National Flood Insurance Program: Actions to Address Repetitive Loss Properties
Published: 2004-03-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Floods have been, and continue to be, the most destructive natural hazard in terms of damage and economic loss to the nation. From fiscal year 1992 through fiscal year 2002, about 900 lives were lost due to flooding and flood damages totaled about $55 billion. Some properties have been repeatedly flooded and the subject of federal flood insurance claims. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for assisting state and local governments, private entities, and individuals to prepare for, mitigate, respond to, and recover from natural disasters, including floods. The National Flood Insurance Program (NFIP) is the primary vehicle for FEMA's efforts to mitigate the impact of floods. The Senate Subcommittee on Economic Policy, Committee on Banking, Housing, and Urban Affairs, asked GAO to discuss (1) FEMA's approach to flood mitigation, (2) the effect of repetitive loss properties on the NFIP, and (3) recent actions taken or proposed to address the impact of repetitive loss properties on the NFIP.
section_title: What GAO Found
paragraphs: FEMA has taken a multifaceted approach to mitigating, or minimizing the life and property losses and disaster assistance costs that result from flooding. Through the National Flood Insurance Program, FEMA develops and updates flood maps that identify flood prone areas and makes insurance available for communities that agree to adopt and enforce building standards based upon these maps. Since its inception in 1968, the National Flood Insurance Program has paid $12 billion in insurance claims to owners of flood-damage properties that have been funded primarily by policyholders' premiums that otherwise would have been paid through taxpayer-funded disaster relief or borne by home and business owners themselves. Through a variety of grant programs, FEMA also provides funding for mitigation planning activities and projects before and after floods occur. Repetitive loss properties represent a significant portion of annual flood insurance program claims. About 1 percent of the 4.4 million properties currently insured by the program are considered to be repetitive loss properties--properties for which policyholders have made two or more $1,000 flood claims. However, about 38 percent of all program claim costs have been the result of repetitive loss properties, at a cost of about $4.6 billion since 1978. Recent federal actions to reduce program losses related to repetitive loss properties include FEMA's strategy to target severe repetitive loss properties for mitigation and congressional proposals to phase out coverage or begin charging full and actuarially based rates for repetitive loss property owners who refuse to accept FEMA's offer to purchase or mitigate the effect of floods on these buildings. FEMA's strategy and the congressional proposals appear to have the potential to reduce the number and vulnerability of repetitive loss properties and, thereby, the potential to help reduce the number of flood insurance claims.

section_title: Letter
paragraphs: I appreciate the opportunity to participate in today’s hearing to discuss the  National Flood Insurance Program and the effect on the program of  repetitive loss properties—properties with two or more losses greater than  $1,000 in a 10-year period.  Floods have been, and continue to be, the most  destructive natural hazard in terms of economic loss to the nation, as well  as the cause of hundreds of deaths in communities across the nation.  During the 10 years from fiscal year 1992 through fiscal year 2001, flooding  resulted in about $55 billion in damages and about 900 deaths. During that  period, the federal government paid about $7.7 billion in federal flood  insurance claims financed primarily through policyholder premiums paid  into the National Flood Insurance Fund.
The Federal Emergency Management Agency (FEMA) within the  Department of Homeland Security (DHS) is the primary federal agency  responsible for assisting state and local governments, private entities, and  individuals to prepare for, mitigate, respond to, and recover from natural  disasters, including floods. FEMA’s National Flood Insurance Program has  served as a key component of the agency’s efforts to minimize or mitigate  the damage and financial impact of floods on the public, as well as to limit  federal expenditures needed after floods occur. The program has been  credited by the administration with saving $1 billion annually by improving  floodplain management and setting building standards—such as one to  elevate structures—that have minimized flood damages. However, in the  past, we have identified a number of concerns about the program’s  financial viability, including how repetitive loss properties have  contributed to the program’s long-term losses. Recent actions have been  taken or proposed by the administration and Members of Congress to  address the challenge posed by repetitive loss properties.
My testimony today is based primarily on our past work. I will provide a  perspective on (1) FEMA’s approach to mitigating flood-related losses  through the flood insurance program and other grant programs, (2) the  effect of repetitive loss properties on the flood insurance program, and   (3) recent actions taken or proposed to address the impact of repetitive  loss properties on the program by FEMA and the Congress.
FEMA has taken a multifaceted approach to mitigating flood-related  losses. Through the flood insurance program, FEMA identifies and  maps flood prone communities and makes insurance available to  property owners in communities that agree to adopt and enforce  building standards to mitigate the impact of floods. FEMA also  provides funding for mitigation planning activities and projects before  and after floods occur through various mitigation grant programs.
Repetitive loss properties represent a significant portion of annual  flood insurance claims. While repetitive loss properties represent only  about 1 percent of the current 4.4 million properties insured by the  program, they have accounted for about 38 percent of all program  claim costs historically and are projected by FEMA to cost about $200  million annually. Since 1978, the total cost of these repetitive loss  properties to the program has been about $4.6 billion.
Recent federal actions to reduce program claims related to repetitive  loss properties include FEMA’s strategy to target the most frequent and  costly repetitive loss properties for mitigation and congressional  proposals to phase out coverage or begin charging full and actuarially  based rates for repetitive loss property owners who refuse to accept  FEMA’s offer to purchase or mitigate the affected buildings. These  actions have the potential to reduce future program losses and improve  the financial condition of the program.
subsections: section_title: Background
paragraphs: Floods continue to be the most destructive natural hazard in terms of  damage and economic loss to the nation. Property damage from flooding  now totals over $1 billion each year in the United States and floods occur  within all 50 states. Nearly 9 of every 10 presidential disaster declarations  result from natural phenomena in which flooding was a major component.  Most communities in the United States can experience some kind of  flooding after spring rains, heavy thunderstorms, or winter snow thaws.  Not only do floods cause damage and loss, they can be deadly—flooding  caused the deaths of about 900 people from fiscal year 1992 through fiscal  year 2001. Tropical Storm Allison, which struck the Gulf Coast in June  2001, demonstrated the economic and social impact flooding can have,  causing billions of dollars in damages and 41 deaths. As a result of the  storm, FEMA paid out over $1 billion in insurance claims, the largest  amount paid for a single event since 1978 when FEMA began to collect  summary statistics on flood claims. More recently, Hurricane Isabel  ravaged the Mid-Atlantic states in September 2003.  Through November 30,  2003, FEMA had paid over $160 million in flood insurance claims and  estimates that ultimately, flood insurance claim payments resulting from  Isabel will be about $450 million.  At least 40 deaths have been attributed  to the storm.
Floods can be slow or fast rising but generally develop over a period of  days. Flash flood waters move at very fast speeds and can roll boulders,  tear out trees, destroy buildings, and obliterate bridges. Walls of water can  reach heights of 10 to 20 feet and generally are accompanied by a deadly  cargo of debris. Flood damage causes both direct and indirect costs.  Direct costs reflect immediate losses and repair costs as well as short-term  costs such as flood fighting, temporary housing, and administrative  assistance. By contrast, indirect costs are incurred in an extended time  period following a flood and include loss of business and personal income  (including permanent loss of employment), reduction in property values,  increased insurance costs, loss of tax revenue, psychological trauma, and  disturbance to ecosystems. In 1968, in recognition of the increasing  amount of flood damage, the lack of readily available insurance for  property owners, and the cost to the taxpayer for flood-related disaster  relief, the Congress passed the National Flood Insurance Act (Pub. L. No.  90-448) that created the National Flood Insurance Program.
section_title: FEMA Has Sought to Minimize Flood- Related Losses Through the National Flood Insurance Program and Various Mitigation Grant Programs
paragraphs: Through the National Flood Insurance Program, FEMA has sought to  minimize flood-related property losses by making flood insurance  available on reasonable terms and encouraging its purchase by people  who need flood insurance protection—particularly those living in flood  prone areas. The program identifies flood prone areas in the country,  makes flood insurance available to property owners in communities that  participate in the program, and requires floodplain building standards to  mitigate flood hazards. FEMA also seeks to mitigate flood hazards through  a variety of mitigation grant programs.
Under the flood insurance program, FEMA prepares flood insurance rate  maps to delineate flood prone areas including special flood hazard areas— also known as 100-year floodplains—where enhanced building standards  and insurance requirements apply. Currently, FEMA is in the initial stages  of a billion dollar effort to update the nation’s flood maps. The Map  Modernization program is intended to improve the accuracy of flood maps,  put the maps in digital format to improve their accessibility, and provide  the basis for assessing the impact of other hazards in support of DHS’s  efforts to protect the nation from both man-made and natural disasters.  For example, the maps could be used to assess the impact of toxic  chemical spills on local waterways. At the request of the Chairman of the  House Financial Services Subcommittee on Housing and Community  Opportunity, we have been reviewing the Map Modernization program and  plan to report on FEMA’s program strategy and the status of the program  later this spring.
Flood maps provide the basis for establishing floodplain building  standards that participating communities must adopt and enforce as part  of the program. For a community to participate in the program, any  structures built within a special flood hazard area after the flood map was  completed must be built according to the program’s building standards  that are aimed at minimizing flood losses. A key component of the  program’s building standards that must be followed by participating  communities is a requirement that the lowest floor of the structure be  elevated to or above the base flood level—the highest elevation at which  there is a 1-percent chance of flooding in a given year. The administration  has estimated that the program’s standards for new construction save  about $1 billion annually in flood damage avoided. According to FEMA,  buildings constructed in compliance with these standards suffer  approximately 80 percent less damage annually than those not built  according to these standards.
Flood maps also provide the basis for setting insurance rates and  identifying properties whose owners are required to purchase flood  insurance. When the program was created, the purchase of flood  insurance was voluntary. To increase the impact of the program, the  Congress amended the original law in 1973 to require the purchase of  flood insurance in certain circumstances. Flood insurance is required for  structures in special flood hazard areas of communities participating in the  program if (1) any federal loans or grants were used to acquire or build the  structures or (2) the structures are secured by mortgage loans made by  lending institutions that are regulated by the federal government. The  National Flood Insurance Reform Act of 1994 that further amended the  program also reinforced the objective of using insurance as the preferred  mechanism for disaster assistance. The act expanded the role of federal  agency lenders and regulators in enforcing the mandatory flood insurance  purchase requirements. It also prohibited further flood disaster assistance  for any property where flood insurance was not maintained even though it  was mandated as a condition for receiving prior disaster assistance.  Currently, the program provides insurance for approximately 4.4 million  policyholders in the nearly 20,000 communities that participate in the  program. The program has paid about $12 billion in insurance claims,  primarily from policyholder premiums that otherwise would have been  paid through taxpayer-funded disaster relief or borne by home and  business owners themselves.
FEMA also has a variety of grant programs designed to mitigate the effects  of natural hazards, including flooding, on people and property. From  October 1989 through July 2003, FEMA funded approximately 3,900 flood  mitigation projects worth about $2 billion through the flood insurance  program and a variety of other grant programs. Through these projects,  FEMA mitigated over 29,000 properties. FEMA’s Flood Mitigation  Assistance Program is funded through the flood insurance program and is  designed to reduce claims under the program. Grants provided to states  and communities are to be used for flood related mitigation activities such  as elevation, acquisition, and relocation of buildings insured by the flood  insurance program. In implementing this program, FEMA has encouraged  states to prioritize project grant applications that include repetitive loss  properties. In addition, FEMA provides funding for mitigation planning  activities and projects before and after floods occur, respectively through  the Pre-Disaster Mitigation Program and the Hazard Mitigation Grant  Program. In implementing the Pre-Disaster Mitigation Program for 2003,  FEMA specifically targeted projects designed to mitigate repetitive loss  properties. Through the Hazard Mitigation Grant Program, FEMA  estimates that it has mitigated over 2,500 repetitive loss properties through  acquisitions, elevations, and other flood protection measures.
section_title: Payments for Repetitive Losses Contribute to Program Financial Concerns
paragraphs: The flood insurance program has raised financial concerns because, over  the years, it has lost money and at times has had to borrow funds from the  U.S. Treasury. One of the primary reasons—payments for repetitive loss  properties—has been consistently identified in our past work and by  FEMA. About 49,000—approximately 1 percent of the 4.4 million buildings  currently insured under the program—have been flooded on more than  one occasion during a 10-year period and have received flood insurance  payments of $1,000 or more for each claim. These repetitive loss  properties are problematic not only because of their vulnerability to  flooding but also because of the costs of repeatedly repairing flood  damages. For example, a 1998 study by the National Wildlife Federation  noted that nearly 1 out of every 10 repetitive loss homes has had  cumulative flood loss claims that exceeded the value of the house.
According to FEMA, repetitive loss properties have accounted for about 38  percent of all program claim costs historically and are projected by FEMA  to cost about $200 million annually. Since 1978, the total cost of these  repetitive loss properties to the program has been about $4.6 billion.  Nearly half of all nationwide repetitive loss property insurance payments  had been made in Louisiana, Florida and Texas. For example, in Texas,  since 1978 there have been approximately 45,000 flood claims totaling over  $1 billion for repetitive damage. These 3 states, plus 12 others, have  accounted for nearly 90 percent of the total payments made for repetitive  loss properties.
section_title: FEMA has Developed a Strategy and Members of Congress Have Proposed Changes to Address Repetitive Losses
paragraphs: FEMA has developed a strategy to reduce the number of properties  repeatedly flooded that, like congressional proposals, seeks to target  repetitive loss properties with the greatest losses. FEMA’s strategy  identifies the highest priority properties, for example those with four or  more losses, that would benefit from mitigation activities designed to  remove them altogether from the floodplains, elevate them above the  reach of floodwaters, or apply other measures that would significantly  reduce their exposure to flood risk. According to FEMA, it has paid out  close to $1 billion dollars in flood insurance claims over the last 21 years  for these properties. As of November 30, 2003 FEMA had identified  approximately 11,000 currently insured repetitive loss properties in this  target group. FEMA has set up a special direct facility for servicing these  properties and provides information about these property to state and  local floodplain management officials. States or communities may sponsor  projects to mitigate flood losses to these properties or may be able to  provide property owners technical assistance on mitigation options. To  facilitate grant-funded mitigation activities for this target group, FEMA  also initiated a pilot program to allow states and communities (where  these properties are located) to use simplified methodology and software  to establish the cost-effectiveness of proposed projects when applying for  grants to mitigate these repetitive loss properties.
Members of Congress have also recognized the financial burden repetitive  loss properties place on the program and have proposed changing  premium rates for properties with the greatest losses. Two bills introduced  in 2003—H.R. 253 and H.R. 670—proposed amending the National Flood  Insurance Act of 1968, to, among other things, change the premiums for  repetitive loss properties. Under the proposed bills, premiums charged for  such properties would reflect actuarially based rates if the property  owner has refused a buyout, elevation, or other flood mitigation measure  from the flood insurance program or FEMA. H.R. 253, as passed by the  House, included a pilot program to allow FEMA to use flood insurance  program funds to target “severe” repetitive loss properties for mitigation.  Specifically, FEMA could use up to $40 million each year for the next 5  years for mitigation directed at these properties. For property owners who  refuse FEMA’s mitigation offers, their premium rates would be increased  by 50 percent if they subsequently made a claim to the program exceeding  $1,500. In the past, we have noted that increasing policyholder premiums  could cause some of the policyholders to cancel their flood insurance.  H.R. 253 includes a provision that provides FEMA the flexibility of  increasing the deductible, which would result in a lower premium rate, for  policies where property owners refuse mitigation offers and make  subsequent claims exceeding $1,500. This may provide property owners  who refuse mitigation offers a means for maintaining their flood insurance  without a significant increase in their premium rate.
While we have not fully analyzed the potential results of FEMA’s repetitive  loss strategy and mitigation actions proposed by H.R. 253, based on a  preliminary assessment, they appear to have the potential to reduce the  number and/or vulnerability of repetitive loss properties and, thereby, the  potential to help improve the program’s financial condition. By making  near term investments targeted to the most costly properties to insure,  FEMA should be able to reduce annual expenditures for these properties  in the long term by reducing the national inventory of repetitive loss  properties.
According to FEMA, there are a total of about 100,000 repetitive loss  properties accounting for $4.6 billion in losses since 1978. Of these  properties, FEMA reports that there are about 49,000 properties that are  currently insured that have accounted for about $2.6 billion in losses since  1978. Of these currently insured properties, about 6,000 repetitive loss  properties that have accounted for about $792 million in losses since 1978  could be considered for mitigation efforts funded through the pilot  program proposed by H.R. 253. In accordance with the bill’s proposed  criteria, each of these properties either had 4 or more separate claims each  exceeding $5,000 with cumulative claims exceeding $20,000 or had at least  2 separate claims with cumulative losses exceeding the value of the  property. The remaining 43,000 currently insured repetitive loss  properties, accounting for $1.8 billion in losses since 1978, do not meet the  criteria for the proposed pilot program. Of these properties that would not  be eligible for the pilot program, about 26,000 properties, accounting for  about $1.6 billion in losses since 1978, had cumulative losses greater than  $20,000, but either (1) less than 4 claims had been filed or (2) each claim  did not meet the $5,000 threshold. (For state by state details on the total  number of repetitive loss properties, the number of currently insured  repetitive loss properties, the number of currently insured repetitive loss  properties that meet the criteria proposed in the H.R. 253 pilot program,  and the number of currently insured repetitive loss properties that do not  meet the criteria, see appendix 1, tables 1, 2, 3, and 4, respectively.)
As with all federal initiatives, the success of FEMA ‘s efforts in  implementing a repetitive loss strategy and any future legislated program  directives will be most effectively determined by using outcome-based,  rather than output-based performance measures. Such outcome-based  measures could allow FEMA to assess the impact of savings to the  National Flood Insurance Program resulting from its mitigation of  repetitive loss properties.
Mr. Chairman, this concludes my statement. I would be pleased to answer  any questions that you or other members of the Subcommittee may have.
section_title: Contact Information
paragraphs: For further information on this testimony, please contact William O.  Jenkins at (202) 512-8777. Individuals making key contributions to this  testimony include Chris Keisling, Kirk Kiester, and Meg Ullengren.
section_title: Appendix 1: Data on Repetitive Loss Properties For the Period January 1, 1978 through November 30, 2003
paragraphs: This appendix contains data we obtained from FEMA’s National Flood  Insurance Program Bureau & Statistical Agent on repetitive loss properties  and the flood insurance losses associated with those properties. To assess  the reliability of this data, we interviewed agency officials knowledgeable  about the data and the system development manager responsible for  maintaining the data and the systems. We determined that the data were  sufficiently reliable for identifying repetitive loss properties and  illustrating the potential impact of the pilot program proposed by H.R. 253  on these properties.
section_title: Related GAO Products
paragraphs: Flood Insurance: Challenges Facing the National Flood Insurance  Program. GAO-03-606T. Washington, D.C.: April 1, 2003.
Major Management Challenges and Program Risks: Federal Emergency  Management Agency. GAO-03-113. Washington, D.C.: January 2003.
Flood Insurance: Extent of Noncompliance with Purchase Requirements  Is Unknown. GAO-02-396. Washington, D.C.: June 21, 2002.
Flood Insurance: Information on the Financial Condition of the  National Flood Insurance Program. GAO-01-992T. Washington, D.C.: July  19, 2001.
Flood Insurance: Emerging Opportunity to Better Measure Certain  Results of the National Flood Insurance Program. GAO-01-736T.  Washington, D.C.: May 16, 2001.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.