Federal Emergency Management Agency: Oversight and Management of 
the National Flood Insurance Program (20-OCT-05, GAO-06-183T).	 
                                                                 
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. GAO issues a report earlier this week that was
mandated by the Flood Insurance Reform Act of 2004. This	 
testimony discusses findings and recommendations from that report
and information from past GAO work. Specifically, the testimony  
discusses (1) the statutory and regulatory limitations on	 
coverage for homeowners under the NFIP; (2) FEMA's role in	 
monitoring and overseeing the NFIP; (3) the status of FEMA's	 
implementation of provisions of the Flood Insurance Reform Act of
2004. It also offers observations on broader issues facing the	 
NFIP including its financial structure and updating flood maps.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-183T					        
    ACCNO:   A39998						        
  TITLE:     Federal Emergency Management Agency: Oversight and       
Management of the National Flood Insurance Program		 
     DATE:   10/20/2005 
  SUBJECT:   Flood control management				 
	     Flood insurance					 
	     Insurance claims					 
	     Insurance regulation				 
	     Monitoring 					 
	     Program management 				 
	     Property damage claims				 
	     Regulatory agencies				 
	     Reporting requirements				 
	     Homeowners insurance				 
	     FEMA National Flood Insurance Program		 

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GAO-06-183T

United States Government Accountability Office

GAO	Chairman, Subcommittee on Housing and Community Opportunity, Committee
on Financial Services, U.S. House of Representatives

For Release on Delivery

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

Thursday, October 20, 2005

MANAGEMENT AGENCY

        Oversight and Management of the National Flood Insurance Program

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

GAO-06-183T

[IMG]

October 2005

FEDERAL EMERGENCY MANAGEMENT AGENCY

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 implementing
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
flooddamaged 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.

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 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.

As GAO has previously 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 major 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.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to participate in today's hearing on the
National Flood Insurance Program (NFIP) to discuss the Federal Emergency
Management Agency's (FEMA) role in the management and oversight of the
NFIP. The NFIP combines property insurance for flood victims, mapping to
identify the boundaries of the areas at 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 are 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 flood risks, private
insurance companies have largely been unwilling to underwrite and bear the
risk of flood insurance.

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.

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.
Flood insurance is available to owners and occupants of insurable property
in flood-prone areas. Our work focused on insurance coverage for
homeowners. However, coverage is also available for other structures, such
as apartment buildings, schools, churches, businesses, cooperative
associations, and condominium associations.

As of August 2005, the NFIP was estimated to have approximately 4.6
million policyholders in about 20,000 communities with $828 billion of
insurance in force. 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 saves about $1 billion in flood damage each year.

As we finalized the report released this week, the exact extent of the
devastation from Hurricanes Katrina and Rita in August and September 2005
was still being assessed; however, the acting director of FEMA's
Mitigation Division testified on October 18, 2005 that the NFIP would pay
$15 to 25 billion in claims for damage resulting from these two storms. As
of October 13, 2005, FEMA had received 192,809 flood insurance claims and
the NFIP had paid nearly $1.3 billion to settle 7,664 of these claims. The
number of claims filed is more than twice as many as were filed in all of
2004, itself a record year. Clearly, these two disasters will challenge
the NFIP with demands the program has never before faced in its more than
35 year history. Already, a record number of flood insurance claims have

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).

been filed in 2005, and Congress has increased the NFIP's authority to
borrow from the United States Treasury from $1.5 billion to $3.5 billion.

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

My testimony today discusses the report we issued on October 18, 2005 that
discusses FEMA's management and oversight of the flood insurance program.4
This report was mandated by the Flood Insurance Reform Act of 2004.5 It
includes recommendations on two pre-Hurricane Katrina floodinsurance
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 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

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).

2004 to August 2005 in accordance with generally accepted government
auditing standards.

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. We have issued reports and
testified before this and other congressional committees on these and
other issues related to the program.6 In the 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.

My testimony today addresses four topics:

o  	insurance coverage available under the NFIP, including coverage
limitations;

o  FEMA's role in monitoring and oversight of the program;

o  	FEMA's progress in implementing the requirements of the National Flood
Insurance Reform Act of 2004; and

o  Some broader challenges facing the program.

6See, for example, the following GAO reports and testimonies: Flood
Insurance: Extent of Noncompliance with Purchase Requirements Unknown,
GAO-02-326 (Washington, D.C.: June 21, 2002); National Flood Insurance
Program: Actions to Address Repetitive Loss Properties, GAO-04-401T
(Washington, D.C.: March 25, 2004); Flood Map Modernization: Program
Strategy Shows Promise, but Challenges Remain, GAO-04-117 (Washington,
D.C.: March 31, 2004); Federal Emergency Management Agency: Challenges
Facing the National Flood Insurance Program, GAO-06-174T (Washington,
D.C.: Oct. 18, 2005).

  Available Insurance Coverage and Limitations Under the NFIP

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 the costs of repairing or replacing flooddamaged property.
For example, there is a $250,000 statutory ceiling on the amount of flood
insurance homeowners can purchase for the building structure and a
$100,000 ceiling on the amount they can purchase for certain personal
property. Thus, homes that might sustain more than $250,000 in damage
cannot be insured to their full replacement cost.

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," 7 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. Pursuant to this delegation of
authority, FEMA has issued regulations, including a "Standard Flood
Insurance Policy," that further delineate the scope of coverage.8 All
flood insurance made available under the NFIP is subject to the express
terms and conditions of the statute and regulations, including the
standard policy.9 The Federal Insurance Administrator within FEMA is
charged with interpreting the scope of coverage under the standard
policy.10

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 prior water damage, and losses resulting from events
other than flood, such as windstorms or or earth movements, are not
covered by the NFIP. Personal property is covered, with certain
limitations, only if the homeowner has purchased separate 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

742 U.S.C. 4013(a).

8The insurance coverage regulations appear at 44 C.F.R. Part 61, and the
Standard Flood Insurance Policy is an appendix to these regulations, set
forth at 44 C.F.C. Part 61, appendix A(1), "Standard Flood Insurance
Policy Dwelling Form."

944 C.F.R. 61.4.

10Id. 61.4(b), 61.14.

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

represents the cost to replace damages 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. Finally, the amount recoverable under the SFIP is
limited to the amount that exceeds the applicable deductible.11 Our report
discusses the limitations on coverage and recoverable losses in greater
detail.

About 40 FEMA employees, assisted by about 170 contractor employees, are
responsible for managing the NFIP. Management responsibilities include
establishing and updating NFIP regulations, administering the National
Flood Insurance Fund, analyzing data to actuarially determine flood
insurance rates and premiums, and offering training to insurance agents
and adjusters. In addition, FEMA and its program contractor are
responsible for monitoring and overseeing the quality of the performance
of the write-your-own companies to assure that the NFIP is administered
properly.

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.

Operational reviews of flood insurance companies participating in the NFIP
that are conducted by FEMA staff are FEMA's primary internal

11SFIP section VI, Deductibles. Applicable deductible amounts are not
listed in the SFIP itself, but are shown on the Declarations Page, a
computer-generated summary of the information provided by the insured in
the insured's application. This page is part of each insured's flood
insurance policy.

control mechanism for monitoring, identifying, and resolving problems
related to how insurers sell and review NFIP policies and adjust claims.
For all aspects of 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 or 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. In
such cases, FEMA requires that the company 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 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.

Program Contractor Reinspections of NFIP Claims

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.12 Procedures for the general adjusters to follow are

12In addition to doing reinspections, these general adjusters are
responsible for estimating damage from flood events, coordinating claims
adjustment activities at disaster locations, and conducting adjuster
training.

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 with officials of 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. Conversely, if a general adjuster finds that the
private-sector adjuster missed a covered expenses in the original
adjustment, the general adjuster is to 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 overall during the 2004 hurricane
season, cited several errors that he had identified in reinspections of
claims, including improper room dimension measurements and improper
allocation of costs caused by wind damage (covered by homeowners'
policies) versus costs caused by flood damage. In addition, the instructor
identified as a problem poor communication with homeowners on the
processes 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, qualify 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

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 to meet our
internal control standard that it have reasonable assurance that program

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

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.13 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. 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

13Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, sections 204,
205, and 207.

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 develop 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 for both its sampling
methodology and implementation of the requirements of the Flood Insurance
Reform Act of 2004. 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.

  Some Broader Issues Facing the NFIP

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

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.14 FEMA has statutory authority to
borrow funds from the Treasury to keep the NFIP solvent.15

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 more than $1.8 billion in
claims from the major disasters of 2004, including hurricanes Charley,
Frances, Ivan, and Jeanne, 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 2008.16 Additional borrowing authority
may be needed to pay claims arising from Hurricanes Katrina and Rita.

14GAO, Flood Insurance: Information on the Financial Condition of the
National Flood Insurance Program, GAO-01-992T (Washington, D.C.: July
2001).

15See 42 U.S.C. 4016.

16The National Flood Insurance Program Enhanced Borrowing Authority Act of
2005, Pub.

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

Some Repetitively-Flooded Properties Are Subsidized under Provisions of
Authorizing Legislation and Continue to Financially Strain the Program

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. 17 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.18 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.19 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.20 Because many repetitive loss
properties were

17Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section
2(3),(4), (5), 118 Stat. 712, 713 (2004).

18Congressional Research Service, Federal Flood Insurance: The Repetitive
Loss Problem, RL32972 (Washington, D.C.: June 30, 2005).

1942 U.S.C. 4014(a)(2), 4015(a), (b).

2042 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.21 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."22 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

21GAO, National Flood Insurance Program: Actions to Address Repetitive
Loss Properties, GAO-04-401T (Washington, D.C.: Mar. 25, 2004).

22Flood Insurance Reform Act of 2004, 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."

150% following future claims of more than $1,500.23 However, the rates
charged cannot exceed the applicable actuarial rate.24

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.

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

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 from 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

23Id., , 118 Stat. 712, 717-718 (2004).

24DHS' proposed appropriation for fiscal year 2006 includes $40 million to
carry out the pilot program. Both houses of Congress passed the bill, and
it was presented to the President on October 14, 2005, but, as of October
17, 2005, the President had not signed the legislation. Department of
Homeland Security Appropriations Act, 2006, H.R. 2360, 109th Cong., title
III (2005).

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 zones 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.25 According to a recent
Congressional Research Service study,26 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,

25The 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.

26Congressional Research Service, Federal Flood Insurance: The Repetitive
Loss Problem (June 30, 2005).

was able to substantiate its differing claims with statistically sound
data that provide a nationwide perspective on lender compliance. 27

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

27GAO, Flood Insurance: Extent of Noncompliance with Purchase Requirements
is Unknown, GAO-02-396 (Washington, D.C: June 21, 2002).

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
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.

Concluding Observations

The most immediate challenge for the NFIP is processing the flood
insurance claims resulting from Hurricanes Katrina and Rita. FEMA
reported, as of October 13th, that it had received 192,809 flood insurance
claims and had paid nearly $1.3 billion to settle 7,664 of these claims.
The number of claims is more than twice as many as were filed in all of
2004, 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

  GAO Contacts and Staff Acknowledgments

(440459)

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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