Flooding is the most widespread natural hazard in the country, affecting virtually every state. From February 1978 through August 2008, there were 90 significant flood events. Since its inception in 1968, NFIP 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 event. 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. The authority for subsidized rates was therefore 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, with the intent that the subsidies would be only a part of an interim solution to long-term adjustments in land use. The first $35,000 of any subsidized policy for a one-to-four family residential property, and the first $100,000 of any other residential property, receives the NFIP subsidy; amounts of insurance in excess of $35,000 and $100,000, respectively, are charged full-risk rates. On average, the premium for a subsidized policy in a high-risk flood zone is higher than the premium on a full-risk policy in the same zone because properties with full-risk rates have either been built to newer flood-resistant building codes or have been mitigated to reduce flood risks and thus are generally less flood prone than properties that are eligible for subsidized rates. For example, the average annual subsidized premium in 2007 for properties located in the highest-risk zones was about $880, while the average annual premium for properties in the same zones paying full-risk rates was about $379. The program has three components: (1) the provision of flood insurance, as mentioned above; (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. 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. Currently, more than 20,000 communities participate in NFIP. FIRMs, which show the level of flood risk in various areas and assign a flood zone designation to each area based on its risk level, are used to set premium rates, among other things. The risk levels range from high to low risk depending on the risk of flooding. Structures used to secure loans from a federally regulated lending institution that are deemed high- risk or high-risk coastal are required to have flood insurance. For structures deemed to have moderate to low risk of flooding, the purchase of flood insurance is voluntary. FIRMs are also used to determine whether a structure is eligible for rate subsidies. Structures built after a community’s FIRM was published must be built to NFIP building standards and pay full-risk rates. Communities also use the maps to establish minimum building standards designed to reduce the impact of flooding, and lenders use them to identify which property owners are required to purchase flood insurance. Once communities join NFIP and are mapped, structures that were built before the FIRM—pre-FIRM structures—become eligible for subsidized rates. Pre-FIRM structures generally are at a high risk of flooding because they are located below the area’s base flood elevation (BFE), which is the computed elevation to which floodwater is anticipated to rise during a flood that is estimated to have a 1 percent chance of occurring annually. To lessen the flood risk level, pre-FIRM structures can be mitigated. FEMA recognizes the following steps for mitigating residential pre-FIRM structures: (1) elevation of structures to or above their BFE, (2) relocation of structures to a higher area, or (3) demolition of structures. Mitigation of pre-FIRM properties is voluntary unless a property is substantially damaged or the owner undertakes substantial improvement. In these cases, the structure must be repaired or renovated to meet the same standards as new construction. Unmitigated existing pre-FIRM properties are eligible for subsidized rates for the life of the properties. As owners sell their subsidized properties, the new owners also become eligible for the subsidized rates, and subsidies apply even if the owners discontinue their insurance coverage and do not purchase insurance again until years later. Mitigation activities have always been part of NFIP, but it was not until the 1988 passage of the Robert T. Stafford Disaster Relief and Emergency Assistance Act that FEMA received the authority to fund mitigation projects for all types of disasters, including flooding. Later, the National Flood Insurance Reform Act of 1994 gave FEMA the authority to carry out a flood-only mitigation assistance program to help policyholders reduce the risk of flood damage to individual properties. In 2004, the Bunning- Bereuter-Blumenauer Flood Insurance Reform Act of 2004 authorized two additional grant programs specifically for properties that experienced repetitive flooding and mandated increased premiums if property owners refused to mitigate. Each program has different types of requirements, purposes, and appropriations. FEMA uses a cost-benefit analysis to determine the cost-effectiveness of proposed mitigation projects and to rank the projects in order of priority. Policyholders can also buy Increased Cost of Compliance (ICC) Coverage—a component of the standard flood insurance policy—which provides up to $30,000 above the insured policy amount for mitigating flood-damaged properties that meet certain criteria. Table 1 summarizes the five mitigation programs and ICC. NFIP’s inventory of properties receiving subsidized premium rates has grown over the past 20 years, hindering the program’s ability to pay claims without borrowing from the Treasury. While the percentage of policies receiving subsidies has dropped since 1978 to 23 percent of all policies as of December 2007, the number of subsidized properties has continued to increase. In addition, despite earlier expectations that the number of subsidized properties would decrease over time, for several reasons the number of policies with subsidized rates is at its highest point since 1980. Further, because of current low NFIP participation rates, there appears to be room for substantial growth in the number of NFIP policies, many of which are likely to receive subsidized premium rates. The properties receiving subsidized rates have been a financial burden on the program because of their relatively high loss experience and subsidized rates that do not reflect the actual risk of flooding. Subsidized properties also account for the majority of repetitive loss properties—properties that have experienced multiple flood losses—which make up around 1 percent of the total policies but 30 percent of the claims dollars paid. While the percentage of residential subsidized properties has dropped over time, the number of subsidized properties has fluctuated since NFIP began but has grown fairly consistently over the last 20 years (see fig. 1). Specifically, the percentage of residential subsidized policies has dropped since the early years of the program from 77 percent in 1978 to 23 percent of all policies as of December 2007. But the number of policies with subsidized rates is at its highest point since 1978, despite earlier expectations that the number of subsidized properties would decrease substantially. According to FEMA, in the early years of the program it used subsidies to encourage participation in the program, and because of the high number of pre-FIRM structures, the number of policies with subsidized rates reached a high of about 1.09 million in 1980. Subsequently, between 1980 and 1985, aggressive annual rate increases for subsidized policies corresponded with a reduction in the number of subsidized policies, which fell to a low of about 705,000 in 1985. However, the number of policies with subsidized rates has increased nearly every year since 1986, reaching a high of almost 1.13 million in 2007. A number of factors help explain this increase. Specifically, according to FEMA, there has been an increase in the number of mortgages with mandatory purchase requirements for flood insurance—that is, mortgages on structures that are located in SFHAs. The Flood Disaster Protection Act of 1973 made flood insurance mandatory for mortgages from federally regulated lenders on buildings located in SFHAs. These lenders are required to check the current FIRM to determine whether the structure is in the SFHA at the time a mortgage is made. FEMA officials also told us that since the 1973 act, the increase in the number of mortgages subject to the flood insurance requirement, coupled with greater enforcement of this requirement by financial regulators in recent years, had resulted in an increased number of flood insurance policies, including policies with subsidized rates. According to FEMA, many of these mortgages were on buildings that were constructed before the most recent FIRMs were in place, making the policies eligible for the subsidized rates. Additionally, the populations of coastal communities have grown steadily over the last 28 years. These communities have relatively high concentrations of properties in SFHAs that are required to have flood insurance, including properties that qualified for subsidized premiums. Moreover, FEMA said that the longer-than-expected life of structures eligible for subsidies has made decreasing the subsidized property inventory more difficult. Some in Congress, at the time NFIP was created, assumed that buildings would be torn down as they aged and any new structures, which would have to meet more strict building codes, would be ineligible for subsidized rates. However, according to FEMA, existing structures have been demolished at a much lower rate than expected and reductions in the overall subsidized property inventory have not occurred. Moreover, some older structures have been renovated and thus may retain their subsidies.