Federal Emergency Management Agency: Challenges for the National Flood Insurance Program
Published: 2006-01-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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. The unprecedented magnitude and severity of the flood losses from hurricanes in 2005 challenged the NFIP to process a record number of claims. These storms also illustrated the extent to which the federal government has exposure for claims coverage in catastrophic loss years. FEMA estimates that Hurricanes Katrina, Rita, and Wilma will generate claims and payments of about $23 billion--far surpassing the total claims paid in the entire history of the NFIP. This testimony provides information from past and ongoing GAO work on issues including: (1) NFIP's financial structure; (2) the impact of properties with repetitive flood losses on NFIP's resources; (3) proposals to increase the number of policies in force; and (4) the status of past GAO recommendations.
section_title: What GAO Found
paragraphs: 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 November 2005, FEMA's authority to borrow from the Treasury was increased from $1.5 billion to $18.5 billion through fiscal year 2008 to help pay claims from the 2005 hurricane season. It is highly unlikely that the NFIP as presently funded could generate sufficient revenues to repay a debt of this size. One reason the NFIP is not actuarially sound is because a number of its policies on dwellings that were built before flood plain management regulations were established in their communities are subsidized and pay premiums of 35-40 percent of the true risk premium. In January 2006, FEMA estimated an annual shortfall in premium income of $750 million because of such policy subsidies. Some subsidized properties, called repetitive loss properties, also suffer repetitive flood losses, which accounted for about $4.6 billion in claims payments from 1978 to March 2004. We need to analyze the progress made to reduce the inventory of subsidized repetitive-loss properties and determine whether additional regulatory or congressional action is needed. A challenge for FEMA is to expand the NFIP policyholder base by enforcing mandatory purchase requirements and encouraging voluntary purchase by homeowners who live in areas at lower risk of flooding. The extent of noncompliance with current mandatory purchase requirements for property owners in special flood hazard areas is unknown. There has been some congressional interest in the feasibility of expanding mandatory purchase requirements beyond the current special high-risk areas, however, there are a number of difficulties to assessing the impacts, effectiveness, and feasibility of such a change in the structure of the NFIP, as well as concerns related to enforcing and assessing compliance. For example, more precise flood mapping of areas outside the current high-risk areas would be required to accurately identify affected property owners. FEMA and its private insurance partners also have efforts underway to increase NFIP participation by marketing policies in areas where purchase is not mandatory. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to develop new materials to explain coverage and the claims process to policyholders, establish an appeals process for claimants, and provide insurance agent education and training requirements. The statutory deadline for implementing these changes was December 30, 2004, and, as of January 2006, FEMA had not developed documented plans with milestones for meeting the provisions of the act, as recommended by GAO.

section_title: Letter
paragraphs: I appreciate the opportunity to participate in today’s hearing on the future  of the National Flood Insurance Program (NFIP) to discuss issues related  to the future financial stability of the NFIP and recommendations we have  made for improvements to the management and oversight of the program.  The NFIP combines property insurance for flood victims, mapping to  identify the boundaries of the areas at highest 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 is 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;  reducing, through this insurance coverage, taxpayer-funded disaster  assistance for property damage when flooding strikes; and  reducing property flood damage through flood plain management  based on accurate, useful flood maps and the enforcement of building  standards (such as elevating structures).
Hurricanes Katrina and Rita represent a tragedy for hundreds of thousands  of our fellow Americans.  Their lives have been turned upside down, and  many who would have benefited from flood insurance did not have it.   This tragedy offers an opportunity to fundamentally rethink the flood  insurance program and how it can best be structured to provide financial  protection from flooding for those who need and would benefit from flood  insurance while enhancing the program’s financial foundation.
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.
The NFIP was established by 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.
As of November 2005, the NFIP was estimated to have approximately 4.8  million policyholders in about 20,000 communities. 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 save about $1 billion in flood damage each year.
Flood maps identify the boundaries of the areas at the greatest risk of  flooding.  These areas are called special high-risk flood hazard areas, often  referred to as the 100-year flood plain, that area in which there is a 1  percent chance of flooding each year, or a 30 percent chance of flooding  over the period of a 30-year mortgage.  Property owners whose properties  are within the 100-year flood plain, as identified on the flood maps, and  whose mortgages are from a federally regulated lender, are required to  purchase flood insurance for the amount of their outstanding mortgage  balance, up to the maximum policy limit 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 the 100-year flood plain. Optional, lower-cost coverage is available  under the NFIP to protect homes in areas of low to moderate risk that are  outside the 100-year flood plain, but owners of properties in these lower- risk areas are not required to purchase flood insurance.
The unprecedented magnitude and severity of the flood losses in 2005  placed unprecedented challenges on the NFIP to process a record number  of claims, many in properties flooded by Hurricanes Katrina and Rita that  were inaccessible for weeks after the flooding occurred. These storms also  illustrated the extent to which the federal government has exposure for  claims coverage in catastrophic loss years. From its inception in 1968 until  August 2005, the NFIP 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. As shown in figure 1, FEMA estimates that  Hurricanes Katrina, Rita, and Wilma are likely to generate claims and  associated payments of about $23 billion— far surpassing the total about  $15 billion in claims paid in the entire history of the NFIP up to those  events.
The NFIP cannot absorb the total costs of paying these claims. On  November 21, 2005, FEMA’s authority to borrow from the Treasury was  increased from $1.5 billion to $18.5 billion through fiscal year 2008. The  acting director of FEMA’s Mitigation Division said this borrowing  authority will pay NFIP claims and expenses into February 2006, when  additional legislative action to increase the borrowing authority will likely  be required. He also said that it is highly unlikely that the program could  generate sufficient revenues to cover a debt of this size. FEMA estimates  that given its current income—about $2 billion annually---and average  historical loss levels, it could expect to handle up to about $1.5 billion in  debt and still have a reasonable chance to repay it within a 3- to 5-year  time period.
GAO has a body of work underway on the preparation for, response to,  and recovery from Hurricanes Katrina and Rita, including how the NFIP  was implemented. We have had teams in the Gulf Coast states since the  weeks immediately following the hurricanes collecting data and  observations from hurricane victims and federal, state, local, and private  participants in the preparation for, response to, and recovery from the  extensive damages.  I have also visited the region and spoken with  governors in some of the affected states, military and civilian officials  leading the recovery efforts, and others to help inform our work.  One  objective of the work we have underway on the NFIP is to assess what  changes, if any, could be made to strengthen the NFIP’s fiscal solvency. To  this end, we will review proposals to increase revenues, reduce costs, or  otherwise make the NFIP more actuarially sound.  We expect to report on  this matter later this year.
As GAO moves forward with this work, we will continue to coordinate  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.
Past experience can provide context for considering future policy options.  In this spirit, my testimony today is based on a body of work that GAO has  done over the past several years before the nation began the struggle to  respond to the devastating effects of Hurricanes Katrina and Rita in our  Gulf Coast states, as well as some preliminary results of interviews and  review of documentation for work in progress on how the NFIP was  implemented for these storms. Our prior work has addressed the issues of  the program’s structure and financing, oversight and management,  repetitive loss properties, mandatory and voluntary purchase of flood  insurance, and revising and improving the nation’s flood maps. Together  the prior work and work in process provide information useful in  assessing efforts over the NFIP’s history to enhance the program’s  financial stability and effectiveness. Most recently, we issued a report in  October 2005 on FEMA’s management and oversight of the flood insurance  program that includes several recommendations for improvement. 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) improving 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.
That report was 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.
subsections: section_title: Major Program Issues –a Summary
paragraphs: 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 for the NFIP 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. In our prior work, we  have identified several major challenges facing the NFIP:    Reducing losses to the program resulting from policy subsidies and  repetitive loss properties. The program is not actuarially sound  because of the number of policies in force that are subsidized—about  29 percent at the time of our 2003 report. As a result of these subsidies,  some policyholders with dwellings that were built before flood plain  management regulations were established in their communities pay  premiums that represent about 35 to 40 percent of the true risk  premium. In January 2006, FEMA estimated a shortfall in annual  premium income because of policy subsidies at $750 million. Moreover,  at the time of our 2004 report, there were about 49,000 repetitive loss  properties—those with two or more losses of $1,000 or more in a 10- year period—representing about 1 percent of the 4.4 million buildings  insured under the program. From 1978 until March 2004, these  repetitive loss properties represented about $4.6 billion in claims  payments.
Increasing property owner participation in the program. The extent of  noncompliance with current mandatory purchase requirements by  affected property owners is unknown. Some interest has been  expressed in Congress in assessing the feasibility of expanding  mandatory purchase requirements beyond current special high-risk  flood hazard areas. FEMA and its private insurance partners also have  efforts underway to increase participation in the NFIP by marketing  flood insurance policies in areas where purchase is not mandatory.
Developing accurate, digital flood maps. The impact of Hurricanes  Katrina, Rita, and Wilma on homeowners has highlighted the  importance of having accurate, up-to-date flood maps that identify the  areas at risk of flooding and, thus, the areas in which homeowners  would benefit from purchasing flood insurance.  In our report on the  NFIP’s flood map modernization program, we discussed the multiple  uses and benefits of accurate, digital flood plain maps. However, the  NFIP faces a major challenge in working with its contractor and state  and local partners of varying technical capabilities and resources to  produce accurate, digital flood maps. In developing those maps, we  recommended that FEMA develop and implement data standards that  will enable FEMA, its contractor, and its state and local partners to  identify and use consistent data collection and analysis methods for  developing maps for communities with similar flood risk.
Providing effective oversight of flood insurance operations. In our  October 2005 report, we said 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.
section_title: The NFIP Pays Expenses and Claims with Premiums to the Extent Possible, 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, exercising its borrowing  authority three times in the last decade when losses exceeded available  fund balances. In each instance, FEMA repaid the funds with interest.  According to FEMA officials, as of August 31, 2005, FEMA had outstanding  borrowing of $225 million with cash on hand totaling $289 million. FEMA  had substantially repaid the borrowing it had undertaken to pay losses  incurred for the 2004 hurricane season that, until Hurricane Katrina  struck, was the worst hurricane season on record for the NFIP. FEMA’s  current debt with the Treasury is almost entirely for payment of claims  from Hurricanes Katrina and Rita and other flood events that occurred in  2005.
subsections: section_title: Premium Subsidies and Repetitive-Loss Properties Affect NFIP’s Actuarial Soundness
paragraphs: 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, the policy subsidies reduce premium income and add risk to the  NFIP. In January 2006, FEMA estimated an annual shortfall in premium  income of $750 million because of policy subsidies. FEMA estimated that  phasing out subsidized rates for non-primary residences and  nonresidential properties alone would affect about 400,000 properties  currently insured by the NFIP.  Some have questioned whether providing  flood insurance for second homes in high risk areas—such as barrier  islands—encourages development in areas at high risk of flooding.
In addition, some of the properties that had received the initial rate  subsidy are subject to repetitive flood losses, placing added financial  strain on the NFIP.  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, there were about 49,000 repetitive loss properties, representing  about $4.6 billion in claims payments from 1978 until March 2004.  As of  March 2004, 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. A significant  number of repetitive loss properties were affected by Hurricanes Katrina  and Rita. According to NFIP statistical data through November 30, 2005,  4,835 repetitive loss properties, including 3,183 in Louisiana, had  substantial damage from Hurricane Katrina. Two hundred and forty-three  repetitive loss properties had substantial damage from Hurricane Rita. Of  these properties, 213 were located in Louisiana and 30 were located in  Texas.
For over a decade, FEMA has pursued a variety of strategies to reduce the  number of repetitive loss properties in the NFIP inventory. 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. Specifically, the premium  rates for these policyholders would increase by 150 percent following their  refusal and another 150% following future claims of more than $1,500.  However, the rates charged cannot exceed the applicable actuarial rate.
Because of the financial drain that repetitive loss properties have posed  for the program, 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 properties, particularly those with repetitive losses;  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: Expansion of the NFIP Policyholder Base
subsections: section_title: Compliance with Mandatory Purchase Requirements Difficult to Determine
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 held by federally-regulated lenders  on property in communities identified by FEMA 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 the zone 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, federally-regulated 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: Expansion of Mandatory Purchase Requirements Would Generate More Premiums, but Implementation Could Be Problematic
paragraphs: Under FEMA’s current Mandatory Purchase of Flood Insurance  Guidelines, properties in a 100-year flood plain with a statistical 1 in 100  chance of flooding in any given year or a 30 percent chance of flooding  during the period of a 30-year mortgage are designated to be in special  flood hazard areas.  Within the boundaries of these areas, homeowners  with mortgages from federal regulated lenders are required to purchase  flood insurance for an amount equal to their outstanding mortgage  balance, up to the maximum policy limit of $250,000 for a single-family  home. To expand the NFIP policyholder base, there has been some  congressional interest in the feasibility of extending the current mandatory  purchase requirement to properties in a 500-year flood plain, which  statistically have a 1 in 500 chance of flooding in any given year. FEMA  has estimated that expanding NFIP mandatory purchase requirements to  include structures in the 500-year flood plain would generate up to $700  million in additional premiums. The current annual premium for a  structure in the 500-year flood plain is about $280. However, a FEMA  official cautioned that the rate of compliance is an important component  of any estimate of the amount of increase in NFIP premiums that would  result from expanding mandatory purchase requirements.
It would be difficult to effectively assess the impacts, effectiveness, and  feasibility of such a change in the structure of the NFIP. We share FEMA’s  concerns related to enforcing and assessing compliance. We also believe  that it would be difficult to assess the impacts an expansion in the  mandatory purchase requirements would have upon a range of  stakeholders, including not only home and business owners, but lenders,  mortgage servicers, builders, and local governments, among others.
We also recognize that it would be difficult and costly to determine the  additional geographic area that would be encompassed in an expanded  special flood hazard area. Current flood mapping focuses on the  boundaries of the 100-year flood plain, and FEMA has not estimated the  additional cost and time required to complete detailed, digitalized maps of  areas outside of the current 100-year special flood hazard area.
section_title: FEMA Has a Marketing Campaign to Attract New Policyholders and Improve Rates of Renewal
paragraphs: In recent years, the number of NFIP policyholders did not grow  substantially. FEMA officials reported a pattern in which at the start of  each hurricane season, the number of polices in force was the same or less  than the number of policies in previous years. During the hurricane  season, the number of polices in force would increase slightly and then  level off or decline again at the end of the season.
FEMA has efforts underway to increase NFIP participation by improving  the quality of information that is available on the NFIP and flood risks and  by marketing to retain policyholders currently in the program. In October  2003, FEMA let a contract for a new integrated marketing campaign called  “FloodSmart.” Marketing elements being used include direct mail, national  television commercials, print advertising, and websites designed for  consumers and insurance agents. According to FEMA officials, in a little  more than 2 years since the contract began, net policy growth was a little  more than 7 percent and policy retention improved from 88 percent to 91  percent.
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.
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 standards. 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 contributions (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.
As I have discussed, it is important when considering any expansion of  mandatory purchase requirements for NFIP policies to understand that  implementation would require the development of additional detailed  flood maps. According to a FEMA official, digital mapping of areas outside  of special flood hazard areas is currently being considered on only a  selective basis for reasons such as potential changes in risk level or  population growth.
section_title: Monitoring and Oversight of NFIP Identifies Specific Problems, but Does Not Provide Comprehensive Information on Overall Program Performance
paragraphs: 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.
According to FEMA, these monitoring and oversight mechanisms will be in  place to assess the implementation of the NFIP after Hurricanes Katrina  and Rita. In addition, FEMA plans to do additional oversight of claims for  these storms that were handled using expedited procedures. To try to  assist NFIP policyholders despite obstacles in communicating with  claimants, reaching flooded properties, and locating records, FEMA  allowed expedited claims processing procedures that were unique to these  storms. In some circumstances, claims were settled without site visits by  certified flood claims adjusters. For flooding caused by the failure of the  levees in the New Orleans area, resulting in flooding from Lake  Pontchartrain, FEMA allowed the use of flood depth data to identify  structures that had been severely affected. If data on the depth and  duration of the water in the building showed that it was likely that covered  damage exceeded policy limits, claims could be settled without a site visit  by a claims adjuster. Similarly, losses in other areas of Louisiana and  Mississippi were handled without a site visit where structures were  washed off their foundations by flood waters and square-foot  measurements of the dwellings were known.
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.
However, 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 recommended that FEMA use a methodologically valid approach for  sampling files selected for operational reviews and quality assurance  claims reinspections. We also plan to follow up on the results of the  monitoring and oversight efforts for claims processed using expedited  processes in our review of the implementation of the NFIP after  Hurricanes Katrina and Rita.
FEMA did not agree with our recommendation. 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.
section_title: FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the Flood Insurance Reform Act of 2004
paragraphs: As of January 2006, 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. In January  2006, the acting director of FEMA’s Mitigation Division said that FEMA  had submitted a draft rule to DHS. However, milestones for future actions  were not established. Claimants who wish to appeal decisions made on  their claims for damage from Hurricanes Katrina and Rita can follow a  process described by FEMA as an “informal” appeals process. As outlined  in the Flood Insurance Claims Handbook, to appeal, policyholders are to  submit statements of their concerns and supporting documentation to the  director of claims in FEMA’s Mitigation Division, Risk Insurance Branch.
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 recommended 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. We will continue to monitor progress being made.
FEMA disagreed with our recommendation and 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: Concluding Observations
paragraphs: The most immediate challenge for the NFIP is processing the flood  insurance claims resulting from Hurricanes Katrina and Rita. Progress is  being made in that area. In December 2005, according to FEMA, more than  70 percent of Hurricane Katrina claims had been paid, totaling more than  $11 billion, some of them using expedited procedures to assist  policyholders who were 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 Contact and Staff Acknowledgments
paragraphs: Contact point 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  rabkinn@gao.gov, or William O. Jenkins Jr. at (202) 512-8757 or  jenkinswo@gao.gov. This statement was prepared under the direction of  Christopher Keisling. Key contributors were John Bagnulo, Christine  Davis, and Deborah Knorr.
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