Nearly 20,000 communities across the United States and its territories participate in the NFIP by adopting and agreeing to enforce state and community floodplain management regulations to reduce future flood damage. In exchange, the NFIP makes federally backed flood insurance available to homeowners and other property owners in these communities. Homeowners with mortgages from federally regulated lenders on property in communities identified to be in special high-risk flood hazard areas are required to purchase flood insurance on their dwellings. 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 must purchase separate NFIP personal property coverage. Although premium amounts vary according to the amount of coverage purchased and the location and characteristics of the property to be insured, the average yearly premium for a 1-year policy was $446, as of June 2005. The National Flood Insurance Act of 1968 established the NFIP. Congress mandated that the NFIP was to be implemented “based on workable methods of pooling risks, minimizing costs, and distributing burdens equitably among those who will be protected by flood insurance and the general public.” To make “flood insurance coverage available on reasonable terms and conditions to persons who have need for such protection,” the NFIP strikes a balance between the scope of the coverage provided and the premium amounts required to provide that coverage. Coverage limitations arise from statute and regulation, including FEMA’s standard flood insurance policy (SFIP), which is incorporated in regulation and issued to policyholders when they purchase flood insurance. To the extent possible, the program is designed to pay operating expenses and flood insurance claims with premiums collected on flood insurance policies rather than by tax dollars. However, as we have reported, the program, by design, is not actuarially sound because Congress authorized subsidized insurance rates to be made available for policies covering certain structures to encourage communities to join the program. As a result, the program does not collect sufficient premium income to build reserves to meet the long-term future expected flood losses. FEMA has statutory authority to borrow funds from the Treasury to keep the NFIP solvent. Following Hurricane Katrina in August 2005, legislation was enacted that increased FEMA’s borrowing authority from a total of $1.5 billion to $3.5 billion through fiscal year 2008. FEMA has exercised its borrowing authority four times in the last decade when losses exceeded available fund balances. For example, as of August 2005, FEMA had borrowed $300 million in 2005 to pay an estimated $1.8 billion on flood insurance claims resulting from the 2004 hurricane season. As it has done when it has borrowed in the past, FEMA intends to repay these funds with interest, according to agency officials, however, the officials had not yet estimated NFIP claims amounts anticipated for flood damage from Hurricane Katrina in August 2005. As shown in figure 1, the number of NFIP policies in force has grown steadily over the past 27 years to a total of about 4.6 million policies in force as of May 31, 2005. As shown in figure 2, NFIP claims payments have varied widely by year over the life of the program depending on the number and severity of flood events; however, as the number of policies in force increased (see fig. 1), the claims payments have trended upward. Claims paid in 2004 were the highest amount in the history of the NFIP—more than $1.9 billion for all flood events. Tables 1 and 2 provide information on payments by flood event in 2003 and 2004. In 2003, the NFIP paid about $478 million on more than 21,000 claims from 5 named flood events and an additional $287 million on 15,232 claims filed for damage from unnamed floods. Of those claims, more than half resulted from damage from Hurricane Isabel in six states and Washington, D.C. Hurricane Isabel was a category 5 hurricane at its peak with sustained winds in excess of 165 miles per hour. It made landfall on September 18, 2003, near Drum Inlet, North Carolina, as a category 2 storm. As it traveled across Virginia, Maryland, and Pennsylvania, Isabel weakened to a tropical storm, but its heavy rains caused storm surge flooding. For 2004 flood events, as of April 30, 2005, the NFIP paid more than $1.9 billion on more than 52,785 NFIP claims from storms including Hurricanes Charley, Frances, Ivan, and Jeanne that caused major damage in Florida and other East Coast and Gulf Coast states. The work of selling, servicing, and adjusting claims on NFIP policies is carried out by thousands of private-sector insurance agents and adjusters who work independently or are employed by insurance companies or their designated subcontractors. According to FEMA, about 95 percent of the NFIP policies in force are written by insurance agents who represent 95 private insurance companies that issue policies and adjust flood claims in their own names. 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. The insurance companies share the FEMA expense allowance and fee for claims settlements with insurance agents who sell and service the policies, a vendor, or subcontractor, if the company has subcontracted with one to handle all or part of its flood insurance business, and flood claims adjusters. Figure 3 shows the key participants in the process: a homeowner; an insurance agent, an insurance company, and, in many cases, a flood insurance vendor, or subcontractor, to assist with aspects of the NFIP business; and a flood adjuster. FEMA and its program contractor manage and oversee the NFIP and the National Flood Insurance Fund accounts into which premiums are deposited and claims and expenses paid. Insurance agents under contract to one or more write-your-own insurance company are the main point of contact for most policyholders to purchase an NFIP policy, seek information on coverage, or file a claim. In order to sell flood insurance, agents must meet basic state insurance licensing requirements. Based on information the insurance agents submit, the insurance companies issue policies, collect premiums from policyholders, deduct an allowance for expenses from the premium, and remit the balance to the National Flood Insurance Fund. In some cases, insurance companies hire subcontractors—flood insurance vendors—to conduct some or all of the day-to-day processing and management of flood insurance policies. Insurance companies work with certified flood adjusters to settle NFIP claims. When flood losses occur, policyholders contact their insurance agents to report the loss. The agent then contacts the write-your-own company to report the loss and it assigns a flood adjuster to assess damages. Flood adjusters may be independentor 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 prices for repairs by reviewing estimates of costs prepared by policyholders and their contractors, consulting pricing software and checking local prices for materials. Claims amounts may be adjusted after the initial settlement is paid if claimants submit documentation that some costs were higher than estimated. An adjuster must have a least 4 consecutive years of full-time property loss adjusting experience and have attended an adjuster workshop, among other requirements, to be certified by FEMA to work on NFIP claims,. To keep their certifications current, adjusters are required to take a 1-day refresher workshop each year and pass a written examination testing their knowledge each year. Flood claims adjusters employed by write-your-own companies are paid salaries and sometimes bonuses for working long hours after major flood events from a percentage fee—about 3.3 percent of the incurred loss, which the NFIP pays write-your-own companies for settling claims, according to an NFIP official. Independent adjusters who work for multiple insurance companies are also paid based on a standard NFIP fee schedule that varies adjuster compensation according to the size of the claim. For example, the fee schedule pays $1,000 for a claim settlement of between $25,000 and $35,000. If the independent adjuster is registered with an independent adjusting firm, a portion of the fee goes to the adjusting firm. 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 offering 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 assure that the NFIP is administered properly. The amount of insurance coverage available to homeowners under the NFIP is limited, based on requirements set forth in statute and regulation. First, by statute, there are limitations on the amount of insurance coverage homeowners may purchase for their dwellings and personal property. In addition, FEMA has further defined the general terms and conditions of flood insurance coverage pursuant to a broad grant of congressionally delegated authority, issuing regulations that include a SFIP. Because of these statutory and regulatory limitations, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing damaged property. In terms of statutory limitations, there is a ceiling on the amount of insurance coverage available for single-family homes, which is $250,000. Because of this statutory ceiling, homes that could sustain more than $250,000 in damage cannot be insured to reflect full replacement costs.