The National Flood Insurance Act of 1968 established NFIP as an alternative to providing direct assistance after floods. NFIP, which provides government-guaranteed flood insurance to homeowners and businesses, was intended to reduce the federal government’s escalating costs for repairing flood damage after disasters. FEMA, which is within the Department of Homeland Security (DHS), is responsible for the oversight and management of NFIP. Since NFIP’s inception, Congress has enacted several pieces of legislation to strengthen the program. The Flood Disaster Protection Act of 1973 made flood insurance mandatory for owners of properties in vulnerable areas who had mortgages from federally regulated lenders and provided additional incentives for communities to join the program. The National Flood Insurance Reform Act of 1994 strengthened the mandatory purchase requirements for owners of properties located in special flood hazard areas (SFHA) with mortgages from federally regulated lenders. Finally, the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 authorized grant programs to mitigate properties that experienced repetitive flooding losses. Owners of these repetitive loss properties who do not mitigate may face higher premiums. To participate in NFIP, communities agree to enforce regulations for land use and new construction in high-risk flood zones and to adopt and enforce state and community floodplain management regulations to reduce future flood damage. Currently, more than 20,000 communities participate in NFIP. NFIP has mapped flood risks across the country, assigning flood zone designations based on risk levels, and these designations are a factor in determining premium rates. NFIP offers two types of flood insurance premiums: subsidized and full risk. The National Flood Insurance Act of 1968 authorizes NFIP to offer subsidized premiums to owners of certain properties. These subsidized premium rates, which represent about 40 to 45 percent of the cost of covering the full risk of flood damage to the properties, apply to about 22 percent of all NFIP policies. To help reduce or eliminate the long-term risk of flood damage to buildings and other structures insured by NFIP, FEMA has used a variety of mitigation efforts, such as elevation, relocation, and demolition. Despite these efforts, the inventories of repetitive loss properties—generally, as defined by FEMA, those that have had two or more flood insurance claims payments of $1,000 or more over 10 years—and policies with subsidized premium rates have continued to grow. In response to the magnitude and severity of the losses from the 2005 hurricanes, Congress increased NFIP’s borrowing authority from the Treasury to $20.8 billion. We have previously identified four public policy goals for evaluating the federal role in providing natural catastrophe insurance: charging premium rates that fully reflect actual risks, limiting costs to taxpayers before and after a disaster, encouraging broad participation in natural catastrophe insurance encouraging private markets to provide natural catastrophe insurance. Taking action to achieve these goals would benefit both NFIP and the taxpayers who fund the program but would require trade-offs. I will discuss the key areas that need to be addressed, actions that can be taken to help achieve these goals, and the trade-offs that would be required. As I have noted, NFIP currently does not charge all program participants rates that reflect the full risk of flooding to their properties. First, the act requires FEMA to charge many policyholders less than full-risk rates to encourage program participation. While the percentage of subsidized properties was expected to decline as new construction replaced subsidized properties, today nearly one out of four NFIP policies is based on a subsidized rate. Second, FEMA may “grandfather” properties that are already in the program when new flood maps place them in higher-risk zones, allowing some property owners to pay premium rates that apply to the previous lower-risk zone. FEMA officials told us that they made the decision to allow grandfathering because of external pressure to reduce the effects of rate increases, and considerations of equity, ease of administration, and the goals of promoting floodplain management. Similarly, FEMA recently introduced a new rating option called the Preferred Risk Policy (PRP) Eligibility Extension that in effect equals a temporary grandfathering of premium rates. While these policies typically would have to be converted to more expensive policies when they were renewed after a new flood map came into effect, FEMA has extended eligibility for these lower rates. Finally, we have also raised questions about whether NFIP’s full-risk rates reflect actual flood risks. Because many premium rates charged by NFIP do not reflect the full risk of loss, the program is less likely to be able to pay claims in years with catastrophic losses, as occurred in 2005, and may need to borrow from Treasury to pay claims in those years. Increasing premium rates to fully reflect the risk of loss—including the risk of catastrophic loss—would generally require reducing or eliminating subsidized and grandfathered rates and offers several advantages. Specifically, increasing rates could: result in premium rates that more fully reflected the actual risk of loss; decrease costs for taxpayers by reducing costs associated with postdisaster borrowing to pay claims; and encourage private market participation, because the rates would more closely approximate those that would be charged by private insurers. However, eliminating subsidized and grandfathered rates and increasing rates overall would increase costs to some homeowners, who might then cancel their flood policies or elect not to buy them at all. According to FEMA, subsidized premium rates are generally 40 to 45 percent of rates that would reflect the full risk of loss. For example, the projected average annual subsidized premium was $1,121 as of October 2010, discounted from the $2,500 to $2,800 that would be required to cover the full risk of loss. In a 2009 report, we also analyzed the possibility of creating a catastrophic loss fund within NFIP (one way to help pay for catastrophic losses). Our analysis found that in order to create a fund equal to 1 percent of NFIP’s total exposure by 2020, the average subsidized premium—which typically is in one of the highest-risk zones—would need to increase from $840 to around $2,696, while the average full-risk premium would increase from around $358 to $1,149. Such steep increases could reduce participation, either because homeowners could no longer afford their policies or simply deemed them too costly, and increase taxpayer costs for postdisaster assistance to property owners who no longer had flood insurance. However, a variety of actions could be taken to mitigate these disadvantages. For example, subsidized rates could be phased out over time or not transferred with the property when it is sold. Moreover, as we noted in our past work, targeted assistance could be offered to those most in need to help them pay increased NFIP premiums. This assistance could take several forms, including direct assistance through NFIP, tax credits, or grants. In addition, to the extent that those who might forego coverage were actually required to purchase it, additional actions could be taken to better ensure that they purchased policies. According to RAND Corporation, in SFHAs, where property owners with loans from federally insured or regulated lenders are required to purchase flood insurance, as few as 50 percent of the properties had flood insurance in 2006. In order to reduce expenses to taxpayers that can result when NFIP borrows from Treasury, NFIP needs to be able to generate enough in premiums to pay its claims, even in years with catastrophic losses—a goal that is closely tied to that of eliminating subsidies and other reduced rates. Since the program’s inception, NFIP premiums have come close to covering claims in average loss years but not in years of catastrophic flooding, particularly 2005. Unlike private insurance companies, NFIP does not purchase reinsurance to cover catastrophic losses. As a result, NFIP has funded such losses after the fact by borrowing from Treasury. As we have seen, such borrowing exposes taxpayers to the risk of loss. NFIP still owes approximately $17.8 billion of the amount it borrowed from Treasury for losses incurred during the 2005 hurricane season. The high cost of servicing this debt means that it may never be repaid, could in fact increase, and will continue to affect the program’s solvency and be a burden to taxpayers. Another way to limit costs to taxpayers is to decrease the risk of losses by undertaking mitigation efforts that could reduce the extent of damage from flooding. FEMA has taken steps to help homeowners and communities mitigate properties by making improvements designed to reduce flood damage—for example, elevation, relocation, and demolition. As we have reported, from fiscal year 1997 through fiscal year 2007, nearly 30,000 properties were mitigated using FEMA funds. Increasing mitigation efforts could further reduce flood damage to properties and communities, helping to put NFIP on a firmer financial footing and reducing taxpayers’ exposure. FEMA has made particular efforts to address the issue of repetitive loss properties through mitigation. These properties account for just 1 percent of NFIP’s insured properties but are responsible for 25 to 30 percent of claims. Despite FEMA’s efforts, the number of repetitive loss properties increased from 76,202 in 1997 to 132,100 in March 2011, or by about 73 percent. FEMA also has some authority to raise premium rates for property owners who refuse mitigation offers in connection with the Severe Repetitive Loss Pilot Grant Program. In these situations, FEMA can initially increase premiums to up to 150 percent of their current amount and may raise them again (by up to the same amount) on properties that incur a claim of more than $1,500. However, FEMA cannot increase premiums on property owners who pay the full-risk rate but refuse a mitigation offer, and in no case can rate increases exceed the full- risk rate for the structure. In addition, FEMA is not allowed to discontinue coverage for those who refuse mitigation offers. As a result, FEMA is limited in its ability to compel owners of repetitive loss properties to undertake flood mitigation efforts. Mitigation offers significant advantages.