National Flood Insurance Program: Actions to Address Repetitive Loss Properties
Released: 2004-03-25T00:00:00

Letter

Background

Floods continue to be the most destructive natural hazard in terms of damage and economic loss to the nation. Property damage from flooding now totals over $1 billion each year in the United States and floods occur within all 50 states. Nearly 9 of every 10 presidential disaster declarations result from natural phenomena in which flooding was a major component. Most communities in the United States can experience some kind of flooding after spring rains, heavy thunderstorms, or winter snow thaws. Not only do floods cause damage and loss, they can be deadly—flooding caused the deaths of about 900 people from fiscal year 1992 through fiscal year 2001. Tropical Storm Allison, which struck the Gulf Coast in June 2001, demonstrated the economic and social impact flooding can have, causing billions of dollars in damages and 41 deaths. As a result of the storm, FEMA paid out over $1 billion in insurance claims, the largest amount paid for a single event since 1978 when FEMA began to collect summary statistics on flood claims. More recently, Hurricane Isabel ravaged the Mid-Atlantic states in September 2003. Through November 30, 2003, FEMA had paid over $160 million in flood insurance claims and estimates that ultimately, flood insurance claim payments resulting from Isabel will be about $450 million. At least 40 deaths have been attributed to the storm.

Floods can be slow or fast rising but generally develop over a period of days. Flash flood waters move at very fast speeds and can roll boulders, tear out trees, destroy buildings, and obliterate bridges. Walls of water can reach heights of 10 to 20 feet and generally are accompanied by a deadly cargo of debris. Flood damage causes both direct and indirect costs. Direct costs reflect immediate losses and repair costs as well as short-term costs such as flood fighting, temporary housing, and administrative assistance. By contrast, indirect costs are incurred in an extended time period following a flood and include loss of business and personal income (including permanent loss of employment), reduction in property values, increased insurance costs, loss of tax revenue, psychological trauma, and disturbance to ecosystems. In 1968, in recognition of the increasing amount of flood damage, the lack of readily available insurance for property owners, and the cost to the taxpayer for flood-related disaster relief, the Congress passed the National Flood Insurance Act (Pub. L. No. 90-448) that created the National Flood Insurance Program.

FEMA Has Sought to Minimize Flood- Related Losses Through the National Flood Insurance Program and Various Mitigation Grant Programs

Through the National Flood Insurance Program, FEMA has sought to minimize flood-related property losses by making flood insurance available on reasonable terms and encouraging its purchase by people who need flood insurance protection—particularly those living in flood prone areas. The program identifies flood prone areas in the country, makes flood insurance available to property owners in communities that participate in the program, and requires floodplain building standards to mitigate flood hazards. FEMA also seeks to mitigate flood hazards through a variety of mitigation grant programs.

Under the flood insurance program, FEMA prepares flood insurance rate maps to delineate flood prone areas including special flood hazard areas— also known as 100-year floodplains—where enhanced building standards and insurance requirements apply. Currently, FEMA is in the initial stages of a billion dollar effort to update the nation’s flood maps. The Map Modernization program is intended to improve the accuracy of flood maps, put the maps in digital format to improve their accessibility, and provide the basis for assessing the impact of other hazards in support of DHS’s efforts to protect the nation from both man-made and natural disasters. For example, the maps could be used to assess the impact of toxic chemical spills on local waterways. At the request of the Chairman of the House Financial Services Subcommittee on Housing and Community Opportunity, we have been reviewing the Map Modernization program and plan to report on FEMA’s program strategy and the status of the program later this spring.

Flood maps provide the basis for establishing floodplain building standards that participating communities must adopt and enforce as part of the program. For a community to participate in the program, any structures built within a special flood hazard area after the flood map was completed must be built according to the program’s building standards that are aimed at minimizing flood losses. A key component of the program’s building standards that must be followed by participating communities is a requirement that the lowest floor of the structure be elevated to or above the base flood level—the highest elevation at which there is a 1-percent chance of flooding in a given year. The administration has estimated that the program’s standards for new construction save about $1 billion annually in flood damage avoided. According to FEMA, buildings constructed in compliance with these standards suffer approximately 80 percent less damage annually than those not built according to these standards.

Flood maps also provide the basis for setting insurance rates and identifying properties whose owners are required to purchase flood insurance. When the program was created, the purchase of flood insurance was voluntary. To increase the impact of the program, the Congress amended the original law in 1973 to require the purchase of flood insurance in certain circumstances. Flood insurance is required for structures in special flood hazard areas of communities participating in the program if (1) any federal loans or grants were used to acquire or build the structures or (2) the structures are secured by mortgage loans made by lending institutions that are regulated by the federal government. The National Flood Insurance Reform Act of 1994 that further amended the program also reinforced the objective of using insurance as the preferred mechanism for disaster assistance. The act expanded the role of federal agency lenders and regulators in enforcing the mandatory flood insurance purchase requirements. It also prohibited further flood disaster assistance for any property where flood insurance was not maintained even though it was mandated as a condition for receiving prior disaster assistance. Currently, the program provides insurance for approximately 4.4 million policyholders in the nearly 20,000 communities that participate in the program. The program has paid about $12 billion in insurance claims, primarily from policyholder premiums that otherwise would have been paid through taxpayer-funded disaster relief or borne by home and business owners themselves.

FEMA also has a variety of grant programs designed to mitigate the effects of natural hazards, including flooding, on people and property. From October 1989 through July 2003, FEMA funded approximately 3,900 flood mitigation projects worth about $2 billion through the flood insurance program and a variety of other grant programs. Through these projects, FEMA mitigated over 29,000 properties. FEMA’s Flood Mitigation Assistance Program is funded through the flood insurance program and is designed to reduce claims under the program. Grants provided to states and communities are to be used for flood related mitigation activities such as elevation, acquisition, and relocation of buildings insured by the flood insurance program. In implementing this program, FEMA has encouraged states to prioritize project grant applications that include repetitive loss properties. In addition, FEMA provides funding for mitigation planning activities and projects before and after floods occur, respectively through the Pre-Disaster Mitigation Program and the Hazard Mitigation Grant Program. In implementing the Pre-Disaster Mitigation Program for 2003, FEMA specifically targeted projects designed to mitigate repetitive loss properties. Through the Hazard Mitigation Grant Program, FEMA estimates that it has mitigated over 2,500 repetitive loss properties through acquisitions, elevations, and other flood protection measures.

Payments for Repetitive Losses Contribute to Program Financial Concerns

The flood insurance program has raised financial concerns because, over the years, it has lost money and at times has had to borrow funds from the U.S. Treasury. One of the primary reasons—payments for repetitive loss properties—has been consistently identified in our past work and by FEMA. About 49,000—approximately 1 percent of the 4.4 million buildings currently insured under the program—have been flooded on more than one occasion during a 10-year period and have received flood insurance payments of $1,000 or more for each claim. These repetitive loss properties are problematic not only because of their vulnerability to flooding but also because of the costs of repeatedly repairing flood damages. For example, a 1998 study by the National Wildlife Federation noted that nearly 1 out of every 10 repetitive loss homes has had cumulative flood loss claims that exceeded the value of the house.

According to FEMA, repetitive loss properties have accounted for about 38 percent of all program claim costs historically and are projected by FEMA to cost about $200 million annually. Since 1978, the total cost of these repetitive loss properties to the program has been about $4.6 billion. Nearly half of all nationwide repetitive loss property insurance payments had been made in Louisiana, Florida and Texas. For example, in Texas, since 1978 there have been approximately 45,000 flood claims totaling over $1 billion for repetitive damage. These 3 states, plus 12 others, have accounted for nearly 90 percent of the total payments made for repetitive loss properties.

FEMA has Developed a Strategy and Members of Congress Have Proposed Changes to Address Repetitive Losses

FEMA has developed a strategy to reduce the number of properties repeatedly flooded that, like congressional proposals, seeks to target repetitive loss properties with the greatest losses. FEMA’s strategy identifies the highest priority properties, for example those with four or more losses, that would benefit from mitigation activities designed to remove them altogether from the floodplains, elevate them above the reach of floodwaters, or apply other measures that would significantly reduce their exposure to flood risk. According to FEMA, it has paid out close to $1 billion dollars in flood insurance claims over the last 21 years for these properties. As of November 30, 2003 FEMA had identified approximately 11,000 currently insured repetitive loss properties in this target group. FEMA has set up a special direct facility for servicing these properties and provides information about these property to state and local floodplain management officials. States or communities may sponsor projects to mitigate flood losses to these properties or may be able to provide property owners technical assistance on mitigation options. To facilitate grant-funded mitigation activities for this target group, FEMA also initiated a pilot program to allow states and communities (where these properties are located) to use simplified methodology and software to establish the cost-effectiveness of proposed projects when applying for grants to mitigate these repetitive loss properties.

Members of Congress have also recognized the financial burden repetitive loss properties place on the program and have proposed changing premium rates for properties with the greatest losses. Two bills introduced in 2003—H.R. 253 and H.R. 670—proposed amending the National Flood Insurance Act of 1968, to, among other things, change the premiums for repetitive loss properties. Under the proposed bills, premiums charged for such properties would reflect actuarially based rates if the property owner has refused a buyout, elevation, or other flood mitigation measure from the flood insurance program or FEMA. H.R. 253, as passed by the House, included a pilot program to allow FEMA to use flood insurance program funds to target “severe” repetitive loss properties for mitigation. Specifically, FEMA could use up to $40 million each year for the next 5 years for mitigation directed at these properties. For property owners who refuse FEMA’s mitigation offers, their premium rates would be increased by 50 percent if they subsequently made a claim to the program exceeding $1,500. In the past, we have noted that increasing policyholder premiums could cause some of the policyholders to cancel their flood insurance. H.R. 253 includes a provision that provides FEMA the flexibility of increasing the deductible, which would result in a lower premium rate, for policies where property owners refuse mitigation offers and make subsequent claims exceeding $1,500. This may provide property owners who refuse mitigation offers a means for maintaining their flood insurance without a significant increase in their premium rate.

While we have not fully analyzed the potential results of FEMA’s repetitive loss strategy and mitigation actions proposed by H.R. 253, based on a preliminary assessment, they appear to have the potential to reduce the number and/or vulnerability of repetitive loss properties and, thereby, the potential to help improve the program’s financial condition. By making near term investments targeted to the most costly properties to insure, FEMA should be able to reduce annual expenditures for these properties in the long term by reducing the national inventory of repetitive loss properties.

According to FEMA, there are a total of about 100,000 repetitive loss properties accounting for $4.6 billion in losses since 1978. Of these properties, FEMA reports that there are about 49,000 properties that are currently insured that have accounted for about $2.6 billion in losses since 1978. Of these currently insured properties, about 6,000 repetitive loss properties that have accounted for about $792 million in losses since 1978 could be considered for mitigation efforts funded through the pilot program proposed by H.R. 253. In accordance with the bill’s proposed criteria, each of these properties either had 4 or more separate claims each exceeding $5,000 with cumulative claims exceeding $20,000 or had at least 2 separate claims with cumulative losses exceeding the value of the property. The remaining 43,000 currently insured repetitive loss properties, accounting for $1.8 billion in losses since 1978, do not meet the criteria for the proposed pilot program. Of these properties that would not be eligible for the pilot program, about 26,000 properties, accounting for about $1.6 billion in losses since 1978, had cumulative losses greater than $20,000, but either (1) less than 4 claims had been filed or (2) each claim did not meet the $5,000 threshold. (For state by state details on the total number of repetitive loss properties, the number of currently insured repetitive loss properties, the number of currently insured repetitive loss properties that meet the criteria proposed in the H.R. 253 pilot program, and the number of currently insured repetitive loss properties that do not meet the criteria, see appendix 1, tables 1, 2, 3, and 4, respectively.)

As with all federal initiatives, the success of FEMA ‘s efforts in implementing a repetitive loss strategy and any future legislated program directives will be most effectively determined by using outcome-based, rather than output-based performance measures. Such outcome-based measures could allow FEMA to assess the impact of savings to the National Flood Insurance Program resulting from its mitigation of repetitive loss properties.

Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have.

Contact Information

For further information on this testimony, please contact William O. Jenkins at (202) 512-8777. Individuals making key contributions to this testimony include Chris Keisling, Kirk Kiester, and Meg Ullengren.

Appendix 1: Data on Repetitive Loss Properties For the Period January 1, 1978 through November 30, 2003

This appendix contains data we obtained from FEMA’s National Flood Insurance Program Bureau & Statistical Agent on repetitive loss properties and the flood insurance losses associated with those properties. To assess the reliability of this data, we interviewed agency officials knowledgeable about the data and the system development manager responsible for maintaining the data and the systems. We determined that the data were sufficiently reliable for identifying repetitive loss properties and illustrating the potential impact of the pilot program proposed by H.R. 253 on these properties.

Related GAO Products

Flood Insurance: Challenges Facing the National Flood Insurance Program. GAO-03-606T. Washington, D.C.: April 1, 2003.

Major Management Challenges and Program Risks: Federal Emergency Management Agency. GAO-03-113. Washington, D.C.: January 2003.

Flood Insurance: Extent of Noncompliance with Purchase Requirements Is Unknown. GAO-02-396. Washington, D.C.: June 21, 2002.

Flood Insurance: Information on the Financial Condition of the National Flood Insurance Program. GAO-01-992T. Washington, D.C.: July 19, 2001.

Flood Insurance: Emerging Opportunity to Better Measure Certain Results of the National Flood Insurance Program. GAO-01-736T. Washington, D.C.: May 16, 2001.

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