Flood Insurance: Implications of Changing Coverage Limits and Expanding Coverage
Published: 2013-07-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: NFIP was created in 1968 and is the only federal flood insurance available. It may be the sole source of insurance to some residents of flood-prone areas. Mainly due to catastrophic losses in 2005, the program became indebted to the U.S. Treasury and has been unable to repay this debt. Because of NFIPs financial instability and management challenges, GAO placed the program on its High-Risk List in 2006. The Biggert-Waters Flood Insurance Reform Act of 2012 introduced many changes to the program and mandates GAO to study the effects of increasing the maximum coverage limits ($250,000 for residential buildings and $500,000 for commercial buildings) and providing optional coverage for business interruption and additional living expenses. This report discusses (1) existing flood insurance coverage, (2) the potential effects of changing NFIP coverage limits, and (3) the potential effects of allowing NFIP to offer optional coverage for business interruption and additional living expenses. To address these objectives, GAO analyzed data from NFIPs databases of policies and claims, reviewed prior reports, and interviewed brokers, insurers, and representatives from consumer advocacy and industry organizations.
section_title: What GAO Found
paragraphs: The National Flood Insurance Program (NFIP) currently has more than 5.5 million policyholders insured for about $1.3 trillion who pay about $3.5 billion in annual premiums, but less than half purchase maximum coverage--a possible indicator of how many might purchase additional coverage were it offered. However, from 2002 through 2012, the proportion of residential and commercial policies at maximum building coverage rose substantially--from 11 to 42 percent and from 21 to 36 percent, respectively. States along the Gulf and East Coasts have the most residential policyholders with maximum coverage. In addition, states with higher median home values generally have a higher percentage of policyholders purchasing coverage up to the limit. Industry stakeholders said that an unknown number of policyholders with higher-value properties choose to purchase additional, or excess, coverage above the NFIP limit through the private flood insurance market--a small and selective group of insurers.
Increasing coverage limits could increase the net revenue of the program and have varying effects on NFIP, the private insurance market, and consumers. Assuming that higher coverage limits had been in effect from 2002 through 2011, GAO's analysis suggests that NFIP still would have suffered losses during years with catastrophic floods, such as 2004 and 2005, but would have experienced net increases in revenue in other years. Such increases could have offset future losses or helped avoid additional debt, but the overall financial impact and risk to the program would depend on the adequacy of the rates charged, which GAO has questioned in the past, and the number of policyholders opting for additional coverage. Regarding the private flood insurance market and consumers, higher NFIP coverage limits could decrease participating insurers' overall risk exposure and provide more options to consumers, but might lessen participation of private insurers, as consumers might need to purchase less private insurance.
Adding optional coverage to NFIP for business interruption and additional living expenses could result in less uninsured risk in the market, but further negatively impact the financial stability of the program. Industry stakeholders told GAO that business interruption coverage is generally purchased by only larger companies, as its high cost prohibits small- and medium-sized companies from being able to afford it. In addition, adding business interruption coverage to NFIP could be particularly challenging. For example, properly pricing risk, underwriting, and claim processing can be complex. NFIP officials have stated that they would have to hire additional expertise in-house to offer this coverage. Similarly, offering optional coverage for additional living expenses has many of the same potential effects on NFIP, the private market, and consumers, although this coverage is generally less complex to administer.
section_title: What GAO Recommends
paragraphs: GAO continues to support previous recommendations to the Federal Emergency Management Agency (FEMA) that address the need to ensure that the methods and data used to set NFIP rates accurately reflect the risk of losses from flooding. FEMA agreed and has taken some steps to begin to implement them.

section_title: Letter
paragraphs: The National Flood Insurance Program (NFIP) is a key component of the  federal government’s efforts to minimize the damage and financial impact  of floods and is the only source of insurance against flood damage for  most residents of flood-prone areas. NFIP is administered by the Federal  Emergency Management Agency (FEMA) within the Department of  Homeland Security and was created in 1968. As of the end of fiscal year  2012, the program had more than 5.5 million policies insured for about  $1.3 trillion that paid about $3.5 billion in annual premiums.
Until 2004, NFIP was able to cover most of its claims with premiums it  collected and occasional loans from the U.S. Treasury (Treasury) that it  repaid. However, after the 2005 hurricanes—primarily Hurricane  Katrina—the program borrowed $16.8 billion from Treasury to cover the  unprecedented number of claims. NFIP has since received additional  borrowing authority in the amount of $9.7 billion to cover claims for  Superstorm Sandy—and as of May 2013, it owed approximately $24  billion.
Prior to the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert- Waters Act), structural weaknesses in the way the program was funded  and operated made it unlikely that NFIP would be able to repay its debt in  the near future. However, the act reauthorized the program through 2017  and made some significant changes, such as eliminating the subsidies for  certain properties, creating a reserve fund, and eliminating the  grandfathering of properties to old rates after remapping. Because most  of these reforms are being phased in over time, their final financial impact  on the program remains unknown.
As a result of the program’s importance, level of indebtedness, potential  for future losses, and management challenges, we placed NFIP on our  High-Risk List in March 2006. addressed some of NFIP’s structural weaknesses and may help increase  NFIP’s long-term financial stability, the program still faces challenges and  the ultimate effect of the changes is not yet known. In earlier reports, we  identified a number of operational challenges that hindered FEMA’s ability  to effectively administer NFIP and contributed to NFIP’s placement on the  list. Any efforts to help stabilize NFIP will require addressing both the  program’s financial challenges and its operational and management  issues.
The Biggert-Waters Act included several mandates for GAO studies, two  of which are addressed in this report. Specifically, the act mandated that  GAO study the impact of increasing the maximum amount of coverage  available under an NFIP policy and the impact of NFIP providing optional  coverage for business interruption and additional living expenses. This  report discusses (1) existing federal flood insurance coverage, (2) the  potential effects on NFIP’s financial condition, the private insurance  market, and consumers of raising or lowering NFIP coverage limits, and  (3) the potential effects on NFIP’s financial condition, the private  insurance market, and consumers of allowing NFIP to offer optional  coverage for business interruption and additional living expenses.
GAO, GAO’s High-Risk Program, GAO-06-497T (Washington, D.C.: Mar. 15, 2006).
To describe the existing federal flood insurance market, we analyzed  NFIP’s Policy and Claims Masterfiles. We used NFIP’s database of  policies to identify all residential single-unit and nonresidential  (commercial) claims with maximum coverage at the end of fiscal year  2012. We also analyzed the policy database to identify the total  residential policies and commercial policies for each fiscal year from 2002  through 2012 and calculated the proportional increase of those with  maximum building coverage. We further analyzed residential single-unit  policy coverage for 2011 to investigate the association between the  percentage of each state’s policyholders with maximum coverage and a  state’s median home value. In addition, we calculated average payments  for residential and commercial claims that were closed and closed without  payment for the period from 2007 through 2012 using data from FEMA’s  BureauNet. To address the effect on NFIP, the private insurance market,  and consumers of increasing NFIP coverage limits or adding optional  coverage for business interruption and additional living expenses, we  interviewed industry experts, including representatives from FEMA,  insurance industry organizations, brokers, insurance companies, and  consumer advocacy organizations. Using NFIP’s claims and policy  databases, we estimated the effect on NFIP’s financial condition of raising  coverage limits from $250,000 to $417,000 by estimating the impact on  net revenue (premiums less claim payments) for residential single-unit  dwellings from 2002 through 2011. We conducted electronic testing of  specific data elements to test for missing data, validity, and  reasonableness and interviewed knowledgeable agency officials to  assure the reliability of the data, and we determined the data to be  reliable for our purposes. To address all objectives, we also reviewed  prior GAO reports and testimonies and relevant studies conducted by  RAND, Wharton Risk Management and Decision Processes Center,  Deloitte Consulting LLP, the Congressional Research Service, and  academia. For more information on our scope and methodology, see  appendix I.
We conducted this performance audit from September 2012 to July 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: History of NFIP
paragraphs: The National Flood Insurance Act of 1968 established NFIP as an  alternative to providing direct disaster relief after floods. NFIP, which  makes federally backed flood insurance available to residential property  owners and businesses, was intended to reduce the federal government’s  escalating costs for repairing flood damage after disasters. Floods are the  most common and destructive natural disaster in the United States.  However, flooding is generally excluded from homeowners’ insurance  policies that typically cover damages from other losses, such as wind,  fire, and theft. Because of the catastrophic nature of flooding and the  inability to adequately predict flood risks, private insurance companies  have historically been largely unwilling to underwrite and bear the risk that  results from providing primary flood insurance coverage. Under NFIP, the  federal government currently assumes the liability for the insurance  coverage and sets rates and coverage limitations, among other  responsibilities, while the private insurance industry sells the policies and  administers the claims for a fee determined by FEMA. Some of these  same insurers also provide coverage for flood insurance above the limit of  NFIP coverage. A number of private insurers that do not sell and  administer NFIP policies also offer flood insurance. Flood insurance  purchased above current NFIP coverage limits generally is referred to as  excess flood insurance.
Since NFIP’s inception, Congress has several times enacted legislation to  strengthen certain aspects of the program. The Flood Disaster Protection  Act of 1973 made flood insurance mandatory for owners of properties in  vulnerable areas who had mortgages from federally insured or regulated  lenders. The act also provided additional incentives for communities to  join the program. Community participation in NFIP is voluntary. However,  communities must join NFIP and adopt FEMA-approved building  standards and floodplain management strategies in order for their  residents to purchase flood insurance through the program. The National  Flood Insurance Reform Act of 1994 strengthened the mandatory  purchase requirement for federally backed mortgages of properties  located in special flood hazard areas (SFHA). The Bunning-Bereuter- Blumenauer Flood Insurance Reform Act of 2004 established a pilot  program to encourage owners of properties that continually suffer from  repeated flood losses to take steps to reduce the risk of damage, known  as mitigation. Owners of these “repetitive loss” properties who do not  mitigate the risks face higher premiums. Finally, the Biggert-Waters Act  reauthorized the program through 2017 and removed subsidized rates for  a number of insured properties, such as residential property that is not the  primary residence, severe repetitive loss properties, business properties,  and property that has incurred flood-related damage for which the  cumulative amounts of payments equaled or exceeded the fair market  value of the property.
section_title: Premiums
paragraphs: NFIP studies and maps flood risks, assigning flood zone designations  based on the risk level for flooding. The type of NFIP policy and the  subsequent rate a policyholder pays depend on several property  characteristics. For example, whether the building was built before or  after the development of the community’s Flood Insurance Rate Map  (FIRM) and where the building is located relative to the floodplain—the  flood zone—can affect the type of policy and rate available to a  policyholder. Flood insurance rates are calculated for each flood zone.  Areas that have a 1-percent chance of flooding in a given year are at high  risk for flooding and are generally referred to as SFHAs. These areas  are designated as zones A or V (see table 1). Areas designated as V or  VE are located along the coast. Areas with moderate to low risk for  flooding are designated as zones B, C, or X.
NFIP offers two types of flood insurance premiums to property owners  who live in participating communities: subsidized and full-risk. The  National Flood Insurance Act of 1968 authorized NFIP to offer subsidized  premiums to owners of certain properties. These subsidized rates are not  based on flood risk and, according to FEMA, represent only about 40 to  45 percent of the full flood risk. Congress originally mandated the use of  subsidized premiums to encourage communities to join the program and  mitigate concerns that charging rates that fully and accurately reflected  flood risk would be a burden to some property owners. According to  FEMA, Congress made changes to the program over the years to  encourage further participation in NFIP through low premiums. However,  as mentioned previously, the Biggert-Waters Act eliminated the existing  subsidies for certain types of properties.
section_title: Differences from Private Insurers
paragraphs: The insurance operations of NFIP differ from those of most private  insurers in a number of ways. For example, by design NFIP does not  operate for profit like a private insurer but must instead meet a public  policy goal—to provide flood insurance in flood-prone areas to property  owners who otherwise would not be able to obtain it. At the same time, it  is expected to cover its claims losses and operating expenses with the  premiums it collects, much like private insurers. In years when flooding  has not been catastrophic, NFIP has generally managed to meet these  competing goals. But in years of catastrophic flooding, such as 2005, it  has not done so and has exercised its authority to borrow from Treasury  to pay claims. This arrangement results in much of the financial risk of  flooding being transferred to the federal government and ultimately the  taxpayer. Further, unlike private insurers that generally are not subject to  limits on premium rate increases, FEMA is limited in how much it can  raise rates. Prior to passage of the Biggert-Waters Act, FEMA had been  prevented from raising rates on each flood zone by more than 10 percent  each year, although the act now allows rate increases of up to 20  percent. The Biggert-Waters Act further changed the program when it  eliminated subsidies for certain properties, such as severe repetitive loss  properties and properties for which the policyholders let their flood  insurance lapse.
NFIP is also required to accept virtually all applications for insurance and  cannot deny coverage or increase premium rates based on the frequency  of losses. Private insurers, on the other hand, may reject applicants or  increase rates if they believe the risk of loss is too high. As a result, NFIP  is less able to offset the effects of adverse selection—the phenomenon  that those who are most likely to purchase insurance are also the most  likely to experience losses. concentration of policyholders in the riskiest areas. This problem is further  compounded when those policyholders with properties at greatest risk are  required to purchase insurance from NFIP because they have a mortgage  from a federally insured or regulated lender.
Adverse selection occurs when insurers cannot distinguish between less risky and more  risky properties, although homeowners can. When premiums do not reflect differences in  risk that are known to potential policyholders, those who buy insurance are often those at  greatest risk for the hazards covered. Adverse selection in the market for natural  catastrophe insurance suggests that homeowners who are at the highest risk of  experiencing a natural catastrophe will buy available insurance.
section_title: Role of Write-Your-Own Insurance Companies
paragraphs: Since its inception, NFIP, to a large extent, has relied on the private  insurance industry to sell and service policies, and in 1983, FEMA  established the Write-Your-Own (WYO) program. Private insurers  become WYOs by entering into an arrangement with FEMA to issue flood  policies in their own name. WYOs adjust flood claims and settle, pay, and  defend all claims arising from the flood policies but assume no flood risk.  Insurance agents from these companies are the main point of contact for  most policyholders. Based on information the insurance agents submit,  WYOs issue policies, collect premiums, deduct an allowance for  commission and operating expenses from the premiums, and remit the  balance to NFIP. In most cases, insurance companies hire  subcontractors—flood insurance vendors—to conduct some or all of the  day-to-day processing and management of flood insurance policies.  When flood losses occur, policyholders report them to their insurance  agents, who notify the WYO insurance companies. The WYO companies  review the claims and process approved claims for payment. FEMA  reimburses the WYO insurance companies for the amount of the claims  plus expenses for adjusting and processing the claims, using rates that  FEMA establishes.
The WYO program was established to increase the NFIP policy base and  the geographic distribution of policies, improve service to NFIP  policyholders through the infusion of insurance industry knowledge, and  provide the insurance industry with direct operating experience with flood  insurance. In the first year of the WYO program, 48 WYO insurance  companies were responsible for about 50 percent of the more than 2  million policies in force. As of September 2012, about 85 WYO insurance  companies accounted for about 85 percent of the more than 5.5 million  policies in force.
section_title: Policy Coverage
paragraphs: Potential policyholders can purchase flood insurance to cover both  buildings and contents for residential and commercial properties. NFIP’s  maximum coverage limit for residential policyholders is $250,000 per unit  for building property and $100,000 per unit for contents. This coverage  includes replacement value of the building and its foundation, electrical  and plumbing systems, central air and heating, furnaces and water  heater, and equipment considered part of the overall structure of the  building. Personal property coverage includes items such as clothing,  furniture, and portable electronic equipment. For commercial  policyholders, the maximum coverage is $500,000 per unit for buildings  and $500,000 for contents. Commercial coverage is similar to residential  with regard to what is covered.
NFIP policies do not provide coverage for business interruption or  additional living expenses, which currently are available through some  private insurers. Private coverage for business interruption generally  includes the loss of income that a business sustains after a disaster while  the business is closed for repairs, as well as temporary relocation  expenses and ongoing expenses to sustain the business, such as payroll  and rent. To obtain coverage for business interruption for a loss caused  by flood, the commercial customer must purchase excess flood insurance  coverage from a private insurance company. Private coverage for  additional living expenses generally includes the expenses for living  outside of the home when the home has been damaged due to a covered  peril. It only includes expenses above normal living expenses, such as  those required to maintain the household’s normal standard of living if the  family must live elsewhere until the dwelling has been repaired. Expenses  typically include rent for a temporary rental home or hotel room, the extra  cost of dining at restaurants compared to normal groceries, laundry, extra  transportation costs to and from work or school, relocation and storage  expenses, and furniture rental for a temporary residence. Generally,  coverage for additional living expenses is automatically included in the  standard homeowners’ policy, but the standard homeowners’ policy  excludes coverage for these types of expenses when the losses result  from flooding.
section_title: Less Than Half of Policyholders Purchase Maximum Coverage from NFIP for Buildings and Contents
paragraphs: Our analysis of NFIP’s database of policies showed that fewer than half of  all residential and commercial policyholders had maximum flood coverage  for buildings, a possible indicator of how many policyholders might  purchase additional coverage if the limits were increased. As of  September 30, 2012, our analysis showed a total of 4,126,802 residential  single-unit policies in force. Of these, 46.8 percent (1,931,958) had  purchased the maximum flood insurance coverage of $250,000 for  buildings, 33 percent (1,363,367) had purchased the maximum coverage  of $100,000 for contents, and 31.7 percent (1,307,734) had purchased  maximum coverage for both buildings and contents. As of September 30,  2012, our analysis also showed a total of 283,398 commercial policies in  the NFIP policy database. Of these, 35.6 percent (100,975) had  purchased maximum coverage of $500,000 for buildings, and 10.9  percent (30,839) had purchased maximum coverage of $500,000 for  contents. The percentage of commercial policyholders who purchased  maximum coverage for both buildings and contents was 8.3 percent  (23,507).
To calculate these proportions, the universe is all residential policies and includes single  units as well as all condominium policies. nationwide averages, areas with very little flooding may mask areas with  heavier flooding and bring the national average down.
We analyzed the number of NFIP residential single-unit policyholders by  state as of September 30, 2011, to determine which states had the  highest number of these policyholders with maximum building coverage  (see fig. 2). Based on our analysis, just over half of all NFIP policies and  about 25 percent of all residential single-unit policies at maximum  coverage limits were from three Gulf Coast states: Florida, Texas, and  Louisiana. Seven states—mostly located on the Gulf Coast and the  Eastern Coast—made up 75 percent of all residential single-unit  policyholders with maximum building coverage and about 35 percent of  all residential single-unit policies. In comparing maximum coverage rates  in individual states, we found that, in general, states with higher median  home values also had a higher percentage of policyholders purchasing  coverage at the maximum limit. For example, as shown in figure 2, the  2011 median home value in California was $355,600, and 63.5 percent of  its policyholders purchased the maximum amount of NFIP building  coverage. Similarly, in 2011 New York had a median home value of  $285,300 and 65 percent of its residential single-unit policyholders  purchased the maximum building coverage, the highest percentage of all  50 states. In contrast, West Virginia had the lowest median home value of  $99,300, and about 7 percent of its policyholders purchased maximum  building coverage, the lowest percentage of all the states. The national  median home value as of September 2011 was $213,300, slightly below  NFIP’s current maximum coverage limit of $250,000 (buildings only).
Some policyholders may wish to purchase more flood insurance than is  available through FEMA, but insurers are selective about providing this  additional coverage, and it can be costly. Although aggregate information  is not available on the precise size of the private flood insurance markets  for residential and commercial properties, some brokers and other staff  from industry organizations told us these markets are generally  considered small. According to an industry survey and our own research,  it appears that about 30 companies offer excess flood coverage to  residential and commercial customers. Some companies only serve  residential clients, and some only serve commercial clients. Companies  that participate in the excess insurance market are selective about the  risk levels they are willing to insure. Some brokers, insurers, and staff at  industry organizations we talked to said that insurance companies  generally only offer residential excess flood insurance to owners of high- value homes that are well constructed, up to code, and not located in  high-risk areas, such as those designated as Zone A or V (high-risk and  high-risk coastal). For example, one insurer said that it insures high-value  homes with coverage up to $15 million and that the average value of the  homes it insures is about four to five times higher than the average value  of homes that NFIP insures. Similarly, on the commercial side, another  insurer said that it only made flood coverage available to gain or retain an  important account, rather than because of an interest in providing private  flood insurance. Further, the company stated that it does not write  insurance for small businesses, primarily due to the catastrophic nature of  the exposure presented by floods.
Industry stakeholders told us that the high cost of excess residential flood  insurance was another factor influencing policyholders’ decisions about  whether or not to purchase this coverage, but precise information on the  costs was difficult to obtain. Insurers we contacted generally were  reluctant to provide specific information on their rates because the rates  are based on many variables unique to each home and are therefore not  generalizable. Three common variables used to determine rates are flood  zone, elevation of building, and the value of the home. However, staff  from insurance industry organizations told us that not many residential  policyholders purchase excess flood coverage because of its high price.
For example, one broker told us that the starting point for an excess flood  rate he had negotiated before Superstorm Sandy was about $.3125 for  every $100 of insurance on building coverage for a post-FIRM property  built in a high-risk area (Zone A) that had been built to the required base  flood elevation. Based on this rate, $500,000 in excess flood coverage  on a building would cost approximately $1,562 annually. However, the  broker also indicated that other variables would change the rate so that  the costs for excess flood insurance on this property could range from  $1,200 to $3,000. According to  NFIP maintained by FEMA, NFIP’s average insurance policy costs about  $600 per year, but the rates vary substantially between zones and can  range from $412 for a preferred risk policy for maximum coverage for the  building and contents in Zones B, C, or X (moderate to low risk) to $4,375  for a pre-FIRM standard policy for a primary residence in a high-risk  coastal area (Zone V) with maximum building coverage. One insurance  company official told us that they charged twice NFIP’s additional rate for  properties in the same zone.explained that many variables affect the rate charged, and these factors  vary for each property. One broker explained that the rating sheet he  used to determine quotes to consumers was 30 pages.
Insurers and brokers that we talked to  Excess flood insurance coverage for commercial policies can be similarly  restrictive and costly. For example, one insurer explained that costs  varied for excess coverage depending on the flood zone where the  property was located. For every $100 of total insurable value, the cost for  buildings in Zone A (high-risk) would range from 5 cents to 50 cents, and  the cost in Zones B or C (moderate to low risk) would range from half a  cent to 10 cents. As a result, $5,000,000 in coverage could cost between  $250 and $25,000 in annual premiums. However, this provider also said  that the flood zone was only one factor used to determine pricing and that  other factors and proprietary pricing also influenced these annual  premiums. In addition to the factors listed for residential policies (i.e.,  flood zone, base flood elevation, and building value), insurers and brokers  we interviewed said that premiums for commercial policies were also  influenced by some or all of the following variables: proximity to Zones A (high risk) or B (moderate to low risk), whether the building has a basement, whether the building is built on a concrete slab, type of equipment located on the first floor,  location of mechanical equipment,  redundancy of operations (i.e., does the company have operations in  another state or country that can continue the business), and whether the company has a disaster recovery plan in place.
In addition to high costs, staff at consumer advocacy organizations and  insurance industry organizations described a number of other reasons  that a consumer might decide not to purchase flood insurance in general.  Some consumers are not sure whether they should purchase flood  insurance, either because they think that a flood will never happen to  them or because they are confused by the fact that it has to be purchased  as a separate policy. Another reason that consumers choose not to  purchase flood insurance is that they expect to get help through disaster  relief efforts in the event of a catastrophe.
section_title: Raising NFIP’s Coverage Limits Would Likely Increase Both Premiums Collected and the Program’s Risk Exposure
paragraphs: Raising NFIP coverage limits would likely increase the program’s risk  exposure, particularly in catastrophic years, although it could make  coverage more affordable for some consumers. Stakeholder opinions  vary regarding the potential effects that raising coverage limits would  have on the private insurance market and on consumers. Opinions also  vary regarding the potential effects of lowering coverage limits.
subsections: section_title: Estimated Effect on NFIP of Raising or Lowering Its Coverage Limit
paragraphs: We estimated the potential financial effect on NFIP if coverage limits had  been raised between 2002 and 2011 and found that higher coverage  limits would have been associated with increased net revenue— premiums less claim amounts—in most years. We estimated the impact  on premiums, claim amounts, and net revenues for each fiscal year from  2002 through 2011 under various hypothetical scenarios in which the  maximum building coverage limit for residential dwellings was $417,000— the conforming loan limit for Fannie Mae and Freddie Mac in 2006—  instead of $250,000. We limited our analysis to nonsubsidized  residential policies. We made a number of assumptions to conduct the  analysis that likely result in overstating both the amount of additional  premium revenue that would have been collected and the amount of  additional claims.each other in terms of their estimated impact on net revenues.
To some extent these overstatements would offset  We first assumed a baseline scenario in which all of the policyholders  with maximum building coverage from fiscal years 2002 through 2011  increased their coverage to the new maximum. Under this baseline  scenario, we also assumed that all of these policyholders paid additional  premiums at the same rate as for their coverage just below the $250,000  limit. In addition, we assumed that those policyholders who received the  maximum building claim amount during the period examined also would  have received an additional building claim amount of $167,000. We  calculated the additional premiums that would have been paid by the  policyholders, the additional claim amounts received by these  policyholders, and the additional net revenue under these assumptions.  Finally, we calculated the actual premiums, actual claim amounts, and  actual net revenue for the policyholders with maximum coverage as  benchmarks for comparison.
Our results for this baseline scenario suggest that higher coverage limits  would have been associated with increased net revenues in most fiscal  years from 2002 through 2011. For all fiscal years except 2004 and 2005,  our baseline estimates of additional premiums are greater than our  estimates of additional claims. For fiscal years 2004 and 2005—years  when the program experienced catastrophic losses—our estimates of  additional premiums are less than our estimates of additional claim  amounts, and the program would have been exposed to additional risk.  As noted in table 2, in most years premiums collected from all policies  exceed claims paid, except for particularly catastrophic years. FEMA  officials explained that most of the losses that NFIP covers are fairly small  and usually fall below the current residential policy limits of $250,000 until  a catastrophic event occurs, such as Hurricane Katrina. However, in  addition to paying claims, NFIP premiums are also used to pay the costs  associated with administering the program, such as WYO expenses,  operating expenses, flood insurance studies, floodplain management, and  FEMA administrative costs. Our analysis assumes that a higher coverage  limit would not result in materially higher administrative expenses for the  program.
We analyzed additional scenarios using variations in our assumptions  and found similar results. We examined different combinations of (1) the  increase in premiums being 20 percent lower than the baseline estimate;  (2) the increase in claims being 20 percent lower than the baseline  estimate; and (3) the percentage of policyholders increasing their  coverage 25 percent, 50 percent, or 75 percent of all policyholders. As  with the baseline scenario, the results from these additional scenarios all  suggest that higher coverage limits would have been associated with  increased net revenue in most of the years analyzed, except for the years  with catastrophic losses. In these years, the scenario results show that  net revenues would have been negative, exposing the program to  additional losses. The estimated additional net revenue shown in table 2,  both positive and negative, would be scaled down if fewer than 100  percent of policyholders at the $250,000 maximum chose to increase  their coverage. See appendix I for details on these additional scenarios.
Our analysis suggests that the effect on the financial condition of the  program of raising NFIP’s coverage limits would depend on a number of  factors. For example, the number and selection of policyholders who  increase their coverage, the additional premiums they pay, and the  additional amounts they receive for claims on their policies are all factors.
In particular, changes in the rate schedule of any additional coverage and  consequent changes in coverage that policyholders make in response  could change the impact of raising coverage limits on NFIP’s financial  condition. As stated earlier, FEMA charges a lower rate for coverage  above $60,000. Although we assumed that the flood insurance rate  schedule would remain constant, FEMA officials indicated that the rate  schedule might decrease at higher coverage limits, and that our  methodology likely overstates the increase in premiums as a result.  Policyholders might respond to changes in the rate schedule by adjusting  their coverage amounts. To the extent that coverage amounts change,  claim amounts may change as well. We did not attempt to quantify the  potential impact of these further changes.
Overall, the financial impact on the program of raising coverage limits  would depend on the adequacy of the rates that would be charged for the  additional coverage. If the size of the program and risk exposure were  increased by raising coverage limits, setting rates for the additional  coverage that accurately reflect the risk would be important, or the  financial stability of the program would be undermined. FEMA officials  said that as long as NFIP rates accurately reflect the actual risk of  flooding, increasing the coverage limits should not affect the program  because even though FEMA would occasionally pay out more with the  increased limits, it would also be collecting more income from higher  premiums, which would help offset the occasional increased payouts.  However, in a 2009 report we raised concerns about FEMA’s rate-setting  process. We found that the annual amount that NFIP collects in both  full-risk and subsidized premiums is not enough to cover its operating  costs, claim losses, and principal and interest payments for the debt owed  to Treasury, thereby exposing the federal government and ultimately  taxpayers to ever-greater financial risks, especially in years of  catastrophic flooding. In addition, we recommended that FEMA ensure  that its rate-setting methods result in rates that accurately reflect flood  risks. As previously discussed, the Biggert-Waters Act requires FEMA to  implement a number of changes to its rate-setting process, including  eliminating certain subsidies; phasing out other subsidies and  grandfathered policies; building a reserve fund; and updating maps that  reflect the relevant information on topography, long-term erosion of  shorelines, future changes in sea levels, and the intensity of hurricanes.
As of June 2013, FEMA’s efforts to implement many of these reforms  were ongoing.
Similarly, lowering NFIP coverage limits would lessen the program’s risk  exposure. A representative from one insurance industry organization also  said that lowering coverage limits would take premiums away from the  program and make it less structurally sound. However, FEMA officials  stated that if coverage limits were lowered, they would adjust premium  levels upward to account for the decreased income the program would  receive. As of September 2012, about 28 percent of all residential single- unit policies were for less than $150,000 in coverage and about 48  percent of commercial policies had less than $350,000 in coverage.
section_title: Effect on the Private Flood Insurance Market of Raising or Lowering the Coverage Limit
paragraphs: Brokers and staff from insurance industry organizations told us that the  private flood insurance market would have less risk exposure if NFIP  were to raise its coverage limits because the point at which NFIP’s  coverage ended and their coverage began, called the “attachment point,”  would be higher. This would lessen the premiums collected and overall  risk exposure of the private flood insurance market. For example, a home  valued at $750,000 needs $500,000 in additional coverage based on the  current coverage limits offered by NFIP. If NFIP’s coverage limits were  increased to $350,000, then the private excess market would only need to  provide coverage for $400,000. Further, one insurer that we talked to said  that NFIP’s coverage limits should be raised because the value of homes  has increased since the coverage limits last increased in 1994 to the  current limits. According to FEMA officials, the prior building coverage  limit was $185,000, set in 1977; thus the building coverage limits have  increased about 35 percent in 36 years.
Staff from one insurance industry organization told us that increased  NFIP coverage limits might push other insurers that currently provide  flood insurance above NFIP’s current limit of $250,000 out of the market.  They explained that fewer companies would be needed because fewer  people would need to purchase additional flood insurance coverage, as  they might be able to get all the insurance they needed through NFIP.  However, as discussed earlier, insurers and brokers noted that  companies providing excess coverage tend to insure more expensive  properties.
When we asked industry stakeholders about the potential effects of  lowering coverage limits, staff from some industry organizations told us  that insurers might drop out of the market due to increased risk and  inability to compete with NFIP’s lower premium rates. Overall, some  industry stakeholders we talked to did not think that either raising or  lowering NFIP’s coverage limits would have a major effect on the excess  flood insurance market.
section_title: Effect on Consumers of Raising or Lowering the Coverage Limit
paragraphs: Opinions varied on how NFIP raising coverage limits would affect  consumer participation in the program. Although raising coverage limits  would provide more coverage options for consumers, staff at consumer  advocacy organizations and insurance industry organizations told us that  raising coverage limits might have minimal impact on overall consumer  participation. The general consensus was that consumers with homes  valued higher than $250,000 would be interested in NFIP increasing its  coverage limits and would likely purchase more coverage through NFIP if  it were available. As we noted earlier, the percentage of residential and  commercial policies at the maximum coverage amounts increased from  2002 through 2012, suggesting possible additional demand for increased  coverage limits. However, these points are applicable to rates in place  prior to the Biggert-Waters Act, and consumers’ decisions may be  different based on higher rates after the act’s implementation.
One FEMA official said that raising the coverage limits could make  premiums more affordable to consumers whose homes were valued at  less than $250,000. He explained that if policyholders who currently buy  the maximum amount of coverage also bought the increased coverage  and paid the additional premiums, FEMA could lower its overall rates to  reach the income level needed to covers its expenses, which would lower  the rates for those who do not purchase the maximum coverage. For  example, if NFIP were to sell 40 percent more coverage on average, it  could also expect to get 40 percent more premiums on average if it did  not change the rates. Although total premiums collected might increase  by 40 percent, the claims payouts would likely be more modest because  smaller claim amounts are more common, and the entire increase in  premiums would not be needed to cover losses. As a result, flood  insurance premiums for individual policyholders could be lowered to  reach the required levels for the program. However, FEMA officials did  not know specifically how rates might change if coverage limits were  changed. Staff at one consumer advocacy organization and at one  industry organization said that most consumers only purchase the amount  they are required to purchase and would probably not purchase additional  coverage if the limits were raised. As previously noted in figure 2, the  median home value in the majority of states is below NFIP’s current  maximum building limit.
Alternatively, if NFIP were to lower its coverage limits, it could force more  consumers whose homes are valued at greater than the limit to purchase  insurance in the private excess flood market, to the extent it is available. If  insurers in the excess flood market were not willing to lower their  attachment point, it could create a gap in coverage between what the  private insurance market was willing to offer and the new NFIP maximum  coverage limit. Staff at some consumer advocacy and industry  organizations said that lowering NFIP’s coverage limits could increase the  demand for excess insurance—either by homeowners’ choice or by  lenders forcing consumers to purchase additional flood insurance to cover  the value of their homes. Others told us that it might not change  consumer participation at all since most consumers only purchased what  they were required to purchase.
section_title: Additional Options Could Expand Coverage for Some but Could Undermine NFIP’s Financial Stability
paragraphs: Adding optional coverage for business interruption or additional living  expenses could have both advantages and disadvantages for NFIP, the  private market, and consumers. These optional types of coverage could  potentially bring in some additional revenue to NFIP or expand the  affordability and availability to customers, therefore lowering overall  uninsured risk in the market. However, NFIP would need to make  changes to its underwriting and claims processing to take into  consideration the complexities associated with each type of coverage or  its financial stability could be further undermined.
subsections: section_title: Coverage for Business Interruption
paragraphs: Adding business interruption coverage could offer several advantages for  NFIP. To the extent that premiums for business interruption coverage  reflect the actual risks, adding this type of coverage could result in  additional revenue to the program. Some brokers we interviewed also  said that adding business interruption coverage to NFIP could result in  less uninsured risk in the market. Under the assumption that FEMA’s  rates would be lower than private market industry rates, industry  stakeholders told us that more small- and medium-sized companies might  be able to purchase this coverage because it would be more affordable to  them. Further, large businesses might be inclined to buy more business  interruption coverage. In general, more businesses buying coverage  would result in less uninsured risk and could offset the need for some  government disaster relief payments.
However, underwriting business interruption coverage and adjusting  claims could be challenging for FEMA because it lacks needed expertise.  We have previously found that underwriting this type of coverage is  complex and that properly pricing the risk for business interruption  coverage requires extensive evaluation of a company’s business model  and cash flow. For example, an insurance broker told us that  commercial customers typically are required to complete a two- to three- page financial worksheet providing historical information on net income  and continuing expenses for the period to be insured, including costs  such as payroll, rent, utilities, and other ongoing expenses that an owner  would be expected to pay even if the building were destroyed. This  information is used to determine the amount of coverage the insurer is  willing to offer and the price of the coverage. Underwriting business  interruption coverage is complex because predicting the costs associated  with flood-related damage is difficult. An academic study noted that in  order to predict the potential losses from a flood, insurers would need to  consider not only the direct damage to a property but also the implications  of a flood on the company’s other locations, infrastructure, supply chains,  and employees. In addition to the complexities of underwriting, we have  previously found that adjusting business interruption claims is also  challenging because the extent of losses depends on the nature of the  business and the circumstances surrounding the loss. Further, one  broker explained that the expertise of forensic accountants is necessary  to adjust for claims.additional experts such as lawyers, adjusters, and forensic accountants if  they added business interruption coverage—experts with a deeper and  more thorough understanding of underwriting and claims processing.
NFIP officials stated that they would need to hire  In addition to these challenges, if the rates NFIP charged for business  interruption coverage were not adequately risk-based, adding such  coverage could negatively impact the program’s financial stability and  thus further increase taxpayer exposure. Further, adverse selection could  increase the program’s risk if only those businesses with the highest risk  or the highest claims purchased business interruption coverage from  NFIP. Some insurers, brokers, and staff from industry organizations that  we talked to emphasized the importance of careful underwriting of  business interruption coverage because underestimating the potential  costs can lead to losses for insurers. For example, one broker we  interviewed explained that after Hurricane Katrina, some private insurers  suffered losses from business interruption coverage because businesses  were closed for such a long period that the losses from this coverage  were greater than the actual value of the building that was damaged.  Although FEMA officials told us that they planned to price any new  coverage at a rate equivalent to the actual risk for flood, we have  previously raised concerns about how FEMA’s rates are calculated and  suggested that the rate-setting process does not fully take into account all   Collectively, these factors increase the risk that full-risk  relevant factors. premiums, as set by FEMA, on any new coverage may be insufficient to  cover future losses, adding to concerns about NFIP’s financial stability.
See GAO-09-12. In this report we found that FEMA sets flood insurance rates on a  nationwide basis, combining and averaging many topographic factors that are relevant to  flood risk, so that these factors are not specifically accounted for in setting rates for  individual properties. Some patterns in historical claims and premium data suggest that  NFIP’s rates may not accurately reflect differences in flood risk. We also found that FEMA  does not fully take into account factors such as ongoing and planned development, long- term trends in erosion, or the effects of global climate change, although private-sector  models are incorporating some of these factors. told us that the availability of business interruption coverage in the private  market is limited because few companies offer private flood insurance.  According to one broker’s estimate, about 10 or 12 insurance companies  currently offer business interruption coverage for flooding. Some  stakeholders suggested that similar to increasing coverage limits, adding  this coverage to NFIP could provide a disincentive for private insurers to  continue offering it. In addition, any change to the federal flood insurance  program would create an increased burden on WYO insurers from an  administrative and operations perspective, as they would likely need to  develop new forms, promote a new product, and respond to the additional  volume of work.
Optional coverage for business interruption through NFIP could  potentially expand the affordability and availability of this coverage for  certain commercial consumers. Business interruption coverage is  expensive through the private market and is generally only purchased by  large companies. For example, one insurance broker that we spoke with  told us that although interest in coverage for business interruption from  companies of all sizes is high, generally only larger companies can afford  it. Staff from an industry association and an insurer further concurred that  the high cost of business interruption coverage prevents small- and  medium-sized companies from purchasing it. A representative from an  industry organization testified that including business interruption  coverage would help provide stability to local economies affected by  flooding and could provide needed security to small businesses.  However, whether NFIP could offer business interruption coverage at  premium rates that are affordable and still adequately risk-based is  unclear.
section_title: Coverage for Additional Living Expenses
paragraphs: The potential impact on NFIP of offering coverage for additional living  expenses could depend on how the coverage is structured. In 2009,  FEMA contracted for a study that focused on NFIP offering additional  living expense coverage. According to the FEMA study, offering  additional living expense coverage in the same way as private insurers— that is, to cover increases in expenses to maintain a household’s normal  standard of living—may not be the most appropriate option for NFIP, in  part because it would be difficult to price. As with business interruption  coverage, inadequate pricing for additional living expense coverage could  further increase taxpayer exposure. In addition, similar to business  interruption coverage, the program’s risk could be further increased by  adverse selection if only the homeowners at higher risk purchased the  coverage.
The appropriate price of additional living expenses could be difficult for  NFIP to determine. According to one insurer we interviewed, the premium  rate for a standard homeowner’s policy that includes additional living  expenses for perils other than flood is based on historical losses,  including historical losses from additional living expenses. However,  FEMA does not have historical data on additional living expense losses  for flood, and the usefulness of any data from private insurers that offer  this coverage is limited because these policies typically cover only a  specific subset of the market and may not account for the larger number  of policyholders that NFIP would cover in a disaster-stricken area. The  FEMA study noted that estimating the expected length of time  policyholders would be displaced and expected costs of claims would be  difficult. For example, in the case of widespread, catastrophic flooding,  the time required to repair a property or relocate policyholders and the  increased demand for a limited supply of temporary living arrangements  could increase the payments NFIP would have to make. Individuals  were displaced for long periods of time following Hurricane Katrina.  Because of the difficulty in estimating potential losses and determining  adequate pricing, the risk exists that premiums collected may not cover  losses, which could increase the government’s exposure if FEMA needed  to rely on its borrowing authority to cover any shortfall. The FEMA study  concluded that if additional living expense coverage was offered through  NFIP, a more basic structure that was easier to manage would be more  appropriate. For example, the study suggested that offering a set dollar  amount or a per diem rate for a specified period to help policyholders  offset their additional expenses would be a better fit for NFIP, rather than  offering full coverage for a number of variables that might differ between  homeowners. Although adding optional coverage for additional living  expenses poses some of the same difficulties as business interruption  coverage, FEMA officials explained that coverage for additional living  expenses is much simpler to administer.
Adding living expense coverage could also have unintended  consequences for private insurance companies. First, WYOs would need  to adjust for changes in claims processing. For example, claims adjusters  would need to conduct additional work to verify the damage to the  property, the length of time the policyholder was displaced, and the  policyholder’s description of normal living expenses in order to avoid  potential fraud or inflation of claims. In addition, staff at an industry  organization told us that if NFIP were to begin offering coverage for  additional living expenses but offered it at subsidized prices (i.e., prices  that did not reflect the full risk), private companies that do offer this  coverage could be priced out of the market. Also, staff at one industry  organization stated that, similar to business interruption coverage, if  FEMA were to begin offering optional coverage for additional living  expenses WYO’s would probably have to make administrative changes to  their flood insurance and marketing programs.
Offering additional living expense coverage could provide more options  for consumers, but few consumers might take advantage of it. Coverage  for additional living expenses resulting from flooding is available on a  limited basis through the private market, such as through optional  additional coverage added to an excess flood insurance policy. For  example, according to the FEMA study, this coverage can be added to  some excess flood insurance policies, with limits from $7,500 up to  $107,500. However, as stated earlier, the number of policyholders who  purchase excess flood insurance coverage is generally low, and those  who do purchase it are typically high-income individuals with properties  located in low-risk areas. Because the excess market is generally  selective, NFIP coverage for additional living expenses could allow  additional consumers the ability to purchase this type of coverage,  although FEMA officials noted that depending on how the coverage was  structured, it could be fairly expensive. A representative of an industry  organization also noted that if the additional coverage were to increase  the price of the premium, consumers would not necessarily elect to  purchase the additional coverage. In addition, a representative from one  consumer advocacy organization said that few consumers might take  advantage of the coverage because they expect the federal government  to come in following a disaster to provide relief.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FEMA within the Department of  Homeland Security for their review and comment. The Department noted  that it concurred with our prior recommendation directing FEMA to take  steps to ensure that methods and data used to set NFIP rates result in  premiums that accurately reflect the risk of losses from flooding.
Further, the letter stated that FEMA has already taken several actions  toward implementing this recommendation, such as revising damage  calculations for flooding events that only reach the foundation of the  structure and performing a climate change study to assess the long-term  impacts of climate change on all aspects of NFIP, including insurance  pricing and grandfathering. The letter also stated that FEMA has other  ongoing efforts, including analyzing water-depth probability curves for  various flood zones; performing geospatial analyses to determine the  extent of zone grandfathering; and piloting studies to determine structural  flood risk information (structure elevation and flood depths for various  return periods) using geospatial data from flood study and terrain models.  FEMA’s anticipated completion date is the end of fiscal year 2013.
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 or your staff have any questions regarding 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 major contributions to  this report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine (1) existing flood insurance coverage; (2)  the potential effects on the National Flood Insurance Program’s (NFIP)  financial condition, the private insurance market, and consumers of  raising or lowering NFIP coverage limits; and (3) the potential effects on  NFIP’s financial condition, the private insurance market, and consumers  of allowing NFIP to offer optional coverage for business interruption and  additional living expenses. For the purposes of this review, we analyzed  flood insurance data obtained from the Federal Emergency Management  Agency (FEMA), NFIP, brokers, and insurance companies that offer  primary and excess flood insurance coverage.
To describe the existing flood insurance market, we obtained NFIP’s  Policy and Claims Masterfiles as of September 30, 2012, and June 30,  2012, respectively. We analyzed NFIP’s database of policies, which  contains information on policy type, coverage amounts, rates, and other  variables used to calculate premiums. We identified all residential single- unit and commercial claims with maximum coverage at the end of fiscal  year 2012. We also analyzed the data to determine trends. We computed  the aggregate number of all residential policies and commercial policies  with maximum coverage since 2002 and the annual rate of policies with  maximum coverage. We further analyzed residential single-unit policy  coverage for 2011 to investigate the association between the percentage  of each state’s policyholders with maximum coverage and a state’s  median home value. Even though NFIP provides coverage to American  Samoa, Guam, Puerto Rico, and the Virgin Islands, we excluded these  territories from our analysis because they are not U.S. states. We  calculated average payments for residential and commercial claims that  were closed and closed without payment for the period from 2007 through  2012 using data from FEMA’s BureauNet. We used the Gross Domestic  Product deflator from the Bureau of Economic Analysis to adjust for  inflation and express claims payment amounts for all years in 2012  dollars.
Using NFIP’s policy and claims databases, we estimated the effect on  NFIP’s financial condition of raising coverage limits from $250,000 to  $417,000 by estimating the impact on net revenue (premiums less claim  payments) for single-family dwellings from 2002 through 2011. The upper  limit of $417,000 used in our analysis was required by the Biggert-Waters  Flood Insurance Reform Act of 2012 (Biggert-Waters Act) and  corresponds to the conforming loan limit for Fannie Mae and Freddie Mac  (the enterprises). The enterprises are restricted by law to purchasing  single-family mortgages with origination balances below a specific  amount, known as the “conforming loan limit.” The limit was increased to  $417,000 in 2006 and remained at this level as of 2012. To assess the  impact of increased building coverage limits on premiums collected from  policyholders, claim amounts paid to policyholders, and net revenues to  NFIP, we used data from FEMA, including data from snapshots of NFIP’s  policy database described above as of September 30 of each year from  2002 through 2011 and data from NFIP’s claims database, which  contains information on claim payments as of June 30, 2012.
For each fiscal year, we used observations on nonsubsidized policies that  were effective between October 1 and September 30 of the fiscal year,  that were for single-family dwellings and that were rated using the flood  insurance manual. We also used data on claims associated with these  policies. Table 3 shows descriptive statistics for the set of policies and  claims we analyzed.
We identified the policies in our analysis sample with the maximum  building coverage of $250,000. We also identified the claims associated  with these same policies that paid the maximum building claim payment  of $250,000. We estimated the impact of a higher building coverage  limit—$417,000 instead of $250,000—on premiums, claim amounts, and  net revenues in seven different scenarios (see table 4). First, for our  baseline scenario, we assumed that all policyholders with maximum  building coverage increased their coverage from $250,000 to $417,000;  that their premium rates per $100 of additional building coverage did not  change; and that they received an additional $167,000 on any claim for  which they received the maximum building claim payment. To assess the  sensitivity of our results on the assumptions that the rates used to  calculate additional premiums are unchanged and that claim amounts for  claims with the maximum building claim payment increased by $167,000,  we analyzed three alternative scenarios that differed from the baseline  scenario by either reducing the rates used to calculate additional  premiums by 20 percent, reducing the additional claim amounts by 20  percent, or both. Second, to assess the sensitivity of our results to the  assumption that all policyholders with maximum building coverage  increase their coverage from $250,000 to $417,000, we also analyzed  three alternative scenarios that differed from the baseline scenario by  reducing the number of policyholders who increased their building  coverage to 25, 50, and 75 percent. In these scenarios, we used  simulations that randomly selected the policyholders who increased their  building coverage a large number of times and then calculated the  average impact on premiums, claims amounts, and net revenues. Third  and finally, we calculated the actual premiums, actual claims amounts,  and actual net revenue as benchmarks for comparison.
To assess the reliability of the data in the policy and claims database, we  examined the variables in the databases for missing values and for  coding errors. We verified that there were not any duplicate observations  on a policy in a fiscal year. We identified and dropped observations in the  policy snapshots that could not be identified as either subsidized or  nonsubsidized. We identified and dropped observations in the claims data  with the date of loss earlier than the policy effective date. We verified that  there is one claim for each policy for each date of loss. We assessed the  extent to which the premium amount reported in the policy data was equal  to the premium calculated using rates and other variables reported in the  data. Based on our assessment, we determined that the data in both  databases were sufficiently reliable for our purposes.
To further address the effects on the private insurance market, NFIP, and  consumers if NFIP were to change its coverage limits, or if NFIP were to  offer optional coverage for business interruption and additional living  expenses, we obtained some data in an industry survey last updated in  2010 pertaining to flood insurance programs outside NFIP that offered  private flood insurance, catastrophe insurance that included coverage for  flood, and other non-lender-placed and lender-placed flood coverage. The  survey data included limits, minimum premiums, general restrictions, and  other variables related to flood insurance coverage. We used the data to  examine high-level information on costs associated with buying excess  flood insurance and geographic coverage, and we identified some  companies that offer coverage for business interruption or additional living  expenses. We verified this information to the extent possible with various  insurance companies listed and Internet research to ensure its accuracy  and determined that it was sufficiently reliable for the purposes of this  report. In addition, we interviewed industry experts, including officials from  FEMA, officials and representatives from five insurance associations, two  consumer advocacy groups, six insurance companies, and four brokers.  We selected insurance companies based on work conducted for a prior  report, suggestions from insurance industry officials, and Internet  research. To address all objectives, we also reviewed our prior reports  and testimonies on flood insurance, and relevant studies conducted by  RAND Corporation, Wharton Risk Management and Decision Processes  Center, Deloitte Consulting LLP, the Congressional Research Service,  and academia.
We conducted this performance audit from September 2012 to July 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: 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 and Patrick Ward  (Assistant Directors); William Chatlos, Christopher Forys, Courtney  LaFountain, Jacquelyn Hamilton, Karen Jarzynka-Hernandez, Marc  Molino, Rhonda Rose, Jennifer Schwartz, Frank Todisco, and Carrie  Watkins made key contributions to this report.