Federal Emergency Management Agency: Challenges Facing the	 
National Flood Insurance Program (18-OCT-05, GAO-06-174T).	 
                                                                 
The disastrous hurricanes that have struck the Gulf Coast and	 
Eastern seaboard in recent years--including Katrina, Rita, Ivan, 
and Isabel--have focused attention on federal flood management	 
efforts. The National Flood Insurance Program (NFIP), established
in 1968, provides property owners with some insurance coverage	 
for flood damage. The Federal Emergency Management Agency (FEMA) 
within the Department of Homeland Security is responsible for	 
managing the NFIP. This testimony offers information from past	 
GAO work on (1) the financial structure of the NFIP; (2) why the 
NFIP insures properties for repetitive flood losses and the	 
impact on NFIP resources; and (3) compliance with requirements	 
for mandatory purchase of NFIP policies. The testimony also	 
discusses recommendations from a report GAO is issuing today on  
FEMA's oversight and management of the NFIP.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-174T					        
    ACCNO:   A39737						        
  TITLE:     Federal Emergency Management Agency: Challenges Facing   
the National Flood Insurance Program				 
     DATE:   10/18/2005 
  SUBJECT:   Flood insurance					 
	     Insurance claims					 
	     Insurance premiums 				 
	     Insurance regulation				 
	     Monitoring 					 
	     Program evaluation 				 
	     Program management 				 
	     Property damage claims				 
	     FEMA National Flood Insurance Program		 
	     Hurricane Isabel					 
	     Hurricane Ivan					 
	     Hurricane Katrina					 
	     Hurricane Rita					 

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GAO-06-174T

                 United States Government Accountability Office

GAO	Testimony Before the Chairman, Committee on Banking, Housing and Urban
Affairs, U.S. Senate

For Release on Delivery

Expected at 10:00 a.m. EDT FEDERAL EMERGENCY

Tuesday, October 18, 2005

MANAGEMENT AGENCY

             Challenges Facing the National Flood Insurance Program

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

GAO-06-174T

[IMG]

October 2005

FEDERAL EMERGENCY MANAGEMENT AGENCY

Challenges Facing the National Flood Insurance Program

What GAO Found

As GAO has reported, the NFIP, by design, is not actuarially sound. The
program does not collect sufficient premium income to build reserves to
meet long-term future expected flood losses, in part because Congress
authorized subsidized insurance rates to be made available for some
properties. FEMA has generally been successful in keeping the NFIP on a
sound financial footing, but the catastrophic flooding events of 2004
(involving four separate hurricanes) required FEMA, as of August 2005, to
borrow $300 million from the U.S. Treasury to help pay an estimated $1.8
billion on flood insurance claims. Following Hurricane Katrina in August
2005, legislation was enacted to increase FEMA's borrowing authority from
$1.5 billion to $3.5 billion through fiscal year 2008.

Properties that suffer repeated flooding but generally pay subsidized
flood insurance rates-so-called repetitive-loss properties-constitute a
significant drain on NFIP resources. These properties account for roughly
1 percent of properties insured under the NFIP, but account for 25 percent
to 30 percent of all claim losses. The Flood Insurance Reform Act of 2004
established a pilot program requiring owners of repetitive-loss properties
to elevate, relocate, or demolish houses, with NFIP bearing some of those
costs. Future studies of the NFIP should analyze the progress made to
reduce the inventory of subsidized repetitive-loss properties, and
determine whether additional regulatory or congressional action is needed.

In 1973 and again in 1994, legislation was enacted requiring the mandatory
purchase of NFIP policies by some property owners in high-risk areas. In
June 2002, GAO reported that the extent to which lenders were required to
enforce mandatory purchase requirements was unknown. While FEMA officials
believed that many lenders often were noncompliant, neither side could
substantiate its claims regarding compliance.

FEMA did not use a statistically valid method for sampling files to be
reviewed in its 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.

FEMA has not yet fully implemented provisions of the Flood Insurance
Reform Act of 2004 requiring the agency to develop new materials to
explain coverage and the claims process to policyholders when they
purchase and renew policies, establish an appeals process for claimants,
and provide insurance agent education and training requirements. The
statutory deadline for implementing these changes was December 30, 2004,
and as of September 2005 FEMA had not developed documented plans with
milestones for meeting the provisions of the act.

United States Government Accountability Office

Mr. Chairman and Members of the Committee:

I appreciate the opportunity to participate in today's hearing on the
future of the National Flood Insurance Program (NFIP) to discuss issues
related to the future financial stability of the NFIP and recommendations
we have made for improvements to the management and oversight of the
program. The NFIP combines property insurance for flood victims, mapping
to identify the boundaries of the areas at highest risk of flooding, and
incentives for communities to adopt and enforce floodplain management
regulations and building standards to reduce future flood damage. The
effective integration of all three of these elements is needed for the
NFIP to achieve its goals of:

o  	providing property flood insurance coverage for a high proportion of
property owners who would benefit from such coverage;

o  	through this insurance coverage reducing taxpayer-funded disaster
assistance when flooding strikes, and

o  	reducing flood damage through flood plain management and the
enforcement of building standards (such as elevating structures).

The Federal Emergency Management Agency (FEMA) within the Department of
Homeland Security (DHS) is responsible for the oversight and management of
the program.1 Under the program, the federal government assumes the
liability for the insurance coverage and sets rates and coverage
limitations, among other responsibilities.

Floods are the most common and destructive natural disaster in the United
States. According to NFIP statistics, 90 percent of all natural disasters
in the United States involve flooding. However, flooding is generally
excluded from homeowner policies that typically cover damage from other
losses, such as wind, fire, and theft. Because of the catastrophic nature
of flooding and the inability to adequately predict

1In 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 retained its name and individual identity
within the department. Under a reorganization plan proposed by the current
Secretary of DHS, the Emergency Preparedness and Response Directorate
would be abolished, and FEMA would report directly to the Undersecretary
and Secretary of DHS.

flood risks, private insurance companies have largely been unwilling to
underwrite and bear the risk of flood insurance.

Congress established the NFIP pursuant to the National Flood Insurance Act
of 19682 to provide policyholders with some insurance coverage for flood
damage, as an alternative to disaster assistance, and to try to reduce the
escalating costs of repairing flood damage. In creating the NFIP, Congress
found that a flood insurance program with "large-scale participation of
the Federal Government and carried out to the maximum extent practicable
by the private insurance industry is feasible and can be initiated."3 In
keeping with this purpose, FEMA has contractual agreements with 95 private
insurance company partners to sell policies and adjust and process claims.

As of August 2005, the NFIP was estimated to have approximately 4.6
million policyholders in about 20,000 communities. Since its inception,
the program has paid about $14.6 billion in insurance claims, primarily
from policyholder premiums that otherwise would have been paid through
taxpayer-funded disaster relief or borne by home and business owners
themselves. According to FEMA, every $3 in flood insurance claims payments
saves about $1 in disaster assistance payments, and the combination of
flood plain management and mitigation efforts save about $1 billion in
flood damage each year.

The unprecedented damage wrought by Hurricanes Katrina and Rita are also
likely to result in unprecedented claims on the NFIP. GAO is beginning a
body of work on the preparation for, response to, and recovery from
Hurricanes Katrina and Rita. As GAO moves forward with this work, we will
continue to work with this and other congressional committees and the
accountability community-federal inspector generals, state and city
auditors-regarding the scope of our future work on emergency management
issues, including the NFIP. Our goal is to apply our resources and
expertise to address long-term concerns, such as those we are discussing
today, and to avoid duplicating the work of others. Currently, we have
teams in the Gulf Coast states collecting data and observations from
hurricane victims and federal, state, local, and private

2The National Flood Insurance Act of 1968, as amended, is codified at 42
U.S.C. 4001 to 4129.

342 U.S.C. 4001(b)(2).

participants in the preparation for, response to, and recovery from these
devastating hurricanes, including the flooding they caused.

Past experience can provide context for considering future policy options.
In this spirit, my testimony today is based on a body of work that GAO has
done over the past several years before the nation began the struggle to
respond to the devastating effects of Hurricanes Katrina and Rita in our
Gulf Coast states. This prior work has addressed the issues of the
program's structure and financing, repetitive loss properties, mandatory
and voluntary purchase of flood insurance, and revising and improving the
nation's flood maps. Together they provide information useful in assessing
efforts over the NFIP's history to enhance the program's financial
stability and effectiveness. Today, we are also releasing a report on
FEMA's management and oversight of the flood insurance program that
includes several recommendations for improvement.4 This report was
mandated by the Flood Insurance Reform Act of 2004.5 It includes
recommendations

on two pre-Hurricane Katrina flood-insurance related issues that pose a
challenge for FEMA. These are (1) improving FEMA's management and
oversight of the NFIP and (2) FEMA's implementation of provisions of the
Flood Insurance Reform Act of 2004 to provide policyholders a flood
insurance claims handbook that meets statutory requirements, to establish
a regulatory appeals process, and to ensure that flood insurance agents
meet minimum NFIP education and training requirements.

The report we are releasing today is based on interviews with FEMA
officials, documentation of its monitoring and oversight processes, and
our field observations of FEMA's monitoring and oversight activities. In
addition, we analyzed the National Flood Insurance Act of 1968, as
amended, its legislative history, and FEMA's implementing regulations, and
we examined documentation and interviewed officials about FEMA's efforts
to comply with provisions of the 2004 Flood Insurance Reform Act. We did
our work from December 2004 to August 2005 in accordance with generally
accepted government auditing standards.

4GAO, Federal Emergency Management Agency: Improvements Needed to Enhance
Oversight and Management of the National Flood Insurance Program,
GAO-06-119 (Washington, D.C.: Oct. 18, 2005).

5Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, Pub. L.
No. 108-264, 118 Stat. 712, 727 (2004).

Major Program Issues-A Summary

A key characteristic of the NFIP is the extent to which FEMA must rely on
others to achieve the program's goals. FEMA's role is principally one of
establishing policies and standards that others generally implement on a
day-to-day basis and providing financial and management oversight of those
who carry out those day-to-day responsibilities. These responsibilities
include ensuring that property owners who are required to purchase flood
insurance do so, enforcing flood plain management and building
regulations, selling and servicing flood insurance policies, and updating
and maintaining the nation's flood maps. In our prior work, we have
identified several major challenges facing the NFIP:

o  	Reducing losses to the program resulting from policy subsidies and
repetitive loss properties.6 The program is not actuarially sound because
of the number of policies in force that are subsidized-about 29 percent at
the time of our 2003 report. As a result of these subsidies, some
policyholders pay premiums that represent about 35-40 percent of the true
risk premium. Moreover, at the time of our 2004 report, there were about
49,000 repetitive loss properties-those with two or more losses of $1,000
or more in a 10-year period-representing about 1 percent of the 4.4
million buildings insured under the program. From 1978 until March 2004,
these repetitive loss properties represented about $4.6 billion in claims
payments.

o  	Increasing property owner participation in the program. As little as
half of eligible properties may participate in the flood insurance
program. Moreover, the extent of noncompliance with the mandatory purchase
requirement by affected property owners is unknown.

o  	Developing accurate, digital flood maps.7 In our report on the NFIP's
flood map modernization program, we discussed the multiple uses and
benefits of accurate, digitized flood plain maps. However, the NFIP faces
a major challenge in working with its contractor and state and local
partners

of varying technical capabilities and resources to produce accurate,
digital flood maps. In developing those maps, we recommended that FEMA
develop and implement data standards that will enable FEMA, its

6 GAO, Flood Insurance: Challenges Facing the National Flood Insurance
Program,GAO-03-606T (Washington, D.C.: April 1, 2003); National Flood
Insurance Program: Actions to Address Repetitive Loss
Properties,GAO-04-401T (Washington, D.C.: March 25, 2004).

7 GAO, Flood Map Modernization: Program Strategy Shows Promise, but
Challenges Remain, GAO-04-417 (Washington, D.C.: March 31, 2004).

contractor, and its state and local partners to identify and use
consistent data collection and analysis methods for developing maps for
communities with similar flood risk.

o  Providing effective oversight of flood insurance operations. In the

The NFIP Pays Expenses and Claims with Premiums, but Its Financial
Structure Is Not Designed to be Actuarially Sound

report we are releasing today, we note that FEMA faces a challenge in
providing effective oversight of the 95 insurance companies and thousands
of insurance agents and claims adjusters who are primarily responsible for
the day-to-day process of selling and servicing flood insurance policies.

To the extent possible, the NFIP is designed to pay operating expenses and
flood insurance claims with premiums collected on flood insurance policies
rather than with 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 some properties
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

Until the 2004 hurricane season, FEMA had been generally successful in
keeping the NFIP on sound financial footing. It had exercised its
authority to borrow from the Treasury three times in the last decade when
losses were heavy and repaid all funds with interest. As of August 2005,
the program had borrowed $300 million to cover an estimated $1.8 billion
in claims from the major disasters of 2004, including hurricanes Charley,
Frances, Ivan, and Jean, which hit Florida and other East and Gulf Coast
states. The large number of claims arising from Hurricanes Katrina and
Rita will require FEMA to borrow heavily from the Treasury, because the
NFIP does not have the financial reserves necessary to offset heavy losses
in the short-term. Following Hurricane Katrina in August 2005, legislation
was enacted that increased FEMA's borrowing authority from $1.5 billion to
$3.5 billion through fiscal year 2008.10 Additional borrowing authority
may be needed to pay claims arising from Hurricanes Katrina and Rita.

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

9See 42 U.S.C. 4016.

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

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

Premium Subsidies and Repetitive-Loss Properties Affect NFIP's Actuarial
Soundness

In reauthorizing the NFIP in 2004, Congress noted that "repetitive-loss
properties"-those that had resulted in two or more flood insurance claims
payments of $1,000 or more over 10 years-constituted a significant drain
on the resources of the NFIP. 11 These repetitive loss properties are
problematic not only because of their vulnerability to flooding but also
because of the costs of repeatedly repairing flood damages. While these
properties make up only about 1 percent of the properties insured under
the NFIP, they account for 25 to 30 percent of all claims losses. At the
time of our March 2004 report on repetitive loss properties, nearly half
of all nationwide repetitive loss property insurance payments had been
made in Louisiana, Texas, and Florida. According to a recent Congressional
Research Service report, as of December 31, 2004, FEMA had identified
11,706 "severe repetitive loss" properties defined as those with four or
more claims or two or three losses that exceeded the insured value of the
property.12 Of these 11,706 properties almost half (49 percent) were in
three states-3,208 (27 percent) in Louisiana, 1,573 (13 percent) in Texas,
and 1,034 (9 percent) in New Jersey.

As the destruction caused by horrendous 2004 and 2005 hurricanes are a
driving force for improving the NFIP today, devastating natural disasters
in the 1960s were a primary reason for the national interest in creating a
federal flood insurance program. In 1963 and 1964, Hurricane Betsy and
other hurricanes caused extensive damage in the South, and, in 1965, heavy
flooding occurred on the upper Mississippi River. In studying insurance
alternatives to disaster assistance for people suffering property losses
in floods, a flood insurance feasibility study found that premium rates in
certain flood-prone areas could be extremely high. As a result, the
National Flood Insurance Act of 1968, which created the NFIP, mandated
that existing buildings in flood-risk areas would receive subsidies on
premiums because these structures were built before the flood risk was
known and identified on flood insurance rate maps.13 Owners of structures
built in flood-prone areas on or after the effective date of the first
flood insurance rate maps in their areas or after December 31, 1974, would
have to pay full actuarial rates.14 Because many repetitive loss
properties were

11Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section
2(3),(4), (5), 118 Stat. 712, 713 (2004).

12Congressional Research Service, Federal Flood Insurance: The Repetitive
Loss Problem, RL32972 (Washington, D.C.: June 30, 2005).

1342 U.S.C. 4014(a)(2), 4015(a), (b).

1442 U.S.C. 4014(a)(1), 4015(c)

built before either December 31, 1974 or the effective date of the first
flood insurance rate maps in their areas, they were eligible for
subsidized premium rates under provisions of the National Flood Insurance
Act of 1968.

The provision of subsidized premiums encouraged communities to participate
in the NFIP by adopting and agreeing to enforce state and community
floodplain management regulations to reduce future flood damage. In April
2005, FEMA estimated that floodplain management regulations enforced by
communities participating in the NFIP have prevented over $1.1 billion
annually in flood damage. However, some of the properties that had
received the initial rate subsidy are still in existence and subject to
repetitive flood losses, thus placing a financial strain on the NFIP.

For over a decade, FEMA has pursued a variety of strategies to reduce the
number of repetitive loss properties in the NFIP. In a 2004 testimony, we
noted that congressional proposals have been made to phase out coverage or
begin charging full and actuarially based rates for repetitive loss
property owners who refuse to accept FEMA's offer to purchase or mitigate
the effect of floods on these buildings.15 The 2004 Flood Insurance Reform
Act created a 5-year pilot program to deal with repetitive-loss properties
in the NFIP. In particular, the act authorized FEMA to provide financial
assistance to participating states and communities to carry out mitigation
activities or to purchase "severe repetitive loss properties."16 During
the pilot program, policyholders who refuse a mitigation or purchase offer
that meets program requirements will be required to pay increased premium
rates. In particular, the premium rates for these policyholders would
increase by 150% following their refusal and another 150% following future
claims of more than $1,500.17 However, the rates charged cannot exceed the
applicable actuarial rate.

15GAO, National Flood Insurance Program: Actions to Address Repetitive
Loss Properties, GAO-04-401T (Washington, D.C.: Mar. 25, 2004).

16Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 102(b),
(c), 118 Stat. 712, 714 (2004). The act defines a "severe repetitive loss
property" to mean single-family properties that have received at least
$20,000 in flood insurance payments based on 4 or more claims of at least
$5,000 each. The act requires FEMA to define in future regulation which
multi-family properties constitute "severe repetitive loss properties."

17Id., section 102(h)(1), (2), (3).

Data Inconclusive on Compliance with Requirements for Mandatory Purchase
of NFIP Policies

It will be important in future studies of the NFIP to continue to analyze
data on progress being made to reduce the inventory of subsidized NFIP
repetitive loss properties, how the reduction of this inventory
contributes to the financial stability of the program, and whether
additional FEMA regulatory steps or congressional actions could contribute
to the financial solvency of the NFIP, while meeting commitments made by
the authorizing legislation.

In 1973 and 1994, Congress enacted requirements for mandatory purchase of
NFIP policies by some property owners in high risk areas. From 1968 until
the adoption of the Flood Disaster Protection Act of 1973, the purchase of
flood insurance was voluntary. However, because voluntary participation in
the NFIP was low and many flood victims did not have insurance to repair
damages from floods in the early 1970s, the 1973 act required the
mandatory purchase of flood insurance to cover some structures in special
flood hazard areas of communities participating in the program. Homeowners
with mortgages issued by federally-regulated lenders on property in
communities identified to be in special flood hazard areas are required to
purchase flood insurance on their dwellings for the amount of their
outstanding mortgage balance, up to a maximum of $250,000 in coverage for
single family homes. The owners of properties with no mortgages or
properties with mortgages held by lenders who are not federally regulated
were not, and still are not, required to buy flood insurance, even if the
properties are in special flood hazard areas-the areas NFIP flood maps
identify as having the highest risk of flooding.

FEMA determines flood risk and actuarial ratings on properties through
flood insurance rate mapping and other considerations including the
elevation of the lowest floor of the building, the type of building, the
number of floors, and whether or not the building has a basement, among
other factors. FEMA flood maps designate areas for risk of flooding by
zones. For example, areas subject to damage by waves and storm surge are
in zone with the highest expectation for flood loss.

Between 1973 and 1994, many policyholders continued to find it easy to
drop policies, even if the policies were required by lenders. Federal
agency lenders and regulators did not appear to strongly enforce the
mandatory

flood insurance purchase requirements.18 According to a recent
Congressional Research Service study,19 the Midwest flood of 1993
highlighted this problem and reinforced the idea that reforms were needed
to compel lender compliance with the requirements of the 1973 Act. In
response, Congress passed the National Flood Insurance Reform Act of 1994.
Under the 1994 law, if the property owner failed to get the required
coverage, lenders were required to purchase flood insurance on their
behalf and then bill the property owners. Lenders became subject to civil
monetary penalties for not enforcing the mandatory purchase requirement.

In June 2002, we reported that the extent to which lenders were enforcing
the mandatory purchase requirement was unknown. Officials involved with
the flood insurance program developed contrasting viewpoints about whether
lenders were complying with the flood insurance purchase requirements
primarily because the officials used differing types of data to reach
their conclusions. Federal bank regulators and lenders based their belief
that lenders were generally complying with the NFIP's purchase
requirements on regulators' examinations and reviews conducted to monitor
and verify lender compliance. In contrast, FEMA officials believed that
many lenders frequently were not complying with the requirements, which
was an opinion based largely on noncompliance estimates computed from data
on mortgages, flood zones, and insurance policies; limited studies on
compliance; and anecdotal evidence indicating that insurance was not
always in place where required. Neither side, however, was able to
substantiate its differing claims with statistically sound data that
provide a nationwide perspective on lender compliance. 20

18The federal entities for lending regulation are the Board of Governors
of the Federal Reserve System, the Office of the Comptroller of the
Currency, the Office of Thrift Supervision, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, and the Farm Credit
Administration.

19Congressional Research Service, Federal Flood Insurance: The Repetitive
Loss Problem (June 30, 2005).

20GAO, Flood Insurance: Extent of Noncompliance with Purchase Requirements
is Unknown, GAO-02-396 (Washington, D.C: June 21, 2002).

Accurate, Updated Flood Maps Are The Foundation of the NFIP

Accurate flood maps that identify the areas at greatest risk of flooding
are the foundation of the NFIP. Flood maps must be periodically updated to
assess and map changes in the boundaries of floodplains that result from
community growth, development, erosion, and other factors that affect the
boundaries of areas at risk of flooding. FEMA has embarked on a multiyear
effort to update the nation's flood maps at a cost in excess of $1
billion. The maps are principally used by (1) the approximately 20,000
communities participating in the NFIP to adopt and enforce the program's
minimum building standards for new construction within the maps'
identified flood plains; (2) FEMA to develop accurate flood insurance
policy rates based on flood risk, and (3) federal regulated mortgage
lenders to identify those property owners who are statutorily required to
purchase federal flood insurance. Under the NFIP, property owners whose
properties are within the designated "100-year floodplain" and have a
mortgage from a federally regulated financial institution are required to
purchase flood insurance in an amount equal to their outstanding mortgage
balance (up to the statutory ceiling of $250,000).

FEMA expects that by producing more accurate and accessible digital flood
maps, the NFIP and the nation will benefit in three ways. First,
communities can use more accurate digital maps to reduce flood risk within
floodplains by more effectively regulating development through zoning and
building standard. Second, accurate digital maps available on the Internet
will facilitate the identification of property owners who are statutorily
required to obtain or who would be best served by obtaining flood
insurance. Third, accurate and precise data will help national, state, and
local officials to accurately locate infrastructure and transportation
systems (e.g., power plants, sewage plants, railroads, bridges, and ports)
to help mitigate and manage risk for multiple hazards, both natural and
man-made.

Success in updating the nation's flood maps requires clear standards for
map development; the coordinated efforts and shared resources of federal,
state, and local governments; and the involvement of key stakeholders who
will be expected to use the maps. In developing the new data system to
update flood maps across the nation, FEMA's intent is to develop and
incorporate flood risk data that are of a level of specificity and
accuracy commensurate with communities' relative flood risks. Not every
community may need the same level of specificity and detail in its new
flood maps. However, it is important that FEMA establish standards for the
appropriate data and level of analysis required to develop maps for all
communities of a similar risk level. In its November 2004 Multi-Year Flood
Hazard Identification Plan, FEMA discussed the varying types of data

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

collection and analysis techniques the agency plans to use to develop
flood hazard data in order to relate the level of study and level of risk
for each of 3,146 counties.

FEMA has developed targets for resource contribution (in-kind as well as
dollars) by its state and local partners in updating the nation's flood
maps. At the same time, it has developed plans for reaching out to and
including the input of communities and key stakeholders in the development
of the new maps. These expanded outreach efforts reflect FEMA's
understanding that it is dependent upon others to achieve the benefits of
map modernization.

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 during 2005 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

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

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
to meet our internal control standard that it have reasonable assurance
that program objectives are being achieved and that its operations are
effective and efficient.

To strengthen and improve FEMA's monitoring and oversight of the NFIP, we
are recommending in today's report that FEMA use a methodologically valid
approach for sampling files selected for operational reviews and quality
assurance claims reinspections.

As of September 2005, FEMA had not yet fully implemented provisions of the
Flood Insurance Reform Act of 2004. Among other things, the act requires
FEMA to provide policyholders a flood insurance claims handbook; to
establish a regulatory appeals process for claimants; and to establish
minimum education and training requirements for insurance agents who sell
NFIP policies.21 The 6-month statutory deadline for implementing these
changes was December 30, 2004.

In September 2005, FEMA posted a flood insurance claims handbook on its
Web site. The handbook contains information on anticipating, filing and
appealing a claim through an informal appeals process, which FEMA intends
to use pending the establishment of a regulatory appeals process. However,
because the handbook does not contain information regarding the appeals
process that FEMA is statutorily required to establish through regulation,
it does not yet meet statutory requirements. 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. Therefore, it remains unclear how or when FEMA will
establish the statutorily required appeals process.

21Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, sections 204,
205, and 207.

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.

We are recommending in today's report that FEMA developed documented plans
with milestones for implementing requirements of the Flood Insurance
Reform Act of 2004 to provide policyholders a flood insurance claims
handbook that meets statutory requirements, to establish a regulatory
appeals process, and to ensure that flood insurance agents meet minimum
NFIP education and training requirements.

FEMA did not agree with our recommendations. It noted that its current
sampling methodology of selecting a sample based on knowledge of the
population to be sampled was more appropriate for identifying problems
than the statistically random probability sample we recommended. Although
FEMA's current nonprobability 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.

FEMA also 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 are valid. For example, although FEMA
commented that it was offering claimants an informal

appeals process in its flood insurance claims handbook, it must establish
regulations for this process, and those are not yet complete.

Concluding Observations

GAO Contacts and Staff Acknowledgments

The most immediate challenge for the NFIP is processing the flood
insurance claims resulting from Hurricanes Katrina and Rita. Already,
according to FEMA, the NFIP has received about twice as many claims in
2005 as it did in all of 2004, which was itself a record year. The need
for
effective communication and consistent and appropriate application of
policy provisions will be particularly important in working with anxious
policyholders, many of whom have been displaced from their homes.

In the longer term, Congress and the NFIP face a complex challenge in
assessing potential changes to the program that would improve its
financial stability, increase participation in the program by property
owners in areas at risk of flooding, reduce the number of repetitive loss
properties in the program, and maintain current and accurate flood plain
maps. These issues are complex, interrelated, and are likely to involve
trade-offs. For example, increasing premiums to better reflect risk may
reduce voluntary participation in the program or encourage those who are
required to purchase flood insurance to limit their coverage to the
minimum required amount (i.e., the amount of their outstanding mortgage
balance). This in turn can increase taxpayer exposure for disaster
assistance resulting from flooding. There is no "silver bullet" for
improving
the current structure and operations of the NFIP. It will require sound
data
and analysis and the cooperation and participation of many stakeholders.

Mr. Chairman and Members of the Committee, this concludes my prepared
statement. I would be pleased to respond to any questions you and the
Committee Members may have.

Contact points for our Office of Congressional Relations and Public
Affairs
may be found on the last page of this statement. For further information
about this testimony, please contact Norman Rabkin at (202) 512-8777 or
at [email protected], or William O. Jenkins, Jr. at (202) 512-8757 or at
[email protected]. This statement was prepared under the direction of
Christopher Keisling. Key contributors were Amy Bernstein,
Christine Davis, Deborah Knorr, Denise McCabe, and Margaret Vo.

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