NFIP was established in the National Flood Insurance Act of 1968 to provide policyholders with some insurance coverage for flood damage, as an alternative to disaster assistance, and to try to reduce the escalating costs of repairing flood damage. NFIP has mapped flood risks, assigning a flood zone designation based on the risk level for flooding (see table 1 for examples), which is a factor in determining premium rates. To participate in NFIP, communities agree to enforce regulations for land use and new construction in high-risk flood zones. As of May 2007, more than 20,300 communities across the United States and its territories participated in NFIP by adopting and agreeing to enforce state and community floodplain management regulations to reduce future flood damage. Although community participation in the program is voluntary, homeowners with mortgages from federally regulated lenders on properties in special high-risk, flood hazard areas are required to purchase flood insurance on their dwellings for at least the outstanding mortgage amount, up to the maximum policy limit of $250,000. Optional, lower-cost coverage also is available under NFIP to protect homes in areas of moderate- to low-risk. In addition, owners of properties built before NFIP officially mapped a community (known as pre-FIRM properties, referring to the Flood Insurance Rate Map) pay premiums that do not reflect their true risk because Congress authorized subsidized insurance rates to be made available for policies covering certain structures to encourage communities to join the program. To insure other personal property items against flood damage, homeowners may purchase separate NFIP personal property (or “contents”) coverage, up to the maximum coverage limit of $100,000. In addition to mapping and categorizing flood risk zones, FEMA also has developed two estimates of potential losses to help set rates and develop information relating to losses. FEMA introduced the concept of the average historical loss year—the purpose of which is to estimate the amount of premium that would be sufficient to pay for losses resulting from the type of loss years that previously occurred. According to FEMA, this estimate is used as one indicator in setting subsidized premium rates. FEMA also prepares a catastrophic loss year estimate, usually every other year, to provide Congress with an informal guide on the losses that could occur in the event of a storm that would have 0.1 percent chance of occurring in a given year (a 1 in a 1,000 year event). For more than a decade, FEMA has pursued a variety of strategies to reduce the number of repetitive loss properties, which are insurable buildings for which NFIP paid two or more claims of more than $1,000 within any rolling 10-year period. For example, NFIP funds three mitigation programs, the FMA program, the RFC program, and the SRL pilot program. The purpose of the FMA program is to fund activities that reduce or eliminate the long-term risk of flood damage to buildings and other structures insured by NFIP, such as property acquisition. The FMA program requires applicants to provide a portion of the funds for the proposed mitigation activities. If the applicant cannot secure funding for the proposed activities, FEMA may contribute 100 percent of the funding through the RFC program, which is specifically designed to mitigate repetitive loss properties (structures insured by NFIP that have had one or more claim payments for flood damages). Finally, the SRL program is designed for repetitive loss properties that have at least four claim payments of more than $5,000 each. See table 2 for more information on these mitigation programs. NFIP staff are located at FEMA headquarters in Washington, D.C., and 10 regional offices. Their functions include tasks for administering mitigation grant programs such as processing applications for grant funds and distributing the funds to eligible applicants. While FEMA establishes policies and procedures for NFIP, and has some staff dedicated to the management of the program, FEMA relies on contractors to administer key aspects of the program. Contractors collect NFIP data, market the program, and sell specific flood-insurance policies. Private insurance companies that participate in FEMA’s Write Your Own (WYO) program largely are responsible for insurance sales and claims adjustment. At the time of our work, there were four major ongoing contracts in place for NFIP, two of which we reviewed in this report. For example, FEMA awards a contract for a BSA, which is responsible for conducting financial and statistical reporting based upon data submissions from the 92 WYO companies, developing forms and information related to NFIP, and providing various data analyses. The BSA contract that was effective from September 2005 through December 2007 was valued at $38 million. FEMA also awards a contract for a DSA, which is responsible for selling and servicing standard and group insurance for policies that are not sold through WYOs. For that agent, the value of the contract in effect from September 2003 to September 2008 is $26.5 million. Two offices in FEMA are responsible for contracts and contract oversight (see fig. 1). A Contracting Officer in the Acquisition Operations Branch awards contracts related to NFIP and has responsibility for determining the adequacy of a contractor’s performance. The Program Management Office also has responsibilities for overseeing each contractor’s performance. A COTR is assigned to each contract. The COTR is authorized to act on behalf of the Contracting Officer to monitor the contract. However, the COTR is not authorized to make any contractual commitments or contractual changes on behalf of FEMA; any changes that the contractor deems may affect the contract, price, terms, or conditions are referred to the Contracting Officer in the Acquisition Operations Branch for action. Each COTR is assisted by monitors, who review and report on technical aspects of the contractor’s performance such as compliance with specific contract terms. Overall, data relating to the number of NFIP policies and amount of insurance coverage indicated upward trends for the period we reviewed and most losses were paid for hurricane-related claims, primarily due to losses from the 2005 hurricane season. The number of policies in force increased 36 percent and the average amount of coverage increased 78 percent from 1997 through 2006, consistent with average rising home values. The average premium per flood-insurance policy decreased 3 percent, but when analyzed by flood risk zone, average premiums increased in the high-risk coastal flood zone, from about $1,039 in 1997 to more than $1,400 in 2006. Over this period, total losses fluctuated from a low of $302 million in 2000 to a high of $2 billion in 2004 before reaching more than $17.7 billion in 2005. In 5 of the 10 years reviewed, less than 10 percent of losses paid out were linked to hurricane-related damage, and over the 10-year period cumulative losses for repetitive loss properties increased from $3.7 billion to $7.9 billion. FEMA’s estimates for average historical loss and catastrophic loss increased over this 10-year period. Finally, analysis by occupancy type shows more than 90 percent of policyholders owned residential properties (single and two-four family homes) or condominiums, and the majority of these properties were found in zones that FEMA designated as high risk. For additional statistical and trend data, see appendixes II-VI. The number of federal flood insurance policies in force increased from 3.96 million in 1997 to 5.40 million at the end of 2006, an increase of 36 percent. The number of policies increased from 1 to 6 percent each year from 1997 through 2005, but increased 12 percent the year after the Gulf Coast hurricanes (see fig. 2). While the number of policies in force has increased, a 2006 study commissioned by FEMA estimated that about half of the single-family homes in special flood hazard areas nationwide do not have flood insurance policies. Moreover, the study estimated that market penetration outside of special flood hazard areas is about 1 percent. The average amount of insurance coverage per policy in force increased from about $158,000 in 1997 to almost $214,000 at the end of 2006, an increase of 78 percent (see table 3). While we did not attempt to determine the reason that the average amount of insurance purchased increased, we note that this increase coincides with the increase in average home values over this period. The average annual premium per policy in force decreased from $489 in 1997 to $475 at the end of 2006, a decrease of almost 3 percent (see table 3). According to FEMA, the average premium has been influenced by changes in two types of flood zones. First, the average premium has been strongly influenced by changes in the moderate- to low-risk flood zones, where policies as a percentage of the total policies in force have increased greatly primarily due to increased sales of Preferred Risk Policies, FEMA’s lowest-cost flood insurance policy. Second, average annual premium per policy has been influenced by the steep increase in the average premium of high-risk coastal zone policies, but because they make up a smaller percent of policies in force, this increase did not drive up the average policy premium. As figure 3 illustrates, the average premium increased in the high-risk coastal zone the most (41 percent), from about $1,039 in 1997 to more than $1,400 at the end of 2006. With the exception of 2005, the amount that FEMA paid out in losses over the 10- year period fluctuated between a low of $302 million in 2000 and a high of $2 billion in 2004 (see fig. 4). Losses refer to the amount that FEMA paid to settle flood insurance claims and are recorded for the year in which the loss occurred. For example, if a flood damaged an insured property in 2005, but the claim was not paid until 2006, the amount paid out would be recorded as a 2005 loss. For 2005, as a result of the Gulf Coast hurricanes, FEMA paid out more than $17.7 billion in losses.