Flood Insurance: More Information Needed on Subsidized Properties
Released: 2013-07-03T00:00:00

Letter

Background

Since the inception of NFIP in 1968, FEMA has sought to have local communities adopt floodplain management ordinances and offered flood insurance to their residents in an effort to reduce the need for government assistance after a flood. Premium subsidies were seen as a way to achieve the program’s objectives by ensuring that owners of existing properties in flood zones could afford flood insurance. NFIP has three components: (1) the provision of flood insurance; (2) the requirement that participating communities adopt and enforce floodplain management regulations; and (3) the identification and mapping of floodplains. Community participation in NFIP is voluntary. However, communities must join NFIP and adopt FEMA-approved building standards and floodplain management strategies in order for their residents to purchase flood insurance through the program. Additionally, communities with Special Flood Hazard Areas (SFHA)—areas at high risk for flooding— must participate in NFIP to be eligible for any form of disaster assistance loans or grants for acquisition or construction purposes in connection with a flood. Participating communities can receive discounts on flood insurance if they establish floodplain management programs that go beyond the minimum requirements of NFIP. FEMA can suspend communities that do not comply with the program, and communities can withdraw from the program. As of May 2013, about 22,000 communities voluntarily participate in NFIP.

Potential policyholders can purchase flood insurance that covers both buildings and contents for residential and commercial properties. NFIP’s maximum coverage limit for single-family residential policyholders is $250,000 per unit for buildings and $100,000 per unit for contents. For commercial policyholders, the maximum coverage is $500,000 per unit for buildings and $500,000 for contents.

Current law prohibits federally regulated lenders, federal agency lenders, and government-sponsored enterprises for housing from making loans for real estate in SFHAs where the community is participating in NFIP, unless For structures deemed not to the property is covered by flood insurance.be in SFHAs—that is, that have moderate to low risk of flooding—the purchase of flood insurance is voluntary.

Flood Zone Designations

NFIP studies and maps flood risks, assigning flood zone designations from high to low depending on the risk of flooding. SFHAs are high-risk areas that have a 1 percent or greater annual chance of flooding and are designated as zones A, AE, V, or VE (table 1). Areas designated as V or VE are located along the coast. Areas with a moderate-to-low risk for flooding are designated as zones B, C, or X. Areas where analysis of the flood risk has not been conducted are designated as D zones.

NFIP offers two types of flood insurance premiums: subsidized and full- risk. Subsidized rates are not based on actual flood risk. According to FEMA, subsidized rates represent only about 40 percent to 45 percent of rates that reflect full flood risk. (We discuss how FEMA determines rates in more detail later in this report.) The type of policy and the subsequent rate a policyholder pays depend on several property characteristics—for example, whether the structure was built before or after a community’s FIRM had been issued and the location of the structure in the floodplain. Structures built after a community’s FIRM was published must be built to meet FEMA building standards and pay full-risk rates. Some communities may implement activities that exceed the minimum standards.

Prior to the Biggert-Waters Act, subsidized policies accounted for about 21 percent of all NFIP policies, while those with full-risk premiums accounted for the remaining 79 percent. While the percentage of subsidized policies has decreased since the program was established, the number of these policies has stayed fairly constant (see fig. 1).

As communities were mapped and joined NFIP, new subsidized policies were added. As shown in figure 2, the percentage change in subsidized policies generally followed the same trend as the percentage change in total policies.

Even with highly discounted rates, subsidized premiums are, on average, higher than full-risk premiums. The premiums are higher because subsidized pre-FIRM structures generally are more prone to flooding (that is, riskier) than other structures. In general, pre-FIRM properties were not constructed according to the program’s building standards or were built without regard to base flood elevation—the level relative to mean sea level at which there is a 1 percent or greater chance of flooding in a given year. For example, the average annual subsidized premium with October 2011 rates for pre-FIRM subsidized properties located in zone A was about $1,200, while the average annual premium for post-FIRM properties in the same zone paying full-risk rates was about $500. Post- FIRM structures have been built to flood-resistant building codes or mitigation steps have been taken to reduce flood risks; thus, they are generally less flood-prone than pre-FIRM properties.

Legislative Authority for and Changes to NFIP

The authority for subsidized rates was included in the National Flood Insurance Act of 1968 as an incentive for communities to join the program by adopting and enforcing floodplain management ordinances that would reduce future flood losses. Subsidies were intended to be only part of an interim solution to long-term adjustments in land use. Congress also authorized the use of subsidized premiums because charging rates that fully and accurately reflected flood risk would be a burden to some property owners. Table 2 shows the sources of legislative authority for various subsidized premium rates.

Since NFIP was established, Congress has enacted legislation to strengthen certain aspects of the program. The Flood Disaster Protection Act of 1973 made the purchase of flood insurance mandatory for properties in SFHAs that are secured by mortgages from federally regulated lenders. This requirement expanded the overall number of insured properties, including those that qualified for subsidized premiums. The National Flood Insurance Reform Act of 1994 expanded the purchase requirement for federally backed mortgages on properties located in an SFHA. The Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 established a pilot program to mitigate properties that continually suffered from severe repeated flood losses and offer grants for properties with repetitive insurance claims.loss” properties who refuse to accept any offer for mitigation actions face higher premiums.

Owners of these “repetitive More recently, in July 2012, Congress passed the Biggert-Waters Act.The act extended the authorization for NFIP for 5 years and made reforms to NFIP that include eliminating existing subsidies for any residential property which is not a primary residence; any severe repetitive loss property; any property that has incurred flood-related damage in which the cumulative amounts of payments under this title equaled or exceeded the fair market value of such property; any business property; and any property that has experienced or sustained substantial damage exceeding 50 percent of the fair market value or substantial improvement exceeding 30 percent of the fair market value.

Rates that fully reflect flood risk for the types of properties listed previously are to be phased in over several years—with increases of 25 percent each year—until the average risk premium rate for such properties is equal to the average of the risk premium rates for properties within any single risk classification.

Furthermore, according to the Biggert-Waters Act, other properties will no longer qualify for subsidies under the following circumstances: any NFIP policy that has lapsed in coverage, as a result of the deliberate choice of the policyholder; and any prospective insured who refuses to accept any offer for mitigation assistance (including an offer to relocate) following a major disaster.

The act also stated that no new subsidies would be provided to any property not insured by NFIP as of the date the act was enacted; any property purchased after the date of enactment of the act. (Thus, property sales trigger elimination of subsidies.)

The Biggert-Waters Act also requires FEMA to adjust rates to accurately reflect the current risk of flood to properties when an area’s flood map is changed, subject to any other statutory provision in chapter 50 of Title 42 of the United States Code. FEMA is determining how this provision will affect properties that were “grandfathered” into lower rates. In addition, the act allows insurance premium rate increases of 20 percent annually (previously capped at 10 percent), establishes minimum deductibles, and requires FEMA to include the losses from catastrophic years in determining premiums that are based upon “average historical loss year.” It also incorporates a definition of “severe repetitive loss property” for single-family properties and required FEMA to establish a reserve fund, among other things.

Most Subsidized Policies Continue to Receive Discounted Rates and Have Mixed Characteristics Relative to Financial Indicators

The Biggert-Waters Act eliminated subsidies on approximately 438,000 policies, and with the continuing implementation of the act, more of the subsidies on the approximately 715,000 remaining policies are expected to be eliminated over time. In terms of characteristics, the geographic distribution of remaining subsidized policies was similar to the distribution of all NFIP policies. Other characteristics we analyzed—indicators of home value and owner income—were different for the policies that continue to qualify for subsidized premium rates compared to those with full-risk rates. In particular, counties with higher home values and income levels tended to have larger percentages of remaining subsidized policies compared to those with full-risk rates.

Most Policies Estimated to Still Qualify for Subsidized Rates, but their Numbers Are Expected to Decline over Time

We estimated that the Biggert-Waters Act eliminated subsidies for approximately 438,000 policies, and that about 715,000 policies continue to qualify for subsidized premium rates (remaining subsidized policies). Before the act, subsidized policies represented about 21 percent of all policies and nearly all subsidized policies were in the high risk areas. After the initial reduction of subsidies, the approximately 715,000 policies that would continue to receive subsidized rates represent about 13 percent of all NFIP policies and 21 percent of all SFHA policies.elimination affected various property types, including nonprimary residences, businesses, and severe repetitive loss properties. About 92 percent of the projected remaining subsidized policies cover single-unit primary residence properties and more than 99 percent cover properties in SFHA areas. The continuing implementation of the act is expected to decrease the number of subsidized policies. However, FEMA faces a number of implementation challenges and elimination of subsidies as required by the act will likely take years.

As mandated by the Biggert-Waters Act, FEMA has begun phasing out subsidized premiums for business properties, residential properties that are not primary residences, and single-family (1-4 units) severe repetitive loss properties. According to our analysis of NFIP data, the 438,000 policies that would no longer qualify for subsidized premium rates included about 345,000 nonprimary residential policies, about 87,000 business policies, and about 9,000 single-family severe-repetitive loss policies. Nearly all subsidized policies for primary residential properties continue to have subsidized rates. Figure 3 summarizes our analysis of the immediate decreases in subsidized policies stemming from the act, by property type.

Subsidies on most of the approximately 715,000 remaining subsidized policies should be eliminated over time. Under provisions of the Biggert- Waters Act, most policies no longer qualify for subsidies if NFIP coverage lapsed or the properties were sold or substantially damaged. We estimated that with implementation of the changes in the act addressing sales and coverage lapses, the number of subsidized policies could decline by almost 14 percent per year (see fig. 4). At this rate, the number of subsidized policies would be reduced by 50 percent in approximately 5 years. After about 14 years, fewer than 100,000 subsidized policies would remain. We based our estimate of the annual decline rate on the average experience of the last 10 years of NFIP data using policies with similar characteristics, but the actual outcomes and time required for subsidies to be reduced could vary. For example, the average annual decline rate for the most recent 3 years of NFIP data was about 11 percent. At this rate, the number of subsidized policies would be reduced by 50 percent in approximately 7 years, and after 18 years, fewer than 100,000 subsidized policies would remain. Additionally, changes from the act may affect the behavior of policyholders. For example, policyholders might not allow their coverage to lapse if they knew that they would lose their subsidy or they might not be able to sell their properties at the same rate if the flood insurance was more expensive.

The Biggert-Waters Act will likely require several years for FEMA to fully implement. FEMA officials acknowledged that they have data limitations and other issues to resolve before eliminating some subsidies. We projected that subsidies on most of the policies required to be eliminated by the act could be identified in FEMA’s data; however, data limitations make implementation of some provisions of the act more difficult. For example, the act eliminated subsidies for residential policies that covered nonprimary residences. FEMA has data on whether a policy covers a primary residence but officials stated that it may be outdated or incorrect. In the past, FEMA did not collect this information for policy renewal so it may have changed over time. The act also eliminated subsidies for business policies. However, FEMA categorizes policies as residential and nonresidential rather than residential and business. As a result, FEMA does not have the information to identify nonresidential properties, such as schools or churches that are not businesses and continue to qualify for a subsidy. Beginning in October 2013, FEMA will require applicants to provide residential and business status for new policies and renewals.

Additionally, the act states that subsidies will be eliminated for policies that have received cumulative payment amounts for flood-related damage that equaled or exceeded the fair market value of the property, and for policies that experience damage exceeding 50 percent of the fair market value of the property after enactment. Currently, FEMA is unable to make this determination as it does not maintain data on the fair market value of properties insured by subsidized policies. FEMA officials said that they are in the process of identifying a data source.

FEMA will have to determine how to apply certain provisions of the Biggert-Waters Act before eliminating some subsidies. For example, the act eliminates subsidies for severe repetitive loss policies and provides a definition of severe repetitive loss for single-family homes. However, it requires FEMA to define severe repetitive loss for multifamily properties. FEMA has not yet developed this definition and we estimate that 1,000 multifamily severe repetitive loss policies will continue to receive a subsidy until the definition is developed and applied. The act also eliminates subsidies when properties are purchased. However, FEMA has not yet determined how to apply this provision of the act to condominium associations. Finally, FEMA officials stated that they have been applying the provisions of the act that eliminate subsidies only to pre-FIRM policies. As a result, approximately 5,500 subsidized post-FIRM V zone structures built before 1981 that currently receive subsidized rates would continue to qualify for subsidies.

Similarities and Differences between Properties with Subsidized versus Full-Risk Rates

We analyzed a number of characteristics of the remaining subsidized policies. First, they had a geographic distribution similar to all NFIP policies. Second, while higher percentages of remaining subsidized policies than policies with full-risk rates were found in counties with higher median home values, remaining subsidized policies generally carried smaller amounts of coverage. Third, counties with the highest median household incomes and counties at the lower end of our income ranking had larger percentages of remaining subsidized policies compared to the percentage of policies with full-risk rates. We limited our analysis of the similarities and differences between remaining subsidized policies and the policies with full-risk rates (nonsubsidized) to single-unit primary residences in SFHAs.

Our analysis of NFIP data on the location of properties that would continue to receive subsidized rates shows that remaining subsidized policies would cover properties in every state and territory in which NFIP operates. Florida (133,000), Louisiana (65,000), California (64,000), New Jersey (48,000), Texas (44,000), and New York (43,000) had the highest numbers of remaining subsidized policies. These states with the addition of South Carolina also had the highest number of total NFIP policies. In contrast, Indiana, Michigan, and Puerto Rico had the highest percentages of remaining subsidized policies as a fraction of total NFIP policies in the state, representing more than 40 percent of all NFIP policies in those states. Figure 5 shows the estimated number of remaining subsidized policies by state and the remaining subsidized policies as a percentage of total NFIP policies in the state.

States with the highest percentage of remaining subsidized policies did not necessarily have the highest percentage of total NFIP policies. Some states had a higher percentage of remaining subsidized policies than the percentage of total NFIP policies in the state (see fig. 6). For example, California had 9 percent of all remaining subsidized policies and about 5 percent of all NFIP policies, and New York had 6 percent of all remaining subsidized policies and 3 percent of all policies. Other states had a larger percentage of total NFIP policies than subsidized policies. For example, Florida had 37 percent of total NFIP policies and about 19 percent of all remaining subsidized policies and Texas had about 12 percent of all policies and 6 percent of remaining subsidized policies.

When analyzed by county, the remaining subsidized policies were located in about 2,930 of the more than 3,100 counties with NFIP policies. The number of remaining subsidized policies in the counties varied greatly. We estimated that 151 counties had only one remaining subsidized policy, and another 1,137 had fewer than 25 remaining subsidized policies. We also estimated that 247 counties had more than 500 of these policies. Ten of these counties had more than 10,000 remaining subsidized policies, 4 of which were in Florida, 2 in Louisiana, and 1 each in California, New Jersey, New York, and Texas. Pinellas County, Florida, had the highest number of estimated remaining subsidized policies at more than 28,000.

Counties with the highest median home values tended to have a higher percentage of remaining subsidized policies than nonsubsidized policies. For our analysis of the financial characteristics of remaining subsidized and nonsubsidized policies, we selected 351 counties that represented See appendix II more than 78 percent of remaining subsidized policies.for more information about the 351 counties we selected for our analysis. Because FEMA lacks data on home values, we used several indicators of home value to compare properties in these counties that would continue to receive subsidized rates with properties charged full-risk rates (see table 3). Most of the policies were in the counties with relatively high home values. For example, the median home value for more than half of the selected counties was in the top quartile of counties nationwide. Further, the median home value for more than one-third of the selected counties was in the top 10 percent of median home values for all counties nationwide.

The results of our analysis of home values varied depending on the indicator and the location. Our analysis showed that in the counties with the highest and lower median home values the percentage of remaining subsidized policies was larger than nonsubsidized policies in SFHAs. For example, about 43 percent of total NFIP policies in the selected 351 counties were in the highest decile of median home values, but about 43 percent of the remaining subsidized policies compared with about 35 percent of nonsubsidized policies were in these counties. Very few policies of any type were in counties in the lower deciles of median home value (deciles 6-10), however in these counties there were higher percentages and larger numbers of remaining subsidized policies than nonsubsidized policies (see table 4).

Our analysis of coverage amounts found that remaining subsidized policies generally carried smaller NFIP coverage amounts than nonsubsidized policies in SFHAs, a possible indicator of lower home values. As shown in figure 7, a smaller percentage of remaining subsidized policies had the maximum coverage of $250,000 than nonsubsidized policies (29 percent versus about 50 percent). Also, a larger percentage of remaining subsidized policies had less than $100,000 in building coverage than nonsubsidized policies (26 percent versus 8 percent). The results of our comparison of coverage amounts could indicate that the subsidized policies were for lower-valued properties, but the perceived flood risk and cost of coverage also could affect the coverage amount. Finally, a larger percentage of V-zone policies had the maximum coverage amount than the A-zone policies but represented a small fraction of all SFHA policies. Further details of our analysis by flood zone appear in appendix II.

We analyzed NFIP coverage amounts (on single-unit primary residence nonsubsidized policies and remaining subsidized policies in SFHAs) and county median home values together and found that higher coverage amounts were associated with higher county median home values. Counties with higher median home values had larger percentages of both remaining subsidized policies and nonsubsidized policies at the NFIP maximum coverage level of $250,000 than counties with lower median home values. In addition, counties with lower median home values generally had larger percentages of remaining subsidized policies and nonsubsidized policies with lower amounts of coverage (less than $100,000) than counties with higher median home values. However, nonsubsidized policies consistently had higher amounts of coverage. In every decile of county median home value, a larger percentage of nonsubsidized policies had the maximum amount of NFIP coverage than remaining subsidized policies, while a smaller percentage of nonsubsidized policies had lower amounts of coverage (less than $100,000) than remaining subsidized policies. Additional details of the combined analysis are presented in appendix II.

We performed five case studies to illustrate results in specific counties. The case studies offer a more in-depth, within county view (how characteristics vary across cities within select counties). We performed the NFIP coverage and median home value analyses, but also used publicly available real estate data to examine city-level median home values within the county. These cases are illustrative only and are not nationwide indicators, and some of the results from these case studies matched our earlier results and some did not. Los Angeles County is one illustration of how NFIP policies compared within a county, but other counties had different results. The results of the other case study counties are presented in appendix II.

Case Study: Los Angeles County, California

Los Angeles County had a median home value in the top 10 percent of all counties and consistent with our earlier results had a higher percentage of remaining subsidized policies than nonsubsidized policies in SFHAs (more than twice as many policies).

Consistent with our analysis of NFIP coverage amounts, a lower percentage of remaining subsidized policies in Los Angeles County had maximum building coverage than nonsubsidized policies (59 versus 77 percent), but a higher percentage had building coverage less than $100,000 (6 versus 3 percent).

However, Los Angeles County also had a high percentage of both subsidized and nonsubsidized policies with maximum NFIP coverage and a low percentage of both types of policies at lower levels of coverage.

Our analysis of the city median home value in Los Angeles County found that about 88 percent of remaining subsidized and nonsubsidized policies were in cities in the second and third quartiles of median home value.

Additionally, although Los Angeles County is located on the Pacific Ocean, it had 120 V-zone (high-risk velocity coastal) policies compared to about 6,000 A-zone (high-risk) policies. Ninety-seven of the V-zone policies were remaining subsidized policies and all were located in a single city with a median home value in the top quartile of median home value.

Comparing policies in SFHAs in the selected counties, our analysis showed that in counties with the highest and lowest median household incomes, there were a larger percentage of remaining subsidized policies than nonsubsidized policies. We used county median household income from the 2007 through 2011 ACS 5-year data for all U.S. counties as an indicator of household income for property owners. We analyzed the data to determine relative ranking of the 351 selected counties relative to all counties and compared the number and percentage of properties that would continue to receive subsidized rates with properties charged full- risk rates. In general, most of all of the policies in our analysis were in counties with higher median household income (deciles 1-4), with fewer policies in the counties with lower median household income counties. However, counties in the highest and lowest decile in median household income had higher percentages of remaining subsidized policies than nonsubsidized policies (see table 5). For example, 19 percent of all policies in the 351 selected counties were in the highest decile of median household income. But about 29 percent of the remaining subsidized policies were in these counties versus about 11 percent of nonsubsidized policies. One percent of all policies in the selected counties were in the lowest decile of median household income. But 4 percent of the remaining subsidized policies were in these counties versus 1 percent of nonsubsidized policies.

We also examined home value and household income indicators together. Selected counties with the highest median household incomes and highest median home values had higher percentages of remaining subsidized policies than nonsubsidized policies in SFHAs. For example, 78 of the 351 selected counties were in the highest decile category for both median home value and median household income. About 26 percent of remaining subsidized policies were in these counties, compared with 7 percent of nonsubsidized policies. Selected counties with higher median household income generally also had higher median home values, but counties with higher median home values did not always have higher median incomes. Higher percentages of remaining subsidized policies than nonsubsidized policies were found in counties with lower median home values and lower median household incomes. More detail on these results can be found in appendix II.

Data Constraints Limit FEMA’s Ability to Estimate the Cost of Subsidies and Establish Full-Risk Rates on Previously Subsidized Policies

The cost of subsidized policies to NFIP can be measured in terms of forgone net premiums (the difference between subsidized and full-risk rates, adjusted for premium-related expenses). However, FEMA does not have the historical program data needed to make this calculation. Because of this constraint, estimating the historic cost of subsidies on NFIP is difficult. FEMA also does not have information on the flood risk of properties with previously subsidized rates, which is needed to establish full-risk rates for these properties going forward.

Historical Cost of Subsidies Difficult to Estimate

FEMA does not have sufficient data to estimate the aggregate cost of subsidies. Since fiscal year 2002, FEMA’s annual actuarial rate reviews have included an estimated range of the percentage of the full-risk premiums that policyholders with subsidized premiums pay. (We refer to this as the subsidy rate). FEMA based these estimated ranges, in part, on the analysis in a 1999 report conducted by PricewaterhouseCoopers (PwC), which sampled pre-FIRM structures around the nation and collected information on elevation of the properties to calculate what the full-risk rates on these properties would have been. FEMA has continued to use this report as the basis for estimating the percentage of the full-risk rate that subsidized policyholders pay. Since fiscal year 2002, NFIP has reported that the estimated subsidized premium rate is between 35 and 45 percent of the full-risk premium rate.said that they did not report an estimate before the 1999 PwC report. Therefore, determining forgone premiums without these estimates would be difficult because the percentage of subsidized premium rates compared with full-risk rates may have varied considerably over time.

Although it was not possible to estimate forgone premiums since the program was established, the following provides information about the impact of subsidized premiums on the program.

Data are not available from FEMA to estimate the forgone premiums before 2002. Using FEMA’s estimated range of subsidy rates to actual premiums collected from 2002 through 2011, we conducted an analysis to estimate the premiums that could have been collected if subsidies had not existed over that period. FEMA officials have clarified their estimate that 2011 subsidized premiums represented 40 percent to 45 percent of full-risk premium rates, explaining that after paying for all administrative and other expenses, the remaining premiums would cover about 40 to 45 percent of the expected average long-term annual losses.

Premiums are used to cover not only claims, but also operating expenses and any debt. According to FEMA officials, 17 percent of forgone premiums would be needed to pay operating expenses that would increase if subsidized premiums were increased. Such expenses consist of premium taxes (about 2 to 2.5 percent of premium) and agents’ commissions associated with the private insurance companies that sell and service NFIP policies (about 15 percent of premium). Therefore, about 83 percent would be available to help cover fixed expenses (which do not vary with premiums) and to pay losses. During years when losses are less than average, the program potentially generates a surplus. During higher-loss years, accumulated surplus could be used to help pay the insured flood losses that exceed that year’s net premium revenue and reduce the likelihood of needing to borrow from Treasury. Therefore, additional premiums could have helped offset FEMA’s need to borrow or put the agency in a better position to manage catastrophic losses or repay its debt.

A similar number but higher percentage of policies were subsidized in the earlier years of the program, therefore, most of the program’s premium revenue did not reflect the risk of flooding. In 1978 about 76 percent of policies were subsidized compared with about 20 percent in 2012. The Flood Disaster Protection Act of 1973 expanded the use of premium subsidies to encourage the purchase of flood insurance and introduced mandatory flood insurance purchase requirements in SFHAs as a condition of receipt of direct federal and federally related financial assistance related to the property. For the next 7 years, the subsidized premiums remained in effect. During this period, nearly every community with a flood hazard joined NFIP, and policies in force reached 2 million by 1979.

The percentage of full-risk premiums that policyholders with subsidized rates paid was also lower than today. When the program began, NFIP administrators set the subsidized rates on the basis of what they considered affordable. However, from 1981 through 1986, FEMA initiated a series of rate increases for all subsidized policies. The increases were intended to generate premiums at least sufficient to cover expenses and losses relative to the historical average loss year when combined with the premiums paid by policyholders with full-risk rates. Since 1986, additional rate increases have been made to bring the average program premium to a level intended to be sufficient to pay for the historical average loss year and have additional funds available to service its debt to Treasury.

Mandated Information on Claims and Premiums Associated with Subsidized Policies

As mandated in the Biggert-Waters Act, we also calculated the claims and premiums attributable to all policies that received subsidies (historically subsidized policies) since 1978 and to policies with characteristics similar to remaining subsidized policies (remaining subsidized policies). While the difference between claims and premiums is not a meaningful measure of the costs of subsidies because premiums are used to pay not only claims but other costs of administering the program, they provide additional descriptive information. Moreover, because flooding is a highly variable event, with losses varying widely from year to year, even analysis of the decades of historical data available could lead to unreliable conclusions about actual flood risks. Based on our analysis of NFIP claims data, we calculated the amount of claims attributable to historically subsidized policies from 1978 through 2011 to have been $24.1 billion, of which $15.2 billion is attributable to remaining subsidized policies. NFIP had $28.5 billion in claims for policies charged at the full-risk premium rates in the same time period. Based on data provided by FEMA on all subsidized premiums, we calculated the amount of premiums collected for all historically subsidized policies from 1978 through 2011 to have been $26.2 billion, of which $15.7 billion is attributable to remaining subsidized policies. Comparatively, FEMA collected $33.7 billion in premiums for policies with full-risk premium rates for the same time period.

FEMA Lacks the Information Needed to Establish Full-Risk Rates That Reflect Risk of Flooding for Remaining Subsidized Policies

FEMA generally lacks information to establish full-risk rates that reflect flood risk for active policies that no longer qualify for subsidies as a result of the Biggert-Waters Act and also lacks a plan for proactively obtaining The act requires FEMA to phase in full-risk rates on such information.these policies. Federal internal control standards state that agencies should identify and analyze risks associated with achieving program objectives, and use this information as a basis for developing a plan for mitigating the risks. In addition, these standards state that agencies should identify and obtain relevant and needed data to be able to meet program goals.

Surveyors calculate the elevation of the first-level of a structure in relation to the expected flood level, or base flood elevation. According to FEMA, obtaining such a certificate typically would cost a policyholder from $500 to $2,000 or more. elevation as one of the factors in its model to set full-risk rates for buildings constructed after the publication of a community’s FIRM. FEMA officials said that although a variety of factors, such as occupancy status and number of floors, are used to determine these rates, the elevation of the building is the most important factor. FEMA also uses elevation certificates as administrative tools. Elevation certificates are required for some properties, but optional for others. For example, communities participating in NFIP must obtain the elevation information for all new and substantially improved structures. In addition, FEMA requires elevation certificates to determine rates for post-FIRM buildings located in high-risk areas, the A and V zones. However, an elevation certificate generally has not been required for pre-FIRM buildings that previously received subsidized rates because information about elevation was not used in setting subsidized rates. According to NFIP data, property elevations relative to the base flood elevation are unknown for 97 percent of both the 1.15 million historically subsidized policies and the more than 700,000 remaining subsidized policies in SFHAs. As of October 2013, FEMA is requiring applicants for new policies on pre-FIRM properties that previously received subsidized rates and property owners whose coverage has lapsed to provide elevation certificates.

FEMA is phasing-in rate increases for other policyholders who no longer qualify for subsidies and is relying on policyholders to voluntarily provide elevation certificates. With the 1999 PwC report as a basis for an estimate of the full-risk rate for subsidized policies, FEMA officials said they have been using the assumption that subsidized rates are about half of the full-risk rates and have begun implementing premium increases of at least 100 percent for all active policies that are having their subsidies eliminated. According to FEMA, they will phase in these increases at 25 percent per year, consistent with the act, for several years until the rates reach a specific level or until policyholders supply an elevation certificate that indicates the property’s risk, allowing FEMA to determine the full-risk rate. If policyholders voluntarily obtain an elevation certificate that shows that their risk is lower, they may be able to qualify for lower rates or it may not take as many years of rate increases to reach the full-risk rate. However, policyholders at higher risks could be subject to even higher rates. According to FEMA officials, it will take several years for previously subsidized policies to reach a full-risk rate and the agency will communicate to policyholders to encourage them to purchase elevation certificates to determine their actual flood risk. For example, FEMA has posted information on its website about program changes as a result of the Biggert-Waters Act and the importance of obtaining elevation certificates.

Although subsidized policies have been identified as a risk to the program because of the financial drain they represent, FEMA does not have a plan to expeditiously and proactively obtain the information needed to set full- risk rates for all of them. Instead, FEMA will rely on certain policyholders to voluntarily obtain elevation certificates. Those at lower risk levels have an incentive to do so because they can qualify for lower rates. However, policyholders with higher risk levels have a disincentive to voluntarily obtain an elevation certificate because they could end up paying an even higher premium. Without a plan to expeditiously obtain property-level elevation information, FEMA will continue to lack basic information needed to accurately determine flood risk and will continue to base full- risk rate increases for previously subsidized policies on limited estimates. As a result, FEMA’s phased-in rates for previously subsidized policies still may not reflect a property’s full risk of flooding, with some policyholders paying premiums that are below and others paying premiums that exceed full-risk rates. As we have previously found, not accurately identifying the actual risk of flooding increases the likelihood that premiums may not be adequate and adds to concerns about NFIP’s financial stability.

Several Options Exist for Reducing the Financial Impact of Remaining Subsidized Policies

Through our previous work as well as interviews we conducted and literature we reviewed for this report, we identified three broad options that could help address NFIP’s financial situation: (1) adjust the pace of the elimination of subsidies, (2) target assistance or remaining subsidies by the financial need of property owners, and (3) increase mitigation efforts. In prior work, we discussed similar options for addressing the impact of subsidized policies and the work we conducted for this report confirmed that, with some modifications to reflect the changes from the Biggert-Waters Act, these were still generally the prevailing options. addition, our previous and current work have shown that each of the options has advantages and disadvantages in terms of the impact on the program’s public policy goals and would involve trade-offs that would have to be weighed. For example, charging premium rates that fully reflect the risk of flooding could help improve the financial condition of NFIP and limit taxpayer costs before and after a disaster. However, eliminating or reducing subsidized policies could have unintended consequences, such as increasing premium rates to the point that flood insurance is no longer affordable for some policyholders and potential declines in program participation.

Adjust the Pace of the Elimination of Subsidies

See GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: Feb. 2013).

GAO-09-20. where they lived. Stakeholders also noted that the threat of increased premium rates would encourage some policyholders affected by Superstorm Sandy to undertake mitigation efforts as they repaired their properties.

Although accelerating the elimination of subsidies could strengthen the financial solvency of the program, it also entails trade-offs and unintended consequences. For example, according to FEMA estimates, the elimination of subsidies for pre-FIRM properties would on average more than double these policyholders’ premium rates, raising concerns about the affordability of the coverage and participation in the program. Higher premium rates might result in reduced participation in NFIP over time as people either decide to drop their policies or are priced out of the market, according to FEMA officials and insurance industry stakeholders we interviewed. The 1999 PwC study estimated that, for communities most likely to experience a decrease in property values if subsidies were immediately eliminated, on average 50 percent of policyholders might cancel their coverage. It is too soon to tell the long-term impacts of the elimination of subsidies that went into effect in 2013. Even reducing, rather than eliminating, subsidies could increase the financial burden on some existing policyholders—particularly low-income policyholders—and could lead to some of them deciding to leave the program. As a result, if owners of pre-FIRM properties, which have relatively high flood losses, cancelled their insurance policies, the federal government—and ultimately taxpayers—could face increased costs in the form of FEMA disaster assistance grants to these individuals. However, according to a recent study, a large proportion of disaster assistance is provided to states, versus directly to individuals, and the assistance provided to individuals via grants and low-interest loans is fairly limited in size. An additional trade-off associated with making immediate increases to premium rates is resistance from local communities. Stakeholders we interviewed further noted that increased insurance costs might make some properties more difficult to sell, particularly pre-FIRM properties in older, inland communities at high risk of flooding.

Delaying the elimination of subsidized policies could address stakeholder concerns about the affordability of flood insurance and the time frames in the Biggert-Waters Act for implementing full-risk rates, but also has trade- offs. For example, while stakeholders we interviewed supported provisions of the act to reduce the number of subsidized policies and moving to full-risk rates, they said that the time frames in the act were aggressive and could be burdensome for low-income policyholders. They also stated that more gradual increases for certain policyholders could keep policies more affordable. They noted there have been proposals to delay the elimination of subsidies and phasing in of full-risk rates. However, delaying the elimination of subsidies would continue to expose the federal government to increased financial risk. And, as previously noted, not charging full-risk rates contributes to FEMA’s ongoing management challenges in maintaining the financial stability of NFIP. NFIP has been on our high-risk list since 2006 because of concerns about its long-term financial solvency and management issues. While Congress and FEMA intended that, insofar as practicable, NFIP be funded with premiums collected from policyholders, the program was, by design, not actuarially sound.

Target Assistance or Remaining Subsidies Based on Financial Need of Property Owner

Targeting assistance, based on financial need, could help ensure that only those in need receive subsidies, with the rest paying full-risk rates. This assistance could take several forms, including direct assistance through NFIP, tax credits, grants, or vouchers. For example, other federal programs have targeted subsidies through means tests or other methods. Such an approach could help ensure that those needing the subsidy would have access to it and retain their coverage. Alternatively, stakeholders we interviewed for this report noted that FEMA could replace the subsidies with vouchers based on financial need to offset higher premiums. For example, the Department of Housing and Urban Development’s Housing Choice Voucher program is administered by public housing agencies that collect information on applicants’ income and assets to determine eligibility and voucher amounts. flood insurance policyholders could be collected to assess need, determine eligibility, and provide appropriate amounts of financial assistance to families that otherwise could not afford their flood insurance premiums.

24 C.F.R. Part 982.

According to industry stakeholders we interviewed, targeting assistance based on financial need would help make the planned phased-in premium increases more affordable. In a recent paper on flood insurance affordability, the Association of State Floodplain Managers (ASFPM) suggested that a flood insurance voucher program could be developed for low-income policyholders who may not be able to afford the rate increases or for those who might need time to adjust to premium increases. ASFPM’s paper also noted that, while the premium rate increases required by the Biggert-Waters Act will improve the financial stability of NFIP, those increases could have a significant impact on flood insurance affordability for low-income policyholders. In particular, the ASFPM paper states that assistance will be necessary for some policyholders to help them transition to either full-risk rates, or to mitigate their properties, otherwise some property owners might not be able to afford to remain in their homes. Other insurance industry representatives and stakeholders have also cited affordability concerns and suggested that as full-risk rates were phased in, assistance for low-income individuals could be provided through a voucher system or program based on financial need. A provision of the act requires FEMA to study NFIP participation and affordability issues, including offering vouchers based on income. According to FEMA officials, as of May 31, 2013, FEMA has consulted with the National Academy of Sciences about determining how to undertake this study.

As previously discussed, our comparison of characteristics (such as median income and median home values) associated with remaining subsidized and nonsubsidized policies indicates that applying full-risk rates may be overly burdensome for some property owners and not for others. For example, we found a higher percentage of subsidized policies in both counties with lower and very high incomes, indicating that in certain areas, some subsidized policyholders may find higher flood insurance rates difficult to afford, while those who were located in higher- income areas may be able to afford premium increases.

However, it could be challenging for FEMA to develop and administer such an assistance program in the midst of ongoing management challenges. Specifically, we have previously found that FEMA has faced significant management challenges in areas that affect NFIP, including strategic and human capital planning; collaboration among offices; and record, financial, and acquisition management. In addition, in previous work we found that FEMA has faced challenges modernizing NFIP’s insurance policy and claims management system. Implementing a financial assistance program would require FEMA to plan and develop new processes. Representatives from a national insurance professional organization we interviewed for this report stated that it would be difficult for FEMA to administer an assistance program and ensure that an evaluation for assistance was done consistently. In addition, they said that to administer an assistance program such as vouchers, tax credits, or grants through the Write-Your-Own companies (insurance companies that sell and service flood insurance for NFIP), a process would be needed to ensure that means-testing is evaluated and administered consistently. They also suggested that it would be easier to administer a program if all policyholders were charged a full-risk rate, with a separate process that would allow them to apply for assistance, based on financial need.

Increase Mitigation Efforts

A third option to address the financial impact of subsidized premium rates on NFIP would be to substantially expand mitigation efforts to ensure that more homes were better protected from flooding, including making mitigation mandatory. Mitigation efforts such as elevation, relocation, and demolition can be used to help reduce or eliminate the long-term risk of flood damage to structures insured by NFIP. However, mitigation of pre- FIRM properties is voluntary unless a property has been substantially damaged or the owner undertook substantial improvement.

GAO-09-20. assistance. While the Biggert-Waters Act eliminated subsidies for severe repetitive loss properties and for prospective policyholders who refuse to accept any offer for mitigation assistance (including an offer to relocate) following a major disaster, properties not built to meet a community’s flood resistant requirements or in the highest-risk zones could face more severe damages in the event of a flood. Insurance industry stakeholders agreed that mitigation could be used to reduce future financial risk for NFIP.

Stakeholders we spoke to for this report also commented that since such mitigation measures often are done at the community level, offering community-based policies could help encourage more mitigation. This is consistent with our prior work in which local officials generally support increased mitigation efforts.incorporating community-based flood insurance into NFIP could help leverage community resources for mitigation projects that would benefit the entire community, rather than individual structures. For example, floodplain mangers noted that with a community-based policy, the local unit of government could assess fees on all properties benefitting from community mitigation measures. In addition, because the premium rate would be on a community versus structure basis, the community, not the property owner, generally would make development or neighborhood-type decisions that either increased or decreased risk in the community.

Industry stakeholders also commented that Disadvantages associated with mitigation as an option to reduce the financial impact of the subsidized policies include the expense to NFIP, taxpayers, and communities. For example, implementing mitigation measures for tens of thousands of properties that continue to receive subsidized rates could take a number of years to complete, which could have an on-going risk to NFIP’s financial health. We have previously reported that increasing mitigation would be costly and require increased funding. Furthermore, we found in our past and current work that buyouts and relocations would be more costly in certain areas of the country and in some cases the cost for mitigating older structures might be prohibitive. The effectiveness of mitigation efforts could be limited by FEMA’s reliance on local communities with varying resources. For example, not all communities have the staff or resources to fully carry out mitigation, meet cost-sharing requirements, and enforce compliance.

As we reported in 2008, even when federal funds are made available to a community and property owners are interested in mitigating their properties, property owners still may have to pay a portion of the mitigation expenses, which could discourage participation in mitigation efforts. In interviews for this report, stakeholders said that mitigation was expensive and that as premiums are increased to full-risk rates, some means of assistance would be helpful for policyholders who may have difficulty paying for mitigation efforts. Mitigation costs would have to be weighed against mitigation benefits (possible savings from a decrease in flood damage).

In addition, certain types of mitigation, such as relocation or demolition, might be met with resistance by communities that rely on those properties for tax revenues, such as coastal communities with significant development in areas prone to flooding. Furthermore, mitigation activities are often constrained by conflicting local interests, cost concerns, and a lack of public awareness of the risks of natural hazards and the importance of mitigation. Communities’ economic interests often can conflict with long-term hazard mitigation goals. For example, a community with a goal of economic growth might allow development to occur in hazard-prone areas (along the coast or in floodplains).

Our analysis indicates that the three options discussed above are not mutually exclusive and may be used together to reduce the financial impact of subsidized policies on NFIP. For example, accelerating the elimination of subsidies could be done in conjunction with targeting assistance to only those policyholders who need help to retain their flood insurance—thus advancing the goal of strengthening the financial solvency of NFIP and addressing affordability concerns for low-income policyholders. In addition, FEMA may be able to build on its existing mitigation efforts and target assistance for mitigation efforts to those policyholders who need financial assistance. The way in which an option is implemented, such as more aggressively or gradually, also can produce different effects in terms of policy goals and thus change the advantages and disadvantages (see table 6).

Conclusions

While FEMA has taken initial steps to eliminate subsidies for various types of properties in accordance with the Biggert-Waters Act requirements, eliminating the more than 700,000 additional policies that continue to receive subsidies will take many years to accomplish. Subsidies on some policies will be eliminated as properties are sold or if coverage lapses, but FEMA has some data limitations and implementation issues to resolve before other subsidies identified in the act can be eliminated. With some efforts under way, FEMA has much work ahead of it in planning and executing implementation of the changes in the act as well as effectively managing NFIP.

Although FEMA has information on premiums and claims paid for subsidized policies over time, it does not have the information needed to determine the appropriate premium amounts policyholders should pay to reflect the full level of risk for floods. To phase out and eventually eliminate subsidies and revise rates over time, FEMA will need information on the relative risk of flooding and property elevations (elevation certificates), which generally had not been required for subsidized policies prior to the Biggert-Waters Act. The act requires FEMA to phase in full-risk rates on policies that previously received subsidies. According to federal internal control standards, agencies should identify and analyze risks associated with achieving program objectives, and use this information as a basis for developing a plan for mitigating the risks and obtaining needed information. Going forward, FEMA will require new policyholders and those whose coverage has lapsed to provide elevation information when renewing or obtaining new policies; however, FEMA will rely on other policyholders who previously received subsidized rates to voluntarily provide this information. As FEMA continues to implement the requirements of the act to charge full-risk rates, the agency plans to assume that all subsidized policies pay about half of the full-risk premium and has begun phasing-in rate increases based on this factor for all active policies that are having their subsidies removed. Without a plan to require all policyholders to obtain elevation certificates to accurately document their property elevations and relative risk of flooding, FEMA will lack information that is key to determining appropriate full-risk rate premiums. As a result, the rates that FEMA plans to implement may not adequately reflect a property’s actual flood risk, and some policyholders may be charged too much and some too little for their premiums.

Recommendation for Executive Action

To establish full-risk rates for properties with previously subsidized rates that reflect their risk for flooding, we recommend that the Secretary of the Department of Homeland Security (DHS) direct the FEMA Administrator to develop and implement a plan, including a timeline, to obtain needed elevation information as soon as practicable.

Agency Comments and Our Evaluation

We provided a draft of this report to DHS for its review and comment. DHS provided written comments that are presented in appendix III. The letter noted that the department concurred with our recommendation to develop and implement a plan to obtain elevation information from previously subsidized policyholders. The letter stated that FEMA will evaluate the appropriate approach for obtaining or requiring the submittal of this information. In particular, the letter noted that although obtaining this information cost-effectively presents significant challenges, FEMA will explore technological advancements and engage with industry to determine the availability of technology, building information data, readily available elevation data, and current flood hazard data that could be used to implement the recommendation. FEMA also provided technical comments, which we have incorporated into the report, as appropriate.

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

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

Appendix I: Objectives, Scope, and Methodology

The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) mandated that GAO conduct a number of studies, including this study on the properties that continue to receive subsidized rates after the implementation of the act and options to further reduce these subsidies.

This report discusses (1) the number, location, and financial characteristics of properties that continue to receive subsidized rates compared with full-risk rate properties, (2) information needed to estimate the historic financial impact of subsidies and establish rates that reflect the risk of flooding on properties with previously subsidized rates, and (3) options to reduce the financial impact of remaining subsidized properties.

Although the Biggert-Waters Act mandated that GAO report on certain characteristics of the remaining subsidized policies and properties, the National Flood Insurance Program (NFIP) databases do not contain information to address several elements listed in the act. Therefore, to the extent possible, we developed alternative methodologies to address the elements of the act.

Number, Location, and Financial Characteristics of Properties That Continue to Receive Subsidized Rates Compared with Full-Risk Rate Properties

To provide information on the number and location of NFIP-insured properties that would continue to receive subsidized premium rates, we analyzed data from NFIP’s policy and repetitive loss databases as of June 30, 2012. We applied the Federal Emergency Management Agency’s (FEMA) algorithm to determine which policies were subsidized, and applied FEMA’s interpretation of the provisions in the Biggert-Waters Act that eliminate subsidies to determine which policies would retain their subsidies.FEMA’s implementation of legislative requirements authorizing subsidized rates for certain properties in high-risk locations.

We also analyzed NFIP’s legislative history and relied on To determine the fair market value of properties that would continue to receive subsidized premium rates, we used other NFIP data and publicly available information as indicators of value because the fair market values required by the act were not available in NFIP’s databases. We used three indicators of home value, (1) NFIP policy-level coverage amounts, (2) 2007 through 2011 5-year American Community Survey (ACS) county-level data on median home values, and (3) January 2013, Zillow city-level median home value index within case study counties.

For consistency in our message, we compared all the indicators at the county-level. To place NFIP policies in counties, we used ZIP code information contained in the NFIP policy file as of June 30, 2012, and matched those data with U.S. Postal Service and Department of Housing and Urban Development ZIP code to county data (as of December 2011). For ZIP codes that crossed county borders, we assigned policies proportionally to the counties based on the fields available in the ZIP code to county file.

We aggregated the total number of policies and remaining subsidized policies for all counties, and selected 351 counties for our analysis that contained the majority of the policies. We selected all counties with 500 or more remaining subsidized policies for single-unit, primary residences (247 counties). We also included the five counties in each state and Puerto Rico with the most remaining subsidized policies for single-unit primary residences, regardless of the total number in the county, to better ensure a comprehensive national representation. Accordingly, the 351 counties we selected represent 78 percent of all remaining subsidized policies nationwide, 77 percent of all remaining subsidized policies for single-unit primary residences, and 77 percent of all NFIP policies. As more than 99 percent of remaining subsidized policies were in Special Flood Hazard Areas (SFHA), we limited our comparison with nonsubsidized policies to those for single-unit primary residences in SFHAs.

We used NFIP policy data as of June 30, 2012, on coverage amounts as the first indicator of home value. To determine how building coverage amounts compared between remaining subsidized and nonsubsidized policies, we categorized NFIP building coverage amounts using less than $100,000, $100,000-$149,999, $150,000-$199,999, $200,000-$249,999, and $250,000, which is the maximum coverage for residential units. We compared the percentage of policies of each type within each category of coverage at the county level for the selected counties. We also conducted this analysis using flood zones, comparing the coverage amounts for A- zone and V-zone policies separately. (The A and V flood zones represent areas at high risk for flooding, and V zones also indicate coastal areas.) Coverage amount as an indicator for home value is limited because NFIP has a maximum building coverage amount of $250,000 per residential unit. Additionally, the perceived flood risk and cost of coverage could affect the coverage amount. However, coverage amount can give an indication of a property’s value relative to other properties.

As a second indicator of home value, we used 2007 through 2011 ACS 5- year county-level estimates for median home values (known as B25077) for all counties in the United States and also included the District of Columbia and Puerto Rico. We included Puerto Rico because of its relatively large number of NFIP policies. We used 5-year data because other ACS data sets did not contain data for all the 351 selected counties. Using county median home value, we ranked all counties and determined the deciles for the 351 selected counties. We compared the percentage of remaining subsidized with nonsubsidized policies from the selected counties in each decile. Because these data are at the county level, areas within the county of relatively high or low home values are indistinguishable. We also analyzed the ACS and NFIP coverage data together, at the county level.

As a third indicator of home value, we used Zillow city-level median home value data as of January 2013, within five selected counties. For the purposes of our county case study analysis, we selected the Zillow Home Value Index because it was publicly available; covered more housing units at the city level than other housing indices; was estimated at a smaller geographic region; and only included nonforeclosure housing units. We judgmentally selected five case study counties and compared data at the city level within the county to provide more detailed illustrations of how home values for properties that continue to receive subsidies compare with those that pay full-risk rates. These cases are not projectable to all counties. We selected our case study counties based on the number of relevant NFIP policies, their location, and the reliability of the data for the county. Specifically, we selected counties with at least 1,000 remaining subsidized policies and nonsubsidized policies for single- unit primary residences. We selected one county from each of the four states with the most remaining subsidized policies. We selected Pinellas County, Florida; Los Angeles County, California; and Ocean County, New Jersey; however, the Zillow data for Louisiana did not meet our level of reliability and was eliminated. As Pinellas County is on the Gulf of Mexico, Los Angeles County is on the Pacific Ocean, and Ocean County is on the Atlantic Ocean, we chose the other two counties to represent inland flooding—Cook County, Illinois, and Pima County, Arizona. The Zillow information for these counties met our criteria for data reliability. For each county, we determined which NFIP policies may be located in the county based on ZIP code. Because the NFIP city name was not consistently entered, two analysts independently matched the NFIP policy city names to Zillow city names within the county. A third analyst served as the mediator for differences using alternative location information. Within each county, we ranked the cities by median home value and distributed them into quartiles. We compared the number and percentage of remaining subsidized policies with the nonsubsidized policies in the cities in each quartile. Additionally, for each case study county, we reviewed the results from the NFIP coverage and ACS analyses within the county.

Because owner income data were not available in NFIP’s databases, we analyzed 2007 through 2011 ACS 5-year data as an indicator of income levels of owners of remaining subsidized properties. We used 5-year, county-level data on median household incomes (B19013) for all counties in the United States, the District of Columbia, and Puerto Rico. Using the median household income data, we ranked all counties and determined the deciles for the 351 selected counties. We compared the percentage of remaining subsidized policies with nonsubsidized policies in SFHAs from the selected counties in each decile. Because these data are at the county level, areas within the county of relatively high or low household incomes are indistinguishable. We also analyzed the ACS median home value and median household income data together, at the county level.

Because consistent, nationwide aggregate data on sales prices for each property covered by a remaining subsidized pre-Flood Insurance Rate Map (FIRM) policy since 1968 were not available from NFIP or other sources, we determined that the home value analysis was sufficiently similar to provide an indication of sales prices to respond to this study element.

We also used NFIP policy fiscal year-end data from 2002 through 2012 to estimate the potential annual rate of decline in the number of remaining subsidized policies over time. Consistent, nationwide aggregate data on sales dates for each pre-FIRM property since 1968 were not available from NFIP or other sources. We compared sequential years of policy data to determine whether each policy with the characteristics of a remaining subsidized policy continued to have coverage. We first matched company and policy data and if no match was found, matched on owner name. If a policy in the first year failed to match by either method, we assumed that the policy no longer had coverage. We estimated the annual rate of decline for 10 sequential year pairs. We compared our results with a recent NFIP policy tenure study by calculating the decline rate from the reported tenure rate. We estimated the number of remaining subsidized policies over a 30-year period given the different annual decline rates.

Because data were not available from NFIP on the number of times each pre-FIRM property had been sold, we determined that the policy decline rate analysis was sufficiently similar to provide an indication of extent of ownership or length of time policies remained in the program to respond to this study element.

Additionally, because data were not available from NFIP’s databases on the extent to which pre-FIRM properties are currently owned by the same owners as at the time of the original NFIP rate map, we determined that the policy decline rate analysis was sufficiently similar to provide an indication of extent of ownership or length of time policies remained in the program to respond to this study element.

Estimated Historic Financial Impact of Subsidized Properties on NFIP

To estimate the financial impact, or cost, of subsidized properties to NFIP, we attempted to calculate forgone premiums—lost revenue to the program in premiums—due to subsidies. Because data on elevations of NFIP subsidized properties were not available to determine the total forgone premiums from subsidized policies, we used FEMA’s estimates of the subsidy rate from 2002 through 2011 to estimate a range of forgone premiums attributable to subsidized properties in this period. We limited our analysis to 2002 through 2011 because FEMA did not estimate subsidy rates prior to 2002. Lacking the information to calculate the ranges associated with the premiums that would have been collected, we made assumptions based on limited historical information from FEMA, including the annual Actuarial Rate Reviews from 2002 through 2011, which state that subsidized premiums were estimated to be between 35 and 45 percent of the full-risk premium (the subsidy rate). Our analysis did not adjust for potential effects on behavior (such as on program participation) or changes in operating expenses that could have occurred had historical rates not been subsidized. In addition, our analysis did not account for new information provided by FEMA officials that only a portion of subsidized premiums is available to pay for losses. We plan to analyze the impact of this new information provided by FEMA in comments on a draft of this report. We will report the methodology and results of our estimate separately. FEMA did not report such estimates from 1978 through 2001.

For the period before 2002, we analyzed a prior GAO report, FEMA’s annual actuarial review, and a PricewaterhouseCoopers study commissioned by FEMA and present qualitative information about the cost of subsidies. Additionally, because of the limited historical program data from FEMA, developing a sufficiently reliable year-by-year or state- by-state estimate of cost to NFIP as a result of remaining subsidized policies is not possible.

To estimate the total losses incurred by subsidized properties since the establishment of NFIP and compare these with the total losses incurred by all structures charged a nonsubsidized premium rate, we analyzed NFIP claims database as of June 30, 2012, to determine total losses attributable to remaining subsidized and nonsubsidized policies. Data were not available before 2002 that would allow us to determine whether a policy had the characteristics of a remaining subsidized policy. For years prior to 2002, we estimated the proportion of claims for previously subsidized policies that were attributable to remaining subsidized policies, based on the average proportion in the claims data in the latest 10 years.

To determine the premium income collected by NFIP as a result of subsidized policies, compared with premium income collected from properties charged a nonsubsidized rate, we analyzed annual NFIP premium data and data broken out by subsidy to determine the annual premiums of remaining subsidized and nonsubsidized policies. We estimated the proportion of previously subsidized premiums attributable to remaining subsidized policies based on the average proportion in the latest 10 years of NFIP policy data.

Options to Reduce the Financial Impact of Remaining Subsidized Properties

To determine the options to reduce the financial impact of remaining properties with subsidized policies, we analyzed NFIP’s legislative history and reviewed FEMA documents as well as documents from insurance industry organizations and academic institutions to gather information on options to eliminate or reduce the financial impact of subsidized policies on NFIP. In addition, we interviewed NFIP officials and representatives of insurance industry organizations and floodplain managers. We also interviewed a nationally recognized academic knowledgeable about the financial impact and the public policy challenges associated with catastrophic events, and discussed previous studies on NFIP and other relevant studies on flood insurance issues.

For all data sets used we performed data testing and gathered information from issuing entities about possible data limitations. For the ACS, Zillow, and NFIP data sets, we interviewed officials on usability and reliability. We determined that each data set used was sufficiently reliable for our intended purposes.

We conducted this performance audit from September 2012 to July 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Comparison of Remaining Subsidized Policies with Nonsubsidized Policies in Special Flood Hazard Areas

We compared various characteristics of the remaining subsidized policies and nonsubsidized policies in SFHAs in selected counties. In addition, we conducted more detailed analysis of five counties for illustrative purposes.

Selected Counties

For our analysis of the financial characteristics of subsidized and nonsubsidized policies in SFHAs, we selected 351 counties that represented 78 percent of all remaining subsidized policies nationwide, 77 percent of all remaining subsidized policies for single-unit primary residences, and 77 percent of all NFIP policies. We selected all counties with more than 500 remaining subsidized policies for single-unit primary residences and the five counties in every state (and Puerto Rico) with the most remaining subsidized policies, regardless of number. Figure 8 shows the 351 selected counties and the number of remaining subsidized policies for single-unit primary residences under NFIP.

For both remaining subsidized policies and nonsubsidized policies, a larger percentage of policies in V zones (coastal areas with a high risk of flooding) had the maximum coverage amount than policies in A zones (noncoastal areas with a high risk of flooding) (see fig. 9). Also for both types of policies, V-zone policies represented a very small fraction of all policies in SFHAs. For example, 1.6 percent of remaining subsidized policies and 0.8 percent of nonsubsidized policies in SFHAs were in V zones.

We analyzed NFIP coverage amounts (for remaining subsidized policies and nonsubsidized policies in SFHAs for single-unit primary residences) and county median home values together and determined that higher coverage amounts were associated with higher county median home values. Counties with higher median home values had higher percentages of remaining subsidized policies and nonsubsidized policies with the NFIP maximum coverage of $250,000 than counties with lower median home values (see table 7). In addition, counties with lower median home values generally had higher percentages of remaining subsidized policies and nonsubsidized policies with lower amounts of coverage (less than $100,000) than counties with higher median home values. However, nonsubsidized policies consistently had higher amounts of coverage. Specifically, in every decile of county median home value, a larger percentage of nonsubsidized policies had the maximum amount of NFIP coverage than remaining subsidized policies. Also in every decile of county median home value, a smaller percentage of nonsubsidized policies had lower amounts of coverage (less than $100,000) than remaining subsidized policies.

We analyzed home value and household income indicators together and found that counties with the highest median household incomes and highest median home values had higher percentages of remaining subsidized policies than nonsubsidized policies in SFHAs. For example, 78 of the 351 selected counties were in the highest decile in both median home value and median household income (see table 8).

About 26 percent of remaining subsidized policies compared with 7 percent of nonsubsidized policies in SFHAs were in these counties (see table 9). Remaining subsidized policies were also found in higher percentages than nonsubsidized policies in counties with lower median income and lower median household counties (lowest 6 deciles). Counties with higher median household income generally also had higher median home values, but counties with higher median home values did not always have higher median incomes.

We performed five case studies to illustrate results in specific counties (see fig. 10). We selected the counties based on the number of relevant NFIP policies, location, and reliability of city-level data. Case studies were chosen to offer a more in-depth, within county view (how things vary across cities within select counties). We performed the NFIP coverage and median home value analyses, but also used publicly available real estate data to examine city-level median home values within the county. We compared remaining subsidized and nonsubsidized policies in SFHAs (A and V flood zones are designated as SFHAs).These cases cannot be projected nationwide, and the results of our analysis from each county are independent of each other. Some of the results from these case studies matched our earlier results, and some did not.

Los Angeles County, California; Ocean County, New Jersey; and Cook County, Illinois; had median home values in the top 10 percent of all counties. Consistent with our earlier results for counties with the highest median home values, Cook and Los Angeles Counties had more remaining subsidized policies than nonsubsidized policies (95 percent and 71 percent of all policies for Cook County and Los Angeles County, respectively); however, Ocean County had fewer remaining subsidized policies (about 44 percent). Los Angeles and Ocean Counties had high percentages of both subsidized and nonsubsidized policies with maximum NFIP coverage and a low percentage of both types of policies at lower levels of coverage. However, Cook County had low percentages of maximum coverage policies.

Pinellas County, Florida, and Pima County, Arizona had median home values in the second decile of all counties. Although Pinellas County had many more policies than Pima County, both had slightly more remaining subsidized policies than nonsubsidized policies (55 percent and 57 percent of all policies for Pinellas County and Pima County, respectively). Pinellas County had lower percentages of policies at maximum coverage than Los Angeles and Ocean Counties but higher percentages than Pima and Cook Counties.

Consistent with our analysis of NFIP coverage amounts, all five counties had lower percentages of remaining subsidized policies at maximum building coverage than nonsubsidized policies. Ocean County had the largest difference between nonsubsidized policies and remaining subsidized policies (77 percent versus 47 percent), and Pima County had the smallest difference (41 percent versus 26 percent). All counties had a higher percentage of remaining subsidized policies than nonsubsidized policies with building coverage less than $100,000, but in some counties the differences were smaller.

The results of our analysis of the city median home value were mixed. In all counties except Los Angeles County, higher percentages of remaining subsidized policies than nonsubsidized policies were in cities in the lowest quartile of median home value, but in Cook and Pinellas Counties the differences were larger. In Pinellas County 59 percent of the remaining subsidized policies were in cities in the lowest quartile of median home value. In the counties with V-zone policies (Los Angeles, Ocean, and Pinellas) a slightly higher percentage of remaining subsidized policies were in cities in the highest quartile of median home value than nonsubsidized policies. In Ocean County more than 30 percent of remaining subsidized and nonsubsidized policies were in cities in the highest quartile, while in Pima County, very few policies of either type were in cities in this quartile. In Los Angeles and Pima counties, most policies of either type were in cities in the second and third quartiles. In Cook County policies were not concentrated in any quartile.

Additionally, fewer than 2 percent of policies were in V zones. Specifically, in the three counties with V-zone policies (Los Angeles, Ocean, and Pinellas) there were about 1,290 V-zone policies compared with about 72,000 A-zone policies. In each county, more V-zone policies were remaining subsidized policies than nonsubsidized policies. In Ocean and Los Angeles Counties, most V-zone policies of either type were in cities with median home values in the top quartile within the county. In Pinellas County the V-zone policies were located in cities in all quartiles of median home value.

Appendix III: Comments from the Department of Homeland Security

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Jill Naamane and Patrick Ward (Assistant Directors); William Chatlos; Barb El Osta; Christopher Forys; Isidro Gomez; Cathy Hurley; Jacquelyn Hamilton; Karen Jarzynka- Hernandez; Courtney LaFountain; May Lee; Barbara Roesmann; Jena Sinkfield; Melvin Thomas; Frank Todisco; Sonya Vartivarian; and Monique Williams made key contributions to this report.