions mentioned in this report  would be important because doing so could ensure that efforts to  increase private-sector involvement in flood insurance would not harm  resilience efforts, particularly funding for mitigation and mapping, and  community participation in NFIP.
section_title: Conclusions
paragraphs: NFIP has experienced significant challenges because FEMA is tasked  with pursuing competing programmatic goals—keeping flood insurance  affordable while keeping the program fiscally solvent. Emphasizing  affordability has led to premium rates that in many cases do not reflect  the full risk of loss and produce insufficient premiums to pay for claims. In  turn, this has transferred some of the financial burden of flood risk from  individual property owners to taxpayers as a whole and resulted in the  program owing $24.6 billion to Treasury. Without reforms, the financial  condition of NFIP could continue to worsen. Shifting the emphasis toward  fiscal solvency would reduce the burden on the taxpayer, but would  require increasing premium rates, which could create affordability  challenges for many policyholders and discourage consumer participation  in flood insurance.
Private insurers’ interest in selling flood insurance has been increasing,  which could transfer some risk from the federal government. This  increased interest, combined with the challenges experienced by the  program, create an opportunity for Congress to consider potential reforms  to NFIP as well as the best role for the federal government in relation to  flood insurance. Regardless of changes in private-sector involvement or  the government’s role, congressional oversight of the program’s federal  fiscal exposure will remain important.
Actions in six areas could advance programmatic goals, mitigate some of  the trade-offs resulting from the competing goals, and reform the flood  insurance program by (1) promoting flood risk resilience, (2) minimizing  fiscal exposure to the federal government, (3) requiring transparency of  the federal fiscal exposure, (4) encouraging consumer participation in the  flood insurance market, and (5) minimizing transition and implementation  challenges. However, a piecemeal approach will not address NFIP’s  ongoing challenges. Rather, taking actions from a comprehensive  perspective—in all six areas—could help balance or mitigate the various  trade-offs and challenges.
The sequence of actions for these areas is also important. That is, some  actions would be more likely to achieve goals if they followed others,  while some could be taken concurrently. For example, when addressing  barriers to private-sector involvement, it would be important to protect  NFIP’s flood resilience activities at the same time. Other important  reforms such as requiring full-risk rates for all policyholders and  expanding the mandatory purchase requirement would create affordability  concerns, so they would warrant having an affordability assistance  program already in place. Finally, addressing the outstanding debt would  best be accompanied by premium rate reform to help reduce the  likelihood of a recurrence of another unpayable debt buildup. Taking  these factors into consideration will therefore be important for any reform  decisions made.
We recognize that many of the potential reforms, in and of themselves,  involve competing goals, and that taking some actions in isolation could  create challenges for some property owners. We also recognize that  many reforms can be challenging to start or complete because they could  involve new programs, new appropriations, and revisions to current law.  As such, they could face resistance because they could create new costs  for the federal government, the private sector, or property owners.  Nevertheless, taking actions on multiple fronts represents the best  opportunity to help address the spectrum of challenges confronting NFIP,  advance private-sector participation, reduce federal fiscal exposure, and  enhance resilience to flood risk.
section_title: Matter for Congressional Consideration
paragraphs: As Congress considers reauthorizing NFIP, it should consider  comprehensive reform to improve the program’s solvency and enhance  the nation’s resilience to flood risk, which could include actions in six  areas: (1) addressing the current debt, (2) removing existing legislative  barriers to FEMA’s revising premium rates to reflect the full risk of loss,  (3) addressing affordability, (4) increasing consumer participation, (5)  removing barriers to private-sector involvement, and (6) protecting NFIP  flood resilience efforts. In implementing these reforms, Congress should  consider the sequence of the actions and their interaction with each other.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of Homeland Security  and the Department of the Treasury for review and comment. Both  departments provided technical comments, which we incorporated, as  appropriate.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-8678 or cackleya@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: Objectives, Scope, and Methodology
paragraphs: In September 2017, the National Flood Insurance Program’s (NFIP)  current authorization will expire, and reauthorization of the program  provides Congress with an opportunity to consider options for improving  the program and changing the federal role in flood insurance. We  performed our work under the authority of the Comptroller General in light  of congressional interest in flood insurance and NFIP’s impeding  reauthorization. This report examines potential reform actions Congress  and the Federal Emergency Management Agency (FEMA) could take to  reduce federal fiscal exposure and improve resilience to flood damage.
To identify these actions, we took an iterative multiphase approach that  included reviewing available information on flood insurance reform;  obtaining input on potential reform actions from knowledgeable  stakeholders through semi-structured individual interviews, a  questionnaire, and a series of roundtables; identifying policy goals for  flood insurance reform; and evaluating the various actions using these  policy goals. The information on flood insurance reform that we reviewed  included prior GAO reports, relevant laws, NFIP history, academic  papers, and testimonies. We interviewed officials of or representatives  from FEMA, the Congressional Budget Office, the Federal Insurance  Office, the National Association of Insurance Commissioners, insurance  industry associations, catastrophe modelers, state insurance programs,  an actuarial association, consumer advocacy groups, think tanks,  academics, and others to gather information on flood reform options. We  also attended the National Flood Conference in May 2016, which was  attended by hundreds of flood insurance stakeholders and included  discussion of a number of topics related to flood insurance reform.
Furthermore, we developed a questionnaire to gather stakeholder input  on options for reforming NFIP, policy goals for evaluating those options,  and the roles for the private sector, federal government, and state  governments in providing flood insurance coverage and managing flood  risk. Specifically, we judgmentally selected a diverse group of 108  stakeholders for the questionnaire based on a review of available  literature on flood insurance reform, work conducted for our prior reports  on flood insurance, and suggestions from stakeholders we interviewed.  Questionnaire respondents represented a number of stakeholder  categories: insurers, insurance agents, insurance adjuster associations,  reinsurers, catastrophe modelers, lender associations, federal agencies,  state insurance regulators, state residual insurance programs, consumer  advocates, academics, think tanks, mitigation associations, real estate  associations, and environmental associations. We conducted the  questionnaire in June 2016 and received responses from 82 of the 108  questionnaire recipients. The results from the questionnaire are not  generalizable to the population of respondents and only represent the  opinions of the individuals but provided insights into potential flood  insurance reforms.
We also conducted four web-based roundtables in August and  September 2016 with a variety of stakeholders to obtain their views on  flood insurance reform. The 43 roundtable participants represented the  same stakeholder categories from which we drew our questionnaire  respondents as well as FEMA. We judgmentally selected a diverse group  of stakeholders for the roundtable based on their knowledge of flood  insurance reform. We used stakeholders’ responses to the questionnaire  to ensure that each roundtable was balanced with a diverse range of  perspectives on flood insurance reform. Two of the roundtables focused  on reforming the flood insurance marketplace and explored several  topics, including the roles of the private sector and the federal  government in primary insurance and managing catastrophic risk. The  other two roundtables focused on promoting flood risk resilience and  explored several topics, including enhancing resilience for existing  structures and future development, the roles of mitigation assistance and  premium assistance, and strategies for encouraging greater consumer  participation in flood insurance.
We also identified five policy goals for evaluating options for flood  insurance reform by reviewing prior GAO reports—one of which included  policy goals for federal involvement in natural catastrophe insurance— and FEMA’s 2015 report on options for privatizing NFIP. We validated  the goals by discussing them during stakeholder interviews, and obtaining  input on them in the questionnaire, including asking questionnaire  respondents to rate the policy goals, provide comments, and suggest  revisions. We analyzed and incorporated all input as necessary and then  developed the five following policy goals: (1) promoting flood risk  resilience, (2) minimizing fiscal exposure to the federal government, (3)  requiring transparency of the federal fiscal exposure, (4) encouraging  consumer participation in the flood insurance market, and (5) minimizing  transition and implementation challenges. Within each of these goals, we  identified several characteristics to help illustrate how various reform  proposals might meet each goal. We used these policy goals and the  information we gathered from the interviews, questionnaire, and  roundtables to evaluate potential actions for flood insurance reform.
We conducted this performance audit from September 2015 to April 2017  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Additional Reforms That Are Contingent on the Development of the Private Flood Insurance Market
paragraphs: Based on our review of the literature and discussions with industry and  nonindustry stakeholders, we identified two other frequently cited  potential flood insurance reforms: (1) converting the National Flood  Insurance Program (NFIP) to the insurer of last resort (residual insurer),  and (2) having NFIP act as a reinsurance backstop to the private flood  insurance market. However we determined, based on input from industry  and nonindustry stakeholders with whom we spoke, that implementing  such reforms now could be premature because they would depend on the  extent to which a private market for flood insurance developed. Instead,  these additional reforms could be considered and evaluated once the  reforms discussed in this report were implemented, and the extent of  development of a private flood insurance market determined. Because  these options were widely mentioned in our meetings and discussed in  the literature we reviewed, we summarized them in this appendix for  completeness.
Many industry and nonindustry stakeholders with whom we spoke  believed that as the private sector enters the flood insurance market,  NFIP could naturally become the insurer of last resort, or residual insurer,  and that this would be a more appropriate role for the federal government  in the long term than the current program. However, because the private  flood insurance market remains in the early stages of development, some  said that it would be preferable to allow the private market to further  develop before considering whether a structured residual insurance  program might be needed or how such a program might be structured.  For example, some state residual insurance programs require their rates  to be at or above that of the highest private-sector rate to ensure they do  not compete with private insurers and that they only provide insurance  coverage to those unable to find it in the private market. If NFIP’s  premium rates continued to be less than full-risk and impeded private- sector involvement, it might become necessary to create a program to  transfer policies to the private sector as we have seen with some state  residual insurance programs. For example, Florida Citizens Property  Insurance Corporation developed a two-pronged effort that (1) provides  claims and risk data to private insurers through a confidentiality  agreement that allows the insurers to determine which policies they would  like to cover, and (2) allows private insurers to submit an application with  detailed risk characteristics to a clearinghouse that matches existing  policies to those characteristics.
Some nonindustry stakeholders with whom we spoke expressed concern  that private insurers only would offer coverage to NFIP’s lowest-risk  policies and leave NFIP with the higher-risk policies, increasing the risk  exposure of the program. Similarly, some nonindustry stakeholders with  whom we spoke expressed concern that private insurers only would be  able to compete for those policies that had premium rates higher than  what the private insurers determine to be necessary to reflect their full risk  of loss, thus leaving NFIP with policies that had less than full-risk rates.  As a result, the decrease in premium revenue could outpace the  decrease in expected flood losses. However, some nonindustry  stakeholders with whom we spoke that had direct experience with  residual insurance programs said that they discovered that private  insurers had been willing to insure much riskier policies than they  originally expected. One industry stakeholder explained that higher-risk  policies can be desirable for private insurers because they have the  potential for higher profit than lower-risk policies, and a private insurer’s  concern is not so much the risk of the individual properties it insures but  rather the correlation of risk among those properties. A nonindustry  stakeholder said that insurers were willing to insure higher-risk properties  as long as they were geographically diversified and balanced by lower- risk properties. One industry and one nonindustry stakeholder  acknowledged that there will always be some properties that are too risky  for the private market, and that these likely would fall to NFIP as a  residual insurer.
While the average risk of residual policies that remain in NFIP would be  higher than NFIP’s current average risk level, the aggregate exposure to  risk could be much lower because of the lower number of policies. Some  industry and nonindustry stakeholders with whom we spoke also said that  if NFIP became a smaller program of the highest-risk properties, it would  be much better positioned to target its mitigation efforts to those  properties. Furthermore, the concern that a residual flood insurance  program would have increased fiscal exposure exists primarily because of  the existence of less than full-risk rates. Therefore, if rates accounted for  the full risk of loss, the program ought to be collecting sufficient premium  revenue to pay for the estimated losses associated with the high-risk  policies over the long term, although with significant uncertainty because  of the nature of the risk.
Many industry and nonindustry stakeholders with whom we spoke agreed  that the private reinsurance market had a significant capacity to reinsure  flood risk for private insurance companies, but disagreed on whether the  federal government also would need to play a role in providing such  reinsurance. For example, some industry and nonindustry stakeholders  said that private reinsurers had an abundance of capital available and  saw flood risk as an attractive option for diversifying their portfolios and  earning a return on the capital. Some of these industry and nonindustry  stakeholders said that the private reinsurance market would be sufficient  to fully reinsure a private flood insurance market.
However, other industry and nonindustry stakeholders with whom we  spoke said that the federal government would need to act as a backstop  to reinsure the most catastrophic flood risks (those capable of causing  losses at levels above which the private market would be unwilling to  reinsure). Because the private flood insurance market is still developing, it  is unclear whether such a gap in the market might develop. Thus, it could  be premature to create a federal reinsurance program, but the issue could  be revisited after it is seen how the private insurance and reinsurance  markets developed.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: Contact
paragraphs: Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov.
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Patrick Ward (Assistant Director);  Christopher Forys (Analyst in Charge); Abby Brown; Pamela Davidson;  Eli Harpst; Carol Henn; Elizabeth Jimenez; John Karikari; Marc Molino;  Patricia Moye; Carl Ramirez; Oliver Richard; Barbara Roesmann; Jessica  Sandler; Joe Silvestri; Andrew Stavisky; and Frank Todisco made key  contributions to this report.