Ninety percent of all natural disasters in the United States involve flooding. Although homeowner insurance policies typically cover damage and losses from fire or theft and often from wind-driven rain, they do not cover flood damage because private insurance companies are largely unwilling to bear the economic risks associated with the potentially catastrophic impact of flooding. To provide some insurance protection for flood victims, as well as incentives for communities to adopt and enforce floodplain management regulations to reduce future flood damage, and to reduce the amount of federal disaster assistance payments, federal law established the NFIP in 1968. The legislative history of the National Flood Insurance Act recognized that insurance for existing buildings constructed before the NFIP was established would be extremely expensive because most of them were flood prone and did not comply with NFIP floodplain management standards that went into effect after they were built. The authorizing legislation included provisions for subsidized insurance rates to be made available for policies covering certain structures to encourage communities to join the program. Under the NFIP, the properties are generally referred to as Pre-FIRM (Flood Insurance Rate Map) buildings. As shown in figure 1, the NFIP has grown from about 1.5 million policies in 1978 to 5.1 million policies in July 2006. More than 20,100 communities nationwide participate in the NFIP. To participate in the program, communities agree to enforce regulations for land use and new construction in high-risk flood zones. In exchange, the NFIP studies and maps flood risks and makes federally backed flood insurance available to homeowners and other property owners. The maps identify special high-risk flood hazard areas, also known as the 100-year floodplain. These areas have a 1 percent chance of being flooded in any given year or at least a 26 percent chance of being flooded over the 30-year life of a typical home mortgage. Property owners in the special high-risk flood hazard areas whose communities participate in the NFIP and who have mortgages from federally regulated lenders are required to purchase flood insurance on their dwellings for at least the outstanding amount of their mortgages up to the maximum policy limit of $250,000. Optional lower-cost coverage is also available under the NFIP to protect homes in areas of low to moderate risk. To insure furniture and other personal property items against flood damage, homeowners may purchase separate NFIP personal property coverage. Maximum coverage amounts under the NFIP are $250,000 for dwellings and $100,000 for personal property. Accurate flood maps that identify the areas at greatest risk of flooding are the foundation of the NFIP. Flood maps must be periodically updated to assess and map changes in the boundaries of floodplains that result from community growth, development, erosion, and other factors that affect the boundaries of areas at risk of flooding. FEMA is in the midst of a multi- year effort to update the nation’s flood maps at a cost in excess of $1 billion. The maps are principally used by (1) more than 20,100 communities participating in the NFIP to adopt and enforce the program’s minimum building standards for new construction within the maps’ identified flood plains, (2) FEMA to develop flood insurance policy rates based on flood risk, and (3) federally regulated mortgage lenders to identify those property owners who are required to purchase federal flood insurance. The work of selling, servicing, and adjusting NFIP claims is carried out by thousands of private sector insurance agents and adjusters who work independently or are employed by insurance companies, adjusting firms, or designated subcontractors under the oversight and management of FEMA within the Department of Homeland Security. According to FEMA, about 95 percent of the NFIP policies in force are written by insurance agents who represent 88 private insurance companies that are paid fees for performing administrative services for the NFIP but do not have exposure for claims losses. The companies, called write-your-own companies, receive an expense allowance from FEMA of about one-third of the premium amounts for their services and are required to remit premium income in excess of this allowance to the National Flood Insurance Fund. The write-your-own companies also receive a percentage fee—about 3.3 percent of the incurred loss—for adjusting and settling claims. To settle claims, including those from Hurricanes Katrina and Rita, insurance companies work with certified flood adjusters. When flood losses are reported, the write-your-own companies assign a flood adjuster to assess damages. Flood adjusters may be independent or employed by an insurance or adjusting company. These adjusters are responsible for assessing damage, estimating losses, and submitting required reports, work sheets, and photographs to the insurance company, where the claim is reviewed and, if approved, processed for payment. Adjusters determine the price for repairs by reviewing estimates of costs prepared by policyholders and their contractors, consulting pricing software, and checking local prices for materials. Adjusters are paid for their services according to a standard fee schedule that is paid in addition to the fees paid to the insurance companies. Adjusters who work for an adjusting company share the fees with the company in exchange for adjusting assignments and administrative support. For example, for the average claims settlement amount for Hurricane Katrina, $94,803, the NFIP fee schedule authorizes payment of 3 percent of the claim amount, or $2,844, for adjusting services. For claims adjusted under the expedited claims processing procedures that were introduced after Hurricane Katrina, FEMA authorized payment of $750 for each claim plus an additional $400 if a site visit was required later in the claims adjustment process. Among the requirements for certification as a claims adjuster for the NFIP are at least 4 consecutive years of full-time property loss adjusting experience, attendance each year at an NFIP adjuster workshop, and demonstration of knowledge of the standard flood insurance policy by passing a written examination. In 2002, FEMA modified the minimum experience requirement to allow adjusters who do not have the requisite experience to work with a seasoned flood adjuster until the write-your- own company determines that the adjuster is able to work independently. Claimants who have questions or concerns about actions taken to resolve their claims have several avenues of recourse. Claims amounts may be adjusted after the initial settlement is paid if claimants submit documentation that some costs to repair or replace damaged items were higher than estimated. If a claimant is not satisfied with the adjuster’s answers or does not agree with decisions, the claimant or the write-your- own company can request FEMA’s program contractor for assistance in reaching a resolution by conducting a special assistance reinspection of the claim. Also, under provisions of the Flood Insurance Reform Act of 2004, claimants may contact FEMA directly to resolve concerns that were not addressed through the other channels. Finally, claimants may bring a claim in federal district court against the insurer. About 40 FEMA employees, assisted by about 170 contractor employees, are responsible for managing the NFIP. Management responsibilities include establishing and updating NFIP regulations, administering the National Flood Insurance Fund, analyzing data to actuarially determine flood insurance rates and premiums, and providing training to insurance agents and adjusters. In addition, FEMA and its program contractor are responsible for monitoring and overseeing the quality of the performance of the write-your-own companies to ensure that the NFIP is administered properly (i.e., appropriate claims settlements are made and program objectives are achieved). Hurricane Katrina, followed closely by Hurricane Rita, had a far-reaching impact on the financial solvency of the NFIP. By all measures, the flood losses were unprecedented in the history of the NFIP. FEMA projects that when all claims are settled, claims from NFIP policyholders who suffered flood damage from Hurricanes Katrina and Rita will total more than $20 billion. In contrast, the NFIP reports that from its inception in 1968 until August 2005, it paid a cumulative total of about $14.6 billion in claims. In the two largest single flood events prior to Hurricane Katrina, the NFIP reports that it processed a little more than 30,000 claims after a Louisiana flood in 1995 and Tropical Storm Allison in 2001. Figure 2 illustrates the magnitude of the flood losses in 2005 compared to losses over the history of the NFIP. Not only were the total cost and number of Hurricane Katrina and Rita claims far greater than in prior flood events, the amount paid per loss was also greater. As shown in figure 3, the average amounts paid per claim for Hurricanes Katrina and Rita flood damages—about $94,800 and $46,000, respectively—were much larger than average claims amounts reported as paid in the 3 prior years. Average paid losses for Hurricane Katrina were about three times the average paid losses reported by the NFIP for damage from flood events in 2004, including Hurricanes Charley, Ivan, Frances, and Jeanne in Florida and other East Coast and Gulf Coast states. As a result of the number and amount of claims for damages from the 2005 hurricane season and particularly Hurricane Katrina, losses to be paid far exceeded the NFIP’s existing borrowing authority with the U.S. Treasury. The borrowing authority was subsequently increased from $1.5 billion before Hurricane Katrina to $18.5 billion in November 2005, and then to $20.8 billion in March 2006 to pay claims and expenses from Hurricane Katrina and other 2005 hurricanes. As of September 30, 2006, FEMA’s debt to the Treasury was $16.9 billion. As we reported in January 2006, it is unlikely that FEMA will be able to repay a debt of this size and pay future claims in a program that generated premium income of about $2 billion in fiscal year 2005. To the extent possible, the NFIP is designed to pay operating expenses and flood insurance claims with premiums collected on flood insurance policies rather than by tax dollars.