Federal Emergency Management Agency: Oversight and Management of the National Flood Insurance Program
Published: 2005-10-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The disastrous hurricanes that have struck the Gulf Coast and Eastern seaboard in recent years--including Katrina, Rita, Ivan, and Isabel--have focused attention on federal flood management efforts. The National Flood Insurance Program (NFIP), established in 1968, provides property owners with some insurance coverage for flood damage. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for managing the NFIP. GAO issues a report earlier this week that was mandated by the Flood Insurance Reform Act of 2004. This testimony discusses findings and recommendations from that report and information from past GAO work. Specifically, the testimony discusses (1) the statutory and regulatory limitations on coverage for homeowners under the NFIP; (2) FEMA's role in monitoring and overseeing the NFIP; (3) the status of FEMA's implementation of provisions of the Flood Insurance Reform Act of 2004. It also offers observations on broader issues facing the NFIP including its financial structure and updating flood maps.
section_title: What GAO Found
paragraphs: The amount of insurance coverage available to homeowners under the NFIP is limited by requirements set forth in statute and FEMA's implementing regulations, which include FEMA's standard flood insurance policy. As a result of these limitations, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing flood-damaged property. For example, homes that could sustain more than $250,000 in damage cannot be insured to their full replacement cost, thus limiting claims to this statutory ceiling. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural weakness in a home, or losses resulting from events other than flood such as windstorms, are not covered by NFIP policies. To meet its monitoring and oversight responsibilities, FEMA is to conduct periodic operational reviews of the 95 private insurance companies that participate in the NFIP, and FEMA's program contractor is to check the accuracy or claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. FEMA did not use a statistically valid method for sampling files to be reviewed in these monitoring and oversight activities. As a result, FEMA cannot project the results of these reviews to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling responsibilities for the NFIP--actions necessary for FEMA to have reasonable assurance that program objectives are being achieved. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to provide policyholders with a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that insurance agents meet minimum education and training requirements. The statutory deadline for implementing these changes was December 30, 2004. Efforts to implement the provisions are under way, but have not yet been completed. DEMA has not developed plans with milestones for assigning accountability and projecting when program improvements will be made, so that improvements are in place to assist victims of future flood events. As GAO has previously reported, the NFIP, by design, is not actuarially sound. The program does not collect sufficient premium income to build reserves to meet long-term future expected flood losses, in part because Congress authorized subsidized insurance rates to be made available for some properties. FEMA has generally been successful in keeping the NFIP on a sound financial footing, but the catastrophic flooding events of 2004 (involving 4 major hurricanes) required FEMA, as of August 2005, to borrow $300 million from the U.S. Treasury to help pay an estimated $1.8 billion on flood insurance claims. Following Hurricane Katrina in August 2005, legislation was enacted to increase FEMA's borrowing authority from $1.5 billion to $3.5 billion through fiscal year 2008.

section_title: Letter
paragraphs: I appreciate the opportunity to participate in today’s hearing on the  National Flood Insurance Program (NFIP) to discuss the Federal  Emergency Management Agency’s (FEMA) role in the management and  oversight of the NFIP. The NFIP combines property insurance for flood  victims, mapping to identify the boundaries of the areas at risk of flooding,  and incentives for communities to adopt and enforce floodplain  management regulations and building standards to reduce future flood  damage. The effective integration of all three of these elements are needed  for the NFIP to achieve its goals of:    providing property flood insurance coverage for a high proportion of  property owners who would benefit from such coverage;  through this insurance coverage reducing taxpayer-funded disaster  assistance when flooding strikes, and  reducing flood damage through flood plain management and the  enforcement of building standards (such as elevating structures).
The Federal Emergency Management Agency (FEMA) within the  Department of Homeland Security (DHS) is responsible for the oversight  and management of the program.  Under the program, the federal  government assumes the liability for the insurance coverage and sets rates  and coverage limitations, among other responsibilities.
Floods are the most common and destructive natural disaster in the  United States. According to NFIP statistics, 90 percent of all natural  disasters in the United States involve flooding. However, flooding is  generally excluded from homeowner policies that typically cover damage  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 largely been unwilling to  underwrite and bear the risk of flood insurance.
Congress established the NFIP pursuant to the National Flood Insurance  Act of 1968 to provide policyholders with some insurance coverage for  flood damage, as an alternative to disaster assistance, and to try to reduce  the escalating costs of repairing flood damage. In creating the NFIP,  Congress found that a flood insurance program with “large-scale  participation of the Federal Government and carried out to the maximum  extent practicable by the private insurance industry is feasible and can be  initiated.” In keeping with this purpose, FEMA has contractual  agreements with 95 private insurance company partners to sell policies  and adjust and process claims. Flood insurance is available to owners and  occupants of insurable property in flood-prone areas. Our work focused  on insurance coverage for homeowners. However, coverage is also  available for other structures, such as apartment buildings, schools,  churches, businesses, cooperative associations, and condominium  associations.
As of August 2005, the NFIP was estimated to have approximately 4.6  million policyholders in about 20,000 communities with $828 billion of  insurance in force. Since its inception, the program has paid about $14.6  billion in insurance claims, primarily from policyholder premiums that  otherwise would have been paid through taxpayer-funded disaster relief or  borne by home and business owners themselves. According to FEMA,  every $3 in flood insurance claims payments saves about $1 in disaster  assistance payments, and the combination of flood plain management and  mitigation efforts saves about $1 billion in flood damage each year.
As we finalized the report released this week, the exact extent of the  devastation from Hurricanes Katrina and Rita in August and September  2005 was still being assessed; however, the acting director of FEMA’s  Mitigation Division testified on October 18, 2005 that the NFIP would pay  $15 to 25 billion in claims for damage resulting from these two storms. As  of October 13, 2005, FEMA had received 192,809 flood insurance claims  and the NFIP had paid nearly $1.3 billion to settle 7,664 of these claims.  The number of claims filed is more than twice as many as were filed in all  of 2004, itself a record year. Clearly, these two disasters will challenge the  NFIP with demands the program has never before faced in its more than  35 year history. Already, a record number of flood insurance claims have  been filed in 2005, and Congress has increased the NFIP’s authority to  borrow from the United States Treasury from $1.5 billion to $3.5 billion.
GAO is beginning a body of work on the preparation for, response to, and  recovery from Hurricanes Katrina and Rita. As GAO moves forward with  this work, we will continue to work with this and other congressional  committees and the accountability community—federal inspector  generals, state and city auditors—regarding the scope of our future work  on emergency management issues, including the NFIP. Our goal is to apply  our resources and expertise to address long-term concerns, such as those  we are discussing today, and to avoid duplicating the work of others.  Currently, we have teams in the Gulf Coast states collecting data and  observations from hurricane victims and federal, state, local, and private  participants in the preparation for, response to, and recovery from these  devastating hurricanes, including the flooding they caused.
My testimony today discusses the report we issued on October 18, 2005  that discusses FEMA’s management and oversight of the flood insurance  program. This report was mandated by the Flood Insurance Reform Act of  2004. It includes recommendations on two pre-Hurricane Katrina flood- insurance related issues that pose a challenge for FEMA. These are (1)  improving FEMA’s management and oversight of the NFIP and (2) FEMA’s  implementation of provisions of the Flood Insurance Reform Act of 2004  to provide policyholders a flood insurance claims handbook that meets  statutory requirements, to establish a regulatory appeals process, and to  ensure that flood insurance agents meet minimum NFIP education and  training requirements.
The report is based on interviews with FEMA officials, documentation of  its monitoring and oversight processes, and our field observations of  FEMA’s monitoring and oversight activities. In addition, we analyzed the  National Flood Insurance Act of 1968, as amended, its legislative history,  and FEMA’s implementing regulations, and we examined documentation  and interviewed officials about FEMA’s efforts to comply with provisions  of the 2004 Flood Insurance Reform Act. We did our work from December  2004 to August 2005 in accordance with generally accepted government  auditing standards.
A key characteristic of the NFIP is the extent to which FEMA must rely on  others to achieve the program’s goals. FEMA’s role is principally one of  establishing policies and standards that others generally implement on a  day-to-day basis and providing financial and management oversight of  those who carry out those day-to-day responsibilities. These  responsibilities include ensuring that property owners who are required to  purchase flood insurance do so, enforcing flood plain management and  building regulations, selling and servicing flood insurance policies, and  updating and maintaining the nation’s flood maps. We have issued reports  and testified before this and other congressional committees on these and  other issues related to the program. In the report we are releasing today,  we note that FEMA faces a challenge in providing effective oversight of  the 95 insurance companies and thousands of insurance agents and claims  adjusters who are primarily responsible for the day-to-day process of  selling and servicing flood insurance policies.
My testimony today addresses four topics:  insurance coverage available under the NFIP, including coverage  limitations;    FEMA’s role in monitoring and oversight of the program;    FEMA’s progress in implementing the requirements of the National  Flood Insurance Reform Act of 2004; and    Some broader challenges facing the program.
subsections: section_title: Available Insurance Coverage and Limitations Under the NFIP
paragraphs: The amount of insurance coverage available to homeowners under the  NFIP is limited by requirements set forth in statute and regulation. As a  result of these limitations, insurance payments to claimants for flood  damage may not cover all the costs of repairing or replacing flood- damaged property. For example, there is a $250,000 statutory ceiling on  the amount of flood insurance homeowners can purchase for the building  structure and a $100,000 ceiling on the amount they can purchase for  certain personal property. Thus, homes that might sustain more than  $250,000 in damage cannot be insured to their full replacement cost.
In addition, to the statutory limitations on coverage amounts, Congress  also gave FEMA broad authority to issue regulations establishing “the  general terms and conditions of insurability,”  including the classes, types,  and locations of properties that are eligible for flood insurance; the nature  and limits of loss that may be covered, the classification, limitation, and  rejection of any risks that FEMA considers advisable; and the amount of  appropriate loss deductibles. Pursuant to this delegation of authority,  FEMA has issued regulations, including a “Standard Flood Insurance  Policy,” that further delineate the scope of coverage. All flood insurance  made available under the NFIP is subject to the express terms and  conditions of the statute and regulations, including the standard policy.  The Federal Insurance Administrator within FEMA is charged with  interpreting the scope of coverage under the standard policy.
In addition, NFIP policies cover only direct physical loss by or from flood.  Therefore, losses resulting primarily from a preexisting structural  weakness in a home or prior water damage, and losses resulting from  events other than flood, such as windstorms or or earth movements, are  not covered by the NFIP. Personal property is covered, with certain  limitations, only if the homeowner has purchased separate NFIP personal  property insurance in addition to coverage for the building. Finally, the  method of settling losses affects the amount recovered. For example,  homes that qualify only for an actual cash value settlement—which  represents the cost to replace damages property, less the value of physical  depreciation—would presumably receive payments that are less than  homes that qualify for a replacement cost settlement, which does not  deduct for depreciation. Finally, the amount recoverable under the SFIP is  limited to the amount that exceeds the applicable deductible. Our report  discusses the limitations on coverage and recoverable losses in greater  detail.
section_title: Monitoring and Oversight of NFIP Identifies Specific Problems, but Does Not Provide Comprehensive Information on Overall Program Performance
paragraphs: About 40 FEMA employees, assisted by about 170 contractor employees,  are responsible for managing the NFIP. Management responsibilities  include establishing and updating NFIP regulations, administering the  National Flood Insurance Fund, analyzing data to actuarially determine  flood insurance rates and premiums, and offering training to insurance  agents and adjusters. In addition, FEMA and its program contractor are  responsible for monitoring and overseeing the quality of the performance  of the write-your-own companies to assure that the NFIP is administered  properly.
To meet its monitoring and oversight responsibilities, FEMA is to conduct  periodic operational reviews of the 95 private insurance companies that  participate in the NFIP. In addition, FEMA’s program contractor is to  check the accuracy of claims settlements by doing quality assurance  reinspections of a sample of claims adjustments for every flood event. For  operational reviews, FEMA examiners are to do a thorough review of the  companies’ NFIP underwriting and claims settlement processes and  internal controls, including checking a sample of claims and underwriting  files to determine, for example, whether a violation of policy has occurred,  an incorrect payment has been made, and if files contain all required  documentation. Separately, FEMA’s program contractor is responsible for  conducting quality assurance reinspections of a sample of claims  adjustments for specific flood events in order to identify, for example,  whether an insurer allowed an uncovered expense, or missed a covered  expense in the original adjustment.
Operational reviews of flood insurance companies participating in the  NFIP that are conducted by FEMA staff are FEMA’s primary internal  control mechanism for monitoring, identifying, and resolving problems  related to how insurers sell and review NFIP policies and adjust claims.  For all aspects of operational reviews, the examiners are to determine  whether files are maintained in good order, whether current forms are  used and whether staff has a proficient knowledge of requirements and  procedures to properly underwrite and process flood claims. Examiners  are also to look at internal controls in place at each company. When  problems are identified, examiners are to classify the severity of the  errors. Each file reviewed is to be classified as satisfactory or  unsatisfactory. Unsatisfactory files contain either a critical error (e.g., a  violation of policy or an incorrect payment) or three non-critical errors  (e.g., violations of procedures that did not delay actions or claims).
Write-your-own companies with error rates of 20 percent or higher of the  total number of files reviewed for the specific underwriting or claims  operation review would always receive an unsatisfactory designation. In  such cases, FEMA requires that the company develop an action plan to  correct the problems identified and is to schedule a follow-up review in 6  months to determine whether progress has been made.
The operational reviews and follow-up visits to insurance companies that  we analyzed during 2005 followed FEMA’s internal control procedures for  identifying and resolving specific problems that may occur in individual  insurance companies’ processes for selling and renewing NFIP policies  and adjusting claims. According to information provided by FEMA, the  number of operational reviews completed between 2000 and August 2005  were done at a pace that allows for a review of each participating  insurance company at least once every 3 years, as FEMA procedures  require. In addition, the processes FEMA had in place for operational  reviews and quality assurance reinspections of claims adjustments met our  internal control standard for monitoring federal programs.
subsections: section_title: Program Contractor Reinspections of NFIP Claims
paragraphs: In addition to operational reviews done by FEMA staff, FEMA’s program  contractor conducts quality assurance reinspections of claims for specific  flood events. The program contractor employs nine general adjusters who  conduct quality assurance reinspections of a sample of open claims for  each flood event. Procedures for the general adjusters to follow are  outlined in FEMA’s Write Your Own Financial Control Plan. According to  the general adjusters we interviewed, in addition to preparing written  reports of each reinspection, general adjusters discuss the results of the  reinspections they perform with officials of write-your-own companies  that process the claims. If a general adjuster determines that the insurance  company allowed an expense that should not have been covered, the  company is to reimburse the NFIP. Conversely, if a general adjuster finds  that the private-sector adjuster missed a covered expenses in the original  adjustment, the general adjuster is to take steps to provide additional  payment to the policyholder.
An instructor at an adjuster refresher training session, while observing  that adjusters had performed very well overall during the 2004 hurricane  season, cited several errors that he had identified in reinspections of  claims, including improper room dimension measurements and improper  allocation of costs caused by wind damage (covered by homeowners’  policies) versus costs caused by flood damage. In addition, the instructor  identified as a problem poor communication with homeowners on the  processes followed to inspect the homeowner’s property and settle the  claim. Overall error rates for write-your-own companies are monitored.  Procedures require additional monitoring, training, or other action if error  rates exceed 3 percent. According to the general adjusters we interviewed  and FEMA’s program contractor, qualify assurance reinspections are  forwarded from general adjusters to the program contractor where results  of reinspections are to be aggregated in a reinspection database as a  method of providing for broad-based oversight of the NFIP as its services  are delivered by the write-your-own companies, adjusting firms and  independent flood adjusters.
section_title: Sampling Methods Used to Conduct Operational Reviews and Quality Assurance Reinspections Do Not Provide Management Information On Overall Performance
paragraphs: The process FEMA used to select a sample of claims files for operational  reviews and the process its program contractor used to select a sample of  adjustments for reinspections were not randomly chosen or statistically  representative of all claims. We found that the selection processes used  were, instead, based upon judgmental criteria including, among other  items, the size and location of loss and complexity of claims. As a result of  limitations in the sampling processes, FEMA cannot project the results of  these monitoring and oversight activities to determine the overall accuracy  of claims settled for specific flood events or assess the overall  performance of insurance companies and their adjusters in fulfilling their  responsibilities for the NFIP—actions necessary for FEMA to meet our  internal control standard that it have reasonable assurance that program  objectives are being achieved and that its operations are effective and  efficient.
To strengthen and improve FEMA’s monitoring and oversight of the NFIP,  we are recommending in today’s report that FEMA use a methodologically  valid approach for sampling files selected for operational reviews and  quality assurance claims reinspections.
section_title: FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the Flood Insurance Reform Act of 2004
paragraphs: As of September 2005, FEMA had not yet fully implemented provisions of  the Flood Insurance Reform Act of 2004. Among other things, the act  requires FEMA to provide policyholders a flood insurance claims  handbook; to establish a regulatory appeals process for claimants; and to  establish minimum education and training requirements for insurance  agents who sell NFIP policies. The 6-month statutory deadline for  implementing these changes was December 30, 2004.
In September 2005, FEMA posted a flood insurance claims handbook on  its Web site. The handbook contains information on anticipating, filing and  appealing a claim through an informal appeals process, which FEMA  intends to use pending the establishment of a regulatory appeals process.  However, because the handbook does not contain information regarding  the appeals process that FEMA is statutorily required to establish through  regulation, it does not yet meet statutory requirements. With respect to  this appeals process, FEMA has not stated how long rulemaking might  take to establish the process by regulation, or how the process might  work, such as filing requirements, time frames for considering appeals,  and the composition of an appeals board. Therefore, it remains unclear  how or when FEMA will establish the statutorily required appeals process.  With respect to minimum training and education requirements for  insurance agents who sell NFIP policies, FEMA published a Federal  Register notice on September 1, 2005, which included an outline of  training course materials. In the notice, FEMA stated that, rather than  establish separate and perhaps duplicative requirements from those that  may already be in place in the states, it had chosen to work with the states  to implement the NFIP requirements through already established state  licensing schemes for insurance agents. The notice did not specify how or  when states were to begin implementing the NFIP training and education  requirements. Thus, it is too early to tell the extent to which insurance  agents will meet FEMA’s minimum standards. FEMA officials said that,  because changes to the program could have broad reaching and significant  effects on policyholders and private-sector stakeholders upon whom  FEMA relies to implement the program, the agency is taking a measured  approach to addressing the changes mandated by Congress. Nonetheless,  without plans with milestones for completing its efforts to address the  provisions of the act, FEMA cannot hold responsible officials accountable  or ensure that statutorily required improvements are in place to assist  victims of future flood events.
We are recommending in today’s report that FEMA develop documented  plans with milestones for implementing requirements of the Flood  Insurance Reform Act of 2004 to provide policyholders a flood insurance  claims handbook that meets statutory requirements, to establish a  regulatory appeals process, and to ensure that flood insurance agents meet  minimum NFIP education and training requirements.
FEMA did not agree with our recommendations for both its sampling  methodology and implementation of the requirements of the Flood  Insurance Reform Act of 2004. It noted that its current sampling  methodology of selecting a sample based on knowledge of the population  to be sampled was more appropriate for identifying problems than the  statistically random probability sample we recommended. Although  FEMA’s current nonprobability sampling strategy may provide an  opportunity to focus on particular areas of risk, it does not provide  management with the information needed to assess the overall  performance of private insurance companies and adjusters participating in  the program—information that FEMA needs to have reasonable assurance  that program objectives are being achieved.
FEMA also disagreed with our characterization of the extent to which  FEMA has met provisions of the Flood Insurance Reform Act of 2004. We  believe that our description of those efforts and our recommendations  with regard to implementing the Act’s provisions are valid. For example,  although FEMA commented that it was offering claimants an informal  appeals process in its flood insurance claims handbook, it must establish  regulations for this process, and those are not yet complete.
section_title: Some Broader Issues Facing the NFIP
subsections: section_title: The NFIP Pays Expenses and Claims with Premiums, but Its Financial Structure Is Not Designed to be Actuarially Sound
paragraphs: To the extent possible, the NFIP is designed to pay operating expenses  and flood insurance claims with premiums collected on flood insurance  policies rather than with tax dollars. However, as we have reported, the  program, by design, is not actuarially sound because Congress authorized  subsidized insurance rates to be made available for policies covering some  properties to encourage communities to join the program. As a result, the  program does not collect sufficient premium income to build reserves to  meet the long-term future expected flood losses. FEMA has statutory  authority to borrow funds from the Treasury to keep the NFIP solvent.
Until the 2004 hurricane season, FEMA had been generally successful in  keeping the NFIP on sound financial footing. It had exercised its authority  to borrow from the Treasury three times in the last decade when losses  were heavy and repaid all funds with interest. As of August 2005, the  program had borrowed $300 million to cover more than $1.8 billion in  claims from the major disasters of 2004, including hurricanes Charley,  Frances, Ivan, and Jeanne, which hit Florida and other East and Gulf Coast  states. The large number of claims arising from Hurricanes Katrina and  Rita will require FEMA to borrow heavily from the Treasury, because the  NFIP does not have the financial reserves necessary to offset heavy losses  in the short-term. Following Hurricane Katrina in August 2005, legislation  was enacted that increased FEMA’s borrowing authority from $1.5 billion  to $3.5 billion through fiscal year 2008. Additional borrowing authority  may be needed to pay claims arising from Hurricanes Katrina and Rita.
section_title: Some Repetitively-Flooded Properties Are Subsidized under Provisions of Authorizing Legislation and Continue to Financially Strain the Program
paragraphs: In reauthorizing the NFIP in 2004, Congress noted that “repetitive-loss  properties”—those that had resulted in two or more flood insurance  claims payments of $1,000 or more over 10 years—constituted a significant  drain on the resources of the NFIP.  These repetitive loss properties are  problematic not only because of their vulnerability to flooding but also  because of the costs of repeatedly repairing flood damages. While these  properties make up only about 1 percent of the properties insured under  the NFIP, they account for 25 to 30 percent of all claims losses. At the time  of our March 2004 report on repetitive loss properties, nearly half of all  nationwide repetitive loss property insurance payments had been made in  Louisiana, Texas, and Florida. According to a recent Congressional  Research Service report, as of December 31, 2004, FEMA had identified  11,706 “severe repetitive loss” properties defined as those with four or  more claims or two or three losses that exceeded the insured value of the  property. Of these 11,706 properties almost half (49 percent) were in  three states—3,208 (27 percent) in Louisiana, 1,573 (13 percent) in Texas,  and 1,034 (9 percent) in New Jersey.
As the destruction caused by horrendous 2004 and 2005 hurricanes are a  driving force for improving the NFIP today, devastating natural disasters  in the 1960s were a primary reason for the national interest in creating a  federal flood insurance program. In 1963 and 1964, Hurricane Betsy and  other hurricanes caused extensive damage in the South, and, in 1965,  heavy flooding occurred on the upper Mississippi River. In studying  insurance alternatives to disaster assistance for people suffering property  losses in floods, a flood insurance feasibility study found that premium  rates in certain flood-prone areas could be extremely high. As a result, the  National Flood Insurance Act of 1968, which created the NFIP, mandated  that existing buildings in flood-risk areas would receive subsidies on  premiums because these structures were built before the flood risk was  known and identified on flood insurance rate maps. Owners of structures  built in flood-prone areas on or after the effective date of the first flood  insurance rate maps in their areas or after December 31, 1974, would have  to pay full actuarial rates. Because many repetitive loss properties were  built before either December 31, 1974 or the effective date of the first flood  insurance rate maps in their areas, they were eligible for subsidized  premium rates under provisions of the National Flood Insurance Act of  1968.
The provision of subsidized premiums encouraged communities to  participate in the NFIP by adopting and agreeing to enforce state and  community floodplain management regulations to reduce future flood  damage. In April 2005, FEMA estimated that floodplain management  regulations enforced by communities participating in the NFIP have  prevented over $1.1 billion annually in flood damage. However, some of  the properties that had received the initial rate subsidy are still in  existence and subject to repetitive flood losses, thus placing a financial  strain on the NFIP.
For over a decade, FEMA has pursued a variety of strategies to reduce the  number of repetitive loss properties in the NFIP. In a 2004 testimony, we  noted that congressional proposals have been made to phase out coverage  or begin charging full and actuarially based rates for repetitive loss  property owners who refuse to accept FEMA’s offer to purchase or  mitigate the effect of floods on these buildings. The 2004 Flood Insurance  Reform Act created a 5-year pilot program to deal with repetitive-loss  properties in the NFIP. In particular, the act authorized FEMA to provide  financial assistance to participating states and communities to carry out  mitigation activities or to purchase “severe repetitive loss properties.”  During the pilot program, policyholders who refuse a mitigation or  purchase offer that meets program requirements will be required to pay  increased premium rates. In particular, the premium rates for these  policyholders would increase by 150% following their refusal and another  150% following future claims of more than $1,500. However, the rates  charged cannot exceed the applicable actuarial rate.
It will be important in future studies of the NFIP to continue to analyze  data on progress being made to reduce the inventory of subsidized NFIP  repetitive loss properties, how the reduction of this inventory contributes  to the financial stability of the program, and whether additional FEMA  regulatory steps or congressional actions could contribute to the financial  solvency of the NFIP, while meeting commitments made by the  authorizing legislation.
section_title: Data Inconclusive on Compliance with Requirements for Mandatory Purchase of NFIP Policies
paragraphs: In 1973 and 1994, Congress enacted requirements for mandatory purchase  of NFIP policies by some property owners in high risk areas. From 1968  until the adoption of the Flood Disaster Protection Act of 1973, the  purchase of flood insurance was voluntary. However, because voluntary  participation in the NFIP was low and many flood victims did not have  insurance to repair damages from floods in the early 1970s, the 1973 act  required the mandatory purchase of flood insurance to cover some  structures in special flood hazard areas of communities participating in the  program. Homeowners with mortgages from federally-regulated lenders on  property in communities identified to be in special flood hazard areas are  required to purchase flood insurance on their dwellings for the amount of  their outstanding mortgage balance, up to a maximum of $250,000 in  coverage for single family homes. The owners of properties with no  mortgages or properties with mortgages held by lenders who are not  federally regulated were not, and still are not, required to buy flood  insurance, even if the properties are in special flood hazard areas—the  areas NFIP flood maps identify as having the highest risk of flooding.
FEMA determines flood risk and actuarial ratings on properties through  flood insurance rate mapping and other considerations including the  elevation of the lowest floor of the building, the type of building, the  number of floors, and whether or not the building has a basement, among  other factors. FEMA flood maps designate areas for risk of flooding by  zones. For example, areas subject to damage by waves and storm surge  are in zones with the highest expectation for flood loss.
Between 1973 and 1994, many policyholders continued to find it easy to  drop policies, even if the policies were required by lenders. Federal agency  lenders and regulators did not appear to strongly enforce the mandatory  flood insurance purchase requirements. According to a recent  Congressional Research Service study, the Midwest flood of 1993  highlighted this problem and reinforced the idea that reforms were needed  to compel lender compliance with the requirements of the 1973 Act. In  response, Congress passed the National Flood Insurance Reform Act of  1994. Under the 1994 law, if the property owner failed to get the required  coverage, lenders were required to purchase flood insurance on their  behalf and then bill the property owners. Lenders became subject to civil  monetary penalties for not enforcing the mandatory purchase requirement.
In June 2002, we reported that the extent to which lenders were enforcing  the mandatory purchase requirement was unknown. Officials involved  with the flood insurance program developed contrasting viewpoints about  whether lenders were complying with the flood insurance purchase  requirements primarily because the officials used differing types of data to  reach their conclusions. Federal bank regulators and lenders based their  belief that lenders were generally complying with the NFIP’s purchase  requirements on regulators’ examinations and reviews conducted to  monitor and verify lender compliance. In contrast, FEMA officials believed  that many lenders frequently were not complying with the requirements,  which was an opinion based largely on noncompliance estimates  computed from data on mortgages, flood zones, and insurance policies;  limited studies on compliance; and anecdotal evidence indicating that  insurance was not always in place where required. Neither side, however,  was able to substantiate its differing claims with statistically sound data  that provide a nationwide perspective on lender compliance.
section_title: Accurate, Updated Flood Maps Are The Foundation of the NFIP
paragraphs: Accurate flood maps that identify the areas at greatest risk of flooding are  the foundation of the NFIP. Flood maps must be periodically updated to  assess and map changes in the boundaries of floodplains that result from  community growth, development, erosion, and other factors that affect the  boundaries of areas at risk of flooding. FEMA has embarked on a multi- year effort to update the nation’s flood maps at a cost in excess of $1  billion. The maps are principally used by (1) the approximately 20,000  communities participating in the NFIP to adopt and enforce the program’s  minimum building standards for new construction within the maps’  identified flood plains; (2) FEMA to develop accurate flood insurance  policy rates based on flood risk, and (3) federal regulated mortgage  lenders to identify those property owners who are statutorily required to  purchase federal flood insurance. Under the NFIP, property owners whose  properties are within the designated “100-year floodplain” and have a  mortgage from a federally regulated financial institution are required to  purchase flood insurance in an amount equal to their outstanding  mortgage balance (up to the statutory ceiling of $250,000).
FEMA expects that by producing more accurate and accessible digital  flood maps, the NFIP and the nation will benefit in three ways. First,  communities can use more accurate digital maps to reduce flood risk  within floodplains by more effectively regulating development through  zoning and building standard. Second, accurate digital maps available on  the Internet will facilitate the identification of property owners who are  statutorily required to obtain or who would be best served by obtaining  flood insurance. Third, accurate and precise data will help national, state,  and local officials to accurately locate infrastructure and transportation  systems (e.g., power plants, sewage plants, railroads, bridges, and ports)  to help mitigate and manage risk for multiple hazards, both natural and  man-made.
Success in updating the nation’s flood maps requires clear standards for  map development; the coordinated efforts and shared resources of federal,  state, and local governments; and the involvement of key stakeholders  who will be expected to use the maps. In developing the new data system  to update flood maps across the nation, FEMA’s intent is to develop and  incorporate flood risk data that are of a level of specificity and accuracy  commensurate with communities’ relative flood risks. Not every  community may need the same level of specificity and detail in its new  flood maps. However, it is important that FEMA establish standards for  the appropriate data and level of analysis required to develop maps for all  communities of a similar risk level. In its November 2004 Multi-Year Flood  Hazard Identification Plan, FEMA discussed the varying types of data  collection and analysis techniques the agency plans to use to develop flood  hazard data in order to relate the level of study and level of risk for each of  3,146 counties.
FEMA has developed targets for resource contribution (in-kind as well as  dollars) by its state and local partners in updating the nation’s flood maps.  At the same time, it has developed plans for reaching out to and including  the input of communities and key stakeholders in the development of the  new maps. These expanded outreach efforts reflect FEMA’s understanding  that it is dependent upon others to achieve the benefits of map  modernization.
section_title: Concluding Observations
paragraphs: The most immediate challenge for the NFIP is processing the flood  insurance claims resulting from Hurricanes Katrina and Rita. FEMA  reported, as of October 13th, that it had received 192,809 flood insurance  claims and had paid nearly $1.3 billion to settle 7,664 of these claims. The  number of claims is more than twice as many as were filed in all of 2004,  itself a record year. The need for effective communication and consistent  and appropriate application of policy provisions will be particularly  important in working with anxious policyholders, many of whom have  been displaced from their homes.
In the longer term, Congress and the NFIP face a complex challenge in  assessing potential changes to the program that would improve its  financial stability, increase participation in the program by property  owners in areas at risk of flooding, reduce the number of repetitive loss  properties in the program, and maintain current and accurate flood plain  maps. These issues are complex, interrelated, and are likely to involve  trade-offs. For example, increasing premiums to better reflect risk may  reduce voluntary participation in the program or encourage those who are  required to purchase flood insurance to limit their coverage to the  minimum required amount (i.e., the amount of their outstanding mortgage  balance). This in turn can increase taxpayer exposure for disaster  assistance resulting from flooding. There is no “silver bullet” for improving  the current structure and operations of the NFIP. It will require sound data  and analysis and the cooperation and participation of many stakeholders.
Mr. Chairman and Members of the Committee, this concludes my prepared  statement. I would be pleased to respond to any questions you and the  Committee Members may have.
section_title: GAO Contacts and Staff Acknowledgments
paragraphs: Contact points for our Office of Congressional Relations and Public Affairs  may be found on the last page of this statement. For further information  about this testimony, please contact Norman Rabkin at (202) 512-8777 or  at rabkinn@gao.gov, or William O. Jenkins, Jr. at (202) 512-8757 or at  jenkinswo@gao.gov. This statement was prepared under the direction of  Christopher Keisling. Key contributors were Amy Bernstein, Christine  Davis, Deborah Knorr, Denise McCabe, and Margaret Vo.
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