Flood Insurance: More Information Needed on Subsidized Properties
Published: 2013-07-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: FEMA, which administers NFIP, estimated that in 2012 more than 1 million of its residential flood insurance policies--about 20 percent--were sold at subsidized rates; nearly all were located in high-risk flood areas. Because of their relatively high losses and lower premium rates, subsidized policies have been a financial burden on the program. Due to NFIP's financial instability and operating and management challenges, GAO placed the program on its high-risk list in 2006. The Biggert-Waters Act eliminated subsidized rates on certain properties and mandated GAO to study the remaining subsidized properties. This report examines (1) the number, location, and characteristics of properties that continue to receive subsidized rates compared with full-risk rate properties; (2) the information needed to estimate the historic cost of subsidies and establish rates for previously subsidized policies that reflect the risk of flooding; and (3) options to reduce the financial impact of remaining subsidized policies. GAO analyzed NFIP data on types of policies, premiums, and claims and publicly available home value and household income data. GAO also interviewed representatives from FEMA, insurance industry associations, and floodplain managers.
section_title: What GAO Found
paragraphs: The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) immediately eliminated subsidies for about 438,000 National Flood Insurance Program (NFIP) policies, but subsidies on an estimated 715,000 policies across the nation remain. Depending on factors such as policyholder behavior, the number of subsidized policies will continue to decline over time. For example, as properties are sold and the Federal Emergency Management Agency (FEMA) resolves data limitations and defines key terms, more subsidies will be eliminated. GAO analysis found that remaining subsidized policies would cover properties in every state and territory where NFIP operates, with the highest numbers in Florida, Louisiana, and California. In comparing remaining subsidized and nonsubsidized policies GAO found varying characteristics. For example, counties with the highest and lower home values had a larger percentage of subsidized versus nonsubsidized policies.
Data constraints limit FEMA's ability to estimate the aggregate cost of subsidies and establish rates reflecting actual flood risks on previously subsidized policies. FEMA does not have sufficient historical program data on the percentage of full-risk rates that subsidized policyholders have paid to estimate the financial impact--in terms of the difference between subsidized and full-risk premium rates--to NFIP of subsidies. Also, because not all policyholders are required to provide documentation about their flood risk, FEMA generally lacks information needed to apply full-risk rates (as required by the Biggert-Waters Act) on previously subsidized policies. FEMA is encouraging these policyholders to voluntarily submit this documentation. Federal internal control standards state that agencies should identify and analyze risks associated with achieving program objectives and develop a plan for obtaining needed data. Without this documentation, the new rates may not accurately reflect a property's full flood risk, and policyholders may be charged rates that are too high or too low relative to their risk of flooding.
Options from GAO's previous and current work for reducing the financial impact of subsidies on NFIP include (1) adjusting the pace of subsidy elimination, (2) targeting assistance or subsidies based on financial need, or (3) increasing mitigation efforts, such as relocation or elevation that reduce a property's flood risk. However, these options have advantages and disadvantages. Moreover, the options are not mutually exclusive, and combining them could help offset some disadvantages.FEMA should develop and implement a plan to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates. FEMA agreed with the recommendation.
section_title: What GAO Recommends
paragraphs: FEMA should develop and implement a plan to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates. FEMA agreed with the recommendation.

section_title: Letter
paragraphs: In 2012, the Federal Emergency Management Agency (FEMA), which  administers the National Flood Insurance Program (NFIP), collected $3.5  billion in premiums. It estimated that about 1.1 million of 5.5 million NFIP  policies—about 20 percent—were sold at highly discounted rates that did  not fully reflect the actual risk of flooding. The National Flood Insurance  Act of 1968 authorized subsidized rates to encourage participation in  NFIP, especially for properties in high-risk locations that otherwise would  have been charged higher premiums and were built before Flood  Insurance Rate Maps (FIRM) became available and the level of risk was  clearly understood. The discounted premiums help achieve the goal of  promoting participation in the program, but do not contribute sufficient  revenues to cover potential losses. We have previously found that  because of their relatively high losses and lower premium rates compared  with policies that are charged rates intended to reflect the actual risk of  flooding (full-risk rates), the policies receiving subsidized rates have been  a financial burden on NFIP.
Since 2000, NFIP has experienced several years with catastrophic  losses—losses exceeding $1 billion—and has needed to borrow money  from the U.S. Treasury (Treasury) to cover claims in some years. The  losses resulting from Superstorm Sandy, which caused extensive  damage in several states on the eastern coast of the United States in  October 2012, also are expected to be catastrophic. As of May 2013,  FEMA owed Treasury $24 billion—up from $17.8 billion prior to  Superstorm Sandy—and had not repaid any principal on its loans since  2010. As a result of the program’s importance, level of indebtedness to  Treasury, substantial financial exposure for the federal government and  taxpayers, and FEMA’s management challenges, NFIP has been on our  high-risk list since 2006. In other reports, we also have identified a  number of management and operational challenges that have hindered  FEMA’s ability to effectively administer NFIP.
The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters  Act) introduced many changes intended to strengthen the future solvency  of NFIP. In particular, the act eliminated subsidized premium rates for  several types of properties. In addition to program changes, the Biggert- Waters Act mandated that GAO conduct a number of studies, including  this study on the properties that continue to receive subsidized rates after  the implementation of the act and options to further reduce these  subsidies.
This report discusses (1) the number, location, and financial  characteristics of properties that continue to receive subsidized rates  compared with full-risk rate properties; (2) the information needed to  estimate the historic cost of subsidies and establish rates for previously  subsidized policies that reflect the risk of flooding; and (3) options to  reduce the financial impact of remaining subsidized properties.
To address these objectives, we analyzed FEMA data on NFIP flood  insurance policies, claims, and repetitive losses, as well as historic data  on claims and premiums for policies with subsidized and full-risk rates.  We used the data and information from FEMA officials about their plans  to implement the Biggert-Waters Act to determine which policies would  retain subsidized rates. We determined the number, location, and  coverage amounts of these remaining subsidized policies, the claims and  premiums attributable to them, and the historic frequency with which they  exited the program. For requested information on the financial  characteristics of policies that was not available from FEMA, we used  indicators from publicly available census and real estate data as well as  NFIP policy-level coverage amount data. We used these data to analyze  the similarities and differences in the financial characteristics of properties  with subsidized and full-risk rates. For example, we ranked nationwide  county-level median home value and median household income from the  2007 through 2011 5-year American Community Survey (ACS)—a  continuous survey of households conducted by the U.S. Census Bureau.We determined the relative ranking for counties with large numbers of  remaining subsidized policies. We also selected five case study counties  to illustrate similarities and differences in characteristics of policies at the  city level within these counties. Results from these case studies cannot  be projected nationwide. We selected the counties based on the number  of relevant NFIP policies, location, and reliability of publicly available real  estate data for the county. We also used the publicly available real estate  data on median home values for cities in these counties. We assessed  the reliability of each data source we used by interviewing agency officials  and gathering and analyzing available information about how the data  were collected and maintained and performed electronic tests of required  data elements. We also spoke with representatives from a private  company that collects and estimates data on real estate values as well as  with an academic and other users of these publicly available real estate  data about the reliability of the data. We determined that the data from  each source we used were sufficiently reliable for the purposes of this  report. We analyzed NFIP’s legislative history and relied on FEMA’s  interpretation and implementation of legislative requirements authorizing  subsidized rates for certain properties in high-risk locations. We  interviewed representatives of NFIP, the insurance industry, and  floodplain managers. Finally, we spoke with an academic about a study of  NFIP properties and analyzed other studies on relevant flood insurance  issues. See appendix I for more details about our scope and  methodology.
We conducted this performance audit from September 2012 to July 2013  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: Since the inception of NFIP in 1968, FEMA has sought to have local  communities adopt floodplain management ordinances and offered flood  insurance to their residents in an effort to reduce the need for government  assistance after a flood. Premium subsidies were seen as a way to  achieve the program’s objectives by ensuring that owners of existing  properties in flood zones could afford flood insurance. NFIP has three  components: (1) the provision of flood insurance; (2) the requirement that  participating communities adopt and enforce floodplain management  regulations; and (3) the identification and mapping of floodplains.  Community participation in NFIP is voluntary. However, communities  must join NFIP and adopt FEMA-approved building standards and  floodplain management strategies in order for their residents to purchase  flood insurance through the program. Additionally, communities with  Special Flood Hazard Areas (SFHA)—areas at high risk for flooding— must participate in NFIP to be eligible for any form of disaster assistance  loans or grants for acquisition or construction purposes in connection with  a flood. Participating communities can receive discounts on flood  insurance if they establish floodplain management programs that go  beyond the minimum requirements of NFIP. FEMA can suspend  communities that do not comply with the program, and communities can  withdraw from the program. As of May 2013, about 22,000 communities  voluntarily participate in NFIP.
Potential policyholders can purchase flood insurance that covers both  buildings and contents for residential and commercial properties. NFIP’s  maximum coverage limit for single-family residential policyholders is  $250,000 per unit for buildings and $100,000 per unit for contents. For  commercial policyholders, the maximum coverage is $500,000 per unit for  buildings and $500,000 for contents.
Current law prohibits federally regulated lenders, federal agency lenders,  and government-sponsored enterprises for housing from making loans for  real estate in SFHAs where the community is participating in NFIP, unless   For structures deemed not to  the property is covered by flood insurance.be in SFHAs—that is, that have moderate to low risk of flooding—the  purchase of flood insurance is voluntary.
subsections: section_title: Flood Zone Designations
paragraphs: NFIP studies and maps flood risks, assigning flood zone designations  from high to low depending on the risk of flooding. SFHAs are high-risk  areas that have a 1 percent or greater annual chance of flooding and are  designated as zones A, AE, V, or VE (table 1). Areas designated as V or  VE are located along the coast. Areas with a moderate-to-low risk for  flooding are designated as zones B, C, or X. Areas where analysis of the  flood risk has not been conducted are designated as D zones.
NFIP offers two types of flood insurance premiums: subsidized and full- risk. Subsidized rates are not based on actual flood risk. According to  FEMA, subsidized rates represent only about 40 percent to 45 percent of  rates that reflect full flood risk. (We discuss how FEMA determines rates  in more detail later in this report.) The type of policy and the subsequent  rate a policyholder pays depend on several property characteristics—for  example, whether the structure was built before or after a community’s  FIRM had been issued and the location of the structure in the floodplain.  Structures built after a community’s FIRM was published must be built to  meet FEMA building standards and pay full-risk rates. Some communities  may implement activities that exceed the minimum standards.
Prior to the Biggert-Waters Act, subsidized policies accounted for about  21 percent of all NFIP policies, while those with full-risk premiums  accounted for the remaining 79 percent. While the percentage of  subsidized policies has decreased since the program was established,  the number of these policies has stayed fairly constant (see fig. 1).
As communities were mapped and joined NFIP, new subsidized policies  were added. As shown in figure 2, the percentage change in subsidized  policies generally followed the same trend as the percentage change in  total policies.
Even with highly discounted rates, subsidized premiums are, on average,  higher than full-risk premiums. The premiums are higher because  subsidized pre-FIRM structures generally are more prone to flooding (that  is, riskier) than other structures. In general, pre-FIRM properties were not  constructed according to the program’s building standards or were built  without regard to base flood elevation—the level relative to mean sea  level at which there is a 1 percent or greater chance of flooding in a given  year. For example, the average annual subsidized premium with October  2011 rates for pre-FIRM subsidized properties located in zone A was  about $1,200, while the average annual premium for post-FIRM  properties in the same zone paying full-risk rates was about $500. Post- FIRM structures have been built to flood-resistant building codes or  mitigation steps have been taken to reduce flood risks; thus, they are  generally less flood-prone than pre-FIRM properties.
section_title: Legislative Authority for and Changes to NFIP
paragraphs: The authority for subsidized rates was included in the National Flood  Insurance Act of 1968 as an incentive for communities to join the program  by adopting and enforcing floodplain management ordinances that would  reduce future flood losses. Subsidies were intended to be only part of an  interim solution to long-term adjustments in land use. Congress also  authorized the use of subsidized premiums because charging rates that  fully and accurately reflected flood risk would be a burden to some  property owners. Table 2 shows the sources of legislative authority for  various subsidized premium rates.
Since NFIP was established, Congress has enacted legislation to  strengthen certain aspects of the program. The Flood Disaster Protection  Act of 1973 made the purchase of flood insurance mandatory for  properties in SFHAs that are secured by mortgages from federally  regulated lenders. This requirement expanded the overall number of  insured properties, including those that qualified for subsidized premiums.  The National Flood Insurance Reform Act of 1994 expanded the  purchase requirement for federally backed mortgages on properties  located in an SFHA. The Bunning-Bereuter-Blumenauer Flood Insurance  Reform Act of 2004 established a pilot program to mitigate properties that  continually suffered from severe repeated flood losses and offer grants for  properties with repetitive insurance claims.loss” properties who refuse to accept any offer for mitigation actions face  higher premiums.
Owners of these “repetitive  More recently, in July 2012, Congress passed the Biggert-Waters Act.The act extended the authorization for NFIP for 5 years and made  reforms to NFIP that include eliminating existing subsidies for any residential property which is not a primary residence; any severe repetitive loss property; any property that has incurred flood-related damage in which the  cumulative amounts of payments under this title equaled or exceeded  the fair market value of such property; any business property; and any property that has experienced or sustained substantial damage  exceeding 50 percent of the fair market value or substantial  improvement exceeding 30 percent of the fair market value.
Rates that fully reflect flood risk for the types of properties listed  previously are to be phased in over several years—with increases of 25  percent each year—until the average risk premium rate for such  properties is equal to the average of the risk premium rates for properties  within any single risk classification.
Furthermore, according to the Biggert-Waters Act, other properties will no  longer qualify for subsidies under the following circumstances: any NFIP policy that has lapsed in coverage, as a result of the  deliberate choice of the policyholder; and any prospective insured who refuses to accept any offer for mitigation assistance (including an offer to relocate) following a major disaster.
The act also stated that no new subsidies would be provided to any property not insured by NFIP as of the date the act was enacted; any property purchased after the date of enactment of the act. (Thus,  property sales trigger elimination of subsidies.)
The Biggert-Waters Act also requires FEMA to adjust rates to accurately  reflect the current risk of flood to properties when an area’s flood map is  changed, subject to any other statutory provision in chapter 50 of Title 42  of the United States Code. FEMA is determining how this provision will  affect properties that were “grandfathered” into lower rates. In addition,  the act allows insurance premium rate increases of 20 percent annually  (previously capped at 10 percent), establishes minimum deductibles, and  requires FEMA to include the losses from catastrophic years in  determining premiums that are based upon “average historical loss year.”  It also incorporates a definition of “severe repetitive loss property” for  single-family properties and required FEMA to establish a reserve fund,  among other things.
section_title: Most Subsidized Policies Continue to Receive Discounted Rates and Have Mixed Characteristics Relative to Financial Indicators
paragraphs: The Biggert-Waters Act eliminated subsidies on approximately 438,000  policies, and with the continuing implementation of the act, more of the  subsidies on the approximately 715,000 remaining policies are expected  to be eliminated over time. In terms of characteristics, the geographic  distribution of remaining subsidized policies was similar to the distribution  of all NFIP policies. Other characteristics we analyzed—indicators of  home value and owner income—were different for the policies that  continue to qualify for subsidized premium rates compared to those with  full-risk rates. In particular, counties with higher home values and income  levels tended to have larger percentages of remaining subsidized policies  compared to those with full-risk rates.
subsections: section_title: Most Policies Estimated to Still Qualify for Subsidized Rates, but their Numbers Are Expected to Decline over Time
paragraphs: We estimated that the Biggert-Waters Act eliminated subsidies for  approximately 438,000 policies, and that about 715,000 policies continue  to qualify for subsidized premium rates (remaining subsidized policies).  Before the act, subsidized policies represented about 21 percent of all  policies and nearly all subsidized policies were in the high risk areas.  After the initial reduction of subsidies, the approximately 715,000 policies  that would continue to receive subsidized rates represent about 13  percent of all NFIP policies and 21 percent of all SFHA policies.elimination affected various property types, including nonprimary  residences, businesses, and severe repetitive loss properties. About 92  percent of the projected remaining subsidized policies cover single-unit  primary residence properties and more than 99 percent cover properties  in SFHA areas. The continuing implementation of the act is expected to  decrease the number of subsidized policies. However, FEMA faces a  number of implementation challenges and elimination of subsidies as  required by the act will likely take years.
As mandated by the Biggert-Waters Act, FEMA has begun phasing out  subsidized premiums for business properties, residential properties that  are not primary residences, and single-family (1-4 units) severe repetitive  loss properties. According to our analysis of NFIP data, the 438,000  policies that would no longer qualify for subsidized premium rates  included about 345,000 nonprimary residential policies, about 87,000  business policies, and about 9,000 single-family severe-repetitive loss  policies. Nearly all subsidized policies for primary residential properties  continue to have subsidized rates. Figure 3 summarizes our analysis of  the immediate decreases in subsidized policies stemming from the act, by  property type.
Subsidies on most of the approximately 715,000 remaining subsidized  policies should be eliminated over time. Under provisions of the Biggert- Waters Act, most policies no longer qualify for subsidies if NFIP coverage  lapsed or the properties were sold or substantially damaged. We  estimated that with implementation of the changes in the act addressing  sales and coverage lapses, the number of subsidized policies could  decline by almost 14 percent per year (see fig. 4). At this rate, the number  of subsidized policies would be reduced by 50 percent in approximately 5  years. After about 14 years, fewer than 100,000 subsidized policies would  remain. We based our estimate of the annual decline rate on the average  experience of the last 10 years of NFIP data using policies with similar  characteristics, but the actual outcomes and time required for subsidies to  be reduced could vary. For example, the average annual decline rate for  the most recent 3 years of NFIP data was about 11 percent. At this rate,  the number of subsidized policies would be reduced by 50 percent in  approximately 7 years, and after 18 years, fewer than 100,000 subsidized  policies would remain. Additionally, changes from the act may affect the  behavior of policyholders. For example, policyholders might not allow  their coverage to lapse if they knew that they would lose their subsidy or  they might not be able to sell their properties at the same rate if the flood  insurance was more expensive.
The Biggert-Waters Act will likely require several years for FEMA to fully  implement. FEMA officials acknowledged that they have data limitations  and other issues to resolve before eliminating some subsidies. We  projected that subsidies on most of the policies required to be eliminated  by the act could be identified in FEMA’s data; however, data limitations  make implementation of some provisions of the act more difficult. For  example, the act eliminated subsidies for residential policies that covered  nonprimary residences. FEMA has data on whether a policy covers a  primary residence but officials stated that it may be outdated or incorrect.  In the past, FEMA did not collect this information for policy renewal so it  may have changed over time. The act also eliminated subsidies for  business policies. However, FEMA categorizes policies as residential and  nonresidential rather than residential and business. As a result, FEMA  does not have the information to identify nonresidential properties, such  as schools or churches that are not businesses and continue to qualify for  a subsidy. Beginning in October 2013, FEMA will require applicants to  provide residential and business status for new policies and renewals.
Additionally, the act states that subsidies will be eliminated for policies  that have received cumulative payment amounts for flood-related damage  that equaled or exceeded the fair market value of the property, and for  policies that experience damage exceeding 50 percent of the fair market  value of the property after enactment. Currently, FEMA is unable to make  this determination as it does not maintain data on the fair market value of  properties insured by subsidized policies. FEMA officials said that they  are in the process of identifying a data source.
FEMA will have to determine how to apply certain provisions of the  Biggert-Waters Act before eliminating some subsidies. For example, the  act eliminates subsidies for severe repetitive loss policies and provides a  definition of severe repetitive loss for single-family homes. However, it  requires FEMA to define severe repetitive loss for multifamily properties.  FEMA has not yet developed this definition and we estimate that 1,000  multifamily severe repetitive loss policies will continue to receive a  subsidy until the definition is developed and applied. The act also  eliminates subsidies when properties are purchased. However, FEMA  has not yet determined how to apply this provision of the act to  condominium associations. Finally, FEMA officials stated that they have  been applying the provisions of the act that eliminate subsidies only to  pre-FIRM policies. As a result, approximately 5,500 subsidized post-FIRM  V zone structures built before 1981 that currently receive subsidized rates  would continue to qualify for subsidies.
section_title: Similarities and Differences between Properties with Subsidized versus Full-Risk Rates
paragraphs: We analyzed a number of characteristics of the remaining subsidized  policies. First, they had a geographic distribution similar to all NFIP  policies. Second, while higher percentages of remaining subsidized  policies than policies with full-risk rates were found in counties with higher  median home values, remaining subsidized policies generally carried  smaller amounts of coverage. Third, counties with the highest median  household incomes and counties at the lower end of our income ranking  had larger percentages of remaining subsidized policies compared to the  percentage of policies with full-risk rates. We limited our analysis of the  similarities and differences between remaining subsidized policies and  the policies with full-risk rates (nonsubsidized) to single-unit primary  residences in SFHAs.
Our analysis of NFIP data on the location of properties that would  continue to receive subsidized rates shows that remaining subsidized  policies would cover properties in every state and territory in which NFIP  operates. Florida (133,000), Louisiana (65,000), California (64,000), New  Jersey (48,000), Texas (44,000), and New York (43,000) had the highest  numbers of remaining subsidized policies. These states with the addition  of South Carolina also had the highest number of total NFIP policies. In  contrast, Indiana, Michigan, and Puerto Rico had the highest percentages  of remaining subsidized policies as a fraction of total NFIP policies in the  state, representing more than 40 percent of all NFIP policies in those  states. Figure 5 shows the estimated number of remaining subsidized  policies by state and the remaining subsidized policies as a percentage of  total NFIP policies in the state.
States with the highest percentage of remaining subsidized policies did  not necessarily have the highest percentage of total NFIP policies. Some  states had a higher percentage of remaining subsidized policies than the  percentage of total NFIP policies in the state (see fig. 6). For example,  California had 9 percent of all remaining subsidized policies and about 5  percent of all NFIP policies, and New York had 6 percent of all remaining  subsidized policies and 3 percent of all policies. Other states had a larger  percentage of total NFIP policies than subsidized policies. For example,  Florida had 37 percent of total NFIP policies and about 19 percent of all  remaining subsidized policies and Texas had about 12 percent of all  policies and 6 percent of remaining subsidized policies.
When analyzed by county, the remaining subsidized policies were located  in about 2,930 of the more than 3,100 counties with NFIP policies. The  number of remaining subsidized policies in the counties varied greatly.  We estimated that 151 counties had only one remaining subsidized  policy, and another 1,137 had fewer than 25 remaining subsidized  policies. We also estimated that 247 counties had more than 500 of these  policies. Ten of these counties had more than 10,000 remaining  subsidized policies, 4 of which were in Florida, 2 in Louisiana, and 1 each  in California, New Jersey, New York, and Texas. Pinellas County, Florida,  had the highest number of estimated remaining subsidized policies at  more than 28,000.
Counties with the highest median home values tended to have a higher  percentage of remaining subsidized policies than nonsubsidized policies.  For our analysis of the financial characteristics of remaining subsidized  and nonsubsidized policies, we selected 351 counties that represented   See appendix II  more than 78 percent of remaining subsidized policies.for more information about the 351 counties we selected for our analysis.  Because FEMA lacks data on home values, we used several indicators of  home value to compare properties in these counties that would continue  to receive subsidized rates with properties charged full-risk rates (see  table 3). Most of the policies were in the counties with relatively high  home values. For example, the median home value for more than half of  the selected counties was in the top quartile of counties nationwide.  Further, the median home value for more than one-third of the selected  counties was in the top 10 percent of median home values for all counties  nationwide.
The results of our analysis of home values varied depending on the  indicator and the location. Our analysis showed that in the counties with  the highest and lower median home values the percentage of remaining  subsidized policies was larger than nonsubsidized policies in SFHAs. For  example, about 43 percent of total NFIP policies in the selected 351  counties were in the highest decile of median home values, but about 43  percent of the remaining subsidized policies compared with about 35  percent of nonsubsidized policies were in these counties. Very few  policies of any type were in counties in the lower deciles of median home  value (deciles 6-10), however in these counties there were higher  percentages and larger numbers of remaining subsidized policies than  nonsubsidized policies (see table 4).
Our analysis of coverage amounts found that remaining subsidized  policies generally carried smaller NFIP coverage amounts than  nonsubsidized policies in SFHAs, a possible indicator of lower home  values. As shown in figure 7, a smaller percentage of remaining  subsidized policies had the maximum coverage of $250,000 than  nonsubsidized policies (29 percent versus about 50 percent). Also, a  larger percentage of remaining subsidized policies had less than  $100,000 in building coverage than nonsubsidized policies (26 percent  versus 8 percent). The results of our comparison of coverage amounts  could indicate that the subsidized policies were for lower-valued  properties, but the perceived flood risk and cost of coverage also could  affect the coverage amount. Finally, a larger percentage of V-zone  policies had the maximum coverage amount than the A-zone policies but  represented a small fraction of all SFHA policies. Further details of our  analysis by flood zone appear in appendix II.
We analyzed NFIP coverage amounts (on single-unit primary residence  nonsubsidized policies and remaining subsidized policies in SFHAs) and  county median home values together and found that higher coverage  amounts were associated with higher county median home values.  Counties with higher median home values had larger percentages of both  remaining subsidized policies and nonsubsidized policies at the NFIP  maximum coverage level of $250,000 than counties with lower median  home values. In addition, counties with lower median home values  generally had larger percentages of remaining subsidized policies and  nonsubsidized policies with lower amounts of coverage (less than  $100,000) than counties with higher median home values. However,  nonsubsidized policies consistently had higher amounts of coverage. In  every decile of county median home value, a larger percentage of  nonsubsidized policies had the maximum amount of NFIP coverage than  remaining subsidized policies, while a smaller percentage of  nonsubsidized policies had lower amounts of coverage (less than   $100,000) than remaining subsidized policies. Additional details of the  combined analysis are presented in appendix II.
We performed five case studies to illustrate results in specific counties.  The case studies offer a more in-depth, within county view (how  characteristics vary across cities within select counties). We performed  the NFIP coverage and median home value analyses, but also used  publicly available real estate data to examine city-level median home  values within the county. These cases are illustrative only and are not  nationwide indicators, and some of the results from these case studies  matched our earlier results and some did not. Los Angeles County is one  illustration of how NFIP policies compared within a county, but other  counties had different results. The results of the other case study counties  are presented in appendix II.
Case Study: Los Angeles County, California
Los Angeles County had a median home value in the top 10  percent of all counties and consistent with our earlier results had a  higher percentage of remaining subsidized policies than  nonsubsidized policies in SFHAs (more than twice as many  policies).
Consistent with our analysis of NFIP coverage amounts, a lower  percentage of remaining subsidized policies in Los Angeles County  had maximum building coverage than nonsubsidized policies (59  versus 77 percent), but a higher percentage had building coverage  less than $100,000 (6 versus 3 percent).
However, Los Angeles County also had a high percentage of both  subsidized and nonsubsidized policies with maximum NFIP  coverage and a low percentage of both types of policies at lower  levels of coverage.
Our analysis of the city median home value in Los Angeles County  found that about 88 percent of remaining subsidized and  nonsubsidized policies were in cities in the second and third  quartiles of median home value.
Additionally, although Los Angeles County is located on the Pacific  Ocean, it had 120 V-zone (high-risk velocity coastal) policies  compared to about 6,000 A-zone (high-risk) policies. Ninety-seven  of the V-zone policies were remaining subsidized policies and all  were located in a single city with a median home value in the top  quartile of median home value.
Comparing policies in SFHAs in the selected counties, our analysis  showed that in counties with the highest and lowest median household  incomes, there were a larger percentage of remaining subsidized policies  than nonsubsidized policies. We used county median household income  from the 2007 through 2011 ACS 5-year data for all U.S. counties as an  indicator of household income for property owners. We analyzed the data  to determine relative ranking of the 351 selected counties relative to all  counties and compared the number and percentage of properties that  would continue to receive subsidized rates with properties charged full- risk rates. In general, most of all of the policies in our analysis were in  counties with higher median household income (deciles 1-4), with fewer  policies in the counties with lower median household income counties.  However, counties in the highest and lowest decile in median household  income had higher percentages of remaining subsidized policies than  nonsubsidized policies (see table 5). For example, 19 percent of all  policies in the 351 selected counties were in the highest decile of median  household income. But about 29 percent of the remaining subsidized  policies were in these counties versus about 11 percent of nonsubsidized  policies. One percent of all policies in the selected counties were in the  lowest decile of median household income. But 4 percent of the  remaining subsidized policies were in these counties versus 1 percent of  nonsubsidized policies.
We also examined home value and household income indicators  together. Selected counties with the highest median household incomes  and highest median home values had higher percentages of remaining  subsidized policies than nonsubsidized policies in SFHAs. For example,  78 of the 351 selected counties were in the highest decile category for  both median home value and median household income. About 26  percent of remaining subsidized policies were in these counties,  compared with 7 percent of nonsubsidized policies. Selected counties  with higher median household income generally also had higher median  home values, but counties with higher median home values did not  always have higher median incomes. Higher percentages of remaining  subsidized policies than nonsubsidized policies were found in counties  with lower median home values and lower median household incomes.  More detail on these results can be found in appendix II.
section_title: Data Constraints Limit FEMA’s Ability to Estimate the Cost of Subsidies and Establish Full-Risk Rates on Previously Subsidized Policies
paragraphs: The cost of subsidized policies to NFIP can be measured in terms of  forgone net premiums (the difference between subsidized and full-risk  rates, adjusted for premium-related expenses). However, FEMA does not  have the historical program data needed to make this calculation.  Because of this constraint, estimating the historic cost of subsidies on  NFIP is difficult. FEMA also does not have information on the flood risk of  properties with previously subsidized rates, which is needed to establish  full-risk rates for these properties going forward.
subsections: section_title: Historical Cost of Subsidies Difficult to Estimate
paragraphs: FEMA does not have sufficient data to estimate the aggregate cost of  subsidies. Since fiscal year 2002, FEMA’s annual actuarial rate reviews  have included an estimated range of the percentage of the full-risk  premiums that policyholders with subsidized premiums pay. (We refer to  this as the subsidy rate). FEMA based these estimated ranges, in part, on  the analysis in a 1999 report conducted by PricewaterhouseCoopers  (PwC), which sampled pre-FIRM structures around the nation and  collected information on elevation of the properties to calculate what the  full-risk rates on these properties would have been. FEMA has  continued to use this report as the basis for estimating the percentage of  the full-risk rate that subsidized policyholders pay. Since fiscal year  2002, NFIP has reported that the estimated subsidized premium rate is  between 35 and 45 percent of the full-risk premium rate.said that they did not report an estimate before the 1999 PwC report.  Therefore, determining forgone premiums without these estimates would  be difficult because the percentage of subsidized premium rates  compared with full-risk rates may have varied considerably over time.
Although it was not possible to estimate forgone premiums since the  program was established, the following provides information about the  impact of subsidized premiums on the program.
Data are not available from FEMA to estimate the forgone premiums  before 2002. Using FEMA’s estimated range of subsidy rates to actual  premiums collected from 2002 through 2011, we conducted an  analysis to estimate the premiums that could have been collected if  subsidies had not existed over that period. FEMA officials have  clarified their estimate that 2011 subsidized premiums represented 40  percent to 45 percent of full-risk premium rates, explaining that after  paying for all administrative and other expenses, the remaining  premiums would cover about 40 to 45 percent of the expected  average long-term annual losses.
Premiums are used to cover not only claims, but also operating  expenses and any debt. According to FEMA officials, 17 percent of  forgone premiums would be needed to pay operating expenses that  would increase if subsidized premiums were increased. Such  expenses consist of premium taxes (about 2 to 2.5 percent of  premium) and agents’ commissions associated with the private  insurance companies that sell and service NFIP policies (about 15  percent of premium). Therefore, about 83 percent would be available  to help cover fixed expenses (which do not vary with premiums) and  to pay losses. During years when losses are less than average, the  program potentially generates a surplus. During higher-loss years,  accumulated surplus could be used to help pay the insured flood  losses that exceed that year’s net premium revenue and reduce the  likelihood of needing to borrow from Treasury. Therefore, additional  premiums could have helped offset FEMA’s need to borrow or put the  agency in a better position to manage catastrophic losses or repay its  debt.
A similar number but higher percentage of policies were subsidized in  the earlier years of the program, therefore, most of the program’s  premium revenue did not reflect the risk of flooding. In 1978 about 76  percent of policies were subsidized compared with about 20 percent  in 2012. The Flood Disaster Protection Act of 1973 expanded the use  of premium subsidies to encourage the purchase of flood insurance  and introduced mandatory flood insurance purchase requirements in  SFHAs as a condition of receipt of direct federal and federally related  financial assistance related to the property. For the next 7 years, the  subsidized premiums remained in effect. During this period, nearly  every community with a flood hazard joined NFIP, and policies in  force reached 2 million by 1979.
The percentage of full-risk premiums that policyholders with  subsidized rates paid was also lower than today. When the program  began, NFIP administrators set the subsidized rates on the basis of  what they considered affordable. However, from 1981 through 1986,  FEMA initiated a series of rate increases for all subsidized policies.  The increases were intended to generate premiums at least sufficient  to cover expenses and losses relative to the historical average loss  year when combined with the premiums paid by policyholders with  full-risk rates. Since 1986, additional rate increases have been made  to bring the average program premium to a level intended to be  sufficient to pay for the historical average loss year and have  additional funds available to service its debt to Treasury.
section_title: Mandated Information on Claims and Premiums Associated with Subsidized Policies
paragraphs: As mandated in the Biggert-Waters Act, we also calculated the claims  and premiums attributable to all policies that received subsidies  (historically subsidized policies) since 1978 and to policies with  characteristics similar to remaining subsidized policies (remaining  subsidized policies). While the difference between claims and premiums  is not a meaningful measure of the costs of subsidies because premiums  are used to pay not only claims but other costs of administering the  program, they provide additional descriptive information. Moreover,  because flooding is a highly variable event, with losses varying widely  from year to year, even analysis of the decades of historical data  available could lead to unreliable conclusions about actual flood risks.  Based on our analysis of NFIP claims data, we calculated the amount of  claims attributable to historically subsidized policies from 1978 through  2011 to have been $24.1 billion, of which $15.2 billion is attributable to  remaining subsidized policies. NFIP had $28.5 billion in claims for policies  charged at the full-risk premium rates in the same time period. Based on  data provided by FEMA on all subsidized premiums, we calculated the  amount of premiums collected for all historically subsidized policies from  1978 through 2011 to have been $26.2 billion, of which $15.7 billion is  attributable to remaining subsidized policies. Comparatively, FEMA  collected $33.7 billion in premiums for policies with full-risk premium rates  for the same time period.
section_title: FEMA Lacks the Information Needed to Establish Full-Risk Rates That Reflect Risk of Flooding for Remaining Subsidized Policies
paragraphs: FEMA generally lacks information to establish full-risk rates that reflect  flood risk for active policies that no longer qualify for subsidies as a result  of the Biggert-Waters Act and also lacks a plan for proactively obtaining   The act requires FEMA to phase in full-risk rates on  such information.these policies. Federal internal control standards state that agencies  should identify and analyze risks associated with achieving program  objectives, and use this information as a basis for developing a plan for  mitigating the risks. In addition, these standards state that agencies  should identify and obtain relevant and needed data to be able to meet  program goals.
Surveyors calculate the elevation of the first-level of a structure in relation to the  expected flood level, or base flood elevation. According to FEMA, obtaining such a  certificate typically would cost a policyholder from $500 to $2,000 or more. elevation as one of the factors in its model to set full-risk rates for  buildings constructed after the publication of a community’s FIRM.  FEMA officials said that although a variety of factors, such as occupancy  status and number of floors, are used to determine these rates, the  elevation of the building is the most important factor. FEMA also uses  elevation certificates as administrative tools. Elevation certificates are  required for some properties, but optional for others. For example,  communities participating in NFIP must obtain the elevation information  for all new and substantially improved structures. In addition, FEMA  requires elevation certificates to determine rates for post-FIRM buildings  located in high-risk areas, the A and V zones. However, an elevation  certificate generally has not been required for pre-FIRM buildings that  previously received subsidized rates because information about elevation  was not used in setting subsidized rates. According to NFIP data,  property elevations relative to the base flood elevation are unknown for  97 percent of both the 1.15 million historically subsidized policies and the  more than 700,000 remaining subsidized policies in SFHAs. As of  October 2013, FEMA is requiring applicants for new policies on pre-FIRM  properties that previously received subsidized rates and property owners  whose coverage has lapsed to provide elevation certificates.
FEMA is phasing-in rate increases for other policyholders who no longer  qualify for subsidies and is relying on policyholders to voluntarily provide  elevation certificates. With the 1999 PwC report as a basis for an  estimate of the full-risk rate for subsidized policies, FEMA officials said  they have been using the assumption that subsidized rates are about half  of the full-risk rates and have begun implementing premium increases of  at least 100 percent for all active policies that are having their subsidies  eliminated. According to FEMA, they will phase in these increases at 25  percent per year, consistent with the act, for several years until the rates  reach a specific level or until policyholders supply an elevation certificate  that indicates the property’s risk, allowing FEMA to determine the full-risk  rate. If policyholders voluntarily obtain an elevation certificate that shows  that their risk is lower, they may be able to qualify for lower rates or it may  not take as many years of rate increases to reach the full-risk rate.  However, policyholders at higher risks could be subject to even higher  rates. According to FEMA officials, it will take several years for previously  subsidized policies to reach a full-risk rate and the agency will  communicate to policyholders to encourage them to purchase elevation  certificates to determine their actual flood risk. For example, FEMA has  posted information on its website about program changes as a result of  the Biggert-Waters Act and the importance of obtaining elevation  certificates.
Although subsidized policies have been identified as a risk to the program  because of the financial drain they represent, FEMA does not have a plan  to expeditiously and proactively obtain the information needed to set full- risk rates for all of them. Instead, FEMA will rely on certain policyholders  to voluntarily obtain elevation certificates. Those at lower risk levels have  an incentive to do so because they can qualify for lower rates. However,  policyholders with higher risk levels have a disincentive to voluntarily  obtain an elevation certificate because they could end up paying an even  higher premium. Without a plan to expeditiously obtain property-level  elevation information, FEMA will continue to lack basic information  needed to accurately determine flood risk and will continue to base full- risk rate increases for previously subsidized policies on limited estimates.  As a result, FEMA’s phased-in rates for previously subsidized policies still  may not reflect a property’s full risk of flooding, with some policyholders  paying premiums that are below and others paying premiums that exceed  full-risk rates. As we have previously found, not accurately identifying the  actual risk of flooding increases the likelihood that premiums may not be  adequate and adds to concerns about NFIP’s financial stability.
section_title: Several Options Exist for Reducing the Financial Impact of Remaining Subsidized Policies
paragraphs: Through our previous work as well as interviews we conducted and  literature we reviewed for this report, we identified three broad options  that could help address NFIP’s financial situation: (1) adjust the pace of  the elimination of subsidies, (2) target assistance or remaining subsidies  by the financial need of property owners, and (3) increase mitigation  efforts. In prior work, we discussed similar options for addressing the  impact of subsidized policies and the work we conducted for this report  confirmed that, with some modifications to reflect the changes from the  Biggert-Waters Act, these were still generally the prevailing options. addition, our previous and current work have shown that each of the  options has advantages and disadvantages in terms of the impact on the  program’s public policy goals and would involve trade-offs that would  have to be weighed. For example, charging premium rates that fully  reflect the risk of flooding could help improve the financial condition of  NFIP and limit taxpayer costs before and after a disaster. However,  eliminating or reducing subsidized policies could have unintended  consequences, such as increasing premium rates to the point that flood  insurance is no longer affordable for some policyholders and potential  declines in program participation.
subsections: section_title: Adjust the Pace of the Elimination of Subsidies
paragraphs: See GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: Feb. 2013).
GAO-09-20. where they lived. Stakeholders also noted that the threat of increased  premium rates would encourage some policyholders affected by  Superstorm Sandy to undertake mitigation efforts as they repaired their  properties.
Although accelerating the elimination of subsidies could strengthen the  financial solvency of the program, it also entails trade-offs and unintended  consequences. For example, according to FEMA estimates, the  elimination of subsidies for pre-FIRM properties would on average more  than double these policyholders’ premium rates, raising concerns about  the affordability of the coverage and participation in the program. Higher  premium rates might result in reduced participation in NFIP over time as  people either decide to drop their policies or are priced out of the market,  according to FEMA officials and insurance industry stakeholders we  interviewed. The 1999 PwC study estimated that, for communities most  likely to experience a decrease in property values if subsidies were  immediately eliminated, on average 50 percent of policyholders might  cancel their coverage. It is too soon to tell the long-term impacts of the  elimination of subsidies that went into effect in 2013. Even reducing,  rather than eliminating, subsidies could increase the financial burden on  some existing policyholders—particularly low-income policyholders—and  could lead to some of them deciding to leave the program. As a result, if  owners of pre-FIRM properties, which have relatively high flood losses,  cancelled their insurance policies, the federal government—and ultimately  taxpayers—could face increased costs in the form of FEMA disaster  assistance grants to these individuals. However, according to a recent  study, a large proportion of disaster assistance is provided to states,  versus directly to individuals, and the assistance provided to individuals  via grants and low-interest loans is fairly limited in size. An additional  trade-off associated with making immediate increases to premium rates is  resistance from local communities. Stakeholders we interviewed further  noted that increased insurance costs might make some properties more  difficult to sell, particularly pre-FIRM properties in older, inland  communities at high risk of flooding.
Delaying the elimination of subsidized policies could address stakeholder  concerns about the affordability of flood insurance and the time frames in  the Biggert-Waters Act for implementing full-risk rates, but also has trade- offs. For example, while stakeholders we interviewed supported  provisions of the act to reduce the number of subsidized policies and  moving to full-risk rates, they said that the time frames in the act were  aggressive and could be burdensome for low-income policyholders. They  also stated that more gradual increases for certain policyholders could  keep policies more affordable. They noted there have been proposals to  delay the elimination of subsidies and phasing in of full-risk rates.  However, delaying the elimination of subsidies would continue to expose  the federal government to increased financial risk. And, as previously  noted, not charging full-risk rates contributes to FEMA’s ongoing  management challenges in maintaining the financial stability of NFIP.  NFIP has been on our high-risk list since 2006 because of concerns  about its long-term financial solvency and management issues. While  Congress and FEMA intended that, insofar as practicable, NFIP be  funded with premiums collected from policyholders, the program was, by  design, not actuarially sound.
section_title: Target Assistance or Remaining Subsidies Based on Financial Need of Property Owner
paragraphs: Targeting assistance, based on financial need, could help ensure that  only those in need receive subsidies, with the rest paying full-risk rates.  This assistance could take several forms, including direct assistance  through NFIP, tax credits, grants, or vouchers. For example, other federal  programs have targeted subsidies through means tests or other methods.  Such an approach could help ensure that those needing the subsidy  would have access to it and retain their coverage. Alternatively,  stakeholders we interviewed for this report noted that FEMA could  replace the subsidies with vouchers based on financial need to offset  higher premiums. For example, the Department of Housing and Urban  Development’s Housing Choice Voucher program is administered by  public housing agencies that collect information on applicants’ income  and assets to determine eligibility and voucher amounts. flood insurance policyholders could be collected to assess need,  determine eligibility, and provide appropriate amounts of financial  assistance to families that otherwise could not afford their flood insurance  premiums.
24 C.F.R. Part 982.
According to industry stakeholders we interviewed, targeting assistance  based on financial need would help make the planned phased-in premium  increases more affordable. In a recent paper on flood insurance  affordability, the Association of State Floodplain Managers (ASFPM)  suggested that a flood insurance voucher program could be developed for  low-income policyholders who may not be able to afford the rate  increases or for those who might need time to adjust to premium  increases. ASFPM’s paper also noted that, while the premium rate  increases required by the Biggert-Waters Act will improve the financial  stability of NFIP, those increases could have a significant impact on flood  insurance affordability for low-income policyholders. In particular, the  ASFPM paper states that assistance will be necessary for some  policyholders to help them transition to either full-risk rates, or to mitigate  their properties, otherwise some property owners might not be able to  afford to remain in their homes. Other insurance industry representatives  and stakeholders have also cited affordability concerns and suggested  that as full-risk rates were phased in, assistance for low-income  individuals could be provided through a voucher system or program  based on financial need. A provision of the act requires FEMA to study  NFIP participation and affordability issues, including offering vouchers  based on income. According to FEMA officials, as of May 31, 2013,  FEMA has consulted with the National Academy of Sciences about  determining how to undertake this study.
As previously discussed, our comparison of characteristics (such as  median income and median home values) associated with remaining  subsidized and nonsubsidized policies indicates that applying full-risk  rates may be overly burdensome for some property owners and not for  others. For example, we found a higher percentage of subsidized policies  in both counties with lower and very high incomes, indicating that in  certain areas, some subsidized policyholders may find higher flood  insurance rates difficult to afford, while those who were located in higher- income areas may be able to afford premium increases.
However, it could be challenging for FEMA to develop and administer  such an assistance program in the midst of ongoing management  challenges. Specifically, we have previously found that FEMA has faced  significant management challenges in areas that affect NFIP, including  strategic and human capital planning; collaboration among offices; and  record, financial, and acquisition management. In addition, in previous  work we found that FEMA has faced challenges modernizing NFIP’s  insurance policy and claims management system. Implementing a  financial assistance program would require FEMA to plan and develop  new processes. Representatives from a national insurance professional  organization we interviewed for this report stated that it would be difficult  for FEMA to administer an assistance program and ensure that an  evaluation for assistance was done consistently. In addition, they said  that to administer an assistance program such as vouchers, tax credits, or  grants through the Write-Your-Own companies (insurance companies that  sell and service flood insurance for NFIP), a process would be needed to  ensure that means-testing is evaluated and administered consistently.  They also suggested that it would be easier to administer a program if all  policyholders were charged a full-risk rate, with a separate process that  would allow them to apply for assistance, based on financial need.
section_title: Increase Mitigation Efforts
paragraphs: A third option to address the financial impact of subsidized premium rates  on NFIP would be to substantially expand mitigation efforts to ensure that  more homes were better protected from flooding, including making  mitigation mandatory. Mitigation efforts such as elevation, relocation, and  demolition can be used to help reduce or eliminate the long-term risk of  flood damage to structures insured by NFIP. However, mitigation of pre- FIRM properties is voluntary unless a property has been substantially  damaged or the owner undertook substantial improvement.
GAO-09-20. assistance. While the Biggert-Waters Act eliminated subsidies for severe  repetitive loss properties and for prospective policyholders who refuse to  accept any offer for mitigation assistance (including an offer to relocate)  following a major disaster, properties not built to meet a community’s  flood resistant requirements or in the highest-risk zones could face more  severe damages in the event of a flood. Insurance industry stakeholders  agreed that mitigation could be used to reduce future financial risk for  NFIP.
Stakeholders we spoke to for this report also commented that since such  mitigation measures often are done at the community level, offering  community-based policies could help encourage more mitigation. This is  consistent with our prior work in which local officials generally support  increased mitigation efforts.incorporating community-based flood insurance into NFIP could help  leverage community resources for mitigation projects that would benefit  the entire community, rather than individual structures. For example,  floodplain mangers noted that with a community-based policy, the local  unit of government could assess fees on all properties benefitting from  community mitigation measures. In addition, because the premium rate  would be on a community versus structure basis, the community, not the  property owner, generally would make development or neighborhood-type  decisions that either increased or decreased risk in the community.
Industry stakeholders also commented that  Disadvantages associated with mitigation as an option to reduce the  financial impact of the subsidized policies include the expense to NFIP,  taxpayers, and communities. For example, implementing mitigation  measures for tens of thousands of properties that continue to receive  subsidized rates could take a number of years to complete, which could  have an on-going risk to NFIP’s financial health. We have previously  reported that increasing mitigation would be costly and require increased  funding. Furthermore, we found in our past and current work that buyouts  and relocations would be more costly in certain areas of the country and  in some cases the cost for mitigating older structures might be prohibitive.  The effectiveness of mitigation efforts could be limited by FEMA’s reliance  on local communities with varying resources. For example, not all  communities have the staff or resources to fully carry out mitigation, meet  cost-sharing requirements, and enforce compliance.
As we reported in 2008, even when federal funds are made available to a  community and property owners are interested in mitigating their  properties, property owners still may have to pay a portion of the  mitigation expenses, which could discourage participation in mitigation  efforts. In interviews for this report, stakeholders said that mitigation was  expensive and that as premiums are increased to full-risk rates, some  means of assistance would be helpful for policyholders who may have  difficulty paying for mitigation efforts. Mitigation costs would have to be  weighed against mitigation benefits (possible savings from a decrease in  flood damage).
In addition, certain types of mitigation, such as relocation or demolition,  might be met with resistance by communities that rely on those properties  for tax revenues, such as coastal communities with significant  development in areas prone to flooding. Furthermore, mitigation activities  are often constrained by conflicting local interests, cost concerns, and a  lack of public awareness of the risks of natural hazards and the  importance of mitigation. Communities’ economic interests often can  conflict with long-term hazard mitigation goals. For example, a community  with a goal of economic growth might allow development to occur in  hazard-prone areas (along the coast or in floodplains).
Our analysis indicates that the three options discussed above are not  mutually exclusive and may be used together to reduce the financial  impact of subsidized policies on NFIP. For example, accelerating the  elimination of subsidies could be done in conjunction with targeting  assistance to only those policyholders who need help to retain their flood  insurance—thus advancing the goal of strengthening the financial  solvency of NFIP and addressing affordability concerns for low-income  policyholders. In addition, FEMA may be able to build on its existing  mitigation efforts and target assistance for mitigation efforts to those  policyholders who need financial assistance. The way in which an option  is implemented, such as more aggressively or gradually, also can  produce different effects in terms of policy goals and thus change the  advantages and disadvantages (see table 6).
section_title: Conclusions
paragraphs: While FEMA has taken initial steps to eliminate subsidies for various  types of properties in accordance with the Biggert-Waters Act  requirements, eliminating the more than 700,000 additional policies that  continue to receive subsidies will take many years to accomplish.  Subsidies on some policies will be eliminated as properties are sold or if  coverage lapses, but FEMA has some data limitations and  implementation issues to resolve before other subsidies identified in the  act can be eliminated. With some efforts under way, FEMA has much  work ahead of it in planning and executing implementation of the changes  in the act as well as effectively managing NFIP.
Although FEMA has information on premiums and claims paid for  subsidized policies over time, it does not have the information needed to  determine the appropriate premium amounts policyholders should pay to  reflect the full level of risk for floods. To phase out and eventually  eliminate subsidies and revise rates over time, FEMA will need  information on the relative risk of flooding and property elevations  (elevation certificates), which generally had not been required for  subsidized policies prior to the Biggert-Waters Act. The act requires  FEMA to phase in full-risk rates on policies that previously received  subsidies. According to federal internal control standards, agencies  should identify and analyze risks associated with achieving program  objectives, and use this information as a basis for developing a plan for  mitigating the risks and obtaining needed information. Going forward,  FEMA will require new policyholders and those whose coverage has  lapsed to provide elevation information when renewing or obtaining new  policies; however, FEMA will rely on other policyholders who previously  received subsidized rates to voluntarily provide this information. As FEMA  continues to implement the requirements of the act to charge full-risk  rates, the agency plans to assume that all subsidized policies pay about  half of the full-risk premium and has begun phasing-in rate increases  based on this factor for all active policies that are having their subsidies  removed. Without a plan to require all policyholders to obtain elevation  certificates to accurately document their property elevations and relative  risk of flooding, FEMA will lack information that is key to determining  appropriate full-risk rate premiums. As a result, the rates that FEMA plans  to implement may not adequately reflect a property’s actual flood risk, and  some policyholders may be charged too much and some too little for their  premiums.
section_title: Recommendation for Executive Action
paragraphs: To establish full-risk rates for properties with previously subsidized rates  that reflect their risk for flooding, we recommend that the Secretary of the  Department of Homeland Security (DHS) direct the FEMA Administrator  to develop and implement a plan, including a timeline, to obtain needed  elevation information as soon as practicable.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DHS for its review and comment.  DHS provided written comments that are presented in appendix III. The  letter noted that the department concurred with our recommendation to  develop and implement a plan to obtain elevation information from  previously subsidized policyholders. The letter stated that FEMA will  evaluate the appropriate approach for obtaining or requiring the submittal  of this information. In particular, the letter noted that although obtaining  this information cost-effectively presents significant challenges, FEMA will  explore technological advancements and engage with industry to  determine the availability of technology, building information data, readily  available elevation data, and current flood hazard data that could be used  to implement the recommendation. FEMA also provided technical  comments, which we have incorporated into the report, as appropriate.
We are sending copies of this report to the appropriate congressional  committees and the Secretary of Homeland Security. In addition, the  report is available at no charge on the GAO website at  http://www.gao.gov.
If you have any questions about 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 key contributions to this report are  listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters  Act) mandated that GAO conduct a number of studies, including this  study on the properties that continue to receive subsidized rates after the  implementation of the act and options to further reduce these subsidies.
This report discusses (1) the number, location, and financial  characteristics of properties that continue to receive subsidized rates  compared with full-risk rate properties, (2) information needed to estimate  the historic financial impact of subsidies and establish rates that reflect  the risk of flooding on properties with previously subsidized rates, and (3)  options to reduce the financial impact of remaining subsidized properties.
Although the Biggert-Waters Act mandated that GAO report on certain  characteristics of the remaining subsidized policies and properties, the  National Flood Insurance Program (NFIP) databases do not contain  information to address several elements listed in the act. Therefore, to the  extent possible, we developed alternative methodologies to address the  elements of the act.
subsections: section_title: Number, Location, and Financial Characteristics of Properties That Continue to Receive Subsidized Rates Compared with Full-Risk Rate Properties
paragraphs: To provide information on the number and location of NFIP-insured  properties that would continue to receive subsidized premium rates, we  analyzed data from NFIP’s policy and repetitive loss databases as of  June 30, 2012. We applied the Federal Emergency Management  Agency’s (FEMA) algorithm to determine which policies were subsidized,  and applied FEMA’s interpretation of the provisions in the Biggert-Waters  Act that eliminate subsidies to determine which policies would retain their  subsidies.FEMA’s implementation of legislative requirements authorizing subsidized  rates for certain properties in high-risk locations.
We also analyzed NFIP’s legislative history and relied on  To determine the fair market value of properties that would continue to  receive subsidized premium rates, we used other NFIP data and publicly  available information as indicators of value because the fair market  values required by the act were not available in NFIP’s databases. We  used three indicators of home value, (1) NFIP policy-level coverage  amounts, (2) 2007 through 2011 5-year American Community Survey  (ACS) county-level data on median home values, and (3) January 2013,  Zillow city-level median home value index within case study counties.
For consistency in our message, we compared all the indicators at the  county-level. To place NFIP policies in counties, we used ZIP code  information contained in the NFIP policy file as of June 30, 2012, and  matched those data with U.S. Postal Service and Department of Housing  and Urban Development ZIP code to county data (as of December 2011).  For ZIP codes that crossed county borders, we assigned policies  proportionally to the counties based on the fields available in the ZIP code  to county file.
We aggregated the total number of policies and remaining subsidized  policies for all counties, and selected 351 counties for our analysis that  contained the majority of the policies. We selected all counties with 500 or  more remaining subsidized policies for single-unit, primary residences  (247 counties). We also included the five counties in each state and  Puerto Rico with the most remaining subsidized policies for single-unit  primary residences, regardless of the total number in the county, to better  ensure a comprehensive national representation. Accordingly, the 351  counties we selected represent 78 percent of all remaining subsidized  policies nationwide, 77 percent of all remaining subsidized policies for  single-unit primary residences, and 77 percent of all NFIP policies. As  more than 99 percent of remaining subsidized policies were in Special  Flood Hazard Areas (SFHA), we limited our comparison with  nonsubsidized policies to those for single-unit primary residences in  SFHAs.
We used NFIP policy data as of June 30, 2012, on coverage amounts as  the first indicator of home value. To determine how building coverage  amounts compared between remaining subsidized and nonsubsidized  policies, we categorized NFIP building coverage amounts using less than  $100,000, $100,000-$149,999, $150,000-$199,999, $200,000-$249,999,  and $250,000, which is the maximum coverage for residential units. We  compared the percentage of policies of each type within each category of  coverage at the county level for the selected counties. We also conducted  this analysis using flood zones, comparing the coverage amounts for A- zone and V-zone policies separately. (The A and V flood zones represent  areas at high risk for flooding, and V zones also indicate coastal areas.)  Coverage amount as an indicator for home value is limited because NFIP  has a maximum building coverage amount of $250,000 per residential  unit. Additionally, the perceived flood risk and cost of coverage could  affect the coverage amount. However, coverage amount can give an  indication of a property’s value relative to other properties.
As a second indicator of home value, we used 2007 through 2011 ACS 5- year county-level estimates for median home values (known as B25077)  for all counties in the United States and also included the District of  Columbia and Puerto Rico. We included Puerto Rico because of its  relatively large number of NFIP policies. We used 5-year data because  other ACS data sets did not contain data for all the 351 selected counties.  Using county median home value, we ranked all counties and determined  the deciles for the 351 selected counties. We compared the percentage of  remaining subsidized with nonsubsidized policies from the selected  counties in each decile. Because these data are at the county level, areas  within the county of relatively high or low home values are  indistinguishable. We also analyzed the ACS and NFIP coverage data  together, at the county level.
As a third indicator of home value, we used Zillow city-level median home  value data as of January 2013, within five selected counties. For the  purposes of our county case study analysis, we selected the Zillow Home  Value Index because it was publicly available; covered more housing  units at the city level than other housing indices; was estimated at a  smaller geographic region; and only included nonforeclosure housing  units. We judgmentally selected five case study counties and compared  data at the city level within the county to provide more detailed  illustrations of how home values for properties that continue to receive  subsidies compare with those that pay full-risk rates. These cases are not  projectable to all counties. We selected our case study counties based on  the number of relevant NFIP policies, their location, and the reliability of  the data for the county. Specifically, we selected counties with at least  1,000 remaining subsidized policies and nonsubsidized policies for single- unit primary residences. We selected one county from each of the four  states with the most remaining subsidized policies. We selected Pinellas  County, Florida; Los Angeles County, California; and Ocean County, New  Jersey; however, the Zillow data for Louisiana did not meet our level of  reliability and was eliminated. As Pinellas County is on the Gulf of Mexico,  Los Angeles County is on the Pacific Ocean, and Ocean County is on the  Atlantic Ocean, we chose the other two counties to represent inland  flooding—Cook County, Illinois, and Pima County, Arizona. The Zillow  information for these counties met our criteria for data reliability. For each  county, we determined which NFIP policies may be located in the county  based on ZIP code. Because the NFIP city name was not consistently  entered, two analysts independently matched the NFIP policy city names  to Zillow city names within the county. A third analyst served as the  mediator for differences using alternative location information. Within  each county, we ranked the cities by median home value and distributed  them into quartiles. We compared the number and percentage of  remaining subsidized policies with the nonsubsidized policies in the cities  in each quartile. Additionally, for each case study county, we reviewed the  results from the NFIP coverage and ACS analyses within the county.
Because owner income data were not available in NFIP’s databases, we  analyzed 2007 through 2011 ACS 5-year data as an indicator of income  levels of owners of remaining subsidized properties. We used 5-year,  county-level data on median household incomes (B19013) for all counties  in the United States, the District of Columbia, and Puerto Rico. Using the  median household income data, we ranked all counties and determined  the deciles for the 351 selected counties. We compared the percentage of  remaining subsidized policies with nonsubsidized policies in SFHAs from  the selected counties in each decile. Because these data are at the  county level, areas within the county of relatively high or low household  incomes are indistinguishable. We also analyzed the ACS median home  value and median household income data together, at the county level.
Because consistent, nationwide aggregate data on sales prices for each  property covered by a remaining subsidized pre-Flood Insurance Rate  Map (FIRM) policy since 1968 were not available from NFIP or other  sources, we determined that the home value analysis was sufficiently  similar to provide an indication of sales prices to respond to this study  element.
We also used NFIP policy fiscal year-end data from 2002 through 2012 to  estimate the potential annual rate of decline in the number of remaining  subsidized policies over time. Consistent, nationwide aggregate data on  sales dates for each pre-FIRM property since 1968 were not available  from NFIP or other sources. We compared sequential years of policy data  to determine whether each policy with the characteristics of a remaining  subsidized policy continued to have coverage. We first matched company  and policy data and if no match was found, matched on owner name. If a  policy in the first year failed to match by either method, we assumed that  the policy no longer had coverage. We estimated the annual rate of  decline for 10 sequential year pairs. We compared our results with a  recent NFIP policy tenure study by calculating the decline rate from the  reported tenure rate. We estimated the number of remaining subsidized  policies over a 30-year period given the different annual decline rates.
Because data were not available from NFIP on the number of times each  pre-FIRM property had been sold, we determined that the policy decline  rate analysis was sufficiently similar to provide an indication of extent of  ownership or length of time policies remained in the program to respond  to this study element.
Additionally, because data were not available from NFIP’s databases on  the extent to which pre-FIRM properties are currently owned by the same  owners as at the time of the original NFIP rate map, we determined that  the policy decline rate analysis was sufficiently similar to provide an  indication of extent of ownership or length of time policies remained in the  program to respond to this study element.
section_title: Estimated Historic Financial Impact of Subsidized Properties on NFIP
paragraphs: To estimate the financial impact, or cost, of subsidized properties to NFIP,  we attempted to calculate forgone premiums—lost revenue to the  program in premiums—due to subsidies. Because data on elevations of  NFIP subsidized properties were not available to determine the total  forgone premiums from subsidized policies, we used FEMA’s estimates of  the subsidy rate from 2002 through 2011 to estimate a range of forgone  premiums attributable to subsidized properties in this period. We limited  our analysis to 2002 through 2011 because FEMA did not estimate  subsidy rates prior to 2002. Lacking the information to calculate the  ranges associated with the premiums that would have been collected, we  made assumptions based on limited historical information from FEMA,  including the annual Actuarial Rate Reviews from 2002 through 2011,  which state that subsidized premiums were estimated to be between 35  and 45 percent of the full-risk premium (the subsidy rate). Our analysis  did not adjust for potential effects on behavior (such as on program  participation) or changes in operating expenses that could have occurred  had historical rates not been subsidized. In addition, our analysis did not  account for new information provided by FEMA officials that only a portion  of subsidized premiums is available to pay for losses. We plan to analyze  the impact of this new information provided by FEMA in comments on a  draft of this report. We will report the methodology and results of our  estimate separately. FEMA did not report such estimates from 1978  through 2001.
For the period before 2002, we analyzed a prior GAO report, FEMA’s  annual actuarial review, and a PricewaterhouseCoopers study  commissioned by FEMA and present qualitative information about the  cost of subsidies. Additionally, because of the limited historical program  data from FEMA, developing a sufficiently reliable year-by-year or state- by-state estimate of cost to NFIP as a result of remaining subsidized  policies is not possible.
To estimate the total losses incurred by subsidized properties since the  establishment of NFIP and compare these with the total losses incurred  by all structures charged a nonsubsidized premium rate, we analyzed  NFIP claims database as of June 30, 2012, to determine total losses  attributable to remaining subsidized and nonsubsidized policies. Data  were not available before 2002 that would allow us to determine whether  a policy had the characteristics of a remaining subsidized policy. For  years prior to 2002, we estimated the proportion of claims for previously  subsidized policies that were attributable to remaining subsidized policies,  based on the average proportion in the claims data in the latest 10 years.
To determine the premium income collected by NFIP as a result of  subsidized policies, compared with premium income collected from  properties charged a nonsubsidized rate, we analyzed annual NFIP  premium data and data broken out by subsidy to determine the annual  premiums of remaining subsidized and nonsubsidized policies. We  estimated the proportion of previously subsidized premiums attributable to  remaining subsidized policies based on the average proportion in the  latest 10 years of NFIP policy data.
section_title: Options to Reduce the Financial Impact of Remaining Subsidized Properties
paragraphs: To determine the options to reduce the financial impact of remaining  properties with subsidized policies, we analyzed NFIP’s legislative history  and reviewed FEMA documents as well as documents from insurance  industry organizations and academic institutions to gather information on  options to eliminate or reduce the financial impact of subsidized policies  on NFIP. In addition, we interviewed NFIP officials and representatives of  insurance industry organizations and floodplain managers. We also  interviewed a nationally recognized academic knowledgeable about the  financial impact and the public policy challenges associated with  catastrophic events, and discussed previous studies on NFIP and other  relevant studies on flood insurance issues.
For all data sets used we performed data testing and gathered  information from issuing entities about possible data limitations. For the  ACS, Zillow, and NFIP data sets, we interviewed officials on usability and  reliability. We determined that each data set used was sufficiently reliable  for our intended purposes.
We conducted this performance audit from September 2012 to July 2013  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: Comparison of Remaining Subsidized Policies with Nonsubsidized Policies in Special Flood Hazard Areas
paragraphs: We compared various characteristics of the remaining subsidized policies  and nonsubsidized policies in SFHAs in selected counties. In addition, we  conducted more detailed analysis of five counties for illustrative purposes.
subsections: section_title: Selected Counties
paragraphs: For our analysis of the financial characteristics of subsidized and  nonsubsidized policies in SFHAs, we selected 351 counties that  represented 78 percent of all remaining subsidized policies nationwide,  77 percent of all remaining subsidized policies for single-unit primary  residences, and 77 percent of all NFIP policies. We selected all counties  with more than 500 remaining subsidized policies for single-unit primary  residences and the five counties in every state (and Puerto Rico) with the  most remaining subsidized policies, regardless of number. Figure 8  shows the 351 selected counties and the number of remaining subsidized  policies for single-unit primary residences under NFIP.
For both remaining subsidized policies and nonsubsidized policies, a  larger percentage of policies in V zones (coastal areas with a high risk of  flooding) had the maximum coverage amount than policies in A zones  (noncoastal areas with a high risk of flooding) (see fig. 9). Also for both  types of policies, V-zone policies represented a very small fraction of all  policies in SFHAs. For example, 1.6 percent of remaining subsidized  policies and 0.8 percent of nonsubsidized policies in SFHAs were in V  zones.
We analyzed NFIP coverage amounts (for remaining subsidized policies  and nonsubsidized policies in SFHAs for single-unit primary residences)  and county median home values together and determined that higher  coverage amounts were associated with higher county median home  values. Counties with higher median home values had higher  percentages of remaining subsidized policies and nonsubsidized policies  with the NFIP maximum coverage of $250,000 than counties with lower  median home values (see table 7). In addition, counties with lower  median home values generally had higher percentages of remaining  subsidized policies and nonsubsidized policies with lower amounts of  coverage (less than $100,000) than counties with higher median home  values. However, nonsubsidized policies consistently had higher amounts  of coverage. Specifically, in every decile of county median home value, a  larger percentage of nonsubsidized policies had the maximum amount of  NFIP coverage than remaining subsidized policies. Also in every decile of  county median home value, a smaller percentage of nonsubsidized  policies had lower amounts of coverage (less than $100,000) than  remaining subsidized policies.
We analyzed home value and household income indicators together and  found that counties with the highest median household incomes and  highest median home values had higher percentages of remaining  subsidized policies than nonsubsidized policies in SFHAs. For example,  78 of the 351 selected counties were in the highest decile in both median  home value and median household income (see table 8).
About 26 percent of remaining subsidized policies compared with 7  percent of nonsubsidized policies in SFHAs were in these counties (see  table 9). Remaining subsidized policies were also found in higher  percentages than nonsubsidized policies in counties with lower median  income and lower median household counties (lowest 6 deciles).  Counties with higher median household income generally also had higher  median home values, but counties with higher median home values did  not always have higher median incomes.
We performed five case studies to illustrate results in specific counties  (see fig. 10). We selected the counties based on the number of relevant  NFIP policies, location, and reliability of city-level data. Case studies  were chosen to offer a more in-depth, within county view (how things vary  across cities within select counties). We performed the NFIP coverage  and median home value analyses, but also used publicly available real  estate data to examine city-level median home values within the county.  We compared remaining subsidized and nonsubsidized policies in SFHAs  (A and V flood zones are designated as SFHAs).These cases cannot be  projected nationwide, and the results of our analysis from each county are  independent of each other. Some of the results from these case studies  matched our earlier results, and some did not.
Los Angeles County, California; Ocean County, New Jersey; and Cook  County, Illinois; had median home values in the top 10 percent of all  counties. Consistent with our earlier results for counties with the highest  median home values, Cook and Los Angeles Counties had more  remaining subsidized policies than nonsubsidized policies (95 percent  and 71 percent of all policies for Cook County and Los Angeles County,  respectively); however, Ocean County had fewer remaining subsidized  policies (about 44 percent). Los Angeles and Ocean Counties had high  percentages of both subsidized and nonsubsidized policies with  maximum NFIP coverage and a low percentage of both types of policies  at lower levels of coverage. However, Cook County had low percentages  of maximum coverage policies.
Pinellas County, Florida, and Pima County, Arizona had median home  values in the second decile of all counties. Although Pinellas County had  many more policies than Pima County, both had slightly more remaining  subsidized policies than nonsubsidized policies (55 percent and 57  percent of all policies for Pinellas County and Pima County, respectively).  Pinellas County had lower percentages of policies at maximum coverage  than Los Angeles and Ocean Counties but higher percentages than Pima  and Cook Counties.
Consistent with our analysis of NFIP coverage amounts, all five counties  had lower percentages of remaining subsidized policies at maximum  building coverage than nonsubsidized policies. Ocean County had the  largest difference between nonsubsidized policies and remaining  subsidized policies (77 percent versus 47 percent), and Pima County had  the smallest difference (41 percent versus 26 percent). All counties had a  higher percentage of remaining subsidized policies than nonsubsidized  policies with building coverage less than $100,000, but in some counties  the differences were smaller.
The results of our analysis of the city median home value were mixed. In  all counties except Los Angeles County, higher percentages of remaining  subsidized policies than nonsubsidized policies were in cities in the  lowest quartile of median home value, but in Cook and Pinellas Counties  the differences were larger. In Pinellas County 59 percent of the  remaining subsidized policies were in cities in the lowest quartile of  median home value. In the counties with V-zone policies (Los Angeles,  Ocean, and Pinellas) a slightly higher percentage of remaining subsidized  policies were in cities in the highest quartile of median home value than  nonsubsidized policies. In Ocean County more than 30 percent of  remaining subsidized and nonsubsidized policies were in cities in the  highest quartile, while in Pima County, very few policies of either type  were in cities in this quartile. In Los Angeles and Pima counties, most  policies of either type were in cities in the second and third quartiles. In  Cook County policies were not concentrated in any quartile.
Additionally, fewer than 2 percent of policies were in V zones.  Specifically, in the three counties with V-zone policies (Los Angeles,  Ocean, and Pinellas) there were about 1,290 V-zone policies compared  with about 72,000 A-zone policies. In each county, more V-zone policies  were remaining subsidized policies than nonsubsidized policies. In Ocean  and Los Angeles Counties, most V-zone policies of either type were in  cities with median home values in the top quartile within the county. In  Pinellas County the V-zone policies were located in cities in all quartiles  of median home value.
section_title: Appendix III: Comments from the Department of Homeland Security
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jill Naamane and Patrick Ward  (Assistant Directors); William Chatlos; Barb El Osta; Christopher Forys;  Isidro Gomez; Cathy Hurley; Jacquelyn Hamilton; Karen Jarzynka- Hernandez; Courtney LaFountain; May Lee; Barbara Roesmann; Jena  Sinkfield; Melvin Thomas; Frank Todisco; Sonya Vartivarian; and  Monique Williams made key contributions to this report.