Flood Insurance: Status of FEMA's Implementation of the Biggert-Waters Act, as Amended
Released: 2015-02-19T00:00:00

Letter

Background

NFIP Overview

In 1968, Congress created NFIP, which makes federally backed flood insurance available to property owners in qualifying communities. NFIP was established as an alternative to providing direct disaster relief after floods and was intended to reduce the federal government’s escalating costs for repairing flood damage after disasters. Currently, NFIP is managed by FEMA’s Federal Insurance and Mitigation Administration (FIMA), with administrative support from FEMA’s Mission Support Bureau. FIMA staff members are responsible for monitoring and overseeing NFIP’s three program areas: insurance, flood mapping, and mitigation activities. Within FIMA, these areas of responsibility are overseen by the Risk Insurance Division, Risk Analysis Division, and Risk Reduction Division, respectively.

Private insurance companies, referred to as “Write Your Own” companies (WYO), write, sell, and service NFIP policies, which are financially backed by the federal government. FEMA funds NFIP primarily through the insurance premiums paid by policyholders but receives appropriations for some flood mapping and mitigation activities. NFIP premiums are to cover insurance claims and all program costs, including outreach, research, and operating expenses. When premiums are insufficient to cover these costs, FEMA may borrow money from Treasury, although Congress sets limits on the overall amount that FEMA may borrow.

Insurance

As of December 2014, about 22,000 communities across the United States and its territories were voluntarily participating in NFIP by adopting and agreeing to enforce flood-related building codes and floodplain management regulations to reduce future flood damage. Homeowners with mortgages held by federally regulated lenders on property in special flood hazard areas (SFHA) are required to purchase flood insurance. Others may purchase flood insurance voluntarily if they live in a participating community. NFIP establishes flood zone designations through its mapping process. SFHAs are high-risk areas that have a 1 percent or greater annual chance of flooding and are designated as A, AE, V, or VE zones.

NFIP coverage limits vary by program (regular or emergency) and property type (for example, residential or nonresidential). In NFIP’s regular program, the maximum coverage limits for residential policyholders are $250,000 for buildings and $100,000 for contents. For commercial policyholders (that is, those with policies for nonresidential properties and multifamily properties), the maximum coverage limit is $500,000 per building and $500,000 for the building owner’s contents. Additional coverage is available for contents owned by tenants. NFIP differentiates two levels of coverage under the regular program—basic and additional. Because claims are more likely to be made against the first several thousand dollars of coverage than against higher levels of coverage, FEMA charges a higher insurance premium per $100 of basic coverage than it does per $100 of additional coverage.

FEMA uses a nationwide class rating system to determine premiums, rather than an individual property or community-level rating system. The premium that NFIP policyholders pay has several components, including a risk component. The risk component varies among policyholders based on location and property characteristics such as flood zone designation (e.g., rate class), elevation of the property relative to the community’s base flood elevation (BFE) (where data are available), building type, number of floors, presence of a basement, and the year a structure was built relative to the year of a community’s original flood map.

The 1968 law that created NFIP authorized subsidies for some policies to encourage community and property owner participation. Generally, subsidized policies cover properties in high-risk locations that otherwise would have been charged higher premiums and that were built before Flood Insurance Rate Maps (FIRM) became available and their flood risk was clearly understood. Further, NFIP allows other property owners to continue to pay “grandfathered” rates, which do not reflect reassessments of their properties’ flood risk that occur when the properties are remapped into higher-risk flood zones but whose policies continue to be classified with other policyholders from lower-risk zones.

Mapping

FIRMs serve several purposes. They provide the basis for setting insurance rates and identifying properties whose owners are required to purchase flood insurance. They also provide the basis for establishing floodplain building standards that communities must adopt and enforce as part of their NFIP participation. While FIMA’s Risk Analysis Division is responsible for flood mapping activities and for flood mapping policy and guidance, stakeholders from all levels of government and the private sector participate in the mapping process. FEMA identifies flood hazards, assesses flood risks, and provides appropriate hazard and risk information to communities nationwide. FEMA relies on local governments to provide it with notice of changes in communities that can pose new or changed flood hazards and works with localities to collect the information needed to update flood maps.

Mitigation

FEMA supports a variety of flood mitigation activities that are designed to reduce flood risk and thus NFIP’s financial exposure. These activities, which are implemented at the state and local levels, include hazard mitigation planning; the adoption and enforcement of floodplain management regulations and building codes; and the use of hazard control structures such as levees, dams, and floodwalls or natural protective features such as wetlands and dunes. Community-level mitigation funding is available through FEMA via grant programs such as the Flood Mitigation Assistance (FMA) Program. Through these programs, FEMA provides cost-sharing opportunities for communities for mitigation activities. At the individual property level, mitigation options include elevating a building to or above the area’s BFE, relocating the building to an area with less flood risk, or purchasing and demolishing the building and turning the property into green space.

Recent Legislation

The Biggert-Waters Act

In July 2012, the President signed into law the Biggert-Waters Act to help strengthen the financial soundness of NFIP. The act mandated changes to several aspects of NFIP’s three programmatic areas—insurance, mapping, and mitigation—and also required a study on affordability (see app. II for a detailed chart of selected requirements from the Biggert- Waters Act).

With respect to insurance, the Biggert-Waters Act required FEMA, among other things, to: create a reserve fund that would maintain at least 1 percent of the total annual potential loss exposure faced by NFIP based on outstanding flood insurance policies in force in the prior fiscal year; issue a report to Congress setting forth options to repay FEMA’s total debt to Treasury within 10 years; increase rates to phase out premium discounts for grandfathered properties that had been remapped to higher-risk flood zones but were still classified with other policyholders from the lower-risk zone; increase rates (at 25 percent a year) to phase out subsidies for certain properties, including secondary residences, businesses, and severe repetitive loss properties; prohibit subsidized rates for properties purchased after or not insured as of July 6, 2012; and develop a methodology for determining the appropriate amounts that WYOs should be reimbursed for selling, writing, and servicing NFIP policies and adjusting claims.

To improve the accuracy of FIRMs (which are used in rate setting), the Biggert-Waters Act required the creation of a Technical Mapping Advisory Council (TMAC) to review and provide recommendations on updating and improving community flood maps. In addition, Section 216 of the Biggert- Waters Act authorized funding for and established a national flood mapping program, under which FEMA was to review, update, and maintain rate maps in coordination with TMAC. With respect to mitigation, the Biggert-Waters Act amended aspects of FEMA’s existing mitigation grants assistance programs. For example, Section 225: eliminated as independent programs a mitigation assistance grant program and a pilot program specific to repetitive insurance claims properties and severe repetitive loss properties, respectively; allowed for grants for eligible mitigation activities to be provided directly to policyholders under certain circumstances; and allowed FEMA to pay a higher percentage of total costs for activities providing mitigation for severe repetitive loss properties than for mitigation activities for other properties covered by the grants program.

The Biggert-Waters Act also mandated that FEMA contract with the National Academy of Sciences (NAS) to conduct a study that would include an analysis of the costs and benefits to the federal government of a flood insurance program with full risk-based premiums that could be combined with a means-tested insurance voucher program for individuals who could not otherwise afford coverage. Under the Biggert-Waters Act, the NAS study can inform a FEMA affordability study, which includes methods to encourage and maintain participation in NFIP and methods to establish an affordability framework.

Concern over rapid rate increases implemented under the Biggert-Waters Act played a role in the enactment of HFIAA in March 2014. HFIAA repealed some of the rate increases implemented under the Biggert- Waters Act. However, the act also modified or continued some changes made by the Biggert-Waters Act to NFIP (see app. II for a detailed chart of selected requirements from HFIAA).

Among other things, HFIAA contained the following with respect to insurance: created a premium surcharge that would be deposited in the reserve fund (generally, a $25 surcharge for primary residences and a $250 surcharge for others); restored grandfathered rates removed by the Biggert-Waters Act, effective retroactive to the Biggert-Waters Act’s enactment on July 6, 2012; did not affect the schedule for phasing out subsidized policies for properties such as secondary residences, businesses, and severe repetitive loss properties (rates would continue to increase at 25 percent a year); reinstated subsidized rates for properties that were purchased after or not insured as of July 6, 2012, that had been removed by the Biggert- Waters Act, but required that FEMA increase premium rates on these and many other types of subsidized policies by at least 5 percent up to the caps established by HFIAA for all policies annually; limited average increases for a risk class to 15 percent and individual policy increases to 18 percent; and required FEMA to issue refunds directly to those who paid NFIP premiums under the Biggert-Waters Act in excess of rates set under HFIAA.

In the area of mapping, HFIAA added a requirement that TMAC review FEMA’s flood mapping program and issue a report with respect to the technical credibility of flood hazard data in all areas where FIRMs are prepared or updated. FEMA is required to provide TMAC’s review report to Congress. HFIAA also requires that FEMA notify affected communities before work begins on new or updated mapping about the model or models being used and provide an explanation of why that model is appropriate. Regarding mitigation, HFIAA required FEMA to establish guidelines to provide alternative mitigation methods, other than building elevation, to reduce flood risk to residential buildings that cannot otherwise be elevated due to their structural characteristics.

HFIAA also permitted additional funding to complete the affordability study, along with additional requirements to include, after which FEMA would be required to prepare and present to Congress an affordability framework that considered (1) accurate communication to consumers of flood risk; (2) targeted assistance to policyholders based on their financial ability to participate in NFIP; (3) individual or community actions to mitigate the risk of flooding or lower the cost of flood insurance; (4) the impact of increases in premium rates on participation; and (5) the impact of FIRMs on the affordability of flood insurance. HFIAA also required FEMA to designate a Flood Insurance Advocate to advocate for the fair treatment of NFIP policyholders and property owners in the mapping of flood hazards, the identification of risks from flood, and the implementation of measures to minimize the risk of flood.

FEMA Has Prioritized and Tracked Required Changes, but Faces Implementation Challenges

In managing its implementation of the Biggert-Waters Act, as amended by HFIAA, FEMA has prioritized its implementation of required changes, established internal mechanisms and indicators for communicating and tracking its implementation status, and regularly communicated its implementation efforts to key external stakeholders. These steps are consistent with relevant federal internal control standards. However, FEMA faces a number of challenges related to the implementation of these laws, such as resource constraints and the need to balance NFIP’s financial solvency with affordability, as well as existing organizational challenges that could affect its implementation efforts.

FEMA Has Prioritized, Tracked, and Communicated Its Implementation of the Biggert-Waters Act, as Amended by HFIAA

To manage its implementation of changes required by the Biggert-Waters Act and HFIAA, FEMA has: established implementation of the changes as a strategic objective in its 2014-2018 strategic plan; ranked the implementation of HFIAA requirements in terms of priority; established mechanisms for coordinating internally on prioritizing and tracking its implementation efforts; and communicated regularly with external stakeholders.

As well as making implementation of the changes an organizational priority within its strategic plan, FEMA has also prioritized legislative requirements for implementation. In its 2014-2018 strategic plan, FEMA established strategy 4.3.1, “Strengthen implementation by prioritizing NFIP reforms under the Biggert-Waters Act of 2012, the Homeowner Flood Insurance Affordability Act of 2014, and the Hurricane Sandy Rebuilding Task Force.”officials stated that they met internally in a collaborative process to rank each section of the law in terms of implementation priority. The officials added that senior FEMA management, including the administrator, were informed of the outcomes of these sessions and consulted on priorities.

Following the passage of HFIAA, FEMA FEMA officials also told us that in developing their implementation priorities they took into consideration input from external stakeholders, such as organizations with flood insurance expertise and experience, WYOs, and congressional representatives.

FEMA also delegated responsibility for implementation among divisions (Risk Insurance, Risk Analysis, and Risk Reduction) and FEMA’s front office. FEMA’s highest priority has been implementing rate changes required by HFIAA, including rate reductions that have resulted in refunds for some policyholders. This priority is consistent with the intent of HFIAA, which sought to address affordability concerns by postponing or repealing some Biggert-Waters Act requirements, including provisions that phased out some discounted premiums (subsidized and grandfathered rates). According to FEMA officials, other high-priority implementation efforts related to HFIAA include communicating flood risk more clearly to individual policyholders, as required by HFIAA Section 28; meeting mapping notification requirements (required by HFIAA Section 30); and designating the flood insurance advocate (required by HFIAA Section 24).

FEMA has established an integration team to oversee its implementation efforts and created regularly updated tracking documents and indicators to prioritize and track implementation. These indicators include numbers assigned to requirements reflecting level of priority and percentages of completion for requirements. FEMA officials stated that the integration team consists of two or three representatives from each of FIMA’s key divisions, the Office of Chief Counsel, FEMA senior management, and others. According to FEMA officials, the integration team met weekly for the first 6 months after the passage of HFIAA and now meets biweekly. At these and other working meetings, staff members and management review the status of implementation efforts, discuss their workload, and evaluate priorities. FEMA has also created tracking documents for both the Biggert-Waters Act and HFIAA that are updated by the integration team at their meetings. These documents rank requirements in terms of priority and establish status indicators that allow staff to review progress toward implementation in terms of percentage completed. The documents also provide a schedule for key deliverables. For most of the reports it is required to produce, some of which do not have legislatively established due dates or have due dates that have already passed, FEMA has established completion time frames. FEMA has also proposed tentative schedules for completing many other requirements. For example, FEMA documentation shows that in certain cases involving rulemaking, multiyear time frames for completing the related requirement have been established.

FEMA officials said that FEMA had also undertaken a broad strategy to educate consumers, stakeholders, elected officials, and the media about flood insurance reform changes and had met frequently with Congress and external stakeholders (including associations involved in NFIP issues) to discuss priorities and the status of FEMA’s implementation of the Biggert-Waters Act and HFIAA. FEMA officials stated that they had: met with key congressional committee staff on a biweekly basis to update them on FEMA’s implementation progress and conducted over 100 meetings to educate congressional representatives and staff on program changes from the Biggert-Waters Act and HFIAA, in 2013 and 2014 worked with a stakeholder association to reach out to local officials to educate them on Biggert-Waters Act and HFIAA changes, developed materials and a specialized toolkit for agents to educate policyholders about the Biggert-Waters Act and HFIAA, consulted with WYOs, as required by HFIAA Section 3, holding a total of 10 consultation sessions specifically on HFIAA implementation and assigned a FEMA manager who is responsible for communicating guidance to WYOs, conducted communications roundtables with four key stakeholder groups to get ideas and feedback on communicating NFIP reforms to relevant audiences, met with representatives from several federal agencies on three occasions to discuss upcoming changes, conducted training and developed materials for insurance agents and other insurance professionals (lenders, realtors, adjusters, and others) to help ensure they have the information and tools they need to properly communicate with policyholders. Between May 2013 and October 2014, FEMA estimates it had trained over 48,500 agents and insurance professionals, and developed materials that policyholders will receive in their annual insurance renewal package describing rate changes.

Steps that FEMA has taken to manage its implementation of the Biggert- Waters Act, as amended by HFIAA, are consistent with relevant federal internal control standards. FEMA has undertaken risk assessment—one of five internal control standards—by establishing agency priorities for implementation. Prioritization activities are a risk identification method that helps management to identify risk factors, both agency-wide and at the activity level. By establishing indicators for tracking its implementation efforts, which are also reviewed by management, FEMA has also implemented control activities, another internal control standard. Control activities are the policies, procedures, and mechanisms that help ensure that management’s directives are carried out. FEMA’s communication of its priorities and implementation within various levels of the agency and externally are consistent with the internal control standard for “information and communications.” Communicating information in a timely manner to management and relevant staff within the organization, as well as externally with key stakeholders, may have a significant impact on the agency achieving its goals.

FEMA Faces Challenges in Implementing the Biggert-Waters Act and HFIAA Requirements

FEMA officials and representatives of flood insurance organizations we interviewed cited a number of challenges related to FEMA’s implementation of the required changes, including the complexity of the legislation and timing of the enactment of HFIAA, resource constraints, and the competing program goals of financial solvency and affordability. Representatives of 4 of the 10 organizations we interviewed stated that both acts added complexity to NFIP without simplifying any aspects of the program. Representatives from 3 organizations mentioned the timing of the passage of HFIAA as a challenge for FEMA. FEMA was in the process of implementing the Biggert-Waters Act when HFIAA was passed and had to undo some of its previous actions to implement certain requirements. Notably, rate increase caps enacted under the Biggert- Waters Act were reduced in HFIAA, while certain subsidy removals were reversed. As a result of these changes, FEMA was required to cancel certain rate increases and issue refunds to affected policyholders. FEMA officials and representatives of half of the organizations we interviewed cited resource constraints as a challenge for FEMA in implementing flood insurance reforms. FEMA officials noted that they were operating within the budget for fiscal year 2014 that was approved prior to the enactment of HFIAA. While HFIAA made funding available for certain requirements, it did not do so for others, including the flood insurance advocate position.

Representatives from the 10 organizations we interviewed noted implementation challenges related to NFIP financial solvency or program affordability. Seven stated that the Biggert-Waters Act, as amended by HFIAA, required FEMA to balance the competing goals of NFIP financial solvency with affordability concerns. Representatives of almost all of the organizations we interviewed (9 out of 10) expressed concern for the financial solvency of NFIP. Six generally favored the removal of discounts for certain policies—subsidized and grandfathered policies—that were initiated under the Biggert-Waters Act but slowed by HFIAA. Representatives from half of the organizations we interviewed stated that rate changes as implemented under the Biggert-Waters Act would have been beneficial to NFIP’s financial position or expressed concern that reinstating certain subsidies and extending the time period for the phasing out of discounted premiums under HFIAA would have a negative impact on the program’s financial solvency. However, representatives from eight organizations also noted that some rate increases were phased in too quickly under the Biggert-Waters Act and that the slowing of rate increases under HFIAA was beneficial for policyholders.

In addition to challenges specific to the implementation of the Biggert- Waters Act and HFIAA requirements, FEMA continues to face organizational challenges that have contributed to its placement on GAO’s High-Risk list since 2006 and which could also impact its implementation efforts. In addition to the debt incurred by the program ($23 billion as of December 2014), weaknesses remain in NFIP management and operations, including contractor oversight, that continue to place the program at risk. As we identified recently in a December 2014 report, contractor issues have affected FEMA’s efforts to implement some rate changes required by the Biggert-Waters Act. We recommended that FEMA institute controls to validate implementation of data system changes and track their progress toward completion in its contractor monitoring reports. FEMA agreed to implement these recommendations and it plans to institute a test plan to validate future system changes, work with WYOs to obtain information on the status of their implementation of system changes, and develop procedures to monitor progress toward the completion of major data system changes.

FEMA Has Made Progress Implementing Certain Requirements but Lacks Data to Implement Others

FEMA has made progress implementing some but not all of the provisions of the Biggert-Waters Act and HFIAA. The Biggert-Waters Act and HFIAA require FEMA to implement changes to the three key components of NFIP (insurance, mapping, and mitigation), improve its communication with policyholders, and study NFIP affordability. FEMA has made some insurance-related changes, including some rate changes and an increase in reserve assessments. But other changes, such as the Biggert-Waters Act requirement to remove some subsidies, have been only partially implemented because necessary data have yet to be collected. The implementation of key Biggert-Waters Act and HFIAA mapping requirements must be coordinated with an expert council that was recently established in July 2014 and held its first meeting in September 2014. FEMA officials anticipate that the implementation of these additional changes will happen over the next several years. FEMA has executed almost all the mitigation assistance requirements under the Biggert-Waters Act and has begun evaluating alternative mitigation methods for residential buildings, as HFIAA requires. Finally, FEMA has begun taking steps to improve communications with policyholders by establishing an interim Office of the Flood Insurance Advocate and providing required notifications, but the lack of available data has delayed the issuance of an affordability study. In February and September 2015, the National Academy of Sciences (NAS) is to deliver two reports that identify approaches for an NFIP affordability framework and nationwide affordability study, respectively.

FEMA Has Made Some Insurance-Related Changes but Lacks the Data Needed for Full Implementation

FEMA considered that it had fully met requirements for completing close to half of the Biggert-Waters Act sections (16 of 34) and about one-third of the HFIAA sections (8 of 26) as of December 2014. Figure 1 illustrates the progress FEMA has made with respect to certain insurance-related requirements that are being undertaken primarily by FIMA’s Risk Insurance Division, such as required rate changes.

FEMA began phasing out subsidized premium rates under the Biggert- Waters Act, but reinstated some due to HFIAA requirements. NFIP has two types of premium rates: those that reflect the full risk of flooding within a rate class (full-risk rates) and those that do not reflect full risk within a rate class. Generally, subsidized policies cover properties in high-risk locations that otherwise would have been charged higher premiums, and were built before Flood Insurance Rate Maps (FIRM) became available and their flood risk was clearly understood. Premium subsidies were seen as a way to encourage participation in NFIP but over time have contributed to NFIP’s financial instability. The largest number of subsidized policies has been for properties built before FIRMs became available (pre-FIRM). As of September 30, 2013, subsidized policies The Biggert-Waters accounted for about 20 percent of NFIP policies.Act removed subsidies for two groups of properties:

Biggert-Waters Act Section 205 required immediate removal of subsidized rates for certain properties, including newly purchased properties or properties not covered as a result of the policyholder’s decision to allow coverage to lapse after July 6, 2012 (the date the act became law). Upon policy renewal, FEMA was required to charge premiums that reflected full-risk rates. However, HFIAA Section 3 reinstated subsidies for the newly purchased properties and certain lapsed properties but also required (Section 5) that FEMA increase the premium rates for such policies—and certain other pre-FIRM properties—by 5 percent to15 percent annually.

Biggert-Waters Act Section 205 also required that subsidies for certain properties, including secondary residences, businesses, and severe repetitive loss properties, be phased out (see fig. 2 for a full list of affected properties). FEMA must increase rates for these properties by 25 percent annually, until the average rate equals the full-risk rate. HFIAA maintained these rate increases.

To comply with the Biggert-Waters Act, FEMA issued guidance to WYOs in March 2013 (effective Oct. 1, 2013) on charging full-risk premiums for properties purchased after or not insured as of July 6, 2012. As discussed previously, HFIAA Section 3 required FEMA to reverse this guidance. In an April 2014 WYO bulletin (effective May 1, 2014), FEMA reinstated the rates that had been in effect prior to the Biggert-Waters Act changes. Then, in October 2014 guidance FEMA increased rates for all pre-FIRM subsidized primary residences by an average annual rate of 14 percent, effective April 2015. FEMA has also issued guidance on the ongoing 25 percent rate increases required by Biggert-Waters Act Section 205. For example, FEMA implemented two annual 25 percent rate increases on secondary residences, effective in January 2013 and January 2014. For other property types, FEMA implemented 25 percent annual rate increases as of October 2013. Further, in October 2014, FEMA released guidance implementing annual 25 percent rate increases on the following subsidized properties: non-primary residences, severe repetitive loss properties, and substantially cumulatively damaged or “substantially damaged or improved” properties, effective April 1, 2015.

Business Subsidies

FEMA began phasing out business subsidies, as required by the Biggert- Waters Act Section 205, but later reinstated them due to HFIAA requirements. In March 2013 guidance (effective Oct. 1, 2013), FEMA increased rates for all nonresidential policies by 25 percent, although it was required to raise rates only on business properties. guidance, FEMA noted that by increasing nonresidential policy rates by 25 percent they would ensure that all business properties are rated as required by the law. For rate-setting purposes, FEMA categorizes businesses as “nonresidential,” along with other structures such as non- profits, churches, and detached garages, and does not have data necessary to specifically identify businesses.

Subject to certain exceptions, HFIAA Section 5 generally capped the maximum allowable premium increase for individual properties at 18 percent and at 15 percent within any rate class. In guidance issued in June 2014 (effective Oct. 1, 2014), FEMA stated that because it could not identify business properties, it was reducing rates on all nonresidential policies in order to comply with HFIAA annual rate increase caps. FEMA officials told us that beginning in October 2015 they will ask owners of nonresidential structures to specify the type of property they were insuring. FEMA officials told us that they are coordinating with WYOs to develop criteria for determining what constitutes a business and modeling the definition on those currently used by the Internal Revenue Service and other agencies. As the reporting of data has a 2-month lag, the first data will arrive in December 2015. Once nonresidential structures are categorized, FEMA plans to begin reducing subsidies to businesses through 25 percent annual premium rate increases.

Grandfathered Policies

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FEMA increase rates to phase out premium discounts for grandfathered properties—properties that had been remapped into higher flood-risk zones but continued paying lower-risk premium rates. However, FEMA had not planned to begin implementing rate increases on grandfathered properties until the second half of 2014. Due to the passage of HFIAA in March 2014, which repealed this Biggert-Waters Act requirement, FEMA never began phasing out the grandfathered premium rates.

Regardless of the passage of HFIAA, FEMA would have faced challenges in phasing out grandfathered policies as it does not have the elevation data necessary to determine full risk rates for all of these policies. NFIP allows certain property owners to continue to pay “grandfathered” rates, which do not reflect reassessments of their properties’ flood risk that occur when the properties are remapped into higher-risk flood zones but whose policies continue to be classified with other policyholders from a lower-risk zone. In order to identify grandfathered policies that are not paying full-risk rates, FEMA officials told us the agency would need to know the property’s elevation in relation to the base flood elevation (BFE) level of the ground beneath the property. However, not all policyholders have elevation certificates that show this information, in part because certificates are not required for all properties. In particular, a FEMA official stated that elevation certificates are not required for properties built outside of a special flood hazard area (SFHA) that are later remapped into an SFHA and pay a grandfathered rate. In addition, an elevation certificate generally has not been required for pre-FIRM buildings that previously received subsidized rates because information about elevation Finally, a FEMA official also noted was not used in setting those rates.that properties may have out-of-date elevation certificates, if remapping has moved them into a high-risk class. We have previously recommended that FEMA develop and implement a plan to obtain elevation information needed to determine full-risk rates for subsidized properties, which are generally also pre-FIRM structures.recommendation, as well as to identify grandfathered policies that are not paying full-risk rates, FEMA officials said that they were in a multiyear process of determining how to collect elevation data. They told us that they were considering whether available BFE databases could serve as a proxy for elevation certificates at the individual property level, for the limited geographies where such data are available.

The number of grandfathered properties could also continue to grow due to the passage of HFIAA. Because HFIAA Section 4 restored grandfathering, future remapping of properties into a SFHA could create new grandfathered and subsidized policies, depending on property characteristics. HFIAA Section 6 stipulated that for properties newly mapped into SFHAs, when the new premium rate is calculated as a full- risk rate, a lower than full-risk rate (preferred-risk premium) will be applied the year following map revision. At the end of this 1-year period, a permanent rate is phased in. Therefore, in the event that an SFHA expands:

Pre-FIRM properties that are newly insured for the first time following an SFHA expansion are still eligible, under previously established NFIP rules, to receive subsidized policies. When this occurs, it will increase the overall number of subsidized policies.

Properties eligible for the initial preferred-risk premium will then have their premium increased each year until the policy reaches its full-risk, grandfathered, or subsidized rate, depending on the property’s eligibility.

For properties that are already insured or were built in compliance with the FIRM in place at the time of construction, full-risk rates may be based on the previous, lower risk rate zone. Therefore, policies written under this rule represent newly grandfathered policies within NFIP.

Refunds

FEMA has issued guidance to repeal certain rate increases and issue refunds as required by HFIAA. In addition to the repeal of certain subsidy removals discussed above, Section 5 of HFIAA capped the maximum allowable premium increase for individual policies at 18 percent and the maximum average increase at 15 percent for any rate class. In October 2014, FEMA issued new guidance to implement rate-setting requirements in accordance with HFIAA, which included rate adjustments to reflect HFIAA caps on annual rate increases. The guidance will be effective for all policies newly purchased or renewed on or after April 1, 2015. Previously, FEMA also issued guidance in June 2014 (effective Oct. 2014) that provides refund procedures for eligible policyholders. In certain cases, per HFIAA Section 3, policyholders will receive refunds from FEMA.

WYOs began issuing refunds in October 2014 and, according to FEMA documentation, almost all refunds were issued by December 2014.groups of policyholders received refunds:

Refunds were issued to those who became ineligible for subsidies under the Biggert-Waters Act because they had purchased properties after July 6, 2012, or whose coverage had lapsed as of that date for certain reasons. The subsidized premium rates for the newly purchased homes and some of the lapsed covered properties were reinstated under HFIAA Section 3 (see fig. 2). According to FEMA officials, this group of policyholders was expected to receive an average refund of $1,000.

Refunds were issued to those who experienced premium increases under the Biggert-Waters Act that were above the 18 percent annual cap imposed by HFIAA Section 5. The Biggert-Waters Act stipulated that premiums generally could be increased annually up to 20 percent within any rate class, with no cap on annual increase for any individual policy. As we have seen, HFIAA revised this cap generally at 18 percent for individual properties and at 15 percent within any rate class (these caps do not apply to properties still subject to the 25 percent annual increases for subsidy removal). FEMA officials estimated that the average refund for this group of policyholders was approximately $60.

In addition, businesses and nonresidential properties will receive one-time refunds in 2014 for premium increases above 18 percent. FEMA must issue refunds to all nonresidential policyholders as HFIAA eliminated FEMA’s legal authority to make the initial increase in their rates. As noted earlier, FEMA will implement ongoing annual 25 percent rate increases on businesses after it has collected the data necessary to identify them. According to FEMA, properties that are still subject to the 25 percent annual increases for subsidy removal (see fig. 2) will generally not receive refunds.

Other Rate Changes

As required by HFIAA Section 5, FEMA issued guidance in October 2014 (effective April 2015) that caps the annual maximum allowable premium increase for individual properties at 18 percent and at 15 percent within any rate class. In its guidance, FEMA also raised average premiums on pre-FIRM subsidized policies by 14 percent, in the top range of allowable premium increases, which includes the reserve assessment. FEMA officials stated that they planned to increase rates for these properties annually. They added that as FEMA increases subsidized rates, at some point a policyholder may have an incentive to obtain an elevation certificate and pay the full-risk rate rather than the subsidized rate because the full-risk rate would be lower.

FEMA officials told us that tracking prospective premium increases for individual policies based on current coverage elections was not difficult, but that setting rates while keeping overall increases under 18 percent for individual properties could be challenging. FEMA officials stated that a cap on individual policies has never been required under NFIP prior to HFIAA. They added that the total premium for a policy is determined by multiple rating factors. As these factors are calculated separately, overall premiums could increase by more than 18 percent in total during the rate-setting process. To address this issue, FEMA officials said that they would monitor rate increases for individual policies and that FEMA already had checks in place to try to ensure that no policies exceeded the premium increase cap in a given year. FEMA officials also told us that they reviewed the impact of rate changes on a sample of policies. For each of the policies within the sample, rating factors were used to calculate premiums under previous rate-setting practices, which were compared to premiums calculated under new rate-setting practices required by HFIAA. FEMA officials noted that they have done these checks prior to the Biggert-Waters Act in order to identify any individual policies that might be experiencing unusual rate increases.

Policies Exceeding 1 Percent of Total Coverage

HFIAA Section 7 asks FEMA to “strive to minimize the number of policies with annual premiums that exceed one percent of the total coverage” and requires FEMA to report such policies to Congress. FEMA officials stated that they were compiling a report that would compare the number of policies with a premium exceeding 1 percent of coverage as of December 31, 2012, with the number of such policies 1 year later, after the Biggert- Waters Act rate increases. FEMA officials stated that after the implementation of the Biggert-Waters Act rate changes, there was a large increase in the number of policies with premiums exceeding 1 percent of total coverage. However, they also told us that the number of such policies had been large prior to the act (including subsidized policies). As of December 2014, FEMA estimated that this report was 50 percent complete. HFIAA did not establish a due date for issuing the related report, but FEMA officials expect an internal draft of this report will be completed in January 2015, with concurrence taking additional time.

FEMA officials told us the agency will be unable to keep premiums below 1 percent of total coverage for a large number of policies. Currently, FEMA’s rate-setting policy requires rates above 1 percent of coverage for several classes of properties, including high-risk properties located in SFHAs. Further, some policies include only basic coverage that may result in a relatively higher pay-out than those with additional coverage. As a result, the premiums on those policies are high relative to their coverage level, and may exceed 1 percent of total coverage.

In addition, as we have seen, HFIAA Section 5 requires that FEMA raise premium rates on certain policies by at least 5 percent per year. FEMA officials said that many such policies already carried premiums that exceeded 1 percent of total coverage.

Reserve Assessments and Related Reports

As discussed previously, as of December 2014, FEMA’s debt to Treasury from flood insurance payments totaled $23 billion. To avoid large increases in FEMA’s debt, Biggert-Waters Act Section 212 required that FEMA create a reserve fund that maintained at least 1 percent of total annual potential loss exposure. The reserve fund is to be phased in over time, with at least 7.5 percent of the total added yearly, but FEMA is not permitted to exceed annual rate increase caps to build up or maintain the reserve fund. NFIP’s current exposure is $1.3 trillion, meaning the reserve fund eventually would need to hold $13 billion, and FEMA would have to collect approximately $975 million annually (7.5 percent of $13 billion) in order to meet statutory targets. As shown in figure 1, FEMA lists the establishment of the reserve fund as 100 percent complete, reflecting that the reserve fund has been created. However, FEMA has not yet met the yearly statutory target for reserve fund contributions.

FEMA has issued guidance on financing the reserve fund and will do so through two separate funding sources: a reserve fund assessment and a reserve fund surcharge. As we reported in April 2014, FEMA established a reserve assessment on NFIP policies following the enactment of the Biggert-Waters Act. With the exception of preferred-risk policies, new policies or renewals on or after October 1, 2013, were subject to a 5 percent increase on their policies for the purposes of building the reserve fund. In an October 1, 2014, WYO bulletin, FEMA raised its reserve assessments. Effective April 2015, policies that had been charged a 5 percent reserve fund assessment will be charged an additional 10 percent. For preferred-risk policies, the reserve fund assessment will increase from 0 percent to 10 percent. FEMA has issued guidance to the WYOs and will begin charging a reserve fund surcharge that is separate from the reserve assessment beginning in April 2015. Consistent with HFIAA Section 8, primary residential properties are subject to a $25 surcharge, while all nonprimary residential and nonresidential properties Due to the April 2015 increases in are subject to a $250 surcharge.reserve assessments and surcharges, FEMA officials estimated that reserve fund contributions will total approximately $500 million in fiscal year 2015. They also estimated that about $1 billion will be contributed to the reserve fund in fiscal year 2016.

FEMA officials noted that a main limitation in calculating these estimates was potential changes in demand for NFIP policies that could impact forecasted reserve fund contributions. They said that the addition of the surcharge and the continued increases from pre-FIRM subsidy removal, as well as increased reserve assessments, could accelerate the decline in policyholders. FEMA and representatives of 6 of the 10 organizations we interviewed also noted that relatively low-risk policyholders might leave the program because of the increases, but the full impact is unclear. Further, while representatives from 4 of the 10 organizations we interviewed viewed building the reserve fund as beneficial to the financial position of NFIP, a couple expressed concerns that FEMA might not be able to reduce NFIP’s debt while building the reserve. Representatives from 2 of the 10 organizations we interviewed noted that neither the Biggert-Waters Act nor HFIAA addressed NFIP’s outstanding debt.

In mid-December 2014, FEMA issued its fiscal year 2013 NFIP report to Congress, which included the following reports required by the Biggert- Waters Act:

Biggert-Waters Act Section 212 required FEMA to submit an annual report to Congress if yearly contributions to the reserve fund do not meet the 7.5 percent target. HFIAA Section 20 amends this provision to require quarterly reporting if the reserve ratio required is not achieved in a given fiscal year.

Biggert-Waters Act Section 213 required FEMA to issue a report to Congress by January 2013 on a repayment plan setting forth options to repay FEMA’s total debt to Treasury within 10 years.

FEMA’s analysis in the report was conducted prior to the enactment of HFIAA. FEMA reported that it would be unlikely that the required reserve fund balance (approximately $13 billion) would be achieved in the next 20 years due to NFIP’s outstanding current debt and related interest expenses. FEMA’s analysis also concluded that, under the current NFIP operating environment, the agency will be unable to repay its debt within the 10-year time frame.

Biggert-Waters Act Section 224 required FEMA to develop a methodology to compensate WYOs, using actual flood insurance expense line data as an input. Specifically, the Biggert-Waters Act required FEMA to: develop a methodology by January 2013, using actual flood insurance line expense data, for determining the amount that WYOs should be compensated for selling, writing, and servicing NFIP policies and adjusting claims on behalf of NFIP, issue rules by July 2013 for formulating revised expense reimbursements, and submit a report to Congress within 60 days of the rule effective date including the rationale for the rule and the degree to which the policy accurately represents WYOs’ true operating costs and expenses.

According to FEMA officials, FEMA is currently undertaking rulemaking as required by Section 224.

FEMA currently provides approximately 12 percent of collected premiums to the WYOs to cover operating expenses. Since 2001, the percentage of premiums has included an additional 1 percentage point after some WYO companies told FEMA that their actual expenses to service flood insurance policies were greater than the amount they were being reimbursed. In August 2009, we concluded that there was no basis for providing these additional payments to WYO companies and recommended that FEMA immediately reassess the practice of paying WYOs the additional 1 percent.

W-14053. Because expenses are paid to WYOs as a percentage of premiums, expense payments are larger for high-risk policies with large premiums. and commissions as this percentage was written into the agreements between WYOs and FEMA.

As part of its efforts to develop a new WYO compensation methodology, FEMA has taken steps to address the quality of WYOs’ expense data. In a May 2013 presentation, FEMA stated that it has worked with the National Association of Insurance Commissioners to issue new reporting guidelines requiring submission of uniform data. However, FEMA also stated, and we have previously reported, historically expense data were reported by WYOs under a variety of accounting interpretations. Because of this, FEMA stated that the data were unusable as a basis for determining actual WYO operating expenses. FEMA also noted that federal flood expense data reported to the National Association of Insurance Commissioners would have to become “more credible” to be used effectively in calculating annual WYO expenses. FEMA officials told us that once the WYO compensation methodology was complete, the rulemaking process would take several additional years.

FEMA Expects Implementation of Mapping Requirements to Take Several More Years

Figure 3 illustrates FEMA’s progress in implementing selected Biggert- Waters Act and HFIAA mapping requirements.

GAO-09-455.

Most of the due dates listed were established by the Federal Emergency Management Agency (FEMA) after the legislative due dates had passed.

Due dates listed are mandated by BWA.

Mapping Program

Both the Biggert-Waters Act and HFIAA established requirements intended to improve FEMA’s FIRMs. Biggert-Waters Act Section 216 established the National Flood Mapping Program and defined FEMA’s responsibility for developing and maintaining FIRMs that are adequate to make flood-risk determinations. The Biggert-Waters Act required that FEMA review, update, and maintain maps that, among other things, use current, accurate, ground-elevation data; include future conditions risk assessment and modeling; and incorporate the best available climate science. The Biggert-Waters Act did not establish a due date for completing this section, and FEMA anticipates that meeting this and other mapping requirements will take several years. As shown in figure 3, FEMA estimated Biggert-Waters Act Section 216 to be 30 percent complete as of December 2014.

The Biggert-Waters Act also authorized $400 million to be appropriated for updating maps annually for fiscal years 2013 through 2017. FEMA’s Risk Mapping, Assessment, and Planning (Risk MAP) program, which encompasses NFIP mapping activities, is funded from two sources— As appropriated funds and fee income from NFIP insurance activities. shown in table 1, appropriations and total funding for the NFIP mapping program have generally decreased since 2009, while fee income has increased slightly. In fiscal year 2009, almost $220 million was appropriated to the mapping program, but in fiscal year 2014 this amount fell to approximately $95 million. In addition to funding, representatives from almost all of the organizations we interviewed (9 out of 10) cited various challenges for FEMA associated with implementing flood mapping requirements, including a lack of elevation data and the changing natural environment.

See GAO, FEMA Flood Maps: Some Standards and Processes in Place to Promote Map Accuracy and Outreach, but Opportunities Exist to Address Implementation Challenges, GAO-11-17 (Washington, D.C.: Dec. 2, 2010) for a detailed discussion of FEMA’s mapping program. Prior to the Biggert-Waters Act, in fiscal year 2009 FEMA had begun a 5-year effort— Risk Mapping, Assessment, and Planning (Risk MAP)—to build on the flood hazard data and maps produced during earlier map modernization initiatives. Under Risk Map, FEMA also began reviewing 20 percent of the nation’s flood maps annually. The funding from fees advances mapping while also paying for things like call centers, data management and archive, web presence, business functions, internal controls, and program management. The appropriated funding is focused on map production and map updates.

To assist with the implementation of FEMA’s mapping program, Biggert- Waters Act Section 215 required FEMA to establish a Technical Mapping Advisory Council (TMAC) to work with FEMA to update its mapping program and provide recommendations on how flood insurance maps could incorporate the best available climate science, among other things. Under this requirement, TMAC was to have issued by July 2013 a report with recommendations to FEMA to ensure that its FIRMs incorporated the best available climate science and that it used the best available methodology to assess future flood risks (Future Conditions Risk Assessment and Modeling Report). HFIAA Section 17 further required that TMAC review FEMA’s flood mapping program to help ensure that FIRMs incorporate technically credible flood hazard data and that FEMA provide TMAC’s review report to Congress. HFIAA did not set a deadline for FEMA to complete this requirement. FEMA estimated that the implementation of Biggert-Waters Act Section 215 was 35 percent complete and HFIAA Section 17 was 10 percent complete as of December 2014 (see fig. 3).

In July 2014, 2 years after the Biggert-Waters Act was passed, FEMA selected TMAC members, and in September 2014 TMAC held its first meeting. TMAC held its second meeting in early December 2014. As mandated in the Biggert-Waters Act, TMAC includes representatives from federal, state, local, and private sector organizations. In establishing TMAC, FEMA officials said that it took approximately 2 years due in part to the rigorous vetting process they conducted for selecting TMAC members that was governed by federal standards for establishing such committees. In addition, as the Biggert-Waters Act did not authorize funding for establishing TMAC, FEMA officials told us that they first had to secure such funding. FEMA anticipates that TMAC will issue the required Biggert-Waters Act report, Future Conditions Risk Assessment and Modeling, in October 2015. As many of the Biggert-Waters Act mapping reforms, such as Section 216, are required to be implemented in coordination with TMAC, FEMA anticipates that the implementation of these additional changes will happen over the next several years as TMAC makes its recommendations to FEMA.

However, FEMA has recently made some improvements to its mapping program and implemented certain requirements. For example, since August 2013 FEMA bi-annually issues a publicly available document (Standards for Flood Risk Analysis and Mapping) that summarizes NFIP mapping standards, with the latest version issued in November 2014. This document is the result of a multiyear project begun in 2011 to improve the way guidelines and standards are published, maintained, and used. FEMA officials noted that many of their existing standards align with Biggert-Waters Act requirements. For example, they noted that their Standards for Flood Risk Analysis and Mapping include at least 10 standards that align with utilizing the most accurate topography and elevation data available (as discussed in the Biggert-Waters Act). In addition, the November 2014 version incorporates aspects of a HFIAA requirement that addresses flood protection systems in communities. As shown in figure 3, FEMA has also completed or nearly completed certain Biggert-Waters Act mapping requirements, including (1) removing the limitation on state contributions for updating flood maps (Section 219); (2) producing an interagency coordination study, contracted with and conducted by the National Academy of Public Administration (Section 221); and (3) establishing a flood protection accreditation task force (Section 226).

Mapping-Related Notifications and Appeals

FEMA has made progress in providing mapping-related notifications and is clarifying the appeals reimbursement HFIAA requires. HFIAA Section 30 required that FEMA notify communities affected by the mapping model before starting a new or updating an existing mapping model that could result in a new or updated FIRM. FEMA must also notify the congressional members from the affected areas at least 30 days before a preliminary map is issued. The notice is to include estimates of the number of homes and businesses affected by preliminary mapping changes. HFIAA did not establish a deadline for FEMA to complete this section. FEMA estimated that this section was 45 percent complete (see fig. 3) as of December 2014, and anticipates completing it after fiscal year 2015.

FEMA has begun issuing monthly notices to congressional representatives and affected communities but has not provided current estimates of the number of homes and businesses affected. FEMA officials told us that they did not have a database to track property ownership, something they would need in order to calculate the estimates. As of September 2014, FEMA officials said that they were working toward creating such a database but face challenges, including data availability as this information is typically collected at the state and local levels.

Biggert-Waters Act Section 246 created and HFIAA Section 18 expanded upon FEMA’s ability to set aside funds to reimburse homeowners for successful map appeals. FEMA officials told us that they had begun working on clarifying requirements under this section and that they will need to develop a process for communicating to communities their status in the reimbursement process. FEMA has not previously reimbursed homeowners for successful map appeals. Biggert-Waters Act Section 246 requires that this requirement be implemented through a rulemaking process. FEMA officials indicated that they planned to group this requirement with other Biggert-Waters Act and HFIAA mapping proposed rules. FEMA does not anticipate completing this requirement for several years.

FEMA Has Taken Steps to Implement Mitigation Requirements

Figure 4 illustrates the progress FEMA has made in implementing Biggert-Waters Act and HFIAA mitigation-related requirements.

FEMA has executed almost all mitigation assistance requirements under the Biggert-Waters Act. The act did not establish a due date for completing these requirements, but FEMA estimated that implementation of Biggert-Waters Act Section 225, which covers mitigation assistance programs, was 90 percent complete (see fig. 4) as of December 2014. Section 225 made several changes to FEMA’s mitigation assistance programs. In particular, it eliminated two mitigation grant programs as independent programs: a pilot program for Severe Repetitive Loss (SRL) properties and a program for Repetitive Flood Claims (RFC). The SRL program was designed to reduce the long-term risk of flood damage to severe repetitive loss residential properties and the associated drain on the National Flood Insurance Fund, while the RFC program was designed to reduce the long-term risk of flood damage to structures insured under NFIP that have had one or more claim payments for flood damage. Biggert-Waters Act Section 225 also made changes to the cost-sharing structure for mitigation grants—FEMA now pays up to 100 percent of the mitigation costs for severe repetitive loss properties, up to 90 percent for repetitive loss properties, and up to 75 percent for all other mitigation projects. Prior to the act, FEMA paid up to 90 percent of the mitigation costs for severe repetitive loss properties, up to 100 percent for repetitive loss properties, and up to 75 percent for all other mitigation projects.

FEMA has since incorporated parts of the SRL and RFC programs into its Flood Mitigation Assistance (FMA) Program and updated its cost-sharing guidance. FEMA officials told us that the elimination of the repetitive and severe repetitive loss programs as independent programs and the cost- sharing changes were positive improvements to NFIP under the Biggert- Waters Act. FEMA officials stated that combining the programs simplified the application process and program administration and the new cost-sharing structure further encourages mitigation for properties. Given that severe repetitive loss properties are the most burdensome in terms of expenses for NFIP, this updated cost-sharing structure is expected to help reduce outlays.

FEMA still needs to institute an important mitigation assistance requirement under the Biggert-Waters Act. Specifically, FEMA has not yet developed a process or guidance for providing mitigation assistance grants directly to policyholders, as now allowed under Biggert-Waters Act Section 225(a)(3). Under this section, if FEMA determines that a state or community cannot manage a grant, it can provide the grant directly to policyholders. The act did not establish a time frame for completing this requirement. According to FEMA, it needs to establish criteria for determining when a state or community cannot manage a grant, and such criteria need to go through a rulemaking process, which can take some time. FEMA officials noted that FEMA has never provided mitigation assistance grants directly to policyholders. According to FEMA officials, by providing mitigation assistance grants directly to policyholders, individuals who live in a state that does not participate in NFIP will now have the opportunity to participate in NFIP’s grant programs.

FEMA, along with representatives from almost all of the organizations (9 out of 10) we interviewed, emphasized the importance of mitigation in terms of its potential to reduce flood risk and NFIP’s financial exposure. Representatives from seven of these organizations noted that mitigation was expensive and that it needed to be made more attractive for policyholders and communities. However, as we previously reported, demand for mitigation assistance funding has exceeded available funding levels. As shown in table 2, since the enactment of the Biggert-Waters Act funding has increased for the FMA program, due in part to the incorporation of the SRL and RFC programs into FMA. However, funding has been reduced for the Pre-Disaster Mitigation program, which funds pre-disaster mitigation programs intended to reduce flood risks to populations and structures.

HFIAA contains additional requirements that pertain to FEMA’s mitigation activities. HFIAA Section 14 requires FEMA to take into account flood mitigation activities when estimating premiums. FEMA estimated that this section was 10 percent complete as of December 2014 (see fig. 4). FEMA officials said that they were at the beginning stages of considering a process for accounting for such activities. The implementation of this requirement should make mitigation activities more attractive to policyholders because rates would be adjusted based upon mitigation measures. HFIAA did not establish a due date for completing this requirement. As of December 2014, FEMA anticipated completing this requirement in fiscal year 2015 or later.

HFIAA Section 26 requires that FEMA establish guidelines for alternative methods of mitigation (other than building elevation) to reduce flood risk to residential buildings that cannot be elevated due to their structural characteristics. HFIAA requires that the guidance be established by March 2015. FEMA estimated that this section was 30 percent complete as of December 2014. According to FEMA officials, FEMA has created an internal working group to start developing related guidelines and hired a contractor in August 2014 to assist. FEMA’s working group and the contractor are in the process of creating guidelines for alternative methods of mitigation. Some options they are considering for alternative methods of mitigation are elevating infrastructure critical to the property when the property itself cannot be elevated (for example, heating and air conditioning systems), constructing small barriers, and using flood- resistant materials in construction. The contractor is also analyzing the effectiveness of each type of alternative mitigation measure. After the analysis is completed, FEMA actuaries will adjust rates based upon alternative mitigation methods, and guidelines on the methods will be released to the public, as required by HFIAA.

FEMA officials stated that they faced challenges determining the long- term effects of alternative mitigation, as well as the appropriate discount to apply to premiums for such activities. According to FEMA officials, it is possible to determine if an alternative mitigation method is designed and installed appropriately; however, it is more challenging to ensure that the system is maintained over time to warrant a continued discount in flood insurance premiums. As of January 2015, FEMA anticipated completing this requirement by late March 2015, as required by HFIAA.

FEMA Has Begun to Implement Notifications and Affordability-Related Requirements

Figure 5 illustrates the progress FEMA has made in implementing other requirements related to outreach, communications, and affordability.

As required by HFIAA Section 24, FEMA has begun establishing a flood insurance advocate to help ensure the fair treatment of NFIP policyholders and property owners in the mapping of flood hazards, identification of flood risks, and implementation of measures designed to mitigate them. HFIAA describes the advocate’s duties as educating policyholders about various issues and assisting them in understanding procedural requirements, as well as coordinating outreach and education with local communities, among other things. HFIAA did not establish a due date for completing this requirement. FEMA estimated that this requirement was 55 percent complete as of December 2014 (see fig. 5). FEMA and representatives from three of the 10 organizations we interviewed said that the establishment of the advocate was one of the key changes made by HFIAA and emphasized its importance.

In mid-December 2014, FEMA established an interim Office of the Flood Insurance Advocate, which is led by an acting flood insurance advocate (effective Dec. 22, 2014). FEMA officials said that until funding is available to establish a permanent office, the interim office would leverage existing resources, and a number of FEMA employees would be detailed to the interim office. The interim office is to begin work on providing specialized assistance to citizens and policyholders on NFIP issues, as well as regional mapping outreach and education support. The acting advocate and staff will address specific public inquiries or concerns regarding NFIP processes. In addition, the acting advocate will also develop a long-term regional mapping outreach and education strategy with the goal of maximizing public support for NFIP activities. FEMA officials stated that the flood insurance advocate will be an independent office within FEMA and have direct access to the FEMA administrator on an advisory basis.

FEMA spent several months developing options to implement this requirement. FEMA detailed one of FIMA’s executive officers to take the lead on producing the concept of operations. FEMA officials told us that they also had held discussions with internal and external stakeholders to gain input on the position’s proposed structure and duties, analyzed data from FEMA call centers to identify important topics for engaged with congressional leaders to identify issues from constituents about NFIP, and benchmarked with other federal agencies with advocacy offices to determine best practices.

Notifications

HFIAA enacted requirements intended to improve the way FEMA communicates NFIP insurance rates and flood risks to policyholders and others. Section 31 requires FEMA, at least 6 months prior to implementation, to make publicly available the rate tables and underwriting guidelines that provide the basis for rating changes made in response to HFIAA requirements. It also requires FEMA to report to Congress, no later than June 2014, on the feasibility of releasing property-level policy and claims data and how the release of these data may assist policyholders and insurers in understanding how FEMA determines actuarial premium rates and assesses flood risk. In response to HFIAA Section 31, FEMA had begun issuing rate change notifications. FEMA officials told us that the 6-month notification requirement did not pose challenges, as they had taken similar actions in the past and had a similar informal agreement with WYOs prior to HFIAA. For example, in October 2014, FEMA publicly issued guidance implementing certain HFIAA rate changes that would take effect 6 months later in April 2015.

In September 2014, about 2 months after the deadline established by HFIAA, FEMA issued the required report to Congress on the feasibility of releasing property-level policy and claims data and establishing guidelines for releasing these data required by Section 31. FEMA reported that NFIP collects and maintains property-level policy and claims data containing some information that is governed by privacy law. FEMA also noted that its current guidelines for releasing this information satisfy the HFIAA requirement. However, FEMA officials stated that releasing individual policy and claims data would not help policyholders and insurers understand how FEMA determines actuarial premium rates and assesses flood risk. FEMA explained that full-risk premiums were not based on loss experience due to the large variability of flood losses. Rather NFIP rate setting is based on several components, including a risk component that varies based on the flood risk profile of an entire risk class, and not specific properties.

HFIAA Section 28 requires FEMA to clearly communicate full flood risk determinations to individual property owners regardless of whether their premiums are full actuarial rates, and FEMA has begun evaluating how to implement this provision but cited challenges. FEMA officials noted that in order to give a property owner a specific full-risk rate, for example, FEMA would need an elevation certification, which can be expensive. FEMA officials estimate that obtaining elevation certificates can cost policyholders from about $500 to $2,000 or more. As discussed earlier, FEMA does not have elevation data for many properties as it does not require certain policyholders to obtain elevation certificates. We have previously recommended that FEMA develop and implement a plan to obtain flood risk information needed to determine full-risk rates for subsidized properties.multiyear process of determining how to collect elevation data and whether available BFE databases could serve as a proxy for elevation certificates at the individual property level, for the limited geographies where such data are available. FEMA actuaries also told us that they were considering methods for providing access to policyholders for any property-level data that were available. HFIAA did not establish a due date for completing this requirement. FEMA estimated that this requirement was 20 percent complete as of December 2014 (see fig. 5) and anticipates completing it in fiscal year 2015.

Affordability Studies

FEMA has taken some action on the affordability studies required by the Biggert-Waters Act and HFIAA, but data challenges have delayed progress. Biggert-Waters Act Section 236 required FEMA to contract with the National Academy of Sciences (NAS) to conduct a study to inform FEMA’s affordability study. FEMA’s study is to examine methods for encouraging NFIP participation and educating policyholders, as well as establishing an affordability framework that includes methods to help individuals afford risk-based premiums through targeted assistance, such as a means-tested voucher program. The section also permits $750,000 in funding and established a due date of April 2013 for completing the study. FEMA and NAS did not complete this study within the required time frames. FEMA officials said that they did not have sufficient time or funding to complete the study and noted that the legislation had also asked them to determine the economic impact of removing all premium discounts from NFIP, something they had thus far been unable to do. FEMA officials cited their lack of elevation data for structures affected by grandfathering and subsidization. The lack of these data means that full- risk rates for many properties cannot be calculated, and thus, the economic impact of removing premium discounts for subsidized and grandfathered policies cannot be determined. In addition, FEMA cited data challenges related to understanding how much a policyholder could afford—for instance, FEMA does not have direct access to information on policyholders’ incomes.

HFIAA Section 16 amended the Biggert-Waters Act Section 236 study to permit additional funding ($2.5 million) for the draft affordability study and extended the time for completing it until September 2015, and HFIAA Section 9 permitted FEMA to contract with another federal agency to complete the study. HFIAA Section 9 also required FEMA to prepare a draft affordability framework to be provided to Congress no later than 18 months after the study was completed. FEMA estimated that the draft affordability study (Section 16) was 40 percent complete and the draft affordability framework (Section 9) was 5 percent complete (see fig. 5) as of December 2014.

A FEMA official said that the agency will consider the affordability study requirement fulfilled after the issuance of two NAS studies. First, in February 2015 NAS will deliver a report that will describe methods for an affordability framework and discuss program policy options—it is to address the question of who should have to pay for the full flood risk associated with where they live and who should be provided assistance. The FEMA official noted that this study will be a key component when they begin work on the draft affordability framework, which will commence after the NAS studies are completed. Second, in September 2015 NAS will deliver a report on approaches that could be used in conducting an affordability study, taking into consideration the lack of data. The study will also include results from a pilot affordability study for the state of North Carolina, which has readily available elevation data on structures. After the completion of NAS’s two studies, a FEMA official told us that the agency will review these studies and make a decision about conducting a nation-wide affordability study based on the results of the studies and taking into account available funding and resources.

FEMA is also developing criteria to begin conducting the affordability study for small businesses, nonprofits, and others. HFIAA Section 29 requires a study of affordability and semi-annual reports thereafter, for small businesses with fewer than 100 employees; nonprofits; houses of worship; and residences with a value equal to or less than 25 percent of the median home value of properties in the same state. HFIAA set a due date for the study of September 2015. FEMA estimated that this study was 5 percent complete as of December 2014. As discussed earlier, FEMA currently cannot distinguish among nonresidential structures, such as businesses and nonprofits. FEMA anticipates finalizing criteria and collecting data on nonresidential properties beginning in October 2015 and implementation of the study will be delayed until data are collected. FEMA officials told us that because reporting of data has a 2-month lag, the first data will arrive in December 2015. As a result, the spring or summer of 2016 will be the earliest any preliminary analysis can be done.

Agency Comments

We provided a draft of this report to FEMA within DHS for its review and comment. DHS provided technical comments, which we incorporated, as appropriate.

We will send copies of this report to the appropriate congressional committees and the Secretary of Homeland Security. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact Alicia Puente Cackley at (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

Our objectives in this report were to describe (1) the Federal Emergency Management Agency’s (FEMA) management of the implementation of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) and Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) and associated challenges and (2) the status of FEMA’s implementation of selected requirements, including whether the agency has met required time frames and established goals.

To address these objectives, we reviewed prior GAO reports and academic and industry studies (identified in a literature review or in interviews) on the National Flood Insurance Program (NFIP) and analyzed relevant laws and regulations. To respond to the first objective, we obtained relevant FEMA documentation on Biggert-Waters Act and HFIAA implementation priorities and status, and we interviewed FEMA officials responsible for managing and executing FEMA’s implementation of these requirements. We compared FEMA’s processes for managing its implementation of Biggert-Waters Act and HFIAA requirements to relevant federal internal control standards. There are five internal control standards—control environment, risk assessment, control activities, information and communications, and monitoring—that are used to assess federal agencies and programs. Given the smaller scope of the activity being reviewed—i.e., a specific process within a program rather than the federal program itself—we limited our comparison to the three federal internal controls standards that we determined to be most appropriate—risk assessment, control activities, and information and communications. We compared information provided in our interviews with relevant FEMA officials and documentation on their management processes to these three internal control standards.

In addition, we interviewed representatives from 10 organizations with flood insurance expertise and experience to obtain input on key changes made by the Biggert-Waters Act and HFIAA and any challenges FEMA may face in implementing these changes. We interviewed representatives from the following 10 organizations: (1) American Academy of Actuaries; (2) Association of State Floodplain Managers; (3) Center for Economic Justice; (4) Congressional Research Service; (5) National Association of Mutual Insurance Companies; (6) National Association of Realtors; (7)

Property Casualty Insurers Association of America; (8) Center for Catastrophic Risk Management and Compensation, RAND Corporation; (9) R Street Institute; and (10) Wharton Risk Management and Decision Processes Center, University of Pennsylvania. The 10 organizations were judgmentally selected based on criteria such as their breadth of flood insurance expertise and type of organization (e.g., academic institution, trade association, think tank) in order to obtain a broad range of views. To select the 10 organizations, we reviewed prior GAO reports, congressional testimony, and academic and public policy databases, such as Google Scholar and PolicyFile. In conducting our reviews, we identified organizations that were identified in multiple resources as having expertise or experience in NFIP, in particular with the Biggert- Waters Act or HFIAA. In addition, we took into consideration the type of organization, its role in implementing NFIP or other expertise, and membership base. Our interviews with these organizations provided further insights on the Biggert-Waters Act and HFIAA but are not generalizable to the flood insurance community as a whole.

To respond to our second objective, we identified Biggert-Waters Act requirements that FEMA was required to implement, changes that HFIAA made to these requirements, and any new HFIAA requirements that FEMA was required to implement. We interviewed FEMA officials responsible for implementing the Biggert-Waters Act, as amended by HFIAA, and representatives from the same 10 organizations discussed above to obtain their perspectives on FEMA’s implementation efforts. To identify important areas within the Biggert-Waters Act and HFIAA and select key requirements for further review, we conducted legislative analysis, reviewed prior GAO work, and conducted initial interviews with FEMA on their implementation priorities. Specifically, in addition to our own legislative analysis, we reviewed: (1) prior GAO reports for discussion of Biggert-Waters Act and HFIAA requirements which may require follow up; (2) reviewed FEMA documentation, including overviews of the Biggert-Waters Act and HFIAA, to identify areas of focus; and (3) analyzed our initial interviews with FEMA for requirements they considered important. We compiled a list of these requirements and obtained consensus for our selection through legal review and at internal meetings. Appendix II contains a detailed chart of these requirements, which covers the majority of Biggert-Waters Act and HFIAA requirements. We conducted additional interviews with FEMA officials and reviewed FEMA documentation on the status of these selected requirements.

We compared FEMA’s implementation status to time frames established by the Biggert-Waters Act and HFIAA and to any goals FEMA has set internally. In the report, we described FEMA’s status in implementing requirements and when it did not meet required due dates, its updated expected time frames for completion (if available). We also described any challenges FEMA faced in implementing certain requirements. In addition, where available, we obtained FEMA data relevant to the implementation of the requirements. To assess the reliability of percentages of completion reported in FEMA documents, we interviewed knowledgeable officials and reviewed documents about the sources of the data. We found these data sufficiently reliable for the purposes of reporting on FEMA’s progress in implementing Biggert-Waters Act and HFIAA requirements. To assess data on the percentage of subsidized policies as of September 30, 2013, and estimates on future reserve fund contributions, we reviewed a recent GAO assessment of the reliability of the data and conducted an interview with the knowledgeable official. We determined that the data were sufficiently reliable to report on the percentage of subsidized policies and discuss FEMA estimates of future reserve fund contributions. To assess the reliability of the mapping and mitigation funding data, we also interviewed knowledgeable officials and reviewed relevant documentation. We found these data sufficiently reliable for reporting on FEMA’s funding for these activities.

We conducted this performance audit from March 2014 to February 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Selected Requirements from the Biggert-Waters Act and Homeowner Flood Insurance Affordability Act (HFIAA)

Appendix II: Selected Requirements from the Biggert-Waters Act and Homeowner Flood Insurance Affordability Act (HFIAA)

The following table contains selected requirements from the Biggert- Waters Flood Insurance Reform Act (Biggert-Waters Act) and the Homeowner Flood Insurance Affordability Act (HFIAA) that the Federal Emergency Management Agency (FEMA) is required to implement. The requirements contained in the table, and discussed in the report, were selected based on our legislative analysis, prior GAO work, and interviews with FEMA through which we identified areas of priority (for example, rate changes) and important requirements.

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact above, Paul Schmidt (Assistant Director), Allison Abrams, Emily Chalmers, Pamela Davidson, Jonathan Harmatz, Scott Hiromoto, Jessica Sandler, and Jena Sinkfeld made key contributions to this report.