Federal Emergency Management Agency: Improvements Needed to	 
Enhance Oversight and Management of the National Flood Insurance 
Program (18-OCT-05, GAO-06-119).				 
                                                                 
In the wake of Hurricane Isabel in 2003, GAO was mandated by the 
Flood Insurance Reform Act of 2004 to report on issues related to
the National Flood Insurance Program (NFIP) and its oversight and
management by the Federal Emergency Management Agency (FEMA).	 
Private insurance companies sell NFIP policies and adjust claims,
while a private program contractor helps FEMA administer the	 
NFIP. To address this mandate, this report assesses (1) the	 
statutory and regulatory limitations on coverage for homeowners  
under the NFIP; (2) FEMA's role in monitoring and overseeing the 
NFIP; (3) FEMA's response to concerns regarding NFIP payments for
Hurricane Isabel claims; and (4) the status of FEMA's		 
implementation of provisions of the Flood Insurance Reform Act of
2004. Although impacts from Hurricane Katrina were not part of	 
the report's scope, GAO recognizes that this disaster presents	 
the NFIP with unprecedented challenges. 			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-119 					        
    ACCNO:   A39717						        
  TITLE:     Federal Emergency Management Agency: Improvements Needed 
to Enhance Oversight and Management of the National Flood	 
Insurance Program						 
     DATE:   10/18/2005 
  SUBJECT:   Flood insurance					 
	     Insurance claims					 
	     Insurance regulation				 
	     Monitoring 					 
	     Program management 				 
	     Regulatory agencies				 
	     Reporting requirements				 
	     Property damage claims				 
	     FEMA National Flood Insurance Program		 
	     Hurricane Isabel					 

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GAO-06-119

United States Government Accountability Office

GAO

                       Report to Congressional Committees

October 2005

FEDERAL EMERGENCY MANAGEMENT AGENCY

 Improvements Needed to Enhance Oversight and Management of the National Flood
                               Insurance Program

GAO-06-119

[IMG]

October 2005

FEDERAL EMERGENCY MANAGEMENT AGENCY

Improvements Needed to Enhance Oversight and Management of the National Flood
Insurance Program

  What GAO Found

The amount of insurance coverage available to homeowners under the NFIP is
limited by requirements set forth in statute and FEMA's regulations, which
include FEMA's standard flood insurance policy. As a result of these
limitations, insurance payments to claimants for flood damage may not
cover all of the costs of repairing or replacing flood-damaged property.
For example, homes that could sustain more than $250,000 in damage cannot
be insured to their full replacement cost, thus limiting claims to this
statutory ceiling. In addition, NFIP policies cover only direct physical
loss by or from flood. Therefore, losses resulting primarily from a
preexisting structural weakness in a home or losses resulting from events
other than flood, such as windstorms, are not covered by NFIP policies.

To meet its monitoring and oversight responsibilities, FEMA is to conduct
periodic operational reviews of the 95 private insurance companies that
participate in the NFIP, and FEMA's program contractor is to check the
accuracy of claims settlements by doing quality assurance reinspections of
a sample of claims adjustments for every flood event. FEMA did not use a
statistically valid method for sampling files to be reviewed in these
monitoring and oversight activities. As a result, FEMA cannot project the
results of these reviews to determine the overall accuracy of claims
settled for specific flood events or assess the overall performance of
insurance companies and their adjusters in fulfilling responsibilities for
the NFIP- actions necessary for FEMA to have reasonable assurance that
program objectives are being achieved.

In the months after Hurricane Isabel, FEMA took steps intended to address
concerns that arose from that flood event. In April 2004, FEMA established
a task force to review claims settlements from Hurricane Isabel claimants.
As a result of task force reviews, almost half of the 2,294 policyholders
who sought a review received additional payments. The additional payment
amount averaged $3,300 more than the original settlement-for a total
average settlement of about $32,400 per claimant. In most cases, the
additional funds were for repairing or replacing buildings or property not
included in the initial adjuster's loss determination, or to cover
additional material or labor costs.

FEMA has not yet fully implemented provisions of the Flood Insurance
Reform Act of 2004 requiring the agency to provide policyholders with a
flood insurance claims handbook that meets statutory requirements, to
establish a regulatory appeals process, and to ensure that insurance
agents meet minimum NFIP education and training requirements. The
statutory deadline for implementing these changes was December 30, 2004.
Efforts to implement the provisions are under way, but have not yet been
completed. FEMA has not developed plans with milestones for assigning
accountability and projecting when program improvements will be made, so
that improvements are in place to assist victims of future flood events.

United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
Due to Statutory and Regulatory Limitations, NFIP Payments May

Not Cover All Costs to Repair or Replace Flood-Damaged Property

Monitoring and Oversight of NFIP Identifies Specific Problems, but Does
Not Provide Comprehensive Information on Overall Program Performance

FEMA Task Force Closed about Half of Hurricane Isabel Claims Reviewed with
Additional Payments FEMA Has Not Fully Implemented NFIP Program Changes

Mandated by the Flood Insurance Reform Act of 2004 Conclusions
Recommendations for Executive Action Agency Comments and Our Evaluation

                                       1

                                      4 8

16

22

28

32 34 35 35

Appendix I Scope and Methodology

Appendix II	Comments from the Federal Emergency Management Agency

Appendix III GAO Contact and Staff Acknowledgements

  Tables

Table 1: NFIP Claims Payments on Flood Events in 2003 12 Table 2: NFIP
Claims Payments on Flood Events in 2004 12 Table 3: Total Number of
Operational Reviews of Write-Your-Own

Companies Conducted by FEMA (January 2000 to August

2005) 25

  Figures

Figure 1: NFIP Policies in Force, 1978-2005 10 Figure 2: Total NFIP Payments to
                            Claimants, 1972-2004 11

Figure 3: Key Participants in the NFIP 14 Figure 4: Disposition of
Hurricane Isabel Claims Reviewed by the FEMA Task Force 29

Figure 5: Comparison of Claims Settlement Amounts for Hurricane Isabel
Claims Reviewed by the Task Force and All Claims Closed with Payment
(2002-2004) 31

Abbreviations

FEMA Federal Emergency Management Agency
NFIP National Flood Insurance Program
OMB Office of Management and Budget
SFIP Standard Flood Insurance Policy

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.

United States Government Accountability Office Washington, DC 20548

October 18, 2005

The Honorable Richard Shelby
Chairman
The Honorable Paul Sarbanes
Ranking Minority Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

The Honorable Michael Oxley
Chairman
The Honorable Barney Frank
Ranking Minority Member
Committee on Financial Services
House of Representatives

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,
Congress established the National Flood Insurance Program (NFIP) in
1968. NFIP coverage is available to owners and occupants of insurable
property in flood-prone areas.1 The Federal Emergency Management
Agency (FEMA) within the Department of Homeland Security is

1 Our report focuses on homeowners' NFIP coverage; NFIP coverage is also
available for other structures such as apartment buildings, schools,
churches, businesses, cooperative associations, and condominium
associations.

responsible for, among other things, oversight and management of the

2

NFIP.

To implement the NFIP, FEMA principally relies on private insurance
companies that sell flood insurance policies and adjust claims from
policyholders after floods occur. FEMA is assisted in its management and
oversight functions by a program contractor. As of August 2005, the NFIP
had about 4.6 million policyholders in about 20,000 communities. As of
August 2005, the program had paid a total of about $14.6 billion in
insurance claims financed primarily by policyholder premiums. Without the
NFIP, the costs to repair damage covered by these claims would otherwise
have been paid through taxpayer-funded disaster relief or by the flood
victims themselves.

Policyholders' concerns regarding the processing and payments of NFIP
claims after Hurricane Isabel in 2003 focused congressional attention on
the program. Specifically, some policyholders cited inadequate payments
for flood damages they incurred and a lack of clarity regarding their
insurance policies and the procedures for filing and adjusting claims for
flood damage.

The Flood Insurance Reform Act of 2004,3 which mandated that FEMA
implement new processes and requirements for selling NFIP policies and
adjusting flood insurance claims, also mandated that we study and report
on issues related to the processing of flood insurance claims and FEMA's
oversight and management of the program. To address this mandate, this
report assesses (1) the statutory and regulatory limitations on
homeowners' coverage under the NFIP; (2) FEMA's role in monitoring and
overseeing the NFIP; (3) FEMA's response to concerns regarding NFIP
payments for claims related to Hurricane Isabel; and (4) the status of
FEMA's implementation of provisions of the Flood Insurance Reform Act of
2004.

2 In March 2003, FEMA and its approximately 2,500 staff became part of the
Department of Homeland Security (DHS). Most of FEMA-including its
Mitigation Division, which is responsible for administering the NFIP-is
now part of the department's Emergency Preparedness and Response
Directorate. However, FEMA has retained its name and individual identity
within the department. The Secretary of DHS has proposed a reorganization
of DHS in which FEMA would report directly to the Secretary and
Undersecretary of DHS.

3 Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, Pub. L.
No. 108-264, 118 Stat. 712 (2004).

As we finalized this report, the extent of the devastation from Hurricanes
Katrina and Rita in August 2005 and September 2005 was not yet fully
determined, as the nation struggled to respond to the immediate needs of
populations of entire cities and towns for food, water, shelter, and basic
health care. Although impacts from Hurricane Katrina and Rita were not
part of our mandate for this report, clearly this disaster will challenge
the NFIP with demands the program has never before faced in its more than
30-year history. Already, a record number of flood insurance claims have
been filed in 2005, and Congress has increased the program's authority to
borrow from the United States Treasury from $1.5 billion to $3.5 billion.

To determine the statutory and regulatory limitations on homeowners'
coverage under the NFIP, we researched The National Flood Insurance Act of
1968, as amended,4 its legislative history, and FEMA's implementing
regulations, which include FEMA's "Standard Flood Insurance Policy"
(SFIP). We also discussed the results of our analysis with officials of
the DHS Office of General Counsel. To assess FEMA's NFIP monitoring and
oversight role, we examined program requirements and reports and observed
NFIP training programs for insurance agents and adjusters. We also
observed a FEMA review of an insurance company's operations, and we
analyzed reports of the results of all reviews of insurance operations and
follow-up visits at insurance companies where FEMA identified critical
errors over a 10-year period, from 1996 to April 2005-a total sample of 15
reports. We interviewed officials of FEMA and its program contractor about
their oversight activities and discussed aspects of the process with
private-sector insurance officials from four of the five largest insurance
companies participating in the NFIP based on the number of claims filed in
2004. We also obtained documentation on how reviews of a sample of claims
adjustments are done after flood events and talked with staff employed by
FEMA's contractor about how they reinspect the work of private-sector
adjusters who prepare flood damage estimates and how they select
properties to visit for these reviews. We interviewed them because they
had performed quality reinspections of claims adjustments for damage from
Hurricane Isabel, as well as from hurricanes in Florida in 2004.

To determine FEMA's response to concerns about Hurricane Isabel claims
payments, we discussed the actions FEMA took to address concerns of

4 The National Flood Insurance Act of 1968, as amended, is codified at 42
U.S.C. 4001 to 4129.

  Results in Brief

Hurricane Isabel claimants with FEMA officials, and we reviewed a
statistically valid sample of 100 files from claimants in Maryland,
Virginia, and North Carolina who were dissatisfied with their initial
claims settlements resulting from Hurricane Isabel and who had their
claims reviewed by a special FEMA task force. We based our analysis of
these claims on the information in the files we reviewed; we did not
independently verify the accuracy of the information in the claims files.
To test the overall reliability of the NFIP database, we reviewed a
statistically valid sample of 250 claims for all flood events that
occurred in 2003 and 2004. We conducted this reliability testing to assure
ourselves that information from the NFIP database was sufficiently
accurate for our reporting purposes. To determine the extent to which FEMA
implemented provisions of the Flood Insurance Reform Act of 2004, we
examined documentation of the agency's efforts and interviewed officials.
We conducted our work from December 2004 through August 2005 in accordance
with generally accepted government auditing standards. Our scope and
methodology are discussed in greater detail in appendix I.

The amount of insurance coverage available to homeowners under the NFIP is
limited by requirements set forth in statute and regulation. As a result
of these limitations, insurance payments to claimants for flood damage may
not cover all of the costs of repairing or replacing flooddamaged
property. For example, there is a $250,000 statutory ceiling on the amount
of flood insurance homeowners may purchase; thus, homes that might sustain
more than $250,000 in damage cannot be insured to their full replacement
cost. In addition, NFIP policies cover only direct physical loss by or
from flood. Therefore, losses resulting primarily from a preexisting
structural weakness defect in a home or prior water damage, and losses
resulting from events other than flood, such as windstorms or earth
movements, are not covered by the NFIP. Moreover, a homeowner's personal
property is covered, with certain limitations, only if the homeowner has
separately purchased NFIP personal property insurance in addition to
coverage for the building. Finally, the method of settling losses affects
the amount recovered. For example, homes that qualify only for an actual
cash value settlement-which represents the cost to replace damaged
property, less the value of physical depreciation-would presumably receive
payments that are less than homes that qualify for a replacement cost
settlement, which does not deduct for depreciation.

To meet its monitoring and oversight responsibilities, FEMA is to conduct
periodic operational reviews of the 95 private insurance companies that
participate in the NFIP. In addition, FEMA's program contractor is to

check the accuracy of claims settlements by doing quality assurance
reinspections of a sample of claims adjustments for every flood event. For
operational reviews, FEMA examiners are to do a thorough review of the
companies' NFIP underwriting and claims settlement processes and internal
controls, including checking a sample of claims and underwriting files to
determine, for example, whether a violation of policy has occurred, an
incorrect payment has been made, and if files contain all required
documentation. Separately, FEMA's program contractor is responsible for
conducting quality assurance reinspections of a sample of claims
adjustments for specific flood events in order to identify, for example,
whether an insurer allowed an uncovered expense or missed a covered
expense in the original adjustment. The operational reviews and follow-up
visits to insurance companies that we analyzed followed FEMA's internal
control procedures for identifying and resolving specific problems that
may occur in individual insurance companies' processes for selling and
renewing NFIP policies and adjusting claims. According to information
provided by FEMA, the number of operational reviews completed between 2000
and August 2005 were done at a pace that allows for a review of each
participating insurance company at least once every 3 years, as FEMA
procedures require. In addition, the processes FEMA had in place for
operational reviews and quality assurance reinspections of claims
adjustments met our internal control standard for monitoring federal
programs. However, the process FEMA used to select a sample of claims
files for operational reviews and the process its program contractor used
to select a sample of adjustments for reinspections were not randomly
chosen or statistically representative of all claims. We found that the
selection processes used were, instead, based upon judgmental criteria
including, among other items, the size and location of loss and complexity
of claims. As a result of limitations in the sampling processes, FEMA
cannot project the results of these monitoring and oversight activities to
determine the overall accuracy of claims settled for specific flood events
or assess the overall performance of insurance companies and their
adjusters in fulfilling their responsibilities for the NFIP-actions
necessary for FEMA meet our internal control standard that it have
reasonable assurance that program objectives are being achieved and that
its operations are effective and efficient.

In the months after Hurricane Isabel, FEMA took steps intended to uniquely
address concerns that arose from that flood event. In April 2004, FEMA
established a task force to review claims settlements from Hurricane
Isabel claimants. This was the first time in the history of the NFIP that
a formal claims review process was established. As a result of task force
reviews, almost half of the 2,294 policyholders who sought a

claims review received additional payments. The additional payment amount
averaged $3,300 more than the original settlement-for a total average
settlement of about $32,400 per claimant. In most cases, the additional
funds were for repairing or replacing buildings or personal property not
included in the initial adjuster's loss determination; or to cover
additional material or labor costs. For example, in one instance the
original adjuster had not included coverage for a kitchen countertop and a
cable television outlet that the task force added to the claims
settlement. In other claims, reviewers allowed higher prices for paint,
dry wall, insulation, and other building materials than had been allowed
in the initial loss report. An NFIP manager said that the original pricing
was not an error in many cases, but that the costs of the materials had
increased between the time of the initial loss and the final settlement
offer. Among reasons that claims reviewed by the task force were closed
with no additional payment were that the reviewer agreed with the original
determination that (1) flood damage to parts of a basement were not
covered and that (2) damage was not due to flood but to wind-driven rain.

As of September 2005, FEMA had not yet fully implemented provisions of the
Flood Insurance Reform Act of 2004. The act requires FEMA to provide
policyholders a flood insurance claims handbook and other new materials
for explaining their coverage when they purchase and renew policies; to
establish a regulatory appeals process for claimants; and to establish
minimum education and training requirements for insurance agents who sell
NFIP policies. The 6-month statutory deadline for implementing these
changes was December 30, 2004. While FEMA advised us that it finalized
statutorily required informational materials in September 2005, its flood
insurance claims handbook does not yet fully comply with statutory
requirements. The handbook contains information on anticipating, filing
and appealing a claim, but does not include information regarding the
appeals process that FEMA is statutorily required to establish through
regulation. In its comments on our draft report, FEMA stated that it was
offering claimants an informal appeals process pending the establishment
of a regulatory process, and that the handbook describes this informal
appeals process. However, by statute, the claims handbook must describe
the regulatory process, which FEMA has yet to establish. With respect to
this appeals process, FEMA has not stated how long rulemaking might take
to establish the process by regulation, or how the process might work,
such as filing requirements, time frames for considering appeals, and the
composition of an appeals board. With respect to minimum training and
education requirements for insurance agents who sell NFIP policies, FEMA
published a Federal Register notice on September 1, 2005, which included
an outline of

training course materials. In the notice, FEMA stated that, rather than
establish separate and perhaps duplicative requirements from those that
may already be in place in the states, it had chosen to work with the
states to implement the NFIP requirements through already established
state licensing schemes for insurance agents. The notice did not specify
how or when states were to begin implementing the NFIP training and
education requirements. Thus, it is too early to tell the extent to which
insurance agents will meet FEMA's minimum standards. FEMA officials said
that, because changes to the program could have broad reaching and
significant effects on policyholders and private-sector stakeholders upon
whom FEMA relies to implement the program, the agency is taking a measured
approach to addressing the changes mandated by Congress. Nonetheless,
without plans with milestones for completing its efforts to address the
provisions of the act, FEMA cannot hold responsible officials accountable
or ensure that statutorily required improvements are in place to assist
victims of future flood events.

To strengthen and improve FEMA's monitoring and oversight of the NFIP, we
are recommending that FEMA use a methodologically valid approach for
sampling files selected for operational reviews and quality assurance
claims reinspections. To help ensure that actions are taken in a timely
manner to address legislative requirements established in the Flood
Insurance Reform Act of 2004, we are recommending that FEMA establish
documented plans with milestones for completing its efforts and hold NFIP
officials accountable for implementing these plans.

In commenting on a draft of this report, FEMA expressed concerns about our
findings related to NFIP program management and oversight. Specifically,
FEMA was concerned that we did not directly address the issue of whether
Congress intended the NFIP to restore flood-damaged properties to their
pre-flood conditions. We believe we have addressed the issue consistent
with our statutory mandate by explaining the statutory and regulatory
provisions that affect both dollar ceilings and other coverage
limitations. In other words, flood insurance policies can only restore
victims to pre-flood conditions within, but not beyond, the dollar
ceilings and other coverage limitations established by law and regulation.
FEMA also questioned our characterization of its operational reviews and
claims reinspection processes in the context of FEMA's overall financial
and management control efforts. However, our focus was on overall NFIP
program management and oversight, not on FEMA's fiduciary responsibilities
or additional internal control measures. During our review, FEMA managers
described the operational reviews and claims inspections

as the primary methods FEMA used for monitoring and overseeing the NFIP.

FEMA also noted that its method of selecting its sample for operational
reviews was more appropriate than the statisticall y random probability
sample we recommended. We believe that, although FEMA's current sampling
strategy may provide an opportunity to focus on particular areas of risk,
it does not provide management with the information needed to assess the
overall performance of private insurance companies and adjusters
participating in the program-information that FEMA needs to have
reasonable assurance that program objectives are being achieved

In addition, FEMA disagreed with our characterization of the extent to
which FEMA has met provisions of the Flood Insurance Reform Act of 2004.
We believe that our description of those efforts and our recommendations
with regard to implementing the Act's provisions remain valid. FEMA's
comments are contained in appendix II. In addition, FEMA provided
technical comments, which we incorporated into the report as appropriate.

                                   Background

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 19685 established the NFIP. Congress
mandated that the NFIP was to be implemented "based on workable

5 The National Flood Insurance Act of 1968, as amended, is codified at 42
U.S.C. 4001 to 4129.

methods of pooling risks, minimizing costs, and distributing burdens
equitably among those who will be protected by flood insurance and the
general public."6 To make "flood insurance coverage available on
reasonable terms and conditions to persons who have need for such
protection,"7 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.8 FEMA has
statutory authority to borrow funds from the Treasury to keep the NFIP
solvent.9 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 2008.10 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.

6 42 U.S.C. 4001(d).

7 Id. 4001(a)(4).

8 GAO, Flood Insurance: Information on the Financial Condition of the
National Flood Insurance Program, GAO-01-992T (Washington, D.C.: July
2001).

9 See 42 U.S.C. 4016.

10 The National Flood Insurance Program Enhanced Borrowing Authority Act
of 2005, Pub.

L. No. 109-65 (Sept. 20, 2005).

Participation in the NFIP As shown in figure 1, the number of NFIP
policies in force has grown and Claims Payments Have steadily over the
past 27 years to a total of about 4.6 million policies in Grown force as
of May 31, 2005.

Figure 1: NFIP Policies in Force, 1978-2005

Policies in force 5,000,000

4,500,000

4,000,000

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

5,00,000 0

     19781979 198019811982 198319841985198619871988198919901991199219931994
                 19951996199719981999 2000200120022003 20042005

Calender year

Source: FEMA.

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.

Figure 2: Total NFIP Payments to Claimants, 1972-2004

Total payments made (dollars in millions) 1,800

1,600

1,400

1,200

1,000 1972-1976 1977

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
        1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Calendar year

Source: FEMA.

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.

             Table 1: NFIP Claims Payments on Flood Events in 2003

Dollars in thousands

Number of paid losses Amount paid

                              Flood event/state(s)

             Hurricane Isabel (Delaware, Maryland, 19,523 $455,869

North Carolina, Pennsylvania, South Carolina, Virginia, and Washington,
D.C.)

Delaware flooding (Delaware) 10

                  Torrential rain (Puerto Rico)           261           1,366 
                    Hurricane Claudette (Texas)         1,035          10,884 
                    Tennessee flood (Tennessee)           309           9,759 
                        Named flood event total        21,138         477,942 
                            Unnamed flood total        15,232         287,317 
                                          Total        36,370        $765,259 

Source: GAO analysis of FEMA data.

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.

Table 2: NFIP Claims Payments on Flood Events in 2004

                              Dollars in thousands

                                                     Number of   
                               Flood event/state(s) paid losses   Amount paid 
                          Kentucky Flood (Kentucky)          279       $5,717 
                    Hurricane Alex (North Carolina)          249        2,436 
               Hurricane Charley (Florida and North        2,434       46,369 
                                          Carolina)              
                        Hurricane Frances (Florida)        4,737      139,866 
         Hurricane Ivan (Alabama, Florida, Georgia,       25,558    1,233,964 

Louisiana, Mississippi, Ohio, Pennsylvania, Virginia, and West Virginia)

            Hurricane Jeanne (Florida and Puerto Rico)   3,994         78,355 
                               Named flood event total  37,251      1,506,707 
                                   Unnamed flood total  15,534        442,678 
                                                 Total  52,785     $1,949,385 
                    Source: GAO analysis of FEMA data.           

    Private Insurers Sell Policies and Adjust NFIP Claims under FEMA Oversight
    and Management

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.11 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.12 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.13

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.

11 The other 5 percent of policies are sold and serviced by state-licensed
insurance agents and brokers who deal directly with FEMA.

12 The fund, which was established in the Treasury by the 1968 legislation
authorizing the NFIP, is the account into which premiums are deposited and
from which losses and operating and administrative costs are paid. See 42
U.S.C. 4017.

13 For example, the flood program manager from one insurance company said
that agents receive a commission of 15 percent of the policy amount as an
incentive to write flood insurance and may receive other incentives during
special flood marketing campaigns.

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

  Due to Statutory and Regulatory Limitations, NFIP Payments May Not Cover All
  Costs to Repair or Replace Flood-Damaged Property

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.14
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 $250,000.15
Because of this statutory ceiling, homes that could sustain more than
$250,000 in damage cannot be insured to reflect full replacement costs.
Furthermore, while homes whose full replacement cost is less than $250,000
may be fully insured, this is not statutorily required. There is a
"mandatory purchase" requirement for homeowners in special high-risk flood
hazard areas who hold mortgages from federally regulated lenders, but they
are only required to insure their homes for the amount of their mortgages,
which may be less than their homes' full replacement cost.16 For
homeowners in areas of low-to moderate-flood risk, the purchase and amount
of insurance is optional, up to the $250,000 statutory maximum.17 As a
result of the $250,000 ceiling and the "mandatory purchase" floor,
insurance on a given home may be less than its full replacement cost.
Homeowners may also separately elect to insure the contents of their homes
under the NFIP, although they are not required to do so. As with the
$250,000 cap on building coverage, there is also a statutory limit on the

14As with homeowners' coverage, statutory and regulatory limitations apply
to NFIP coverage for other types of property. See 44 C.F.R. Part 61,
appendix A(1), "Standard Flood Insurance Policy Dwelling Form," appendix
A(2), "Standard Flood Insurance Policy General Property Form," and
appendix A(3), "Standard Flood Insurance Policy Residential Condominium
Building Association Form."

15 42 U.S.C. 4013(b)(2).

16 Id. 4012a(a), (b)(1).

17 See id. 4012.

amount of personal property coverage homeowners can buy. By statute,
homeowners can purchase no more than $100,000 in personal property
coverage, even if the value of their personal property exceeds this
amount.18

In addition to the statutory limitations on coverage amounts, Congress
also gave FEMA broad authority to issue regulations establishing "the
general terms and conditions of insurability," including the classes,
types, and locations of properties that are eligible for flood insurance;
the nature and limits of loss that may be covered; the classification,
limitation, and rejection of any risks that FEMA considers advisable; and
the amount of appropriate loss deductibles.19 Pursuant to this delegation
of authority, FEMA has issued regulations, including a "Standard Flood
Insurance Policy," that further delineate the scope of coverage.20 All
flood insurance made available under the NFIP is subject to the express
terms and conditions of the statute and regulations, including the SFIP.21

The SFIP is a contractual document that contains the terms of coverage and
is issued to homeowners when they purchase flood insurance. Some of the
principal SFIP limitations concern whether particular events, losses,
building property and personal property are covered, and what deductible
amounts and loss settlement methods apply when an insured files a claim.
While either FEMA or private write-your-own insurance companies may issue
flood insurance policies, FEMA's regulations prohibit any change to the
SFIP provisions without the express written consent of the Federal
Insurance Administrator, the FEMA official responsible for administering
the NFIP.22 The Administrator is also charged with interpreting the scope
of coverage under the SFIP.23

18 Id. 4013(b)(3).

19 Id. 4013(a).

20 The insurance coverage regulations appear at 44 C.F.R. Part 61, and the
SFIP is an appendix to these regulations, set forth at 44 C.F.R. Part 61,
appendix A(1), "Standard Flood Insurance Policy Dwelling Form."

21 44 C.F.R. 61.4.

22 Id. 61.13(d), (f).

23 Id. 61.4(b), 61.14.

The SFIP covers only "direct physical loss by or from flood."24 It does
not cover losses resulting from events other than flood, such as
windstorms or earth movements. Additionally, if the losses primarily
result from conditions inherent to the dwelling or within the control of
the insured, they are not covered by the SFIP.25 Nor does the SFIP provide
coverage if the flood is already in progress when the policy begins or
when the insured adds coverage. Finally, the SFIP only covers direct,
physical flood losses, not indirect losses such as loss of revenue or
profits, interruption of business, access to and use of the insured
property, or living expenses incurred while property is uninhabitable.26

The SFIP limits what type of building property is covered, considering
such things as the property's use, permanence, and degree of enclosure.
For coverage purposes, the SFIP defines a "building" as a manufactured
home; a travel trailer affixed to a permanent foundation; or a "structure
with two or more outside rigid walls and a fully secured roof, that is
affixed to a permanent site."27 A building under construction may be
covered even if not yet walled or roofed if the construction is underway
at the time the losses are incurred.28 Detached garages may be covered,
but not if the garage is used for residential, business, or farming
purposes,29 in which case it must be separately insured. Certain items of
property are considered part of the building. In general, these are items
built in or affixed to the building, for example, stoves, ovens,
refrigerators, central air conditioners, and permanently installed
cabinets and carpets. At the basement level, building coverage is more
limited and does not extend to finishing materials. For example, whereas
the SFIP covers permanently

24 The SFIP defines a flood as "[a] general and temporary condition of
partial or complete inundation of two or more acres of normally dry land
area or of two or more properties" caused by specified events such as the
overflow of inland or tidal waters. SFIP section II, Definitions
("Flood").

25 SFIP section V, Exclusions. For example, the SFIP would not cover water
damage that primarily resulted from a structural defect in the insured's
dwelling.

26 SFIP section V, Exclusions.

27 SFIP section II, Definitions ("Building").

28 SFIP section III, Property Covered (Coverage A - Building Property).
However, if the building under construction does not have at least two
walls and a roof, the deductible amount is twice that which would
otherwise apply. SFIP section VI, Deductibles.

29 SFIP section III, Property Covered (Coverage A - Building Property).
Coverage for a detached garage is limited to no more than 10 percent of
the building's limit of liability. Use of this insurance is optional but
reduces the building's limit of liability.

installed paneling and wallpaper above the basement level, coverage in the
basement is limited to unfinished drywall.30

The SFIP only insures for personal property if the homeowner purchases
personal property coverage and the personal property is inside a
building.31 Personal property includes movable items such as portable
microwaves, window-type air conditioning units, and carpets that are not
permanently installed. In a basement, coverage is limited to certain items
installed in their functioning location and, if necessary for operation,
connected to a power source, for example, portable air conditioning units
and clothes washers and dryers. Certain types of personal property are
specially limited to payment of no more that $2,500, regardless of the
magnitude of the loss. These objects include artwork, collectibles,
jewelry, furs, and property used in any business.32 Personal property
coverage does not extend to such things as currency, postage, deeds, and
other valuable papers.33

Certain types of property are wholly excluded from both building property
and personal property coverage. The first type of excluded properties are
those that are generally separate from the main dwelling, such as
recreational vehicles; self-propelled vehicles and machines; land, plants,
and animals; walkways, driveways, patios; and hot tubs and swimming pools.
The second type of excluded properties are those with a close relationship
with water or that are located below ground, including buildings and
personal property located entirely, in, on, or over water; boathouses,
wharves, piers, and docks; underground structures or equipment; and
buildings and contents where more than 49 percent of the actual cash value
of the building is below ground.34

The amount recoverable under the SFIP is limited to the amount that
exceeds the applicable deductible.35 Applicable deductible amounts are not
listed in the SFIP itself, but are shown on the Declarations Page, a

30 SFIP section III, Property Covered (Coverage A - Building Property).
31 SFIP section III, Property Covered (Coverage B - Personal Property).
32 SFIP section III, Property Covered (Coverage B - Personal Property).
33 SFIP section IV, Property Not Covered.
34 SFIP, section IV, Property Not Covered.
35 SFIP section VI, Deductibles.

computer-generated summary of the information provided by the insured in
the insured's application. The Declarations Page is part of each insured's
flood insurance policy. 36

The final type of limitation found in the SFIP derives from the methods of
settling losses. There are three loss settlement methods under the SFIP:
(1) "replacement cost," which homeowners may only purchase for
singlefamily dwellings in which they principally reside; (2) "special loss
settlement," which only applies to large manufactured homes;37 and (3)
"actual cash value," which applies to any property that does not qualify
for replacement cost or special loss settlement.

The only difference between replacement cost and actual cash value is the
significance attached to the property's physical depreciation. An actual
cash value loss settlement represents what it would cost to replace
damaged property, less the value of its physical depreciation.38 Because
of depreciation, actual cash value will presumably be less than the full
cost to repair or replace the damage.39 A replacement cost loss
settlement, on the other hand, does not deduct for physical depreciation.
If replacement cost coverage applies, the policy will pay the actual
amount spent to repair or replace the damage with materials of like kind
and quality, subject to the applicable deductible and the building's limit
of liability.40

Homeowners can only obtain replacement cost coverage for their
singlefamily dwellings, not for multi-family dwellings or items of
personal property, which are subject to actual cash value coverage. In
addition, not all single-family dwellings are eligible for replacement
cost coverage. To

36 SFIP section II, Definitions ("Declarations Page").

37 "Special Loss Settlement" combines elements of replacement cost and
actual cash value settlements. Under the "Special Loss" rules, totally
destroyed dwellings receive either replacement cost coverage or 1.5 times
the actual cash value, whichever is less, up to the dwelling's limit of
liability. Partially damaged dwellings are entitled to replacement cost
coverage.

38 SFIP section II, Definitions ("Actual Cash Value").

39 An actual cash settlement may be increased to reflect a greater
proportion of the costs of repairing or replacing damaged property,
without deduction for depreciation. The SFIP provides a formula for
calculating the proportion of the repair or replacement costs an insured
with actual cash coverage is eligible to receive. The SFIP will pay this
proportional amount if it is greater than the actual cash settlement.

40 SFIP section VII, General Conditions, subsection V, Loss Settlement.

qualify for such coverage, a home must be insured for 80 percent or more
of its full replacement cost or the maximum coverage amount of $250,000,
and it must a principal residence. If a home does not meet both criteria,
the policy will pay the actual cash value for the covered damage.

An additional limitation in replacement cost coverage applies when the
full cost of repair or replacement is greater than $1,000 or 5 percent of
the entire amount of insurance on the dwelling. In that case, the SFIP
provides that it "will not be liable for any loss unless and until the
actual repair or replacement is completed," unless the insured foregoes a
replacement cost settlement and makes a claim for actual cash instead.41
If the insured eventually spends more on the repair or replacement than
the actual cash settlement, the individual may file a claim for additional
replacement cost liability, provided he or she provides a notice of intent
to do so within 180 days after the date of loss. 42

We developed the following hypothetical property adjustment example with
the assistance of FEMA's director of NFIP claims to illustrate how
applicable limitations could reduce coverage for claimants whose property
is damaged by flood:

Hypothetical: A poorly maintained 30-year-old home located in a designated
flood zone was damaged when a nearby river overflowed. The home's full
replacement cost was $60,000. The homeowner purchased an NFIP policy for
$30,000 in coverage. Although a contractor estimated it would cost $40,000
to repair damages to the structure and personal property losses totaled
another $10,000, a NFIP adjuster determined that payment on the claim was
$8,000 because:

o  The homeowner had chosen not to insure his personal property.

o  	The adjuster determined that some problems that needed to be addressed
had not been caused by the flood (e.g., leaking pipes in the bathroom and
preexisting mold in the basement).

41 SFIP section VII, General Conditions, subsection V, Loss Settlement.

42 FEMA officials told us that the agency did not require Hurricane Isabel
claimants to wait until after making repairs to obtain the full
replacement cost. They also said that FEMA plans to amend its regulations
to delete the requirement from the SFIP.

  Monitoring and Oversight of NFIP Identifies Specific Problems, but Does Not
  Provide Comprehensive Information on Overall Program Performance

o  	The basement of the home, where the largest amount of damage occurred,
was finished, and coverage was limited to drywall damage.

o  	Actual cash value will be paid for repairs or replacement of damage to
the dwelling because the homeowner did not insure the structure for at
least 80 percent of its full replacement cost. Because the condition of
the home before the flood was poor, the actual cash value was low. In this
hypothetical case, the adjuster determined that the actual cash value of
damaged property covered by the policy was $9,000.

o  	A $1,000 deductible applied, reducing the $9,000 actual cash value
payment to $8,000.

FEMA's primary method to monitor and oversee the NFIP is to conduct
operational reviews of the 95 write-your-own insurance companies
participating in the NFIP. In addition, FEMA's program contractor is to
reinspect a sample of claims adjustments for every flood event to identify
errors, among other things. The operational reviews and follow-up visits
we analyzed followed FEMA's internal control procedures on the processes
for examiners to follow in conducting the reviews and for doing the
reviews at a pace that allows for a review of each write-your-own company
on at least a triennial basis. The processes FEMA followed also met our
internal control monitoring standard that requires federal agencies to
ensure that the findings of audits and other reviews are promptly
resolved. However, in doing these monitoring and oversight activities,
neither FEMA nor its program contractor used a statistically valid method
for sampling files selected for operational reviews or claims
reinspections. As a result, FEMA did not meet our internal control
standard that federal agencies have internal controls in place to provide
reasonable assurance that program objectives are being achieved and that
program operations are effective and efficient. Without a statistically
valid sampling methodology, the agency cannot project the results of these
monitoring and oversight activities to determine the overall accuracy of
claims settled for specific flood events or assess the overall performance
of insurance companies and their adjusters in fulfilling their
responsibilities for the NFIP.

    FEMA's Operational Reviews of Insurers We Analyzed Identified and Followed
    Up on Problems

Operational reviews of flood insurance companies participating in NFIP
that are conducted by FEMA staff are FEMA's primary internal control
mechanism for monitoring, identifying, and resolving problems related to
how insurers sell and renew NFIP policies and adjust claims. Our analysis
of reports of all 15 operational reviews and follow up visits at companies
that were identified as having critical errors (e.g., incorrect payments)
found that FEMA checked information and conducted file reviews in
accordance with the requirements and procedures outlined in its Write Your
Own Financial Control Plan.43 In addition, our analysis found that FEMA
followed up at all of the companies where operational reviews had
identified critical errors to monitor the progress these companies made
over time in addressing and resolving critical errors. Monitoring the
quality of performance over time and ensuring that the findings of audits
and other reviews are promptly resolved is an internal control standard
that we have identified for the federal government.44

According to the FEMA director of NFIP claims, one or two examiners from
FEMA's NFIP Claims and Underwriting sections go on-site to review the
operations of the 95 write-your-own companies. If vendors handle all or
part of a company's NFIP business, operational reviews are conducted at
the vendor locations and reviews of all of the companies doing business
with the vendor can be completed during one visit. Seven FEMA staff in the
Mitigation Division underwriting section and two staff in the claims
section have primary responsibility for conducting operational reviews in
addition to other responsibilities including writing insurance manuals and
regulations, providing technical assistance, and responding to inquiries
from policyholders, Members of Congress and others. As discussed below,
FEMA directs examiners to conduct three steps for each operational
review-a general underwriting review, a specific underwriting review, and
a claims operation review of each insurance company's NFIP business.
Requirements and procedures for the operational review are outlined in
FEMA's Write Your Own Financial Control Plan.

In the general underwriting review, examiners are to review how the
company has handled applications for NFIP policies and how policies are
issued and cancelled among other items. The examiners are to check a

43 National Flood Insurance Program, The Write Your Own Program Financial
Control, Plan Requirements and Procedures, revised December 1, 1999.

44 See GAO, Standards for Internal Control in the Federal Government
(Washington, D.C.: Nov. 1999).

sample of files to determine, for example, whether NFIP policies were
renewed using correct payment rates and whether appropriate documentation
was included in the file. In the specific underwriting review and the
claims operation review, examiners are to conduct detailed examinations of
files to check for completeness and accuracy. For example, they must make
sure that elevations are calculated correctly on new policies and that
photographs document damage on flood claims.

For all aspects of the operational reviews, the examiners are to determine
whether files are maintained in good order, whether current forms are used
and whether staff has a proficient knowledge of requirements and
procedures to properly underwrite and process flood claims. Examiners are
also to look at internal controls in place at each company. When problems
are identified, examiners are to classify the severity of the errors. Each
file reviewed is to be classified as satisfactory or unsatisfactory.
Unsatisfactory files contain either a critical error (e.g., a violation of
policy or an incorrect payment) or three non-critical errors (e.g.,
violations of procedures that did not delay actions on claims).

Write-your-own companies with error rates of 20 percent or higher of the
total number of files reviewed for the specific underwriting or claims
operation review would always receive an unsatisfactory designation. If a
company receives an unsatisfactory designation, FEMA requires that it
develop an action plan to correct the problems identified and is to
schedule a follow-up review in 6 months to determine whether progress has
been made. The action plans developed by the companies generally must
contain a timetable for addressing deficiencies, including a plan for
making progress reports to FEMA and developing more stringent internal
quality control procedures. If a company continues to have problems and
fails to implement an action plan, it can ultimately be withdrawn from the
NFIP. According to FEMA officials, a company has been required to withdraw
from the NFIP once in the program's history in part because of issues
raised in operational reviews and in part due to other financial problems.

In our analysis of reports of all 15 operational reviews and follow-up
visits done at insurance companies that were identified as having critical
errors, we found that examiners checked information and did file reviews
in accordance with the requirements and procedures outlined in the Write
Your Own Financial Control Plan. We also determined that FEMA followed up
to monitor the progress the companies made in addressing and resolving
critical errors. For example, in one instance after a writeyour-own
company received two unsatisfactory designations, it was

directed by FEMA to rewrite all of its policies to be sure that the
correct premiums were being charged to policyholders. In another instance,
FEMA required a write-your-own company to take more extensive action than
was proposed in its plan to address deficiencies.

In addition, according to information provided by FEMA, operational
reviews completed since 2000 were on pace to meet FEMA's policy that each
of the 95 write-your-own companies be operationally reviewed at least once
every 3 years. Table 3 shows the number of operational reviews reported by
FEMA from January 2000 through August 2005. FEMA has scheduled a review of
31 write-your-own companies at a large vendor location for later in 2005.

Table 3: Total Number of Operational Reviews of Write-Your-Own Companies
Conducted by FEMA (January 2000 to August 2005)

Number of Year companies reviewed

2000

2001

2002

2003

2004

January to August 2005

Total

                                 Source: FEMA.

    Reinspections of NFIP Claims Conducted by Program Contractor

In addition to operational reviews done by FEMA staff, FEMA's program
contractor conducts quality assurance reinspections of claims for specific
flood events. The program contractor employs nine general adjusters who
conduct quality assurance reinspections of a sample of open claims for
each flood event.45 Procedures for the general adjusters to follow in
conducting these reinspections are outlined in FEMA's Write Your Own
Financial Control Plan. According to the general adjusters we interviewed,
in addition to preparing written reports of each reinspection, general
adjusters discuss the results of the reinspections they perform

45 In addition to doing reinspections, these general adjustors are
responsible for estimating damage from flood events, coordinating claims
adjustment activities at disaster locations, and conducting adjuster
training.

with officials of the write-your-own companies that process the claims. If
a general adjuster determines that the insurance company allowed an
expense that should not have been covered, the company is to reimburse the
NFIP. If a general adjuster finds that the private-sector adjuster missed
a covered expense in the original adjustment, the general adjuster will
take steps to provide additional payment to the policyholder. An
instructor at an adjuster refresher training session, while observing that
adjusters had performed very well over all during the 2004 hurricane
season, cited several errors that he had identified in reinspections of
claims, including improper measurement of room dimensions and improper
allocation of costs caused by wind damage (covered by homeowners'
policies) versus costs caused by flood damage. In addition, the instructor
identified a problem that arose, namely, poor communication with
homeowners on the process followed to inspect the homeowner's property and
settle the claim. Overall error rates for write-your-own companies are
monitored. Procedures require additional monitoring, training, or other
action if error rates exceed 3 percent. According to the general adjusters
we interviewed and FEMA's program contractor, quality assurance
reinspections are forwarded from general adjusters to the program
contractor where results of reinspections are to be aggregated in a
reinspection database as a method of providing for broad-based oversight
of the NFIP as its services are delivered by the write-your-own companies,
adjusting firms and independent flood adjusters.

    Sampling Methods Used to Conduct Operational Reviews and Quality Assurance
    Reinspections Do Not Provide Management Information on Overall Performance

FEMA used nonprobability sampling processes rather than random sampling to
select files for operational reviews and claims for quality assurance
reinspections. In nonprobability sampling, staff select a sample based on
their knowledge of the population's characteristics. The major limitation
of this type of sampling is that the results cannot be generalized to a
larger population, because there is no way to establish, by defensible
evidence, how representative the sample is. A nonprobability sample is
therefore not appropriate to use if the objective is to generalize about
the population from which the sample is taken.46

For the operational reviews, specific guidance on how to select files for
review is not documented, although guidance is provided on the number of
files to review based on the size of the write-your-own companies' volume
of NFIP business. The process used to select claims for review, as

46 GAO, Policy Manual (Washington, D.C.: Jan.1, 2004).

it is described by FEMA managers who oversee operational reviews,
identifies problems at the write-your-own companies, but it is not
designed to assess overall performance. For the specific underwriting
portion of the review, examiners use a process described by a FEMA
official as adverse selection, or selection of files for review that
include the most difficult new policies that the company underwrote in the
period since the last operational review under the assumption that if the
company addresses difficult underwriting issues correctly, it will also be
able to do routine underwriting issues correctly. According to this
official, some examples of the most difficult underwriting issues are
policies covering properties in the flood hazard areas closest to bodies
of water and elevated buildings that have enclosures underneath them. For
the claims operation portion of the operational review, like the
underwriting portion, an examiner said that FEMA attempts to select the
more difficult or potentially troublesome claims files to review. In
addition, files that are closed without payment and those with
particularly large settlements are to be included in the sample of files
reviewed. Thus, the operational reviews provide FEMA with management
information on specific problems that occur at writeyour-own companies
but, by design, do not assess the overall performance of the companies.

For quality assurance reinspections, procedures are included in the
written FEMA guidance on the number of claims to sample, but not on the
sample selection process. General adjusters employed by FEMA's contractor
are to reinspect a sample of properties based on the total number of
claims the write-your-own company is processing for the flood event. A
FEMA official said that this number is up to about 4 percent of claims for
each flood event based on the total number of claims filed for the flood
event. Although the two general adjusters we interviewed said their
inspection sample selection process was random, the selection process they
described involved choosing properties to reinspect based upon criteria
they considered to be important. The general adjusters said that they
generally reinspected the adjustments done on properties from a variety of
neighborhoods that represented different types (i.e., single family and
condominium) and values of houses, and varying flood loss claims amounts.
A FEMA manager said that this process was comparable to the approach used
by all nine of the general adjustors. While these criteria, if properly
applied, would lead to some variety in the selection of claims to review,
the selection process is not random or statistically valid for purposes of
projecting results to overall performance. By exercising a more rigorous
sample selection process, without incurring additional costs or selecting
larger sample sizes, FEMA would improve its internal control processes.

  FEMA Task Force Closed about Half of Hurricane Isabel Claims Reviewed with
  Additional Payments

Because FEMA's primary means of providing oversight are its operational
reviews and quality assurance reinspections, statistically-valid
information from these oversight activities is essential. However, FEMA's
use of an approach that lacks statistical validity for selecting files for
operational reviews and claims for reinspections does not provide
management with the information needed to assess the overall performance
of the writeyour-own companies, including the overall accuracy of the
underwriting of NFIP policies and the adjustment of claims-information
that FEMA needs to have reasonable assurance that program objectives are
being achieved. Without a statistically valid sampling methodology, FEMA
did not meet our internal control standard that federal agencies provide
reasonable assurance that program objectives are being achieved and that
program operations are effective and efficient.47

FEMA took unique actions to respond to concerns regarding NFIP payments
for Hurricane Isabel flood claims. In April 2004, about 7 months after
Hurricane Isabel, FEMA established a task force to review claims
settlements based on requests by Hurricane Isabel claimants.48 It was the
first time in the history of the NFIP that a formal review process was
established for NFIP claimants who were not satisfied with actions taken
on their claims. According to an NFIP official, the task force was
comprised of about 50 current and former certified flood adjusters from
various private sector flood insurance adjusting firms, the nine general
adjusters employed by FEMA's program contractor, and three FEMA staff.
Adjusters were assigned to review claims outside of states where they had
previously adjusted claims for Hurricane Isabel damage, according to the
official.

As shown in figure 4, FEMA officials said they sent notifications to
23,770 Isabel claimants in six states49 and Washington, D.C., to advise
claimants

47 In addition, the Improper Payments Information Act of 2002, Pub. L. No.
107-300, 116 Stat. 2350, (2002), requires each executive agency to review
all of its programs and activities annually and identify those that may be
susceptible to significant improper payments. If DHS determines during the
annual review that the NFIP is susceptible to significant improper
payments, it will be required, in accordance with Office of Management and
Budget (OMB) guidance, to report statistically valid estimates of improper
NFIP payments to Congress before March 31 of the following applicable
year.

48 After the task force was created, the Senate Committee on Banking,
Housing, and Urban Affairs affirmed the need for an independent review of
Hurricane Isabel claims. See S. Rep. No. 108-262, at 5 (2004).

49 Maryland, North Carolina, Virginia, Delaware, Pennsylvania, and South
Carolina.

that they could have their claims reviewed by a special FEMA task force if
they were unhappy with actions taken to settle them. Claimants could
request a review by the FEMA task force in person at a community meeting,
by telephone, mail, or fax. About 10 percent of the claimants who were
notified (2,294)-all with property in Maryland, Virginia, and North
Carolina-responded. In reviewing those claims, the task force determined
that 1,229 of the claims should be closed with no additional payment and
that 1,065 claims should be closed with additional payments.

Figure 4: Disposition of Hurricane Isabel Claims Reviewed by the FEMA Task
Force

Source: GAO analysis of FEMA data.

Based on our review of a statistically representative sample of claims
files selected from the 2,294 claimants that responded to FEMA that they
wanted a task force review of their claims, the task force closed claims
with no additional payment for a variety of reasons. For example:

o  	Task force agreed with the original determination that flood damage to
parts of a basement were not covered.

o  	Task force agreed with the original determination that damage was not
due to flood but to wind-driven rain.

o  	Task force agreed with the original determination that a claimant did
not have coverage for personal property.

Based on our analysis, reviewers allowed additional payments most
frequently to:

o  	Repair or replace building or personal property items that the initial
adjuster did not include in the loss report.

o  	Pay a higher amount for materials, labor, or personal property items
than the original adjuster had allowed.

In more than 90 percent of claims closed by the task force with additional
payment, the reviewer determined that additional payments were due for one
of these two reasons.50 In 48 percent of the claims, additional payments
were allowed for items that the initial adjuster did not include in the
loss report, and in 43 percent of claims, additional payments were allowed
to pay a higher amount for costs than the original adjuster had allowed.
For example, in one claim we reviewed, the original estimate did not
include coverage for a kitchen countertop and a cable television outlet
that the reviewer included in the final claim settlement. In other claims,
reviewers allowed higher prices for paint, dry wall, insulation, base
molding, ceramic floor tile, and window trim, among other items, than had
been allowed in the initial loss report. One general adjuster for FEMA's
program contractor said that the original pricing was not an error in many
cases, but that the costs of the materials had increased between the time
of the initial loss and the final settlement offer.

Based on our analysis of the statistically representative sample of 100
claims files reviewed by the FEMA task force, the average amount paid on
claims closed with payments and for which claimants requested a review by
the task force was $32,438.51 The average additional payment amount

50 In 9 percent of the cases, the task force allowed recoverable
depreciation not allowed in the original settlement or determined that the
claim should be paid for a primary residence at replacement cost value
rather than for a seasonal residence at actual cash value. Some claimants
received additional payments for more than one reason.

51 This information was current at the time of the review of the claim by
the task force and does not reflect any subsequent actions taken on the
claim by the write-your-own companies. FEMA's program contractor reported
that about 3,866 Hurricane Isabel claims were closed without any payment.
Most frequently Hurricane Isabel claims were closed without payment
because the adjuster report determined that the damages did not exceed the
amount of the deductible on the NFIP policy. In other instances,
policyholders filed a claim but failed to follow up by providing
appropriate documentation of loss. In several instances, claims were filed
for damage to seawalls, which are specifically excluded from coverage
under the NFIP.

determined by the task force for claims that were closed with an
additional payment was $3,340. In comparison, as illustrated in figure 5,
the average closed payments for 2002, 2003, and 2004 for claims closed
with payment were $16,878, $19,980, and $30,668, respectively.52

Figure 5: Comparison of Claims Settlement Amounts for Hurricane Isabel
Claims Reviewed by the Task Force and All Claims Closed with Payment
(2002-2004)

Claims (in dollars)

40000

35000

30000

25000

20000

15000

10000

5000 0

32,438 30,688

2002

2003

                              Hurricane Isabel2004

Source: GAO analysis of NFIP data.

52 For claims in our file review, the median settlement amount-the point
at which half of the cases were settled at higher amount and half were
settled at a lower amount-was $15,583 before the task force review and
$19,826 after the task force review. Data on median settlement amounts for
2002, 2003, and 2004 was not available.

  FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the Flood
  Insurance Reform Act of 2004

As of September 2005, FEMA had not fully implemented NFIP program changes
mandated by the Flood Insurance Reform Act of 2004 to (1) develop
supplemental materials for explaining coverage and the claims process to
policyholders when they purchase and renew policies and (2) establish, by
regulation, an appeals process for claimants. The 6-month statutory
deadline for implementing these changes was December 30, 2004. The act
also required FEMA to establish minimum training and education
requirements for flood insurance agents and to publish the requirements in
the Federal Register by December 30, 2004. Although FEMA published a
Federal Register notice of its requirements on September 1, 2005, the
notice explained that FEMA intended to work with the states to implement
the minimum NFIP standards through existing state licensing schemes for
insurance agents. Thus, it is too early to tell the extent to which
insurance agents will meet FEMA's minimum requirements.

For purposes of explaining coverage and the claims process to
policyholders, the Flood Insurance Reform Act of 2004 required FEMA to
develop three types of informational materials. The required materials
are: (1) supplemental forms explaining in simple terms the exact coverage
being purchased; (2) an acknowledgement form that the policyholder
received the SFIP and any supplemental explanatory forms, as well as an
opportunity to purchase coverage for personal property; and (3) a flood
insurance claims handbook describing the process for filing and appealing
claims.53 FEMA officials said they had drafted an acknowledgement form and
new insurance program forms to explain coverage to policyholders when they
purchase and renew their insurance. FEMA officials said that these forms
were final as of September 2005, and that they expected distribution to
policyholders to begin in October 2005. While FEMA appears to have
completed its implementation efforts with respect to the supplemental and
acknowledgement forms, its flood insurance claims handbook does not yet
fully comply with statutory requirements. FEMA posted a flood insurance
claims handbook, dated July 2005, on its website in September 2005. The
handbook contains information on anticipating, filing and appealing a
claim, but does not include information regarding the appeals process that
FEMA is statutorily required to establish through regulation. In its
comments on our draft report, FEMA stated that it was offering claimants
an informal appeals process pending the establishment

53 Sections 202, 203 and 204 of the Flood Insurance Reform Act of 2004
contain these requirements.

of a regulatory process, and that the handbook describes this informal
appeals process. However, by statute, the claims handbook must describe
the regulatory process, which FEMA has yet to establish.

The establishment of a regulatory appeals process is required by section
205 of the Flood Insurance Reform Act of 2004. To address this
requirement, FEMA officials said they had discussed the feasibility of
maintaining a permanent task force to consider appeals-like the one
created to review Hurricane Isabel claims. In commenting on a draft of
this report, the acting director of FEMA's Emergency Preparedness and
Response Directorate said that FEMA had rejected this plan, but he did not
disclose any alternative plan detailing key elements of an appeals process
such as how to initiate an appeal, time frames for considering appeals,
the size of an appeals board, and the qualifications for membership, or
how long the rulemaking process to provide for appeals by regulation might
take. Therefore, it remains unclear how or when FEMA will establish the
regulatory appeals process, as directed by the Flood Insurance Reform Act
of 2004.

Finally, section 207 of the Flood Insurance Reform Act of 2004 required
FEMA, in cooperation with the insurance industry, state insurance
regulators, and other interested parties, to establish minimum training
and education requirements for all insurance agents who sell flood
insurance policies and to publish the requirements in the Federal
Register. On September 1, 2005, FEMA published a Federal Register notice
in response to this requirement.54 In the notice, FEMA provided a course
outline for flood insurance agents, which consisted of eight sections: an
NFIP Overview; Flood Maps and Zone Determinations; Policies and Products
Available; General Coverage Rules; Building Ratings; Claims Handling
Process; Requirements of the Flood Insurance Reform Act of 2004; and Agent
Resources. FEMA further stated that, rather than establish separate and
perhaps duplicative requirements from those that may already be in place
in the states, it had chosen to work with the states to implement NFIP
requirements through already established state licensing schemes for
insurance agents. However, the notice did not specify how or when states
were to begin implementing the NFIP training and education requirements.
Given the recent publication of the Federal Register notice, and the
states' eventual role in implementing FEMA's training and

54 See Flood Insurance Training and Education Requirements for Insurance
Agents, 70 Fed. Reg. 52,117 (2005).

Conclusions

education requirements, it is too early to tell the extent to which
insurance agents will meet FEMA's minimum standards.

FEMA officials said that developing and implementing changes to the NFIP
can have broad reaching and significant impacts for the millions of NFIP
policyholders, as well as the private sector stakeholders upon whom FEMA
relies to implement the program. As a result, the agency is taking a
measured approach to making the mandated changes to ensure that it
achieves results and minimizes any negative effects on policyholders and
NFIP stakeholders. Nonetheless, without plans with milestones for
completing its efforts to provide policyholders with a flood insurance
claims handbook that meets statutory requirements, to establish a
regulatory appeals process, and to ensure that insurance agents meet
minimum NFIP education and training requirements, FEMA cannot hold
responsible officials accountable and track progress to ensure that these
management improvements are in place to assist victims of future flood
events.

A key challenge that FEMA faces in its role as coordinator of the federal
disaster response efforts, including the NFIP, is to ensure through its
monitoring and oversight efforts that programs are implemented in
accordance with statutory and regulatory requirements across the nation.
It is a difficult challenge to meet, as services are delivered primarily
through a decentralized system of private-sector contractors, their
employees, and their subcontractors. However, it is increasingly important
that FEMA have assurances that program requirements are followed in light
of the growing participation and increasing costs of its programs.

While FEMA's NFIP monitoring and oversight processes have identified
specific problems with the delivery of services, the lack of statistically
representative samples for processes to assess the accuracy of claims and
adjustments limits FEMA's ability to project the results of its analyses
in order to provide management information on the private sector's overall
implementation of the program. Without such information, the value of
FEMA's monitoring processes-operational reviews and quality assurance
reinspections-as critical internal control activities is limited. Such
information could also help the agency better identify potential needs for
such things as additional training requirements or clarification of NFIP
coverage and claims guidance, as identified in the Flood Insurance Reform
Act of 2004.

FEMA officials have been working to address the consequences of the most
devastating hurricane season on record, and these efforts have
understandably put pressure on FEMA's resources, particularly since claims
began to be filed for the damage from Hurricane Katrina. Nonetheless, the
agency may continue to face challenges like those posed by Hurricane
Isabel in implementing the NFIP until plans for addressing some of the key
legislative requirements of the Flood Insurance Reform Act of 2004 are
developed and implemented. Without establishing a roadmap and a schedule
for meeting mandated time frames that have already elapsed, FEMA is
limited in its ability to project when program improvements will be made.

Recommendations for To improve FEMA's oversight and management of the
NFIP, we recommend that the Secretary of the Department of Homeland
SecurityExecutive Action direct the Under Secretary of Homeland Security
for Emergency Preparedness and Response to take the following two actions:

o  	use a methodologically valid approach to draw statistically
representative samples of claims for underwriting and claims portions of
operational reviews and for quality assurance reinspections of claims by
general adjusters; and

o  	develop documented plans with milestones for implementing requirements
of the Flood Insurance Reform Act of 2004 to provide policyholders with a
flood insurance claims handbook that meets statutory requirements, to
establish a regulatory appeals process, and to ensure that insurance
agents meet minimum NFIP education and training requirements.

On October 12, 2005, the Acting Director of FEMA's Mitigation Division

Agency Comments provided written comments on a draft of this report. FEMA
offered

and Our Evaluation 	substantive comments on three issues (App. II). FEMA
offered comments principally in three areas: (1) its disappointment that
we had not directly addressed the issue of whether Congress intended the
flood insurance program to restore damaged property to its pre-flood
condition; (2) its view that the method of choosing its sample for
operational reviews was appropriate and that its financial and internal
controls are wide-ranging and include processes that we did not address;
and (3) its view that contrary to the impression given in our draft
report, FEMA has worked diligently to implement the requirements of the
Flood Insurance Reform Act of 2004.

o  	FEMA expressed disappointment that our report made no explicit,
unambiguous statement regarding whether Congress intended flood insurance
to restore damaged property to its pre-flood condition. We believe we have
addressed the issue consistent with our statutory mandate by explaining
the statutory and regulatory provisions that affect both dollar ceilings
and other coverage limitations. Section 208 of the Flood Insurance Reform
Act of 2004 mandated GAO to conduct a study of aspects of the National
Flood Insurance Program (NFIP), including "the adequacy of the scope of
coverage provided under flood insurance policies in meeting the intended
goal of Congress that flood victims be restored to their pre-flood
conditions, and any recommendations to ensure that goal is being met." To
address this mandate, it was necessary to consider the legal framework of
flood insurance coverage established by the National Flood Insurance Act
of 1968, as amended, and FEMA's implementing regulations. The amounts and
limitations of flood insurance policy coverage are affected by both the
statute and the regulations. In other words, flood insurance policies can
only restore victims to pre-flood conditions within, but not beyond, the
limits established by law and regulation. To address our mandate, we
therefore explained the statutory and regulatory provisions that placed
limitations on the amount claimants could recover under their flood
insurance policies. Our April 2005 testimony55 and this report make clear
that the statutory ceilings on the maximum amount of coverage that can be
purchased and the policy limitations that result from FEMA regulations may
result in a policyholder's insured structure not being restored to its
pre-flood condition.

o  	FEMA highlights a number of oversight and management procedures for
the program, including those for financial management. It also noted that
its method of selecting its sample for operational reviews was more
appropriate than the statistically random probability sample we
recommended. Most of the additional oversight and management processes and
controls FEMA noted in its comments are for financial management-an area
not included in the scope of our work. Our work focused on program
implementation and oversight. During our review, FEMA managers described
the operational reviews and claims inspections as the primary methods FEMA
used for monitoring and overseeing the NFIP.

55 See GAO, National Flood Insurance Program: Oversight of Policy Issuance
and Claims, GAO-05-523T (Washington, D.C.: April 14, 2005).

o  	In support of its current sampling strategy for its operational
reviews, FEMA cites a report it had commissioned in 1999---a report FEMA
had not previously mentioned or provided to us. Thus, we cannot comment on
that report or its recommendations. Nevertheless, although FEMA's current
sampling strategy may provide an opportunity to focus on particular areas
of risk, it does not provide management with the information needed to
assess the overall performance of the writeyour-own companies, including
the overall accuracy of the underwriting of NFIP policies and the
adjustment of claims- information that FEMA needs to have reasonable
assurance that program objectives are being achieved

o  	With respect to FEMA's implementation of program changes mandated by
the Flood Insurance Reform Act of 2004, we described several actions FEMA
had taken in its efforts to comply with the Act, while noting that it had
not fully implemented the Act's requirements. In its comments on our draft
report, FEMA said that it had been working diligently to meet the Act's
requirements and had made further progress on certain initiatives, for
example, by finalizing "Summary of Coverage" forms required by section 202
of the act and distributing them to policyholders purchasing or renewing
their coverage after September 21, 2005. We have updated our draft report
to reflect the new status information, but work remains to be done before
FEMA fully implements other requirements of the Flood Insurance Reform Act
of 2004. As we noted in our report, section 205 of the Act requires FEMA
to establish a claim appeals process by regulation, and section 204 of the
Act requires FEMA to describe this regulatory appeals process in its flood
insurance claims handbook. Although FEMA commented that it was offering
claimants an informal appeals process pending the establishment of a
regulatory process, it must establish the regulatory process to be in
compliance with the informational requirements of section 204 and the
procedural requirements of section 205 of the act. Finally, although FEMA
published minimum education and training requirements for flood insurance
agents in the Federal Register in September 2005, FEMA has not established
how or when states are to begin imposing these requirements on flood
insurance agents. Thus, we believe our recommendation that FEMA develop
documented plans with milestones for implementing the requirements of the
Flood Insurance Reform Act of 2004 remains appropriate.

FEMA also offered a number of technical comments that we incorporated as
appropriate.

We are sending copies of this report to the Secretary of the Department of
Homeland Security. We will also make copies available to others upon
request. In addition, the report will be available at no charge on GAO's
Web site at http://www.gao.gov.

If you have any questions, please contact me at (202) 512-8777 or
[email protected] or Christoper Keisling, assistant director at (404) 679
1917 or [email protected]. Contact points for our offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
GAO staff who made major contributions to this report are listed in
appendix III.

William O. Jenkins, Jr.
Director, Homeland Security and Justice Issues

                       Appendix I: Scope and Methodology

To address provisions in the Flood Insurance Reform Act of 2004 for a GAO
study and report on issues related to the processing of flood insurance
claims and the Federal Emergency Management Agency's (FEMA) oversight and
management of the program, we assessed (1) the statutory and regulatory
limitations on homeowners' coverage under the National Flood Insurance
Program (NFIP); (2) FEMA's role in monitoring and overseeing the NFIP; (3)
FEMA's response to concerns regarding NFIP payments for Hurricane Isabel
claims; and (4) the status of FEMA's implementation of requirements of the
Flood Insurance Reform Act of 2004.

To determine the statutory and regulatory limitations on homeowners'
coverage under the NFIP, we reviewed the National Flood Insurance Act of
1968, as amended, its legislative history, and FEMA's implementing
regulations, including its "Standard Flood Insurance Policy." We also
discussed our review with officials of DHS Office of General Counsel.

To assess FEMA's role in monitoring and overseeing the NFIP, we examined
program requirements and reports. We analyzed the results of 15
operational reviews and follow-up visits FEMA completed from 2001 through
February 2005 to determine whether they were done in accordance with
requirements and procedures outlined in FEMA's Write Your Own Financial
Control Plan and GAO's Standards for Internal Control in the Federal
Government. To determine whether FEMA met the standard for assessing the
quality of performance over time and ensuring that findings of its
operational reviews were addressed, we analyzed reports of the results of
all reviews of insurance operations and follow-up visits at insurance
companies where FEMA identified critical errors over a 10-year period,
from 1996 to April 2005-a total of 15 reports. All of the reviews and
visits for this 10-year period occurred from 2001 to April 2005 because
for several years prior to 1999, FEMA did not conduct operational reviews.
The reviews were restarted on a "practice" basis in 1999 and a regular
basis in 2000. We also observed FEMA examiners as they conducted a portion
of an operational review at a flood insurance vendor location and obtained
information on the schedule of operational reviews from 2000 to June 2005.
We obtained documentation on how quality assurance reinspections of claims
adjustments are done after flood events and reviewed copies of several
reinspection reports and examples of data maintained in the NFIP
reinspection database, as well as aggregate information on the number of
quality assurance reinspections done from 2000 to June 2005. We
interviewed officials of FEMA and its program contractor about their
oversight activities, and we discussed aspects of the process with
private-sector insurance officials from four of the five largest

Appendix I: Scope and Methodology

write-your-own companies in terms of the number of claims filed in 2004.
For example, we talked with FEMA officials about how claims files were
selected for each operational review to examine write your own companies'
claims underwriting and adjustment activities and talked with two of the
nine general adjusters employed by FEMA's program contractor about how
they reinspect the work of adjusters who prepare flood damage estimates
and how they select properties to visit. We interviewed these two general
adjusters because they had performed reinspections of claims adjustments
for damage from Hurricane Isabel and from hurricanes in Florida in 2004.
We did not evaluate FEMA's methodology for selecting sample sizes for its
monitoring and oversight activities.

To determine FEMA's response to concerns about Hurricane Isabel claims
payments, we reviewed a statistically valid sample of 100 claims files of
claimants in Maryland, Virginia, and North Carolina who were not satisfied
with their initial claims settlements and had their claims reviewed by a
special FEMA task force. The claims files included documentation of
actions taken on the claims by the write-your-own companies and the FEMA
task force, as well as correspondence and documentation provided by the
claimants. For this representative sample of claims, we determined the
average additional amount paid on claims that were closed with an
additional payment; the average amount of claims reviewed by the task
force; and reasons claims were closed by the task force with and without
additional payments. We based our analysis on the information in the files
we reviewed; we did not verify the accuracy of the information in the
claims files. We tested the reliability of claims payments amounts for the
NFIP database on a statistically valid sample of 250 claims for all flood
events in 2003 and 2004. We determined that the NFIP database was
sufficiently reliable for our reporting purposes. We discussed the actions
FEMA took to address concerns of Hurricane Isabel claimants with FEMA
officials, as well as the two general adjusters we interviewed, other
officials of FEMA's program contractor, and private-sector insurance
officials. We did not interview NFIP policyholders who filed claims for
flood damage after Hurricane Isabel because (1) such interviews would have
provided anecdotal information that could not be used to make judgments
about Hurricane Isabel claimants as a group or any subset of the group;
and (2) we started our review more than a year after Hurricane Isabel
occurred; thus, testimonial information would have been dated.

To determine the extent to which FEMA had implemented provisions of the
Flood Insurance Reform Act of 2004, we examined documentation of the
agency's efforts, including draft materials FEMA had prepared for
distribution to policyholders. We also interviewed officials to determine

Appendix I: Scope and Methodology

what progress had been made and what milestones, if any, had been
established to meet the legislative mandates.

We conducted our work in accordance with generally accepted government
auditing standards between December 2004 and August 2005.

Appendix II: Comments from the Federal Emergency Management Agency

Appendix II: Comments from the Federal Emergency Management Agency

Appendix II: Comments from the Federal Emergency Management Agency

Appendix II: Comments from the Federal Emergency Management Agency

Appendix II: Comments from the Federal Emergency Management Agency

Appendix III: GAO Contact and Staff Acknowledgements

GAO Contact William O. Jenkins, Jr. (202) 512-8777

Acknowledgments 	Amy Bernstein, Christine Davis, Pawnee Davis, Wilfred
Holloway, Deborah Knorr, and Raul Quintero made significant contributions
to this report.

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