Flood Insurance: Forgone Premiums Cannot Be Measured and FEMA Should Validate and Monitor Data System Changes
Published: 2014-12-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As of September 30, 2013, FEMA, which administers NFIP, had more than 1.1 million subsidized flood insurance policies—about 21 percent of all of its policies. Because their premiums do not reflect the full risk of losses, subsidized policies have been a financial burden on the program. Due to NFIP's financial instability and operating and management challenges, GAO placed the program on its high-risk list in 2006. The Biggert-Waters Act mandated GAO to report on the forgone premiums from subsidies in NFIP.
This report examines the forgone premiums associated with subsidies during 2002–2013 along with data reliability issues discovered in GAO's examination. Data for earlier periods were unavailable. GAO analyzed NFIP premium data, published statements about the size of the subsidies, and expenses associated with premiums. GAO also interviewed FEMA officials.
section_title: What GAO Found
paragraphs: The actual forgone premiums—the difference between subsidized and full-risk premiums—to the National Flood Insurance Program (NFIP) due to subsidies cannot be measured. The Federal Emergency Management Agency (FEMA) does not collect flood risk information for all subsidized policies, which is needed to calculate their full-risk premium rates. GAO recommended in July 2013 that FEMA develop and implement a plan to obtain this information. FEMA agreed with the recommendation, but has not yet fully implemented it. Although FEMA is phasing out subsidies through statutorily required rate increases, collecting this information remains important because the number of subsidized policies—and associated financial impacts—could grow over time with the restoration of certain subsidies under the Homeowner Flood Insurance Affordability Act of 2014 that previous legislation had eliminated. Working with available data and FEMA's published statements describing the size of the subsidies, GAO estimated forgone premiums in the range of $16–25 billion for 2002–2013 but estimates vary based on the calculation used. As FEMA would have incurred additional expenses if it had been able to collect the forgone premiums, GAO estimated that FEMA might have had $11–17 billion in premiums net of expenses, or as much as $1 billion a year, for losses or debt repayment.
FEMA did not have sufficient controls or monitoring in place to validate system changes (made because of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act)) before they became effective, and some premium data were unreliable. Federal internal control standards suggest that agencies have controls, such as validating implementation of changes, to help ensure the accuracy of transactions. A FEMA contracting handbook also calls for monitoring a contractor's progress toward completion of specified requirements. However, FEMA did not validate that its contractor fully implemented changes and system checks, or verify the changes in vendors' software, before program changes became effective in October 2013. FEMA's monitoring reports also did not capture critical information to oversee the contractor's progress toward completion of the required changes. As a result, premium data on policies GAO analyzed are unreliable in the time period studied, some policyholders were charged inaccurate rates, and the full extent of delays and errors went undetected for nearly a year. Without better monitoring and controls over future changes, FEMA risks further inaccuracies in its data system.
section_title: What GAO Recommends
paragraphs: GAO recommends that FEMA institute controls to validate implementation of data system changes and track progress toward completion in its monitoring reports. GAO also maintains its position that a recommendation made in July 2013 ( GAO-13-607 ) that FEMA develop and implement a plan to obtain flood-risk information needed to determine full-risk rates for properties with subsidized rates is valid and should be fully implemented. FEMA agreed with the new recommendations and discussed its approach for addressing the July 2013 recommendation.

section_title: Letter
paragraphs: As of September 30, 2013, the Federal Emergency Management Agency  (FEMA) had more than 1.1 million—about 21 percent—of its National  Flood Insurance Program (NFIP) policies sold at discounted rates  (subsidized rates) that did not fully reflect the actual risk of flood damage.  The National Flood Insurance Act of 1968 authorized subsidized rates to  encourage community and property owner participation in NFIP.  Generally, subsidized policies cover properties in high-risk locations that  otherwise would have been charged higher premiums and were built  before Flood Insurance Rate Maps (FIRM) became available and the  flood risk was clearly understood. Subsidized premiums help achieve a  program goal of promoting participation in the program but do not  contribute sufficient revenues to cover long-term expected losses. As a  result, policies receiving subsidized rates have been a financial burden on  NFIP, and the program is not actuarially sound. Since 2000, NFIP also  experienced several years with catastrophic losses ($1 billion or more)  and borrowed money from the Department of the Treasury (Treasury) to  cover claims. As of September 30, 2014, FEMA owed Treasury $24  billion and had not repaid any principal on its loans since 2010. In  September 2014, FEMA’s largest loan from Treasury was refinanced into  three smaller loans with higher interest rates, and FEMA will have higher  interest payments on its debt. As a result of the program’s importance,  level of indebtedness to Treasury, substantial financial exposure for the  federal government and taxpayers, and FEMA’s operating and  management challenges, NFIP has been on our high-risk list since 2006.
The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters  Act) and the Homeowner Flood Insurance Affordability Act of 2014  (HFIAA) introduced many changes to NFIP. In particular, the Biggert- Waters Act phased out and eliminated subsidized premium rates for  several types of properties. As mandated by the Biggert-Waters Act,  FEMA has begun phasing out subsidies on policies for business  properties, residential properties that are not primary residences, and  single-family properties with severe repetitive losses. Additionally, on  October 1, 2013, FEMA began prohibiting subsidies from being passed to  new property owners and removed them if insurance coverage lapsed as  a result of the policyholders’ deliberate choice. HFIAA, which became law  in March 2014, repeals or alters portions of the Biggert-Waters Act. For  example, HFIAA permits certain subsidies to carry over to new property  owners and allows them to continue after a lapse in insurance coverage  for certain reasons. HFIAA did not stop the phasing out of subsidies on  policies for nonprimary residences, severe repetitive loss properties, and  businesses. FEMA plans to continue to phase out subsidized rates for  these policies with 25 percent annual increases. Under HFIAA, FEMA  also generally must increase premium rates on other subsidized policies  by 5–15 percent annually.
The Biggert-Waters Act mandated that we conduct a number of studies,  including a study on the properties that continue to receive subsidized  rates after the implementation of the act. This report estimates NFIP  forgone premiums for subsidized properties in 2002–2013. In addition, it  examines issues we identified surrounding modifications made to FEMA’s  data system to implement changes required under the Biggert-Waters  Act.
To address these objectives, we analyzed FEMA data on NFIP flood  insurance policies, program expenses, and estimates of long-term losses  covered by subsidized premiums as well as information on its policy  rating methodology. We used policy data from 2002 through 2013 to  determine the number and associated premiums of the subsidized  policies and applied FEMA’s published statements describing the size of  the subsidies and expenses to estimate forgone premiums and forgone  premiums net of program expenses. We assessed the reliability of the  policy and expense 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 determining the number of  subsidized policies and the associated premiums. FEMA officials stated  that their statements about the size of the subsidy should not be  considered definitive or precise. However, because FEMA officials said  that these statements were the only information available on the size of  the subsidy, we used them in three different calculations to estimate  forgone premiums, added caveats to our estimates, and noted the  limitations of using them. Using FEMA’s tables for generating NFIP  premium rates published on June 26, 2014, we also generated examples  of how many years it might take for subsidized premium rates to reach  full-risk rates. Additionally, we attempted to use policy data from 2014 and  FEMA’s policy rating methodology in a fourth estimation of forgone  premiums. We attempted to calculate subsidized premiums for primary  residential policies that would have qualified for subsidies before the  Biggert-Waters Act to compare them with the full-risk premiums actually  paid after the Biggert-Waters Act changes were effective. However, we  identified a number of discrepancies in the data and determined that they  were not sufficiently reliable to be used for this analysis. We also  assessed contract documentation and monitoring processes and reports  against federal internal control standards. We reviewed recent NFIP  legislation and examined FEMA’s implementation of legislative  requirements authorizing subsidized rates for certain properties in high- risk locations. We interviewed FEMA officials. See appendix I for more  details about our scope and methodology.
We conducted this performance audit from May 2014 to December 2014  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: In 1968, Congress created NFIP to address the increasing cost of federal  disaster assistance by providing flood insurance to property owners in  flood-prone areas, where such insurance was either not available or  prohibitively expensive. The 1968 law authorized subsidies to  encourage community and property owner participation. To participate in  the program, communities must adopt and agree to enforce floodplain  management regulations to reduce future flood damage. In exchange,  NFIP makes federally backed flood insurance available to homeowners  and other property owners in these communities.
Since NFIP was established, Congress has enacted legislation to  strengthen certain aspects of the program. For example, the Flood  Disaster Protection Act of 1973 made the purchase of flood insurance  mandatory for properties in Special Flood Hazard Areas (SFHA)—areas  at high risk for flooding—that are secured by mortgages from federally  regulated lenders and located in NFIP participating communities. This  requirement expanded the overall number of insured properties, including  those that qualified for subsidized premiums. The National Flood  Insurance Reform Act of 1994 expanded the purchase requirement for  federally backed mortgages on properties located in an SFHA.
FEMA bases premium rates for NFIP policies on a property’s risk of  flooding and other factors. FEMA studies and maps flood risks, assigning  flood zone designations from high to low depending on the risk of  flooding. For example, SFHAs are high-risk areas that have a 1 percent  or greater annual chance of flooding and are designated as zones A, AE,  V, or VE. Areas designated as V or VE are located along the coast and  are at risk of 3 foot or higher breaking waves. Areas designated as A or  AE can be located along the coast or inland. Zones B, C, or X are areas  with a moderate-to-low risk for flooding. Zone D denotes areas for which  flood risk analysis has not been conducted. FEMA also uses property  characteristics in setting premium rates, such as elevation of the property  relative to the property’s base flood elevation (BFE)—the level relative to  mean sea level at which there is a 1 percent or greater chance of flooding  in a given year—and building type (residential or nonresidential).  Additionally, FEMA uses policy characteristics in setting premium rates,  such as coverage and policy deductible amounts.
NFIP has two types of premium rates: those that reflect the full risk of  flooding to the group of properties within a rate class (full-risk rates) and  those that do not reflect full risk (subsidized rates). The largest number  of subsidized policies has been for properties built before FIRMs became  available. Even with highly discounted rates, subsidized premiums are,  on average, higher than full-risk premiums. Full-risk rated structures have  been built to flood-resistant building codes or have mitigated flood risks  and generally are at or above BFE. However, FEMA can calculate full- risk rates for structures that are up to 15 feet below BFE in A zones, and  10 feet below BFE in V zones. Pre-FIRM subsidized properties generally  were not constructed according to the program’s building standards or  were built without regard to BFE. Therefore, subsidized structures  generally are assumed to be more prone to flooding (that is, riskier) than  other structures and premiums are higher, even with the subsidy. For  example, according to FEMA’s flood insurance manual effective October  1, 2014, the costs of building and contents coverage for subsidized  policies in an AE zone were higher than coverage for a similar full-risk  policy at 1 foot above BFE.
Although the percentage of policies that is subsidized and percentage of  premiums from these policies relative to all NFIP policies has decreased  over time, the number of subsidized policies has not changed greatly. In  2012, subsidized policies accounted for about 20 percent of NFIP  policies. From 1978 through 2012, the percentage of policies that was  subsidized decreased because the number of total policies increased, but  the numbers of subsidized policies stayed fairly constant (see fig. 1).
Similarly, the percentage of premiums from subsidized policies decreased  from 1978 to 2012. In 2012 premiums from subsidized policies  represented 38 percent of all NFIP premiums (see fig. 2).
The Biggert-Waters Act and HFIAA affected NFIP’s ability to charge  subsidized premium rates on certain types of properties and will change  the number of policies that are subsidized as well as the size of the  subsidy. For example the Biggert-Waters Act prohibited subsidies from  being extended for homes sold to new owners after July 6, 2012 (date of  enactment) and removed them if properties lapsed in coverage as a result  of the policyholders’ deliberate choice. Under the changes in the  Biggert-Waters Act, the number of subsidized policies could have  decreased over time. HFIAA reinstated premium subsidies for properties  that were purchased after July 6, 2012, and properties not insured as of  July 6, 2012. Thus, new policies may join NFIP and receive subsidized  rates and the number of subsidized policies could increase over time.
However, provisions under both acts changed the status of subsidies and  decreased the size of subsidies by annually increasing subsidized rates.  The Biggert-Waters Act required FEMA to phase out subsidies—annually  increasing premiums by 25 percent until full-risk rates were reached—for  certain types of properties, including business properties, residential  properties that are not a primary residence, properties that have  experienced or sustained substantial damage or improvement, and  severe repetitive loss properties. HFIAA did not affect the phase out  schedule of these subsidies—which represented about 41 percent of all  subsidized policies, as of September 30, 2013 (see fig. 3). Under  HFIAA, FEMA also generally must increase premium rates on other  subsidized policies by 5–15 percent annually.
The time that will be required for subsidized rates to reach full-risk rates  varies by flood zone, coverage amounts, and elevation relative to BFE. At  the level of the rate increases to phase out certain subsidies required  under the Biggert-Waters Act (25 percent per year), some policyholders  could continue to benefit from subsidized rates for 12 years or more. For  annual increases of 15 percent under HFIAA, phase-out times for  subsidies will be longer. For annual increases of 5 percent, policyholders  could continue to benefit from subsidized rates for more than 30 years.  For example, figure 4 shows the different timelines for a subsidized  single-family policy in an AE flood zone to reach the full-risk rate (with the  number of years varying according to amount of coverage, elevation  relative to BFE, and the percentage of the annual rate increases). As  FEMA increases subsidized rates, at some point a policyholder may have  an incentive to obtain an elevation certificate and pay the full-risk rate  rather than the subsidized rate because the full-risk rate would be lower.  For example, a policyholder choosing $250,000 in building coverage for a  currently subsidized AE zone policy at BFE would pay a lower full-risk  rate than the subsidized rate if the policyholder documented the elevation  with an elevation certificate. If a policyholder chose to supply an elevation  certificate, FEMA would charge the lower of the full-risk and subsidized  rates.
FEMA sells and services NFIP policies primarily through private  insurance companies that participate in the Write-Your-Own (WYO)  program. Insurance agents from these companies are the main point of  contact for most policyholders. FEMA compensates the companies based  on a percentage of the premiums and claims for policies they manage.  WYOs adjust, settle, and pay flood claims, as well as handle lawsuits  arising from claims. Based on information the insurance agents submit,  WYOs issue policies, collect premiums, deduct an allowance for  commissions and operating expenses from the premiums, and remit the  balance to NFIP. When flood losses occur, policyholders report them to  their insurance agents, who notify the WYOs. The WYOs review the  claims and process approved claims for payment. FEMA reimburses  WYOs from the National Flood Insurance Fund for the amount of the  claims plus a percentage of the claims to cover adjusting and processing  expenses. FEMA has modified its WYO compensation methodology over  time. Although WYOs handle most flood policies, FEMA also contracts  with a company that serves as FEMA’s direct agent. The direct agent  sells and services standard policies, but also exclusively sells and  services repetitive loss and group policies. The direct agent is  compensated through the contract rather than with a percentage of  premiums and claims. The WYOs and FEMA’s direct agent submit  information on new and renewed policies and claims to FEMA’s policy  and claims data system. As part of its monitoring and oversight  responsibilities, FEMA conducts operational reviews of the direct agent  annually, and WYO companies about every 3 years.
FEMA funds NFIP primarily through insurance premiums and fees paid by  policyholders. FEMA uses NFIP premiums to pay insurance claims  (losses) and all program expenses, including salaries, outreach, research,  and operating expenses. When premiums are insufficient to cover these  losses and expenses, FEMA may borrow money from Treasury. NFIP’s  program expenses are either variable (increase with premium increases)  or fixed (do not change with premium increases). Variable expenses  include state or local premium taxes, and WYO commissions and  expenses. Fixed expenses include NFIP salaries, floodplain mapping,  mitigation grants, contractor costs, and the direct agent. In addition to  premiums, NFIP collects a policy fee from each policyholder that covers a  portion of the fixed expenses. After expenses, FEMA uses the remainder  of premiums to pay for losses and debt repayment (see fig. 5).
section_title: FEMA Lacks Data to Measure Forgone Premiums Accurately and Estimates Vary Widely
subsections: section_title: Because Flood Risk Information Is Limited, the Forgone Premiums Associated with Subsidized Policies Cannot Be Measured Accurately
paragraphs: FEMA does not collect the flood risk information for most subsidized  policies and therefore cannot accurately determine forgone premiums  (the difference between subsidized premiums paid and the premiums that  would be required to cover the full risk of losses) associated with  subsidized policies. FEMA has not required all policyholders to submit  flood risk information, specifically elevation certificates, which are needed  to determine their full risk, because it does not use the information in  rating subsidized policies. In implementing the Biggert-Waters Act,  FEMA began requiring certain policyholders to submit elevation  information upon renewal or when new policies were issued as required  for full-risk rates. However, according to FEMA officials, FEMA will not  continue to collect this information with the restoration of these subsidies  under HFIAA. According to FEMA officials, obtaining elevation certificates  can cost policyholders from about $500 to $2,000 or more. Therefore, the  information needed to accurately measure forgone premiums associated  with subsidized policies is not available.
We previously recommended that FEMA collect flood risk information  from all affected policyholders in SFHAs. In July 2013, we found that to  phase out and eventually eliminate subsidies specified under the Biggert- Waters Act and revise rates over time, FEMA would need information on  the relative risk of flooding and property elevations (elevation certificates),  which generally had not been required for subsidized policies prior to the  act. We recommended that FEMA develop and implement a plan to  obtain the flood risk information needed to determine full-risk rates for  properties with subsidized rates. FEMA agreed with the recommendation  and as part of our current review said that it was evaluating different  approaches for obtaining the information and using it more broadly.  FEMA officials also stated that obtaining this information from other  sources is very difficult because BFEs are not available on the maps for  about 500,000 subsidized policies and some technologies for obtaining  elevations lack precision. FEMA officials stated that they will continue to  rely on policyholders to voluntarily obtain elevation certificates.  Policyholders with structures at lower risk (higher elevations relative to  BFE) have an incentive to obtain the certificates because they can qualify  for lower rates. However, policyholders with structures at higher risk  (lower elevations relative to BFE) have no incentive to obtain an elevation  certificate. Thus, it is unlikely that FEMA will collect flood risk for all  properties relying only on voluntary submissions.
Although FEMA has taken some steps, we maintain the importance of  fully implementing this recommendation and obtaining flood risk  information to measure accurately forgone premiums associated with  subsidies. Under HFIAA, FEMA must increase subsidized premium rates  for all but certain properties by 5–15 percent annually, which eventually  should phase out all pre-FIRM subsidized rates. FEMA will need the  property-level information for these subsidized policies and the policies  with subsidies that are being phased out through the annual 25 percent  increases under the Biggert-Waters Act, to know when the relevant  subsidized premium rate reaches the full-risk rate for any given policy.  Obtaining information that would allow for measuring forgone premiums  associated with subsidies also is important because although the size of  subsidies will decrease under HFIAA, the number of subsidized policies  could increase over time and continue to affect the financial stability of the  program. Historically, the percentage change in subsidized policies  generally followed the same trend as the percentage change in total  policies (see fig. 6).
FEMA has begun to collect elevation information for policyholder  disclosure purposes as required by HFIAA, but according to FEMA  officials they have not determined it to be of sufficient quality for use in  determining full-risk rates, which would be required to measure forgone  premiums. HFIAA requires FEMA to clearly communicate full flood risk  determinations to individual property owners regardless of whether their  premium rates are full actuarial rates or subsidized. Additionally,  information about risk is important in that it can influence behavior, such  as purchase decisions and decisions to mitigate risk. According to FEMA  officials, in response to the HFIAA provision, FEMA has begun gathering  relevant information from publicly available sources and considering  formats for disclosing the information to policyholders. Additionally, they  said that FEMA has an ongoing pilot program in North Carolina to use  Light Detection and Ranging (LIDAR) technology and flood maps to  determine flood risk at the property level. According to FEMA officials, the  information from these two efforts could give an order of magnitude for  the risk, but may not be of sufficient quality to use in rating policies. This  information also may not be of sufficient quality to measure forgone  premiums associated with subsidized policies.
section_title: Estimates of Forgone Premiums for Subsidized Policies Vary
paragraphs: Although the information to measure actual forgone premiums for  subsidized policies was not available, using available information we  estimated forgone premiums for 2002–2013 to be roughly $16–25 billion  and $11–17 billion net of expenses. We were unable to calculate the  actual forgone premiums for subsidized policies because, as stated  previously, FEMA does not have the information required to determine  flood risk for most of these policies. Therefore, to estimate forgone  premiums we used two statements about the subsidy’s impact on NFIP  premiums that are included in FEMA’s actuarial rate reviews for 2002– 2013.
Impact on aggregate premiums. If FEMA were to eliminate the  subsidy for the approximately 20 percent of policies with subsidized  rates, while leaving the unsubsidized policies unchanged, the  aggregate premium for the entire NFIP would increase approximately  50–75 percent.
Percentage of expected long-term losses covered by subsidized  premiums. The subsidized pre-FIRM properties are estimated to pay  45–50 percent of the full-risk premium needed to fund the long-term  expectation for losses. That is, subsidized policyholders pay 45–50  percent of what they would pay if they were charged full rates. FEMA  first reported this percentage as 35–40 percent for 2002, but gradually  increased the percentage after making adjustments to the subsidized  rates.
We note several limitations to using these statements to produce our  estimates. First, FEMA officials said the statements should not be  considered definitive or precise; therefore, our estimates also are not  precise. The officials stated they based the statements on their analysis  of a 1999 PricewaterhouseCoopers (PwC) report, which sampled pre- FIRM structures around the nation, determined their flood zones,  elevations relative to BFE, and full-risk rates, and then projected a  nationwide distribution of the policies. FEMA officials said they used this  information to arrive at the 35–40 percent estimate for 2002. They used  professional judgment to make adjustments to the statements over the  years based on how rate increases for subsidized policies compared with  inflation. Second, relying on these statements limited the scope of our  analysis because FEMA did not include these statements in actuarial  reviews for years before 2002. Therefore, we could not estimate the total  historic forgone premiums of these subsidies and limited our scope to  2002–2013. In the past, FEMA subsidized a much larger percentage of  policies (76 percent in 1978, compared with 21 percent in 2013), so  current estimates should not be applied to previous years.
Third, FEMA’s statements do not account for any changes in program  participation that could result from increasing the premium rates of  subsidized policies to full-risk rates. According to FEMA officials and  insurance industry stakeholders, higher premiums could have resulted in  reduced participation in NFIP over time as policyholders either decided to  drop policies or were priced out of the market. The 1999 PwC study  estimated a possible 50 percent decrease in participation by affected  property owners if subsidies were immediately eliminated. This drop in  participation could result both in lower premium revenues and lower  losses, so the net effect on the program of eliminating subsidies would be  unclear. FEMA officials stated that increased rates likely resulted in some  property owners forgoing flood insurance when FEMA began charging  full-risk rates for properties that previously would have qualified for  subsidized rates (in the short time after the Biggert-Waters Act was  implemented and before HFIAA was enacted). Had FEMA substantially  increased subsidized rates in earlier years, it likely would not have  collected the total amount of forgone premiums we estimate in this report.
Considering these limitations, we relied on FEMA’s statements in  producing our estimates because they provide the only information  available about the relationship of subsidies and full-risk rates for the  period we reviewed. We estimated the range of forgone premiums using  three different calculations to illustrate the potential magnitude of forgone  premiums associated with subsidized policies. Table 1 summarizes the  estimated forgone premiums and forgone premiums net of expenses from  each calculation using FEMA’s statements, as discussed above. For the  first estimate, we used FEMA’s statement about the impact of eliminating  subsidies on aggregate premiums. For the second estimate, we used the  percentage of long-term expected losses covered by subsidized  premiums. For the third, we used the percentage of long-term expected  losses covered by subsidized premiums to estimate forgone premiums for  only the policies that remained subsidized after HFIAA.
We estimated forgone premiums at $16–25 billion during 2002–2013,  using FEMA’s statement that eliminating subsidies would increase NFIP  premiums 50–75 percent after expenses. As discussed previously, some  program expenses increase as premiums increase. Therefore, FEMA  also would have incurred additional expenses if the agency had been  able to collect the forgone premiums. We estimated that FEMA might  have had $11–17 billion in premiums net of expenses. This amount—as  much as $1 billion a year—could have been available for losses or debt  repayment. Figure 7 shows the estimated annual aggregate NFIP  premiums had subsidies been eliminated. The low bar assumes a 50  percent increase in aggregate NFIP premiums and the high bar assumes  a 75 percent increase.
We estimated $18–23 billion in forgone premiums during 2002–2013,  using FEMA’s second statement that subsidized premiums cover 45–50  percent of long-term expected losses. As FEMA also would have  incurred additional expenses if it had been able to collect the forgone  premiums, we estimated that FEMA might have had $13–16 billion in  premiums net of expenses. This amount could have been available for  losses or debt repayment. These ranges fall within those estimated in our  first approach. In this approach, we estimated the difference between  premiums for subsidized policies and their assumed full-risk premiums  based on FEMA’s stated percentage ranges. Figure 8 shows the  estimated full-risk premiums for subsidized policies. Each bar depicts the  annual subsidized premiums actually collected and the estimated forgone  premiums, assuming the low and high ends of FEMA’s statements about  the percentage of losses covered by subsidized premiums.
Finally, we estimated forgone premiums attributable to policies that would  remain subsidized after HFIAA. We refer to remaining subsidized policies  as those with subsidized premiums not subject to FEMA’s 25 percent  annual increases. As discussed earlier, FEMA is phasing out subsidies— through 25 percent annual increases—including for nonprimary  residences, severe repetitive loss properties, and business properties, as  required by the Biggert-Waters Act. Under HFIAA, FEMA also generally  must increase premium rates on other subsidized policies by 5–15  percent annually. See figure 9 for a comparison of estimated forgone  premiums for subsidies subject to 25 percent annual increases and  remaining subsidies.
We estimated forgone premiums for the remaining subsidized policies  would have been $11–14 billion during 2002–2013, again using FEMA’s  statement that subsidized premiums cover 45–50 percent of long-term  expected losses. As FEMA also would have incurred additional expenses  if it had been able to collect the forgone premiums, we estimated that  FEMA might have had $8–9 billion in premiums net of expenses. This  portion could have been available for losses or debt repayment. This  estimate is lower than our estimates from the second calculation because  it includes only a subset of the subsidized policies—those that remained  subsidized after the Biggert-Waters Act and HFIAA changes.
section_title: Fourth Estimation of Forgone Premiums Not Viable Due to Unreliable Premium Data and Insufficient Controls Surrounding Implementation of Data System Changes
paragraphs: FEMA did not proactively validate or monitor implementation of data  system changes, which resulted in unreliable premium data that were  unable to be used for a fourth estimation of forgone premiums. FEMA  needed to modify its data system to implement the changes required in  the Biggert-Waters Act, but did not have sufficient controls in place to  validate that the changes made were complete and accurate. FEMA  provided the contractor that maintains its policy data system instructions  for changes in the system, including adding new data fields (such as the  date of purchase), adding new risk-rating methods to calculate premiums  for policies affected by the Biggert-Waters Act, and developing new edit  checks. For example, because FEMA had to charge full-risk rates for  policies that previously would have qualified for subsidized rates, changes  had to be programmed into the system to identify and require elevation  certificates for the affected policies (both new and renewing). Software  vendors that WYOs and FEMA’s direct agent use to assist them with  servicing flood insurance policies also received these instructions.  FEMA also published a new Flood Insurance Manual that included  updated rate tables and instructions on rating these policies. According to  its usual process, FEMA released instructions for most of the changes 6  months before changes were to be effective. FEMA also issued three  additional sets of changes at 5 months, 3 months, and 2 months before  changes were to be effective. In total, FEMA released more than 350  pages of instructions to the contractor and vendors, the most changes  released in the last several years. The changes became effective on  October 1, 2013.
In an attempt to illustrate forgone premiums, we analyzed over 260,000  pre-FIRM policies for primary residences sold between the date these  changes were effective (October 2013) and the enactment of HFIAA  (March 2014) and found discrepancies in premium data for some of these  policies. To illustrate how forgone premiums could be measured  accurately if flood risk information were available for subsidized policies,  we planned to compare the reported full-risk premiums in the data system  with hypothetical subsidized premiums we could calculate based on  policy information in the data. However, our preliminary results revealed  discrepancies in FEMA’s reported premiums for some of these policies.  These discrepancies, as well as limited monitoring of the contractor’s  progress toward completion of data system changes, called into question  the reliability of the reported premium data in the system and prevented  completion of our analysis. Specifically,
Some policyholders who should have paid full-risk rates after the  Biggert-Waters Act were inaccurately charged subsidized rates.  According to our analysis, 49 percent of the new policies that should  have paid full-risk rates from October 1, 2013, through February 28,  2014, were charged subsidized rates instead. We found that more  than 20 WYOs inaccurately charged subsidized rates for policies  rather than full-risk rates, but most of the policies were sold by a few  WYOs and FEMA’s direct agent. FEMA also found these errors during  its annual operational review of the direct agent about 6 months after  the changes were effective. According to FEMA, no corrections were  made to the affected policies because by that time HFIAA had been  enacted which reinstated subsidies for this category of policies. FEMA  officials stated that most of these errors were attributable to software  provided by the company that is both the direct agent to FEMA and a  software vendor for WYOs. FEMA officials stated that the vendor  subsequently made the necessary corrections to its software.  Although FEMA officials said that they did not suspect problems with  additional vendors, we could not verify this because we did not have  information on which vendor software was used by each WYO.
FEMA’s standard controls for its data system did not detect or report  erroneous premium rates submitted by WYOs and FEMA’s direct  agent and policyholders were under- or overcharged. Typically,  FEMA’s data system, which is administered by a contractor,  automatically checks the premiums submitted by WYOs or its direct  agent when rating a new or renewed policy. If a discrepancy is  detected, an error code is generated and sent to the WYO or the  direct agent for correction. However, for one class of policies in our  analysis—new policies that were rated using one of the new Biggert- Waters Act-related risk-rating methods to calculate premiums—our  preliminary results showed that about 28 percent of these  policyholders paid at least 5 percent more in premiums than they  should have, or paid at least 5 percent less in premiums than they  should have based on the rates available in FEMA’s data.  Additionally, for another class of policies—those rated tentatively or  provisionally (about 4,400 policies—about 2 percent of policies in our  analysis)—about 45 percent of policies analyzed had premiums that  were off by more than 5 percent based on the rates available in  FEMA’s data. Including both of these groups, more than 30,000  policies were affected. FEMA officials acknowledged these errors.  Automatic edit checks were not performed on these policies, so the  system did not detect or report these errors. After we discussed these  discrepancies with FEMA officials, they conducted an inquiry with the  contractor in August and September 2014. As a result, the contractor  informed FEMA that it had not implemented all the required system  changes before the effective date and that it had disabled some  automatic edit checks. According to documentation from the  contractor, the contractor did not sufficiently communicate either issue  to FEMA. Because the edit checks were inoperative, FEMA did not  receive complete error reports and its controls, such as monitoring  data system error rates and reviewing error reports, did not identify  any problems. In response, FEMA required the contractor to  implement the changes within 10 days or be in violation of the  contract. Changes included implementing automatic checks on  premiums calculated using the new Biggert-Water Act rating methods  and enabling error checks on new data fields (such as the date of  purchase). According to contractor documentation, the contractor  implemented most of the changes as of September 2014. As of  October 2014, FEMA had not yet verified these changes.
FEMA’s monitoring was not sufficient to identify problems with the  contractor’s implementation of system changes before changes were  effective. FEMA has processes in place to monitor contractor  performance, but monitoring reports provided minimal information on  the progress of the data system changes. For example, the contractor  submits weekly performance reports and presents information from  these reports in monthly reports that are reviewed by FEMA  contracting office staff and the contracting officer’s representative.  The reports also are available to management. The monthly reports  track risks and issues associated with selected objectives, key  milestones, and the progress toward completion of these objectives.  We reviewed the reports from April 2013 through June 2014 and  found that the weekly contractor performance reports included  documentation of FEMA providing the contractor clarifications.  However, the reports included minimal information on the progress of  the implementation of the data system changes—stating, for example  that programming changes were continuing—with many weeks  passing without updates. Furthermore, the monthly reports that are  available for management to review did not track the status of the  data system changes. Following FEMA’s inquiry about the data  discrepancies described previously, the contractor informed FEMA  that 50 percent of the changes scheduled to be effective on October  1, 2013, had been implemented by the required date and 70 percent  of the changes scheduled to be effective on June 1, 2014, had been  implemented by the required date.
Federal internal control standards and FEMA’s data system manual and  contracting officer’s representative handbook provide guidelines for  controls and monitoring. For example, the internal control standards and  data system manual state that error checks should be implemented to  help ensure the accuracy of data being entered and that changes should  be verified. Specifically, according to federal internal control standards,  data validation and edit checks should be performed at all interfaces with  other systems to identify erroneous data. Erroneous data should be  captured, reported, investigated, and promptly corrected, according to  internal controls and FEMA’s data system manual. In addition, controls  should be in place to determine whether changes to technology have  been made properly. This may involve reviewing changes and testing  results. Further, FEMA’s data system manual states that a system check  (to verify the premium) is to be performed for all policies that have the  data required to calculate the premium. Errors associated with this  verification should be noted on the file. Regarding monitoring, FEMA’s  handbook for contracting officer’s representatives states that these  representatives are responsible for monitoring the contractor’s  compliance with all requirements of the statement of work and reporting  any potential or existing problems. Such monitoring enables the agency  to ensure progress toward completion of the contractor’s specific  requirements. One objective in the data contractor’s statement of work is  implementing data system changes as required.
FEMA provided the contractor, WYOs, and vendors with instructions for  implementing changes, including adding edit checks for new data  elements, but its controls were not sufficient to identify problems with the  contractor’s and vendors’ implementation of the changes before the  changes were effective.
FEMA did not verify the contractor’s implementation of  programming changes and edit checks before the rating changes  became effective. FEMA officials told us they provided the  contractor and vendors the requirements 6 months before they  were to be effective—which is the typical process—and that  regular reports from the contractor and other correspondence with  the contractor to provide clarifications did not indicate any  problems or delays with implementation of the changes. Further,  FEMA did not take any additional steps to ensure that the  contractor had implemented the data system changes until August  after we identified a number of discrepancies.
FEMA does not verify that changes in vendors’ software that  assists agents in generating rates are correctly implemented  before the changes are effective. FEMA officials said that the  WYOs and FEMA’s direct agent are responsible for monitoring  their software vendors and that FEMA does not have direct  oversight.
FEMA officials noted that they rely on processes such as data system  monitoring and error report reviews to identify errors from the contractor  or vendors, and that they did not identify these errors sooner because edit  checks were inoperable. Documentation from the contractor in response  to FEMA’s August and September 2014 inquiries states that it revised the  edit check strategy without FEMA’s approval.
In addition to insufficient controls, FEMA’s monitoring reports did not  contain sufficient information to identify problems with the implementation  of the changes before the changes were effective. FEMA maintained  documentation of change requests and responses provided to the  contractor’s questions and has regular reports from the contractor to  monitor performance, but these documents did not capture critical  information needed to oversee the contractor’s progress toward  completion of the data system changes. For example, the template for  monthly monitoring reports includes tracking of key milestones and status  of the percentage complete, but FEMA did not direct the contractor to  track the progress of implementing data system changes in these reports,  even though the number of required data system changes was the most  changes released in the last several years.
As a result of not proactively monitoring or verifying the implementation of  data system changes, premium data for the policies between the  implementation of the Biggert-Waters Act and enactment of HFIAA were  unreliable and some policyholders were charged inaccurate rates. We  determined that the premium data for these policies did not meet GAO  reliability standards for our planned analysis to illustrate forgone  premiums. In addition, FEMA officials stated that they used the data from  this time period to characterize policies that previously qualified for  subsidies but were charged full-risk rates. Because of inaccuracies in  these data, FEMA cannot rely on these data for business planning or  other purposes. Furthermore, because WYOs and FEMA’s direct agent  did not consistently apply rating changes between the implementation of  the Biggert-Waters Act and enactment of HFIAA, our analysis shows that  subsidized rates were incorrectly applied to at least 50,000 policies that  should have been charged full-risk rates, and at least 30,000 other  policyholders were over- or undercharged. The financial impact to NFIP of  these inaccurate rates may have been negligible because HFIAA  repealed many of the Biggert-Waters Act immediate subsidy removal  provisions and required refunds to policyholders who again qualified for  subsidized rates. However, the errors demonstrate that FEMA lacks  sufficient controls over implementing changes to its data system. Without  validating that the contractor and vendors have fully implemented  changes and edit checks before processing refunds (scheduled for  October through December 2014) and making additional changes  associated with HFIAA (scheduled for April 2015), FEMA risks further  inaccuracies in its data. In addition, without monitoring progress toward  completion of data system changes, FEMA may not be aware of the full  extent of problems its typical error reports may identify and would have  inadequate information to oversee the performance of the contract.
section_title: Conclusions
paragraphs: Our analysis shows that forgone premiums associated with subsidies  could be as much as $1 billion dollars a year, but our estimates are  imprecise because of the lack of information on policies’ flood risk. FEMA  agreed with our previous recommendation (from July 2013) that it develop  and implement a plan to obtain information on the relative risk of flooding  and property elevations for subsidized policies. We acknowledge the  difficulty and expense involved in obtaining precise flood risk information,  but maintain the position that our recommendation is valid and should be  fully implemented because the number of subsidized policies could grow  under HFIAA. Flood risk information (such as from elevation certificates)  is needed to correctly charge full-risk rates to an increasing number of  policies as FEMA phases out subsidies, but FEMA continues to rely on  policyholders to voluntarily submit it. In addition, such information could  help FEMA provide policyholders information about their flood risk as  required by HFIAA.
FEMA did not proactively validate or monitor the implementation of large- scale changes to its data system before the rating changes became  effective, and the reliability of premium data and other information  submitted to its system was compromised. In addition, FEMA was  unaware of the extent of delays and errors in its data system. Federal  internal control standards call for agencies to have controls in place to  help ensure the accuracy of all transactions and to determine if data  system changes have been made properly. FEMA’s contracting officer’s  representative handbook also states that a contractor’s performance  should be monitored to ensure progress toward completion of specified  requirements. However, FEMA lacked sufficient controls to oversee its  contractor’s and software vendors’ implementation of data system  changes before the changes were effective and therefore premium data  and other information on policies subject to full-risk rates between  October 1, 2013, and March 21, 2014 (the enactment of HFIAA) are  unreliable. The consequences of the data unreliability are broad, affecting  programmatic decision making (such as rate setting), accuracy of  policyholders’ rates, and stakeholders that rely on the accuracy of  FEMA’s data. Moreover, FEMA is planning further changes to its system  in 2015. Monitoring progress toward completion and adding controls,  such as data validation, as FEMA processes refunds and implements the  additional changes can help ensure proactively that accurate data on  policies are recorded, policyholders are charged appropriate rates, and  inaccuracies are not further propagated in FEMA’s data system.
section_title: Recommendations for Executive Action
paragraphs: To better ensure that future data system changes are fully and accurately  implemented before they become effective, we recommend that the  Secretary of the Department of Homeland Security (DHS) direct the  FEMA Administrator to take the following three actions:  Institute internal controls, such as testing a sample of policies, to  validate that the data system contractor fully implemented changes  and edit checks before program changes become effective.
Obtain information verifying the status of software vendors’  implementation of program changes in their systems before program  changes become effective. For example, this could include instructing  WYOs and the direct agent to include controls or status updates in the  terms of work or contracts with their software vendors.
Require the data system contractor to include detailed information on  the progress toward completion of major data system changes in  regular monitoring reports, such as weekly status updates and  monthly reports.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FEMA within DHS for its review and  comment. DHS provided written comments that are presented in  appendix II. In its letter, DHS concurred with our three recommendations  and has begun taking actions to address two. First, to respond to the  recommendation for internal controls to validate system changes, FEMA  has instituted a test plan that will be used to validate the October 2013  and June 2014 system changes as well as future changes. Second, to  respond to the recommendation for enhanced reporting by the data  system contractor, FEMA has been developing a standard operating  procedure to monitor progress toward completion of major data system  changes. In addition, DHS stated that FEMA will work with the WYOs to  obtain information on the status of their vendors’ implementation of  system changes beginning with changes scheduled for April 2015.  FEMA  also provided technical comments, which we have incorporated in the  report, as appropriate.
We are sending copies of this report to the appropriate congressional  committees and the Secretary of Homeland Security. In addition, the  report is available at no charge on the GAO website at  http://www.gao.gov.
If you have any questions about this report, please contact me at (202)  512-8678 or cackleya@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters  Act) mandated that we conduct a number of studies about the National  Flood Insurance Program (NFIP), including a study on the cost of forgone  premiums of the properties that receive subsidized rates. This report  discusses the estimated forgone premiums for subsidized policies during  2002–2013, and issues we identified surrounding modifications made to  the Federal Emergency Management Agency’s (FEMA) data system to  implement changes required under the Biggert-Waters Act.
To estimate forgone premiums, we compiled information on premiums  from the NFIP policy databases of FEMA, and information on expenses  and published statements regarding the size of the subsidy from FEMA’s  actuarial rate review documents. First, to obtain the number and  premiums associated with all NFIP policies, all subsidized policies, and  subsidized policies that would continue to receive subsidized premium  rates (those not subject to 25 percent annual increases) after the  Homeowner Flood Insurance Affordability Act of 2014 (HFIAA), we  analyzed data from NFIP’s policy database. These data represent  snapshots from the end of fiscal years 2002–2013. We applied the same  algorithm that FEMA used to determine which policies were subsidized  before the Biggert-Waters Act, and applied FEMA’s interpretation of the  provisions in the Biggert-Waters Act that eliminated subsidies and the  provisions in HFIAA that restored subsidies. We adjusted all premium  amounts for each year into 2014 dollars by applying gross domestic  product (GDP) price indexes provided by the Bureau of Economic  Analysis. Second, to determine the percentage of NFIP premiums  required for fixed and variable expenses for each year, we obtained  historical information on NFIP expenses for 2002–2011, and projected  expenses information for 2012–2013 from FEMA’s actuarial rate reviews.  Third, to obtain FEMA-published information on the size of the subsidy,  we compiled the percentage amounts for the following statements from  FEMA’s actuarial rate reviews for 2002–2013:  If subsidies were eliminated, aggregate NFIP premiums would  increase by 50–75 percent after expenses.
Subsidized premiums, on average, cover 45–50 percent of expected  full-risk losses after expenses.
With all information compiled, for each year, we selected the relevant  premiums (premiums from all NFIP policies, all subsidized policies, and  subsidized policies that would continue to receive subsidized premium  rates after HFIAA), and applied the FEMA statements about the size of  the subsidy to three calculations to estimate forgone premiums. First, we  used aggregate NFIP premiums and FEMA’s statement that if subsidies  were eliminated, overall NFIP premiums would increase by 50–75 percent  after expenses. Second, we used all subsidized premiums and FEMA’s  statement that subsidized premiums, on average, cover 45–50 percent of  full-risk losses. Third, we used subsidized premiums for the portion of  subsidized policies with characteristics that would have allowed them to  receive subsidies after HFIAA and the same statement that subsidized  premiums, on average, cover 45–50 percent of full-risk losses.
Using the relevant premiums we performed the following:
To estimate the high and low values of the range for forgone  premiums net of expenses for each year for the first calculation, we  subtracted expenses from the premiums collected and multiplied the  result by the high and low values of the percentage range.
To estimate the high and low values of the range for forgone  premiums net of expenses for each year for the second and third  calculations, we subtracted expenses from the premiums collected  (premiums collected net of expenses) and divided the premiums  collected net of expenses by the high and low values of the  percentage range. We then subtracted premiums collected net of  expenses from the result.
To estimate the high and low values of the range for forgone  premiums for each year for each calculation, we increased the high  and low values of the range for forgone premiums net of expenses by  the variable expense percentage.
Finally, to estimate the high and low values of the range for forgone  premiums and forgone premiums net of expenses for 2002–2013 for  each calculation, for all years we added the low-range values together  and the high-range values together.
We assessed the reliability of FEMA’s policy and expense data by  gathering and analyzing available information about how the data were  created and maintained and performed electronic tests of required data  elements of the policy data. We determined that these policy and  expense data were sufficiently reliable to use for the three calculations  described above. FEMA officials said that the statements about the size  of the subsidy should not be considered precise or definitive. They stated  they based their statements about the size of the subsidy for 2002 on  their analysis of a 1999 PricewaterhouseCoopers (PwC) report that  sampled structures around the nation that were built before flood  insurance rate maps (FIRM) became available, determined their flood  zones, elevations relative to base flood elevation (BFE), and full-risk  rates, and then projected a nationwide distribution of the policies. FEMA  officials stated that they used professional judgment to make adjustments  to the statements about the size of the subsidy for 2003–2013 based on  how rate increases for subsidized policies compared with inflation. FEMA  officials stated that these statements were the only information available  on the size of the subsidy. Therefore, we used them, but we added  caveats to our estimate and noted the several limitations to using these  statements to produce our estimates. First, as previously noted, FEMA  officials said the statements should not be considered definitive or  precise; therefore, our estimates also are not precise. Second, relying on  these statements limited the scope of our analysis because FEMA did not  include these statements before 2002. Therefore, we could not estimate  the total historic forgone premiums of these subsidies and limited our  scope to 2002–2013. In the past, FEMA had subsidized a much larger  percentage of policies (about 76 percent in 1978, compared with 21  percent in 2013), so current estimates should not be applied to previous  years. Third, FEMA’s statements do not account for any changes in  program participation that could result from increasing the premium rates  of subsidized policies to full-risk rates.
Additionally, we attempted to calculate hypothetical subsidized premiums  for primary residential policies that for a short, recent period paid full-risk  rates but that would have qualified for subsidies before the Biggert- Waters Act. We planned to compare the hypothetical premiums with the  full-risk premiums policyholders actually paid. FEMA began charging full- risk rates to new policies in this category on October 1, 2013, but HFIAA  (enacted in March 2014) repealed the provision to charge full-risk rates to  these policies. Therefore, for these calculations, we used FEMA’s policy  rating methodology and obtained NFIP policy data as of February 28,  2014, and selected policy records with effective dates from October 1,  2013, through February 28, 2014. To select records that would have  qualified for a subsidy before the Biggert-Waters Act, we applied a  modified version of FEMA’s algorithm to determine which policies were  pre-FIRM, primary residence policies in special flood hazard areas  without consideration of elevation. We used two methodologies to  determine which policies were new and therefore immediately subject to  full-risk rates; however, changes affecting data fields we used in these  methodologies were among those that had not been implemented by the  contractor, thus impacting our ability to complete the analysis. First, we  used FEMA’s rating method field that would indicate (according to FEMA  documentation) that the policy was affected by the Biggert-Waters Act.  Using this method, we found the policies that FEMA officials  acknowledged had been erroneously charged subsidized rates. Second,  at FEMA officials’ suggestion, we used a data field that would indicate a  new policy and the new purchase date field. Similarly, we found that  many policies had been charged subsidized rates and that the new  purchase date field was unreliable because of either missing or invalid  data for more than 95 percent of the policies. Therefore, without a valid  methodology for selecting policies and without reliable premium data, we  were not able to complete our analysis.
To determine subsidized rates that each policy holder would have paid,  we used FEMA’s premium rate tables and rating methodology for its flood  insurance manual effective October 1, 2013, and variables in the data to  select the proper basic and additional coverage rates for building and  contents coverage for each policy. To calculate the subsidized premiums,  we first added (1) the basic building rate multiplied by the amount of  building coverage, up to the basic insurance limit; (2) the additional  building rate multiplied by the amount of additional building coverage; (3)  the basic contents rate multiplied by the amount of contents coverage up  to the basic insurance limit; and (4) the additional contents coverage rate  multiplied by the amount of additional contents. Second, we multiplied the  result by the deductible factor and added the Increased Cost of  Compliance (ICC) premium. Third, we subtracted the Community Rating  System (CRS) discount, and added the probation surcharge and federal  policy fee.
To determine which policies were paying full-risk rates, for each record,  we compared our determined building and contents basic rates to those  assigned in the data. We considered those that matched to be subsidized  and would have removed them from further analysis. However, we  identified a number of discrepancies in the data and determined that the  data were not sufficiently reliable to be used for this analysis. For  example, using either methodology for selecting new policies resulted in  more than 45 percent of policies receiving subsidized rather than full-risk  rates. Additionally, some policies that had rate matches did not match on  premium. We therefore calculated a premium based on FEMA’s rates and  found additional problems with the premiums in the data. As policy  selection and the reliability of the reported full-risk premiums were critical  to our analysis, we determined the data to be unreliable for this analysis.
We reported these and additional discrepancies to FEMA officials. FEMA  conducted an inquiry with the data system contractor. As a result, the  contractor informed FEMA that several requirements for changes that  should have been in place by October 2013 had not been implemented,  including system checks on new fields and checks on reported premiums  for certain policies. Additionally, FEMA officials stated that they had  found vendor issues in an operational review in April that showed that not  all vendors had the October 2013 changes in place. We also analyzed  recent NFIP legislation and examined FEMA’s implementation of  legislative requirements authorizing subsidized rates for certain properties  in high-risk locations. To calculate the number of annual rate increases  required for subsidized premium rates to reach full-risk rates, we used  FEMA’s building coverage rates for subsidized and full-risk rates effective  March 21, 2014—FEMA’s most recent published rates for policies below  BFE at the time of analysis. To adjust full-risk rates by inflation, we  applied FEMA’s full-risk rate amounts for building coverage for properties  in AE flood zones at BFE, at 2 feet below BFE, at 5 feet below BFE, and  at 10 feet below BFE by the gross domestic product (GDP) price index for  each of the next 30 years. To calculate the yearly subsidized rates after  increases, we annually increased the subsidized rate amounts for building  coverage by 5 percent, 15 percent, and 25 percent. To determine the  number of years before the subsidized rate reached the full-risk rates at  the same elevations, for each year we compared the increased  subsidized rate with the inflation-adjusted full-risk rate, noting when the  subsidized rate exceeded the full-risk rate at each elevation. In addition,  to determine the extent that status information was required and present  in contractor reports, we analyzed the statement of work for the contract  and status documents prepared by the contractor and FEMA from April  2013 through June 2014. Finally, we interviewed FEMA actuaries,  underwriters, and program management.
We conducted this performance audit from May 2014 to December 2014  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: Comments from the Department of Homeland Security
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jill Naamane (Assistant Director);  Karen Jarzynka-Hernandez (Analyst-in-Charge); Pamela Davidson;  Catrin Jones; May Lee; Barbara Roesmann; Jessica Sandler; Jena  Sinkfield; Frank Todisco; and Jack Wang made key contributions to this  report.