Flood Insurance: Challenges Facing the National Flood Insurance Program
Published: 2003-04-01T00:00:00

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 economic loss to the nation. The National Flood Insurance Program is a key component of the federal government's efforts to minimize the damage and financial impact of floods. The program identifies flood-prone areas of the country, makes flood insurance available in the nearly 20,000 communities that participate in the program, and encourages flood-plain management efforts. Since its inception in 1969, the National Flood Insurance has provided $12 billion in insurance claims to owners of flood-damaged properties, and its building standards are estimated to save $1 billion annually. The program has been managed by the Federal Emergency Management Agency, but along with other activities of the agency, it was recently placed into the Department of Homeland Security. GAO has issued a number of reports on the flood insurance program and was asked to discuss the current challenges to the widespread success of the program.
section_title: What GAO Found
paragraphs: The program faces the following challenges in operating the program effectively and protecting property owners from loss from floods. Improving information on the program's financial condition: Cash-based budgeting, which focuses on the amount of funds that go in and out of a program in a fiscal year, obscures the program's costs and does not provide information necessary to signal emerging problems, such as shortfalls in funds to cover the program's risk exposure. Accrual-based budgeting better matches revenues and expenses, recognizes the risk assumed by the government, and has the potential to overcome the deficiencies of cash-based budgeting. Reducing losses to the program resulting from policy subsidies and repetitive loss properties: The program has lost money and is not actuarially sound because about 29 percent of the policies in force are subsidized but appropriations are not provided to cover the subsidies. Owners of structures built before the flood zone was included in the program pay reduced premiums that represent only about 35-40 percent of the true risk premium. Further, repetitive loss properties--properties with two or more losses in a 10-year period--add to program losses as they represent 38 percent of claims losses but account for 2 percent of insured properties. Increasing property owner participation in the program: The administration has estimated that less than 50 percent of eligible properties in flood plains participate in the program. Additionally, even when the purchase of insurance is mandatory, the extent of noncompliance with the mandatory purchase requirement is unknown and remains a concern. Actions have been initiated or proposed by the administration or in the Congress to address some of the challenges. However, the affect of some actions on the program is not clear. For example, reducing subsidies may cause some policyholders to cancel their policies, reducing program participation and leaving them vulnerable to financial loss from floods. Further, placement of the program within the Department of Homeland Security has the potential to decrease the attention, visibility, and support the program receives.

section_title: Letter
paragraphs: Floods have been, and continue to  be, the most destructive natural  hazard in terms of economic loss to  the nation.  The National Flood  Insurance Program is a key  component of the federal  government’s efforts to minimize  the damage and financial impact of  floods.  The program identifies  flood-prone areas of the country,  makes flood insurance available in  the nearly 20,000 communities that  participate in the program, and  encourages flood-plain  management efforts.  Since its  inception in 1969, the National  Flood Insurance has provided $12  billion in insurance claims to  owners of flood-damaged  properties, and its building  standards are estimated to save $1  billion annually.  The program has  been managed by the Federal  Emergency Management Agency,  but along with other activities of  the agency, it was recently placed  into the Department of Homeland  Security.
The program faces the following challenges in operating the program  effectively and protecting property owners from loss from floods.
Improving information on the program’s financial condition.   Cash-based budgeting, which focuses on the amount of funds that go in  and out of a program in a fiscal year, obscures the program’s costs and  does not provide information necessary to signal emerging problems,  such as shortfalls in funds to cover the program’s risk exposure.   Accrual-based budgeting better matches revenues and expenses,  recognizes the risk assumed by the government, and has the potential to  overcome the deficiencies of cash-based budgeting.
Reducing losses to the program resulting from policy subsidies  and repetitive loss properties. The program has lost money and is not  actuarially sound because about 29 percent of the policies in force are  subsidized but appropriations are not provided to cover the subsidies.   Owners of structures built before the flood zone was included in the  program pay reduced premiums that represent only about 35-40 percent  of the true risk premium.  Further, repetitive loss properties—properties  with two or more losses in a 10-year period—add to program losses as  they represent 38 percent of claims losses but account for 2 percent of  insured properties.  Increasing property owner participation in the program.  The  administration has estimated that less than 50 percent of eligible  properties in flood plains participate in the program.  Additionally, even  when the purchase of insurance is mandatory, the extent of  noncompliance with the mandatory purchase requirement is unknown  and remains a concern.
GAO has issued a number of  reports on the flood insurance  program and was asked to discuss  the current challenges to the  widespread success of the  program.
Actions have been initiated or proposed by the administration or in the  Congress to address some of the challenges.  However, the affect of some  actions on the program is not clear.  For example, reducing subsidies may  cause some policyholders to cancel their policies, reducing program  participation and leaving them vulnerable to financial loss from floods.   Further, placement of the program within the Department of Homeland  Security has the potential to decrease the attention, visibility, and support  the program receives. www.gao.gov/cgi-bin/getrpt?GAO-03-606T.
To view the full testimony, click on the link  above. For more information, contact  JayEtta Z. Hecker, (202) 512-2834,  Heckerj@gao.gov.
Mr. Chairman and Members of the Subcommittee:  I appreciate the opportunity to submit this statement for the record on the  National Flood Insurance Program and challenges to its success. Floods  have been, and continue to be, the most destructive natural hazard in  terms of economic loss to the nation. The flood insurance program, which  has been administered by the Federal Emergency Management Agency  (FEMA), has been a key component of the federal government’s efforts to  minimize the impact of floods and to provide flood-related disaster relief.  For example, the program has been credited by the administration with  saving a billion dollars annually by improving flood plain management and  setting building standards—such as one to elevate properties—that have  reduced potential losses. Additionally, the approximately $12 billion paid  in insurance claims from 1969 through 2002 to policyholders has been  funded primarily by policyholders’ premiums, thus saving the federal  government from paying all damage-related expenses in the aftermath of  floods.
Nevertheless, the flood insurance program faces challenges. In reports  published within the last few years, FEMA’s Inspector General and we  have identified a number of concerns with the program’s financial viability  and with the extent to which flood insurance policies have been purchased  for structures in flood-prone areas. In addition, the administration noted in  its fiscal year 2004 budget request that the program is only moderately  effective; it and the Congress have proposed measures to improve the  program’s effectiveness. With the creation of the Department of Homeland  Security (DHS) and the inclusion of FEMA’s functions within it, the  program—along with its associated problems and improvement  measures—has now become the responsibility of the new department.
My statement today is based primarily on our past work and on  preliminary results from ongoing work that we are conducting for the  Subcommittee examining flood zone remapping efforts. I will provide a  perspective on (1) the program’s presentation of financial information, (2)  the major causes of losses in the program, (3) the extent of property  owner participation in the program, and (4) recent actions taken or  proposed to improve the program. In summary:    The flood insurance program’s use of cash-based budgeting may present  misleading information on the program’s financial condition. Cash-based  budgeting, which focuses on the amount of funds into and out of the  program in a fiscal year, can obscure the program’s costs because the time  between the extension of insurance, the receipt of premiums, the  occurrence of insured events, and payment of claims may extend over  several fiscal years. Further, this form of budgeting may not provide the  information necessary to signal emerging problems, such as shortfalls in  funds to cover the program’s risk exposure. The use of accrual-based  budgeting—which, among other things, better matches revenues and  expenses and recognizes the liability for future insurance claim  payments—has the potential to overcome a number of the deficiencies in  cash-based budgeting.
Subsidies on certain policies and so-called repetitive loss properties— properties that have experienced two or more losses greater than $1,000 in  a 10-year period—have been the principal causes of the flood insurance  program’s long-term losses. About 29 percent of all policies in force are  subsidized, and on average the premiums for these policies are only about  35-40 percent of—and about $500 million annually less than—the true risk  premium for those properties. Additionally, about 38 percent of all  program claims have been the result of repetitive loss properties, at a cost  of about $200 million annually.
Flood insurance program participation—the percentage of structures in  designated flood zones that are insured—may be low, resulting in many  property owners being at risk of financial loss due to flooding. The  administration estimates that less than half of the eligible properties in  flood plains participate in the program. Further, even when the purchase  of flood insurance is mandatory—properties in flood zones with  mortgages from federally regulated lenders are required to have flood  insurance—the extent of noncompliance with this requirement is  unknown and remains a concern.
Recent actions have been taken or proposed by the administration and the  Congress that may affect the program. These include actions to eliminate  the premium subsidy on properties that are second homes or vacation  properties, to phase out coverage or begin charging full and actuarially  based rates for repetitive loss properties, and to undertake an expanded  program to update flood maps upon which the program bases its  insurance rates and mandatory purchase requirements. While these  actions will address some of the challenges in the program, certain actions  may have adverse implications—for example, increasing premiums to  subsidized policyholders may cause some to cancel their insurance and  remapping flood zones may bring into the program more properties that  could be subsidized. Moreover, action has not been taken to move the  program to accrual-based budgeting. Finally, the placement of the  program—which is not directly security related—into the new Department  of Homeland Security may affect the amount of attention the program  receives as it pursues nonsecurity- related goals in a department that is  under tremendous pressure to succeed in its primary mission of securing  the homeland.
Before I discuss these issues in greater detail, I would like to briefly  explain the National Flood Insurance Program and its importance to the  federal flood management effort.
subsections: section_title: The National Flood Insurance Program Has Sought to Minimize Flood- Related Losses
paragraphs: 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 enacted the  National Flood Insurance Act (P.L. 90-448) that created the National Flood  Insurance Program. Since its inception, the program 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 known as special flood hazard 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  encourages floodplain management efforts to mitigate flood hazards. The  program has paid about $12 billion in insurance claims, primarily from  policyholder premiums that otherwise would, to some extent, have  increased taxpayer-funded disaster relief.
Under the program, flood insurance rate maps (FIRM) have been prepared  to identify special flood hazard areas—also known as 100-year  floodplains—that have a 1-percent or greater chance of experiencing  flooding in any given year. For a community to participate in the program,  any structures built within a special flood hazard area after the FIRM 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 are  saving about $1 billion annually in flood damage avoided.
When the program was created, the purchase of flood insurance was  voluntary. To increase the impact of the program, however, the Congress  amended the original law in 1973 and again in 1994 to require the purchase  of flood insurance in certain circumstances. Flood insurance was 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. Owners  of properties with no mortgages or properties with mortgages held by  unregulated lenders were not, and still are not, required to purchase flood  insurance, even if the properties are in special flood hazard areas.
The National Flood Insurance Reform Act of 1994 that 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 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.  Regarding the prohibition on further flood disaster assistance, the act  prohibits borrowers who have received certain disaster assistance, and  then failed to obtain flood insurance coverage, from receiving future  disaster aid.
FEMA’s Federal Insurance and Mitigation Administration has been  responsible for managing the flood insurance program. However, the  Homeland Security Act of 2002 transferred this responsibility to the  Department of Homeland Security (DHS). As part of the largest  reorganization of the federal government in over 50 years, the legislation  combined about 170,000 federal employees, 22 agencies, and various  missions—some that have not traditionally been considered security  related—into the new department. FEMA’s responsibilities, including the  flood insurance program, were placed in their entirety into DHS, effective  March 1, 2003. Responsibility for the flood insurance program now resides  in DHS’s Emergency Preparedness and Response Directorate.
section_title: Cash-Basis Budgeting Does Not Provide All Needed Information on Flood Insurance Program’s Financial Condition
paragraphs: Historically, federal government programs, including the National Flood  Insurance Program, report income and expenditures on a cash basis— income is recorded when received and expenditures are recorded when  paid. Over the years, the annual reporting of the program’s premium  revenues and its claims losses and expenses has shown wide fluctuations  in cash-based operating net income or losses. For example, for fiscal year  2002, the program had a net income of $755 million, but in the previous  year it had a net loss of $518 million. For the life of the program, the  program has shown a net loss of $531 million. The program has, on  numerous occasions, borrowed from the U.S. Treasury to fund claims  losses.
This “cash-based” budgeting, although useful for many government  programs, may present misleading financial information on the flood  insurance program. In 1997 and again in 1998,  we reported that cash- based budgeting has shortcomings for federal insurance programs.  Specifically, its focus on single period cash flows can obscure the  program’s cost to the government and thus may (1) distort the information  presented to policymakers, (2) skew the recognition of the program’s  economic impact, and (3) cause fluctuations in the deficit unrelated to  long-term fiscal balance. The focus on annual cash flows—the amounts of  funds into and out of a program during a fiscal year—may not reflect the  government’s cost because the time between the extension of the  insurance, the receipt of premiums, the occurrence of an insured event,  and the payment of claims may extend over several fiscal years.
For the flood insurance program, cash-based budgeting may not provide  the information necessary to signal emerging problems, make adequate  cost comparisons, or control costs. For example, under its current  practices, the program provides subsidized policies without explicitly  recognizing the potential cost to the government. Under current policy, the  Congress has authorized subsidies to be provided to a significant portion  of the total policies in force, without providing annual appropriations to  cover the potential cost of these subsidies. The program, as designed, does  not charge a premium sufficient to cover its multiyear risk exposure. As a  result, not only is the program actuarially unsound, but also the size of the  shortfall is unknown. This is a concern that the administration has  recognized and identified as a financial challenge to the flood insurance  program.
The use of accrual-based budgeting for the flood insurance program has  the potential to overcome a number of the deficiencies in cash-based  budgeting. Accrual-based budgeting (1) recognizes transactions or events  when they occur, regardless of cash flows; (2) matches revenues and  expenses whenever it is reasonable and practicable to do so; (3)  recognizes the cost for future insurance claim payments when the  insurance is extended; and (4) provides a mechanism for establishing  reserves to pay those costs. In short, because of the time lag between the  extension of an insurance commitment, the collection of premiums, and  the payment of claims, measuring the financial condition of the flood  insurance program by comparing annual premium income and losses  creates a budgetary distortion. That distortion, together with the  misinformation it conveys, could be reduced or eliminated by accrual- based budgeting.
In our 1997 report, we pointed out that developing accrual-based budgets  would be challenging, requiring the development of models to generate  reasonably reliable cost estimates of the risks assumed by federal  insurance programs. Nevertheless, the potential benefits to the flood  insurance program, as well as other federal insurance programs, warrant  the effort to develop these risk-assumed cost estimates. We suggested that  the Congress consider encouraging the development and subsequent  reporting of annual risk-assumed cost estimates for all federal insurance  programs. At this time, the flood insurance program is still using cash- based budgeting for reporting its financial performance. We continue to  believe that the development of accrual-based budgets for the flood  insurance program would be a valuable step in developing a more  comprehensive approach for reporting on the operations and real costs of  this program.
section_title: Policy Subsidies and Payments for Repetitive Losses Contribute to Program Losses
paragraphs: The National 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. Two reasons—policy subsidies and  payments for repetitive losses—have been consistently identified in our  past work and by FEMA to explain financial challenges in the National  Flood Insurance Program. First, the flood insurance program has  sustained losses, and is not actuarially sound, largely because many  policies in the program are subsidized. The Congress authorized the  program to make subsidized flood insurance rates available to owners of  structures built before a community’s FIRM was prepared. For a single- family pre-FIRM property, subsidized rates are available for the first  $35,000 of coverage, although any insurance coverage above that amount  must be purchased at actuarial rates. These pre-FIRM structures are  generally more likely to sustain flood damage than later structures  because they were not built according to the program’s building standards.  The average annual premium for a subsidized policy is $637, representing  about 35-40 percent of the true risk premium for these properties.
According to flood insurance program officials, about 29 percent of the 4.4  million policies in force are currently subsidized. Although this percentage  of subsidized policies is substantially lower than it was in the past, it still  results in a significant reduction in revenues to the program. Program  officials estimate that the total premium income from subsidized  policyholders is currently about $500 million per year less than it would be  if these rates had been actuarially based and participation remained the  same. Originally, funds to support subsidized premiums were appropriated  for the flood insurance program; however, since the mid-1980s no funds  have been appropriated, and the losses resulting from subsidized policies  must be borne by the program.
As we reported in July 2001, increasing the premiums charged to  subsidized policyholders to improve the program’s financial health could  have an adverse impact. Elimination of the subsidy on pre-FIRM structures  would cause rates on these properties to rise, on average, to more than  twice the current premium rates. Program officials estimate that  elimination of the subsidy would result in an annual average premium of  about $1,300 for pre-FIRM structures. This would likely cause some pre- FIRM property owners to cancel their flood insurance. Cancellation of  policies on these structures—which are more likely to suffer flood loss— would in turn increase the likelihood of the federal government having to  pay increased costs for flood-related disaster assistance to these  properties. The effect on the total federal disaster assistance costs of  phasing out subsidized rates would depend on the number of  policyholders who would cancel their policies and the extent to which  future flood disasters affecting those properties occurred. Thus, it is  difficult to estimate whether the increased costs of federal disaster relief  programs would be less than, or more than, the cost of the program’s  current subsidy.
In addition to revenue lost because of subsidized policies, significant costs  to the program result from repetitive loss properties. According to FEMA,  about 38 percent of all claims historically, and about $200 million annually,  represent repetitive losses—properties having two or more losses greater  than $1,000 within a 10-year period. About 45,000 buildings currently  insured under the program have been flooded on more than one occasion  and have received flood insurance claims payments of $1,000 or more for  each loss. Over the years, the total cost of these multiple-loss properties to  the program has been about $3.8 billion.
Although repetitive loss properties represent about one-third of the  historical claims, these properties make up a small percentage of all  program policies. A 1998 study by the National Wildlife Federation noted  that repetitive loss properties represented only 2 percent of all properties  insured by the program, but they tended to have damage claims that  exceeded the value of the insured structure and most were concentrated  in special flood hazard areas. For example, nearly 1 out of every 10  repetitive loss homes has had cumulative flood loss claims that exceeded  the value of the house. Furthermore, over half of all nationwide repetitive  loss property insurance payments had been made in Louisiana and Texas.  About 15 states accounted for 90 percent of the total payments made for  repetitive loss properties.
section_title: Participation in the Program May Be Low
paragraphs: Not only does the National Flood Insurance Program face challenges with  its financial condition, but also in achieving one of the purposes for which  it was created—to make flood insurance the mechanism for property  owners to cover flood losses. Participation rates—the percentage of  structures in special flood hazard areas that are insured—provide a  measure to indicate the degree to which the owners of properties  vulnerable to flooding are protected from financial loss through insurance,  the financial risk to the government from flood-related disaster assistance  is decreasing, and the program is obtaining high levels of premium income.  The rate of participation in the program, however, may be low. In its fiscal  year 2004 budget request, the administration noted that less than half of  the eligible properties in flood areas participate in the program, a  participation rate that was significantly lower than the nearly 90 percent  participation rate for wind and hurricane insurance in at-risk areas.
No comprehensive data are available to measure nationwide participation  rates. However, various studies have identified instances where low levels  of participation existed. For example:    A 1999 DeKalb County, Georgia, participation study determined that of  over 17,000 structures in the special flood hazard areas, about 3,100—18  percent—had flood insurance.
A 1999 FEMA post-disaster study of 11 counties in Vermont found that 16  percent of homes sampled in the special flood hazard areas had flood  insurance.
A 1999 study by the Strategic Advocacy Group of two counties in  Kentucky that had experienced flood disasters found that flood insurance  was in force for 52 percent of homes mortgaged since 1994 and was in  force for 30 percent of homes mortgaged before 1994.
An August 2000 FEMA Inspector General study that noted that statistics  from North Carolina showed that of about 150,000 structures in special  flood hazard areas, 33 percent were covered by flood insurance.
FEMA estimates that one-half to two-thirds of those structures in special  flood hazard areas do not have flood insurance coverage, because the  uninsured owners either are not aware that homeowner’s insurance does  not cover flood damage or do not perceive the serious flood risk to which  they are exposed.
One area of flood insurance participation that should not be of concern,  yet is, are those properties for which the purchase of flood insurance is  mandatory. Flood insurance is required for properties located in flood- prone areas of participating communities for the life of mortgage loans  made or held by federally regulated lending institutions, guaranteed by  federal agencies, or purchased by government-sponsored enterprises. No  definitive data exist on the number of mortgages meeting these criteria;  however, according to program officials, most mortgages made in the  country meet the criteria, and for those in a special flood hazard area, the  property owners would have to purchase and maintain flood insurance  over the life of the loan.
The level of noncompliance with this mandatory purchase requirement is  unknown. As we reported in June 2002, federal banking regulators and  government-sponsored enterprises believe noncompliance is very low on  the basis of their bank examinations and compliance reviews. Conversely,  flood insurance program officials view noncompliance with the mandatory  purchase requirement to be significant, based on aggregate statistics and  site-specific studies that indicate that noncompliance is occurring. Neither  side, however, is able to substantiate its differing claim with statistically  sound data that provide a nationwide perspective on noncompliance.
Data we collected and analyzed for our June 2002 report help address  some concerns with the issue of noncompliance, but the issue remains  unresolved. We analyzed available flood insurance, mortgage purchase,  and flood zone data to determine whether noncompliance was a concern  at the time of loan origination. Our analysis of mortgage and insurance  data for 471 highly flood-prone areas in 17 states showed that, for most  areas, more new insurance policies were purchased than mortgages  issued, which suggests noncompliance was not a problem in those areas at  the time of loan origination.
However, data to determine whether insurance is retained over the life of  loans are unavailable, and this issue remains unresolved. There are  indications that some level of noncompliance exists. For example, an  August 2000 study by FEMA’s Office of Inspector General examined  noncompliance for 4,195 residences in coastal areas of 10 states and found  that 416—10 percent—were required to have flood insurance but did not.  Flood insurance program officials continue to be concerned with required  insurance policy retention and are working with federal banking  regulatory organizations and government-sponsored enterprises to identify  actions that can be taken to better ensure borrowers are required to renew  flood insurance policies annually.
section_title: The Administration and the Congress Have Proposed and Initiated Actions to Improve the Program
paragraphs: The administration and the Congress have recognized the challenges  facing the flood insurance program and have proposed actions to improve  it. These actions include the following:    Reducing or eliminating subsidies for certain properties. In the fiscal  year 2004 budget request, the administration proposed ending premium  subsidies for second homes and vacation properties. According to flood  insurance program officials, this change would affect 30 percent of the  properties currently receiving subsidized premiums and would increase  revenue to the program by $200 million annually. Additionally, program  officials plan to increase the rates on all subsidized properties by about 2  percent in May 2003.
Changing premium rates for repetitive loss properties. Two bills—H.R.  253 and H.R. 670—have been introduced to amend the National Flood  Insurance Act of 1968 that would, among other things, change the  premiums for repetitive loss properties. Under these 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.
Improving efforts to increase program participation. The administration  has identified three strategies it intends to use to increase the number of  policies in force: expanded marketing, program simplification, and  increasing lender compliance. With regard to lender compliance, DHS  plans to conduct an education effort with financial regulators about the  mandatory flood insurance requirements for properties with mortgages  from federally regulated lenders. Additionally, DHS plans to evaluate the  program’s incentive structure to attract more participation in the program.
Conducting a remapping of the nation’s flood zones. Many of the nation’s  FIRMs are old and outdated, and for some communities FIRMs have never  been developed. The administration has initiated a multiyear, $1 billion  effort to map all flood zones in the country and reduce the average age of  FIRMs from 13 to 6 years.
While we have not fully analyzed these actions, on the basis of a  preliminary assessment, they appear to address some of the challenges to  the flood insurance program, including two of the key challenges—the  program’s financial losses and the perceived low level of participation in  the program by property owners in flood-prone areas. Reducing subsidies  and repetitive loss properties has the potential to help improve the  program’s financial condition, and increasing program participation would  better protect those living in at-risk areas and potentially lower federal  cost for disaster assistance after flood events. However, as mentioned  earlier, actions such as increasing premiums to subsidized policyholders  could cause some of these policyholders to cancel their flood insurance,  resulting in lower participation rates and possibly raising federal disaster  assistance costs.
The remapping of flood zones could potentially affect both participation  rates and the program’s financial condition. Remapping could identify  additional properties in special flood hazard areas that do not participate  in the program and for which DHS will need to undertake efforts to  encourage their participation in the program. Further, these additional  properties may not meet the program’s building standards since they were  built before the FIRM that included properties in the special flood hazard  area was developed. This could cause the program to offer subsidized  insurance rates for these properties, potentially exacerbating the losses to  the program resulting from subsidized properties. At the Subcommittee’s  request, we have begun a review to examine the remapping effort and its  effects, and will report on the results later this year.
None of these proposals, however, addresses the need to move the  program’s current cash-based budgeting for presenting the program’s  financial condition to accrual-based budgeting. As we noted earlier, the  current method of budgeting does not accurately portray the program’s  financial condition and does not allow the program to create reserves to  cover catastrophic losses and be actuarially sound. If a catastrophic loss  occurs, this may place the program in the position of again having to  borrow substantial sums from the Treasury in order to satisfy all claims  losses.
One additional challenge facing the flood insurance program relates to its  placement in DHS. As we discussed in a January 2003 report on FEMA’s  major management challenges and program risks, the placement in DHS  of FEMA and programs such as flood insurance that have missions not  directly related to security represents a significantly changed environment  under which such programs will be conducted in the future. DHS is under  tremendous pressure to succeed in its primary mission of securing the  homeland, and the possibility exists that the flood insurance program may  not receive adequate attention, visibility, and support as part of the  department. For the flood insurance program to be fully successful, it will  be important for DHS management to ensure that sufficient management  capacity and accountability are provided to achieve the objectives of the  program. In this regard, the President’s fiscal year 2004 budget request  notes that additional reforms to the flood insurance program are being  deferred until the program is incorporated into DHS. This incorporation  has now occurred, and congressional oversight—such as through hearings  like this one today—should help to ensure that DHS maintains appropriate  focus on managing and improving the flood insurance program and  championing the reforms necessary to achieve the program’s objectives.
section_title: Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact JayEtta Z.  Hecker at (202) 512-2834 or William O. Jenkins at (202) 512-8777.  Individuals making key contributions to this testimony included Christine  E. Bonham, Lawrence D. Cluff, Kirk Kiester, John T. McGrail, and John R.  Schulze.