Flood Insurance: Options for Addressing the Financial Impact of Subsidized Premium Rates on the National Flood Insurance Program
Published: 2008-11-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Federal Emergency Management Agency (FEMA), the Department of Homeland Security (DHS) agency that administers the National Flood Insurance Program (NFIP), estimates that subsidized properties--those that receive discounted premium rates that do not fully reflect the properties' actual flood risk--experience as much as five times the flood damage as properties that do not qualify for subsidized rates. Almost one in every four residential policies has subsidized rates that are on average 35-40 percent of the full-risk rate. Unprecedented losses from the 2005 hurricane season and NFIP's periodic need to borrow from the Department of the Treasury to pay flood insurance claims has raised concerns about the impact that subsidized premium rates have on the longterm financial solvency of NFIP. GAO designated NFIP as high-risk in March 2006; as of June 2008, NFIP's debt stood at $17.4 billion. This report (1) provides information on NFIP's inventory of subsidized properties and (2) examines NFIP's current approach to subsidized properties and the advantages and disadvantages of options for reducing the costs associated with these properties. To do this work, GAO analyzed data on policies and claims and collected available data about subsidized properties. GAO also reviewed applicable reports and interviewed relevant agency, state, and private sector officials. In its written comments, DHS expounded upon several topics discussed in this report.
section_title: What GAO Found
paragraphs: While it constitutes a declining percentage of all NFIP policies, the number of properties receiving subsidized premium rates has grown since 1985; by 2007 it was at its highest point in almost 30 years. According to FEMA, this growth resulted from several factors, including a growing number of mortgages with mandatory flood insurance purchase requirements and greater enforcement of these requirements, the longer-than-expected life of the structures that are eligible for subsidies, and increased awareness of the dangers of floods from several major recent disasters and increased NFIP marketing efforts. To date, more than half of the subsidized policies are concentrated in five states with relatively high flood risk--California, Florida, Louisiana, New Jersey, and Texas. Current low participation rates--around 50 percent of single-family homes in high-risk areas--leave room for substantial growth in the number of NFIP policies, many of which would be likely to receive subsidized rates. Because of their relatively high loss experience and lower premium rates, the policies receiving subsidized rates have been a financial burden on the program, with total claims exceeding premiums by $962 million over the period from 1986 through 2004, before the large losses from the 2005 hurricanes. Without changes to the program, the number of subsidized properties will likely continue to grow, increasing the potential for future NFIP operating deficits. As Congress evaluates the impact of subsidized premium rates, it is faced with balancing the public policy goals of charging premium rates that fully reflect actual risks, encouraging broad program participation through affordable rates, and limiting costs to taxpayers. While the current program of propertybased subsidies and voluntary mitigation efforts--steps taken to reduce a property's flood risk such as relocation or elevation--encourages broad program participation, it is unlikely to substantially reduce the adverse financial impact of subsidized properties. GAO identified three options for addressing the financial impact of subsidized properties on the NFIP, each with advantages and disadvantages. One option would be to increase mitigation efforts, including making mitigation mandatory. Mitigation could help reduce flood losses, but the increased funding for such efforts could be high. A second option, eliminating or reducing subsidies, could improve NFIP's financial stability by increasing the number of policies that more accurately reflect the risk of flooding. However, the resulting higher premium rates could reduce NFIP participation and could meet resistance from local communities. A third option would be to target subsidies based on financial need, which could help ensure that only those in need receive subsidies, with the rest paying full-risk rates. However, it could be challenging for FEMA to develop and administer such a program in the midst of ongoing management challenges. While the inherent difficulty in determining premium rates adequate to cover potentially volatile and at times catastrophic flood losses means that the potential for the program to incur future operating deficits will always exist, implementing any or a combination of these options could significantly reduce the adverse financial impact of subsidies on NFIP.

section_title: Letter
paragraphs: The Honorable Richard C. Shelby  Ranking Member  Committee on Banking, Housing,    and Urban affairs  United States Senate  In 2007, about 1.2 million—or almost one out of four—residential flood  insurance policies covered by the National Flood Insurance Program  (NFIP) continued to be sold at highly discounted rates that did not fully  reflect the actual risk of flood damage (known as subsidized rates). The  Federal Emergency Management Agency (FEMA), which is the  Department of Homeland Security agency that administers NFIP,  estimates that properties covered by policies with subsidized rates  experience as much as five times more flood damage than compliant new  structures experience that are charged rates that aim to reflect the actual  risk of flooding (full-risk rates). Given that subsidized rates average 35 to  40 percent of what full-risk rates would be on the same properties, these  policies represent a financial drain on the program. Over the years, the  program has had to borrow periodically from the U.S. Treasury. Largely as  a result of claims associated with the 2005 hurricane season, the program’s  outstanding debt stands at $17.4 billion as of June 2008.
The National Flood Insurance Act of 1968 authorized subsidized rates to  encourage participation in NFIP. Specifically, the act authorizes  subsidized rates for many existing properties in high-risk locations known  as Special Flood Hazard Areas (SFHA) that otherwise would have been  charged higher premiums, with the justification that these properties were  built before Flood Insurance Rate Maps (FIRM) became available and the  level of risk was clearly understood. But critics of the subsidies have  argued that subsidized rates should be discontinued for several reasons.  Critics argue, for example, that some of the individuals receiving subsidies  may be able to afford full-risk premiums and that the availability of  subsidized rates may actually create a disincentive for property owners to  mitigate their properties to reduce the risk of flood damage.
In March 2006, we designated NFIP as high-risk, in part because of the  program’s financial condition and inability to repay funds borrowed from  the U.S. Treasury to cover the catastrophic flood losses resulting from the  2005 hurricanes. More recent flooding in the Midwest and from the 2008  hurricane season are likely to reignite persistent questions about the  program’s long-term financial solvency and the impact of subsidized  premiums on its long-term financial health. To address these questions, as  agreed with your staff, this study (1) provides information on NFIP’s  inventory of subsidized properties and their financial impact on the  program and (2) examines NFIP’s current approach to managing its  inventory of subsidized properties and the advantages and disadvantages  of options for reducing or eliminating the financial impact of properties  insured at subsidized rates.
To address these objectives, we analyzed NFIP data on flood insurance  policies, including both subsidized and full-risk premiums and claims. We  assessed the reliability of these data by gathering and analyzing available  information about how the data were created and maintained and  performed electronic tests of required data elements. We determined that  the data were sufficiently reliable for the purposes of this report. We also  analyzed NFIP’s legislative history and examined FEMA’s implementation  of legislative requirements authorizing subsidized rates for certain  properties in high risk locations. In addition, we judgmentally selected and  visited five counties that experienced various types of flooding and had  large numbers of subsidized properties in order to more fully understand  similarities and differences in how NFIP operated at the local level.  During our site visits we met with local floodplain managers, property tax  assessors, building permit officials, civil engineers, real estate agents,  insurance agents, claims adjusters, and other relevant parties. We  interviewed officials from the five FEMA regional offices responsible for  these counties and spoke with representatives from private companies  that collected and sold data on real estate transactions and values, for  marketing purposes. Finally, we spoke with Congressional Budget Office  (CBO) staff about its study of NFIP properties and we analyzed various  other studies on relevant flood insurance issues. Further details about our  scope and methodology are included in appendix I.
We conducted this performance audit from December 2006 to November  2008 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: Flooding is the most widespread natural hazard in the country, affecting  virtually every state. From February 1978 through August 2008, there were  90 significant flood events. Since its inception in 1968, NFIP 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 event. 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. The  authority for subsidized rates was therefore 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, with the intent that the subsidies would be only  a part of an interim solution to long-term adjustments in land use. The first  $35,000 of any subsidized policy for a one-to-four family residential  property, and the first $100,000 of any other residential property, receives  the NFIP subsidy; amounts of insurance in excess of $35,000 and $100,000,  respectively, are charged full-risk rates. On average, the premium for a  subsidized policy in a high-risk flood zone is higher than the premium on a  full-risk policy in the same zone because properties with full-risk rates  have either been built to newer flood-resistant building codes or have been  mitigated to reduce flood risks and thus are generally less flood prone  than properties that are eligible for subsidized rates. For example, the  average annual subsidized premium in 2007 for properties located in the  highest-risk zones was about $880, while the average annual premium for  properties in the same zones paying full-risk rates was about $379.
The program has three components: (1) the provision of flood insurance,  as mentioned above; (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. 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. Currently, more than 20,000 communities participate in NFIP.
FIRMs, which show the level of flood risk in various areas and assign a  flood zone designation to each area based on its risk level, are used to set  premium rates, among other things. The risk levels range from high to  low risk depending on the risk of flooding. Structures used to secure  loans from a federally regulated lending institution that are deemed high- risk or high-risk coastal are required to have flood insurance. For  structures deemed to have moderate to low risk of flooding, the purchase  of flood insurance is voluntary. FIRMs are also used to determine whether  a structure is eligible for rate subsidies. Structures built after a  community’s FIRM was published must be built to NFIP building  standards and pay full-risk rates. Communities also use the maps to  establish minimum building standards designed to reduce the impact of  flooding, and lenders use them to identify which property owners are  required to purchase flood insurance.
Once communities join NFIP and are mapped, structures that were built  before the FIRM—pre-FIRM structures—become eligible for subsidized  rates. Pre-FIRM structures generally are at a high risk of flooding because  they are located below the area’s base flood elevation (BFE), which is the  computed elevation to which floodwater is anticipated to rise during a  flood that is estimated to have a 1 percent chance of occurring annually.  To lessen the flood risk level, pre-FIRM structures can be mitigated. FEMA  recognizes the following steps for mitigating residential pre-FIRM  structures: (1) elevation of structures to or above their BFE, (2) relocation  of structures to a higher area, or (3) demolition of structures. Mitigation of  pre-FIRM properties is voluntary unless a property is substantially  damaged or the owner undertakes substantial improvement. In these  cases, the structure must be repaired or renovated to meet the same  standards as new construction. Unmitigated existing pre-FIRM properties  are eligible for subsidized rates for the life of the properties. As owners  sell their subsidized properties, the new owners also become eligible for  the subsidized rates, and subsidies apply even if the owners discontinue  their insurance coverage and do not purchase insurance again until years  later.
Mitigation activities have always been part of NFIP, but it was not until the  1988 passage of the Robert T. Stafford Disaster Relief and Emergency  Assistance Act that FEMA received the authority to fund mitigation  projects for all types of disasters, including flooding. Later, the National  Flood Insurance Reform Act of 1994 gave FEMA the authority to carry out  a flood-only mitigation assistance program to help policyholders reduce  the risk of flood damage to individual properties. In 2004, the Bunning- Bereuter-Blumenauer Flood Insurance Reform Act of 2004 authorized two  additional grant programs specifically for properties that experienced  repetitive flooding and mandated increased premiums if property owners  refused to mitigate. Each program has different types of requirements,  purposes, and appropriations. FEMA uses a cost-benefit analysis to  determine the cost-effectiveness of proposed mitigation projects and to  rank the projects in order of priority. Policyholders can also buy Increased  Cost of Compliance (ICC) Coverage—a component of the standard flood  insurance policy—which provides up to $30,000 above the insured policy  amount for mitigating flood-damaged properties that meet certain criteria.  Table 1 summarizes the five mitigation programs and ICC.
section_title: The Growing Inventory of Subsidized Properties Has Contributed to NFIP’s Operating Losses
paragraphs: NFIP’s inventory of properties receiving subsidized premium rates has  grown over the past 20 years, hindering the program’s ability to pay claims  without borrowing from the Treasury. While the percentage of policies  receiving subsidies has dropped since 1978 to 23 percent of all policies as  of December 2007, the number of subsidized properties has continued to  increase. In addition, despite earlier expectations that the number of  subsidized properties would decrease over time, for several reasons the  number of policies with subsidized rates is at its highest point since 1980.  Further, because of current low NFIP participation rates, there appears to  be room for substantial growth in the number of NFIP policies, many of  which are likely to receive subsidized premium rates. The properties  receiving subsidized rates have been a financial burden on the program  because of their relatively high loss experience and subsidized rates that  do not reflect the actual risk of flooding. Subsidized properties also  account for the majority of repetitive loss properties—properties that have  experienced multiple flood losses—which make up around 1 percent of  the total policies but 30 percent of the claims dollars paid.
subsections: section_title: The Number of Policies Receiving Subsidized Rates Has Increased due to a Number of Factors
paragraphs: While the percentage of residential subsidized properties has dropped over  time, the number of subsidized properties has fluctuated since NFIP began  but has grown fairly consistently over the last 20 years (see fig. 1).  Specifically, the percentage of residential subsidized policies has dropped  since the early years of the program from 77 percent in 1978 to 23 percent  of all policies as of December 2007. But the number of policies with  subsidized rates is at its highest point since 1978, despite earlier  expectations that the number of subsidized properties would decrease  substantially. According to FEMA, in the early years of the program it used  subsidies to encourage participation in the program, and because of the  high number of pre-FIRM structures, the number of policies with  subsidized rates reached a high of about 1.09 million in 1980.  Subsequently, between 1980 and 1985, aggressive annual rate increases for  subsidized policies corresponded with a reduction in the number of  subsidized policies, which fell to a low of about 705,000 in 1985. However,  the number of policies with subsidized rates has increased nearly every  year since 1986, reaching a high of almost 1.13 million in 2007.
A number of factors help explain this increase. Specifically, according to  FEMA, there has been an increase in the number of mortgages with  mandatory purchase requirements for flood insurance—that is, mortgages  on structures that are located in SFHAs. The Flood Disaster Protection Act of 1973 made flood insurance mandatory for mortgages from federally  regulated lenders on buildings located in SFHAs. These lenders are  required to check the current FIRM to determine whether the structure is  in the SFHA at the time a mortgage is made. FEMA officials also told us  that since the 1973 act, the increase in the number of mortgages subject to the flood insurance requirement, coupled with greater enforcement of this  requirement by financial regulators in recent years, had resulted in an  increased number of flood insurance policies, including policies with  subsidized rates. According to FEMA, many of these mortgages were on  buildings that were constructed before the most recent FIRMs were in  place, making the policies eligible for the subsidized rates. Additionally,  the populations of coastal communities have grown steadily over the last  28 years. These communities have relatively high concentrations of  properties in SFHAs that are required to have flood insurance, including  properties that qualified for subsidized premiums.
Moreover, FEMA said that the longer-than-expected life of structures  eligible for subsidies has made decreasing the subsidized property  inventory more difficult. Some in Congress, at the time NFIP was created,  assumed that buildings would be torn down as they aged and any new  structures, which would have to meet more strict building codes, would be  ineligible for subsidized rates. However, according to FEMA, existing  structures have been demolished at a much lower rate than expected and  reductions in the overall subsidized property inventory have not occurred.  Moreover, some older structures have been renovated and thus may retain  their subsidies. And because subsidized premiums are tied to the property  and not the policyholder, properties have retained their subsidies even as  ownership has changed.
Other factors have also contributed to the increase in the number of  subsidized properties. For example, FEMA told us that SFHA boundaries  have been modified through its map modernization program, resulting in  more properties in SFHAs, and many of these properties are eligible for  subsidized rates. Moreover, FEMA told us that many homeowners  purchased flood insurance after seeing the devastation caused by the  hurricanes of 2005. FEMA officials commented that many homeowners  believed that there was little to no chance that their homes would be  flooded, but that after the 2005 hurricanes, these homeowners had a better  understanding of the reality of their actual flood risk. FEMA noted that a  community’s policy inventory often increases sharply after experiencing a  flood. Another possible reason for the increase is that disaster assistance  for repair or replacement of buildings or manufactured (mobile) homes  and/or personal property in SFHAs can trigger a requirement to purchase  flood insurance. In addition, according to FEMA, the recent increase in its  marketing efforts through its FloodSmart campaign has contributed to the  increase in policies.  This program was designed to educate and inform  partners, stakeholders, property owners, and renters about insuring their  homes and businesses against flood damage. In 2004, the year in which  FloodSmart was implemented, NFIP had 1.05 million policies with  subsidized rates. By 2007, this number had increased 8 percent to almost  1.13 million. However, for the reasons discussed earlier, proving a causal  relationship is difficult. According to FEMA officials, most populated  floodplains participate in NFIP, but communities are still joining. For  example from 1978 to 2007, the number of communities participating in  NFIP has steadily increased from 15,999 to 20,474. Additionally, FEMA  expects as many as 300 new communities to join NFIP in fiscal year 2008,  and by the end of the first quarter, 141 communities had already joined.
As of December 31, 2007, NFIP included almost 5.3 million active flood  insurance policies on residential properties, nearly 23 percent (1.19  million) of which were charged subsidized premiums. Figure 2 details the  number of total residential NFIP policies in each state, as well as the  number of those policies that received subsidized premium rates.  Approximately 70 percent (3.69 million) of the total policies were  concentrated in five states: California, Florida, Louisiana, New Jersey, and  Texas. Furthermore, 57 percent (673,964) of the almost 1.2 million  residential policies with subsidized premiums were located in the same  five states. Because of the high number of policies, these states have  historically accounted for the majority of claims losses paid out as well as  premium dollars received by the program. According to FEMA data, these  states accounted for 59 percent of claims losses from 1978 to 2004 and 67  percent of premium dollars. Taking the 2005 hurricanes into account, the  same numbers for 1978 to 2007 changed to 70 percent of claims losses and  66 percent of premium dollars.
section_title: Low Market Penetration Leaves Room for Growth in Policies with Subsidized Premium Rates
paragraphs: Low market penetration for NFIP flood insurance policies, particularly in  some areas, leaves room for growth in the number of flood insurance  policies as FEMA continues to encourage participation in NFIP through  FloodSmart. According to a 2006 RAND study commissioned by FEMA,  there were approximately 3.6 million single-family homes in SFHAs  nationwide, half of which had no flood insurance. The study also found  that while about a third of NFIP’s policies were for homes outside of  SHFAs, NFIP’s market penetration rate for such properties was only about  1 percent. Another indicator of the potential for growth is that, according  to FEMA data, approximately 2,000 communities do not participate in  NFIP, and of the 20,400 that do participate, approximately 3,500 had no  NFIP policies and 1,700 others each had only one policy.
FEMA is aware of the low market penetration rates and has been making  efforts to increase the number of flood insurance policies, largely through  its FloodSmart campaign. To aid in this effort, FEMA recently purchased  more detailed market penetration data, which could allow FEMA to target  areas with particularly low participation in NFIP. While these data are not  yet finalized, initial calculations suggest that the actual market penetration  rate for SFHA structures could be even lower than what the RAND study  estimated. For example, some areas of the Midwest and Northeast appear  to have considerably lower policy volumes than other areas of the country,  based on their flood declarations, cumulative flood claims payments, and  population. (See app. II for a more detailed analysis of market  penetration.) Similarly, the RAND study found that the Midwest and  Northeast had a much lower market penetration than other regions of the  United States.
While it is uncertain what percentage of any new policies might be eligible  to receive subsidized rates, FEMA officials said that any increase would  largely depend on the location of future program participants. Because  older structures are more likely to be pre-FIRM, areas of the country with  older structures, such as the Midwest, are more likely to have a higher  percentage of potentially subsidized properties. The lower market  penetration in the Midwest, combined with flood risk awareness resulting  from the recent Midwest floods as well as the FloodSmart campaign, could  increase participation in NFIP, resulting in a higher proportion of  subsidized rates than the current 23 percent. On the other hand, FEMA  said that areas of the country with newer structures, such as the Gulf  Coast, are likely to have a lower percentage of subsidized policies. Most  recent policy growth has been in these regions, so if this trend continues,  future additional policies could have a lower proportion of subsidized  rates.
section_title: Subsidized Properties Have Contributed to NFIP’s Historical Operating Deficits and Account for the Majority of Repetitive Loss Properties
paragraphs: The large number of subsidized properties has contributed to NFIP’s  historical operating losses through its relatively high loss experience and  rates that do not reflect the actual risk of flooding. Therefore, despite the  increase in policies with full-risk rates relative to policies with subsidized  rates, policies with subsidized rates have continued to be a drain on the  program’s overall financial condition. For example, while there have been  fewer policies with subsidized rates than policies with full-risk rates in  every year since 1982, subsidized properties have accounted for more  claims payments than properties paying full-risk premium rates in all but 5  of those years. As previously mentioned, subsidized premiums average  about 35 to 40 percent of the premium that would fully reflect the  associated risk of loss. As a result, NFIP has not collected enough in  premiums to cover the claims that FEMA estimates will be made on these  properties in an average year. From 1986 to 2004, policies receiving  subsidized rates resulted in a $962 million operating deficit. This deficit  occurred despite the fact that in 1986, among other things, FEMA finished  a series of aggressive rate increases on subsidized properties to ensure  that the premiums collected better reflected expected losses. However, in  2005, Hurricanes Katrina, Rita, and Wilma resulted in claims losses that far  exceeded those in previous years. As a result of these Gulf Coast  hurricanes, FEMA had to borrow $17.5 billion to pay NFIP claims.  Moreover, in 2008, FEMA had to borrow additional funds from the  Treasury to pay its interest payment on its outstanding debt to the  Treasury. Prior to 2005, policies with subsidized rates accounted for 58  percent of claims dollars paid, but because of the extraordinary nature of  the 2005 hurricanes, including that many losses occurred on properties  that were located in moderate- to low-risk areas, properties with both  subsidized and full-risk rated policies experienced significant losses. Of  the total losses from the 2005 hurricanes, 29 percent were from claims  paid on subsidized properties, while 71 percent were from full-risk  policies. However, the operating deficit for subsidized policies increased  substantially, to $6.3 billion.
Properties with repetitive losses, the majority of which receive subsidized  premium rates, have also contributed to NFIP’s operating deficit. As  previously reported, these properties account for about 1 percent of all  policies but are estimated to account for up to 30 percent of all NFIP  losses. As of March 2008, there were 126,351 repetitive loss properties,  just over 60 percent of which had subsidized rates. Although not all  repetitive loss properties are part of the subsidized property inventory,  given that a high proportion of these properties receive subsidized rates,  their propensity for flood losses contributes to the financial risks faced by  NFIP. While Congress has made efforts to target these properties, the  number of subsidized properties that are also repetitive loss properties has  continued to grow, making them an ongoing challenge to the financial  stability of the program.
section_title: Several Options Exist for Addressing the Financial Impact of Subsidized Properties on NFIP, but Each Option Involves Trade-offs
paragraphs: Because of the financial condition of NFIP and mounting losses, the  negative financial impact that subsidized premium rates have on the  program continues to be an area warranting ongoing attention, as we  pointed out when placing NFIP on the high-risk list in 2006. As Congress  continues to evaluate the appropriate role of the federal government in  insuring natural catastrophes in light of recent events in the Gulf Coast  region, evaluating whether to maintain the current system of NFIP  subsidies or make changes has been an ongoing part of the debate, as  evidenced by various bills that have been introduced in Congress.  However, balancing the public policy goals of charging premium rates that  fully reflect actual risks, encouraging broad participation in natural  catastrophe insurance programs by maintaining affordable rates, and  limiting taxpayer costs before and after a disaster will be an ongoing  challenge. While the current system of subsidies and voluntary mitigation  might promote broad program participation, it does create some exposure  for taxpayers and allows rates that do not reflect actual risks. We discuss  three broad public policy options for addressing the financial impact of  subsidized properties on the financial solvency of NFIP:    eliminate or reduce use of subsidies, and   target use of subsidies based on the financial need of the property owner.
Each of the options has both advantages and disadvantages in terms of  how it affects the program’s public policy goals.
subsections: section_title: The Current System of Subsidies and Limited Mitigation Does Little to Address the Long-Term Financial Instability of NFIP
paragraphs: Subsidizing premiums can encourage participation in NFIP, especially  among those who might not be able to afford premium rates that fully  reflect the actual risk of flooding. Some proponents believe that charging  actuarial risk rates could result in some property owners not buying any  flood insurance and NFIP receiving less in total premiums than it would if  it allowed subsidized rates. The proponents also assert that continuing the  subsidies is also preferable to charging full-risk rates, because while  subsidized rates do not cover the actual risk of loss, they at least offset a  portion of the cost of providing postdisaster assistance to property owners  who might otherwise have no flood insurance and pay no premiums.
One disadvantage of the current approach is that those who receive  subsidies are not paying premium rates that reflect the full risk of loss  from flooding. As noted previously, not charging full-risk rates contributes  to FEMA’s challenges in maintaining the financial stability of NFIP. In  addition, charging less than full-risk rates can send incorrect signals to  property owners about the risks associated with living in certain areas and  reduce incentives to undertake mitigation efforts because subsidized rates  may distort a property owners view about the financial benefits of  mitigation. Further, policies with subsidized rates could result in higher  financial losses for NFIP than policies with full-risk rates.
Another disadvantage of the current approach is that although FEMA has  stated that it is generally cost-beneficial to mitigate properties, depending  on the properties’ flooding history and expected future losses, among  others, it faces several limitations in attempting to reduce the number of  properties receiving subsidized premium rates, including those properties  that have the greatest negative financial impact on NFIP. To begin with,  mitigation is generally voluntary, except when there has been substantial  damage to the insured structure, and participating communities interested  in NFIP mitigation funding are required to compete for available funding  through one of the available mitigation programs. In addition, even when  funds are made available to a community and property owners are  interested in mitigating their properties, the property owners may still  have to pay a portion of the mitigation expenses, a fact that could  discourage mitigation among those unable or unwilling to contribute to  the cost of mitigation. For example, local officials and real estate agents in  Sonoma County, California, told us that ICC was the primary financial tool  used by flooded homeowners to elevate their homes, but because ICC  limits mitigation assistance to $30,000 and the cost of elevating a house in  Sonoma County typically is more than twice that, some residents were not  able to cover the additional cost and therefore could not take advantage of  ICC funds.
In addition, although FEMA has provided communities with information  on which properties have had the most severe repetitive flood losses,  current mitigation efforts in participating communities are not necessarily  targeted at properties receiving subsidized premium rates that have  flooded repeatedly. States and local communities determine their  priorities, and some communities, therefore, may focus their mitigation  efforts on activities that benefit more than one property, such as regrading  the land to control the flow of water and building retaining ponds.
Finally, although mitigation is mandatory when a property has been  substantially damaged or renovated, mitigation may not always occur. If  the cost of repairing a pre-FIRM structure to its condition before the  damage occurred is equal to or greater than 50 percent of that structure’s  market value before the damage, NFIP requires that the structure be  mitigated. However, participating communities, not FEMA, are responsible  for enforcing compliance with NFIP regulations and building codes,  although FEMA can suspend a community that is not in compliance with  NFIP. According to some local stakeholders, not all communities enforce  or are able to enforce compliance. For example, local officials in Harris  County, Texas, identified one pre-FIRM property owner in the county who  has refused the county’s offers to buy his property despite repeated  offers. According to the county tax office, that property had a market  value of $153,330 in 2007. According to NFIP data, that policyholder had  collected over $975,000 in 15 flood claim payments from 1979 through 2006  for structural damage, ranging from over $3,000 to $185,000 per payment.
In spite of these limitations, existing mitigation efforts have resulted in the  reduced risk of loss for a number of properties. However, the number of  properties mitigated is small compared with the total number of properties  receiving subsidized rates. As shown in table 2, nearly 30,000 properties  have been mitigated with FEMA funds since fiscal year 1997. However, the  number of policies with subsidized rates still increased during that same  period from 1.03 million in 1997 to almost 1.13 million in 2007. FEMA  officials have acknowledged that mitigating properties can be difficult, at  least in part due to the cost, time, and resources required. According to  FEMA, the current average cost to mitigate a residential property ranges  from $143,000 for elevating a property to $176,000 for acquiring a property.
After the passage of the Bunning-Bereuter-Blumenauer Flood Insurance  Reform Act of 2004, FEMA officials made mitigating repetitive loss  properties a priority, especially those with severe repetitive losses. FEMA  has identified approximately 7,000 properties as having had experienced  severe repetitive losses. Over 1,400 properties of these severe repetitive  loss properties have received cumulative claims payments ranging from  $200,000 to over several million dollars per property. Although each  property must be subject to an individual cost-benefit determination to  reflect its unique characteristics and expected future losses, because these  aggregate payments were above the average mitigation costs, mitigation  may be cost-effective for many of them if similar losses were expected in  the future. However, FEMA officials told us that they did not anticipate  being able to totally eliminate severe repetitive loss properties given the  current funding level for the Severe Repetitive Loss Pilot Program of $160  million for fiscal years 2006 through 2008, and uncertainty over ongoing  appropriations for this program.
section_title: Options Exist That Could Help Reduce the Number of Subsidized Properties and Their Financial Impact on NFIP
paragraphs: Reducing the financial impact of subsidized properties on NFIP would  generally involve either reducing the number of properties receiving  subsidized premium rates, reducing the losses associated with these  properties, reducing the amount of the subsidy, or some combination of  these approaches. Whether maintaining the current program or making  changes to NFIP subsidies, Congress will be faced with balancing often- competing public policy goals, which include charging premium rates that  more fully reflect actual flood risks and help better ensure NFIP solvency,  encouraging broad participation in natural catastrophe insurance  programs by offering affordable rates, and limiting taxpayer costs before  and after a disaster. We discuss three broad options that could help  address NFIP’s financial situation: (1) increase mitigation efforts, (2)  eliminate or reduce use of subsidies, and (3) target use of subsidies on the  financial need of property owners. Each of the three options has both  advantages and disadvantages in terms of its effect on these public policy  goals, which we highlight in table 4. We also note that the options are not  mutually exclusive and may be used in conjunction with others, and that  how an option is implemented can affect its advantages and  disadvantages.
One option to address the financial impact of subsidized premium rates on  NFIP would be to substantially expand flood mitigation efforts, including  targeting those properties that have been most costly to the program. This  option would substantially expand the requirements of the Bunning- Bereuter-Blumenauer Flood Insurance Reform Act of 2004, which  mandated mitigation for insured properties that have received four or  more flood claims payments totaling more than $20,000 or two claims  payments whose total exceeds the value of the property and created the  Severe Repetitive Loss Pilot Program to help carry out such mitigation.  This option would have a more restrictive criterion, which could increase  the number of subsidized properties for which mitigation is required.  Mitigation could be required for all insured properties that have filed two  or more flood claims, irrespective of claims total; subsidies could be  eliminated for property owners who refuse or do not respond to a  mitigation offer; or some combination of these approaches. This option  would require increased funding for mitigation purposes.
This option has several advantages. First, it could reduce flood losses by  ensuring that more homes were better protected from flooding through  mitigation, whether it was through elevation, relocation, or demolition.  Because many repetitive loss properties have subsidized premiums—that  is, rates that do not reflect their actual risk of flooding—increased  mitigation could reduce the claims payments the program makes on these  properties and could ultimately reduce taxpayer exposure in the long  term. As the congressional findings in the Bunning-Bereuter-Blumenauer  Flood Insurance Reform Act of 2004 noted, and as FEMA officials  concurred, mitigating repetitive loss properties through buyouts,  elevations, relocation, flood-proofing, or regrading and other engineering  projects would produce savings for policyholders and for federal  taxpayers through reduced flood insurance losses and federal disaster  assistance. Second, denying subsidies to those who refuse or do not  respond to mitigation offers could increase the number of property  owners paying full-risk rates and encourage mitigation. Third, FEMA could  build upon its existing mitigation programs and thus continue targeting  those properties that have been most costly in terms of claims paid while  maintaining current subsidy rates. As we have noted, subsidies have been  used to encourage participation in the program. Local officials generally  support increased mitigation efforts. Reducing flood risk generally  increases property values and, as a consequence, the local tax base. And  as we have seen, participation from local communities is critical for  successful mitigation efforts.
However, there are several disadvantages associated with this option.  First, because subsidized rates do not reflect a property’s actual flood risk,  subsidized property owners might not be motivated to undertake  mitigation efforts that would reduce the risk of flood and their premium  rate. Second, substantially increasing mitigation efforts would be costly  and would require increased funding for FEMA’s mitigation programs. As  stated earlier, about 1.2 million policies received subsidized rates in 2007,  including approximately 7,000 severe repetitive loss properties. FEMA  estimates that the average mitigation cost would range from about  $143,000 to about $176,000 per residential property. Buyouts and  relocations would be more costly in areas of the country with relatively  expensive real estate. Applying FEMA’s mitigation cost range per property  to the number of severe repetitive loss properties results in an estimated  cost range of approximately $1 billion to approximately $1.2 billion.  Applying the same calculation to the rest of the repetitive loss properties  would add over $17 billion to over $22 billion to the estimate. However,  mitigation costs would have to be weighed against the possible savings  from a decrease in flood damage that would result from mitigation.
Third, the mitigation process is often lengthy, and mitigating a large  number of properties could take a number of years to complete, and until  then, subsidized premium rates would continue to negatively affect the  program’s financial health. Fourth, FEMA’s reliance on local communities  to undertake and enforce mitigation activities could limit the effectiveness  of these efforts. Despite being a national program, NFIP relies on state and  local communities to ensure the program’s implementation and success.  While local communities recognize the importance of mitigation, not all  communities have the staff or resources to fully carry out current  mitigation efforts, meet the cost-sharing requirement (generally 25 percent  of the eligible project costs, which either the community or the property  owner could provide) that four of the five mitigation programs require,  and enforce noncompliance requirements. Some communities, in fact,  require the homeowner to provide the cost-sharing requirement.  Moreover, it is the responsibility of the local floodplain management  agencies to enforce compliance with the ordinances by, for example,  ensuring that property owners undertake proper mitigation efforts and by  issuing appropriate work permits for the damaged property. Some  communities may not have sufficient resources for expanded efforts in  these areas. 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.
subsections: section_title: Eliminating or Reducing Subsidies Would Ensure That Rates Better Reflect Actual Risk but Could Reduce Participation
paragraphs: A second option—eliminating or reducing the subsidies—would meet the  public policy goals of charging premium rates that more fully reflect actual  risks. Because FEMA would be able to charge more policyholders  premium rates that more closely represent actual flood risk, the premiums  collected would more closely reflect the losses that the agency expected  to incur, contributing to the financial health of NFIP. One way to  implement a reduction of the subsidies is to base the rate on the number  and amounts of flood claims per property. In other words, if a property has  a certain number of claims, the subsidy would be rerated and the  policyholder could be required to pay a higher premium. Another way is to  eliminate subsidies for certain categories of subsidized properties, such as  nonprimary residences (vacation homes or rental properties) or to limit  subsidies to existing property owners.
Another advantage to eliminating or reducing subsidies is that the  resulting higher premium rates could motivate property owners to  undertake mitigation efforts in order to reduce those premium rates. More  mitigation could, in turn, result in less flood damage, lower losses for  NFIP, and potentially lower taxpayer exposure. Moreover, by paying the  rate that more closely reflects the actual risk of flooding, property owners  who previously had paid subsidized premiums would better understand  the actual costs and risks associated with living in certain areas.
However, this option has at least two disadvantages. First, while many  current NFIP policyholders are required by their lenders to maintain those  policies, the elimination of subsidies, according to various stakeholders  and a 1999 study commissioned by FEMA, would on average more than  double these policyholders’ premium rates and may result in reduced  participation in NFIP over time as people either dropped their policies or  were priced out of the market. Even reducing subsidies could increase the  financial burden on some existing policyholders—particularly low-income  policyholders—and could cause some of them to leave the program. As a  result, if owners of pre-FIRM structures, which suffer the greatest flood  loss, cancel their insurance policies, the federal government—and  ultimately taxpayers—could likely face increased costs in the form of  FEMA disaster assistance grants and low-interest disaster loans from the  Small Business Administration (SBA) in future floods. To the extent that  higher premium rates would lead some property owners to decide not to  purchase flood insurance, those property owners would not be eligible for  NFIP mitigation assistance, reducing the likelihood that they would  undertake mitigation efforts to reduce their flood risk. Furthermore,  some FEMA officials said that a lack of subsidies could cause  communities to drop out of NFIP. These communities would no longer be  eligible for federal mitigation assistance or be subject to mandatory  purchase requirements. Moreover, they would not have to comply with  NFIP floodplain management standards and building codes, raising the  possibility that residents would construct properties that had a high risk of  being damaged by a flood.
Second, we found that some communities might resist the elimination or  reduction of subsidies because of the potential effect on residents. For  example, some officials in one Texas community with a large rental  population and low-income residents said that eliminating or reducing the  subsidy would negatively affect their residents. Premium rate increases on  rental properties likely would be passed to the tenants, some of whom are  low-income tenants, thus creating a potential hardship. Officials in an Ohio  community we visited said that many businesses would be unable to  afford full-risk premiums, which would have a negative effect on their  economy.
section_title: Need-Based Subsidies Could Ensure That More Policyholders Paid Full-Risk Rates but Could Create Implementation Challenges
paragraphs: A third option would be to target premium rate subsidies to those  policyholders who had the greatest financial need based on a means-based  test. As currently structured, the subsidy is tied to the property, not the  property owner, and any pre-FIRM property located in an SFHA in a  participating community is eligible for a subsidy. And as mentioned  previously, when a pre-FIRM property is sold, the new owner is also  eligible for the subsidy. Additionally, the program does not take into  account any characteristics of the owner, such as income level, or  consider how the property is used—for example, as a residence, vacation  home, or rental. FEMA does currently offer a temporary subsidized  premium rate based on the financial need of the property owner through  its Group Flood Insurance Policy (GFIP) program. Under that program,  property owners in federally declared disaster areas apply to state based  Individual and Family Grant (IFG) programs and, if accepted based on  their financial need, are eligible to receive a flat premium rate of $200 per  year for three years. After the three year period the rates would be  adjusted to the appropriate rate for that location and property.
This needs-based option would remove the subsidy from the property and  instead attach it to the policyholder on the basis of need as determined by  specified financial requirements and eligibility criteria. Means-tested  programs are not new to the federal government. Over the years, Congress  has established about 80 separate programs to provide cash and noncash  assistance to low-income individuals and families. Such programs provide  a means of delivering assistance to those in need, and we have made  recommendations to simplify the process for determining financial  eligibility for various programs.
Depending on how the option was implemented, a potential advantage to  this option would be that more policyholders would have to pay the full- risk rate and that those eligible for the subsidy would be made aware of  the full-risk rate before applying for the subsidy. As a result, more  policyholders would be aware that they were receiving subsidies and  would better understand the actual costs and risks associated with living  in certain areas. In addition, because some policyholders would no longer  be receiving a subsidy, FEMA would be collecting more in premiums.  Increased premium collection would improve NFIP’s ability to make  claims payments, reduce its need to borrow from the U.S. Treasury, and  potentially limit taxpayer exposure. Further, because the only  policyholders who would lose their subsidies generally would be those  who were deemed able to afford full-risk rates, to the extent that higher  rates would negatively affect the program, potentially fewer property  owners may drop their insurance as compared with other nontargeted  options for reducing subsidies. The program would benefit those in  greatest financial need. Finally, charging higher rates that more accurately  reflect the risk of flooding may motivate policyholders to undertake  mitigation to reduce their premium rates.
However, this option has several disadvantages. Eliminating subsidies and  requiring those who are deemed able to afford them to pay full-risk rates  could cause some property owners to stop buying flood insurance. Even  though a means-based test might determine that some property owners did  not qualify for subsidies, the higher cost of the full-risk rate premiums  could lead some to decide not to purchase coverage and instead rely on  federal disaster assistance, which generally requires that they purchase  flood insurance as a condition of the assistance. In addition, requiring  property owners to go through an application process to receive  subsidized premium rates, rather than receiving them on the basis of their  property’s characteristics, could discourage some property owners with  limited resources and in greatest need of coverage from applying for the  subsidy.
This option also would involve certain implementation challenges in the  midst of other ongoing management challenges for NFIP. To implement  this option, FEMA first would need to determine how to design the  program and determine how to conduct the means test. Depending on how  the program was designed, FEMA might need to collect or purchase data  on income and wealth of property owners to help determine eligibility  benchmarks. In addition, FEMA would need to devote resources, including  staff, to developing, implementing, and monitoring the means test  program. For example, FEMA would need to develop eligibility  benchmarks and a process for applying for and awarding subsidies. The  agency would need to determine who would conduct the tests and certify  the results—that is, whether FEMA, state and community officials, the  Write-Your-Own insurance companies that currently serve as the delivery  system for NFIP, or some other entity would perform these activities.  FEMA also would need to establish an oversight mechanism to ensure that  the program was operating as intended. Finally, FEMA would have to  ensure that costs of the subsidies and the costs associated with  administering means-based testing did not result in costs that were larger  than the current subsidies. FEMA could use existing programs in other  agencies to formulate a template for means testing in order to make  implementation easier.
Moreover, addressing these challenges could be difficult for the agency,  which is already in the process of addressing management and oversight  challenges. As we have previously reported, FEMA faces challenges in  providing oversight of its contractors, state and local partners, and Write- Your-Own insurance companies, as well as overseeing claims adjustments  and its map modernization program. New management challenges  created by implementing a means-based test could make addressing these  existing challenges more difficult and may require additional staff.
While any of these options—or a combination of them—could help reduce  the adverse impact of subsidies on the financial health of NFIP, the  potential would still exist for claims to exceed losses in any given year. As  we have seen in 2008, flood losses are volatile and highly unpredictable,  and estimating future losses and determining premium rates adequate to  cover those losses is an inherently difficult process. In addition, even if  subsidized rates were eliminated, the potential for catastrophic losses  could still result in NFIP needing to borrow from the Treasury to pay  losses. Absent a change in the NFIP’s use of subsidized premium rates,  however, the subsidies will continue to hinder the financial stability of the  program, and the potential further increases in the number of properties  receiving subsidies could make the situation worse. Therefore,  implementing any or a combination of these options could significantly  reduce the adverse financial impact of subsidies on NFIP.
section_title: Agency Comment and Our Evaluation
paragraphs: We provided a draft of this report to the Department of Homeland Security  (DHS) for comment. It provided written comments that are reprinted in  appendix III. In its written comments, DHS expounded upon several topics  discussed in the report. First, DHS noted that it is aware of the financial  impact of subsidized and repetitive loss properties on the NFIP, and stated  that while it has proposed a number of initiatives through the years, most  of these were not welcomed by stakeholders. Second, DHS noted that  amendments to current statutes and rules would be needed if FEMA were  to require mitigation via a grant program beyond the substantial damage  provision that currently is the only provision that triggers mandatory  mitigation. We recognize that some aspects of the options discussed in this  report would require legislative changes. However, we would encourage  FEMA to continue to pursue actions to address the financial drain on NFIP  brought about by subsidized premium rates, such as the planned 2009  increase in the standard deductible for subsidized policyholders as  mentioned in its comments. Third, DHS recognized that a needs-based  subsidy could be beneficial, but it recommended that the burden of  making needs-based determinations be placed on someone other than the  insurance agent and that a discussion be held on how the costs of  discounted premiums would be borne. We noted in the report that a needs- based program could be implemented in a number of ways, and agree that  careful study would have to be done before implementing such a program.  DHS also described a current program where some participants receive  subsidized premium rates based on their short-term financial need, with  the needs determination performed by a third party. We have added a  discussion of this program to the report and note that this may provide  useful insights to a broader-based approach. DHS also provided technical  comments, which we have incorporated as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution of this report until 30  days from the report date. At that time, we will provide copies to the  Chairman, Senate Committee on Banking, Housing, and Urban Affairs; the  Chairman and Ranking Member of the Senate Committee on Homeland  Security and Governmental Affairs; the Chairman and Ranking Member of  the House Committee on Financial Services; the Chairman and Ranking  Member of the House Committee on Homeland Security; and other  interested committees. We are also sending a copy of this report to the  Secretary of Homeland Security and other interested parties. In addition,  the report will available at no charge on our Web site at  http://www.gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.
If you or your staff has any questions about this report, please contact me  at (202) 512-8678 or williamso@gao.gov. GAO contact and staff  acknowledgments are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To provide information on the National Flood Insurance Program’s (NFIP)  inventory of subsidized properties in terms of size, location, and financial  impact on NFIP, we obtained data on policies, claims, and repetitive losses  from the Federal Emergency Management Agency’s (FEMA) private  contractor, Computer Sciences Corporation, that maintains various NFIP  databases. We obtained data pertaining to NFIP and NFIP subsidized and  full-risk policies from 1978 through June 2008, including information on  policies, premiums, and claims. We used these data to analyze the size,  growth, costs, geographic distribution, and market penetration of the  subsidized inventory and total inventory nationwide and for states and  counties. We also reviewed relevant FEMA reports and analysis on these  factors. We assessed the reliability of FEMA’s policy and claims data by  (1) reviewing existing information about the data and the system that  produced them, (2) interviewing agency officials knowledgeable about the  data, and (3) performing electronic testing of required data elements. We  determined that the data were sufficiently reliable for the purposes of this  report.
Originally, we planned to construct a comprehensive nationwide profile of  subsidized properties and policyholders by merging vendor data  containing market values of subsidized properties and income data of  owners with NFIP policy and claims data. To do this, we met with private  vendors that, for marketing purposes, collect and sell nationwide statistics  on real estate market values and transactions and household incomes.  Specifically, we explored ways to develop nationwide comparisons of  subsidized and full-risk properties—for example, comparing market values  and household income—within and across geographic areas. However, we  were unable to identify data sources that would enable us to pull  statistically valid samples of subsidized properties and policyholders  nationwide that could be projected to the entire inventory of subsidized  and full-risk properties. While we were able to identify sources that had  nationwide data, the vendors we contacted lacked data on real estate  values in certain areas of the country. The omitted areas not only included  rural areas, but also some areas with large populations, such as parts of  Louisiana and Texas—both of which have large numbers of subsidized  properties. We also determined that matching individual property  addresses maintained on an NFIP database and a vendor database would  create inconsistencies that would prohibit a valid nationwide sample,  thereby preventing us from extrapolating any results nationwide. In 2007,  the Congressional Budget Office (CBO) attempted to produce a similar  nationwide profile by merging vendor and NFIP data, but its match rates  for addresses between databases were too low and thus the results from  its study were limited to the properties that they were able to match and  could not be generalized nationally. We spoke with CBO officials regarding  their study.
As an alternative to the national profile, we planned to construct profiles  for the five counties that we judgmentally selected for site visits (our  methodology and purpose for the site visits are discussed below). This  alternative effort involved matching NFIP data on individual properties  with county tax records, local real estate listings, and other local sources  that might have data on those properties. However, we determined that  this approach also would not produce match rates high enough to produce  countywide profiles for three of the five counties, and data from the two  remaining counties were not usable for our purposes. For example, we  found that conventions for mailing addresses varied considerably across  the five counties and differed from the NFIP data. While counties and  NFIP use U.S. Postal Service’s address standardization format, NFIP also  permits descriptive addresses, such as “Third Cabin on Beulah Lake,” “N  Side of Shell Belt Rd,” and “5 Houses From Johnson’s Seafood,” which  made address matching difficult. In addition, we found certain data not to  be useful for our purposes. For example, local property tax records did  not maintain comparable market values of properties. In one county we  found that tax records contained last sale information that, for many  properties, could be several years old if the properties were not sold  annually, and did not reflect current market values of those properties. In  another county, tax records did not have information on selling prices of  properties because state law prohibited public disclosure of this  information. Thus we decided not to pursue this alternative effort.
Finally, to satisfy the objective, we selected and visited a judgmental  sample of five counties across the country (Sonoma County, California;  Pinellas County, Florida; Jefferson County, Missouri; Washington County,  Ohio; and Harris County, Texas). Our purpose was to obtain available  information on the characteristics of subsidized properties in these  counties (such as types of structures, flooding history, and market values)  and characteristics of their policyholders (such as income and perceived  benefits obtained from subsidized rates). We also sought to understand  similarities and differences in how NFIP is implemented within each  locality. We selected counties with NFIP communities that had completed  NFIP’s map modernization in order to have timely data to help construct  profiles of properties in these counties. We selected a mix of coastal and  inland counties in order to capture coastal and riverine types of flooding.  We selected from counties that had large numbers or percentages of  subsidized properties, large numbers of repetitive loss properties, and  large cumulative historical dollars of claims losses paid in order to capture  areas likely to have had meaningful, if not extensive, experience dealing  with flooding and NFIP. During our visits to the five counties, we met with  local floodplain managers, property tax appraisers and assessors, building  permit officials, civil engineers, real estate agents, flood insurance agents,  flood claims adjusters, and other relevant parties. We discussed local  flooding history, flood plain management, building standards, flood claims  adjusting, and real estate values and taxes as they pertained to  implementation of NFIP generally, and NFIP subsidized properties in  particular. We also spoke with officials from the five FEMA regional  offices responsible for these counties. Tables 5 through 7 compare the five  counties using a number of factors. While these five counties are not a  complete representation of the entire body of NFIP communities, their  diversity across multiple factors contributed to our understanding of the  administration of NFIP at the local level.
Table 5 compares the five counties by population, area, population  density, housing density, household income and housing values and shows  the ranges in these factors across the counties, as well as the types of  flooding and the percentages of land area in the floodplain.
Table 6 shows policies in force and cumulative claims paid broken down  by subsidized and total and the percentages for subsidized for the five  counties. In each of the five counties, cumulative claims paid on  subsidized policies were a higher percentage of cumulative total claims  paid than were subsidized policies in force as a percentage of total policies  in force.
Table 7 compares repetitive loss properties across the five counties using  the number of repetitive loss properties still insured versus the number of  repetitive loss properties no longer insured, and the number and dollars of  loss payments for these groups.
To evaluate NFIP’s existing structure and identify and evaluate options for  reducing or eliminating the costs of properties insured at subsidized  premium rates and the advantages and disadvantages of these options, we  analyzed NFIP’s legislative history, which described the objectives of NFIP  overall and NFIP subsidies in particular, and original expectations about  the subsidized inventory. We also reviewed more recent legislation,  including the Robert T. Stafford Disaster Assistance and Emergency Relief  Act and the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of  2004, which established the Severe Repetitive Loss Pilot Program. We  discussed nationwide mitigation strategies and related efforts and costs  for repetitive loss properties, including severe repetitive loss properties  with FEMA officials. In our visits with local entities in the five counties as  noted above, we also obtained available information on resources,  expenditures, and costs of individual mitigation efforts. We also discussed  these issues with FEMA regional offices responsible for the five counties.
Finally, we analyzed FEMA’s statistics on repetitive loss properties  including cumulative historical claims costs and the number of these  properties mitigated in the five counties we visited and nationwide. We  also analyzed relevant information in various other studies, including two  of our studies discussing public policy goals for federal involvement in  catastrophe insurance.
We conducted our work between December 2006 and November 2008 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: Some Areas of the Country That Appear to Have a Potential for an Increase in the Number of NFIP Policies
paragraphs: Recent flooding, especially in the Midwest in 2008, highlights the  devastation that can be caused from flooding. This appendix provides  examples of areas of the country that appear to have higher populations  and flooding risks relative to their policy volumes when compared to other  areas, and thus have the potential for increases in the number of NFIP  policies. As we noted in the report, an increase in market penetration  would also likely bring an increase in the number of subsidized policies.  We identified the examples by comparing the number of NFIP policies in a  given area, as of September 2006, with the total number of county flood  declarations from January 1980 to June 2008, cumulative flood claims  payments from January 1978 to April 2008, and population as of 2004 for  counties and 2005 for states.
Example 1: Some Midwestern and Northeastern states and  counties that appeared to have a higher history of flood losses  relative to policy counts than other areas of the country    The five combined states of Iowa, Michigan, Minnesota, Missouri, and  Wisconsin, when compared to Collier County, Florida, had more  county flood disaster declarations (2,092 versus 12), significantly more  flood claims payments ($704,706,000 versus $12,483,000), and a much  larger population (28,906,000 versus 297,000), but a similar number of  NFIP policies (80,572 versus 85,246).
Maine, when compared to Idaho, had significantly more flood claim  payments ($36,332,000 versus $4,754,000) and county flood disaster  declarations (159 versus 42), but a similar number of NFIP policies  (7,891 versus 7,079). The states also had similar populations: 1,285,000  for Maine and 1,480,000 for Idaho.
Wisconsin, when compared to Rhode Island, had many more county  flood disaster declarations (276 versus 11), but had similar flood claims  payments ($32,693,000 versus $34,219,000). Even though Wisconsin has  a much larger population (5,479,000 versus 1,012,000), it has a similar  number of NFIP policies (12,945 versus 14,432).
Iowa, when compared to New Mexico, had almost 10 times more  county flood disaster declarations (558 versus 56), and about eight  times more in flood claims payments ($65.915.000 versus $8,038,000)  but almost 30 percent fewer policies (10,185 versus 14,455). Iowa’s  population was larger than New Mexico’s (2,941,000 versus 2,016,000).
The four combined states of Kansas, Nebraska, South Dakota, and  North Dakota, when compared to Oregon, had more county flood  disaster declarations (1,346 versus 124) and three times more in flood  claims payments ($244,828,499 vs. $76,727,971), but a similar number of  policies (30,683 versus 29,780) for a much larger population (6,009,000  versus 3,613,000).
Example 2: Counties with flood disaster declarations but no  communities in NFIP  We found 66 counties that had flood disaster declarations but no  communities that had joined NFIP. Below are selected examples from  those counties.
Clay County, Alabama (population 14,092) has had seven flood  declarations.
San Francisco County, California (population 744,230) has had three  flood declarations.
Henry County, Iowa (population 20,258) has had six flood declarations.    Winneshiek County, Iowa (population 21,188) has had seven flood  declarations.
Adair County, Kentucky (population 17,575) has had six flood  declarations.
Dallas County, Missouri (population 16,328) has had eight flood  declarations.
Example 3: Counties with flood disaster declarations but very few  NFIP policies  We found 14 counties, all with populations over 100,000, that had one or  more flood declarations but very few NFIP policies. Below are selected  examples from those counties.
Potter County, Texas (population 118,000) has had three flood disaster  declarations but had only six policies.
Bibb County, Georgia (population 155,000) has had four flood disaster  declarations but had only 13 policies.
Carroll County, Georgia (population 102,000) has had six flood disaster  declarations but had only 83 policies.
section_title: Appendix III: Comments from the Department of Homeland Security
section_title: Appendix IV: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contact
section_title: Staff Acknowledgements
paragraphs: In addition to the contact named above, Patrick Ward, Assistant Director;  Lawrence Cluff, Assistant Director; Tania Calhoun; Emily Chalmers;  William (Rudy) Chatlos; Martha Chow; Nima Patel Edwards; Christopher  Forys; Catherine Hurley; Karen Jarzynka; and Melvin Thomas made  significant contributions to this report.