Since the inception of NFIP in 1968, FEMA 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. 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. NFIP has three components: (1) the provision of flood insurance; (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 through the program. Additionally, communities with Special Flood Hazard Areas (SFHA)—areas at high risk for flooding— must participate in NFIP to be eligible for any form of disaster assistance loans or grants for acquisition or construction purposes in connection with a flood. 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. As of May 2013, about 22,000 communities voluntarily participate in NFIP. Potential policyholders can purchase flood insurance that covers both buildings and contents for residential and commercial properties. NFIP’s maximum coverage limit for single-family residential policyholders is $250,000 per unit for buildings and $100,000 per unit for contents. For commercial policyholders, the maximum coverage is $500,000 per unit for buildings and $500,000 for contents. Current law prohibits federally regulated lenders, federal agency lenders, and government-sponsored enterprises for housing from making loans for real estate in SFHAs where the community is participating in NFIP, unless For structures deemed not to the property is covered by flood insurance.be in SFHAs—that is, that have moderate to low risk of flooding—the purchase of flood insurance is voluntary. NFIP studies and maps flood risks, assigning flood zone designations from high to low depending on the risk of flooding. SFHAs are high-risk areas that have a 1 percent or greater annual chance of flooding and are designated as zones A, AE, V, or VE (table 1). Areas designated as V or VE are located along the coast. Areas with a moderate-to-low risk for flooding are designated as zones B, C, or X. Areas where analysis of the flood risk has not been conducted are designated as D zones. NFIP offers two types of flood insurance premiums: subsidized and full- risk. Subsidized rates are not based on actual flood risk. According to FEMA, subsidized rates represent only about 40 percent to 45 percent of rates that reflect full flood risk. (We discuss how FEMA determines rates in more detail later in this report.) The type of policy and the subsequent rate a policyholder pays depend on several property characteristics—for example, whether the structure was built before or after a community’s FIRM had been issued and the location of the structure in the floodplain. Structures built after a community’s FIRM was published must be built to meet FEMA building standards and pay full-risk rates. Some communities may implement activities that exceed the minimum standards. Prior to the Biggert-Waters Act, subsidized policies accounted for about 21 percent of all NFIP policies, while those with full-risk premiums accounted for the remaining 79 percent. While the percentage of subsidized policies has decreased since the program was established, the number of these policies has stayed fairly constant (see fig. 1). As communities were mapped and joined NFIP, new subsidized policies were added. As shown in figure 2, the percentage change in subsidized policies generally followed the same trend as the percentage change in total policies. Even with highly discounted rates, subsidized premiums are, on average, higher than full-risk premiums. The premiums are higher because subsidized pre-FIRM structures generally are more prone to flooding (that is, riskier) than other structures. In general, pre-FIRM properties were not constructed according to the program’s building standards or were built without regard to base flood elevation—the level relative to mean sea level at which there is a 1 percent or greater chance of flooding in a given year. For example, the average annual subsidized premium with October 2011 rates for pre-FIRM subsidized properties located in zone A was about $1,200, while the average annual premium for post-FIRM properties in the same zone paying full-risk rates was about $500. Post- FIRM structures have been built to flood-resistant building codes or mitigation steps have been taken to reduce flood risks; thus, they are generally less flood-prone than pre-FIRM properties. The authority for subsidized rates was 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. Subsidies were intended to be only part of an interim solution to long-term adjustments in land use. Congress also authorized the use of subsidized premiums because charging rates that fully and accurately reflected flood risk would be a burden to some property owners. Table 2 shows the sources of legislative authority for various subsidized premium rates. Since NFIP was established, Congress has enacted legislation to strengthen certain aspects of the program. The Flood Disaster Protection Act of 1973 made the purchase of flood insurance mandatory for properties in SFHAs that are secured by mortgages from federally regulated lenders. This requirement expanded the overall number of insured properties, including those that qualified for subsidized premiums. The National Flood Insurance Reform Act of 1994 expanded the purchase requirement for federally backed mortgages on properties located in an SFHA. The Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 established a pilot program to mitigate properties that continually suffered from severe repeated flood losses and offer grants for properties with repetitive insurance claims.loss” properties who refuse to accept any offer for mitigation actions face higher premiums. Owners of these “repetitive More recently, in July 2012, Congress passed the Biggert-Waters Act.The act extended the authorization for NFIP for 5 years and made reforms to NFIP that include eliminating existing subsidies for any residential property which is not a primary residence; any severe repetitive loss property; any property that has incurred flood-related damage in which the cumulative amounts of payments under this title equaled or exceeded the fair market value of such property; any business property; and any property that has experienced or sustained substantial damage exceeding 50 percent of the fair market value or substantial improvement exceeding 30 percent of the fair market value. Rates that fully reflect flood risk for the types of properties listed previously are to be phased in over several years—with increases of 25 percent each year—until the average risk premium rate for such properties is equal to the average of the risk premium rates for properties within any single risk classification. Furthermore, according to the Biggert-Waters Act, other properties will no longer qualify for subsidies under the following circumstances: any NFIP policy that has lapsed in coverage, as a result of the deliberate choice of the policyholder; and any prospective insured who refuses to accept any offer for mitigation assistance (including an offer to relocate) following a major disaster. The act also stated that no new subsidies would be provided to any property not insured by NFIP as of the date the act was enacted; any property purchased after the date of enactment of the act. (Thus, property sales trigger elimination of subsidies.) The Biggert-Waters Act also requires FEMA to adjust rates to accurately reflect the current risk of flood to properties when an area’s flood map is changed, subject to any other statutory provision in chapter 50 of Title 42 of the United States Code. FEMA is determining how this provision will affect properties that were “grandfathered” into lower rates. In addition, the act allows insurance premium rate increases of 20 percent annually (previously capped at 10 percent), establishes minimum deductibles, and requires FEMA to include the losses from catastrophic years in determining premiums that are based upon “average historical loss year.” It also incorporates a definition of “severe repetitive loss property” for single-family properties and required FEMA to establish a reserve fund, among other things. The Biggert-Waters Act eliminated subsidies on approximately 438,000 policies, and with the continuing implementation of the act, more of the subsidies on the approximately 715,000 remaining policies are expected to be eliminated over time. In terms of characteristics, the geographic distribution of remaining subsidized policies was similar to the distribution of all NFIP policies. Other characteristics we analyzed—indicators of home value and owner income—were different for the policies that continue to qualify for subsidized premium rates compared to those with full-risk rates. In particular, counties with higher home values and income levels tended to have larger percentages of remaining subsidized policies compared to those with full-risk rates. We estimated that the Biggert-Waters Act eliminated subsidies for approximately 438,000 policies, and that about 715,000 policies continue to qualify for subsidized premium rates (remaining subsidized policies). Before the act, subsidized policies represented about 21 percent of all policies and nearly all subsidized policies were in the high risk areas. After the initial reduction of subsidies, the approximately 715,000 policies that would continue to receive subsidized rates represent about 13 percent of all NFIP policies and 21 percent of all SFHA policies.elimination affected various property types, including nonprimary residences, businesses, and severe repetitive loss properties.