    National Flood Insurance Program: New Processes Aided Hurricane
    Katrina Claims Handling, but FEMA's Oversight Should Be Improved
    (15-DEC-06, GAO-07-169).

    In August and September 2005, Hurricanes Katrina and Rita caused
    unprecedented destruction to property along the Gulf Coast,
    resulting in billions of dollars of damage claims to the National
    Flood Insurance Program (NFIP). This report, which we initiated
    under the authority of the Comptroller General, examines (1) the
    impact of Hurricanes Katrina and Rita on the NFIP and paid losses
    by location and property type; (2) the challenges the Federal
    Emergency Management Agency (FEMA) and others faced in addressing
    the needs of NFIP claimants and communities; (3) FEMA's methods
    of monitoring and overseeing claims adjustments; and (4) FEMA's
    efforts to meet the requirements of the Flood Insurance Reform
    Act of 2004 to establish policyholder coverage notifications, an
    appeals process for claimants, and education and training
    requirements for agents. To conduct these assessments, GAO
    interviewed FEMA and insurance officials, analyzed claims data,
    and examined a sample of reports done on the accuracy of claims
    adjustments.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-169
        ACCNO:   A64187
      TITLE:     National Flood Insurance Program: New Processes Aided
    Hurricane Katrina Claims Handling, but FEMA's Oversight Should Be
    Improved
         DATE:   12/15/2006
      SUBJECT:   Accountability
    	     Claims processing
    	     Claims settlement
    	     Damage claims
    	     Federal aid programs
    	     Flood insurance
    	     Hurricane Katrina
    	     Hurricane Rita
    	     Insurance claims
    	     Insurance losses
    	     Natural disasters
    	     Policy evaluation
    	     Program evaluation
    	     Property losses
    	     Residences
    	     Government agency oversight
    	     Policies and procedures
    	     National Flood Insurance Program

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    GAO-07-169

         * [1]Results in Brief
         * [2]Background

              * [3]NFIP Provides Insurance and Maps Flood Risk for Communities
              * [4]Private Insurers Sell Policies and Adjust NFIP Claims under

         * [5]Hurricanes Katrina and Rita Had a Far-Reaching Impact on the

              * [6]Most NFIP Loss Claims Were in Louisiana for Primary Residenc

         * [7]FEMA and Private Sector NFIP Partners Were Challenged to Pro

              * [8]Officials Described Challenges to Processing Flood Claims
              * [9]Over 95 Percent of Claims Were Closed within 9 Months with R
              * [10]FEMA Approved the Use of Expedited and Square Foot Claims Ad
              * [11]NFIP Adjustment Process Will Continue with Claims for Help t
              * [12]FEMA Issued Advisory Base Flood Elevations to Guide Rebuildi

         * [13]Results of Monitoring and Oversight of Claims Payments Were

              * [14]General Adjusters and Disaster Analysts Did Quality Reinspec
              * [15]Quality Reinspection Program Does Not Rely on a Statisticall
              * [16]Limited Information Available on the Overall Results of the

         * [17]FEMA Has Made Progress Implementing NFIP Program Changes in

              * [18]Informational Materials to Explain Coverage and the Claims P
              * [19]Formal Appeals Process in Place
              * [20]Some States Have Established Minimum Education and Training
              * [21]FEMA Has Not Established a Pilot Program to Mitigate Damage

         * [22]Conclusions
         * [23]Recommendation for Executive Action
         * [24]Agency Comments and Our Evaluation
         * [25]GAO Contact
         * [26]Acknowledgments
         * [27]GAO's Mission
         * [28]Obtaining Copies of GAO Reports and Testimony

              * [29]Order by Mail or Phone

         * [30]To Report Fraud, Waste, and Abuse in Federal Programs
         * [31]Congressional Relations
         * [32]Public Affairs

    Report to Congressional Committees

    United States Government Accountability Office

    GAO

    December 2006

    NATIONAL FLOOD INSURANCE PROGRAM

    New Processes Aided Hurricane Katrina Claims Handling, but FEMA's
    Oversight Should Be Improved

    GAO-07-169

    Contents

    Letter 1

    Results in Brief 5
    Background 10
    Hurricanes Katrina and Rita Had a Far-Reaching Impact on the Financial
    Solvency of the NFIP 14
    FEMA and Private Sector NFIP Partners Were Challenged to Process a Record
    Number of Claims and Address the Needs of NFIP Claimants and Communities
    24
    Results of Monitoring and Oversight of Claims Payments Were Inconclusive
    because FEMA Did Not Reinspect a Statistically Valid Sample of Claims 34
    FEMA Has Made Progress Implementing NFIP Program Changes in the Flood
    Insurance Reform Act of 2004 39
    Conclusions 43
    Recommendation for Executive Action 44
    Agency Comments and Our Evaluation 45
    Appendix I Scope and Methodology 48
    Appendix II Statistical Information on NFIP Claims Paid for Hurricanes
    Katrina and Rita 51
    Appendix III Parishes and Counties Where FEMA Issued Advisory Flood
    Elevation Guidance 53
    Appendix IV Results of GAO Review of a Random Selection of Reinspection
    Reports for Hurricanes Katrina and Rita 54
    Appendix V State Actions on Training of Agents That Sell NFIP Policies 57
    Appendix VI Comments from the Department of Homeland Security 58
    Appendix VII GAO Contact and Staff Acknowledgments 61

    Tables

    Table 1: Hurricane Katrina Loss Information by State 19
    Table 2: Hurricane Rita Loss Information by State 19
    Table 3: Number of FEMA Quality Assurance Reinspection Reports and the
    Sample We Reviewed, by Process Type and Flood Event 50
    Table 4: Hurricane Katrina Principal and Nonprincipal Residential Paid
    Losses by State 51
    Table 5: Hurricane Rita Principal and Nonprincipal Residential Paid Losses
    by State 51
    Table 6: Hurricane Katrina Paid Residential Losses for Dwellings and
    Contents by State 52
    Table 7: Hurricane Rita Paid Residential Losses for Dwellings and Contents
    by State 52
    Table 8: Parishes and Counties Where FEMA Issued Advisory Flood Elevation
    Guidance 53

    Figures

    Figure 1: NFIP Policies in Force, 1978-2006 11
    Figure 2: Total NFIP Payments to Claimants, 1972-2005 15
    Figure 3: Average Loss Payments for Hurricanes Katrina and Rita and Flood
    Events from 2002 to 2004 16
    Figure 4: Hurricane Katrina Losses by Location 18
    Figure 5: Hurricane Katrina Paid Losses for Principal and Nonprincipal
    Noncondominium Residential Properties 20
    Figure 6: Hurricane Rita Paid Losses for Principal and Nonprincipal
    Noncondominium Residential Properties 21
    Figure 7: Hurricane Katrina Claims Paid In and Out of Special Flood Hazard
    Areas 22
    Figure 8: Hurricane Rita Claims Paid In and Out of Special Flood Hazard
    Areas 22
    Figure 9: Hurricane Katrina Paid Residential Losses for Dwellings and
    Contents 23
    Figure 10: Hurricane Rita Paid Residential Losses for Dwellings and
    Contents 24
    Figure 11: Flood Adjusters Were Challenged to Get To and Identify Heavily
    Damaged Houses 26
    Figure 12: A New Orleans House Is Elevated Using ICC Coverage to Pay Some
    Costs 31
    Figure 13: Results of GAO Review of Quality Reinspections of Hurricanes
    Katrina and Rita Claims Processed Using Expedited Procedures 54
    Figure 14: Results of GAO Review of Quality Reinspections of Hurricane
    Katrina Claims Processed Using Regular Claims Adjustment Procedures 55
    Figure 15: Results of GAO Review of Quality Reinspections of Hurricane
    Rita Claims Processed Using Regular Claims Adjustment Procedures 56

    Abbreviations

    DHS Department of Homeland Security FEMA Federal Emergency Management
    Agency FIRM Flood Insurance Rate Map ICC increased cost of compliance NFIP
    National Flood Insurance Program

    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
    its entirety without further permission from GAO. However, because this
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    separately.

    United States Government Accountability Office

    Washington, DC 20548

    December 15, 2006 December 15, 2006

    In late August 2005, Hurricane Katrina came ashore and destroyed or made
    uninhabitable an estimated 300,000 homes along the Gulf Coast of the
    United States. Hurricane Rita followed a few weeks later, making landfall
    in Texas and Louisiana and adding to the devastation, with Louisiana
    suffering the most damaging effects from both hurricanes. Much of the
    damage all along the Gulf Coast was the result of catastrophic flooding.
    As a result, the National Flood Insurance Program (NFIP) had a large role
    to play in the region's recovery. Federal Emergency Management Agency
    (FEMA) officials estimate that half of Hurricane Katrina and Rita flood
    victims were insured by the NFIP. Those who did have coverage filed more
    than five times the number of claims, through May 31, 2006, at 10 times
    the cost of any other prior flood event in NFIP history. In late August
    2005, Hurricane Katrina came ashore and destroyed or made uninhabitable an
    estimated 300,000 homes along the Gulf Coast of the United States.
    Hurricane Rita followed a few weeks later, making landfall in Texas and
    Louisiana and adding to the devastation, with Louisiana suffering the most
    damaging effects from both hurricanes. Much of the damage all along the
    Gulf Coast was the result of catastrophic flooding. As a result, the
    National Flood Insurance Program (NFIP) had a large role to play in the
    region's recovery. Federal Emergency Management Agency (FEMA) officials
    estimate that half of Hurricane Katrina and Rita flood victims were
    insured by the NFIP. Those who did have coverage filed more than five
    times the number of claims, through May 31, 2006, at 10 times the cost of
    any other prior flood event in NFIP history.

    The NFIP was established in 1968 in part to provide some insurance
    protection for flood victims because private insurers were and are still
    largely unwilling to bear the economic risks associated with the
    potentially catastrophic impact of flooding. Under statute, homeowners may
    purchase up to $250,000 of NFIP coverage on their dwellings and up to an
    additional $100,000 for coverage of personal property (i.e., furniture and
    electronic equipment), and business owners may purchase up to $500,000 of
    coverage on their building structures and $500,000 on the contents. The
    NFIP was established in 1968 in part to provide some insurance protection
    for flood victims because private insurers were and are still largely
    unwilling to bear the economic risks associated with the potentially
    catastrophic impact of flooding. Under statute, homeowners may purchase up
    to $250,000 of NFIP coverage on their dwellings and up to an additional
    $100,000 for coverage of personal property (i.e., furniture and electronic
    equipment), and business owners may purchase up to $500,000 of coverage on
    their building structures and $500,000 on the contents.

    As of June 2006, the NFIP had a little over 5.1 million policies in force.
    About 3 million of the policies, about 62 percent, were for properties in
    the five states affected by Hurricanes Katrina and Rita, and Florida had
    the largest number of policies of any state in the nation, with almost 2.1
    million.1 Homeowners are required to purchase flood insurance at least
    equal to the amount of their outstanding mortgage up to the maximum policy
    limit if (1) their property is within a designated special high-risk flood
    hazard area and (2) their mortgage was issued by a federally regulated
    lender. Optional, lower-cost coverage is available under the NFIP to
    protect homes in areas of low to moderate risk. As of June 2006, the NFIP
    had a little over 5.1 million policies in force. About 3 million of the
    policies, about 62 percent, were for properties in the five states
    affected by Hurricanes Katrina and Rita, and Florida had the largest
    number of policies of any state in the nation, with almost 2.1 million.1
    Homeowners are required to purchase flood insurance at least equal to the
    amount of their outstanding mortgage up to the maximum policy limit if (1)
    their property is within a designated special high-risk flood hazard area
    and (2) their mortgage was issued by a federally regulated lender.
    Optional, lower-cost coverage is available under the NFIP to protect homes
    in areas of low to moderate risk.

    1Alabama, Florida, Louisiana, Mississippi, and Texas are the five states
    in which major disaster declarations were made for Hurricane Katrina or
    Rita.

    The NFIP is intended to pay operating expenses and insurance claims with
    flood insurance policy premiums rather than tax dollars, but it has
    statutory authority to borrow funds from the U. S. Treasury to keep
    solvent in heavy loss years.2 Historically, the NFIP has been able to
    repay funds borrowed from the Treasury to meet its claims obligations.
    However, the magnitude and severity of losses from Hurricane Katrina and
    other 2005 hurricanes required the NFIP to obtain borrowing authority of
    $20.8 billion from the Treasury, an amount the program is unlikely to be
    able to repay while paying future claims with its current premium income
    of about $2 billion annually. As a result of the catastrophic losses, we
    designated the program as a high-risk area in March 2006, and Congress is
    considering a number of legislative changes to improve the NFIP's
    financial solvency.3

    The Federal Emergency Management Agency, within the Department of Homeland
    Security, administers the NFIP. FEMA pays 88 private insurance companies
    to perform the administrative functions of selling and servicing flood
    insurance policies and settling claims, although the companies do not
    assume risk for losses. To settle claims, including those from Hurricanes
    Katrina and Rita, insurance companies work with certified flood adjusters
    who assess damages and estimate losses. The NFIP pays for adjuster
    services according to a standard fee schedule. For example, for the
    average claims settlement amount for Hurricane Katrina, $94,803, the NFIP
    fee schedule authorizes payment of 3 percent of the claim amount, or
    $2,844, for adjusting services. FEMA is responsible for the management and
    oversight of the NFIP and is assisted in performing these functions by a
    program contractor. The NFIP also provides incentives for communities to
    adopt and enforce floodplain management regulations to reduce future flood
    damage.

    After NFIP policyholders cited concerns regarding the processing and
    payments of claims after Hurricane Isabel in 2003, Congress passed the
    Flood Insurance Reform Act. This act reauthorized the program and directed
    FEMA to take actions to provide policyholders with additional information
    on their coverage, establish a regulatory appeals process for those who
    disagree with actions taken to settle their claims, and establish minimum
    education and training requirements for agents that sell policies. In
    addition, the Flood Insurance Reform Act authorized a pilot program to
    help reduce the inventory of properties that have had repetitive claims
    for flood damage.4

    242 U.S.C. S 4001(d) (2000); 42 U.S.C. S 4016 (2000).

    3See GAO, GAO's High-Risk Program, [33]GAO-06-497T (Washington, D.C.: Mar.
    15, 2006).

    The unprecedented number of losses from Hurricanes Katrina and Rita
    confronted the NFIP with management and accountability challenges never
    before faced in its almost 40-year history. This report, prepared under
    the authority of the Comptroller General to initiate reviews on his own,
    (1) describes the impact of Hurricanes Katrina and Rita on the NFIP and
    the extent of the losses paid by location and type of property; (2)
    describes the challenges FEMA and its private sector partners faced and
    the results of their efforts to process flood claims from Hurricanes
    Katrina and Rita and address the needs of NFIP claimants and communities;
    (3) assesses FEMA's method of monitoring and overseeing claims adjustments
    and the results of that monitoring and oversight; and (4) assesses FEMA's
    efforts to implement the provisions of the Flood Insurance Reform Act of
    2004 by establishing notifications on coverage to policyholders, an
    appeals process for claimants, agent education and training requirements,
    and a pilot program to help reduce the number of insured properties that
    have sustained repeated severe flood losses.

    We have recently completed or have under way several other reports and
    testimonies related to FEMA's administration and management of the NFIP.
    In October 2005, we issued a report that reviewed, among other things,
    FEMA's monitoring and oversight of the NFIP and the status of its
    implementation of provisions of the Flood Insurance Reform Act of 2004. In
    that report, we recommended that FEMA use a statistically valid method to
    select claims for review and establish milestones for meeting provisions
    of the Flood Insurance Reform Act. We testified on the results of that
    work before the Senate Committee on Banking, Housing and Urban Affairs and
    the House Financial Services Committee Subcommittee on Housing and
    Community Opportunity.5 In January 2006, we testified again before the
    Senate Committee on Banking, Housing and Urban Affairs on challenges
    facing the NFIP.6 In addition, we have work under way to examine the cost
    of operating the NFIP, including fees paid for the services of private
    insurance companies and claims adjusters. We anticipate issuing a report
    on that work in 2007. In other related work on catastrophe insurance
    issues, we are reviewing natural hazard loss mitigation activities and
    assessments of hurricane damages caused by wind versus flooding. We also
    anticipate reporting on this work in 2007.

    4Hurricane Isabel caused flood damage in Delaware, Maryland, North
    Carolina, Pennsylvania, South Carolina, Virginia, and Washington, D.C.,
    that resulted in 19,523 claims for which the NFIP paid $456 million to
    policyholders. The NFIP reauthorization legislation is the Bunning,
    Bereuter-Blumenauer Flood Insurance Reform Act of 2004, Pub. L. No.
    108-264, 118 Stat 712 (codified in scattered sections of 42 U.S.C. (2004).

    To describe the impact of Hurricanes Katrina and Rita on the NFIP and the
    extent of the losses paid by location and property type, we reviewed
    congressional actions to increase the NFIP borrowing authority, and we
    interviewed the Director and other officials of FEMA's Mitigation
    Division. We also analyzed data on claims payments from the NFIP
    management information system. We tested the reliability of the NFIP
    database to assure ourselves that the information we obtained from it was
    sufficiently reliable for our reporting purposes.

    To describe the challenges FEMA and its private sector partners faced and
    the results of their efforts to process flood claims resulting from
    Hurricanes Katrina and Rita and address the needs of NFIP claimants and
    communities, we interviewed selected headquarters and field officials of
    FEMA and its program contractor. We conducted semistructured interviews
    with insurance industry officials involved in the recovery effort selected
    on the basis of our judgment. Their views are not representative of the
    universe of all insurance industry officials involved in the flood
    recovery effort. We documented policies and procedures in place for
    claimants who disagreed with actions taken to settle their claims, and we
    collected and analyzed available NFIP data on complaints and appeals filed
    by claimants. We also interviewed selected officials regarding actions
    taken to develop and issue advisory opinions on elevations for rebuilding
    after the hurricanes in 15 Louisiana and Mississippi communities, and we
    reviewed the advisories and analyzed impacts on the communities' recovery
    efforts.

    5See GAO, Federal Emergency Management Agency: Improvements Needed to
    Enhance Oversight and Management of the National Flood Insurance Program,
    ( [34]GAO-06-119 (Washington, D.C.: Oct. 18, 2005); GAO, Federal Emergency
    Management Agency: Challenges Facing the National Flood Insurance Program
    ( [35]GAO-06-174T (Washington, D.C.: Oct. 18, 2005); and GAO, Federal
    Emergency Management Agency: Oversight and Management of the National
    Flood Insurance Program, ( [36]GAO-06-183T Washington, D.C.: Oct. 20,
    2005).

    6See GAO, Federal Emergency Management Agency: Challenges for the National
    Flood Insurance Program, [37]GAO-06-335T (Washington, D.C.: Jan 25, 2006).

    To assess FEMA's role in monitoring and overseeing the NFIP and the
    results of that oversight, we examined guidance for the quality assurance
    reinspections that FEMA's program contractor conducts for a sample of
    claims adjustments after every flood event and followed up on action taken
    on our prior recommendation for improvements in the quality reinspection
    program.7 We interviewed FEMA and program contractor officials involved in
    the quality assurance process, and we conducted a review of a random
    sample of the quality reinspections done of Hurricane Katrina and Rita
    claims adjustments.8

    To assess the status of FEMA's efforts to implement provisions of the
    Flood Insurance Reform Act of 2004 after Hurricanes Katrina and Rita, we
    interviewed FEMA officials and examined documentation of the actions FEMA
    took. We assessed FEMA's actions to comply with the provisions to
    determine whether they met the legal requirements of the act. We performed
    our work from December 2005 through November 2006 in accordance with
    generally accepted government auditing standards. Our scope and
    methodology are discussed in greater detail in appendix 1.

    Results in Brief

    Hurricane Katrina, closely followed by Hurricane Rita, had a far-reaching
    impact on the NFIP. Both the number of claims paid and the value of claims
    payments were unprecedented. As a result, claims for damages from the 2005
    hurricane season far exceeded the ability of the NFIP to pay for them. The
    NFIP's borrowing authority with the U.S. Treasury was increased from $1.5
    billion before Hurricane Katrina to about $20.8 billion in March 2006. As
    we have reported, it is unlikely that the NFIP will be able to repay this
    debt and pay future claims with annual insurance premium revenue of about
    $2 billion.9 Legislation has been introduced in Congress to forgive the
    debt, and attention has focused on the extent of the federal government's
    exposure for future catastrophic losses and ways to improve the program's
    financial solvency. As of May 2006, with over 95 percent of the claims
    reported by FEMA to be closed, the NFIP had paid claims for about 162,000
    losses for flood damage from Hurricane Katrina in Alabama, Florida,
    Louisiana, and Mississippi. About 135,000 of these claims (about 83
    percent) were in Louisiana. As of July 2006, more than 83,500 claims
    resulted from property damage in the New Orleans area. About 9,000
    additional NFIP claims, over 7,000 of them in Louisiana, were paid as a
    result of losses from Hurricane Rita. To put the number of loss claims in
    perspective, the NFIP processed a little more than 30,000 claims in each
    of the two largest single flood events prior to Hurricane Katrina, a 1995
    Louisiana flood and Tropical Storm Allison in 2001. The average amount
    paid per claim for Hurricane Katrina flood damages, about $94,800, was
    about three times the average paid per claim in the previous record year,
    2004, for damages from flood events including Hurricanes Charley, Ivan,
    Frances, and Jeanne in Florida and other East Coast and Gulf Coast states.
    Most paid losses were for primary residences within special flood hazard
    areas in which flood insurance was generally required, but about 16
    percent of claims for noncondominium residential losses from Hurricane
    Katrina (24,511) were for nonprincipal residences (i.e., second homes),
    and (about 22 percent) of claims paid for Hurricane Katrina (about 36,000)
    were on properties outside of the special flood hazard areas where
    purchase of flood insurance is optional.

    7See [38]GAO-06-119 .

    8Percentage estimates from our sample have 95 percent confidence intervals
    of within +/- 5 percentage points of the estimate.

    9See [39]GAO-06-335T .

    The magnitude and severity of the damages from Hurricane Katrina closely
    followed by Hurricane Rita presented FEMA and its private sector NFIP
    partners with challenges to accurately process a record number of flood
    claims in a timely manner and address other needs of NFIP claimants and
    communities. Among the challenges FEMA and private sector officials we
    interviewed said they faced were difficulties in (1) reaching the insured
    properties for up to a month because debris blocked roadways and flood
    waters contaminated houses, and (2) identifying the demolished homes to be
    inspected on streets where signs had washed away. Despite these and other
    obstacles, FEMA reported that over 95 percent of the Gulf Coast claims
    were closed by May 2006, about 9 months after the storms struck. The time
    periods for closing claims were comparable to those for closing claims in
    other, smaller recent flood events. Concerns from claimants about actions
    taken to settle their claims were relatively few in relation to the large
    number of claims filed. For example, as of April 2006, 13 appeals had been
    filed by claimants related to settlements of their claims for Hurricane
    Katrina damage, and no appeals had been filed on claims for damage from
    Hurricane Rita. To help keep pace with the volume of claims filed and
    assist policyholders, FEMA approved expedited methods for claims
    processing that were unique to Hurricanes Katrina and Rita and took other
    special actions to assist claimants. In some circumstances where data
    showed that flood losses exceeded policy limits, FEMA authorized claims
    payments to policy limits without site visits by certified flood claims
    adjusters or allowed the use of models that paid claims based on the
    square footage of the home and general classification by adjusters of the
    quality of its building materials (i.e., flooring and doors). FEMA
    authorized payments to its private insurance company partners of $750 per
    expedited claim adjustment--a lower fee than would have been paid for a
    more time-consuming room-by-room, line-item-by-line-item visual assessment
    of flood damage.

    As in previous flood events, FEMA's primary method of monitoring and
    overseeing claims settlements and addressing concerns from claimants was
    its quality reinspection program. Employees of FEMA's program contractor
    are to reinspect a sample of claims adjustments for every flood event to
    identify errors, among other things. As of August 2006, FEMA's program
    contractor had conducted quality assurance reinspections of 4,316
    Hurricane Katrina and Rita claims. FEMA also organized a special task
    force to review an additional 1,696 claims adjusted using expedited
    methods. However, FEMA neither used a random sample of all claims closed
    for its reinspections nor analyzed the overall results of those
    reinspections to determine the total number of payment errors and their
    potential causes--actions that we have reported are necessary to meet our
    internal control standard that FEMA have reasonable assurance that program
    objectives are being achieved (e.g., claims are settled accurately) and
    its operations are effective and efficient. Instead of using a random
    sample of all closed claims, as we recommended in October 2005, FEMA's
    sample selection was based upon judgmental criteria including, among other
    items, the size and location of loss and complexity of claims.
    Consequently, the results of FEMA's NFIP quality reinspection program for
    Hurricanes Katrina and Rita cannot be projected to a population larger
    than the 4,316 claims adjustments that were reinspected. As a result, FEMA
    is unable to determine the overall accuracy of claims settled for specific
    flood events. A FEMA official told us that FEMA expects to use a random
    sample for future flood events, as we recommended, but was not able to do
    so in the aftermath of Hurricanes Katrina and Rita because other
    priorities to meet the needs of claimants and communities took precedence.
    Neither FEMA nor its program contractor analyzed the overall results of
    the 4,316 quality reinspections for Hurricanes Katrina and Rita done
    between January and September 2006 to identify the total number of payment
    errors and the magnitude of those errors. We reviewed a random sample of
    these 4,316 reinspections and estimated there were payment errors in about
    14 percent of the Hurricane Katrina reinspected claims adjusted using
    regular processes, 1 percent of the Hurricanes Katrina and Rita
    reinspected claims adjusted using expedited methods, and 2 percent of
    Hurricane Rita reinspected claims adjusted using regular processes.
    Payment errors identified in our review of reinspection reports for
    Hurricane Katrina claims settled using regular processes included 8
    underpayments that ranged from more than $131,000 to $543 and 36
    overpayments that ranged from $65,000 to $86. 10 Because, in the past,
    FEMA has had neither an appropriate sampling methodology nor a requirement
    for an overall analysis of the accuracy of the claims adjustments after
    every flood event, we do not know how the error rates we identified
    compare to adjusting errors in other smaller flood events. FEMA has
    procedures in place to recover overpayments made by insurance companies
    and adjust payments to policyholders for underpayments.

    FEMA made progress in implementing the NFIP program changes provided for
    in the Flood Insurance Reform Act of 2004, since we last reported on the
    status of the implementation in October 2005.11 However, implementation is
    not yet complete. The act mandated FEMA by December 30, 2004, to (1)
    develop supplemental materials for explaining NFIP coverage and the claims
    process to policyholders when they purchase and renew policies; (2)
    establish, by regulation, an appeals process for claimants; and (3)
    establish, in cooperation with the insurance industry, state insurance
    regulators, and other interested parties, minimum training and education
    requirements for flood insurance agents and publish the requirements in
    the Federal Register. The act also authorized FEMA to create a pilot
    program to provide financial assistance to states and communities to carry
    out certain activities, including elevating and demolishing structures
    that have suffered severe and repeated damage from flooding.12 FEMA has
    met the requirements of the act to establish notifications on coverage to
    policyholders and an appeals process for claimants. With respect to the
    requirement that it establish minimum education and training requirements
    for agents who sell NFIP policies, FEMA published a notice in the Federal
    Register in September 2005, stating that it intended to implement the
    standards through existing state licensing schemes for insurance agents.
    To that end, FEMA has actively solicited partnerships with state
    legislators and the insurance industry to implement training standards.
    However, as we reported in October 2005, FEMA has not developed milestones
    for state adoption of minimum training and education requirements.13 As of
    October 2006, 15 states have established minimum training and education
    requirements for insurance agents that sell NFIP policies. Two states have
    issued advisory notices, and 1 state has established standards for a
    continuing education course in flood insurance but has not made the course
    mandatory.14 As of October 2006, FEMA had not developed and issued
    guidance for implementing the pilot program authorized by the act to help
    reduce the inventory of NFIP properties that have sustained repeated
    severe flood losses. However, officials said that they had made progress
    in developing the program guidance and implementing regulations.

    10 In two instances, we could not identify underpayment amounts and in one
    instance we could not identify an overpayment amount.

    11See [40]GAO-06-119 .

    12Id. At S 102 (codified at 42 U.S.C. S 4102a (2004)).

    To strengthen and improve FEMA's monitoring and oversight of the NFIP,
    including ensuring that claims payments are accurately determined, we are
    recommending that FEMA analyze the overall results of a statistically
    valid sample of claims adjustments to be completed for each future flood
    event to determine the number and types of claims adjustment errors made
    and to help determine whether new, cost-efficient methods for adjusting
    claims that were introduced after Hurricane Katrina are feasible to use
    after other flood events.

    In commenting on a draft of this report, the Department of Homeland
    Security (DHS) agreed with our recommendation to improve its quality
    reinspection program and stated that it was revising its guidance
    accordingly and would use the recommended sampling and reporting
    procedures in future flood events. DHS reiterated a comment made in FEMA's
    review of our October 2005 report that we did not review all of the
    controls and processes that FEMA has in place to provide oversight for the
    NFIP. Most of the additional oversight and management processes and
    controls that FEMA has in place are for financial management--an area not
    included in the scope of our work for this report but to be addressed in
    work that we have under way. DHS also provided additional information
    about the determination of the number of quality control reinspections to
    be performed after flood events and actions it has taken to implement the
    provision of the Flood Insurance Reform Act of 2004 to establish, in
    cooperation with the insurance industry, state insurance regulators, and
    other interested parties, minimum training and education requirements for
    flood insurance agents and publish the requirements in the Federal
    Register. DHS's comments are contained in appendix VI. In addition, DHS
    provided a technical comment, which we incorporated into the report.

    13See [41]GAO 06-119 .

    14Eleven of the14 states that implemented minimum training standards did
    so through bulletins or advisory opinions, which are not enforceable by
    law but are enforced in practice.

    Background

    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, and to
    reduce the amount of federal disaster assistance payments, federal law
    established the NFIP in 1968.15 The legislative history of the National
    Flood Insurance Act recognized that insurance for existing buildings
    constructed before the NFIP was established would be extremely expensive
    because most of them were flood prone and did not comply with NFIP
    floodplain management standards that went into effect after they were
    built. The authorizing legislation included provisions for subsidized
    insurance rates to be made available for policies covering certain
    structures to encourage communities to join the program. Under the NFIP,
    the properties are generally referred to as Pre-FIRM (Flood Insurance Rate
    Map) buildings.

    As shown in figure 1, the NFIP has grown from about 1.5 million policies
    in 1978 to 5.1 million policies in July 2006.

    15The National Flood Insurance Act of 1968, as amended, is codified at 42
    U.S.C. 4001-4129.

    Figure 1: NFIP Policies in Force, 1978-2006

    NFIP Provides Insurance and Maps Flood Risk for Communities That Agree to
    Enforce Land Use Regulations

    More than 20,100 communities nationwide participate in the NFIP. To
    participate in the program, communities agree to enforce regulations for
    land use and new construction in high-risk flood zones. In exchange, the
    NFIP studies and maps flood risks and makes federally backed flood
    insurance available to homeowners and other property owners. The maps
    identify special high-risk flood hazard areas, also known as the 100-year
    floodplain. These areas have a 1 percent chance of being flooded in any
    given year or at least a 26 percent chance of being flooded over the
    30-year life of a typical home mortgage.

    Property owners in the special high-risk flood hazard areas whose
    communities participate in the NFIP and who have mortgages from federally
    regulated lenders are required to purchase flood insurance on their
    dwellings for at least the outstanding amount of their mortgages up to the
    maximum policy limit of $250,000. 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 may purchase separate NFIP personal property coverage.
    Maximum coverage amounts under the NFIP are $250,000 for dwellings and
    $100,000 for personal property.

    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 is in the midst of a
    multi-year effort to update the nation's flood maps at a cost in excess of
    $1 billion. The maps are principally used by (1) more than 20,100
    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 flood insurance policy rates
    based on flood risk, and (3) federally regulated mortgage lenders to
    identify those property owners who are required to purchase federal flood
    insurance.

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

    The work of selling, servicing, and adjusting NFIP claims is carried out
    by thousands of private sector insurance agents and adjusters who work
    independently or are employed by insurance companies, adjusting firms, or
    designated subcontractors under the oversight and management of FEMA
    within the Department of Homeland Security. According to FEMA, about 95
    percent of the NFIP policies in force are written by insurance agents who
    represent 88 private insurance companies that are paid fees for performing
    administrative services for the NFIP but do not have exposure for claims
    losses.16 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.17 The write-your-own
    companies also receive a percentage fee--about 3.3 percent of the incurred
    loss--for adjusting and settling claims.18

    To settle claims, including those from Hurricanes Katrina and Rita,
    insurance companies work with certified flood adjusters. When flood losses
    are reported, the write-your-own companies assign a flood adjuster to
    assess damages. Flood adjusters may be independent or 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 the
    price for repairs by reviewing estimates of costs prepared by
    policyholders and their contractors, consulting pricing software, and
    checking local prices for materials.

    16The other 5 percent of policies are sold and serviced by state-licensed
    insurance agents and brokers who deal directly with FEMA.

    17The 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.

    18The fee is paid by the NFIP for costs to establishing and staffing
    operations centers in flooded communities, according to a FEMA official.

    Adjusters are paid for their services according to a standard fee schedule
    that is paid in addition to the fees paid to the insurance companies.
    Adjusters who work for an adjusting company share the fees with the
    company in exchange for adjusting assignments and administrative support.
    For example, for the average claims settlement amount for Hurricane
    Katrina, $94,803, the NFIP fee schedule authorizes payment of 3 percent of
    the claim amount, or $2,844, for adjusting services. For claims adjusted
    under the expedited claims processing procedures that were introduced
    after Hurricane Katrina, FEMA authorized payment of $750 for each claim
    plus an additional $400 if a site visit was required later in the claims
    adjustment process.

    Among the requirements for certification as a claims adjuster for the NFIP
    are at least 4 consecutive years of full-time property loss adjusting
    experience, attendance each year at an NFIP adjuster workshop, and
    demonstration of knowledge of the standard flood insurance policy by
    passing a written examination. In 2002, FEMA modified the minimum
    experience requirement to allow adjusters who do not have the requisite
    experience to work with a seasoned flood adjuster until the write-your-own
    company determines that the adjuster is able to work independently.

    Claimants who have questions or concerns about actions taken to resolve
    their claims have several avenues of recourse. Claims amounts may be
    adjusted after the initial settlement is paid if claimants submit
    documentation that some costs to repair or replace damaged items were
    higher than estimated. If a claimant is not satisfied with the adjuster's
    answers or does not agree with decisions, the claimant or the
    write-your-own company can request FEMA's program contractor for
    assistance in reaching a resolution by conducting a special assistance
    reinspection of the claim. Also, under provisions of the Flood Insurance
    Reform Act of 2004, claimants may contact FEMA directly to resolve
    concerns that were not addressed through the other channels. Finally,
    claimants may bring a claim in federal district court against the insurer.

    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 providing 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 ensure that the NFIP is administered
    properly (i.e., appropriate claims settlements are made and program
    objectives are achieved).

    Hurricanes Katrina and Rita Had a Far-Reaching Impact on the Financial Solvency
    of the NFIP

    Hurricane Katrina, followed closely by Hurricane Rita, had a far-reaching
    impact on the financial solvency of the NFIP. By all measures, the flood
    losses were unprecedented in the history of the NFIP. FEMA projects that
    when all claims are settled, claims from NFIP policyholders who suffered
    flood damage from Hurricanes Katrina and Rita will total more than $20
    billion. In contrast, the NFIP reports that from its inception in 1968
    until August 2005, it paid a cumulative total of about $14.6 billion in
    claims. In the two largest single flood events prior to Hurricane Katrina,
    the NFIP reports that it processed a little more than 30,000 claims after
    a Louisiana flood in 1995 and Tropical Storm Allison in 2001. Figure 2
    illustrates the magnitude of the flood losses in 2005 compared to losses
    over the history of the NFIP.

    Figure 2: Total NFIP Payments to Claimants, 1972-2005

    Not only were the total cost and number of Hurricane Katrina and Rita
    claims far greater than in prior flood events, the amount paid per loss
    was also greater. As shown in figure 3, the average amounts paid per claim
    for Hurricanes Katrina and Rita flood damages--about $94,800 and $46,000,
    respectively--were much larger than average claims amounts reported as
    paid in the 3 prior years. Average paid losses for Hurricane Katrina were
    about three times the average paid losses reported by the NFIP for damage
    from flood events in 2004, including Hurricanes Charley, Ivan, Frances,
    and Jeanne in Florida and other East Coast and Gulf Coast states.

    Figure 3: Average Loss Payments for Hurricanes Katrina and Rita and Flood
    Events from 2002 to 2004

    As a result of the number and amount of claims for damages from the 2005
    hurricane season and particularly Hurricane Katrina, losses to be paid far
    exceeded the NFIP's existing borrowing authority with the U.S. Treasury.
    The borrowing authority was subsequently increased from $1.5 billion
    before Hurricane Katrina to $18.5 billion in November 2005, and then to
    $20.8 billion in March 2006 to pay claims and expenses from Hurricane
    Katrina and other 2005 hurricanes. As of September 30, 2006, FEMA's debt
    to the Treasury was $16.9 billion. As we reported in January 2006, it is
    unlikely that FEMA will be able to repay a debt of this size and pay
    future claims in a program that generated premium income of about $2
    billion in fiscal year 2005.19

    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 by tax dollars. However, by design, the program is not
    actuarially sound because federal law 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.

    19See [42]GAO-06-335T .

    In November 2006, legislation was pending in both houses of Congress to
    reform the NFIP. A Senate provision would forgive the NFIP debt and bills
    in both houses had provisions to improve the financial solvency of the
    program and reduce the extent of the federal government's exposure for
    losses in catastrophic loss years. For example, proposed legislation in
    both the Senate and the House of Representatives contain provisions that
    would allow premium increases of up to 15 percent annually on NFIP
    policies, up from the current cap of 10 percent on premium increases.
    Additionally, legislation in both houses of Congress would phase out
    subsidized rates for some properties built before flood insurance rate
    maps were put into effect in their communities, including nonresidential
    properties and those that are not primary residences. However, none of the
    proposals, if enacted, would make changes to the NFIP that would result in
    collecting enough premium income to cover losses for any future flood
    events of the magnitude of Hurricane Katrina.

    Until the 2004 hurricane season, FEMA had been generally successful in
    keeping the NFIP on sound financial footing, exercising its borrowing
    authority three times in the last decade when losses exceeded available
    fund balances. In each instance, FEMA repaid the funds with interest.
    According to FEMA officials, as of August 31, 2005, FEMA had outstanding
    borrowing of $225 million with cash on hand totaling $289 million. FEMA
    had substantially repaid the borrowing it had undertaken to pay losses
    incurred for the 2004 hurricane season, which, until Hurricane Katrina
    struck, had been the worst hurricane season on record for the NFIP. FEMA's
    current debt with the Treasury is almost entirely for payment of claims
    from Hurricanes Katrina and Rita and other flood events that occurred in
    2005.

    Most NFIP Loss Claims Were in Louisiana for Primary Residences in Special Flood
    Hazard Areas

    As shown in figure 4, the majority of NFIP claims for flood damage from
    Hurricane Katrina were in Louisiana, and a large portion of the Louisiana
    Hurricane Katrina claims were in New Orleans.

    Figure 4: Hurricane Katrina Losses by Location

    Note: Number of claims rounded to the nearest thousand.

    As of May 2006, the NFIP had paid about 162,000 claims for losses from
    flood damage from Hurricane Katrina in Alabama, Florida, Louisiana, and
    Mississippi. About 135,000 of these losses (about 83 percent) were in
    Louisiana. As of July 2006, about 83,500 Louisiana claims were made for
    property damage in the New Orleans area, where flood waters breached
    levees and floodwalls. Almost 9,000 additional NFIP claims, over 7,000 of
    them from Louisiana, were paid as a result of losses from Hurricane Rita.

    Tables 1 and 2 provide a state-by-state breakdown of the number of paid
    losses, the number of losses paid at policy limits, and the average
    payment amounts per loss for Hurricanes Katrina and Rita, through May
    2006.

    Table 1: Hurricane Katrina Loss Information by State (as of May 31, 2006)

                                  Amount paid
                   Number of paid (dollars in  Number of losses paid Average loss
    State               losses   millions)       at policy limits      payment
    Alabama              4,915      $257.4                    633      $54,374
    Florida              5,382       109.4                     19       20,319
    Louisiana          134,829    12,635.3                 66,140       93,713
    Mississippi         16,939     2,362.2                 11,593      139,454
    Total              162,065   $15,364.3                 78,385      $94,803

    Source: GAO analysis of NFIP data.

    Table 2: Hurricane Rita Loss Information by State (as of May 31, 2006)

                             Amount paid
                   Number of (dollars in    Number of losses paid at Average loss
    State     paid losses   millions)               policy limits      payment
    Louisiana       7,251      $360.9                       2,264      $49,767
    Texas           1,603        46.9                          80       29,264
    Total           8,854      $407.8                       2,344      $46,055

    Source: GAO analysis of NFIP data.

    The majority of Hurricane Katrina and Rita paid losses were for flood
    damage to residences. About 96 percent of Hurricane Katrina paid losses
    and about 94 percent of Hurricane Rita paid losses were for residential
    properties including condominiums, while 4 percent and 6 percent of the
    paid losses, respectively, were for nonresidential properties including
    businesses and public buildings (i.e., schools and churches).

    As shown in figures 5 and 6, the majority of paid losses for
    noncondominium residential properties were for principal residences.20
    About 16 percent of paid claims for residences damaged by Hurricane
    Katrina were nonprincipal residences, which include secondary homes. About
    18 percent of paid losses for residences damaged by Hurricane Rita were
    for nonprincipal residences. See appendix II for detailed information on
    principal and nonprincipal residential paid losses by state.

    Figure 5: Hurricane Katrina Paid Losses for Principal and Nonprincipal
    Noncondominium Residential Properties (as of May 31, 2006)

    Note: Nonprincipal residences include secondary homes. "Unknown" indicates
    that claims folders did not provide information on the type of residence
    that could be captured in the NFIP statistical database.

    20Condominiums are not included because condominium associations are
    required to purchase policies to insure condominium buildings. Individual
    unit owners may elect to purchase separate policies for coverage on the
    contents of their units (i.e., furniture and electronic equipment).

    Figure 6: Hurricane Rita Paid Losses for Principal and Nonprincipal
    Noncondominium Residential Properties (as of May 31, 2006)

    Note: Nonprincipal residences include secondary homes. "Unknown" indicates
    that claims folders did not provide information on the type of residence
    that could be captured in the NFIP statistical database.

    Most of the paid losses were for properties located within the special
    flood hazard areas where homeowners with mortgages from federally
    regulated lenders are required to purchase flood insurance on their
    dwellings for at least the amount of their outstanding mortgage. As shown
    in figure 7, about 78 percent of the paid losses for Hurricane Katrina
    through May 2006, were in special flood hazard areas subject to flooding
    or flooding and wave action where purchase of flood insurance is mandatory
    on properties with mortgages from federally regulated lenders. However,
    claims were also paid on 36,325 losses (about 22 percent) on properties
    outside of the special flood hazard areas where purchase of flood
    insurance is optional. As shown in figure 8, of 8,851 paid loses for
    Hurricane Rita through May 2006, 6,746 (about 76 percent) were in special
    flood hazard areas.

    Figure 7: Hurricane Katrina Claims Paid In and Out of Special Flood Hazard
    Areas (as of May 31, 2006)

    Note: We could not determine the flood zone for 46 additional claims.
    However, we have determined that these data are sufficiently reliable for
    the purposes of our analysis.

    Figure 8: Hurricane Rita Claims Paid In and Out of Special Flood Hazard
    Areas (as of May 31, 2006)

    Note: We could not determine the flood zone for 3 additional claims.
    However, we have determined that these data are sufficiently reliable for
    the purposes of our analysis.

    While homeowners who live in specially designated flood hazard areas are
    required to purchase NFIP insurance on their dwellings at least for the
    amount of any federally regulated mortgage, the purchase of coverage for
    the home's contents, including furniture and personal property, is
    optional and may be purchased separately. NFIP policyholders who live in,
    for example, rental units, cooperatives, or condominium buildings may
    elect to purchase NFIP policies for contents coverage only. Figures 9 and
    10 show that most paid Hurricane Katrina and Hurricane Rita residential
    losses were for both dwellings and contents. See appendix III for detailed
    information on residential paid losses for dwellings and contents by
    state.

    Figure 9: Hurricane Katrina Paid Residential Losses for Dwellings and
    Contents (as of May 31, 2006)

    Note: Includes condominiums

    Figure 10: Hurricane Rita Paid Residential Losses for Dwellings and
    Contents (as of May 31st, 2006)

    Note: Includes condominiums

    FEMA and Private Sector NFIP Partners Were Challenged to Process a Record Number
    of Claims and Address the Needs of NFIP Claimants and Communities

    The magnitude and severity of the damages from Hurricane Katrina closely
    followed by Hurricane Rita presented FEMA and its private sector NFIP
    partners with challenges to accurately process a record number of flood
    claims in a timely manner under adverse conditions and address other needs
    of NFIP claimants and communities.

    Officials Described Challenges to Processing Flood Claims

    Challenges to addressing the needs of NFIP claimants after Hurricane
    Katrina were not limited to managing and processing a record volume of
    claims for damage in four Gulf Coast states. An official of FEMA's NFIP
    contractor described some of the adverse conditions faced by NFIP and
    write-your-own company officials and flood adjusters after Hurricane
    Katrina:

    "A month after Hurricane Katrina, our adjusters couldn't get to flooded
    properties because roadways were blocked by debris and houses were
    contaminated by flood waters. In many cases, adjusters could not even
    identify the houses they were trying to inspect because street signs were
    washed away and houses were piled on top on one another as a result of the
    storm surge. Adjusters went to some addresses only to find nothing left
    standing but the foundation. Making contact with claimants was in some
    cases impossible because they were scattered across the country and
    relocating frequently from one temporary address to another. In many
    cases, the documentation we normally use to adjust claims no longer
    existed. Claimants' files at local insurance agencies, mortgage records,
    and other documents were gone in the flood."

    According to a representative of FEMA's program contractor on-site in
    Hammond, Louisiana, about 8,000 adjusters were working on claims from
    Hurricanes Katrina and Rita at the high point, from October through
    December 2005. An owner of a firm that specializes in insurance claims
    adjustments for catastrophes described the problems he faced in getting
    adjusters to the affected areas. The majority of adjusters who worked
    under contract for this firm were staying in Mobile, Alabama, a 2 1/2- to
    3-hour drive from the New Orleans area. Highways were jammed, and lodging
    and fuel were in short supply. The business owner said that he bought more
    than 30 houses in the Mobile area, several tanker trucks of oil, and a gas
    station to meet adjusters' housing and transportation needs.

    Figure 11 shows photographs of flooded neighborhoods that illustrate some
    of the challenges faced by flood adjusters in getting to and identifying
    the heavily damaged houses they were assigned to inspect.

    Figure 11: Flood Adjusters Were Challenged to Get To and Identify Heavily
    Damaged Houses

    Over 95 Percent of Claims Were Closed within 9 Months with Relatively Few
    Complaints

    Despite the large volume of claims and adverse conditions for settling
    them, the NFIP was successful in closing 92 percent of NFIP claims for
    Hurricane Katrina and 86 percent for Hurricane Rita by March 2006, about 7
    1/2 months after the storms struck. By May 2006, about 9 months after the
    storms, FEMA reported that over 95 percent of the Gulf Coast claims were
    closed. These time frames for closing claims are comparable to time frames
    for closing claims in other, smaller flood events. For example, in
    Florida, where the largest number of claims for flood damage were filed in
    the 2004 hurricane season, the NFIP closed about 88 percent of the 33,888
    claims from Hurricanes Charley, Ivan, Frances, and Jeanne within 7 months
    and about 92 percent within 9 months.

    Concerns from claimants about actions taken to settle their claims were
    relatively few in relation to the large number of claims filed. For
    example, as of April 2006, 13 appeals had been filed by claimants related
    to settlements of their claims for Hurricane Katrina damage, and no
    appeals had been filed on claims for damage from Hurricane Rita. In
    February 2006, FEMA's program contractor had received about 500 requests
    for special assist reinspections. These requests occur when claimants and
    insurance companies do not agree on aspects of the claims adjustment and
    ask for assistance in reaching a resolution. FEMA was not able to provide
    comparison data from prior years or updated information on the number of
    appeals filed after April 2006 and the number of special assist
    reinspections for Hurricanes Katrina and Rita after February 2006.

    FEMA Approved the Use of Expedited and Square Foot Claims Adjustment Methods
    Unique to Hurricane Katrina

    To try to assist NFIP policyholders despite many obstacles, FEMA approved
    expedited claims processing methods that were unique to Hurricanes Katrina
    and Rita. In some circumstances, claims could be adjusted without site
    visits by certified flood claims adjusters. For flooding from Lake
    Pontchartrain in New Orleans caused by the failure of the levees, FEMA
    allowed the use of aerial and satellite photography and flood depth data
    to identify structures that had been severely affected. If data on the
    depth and duration of the water in the building showed that it was likely
    that covered damage exceeded policy limits, the claim could be settled
    without a site visit by a claims adjuster. Similarly, for some other
    losses in Louisiana, Alabama and Mississippi, FEMA authorized claims
    adjustments without site visits where structures were washed off of their
    foundations by flood waters and square foot measurements of the dwellings
    were known. While FEMA authorized the use of these approaches, the
    write-your-own companies made the decision on whether they wished to use
    expedited processes to adjust claims. In addition, FEMA authorized the use
    of a square foot measurement methodology for homes that had been flooded
    off of their slabs, pilings, or posts. In those instances, damages could
    be calculated by a certified flood adjuster based on measurements of room
    dimensions and classification of building materials as high, medium, or
    low level, rather than a room-by-room, item-by-item calculation of loss
    amounts. FEMA authorized payments to its private insurance company
    partners of $750 per expedited claim adjustment--a lower fee than would
    have been paid for a more time-consuming room-by-room,
    line-item-by-line-item visual assessment of flood damage.

    According to the FEMA director of NFIP claims, about 17,200 claims for
    damage, mostly from Hurricane Katrina (about 11 percent of all Hurricane
    Katrina claims), were adjusted using expedited procedures. Although a
    relatively small number of claims were adjusted using expedited processes,
    officials of FEMA, its program contractor, representatives of two of the
    five private insurance companies we interviewed, and a flood claims
    adjusting service official said that having the option to do some
    expedited adjustments enabled the NFIP to keep up with demands for
    adjuster services and close the claims as quickly as it did.

    Representatives of the three insurance companies we visited that did not
    use expedited processes to a significant extent said they did not do so
    for reasons including concerns over the accuracy of flood depth data,
    delays in the availability of flood depth data, and because their
    companies did not write homeowners' policies on the dwellings in question,
    they lacked necessary information (i.e., square foot measurements of the
    home) that were needed to process claims without site inspections.

    According to the FEMA director of NFIP claims, two large write-your-own
    insurance companies developed models that were approved by FEMA for use in
    making square foot estimates of damage for some claims from Hurricanes
    Katrina and Rita instead of sending certified flood adjusters to the sites
    to assess and document damage room by room and item by item. According to
    the FEMA official, the square foot models paid claims based on the square
    footage of the property and a classification of the building materials as
    low, middle, or high level. For example, claims paid on a flooded
    high-level kitchen would be more than payments for a middle-level kitchen
    of the same square footage. If one or two high-end items were in a
    middle-level home (i.e., a custom front door or exotic hardwood floors),
    an adjustment to the middle-end rate would be made for those specific
    items. According to the official, the NFIP had experimented briefly with a
    much less sophisticated approach to square foot estimating about 10 years
    ago but had not used any form of claims adjusting since that time other
    than the traditional approach of sending a certified flood adjuster to the
    site to assess damage and estimate losses with required reports, work
    sheets, and photographs to document damage room by room and line item by
    line item.

    The director of NFIP claims said that FEMA did not track the number of
    estimates done using the square foot method. He said that FEMA plans to
    examine the accuracy of the models carefully and consider using them for
    other catastrophic flooding events in the future. Because usage of the
    square foot method by the two companies with approved models was not
    carefully tracked during Hurricanes Katrina and Rita, FEMA paid the same
    fee for square foot adjustments as it did for regular
    line-item-by-line-item adjustments that took longer to perform and
    required more extensive documentation. However, the director of NFIP
    claims said that if the square foot methodology is approved for future
    use, the fee schedule paid for these adjustments would probably be lower
    than the current schedule for regular claims adjustments, with a resulting
    savings for the NFIP.

    In addition to approving expedited and square foot claims adjusting
    methods, FEMA took several other actions to expedite claims adjustments
    and meet the needs of claimants in the aftermath of Hurricanes Katrina and
    Rita. These were actions that, according to officials, FEMA had also used
    to a more limited extent in prior large flood events. Specifically, FEMA

               o waived the requirement that property owners furnish proof of
               loss statements that list their losses for all Hurricane Katrina
               and Rita claims,

               o allowed telephone adjustments for some claims below $25,000,

               o established special toll-free telephone lines to assist
               policyholders who had questions about filing claims,

               o liberalized adjuster training requirements to deploy more
               adjusters to flood-damaged areas, and

               o authorized insurance companies and independent flood adjusting
               firms to use adjusters who did not meet FEMA's minimum flood
               certification requirements provided that they worked under the
               direction of seasoned adjusters until the company certified that
               they were trained.

    NFIP Adjustment Process Will Continue with Claims for Help to Elevate or Remove
    Substantially Damaged Properties

    As part of its floodplain management strategy, FEMA policies encourage the
    elevation or removal of damaged properties from the floodplain.21 In
    addition to paying claims for flood damage, NFIP policies pay up to
    $30,000 to owners of substantially damaged or repetitive loss properties
    for the cost of taking mitigation actions such as elevation,
    floodproofing, relocation or demolition, in order to comply with state or
    local floodplain management laws or ordinances. The payments are made
    under the increased cost of compliance (ICC) coverage of the standard
    flood insurance policy. As a first step to making claims for this
    coverage, adjusters are required to file preliminary damage assessment
    forms with FEMA for properties that may be substantially damaged. Figure
    12 shows renovations in process on a New Orleans house that is being
    elevated to mitigate against future flood damage using ICC coverage to pay
    some of the costs.

    21A property is considered to be "substantially damaged" if the cost of
    repairing the property exceeds 50 percent of its market value (or a lower
    trigger if adopted locally), as determined by a state or community
    declaration.

    Figure 12: A New Orleans House Is Elevated Using ICC Coverage to Pay Some
    Costs

    As of April 26, 2006, adjusters had completed almost 50,000 preliminary
    damage assessment forms for properties flooded by Hurricane Katrina and a
    little more than 1,000 forms for properties flooded by Hurricane Rita.
    Over 40,000 of the forms for damage in the two storms were for properties
    located in Louisiana. Through May 2006, FEMA had made ICC payments of
    about $7 million on Hurricane Katrina and Rita claims. Anticipating a
    large number of ICC claims as a result of the 2005 hurricane season, FEMA
    increased the time frame for property owners to complete the mitigation
    actions from 2 years to 4 years after a state or community issued a
    substantial damage declaration. In an upcoming revision to the standard
    flood insurance policy, FEMA plans to make permanent the increase in time
    for property owners to complete work and receive ICC payments.

    FEMA Issued Advisory Base Flood Elevations to Guide Rebuilding Efforts in the
    Aftermath of Hurricanes Katrina and Rita

    In addition to approving new methods for expedited processing of some NFIP
    claims after Hurricane Katrina, FEMA also took new steps to guide
    communities' rebuilding efforts. For the first time, FEMA issued advisory
    guidance on coastal flood elevations that communities can use in the
    reconstruction process until more detailed data become available.
    According to FEMA officials, this guidance--called advisory base flood
    elevations--was necessary because a risk assessment showed that base flood
    elevations in effect for coastal Louisiana and Mississippi did not reflect
    the true risk to the areas from flooding. According to a FEMA official,
    FEMA expects to have updated rate maps for coastal areas by early 2007 so
    that communities can begin the process of considering to adopt them.

    Accurate flood maps that identify the areas at high risk of flooding are
    the foundation of the NFIP, and the flood maps for some areas of the Gulf
    Coast affected by Hurricanes Katrina and Rita were out of date. The maps
    identify base flood elevation levels--the height at which there is a 1
    percent chance of a flood occurring in a given year, also known as the
    100-year flood. FEMA uses the 100-year flood as the standard for setting
    premium rates and requirements for NFIP.

    Prior to Hurricanes Katrina and Rita, FEMA was conducting a coastal study
    of hurricane storm flooding as a part of its map modernization program.22
    According to a FEMA official, the agency was about to issue several new
    preliminary flood insurance rate maps in the Gulf Coast region when the
    storms hit. However, the storm surges from Hurricanes Katrina and Rita far
    exceeded the base flood elevations in many areas of the Gulf Coast,
    raising questions about the validity of the base flood elevations and
    current flood insurance rate maps. In response, FEMA conducted risk
    assessments using the most current and accurate flood risk data available.
    The analyses incorporated storm data from the past 35 years, including
    data from Hurricanes Katrina and Rita, tide (water level) gauge data, and
    other engineering studies. The analyses showed that base flood elevations
    on the flood insurance rate maps in effect for coastal Louisiana and
    Mississippi did not reflect the true risk from flooding because the
    elevations were between 1 and 9 feet too low. Also, the analyses showed
    that higher storm surges and larger waves can be expected to spread
    farther inland than previously estimated because of land subsidence and
    the loss of the protective coastal barrier over the past 10 to 20 years.
    On completion of the risk analyses, FEMA issued advisory base flood
    elevation maps for 15 parishes in Louisiana and 3 counties in Mississippi
    that took into account the more accurate and up-to-date flood hazard data.
    (See app. III for a list of the communities for which the advisories were
    issued and the status of the communities' consideration of their
    adoption.)

    22FEMA embarked on a multiyear map modernization program to update the
    nation's flood maps at a cost in excess of $1 billion. The goal of the
    program is to update the nation's inventory of flood insurance rate maps
    that identify areas of risk of flooding and determine flood insurance
    rates. They are also used for floodplain management and mitigation
    activities.

    FEMA cannot require communities participating in the NFIP to use the
    advisory base flood elevations. According to FEMA, it issued the
    advisories to parishes and counties, and individual communities within
    those jurisdictions can decide whether or not or to what extent they will
    adopt the guidance. For example, the City of Gulfport, Mississippi,
    adopted the advisories in September 2006 to protect citizens from future
    floods but extended the official adoption of the new elevations to
    November 1, 2006, to allow residents wishing to rebuild to less stringent
    elevation requirements in effect prior to the adoption of the advisories
    adequate time to secure building permits. The New Orleans city council
    approved FEMA's new advisories but made exceptions for properties in the
    French Quarter and other national historic structures in the city and
    those listed with the Historic Districts Landmarks Commission.23 Lafourche
    Parish, Louisiana, rejected the advisory because the parish council
    considered some advisory map data to be wrong, determined that adopting
    the advisory would have a high negative economic impact on homeowners, and
    noted that the advisory information was intended to be only advisory and
    preliminary.

    However, FEMA has provided incentives for individual homeowners and
    communities to rebuild using the advisory standards. For example, FEMA
    requires that rebuilding projects it funds, through public assistance or
    mitigation grants, be built to advisory standards. Similarly, FEMA grants
    for repairing and rebuilding public infrastructure such as schools,
    libraries, and police stations will not be available to communities unless
    they rebuild to advisory base flood elevations. NFIP policyholders who
    live in communities that have flood plain management standards that exceed
    the minimum standard are eligible for discounts on their premiums. ICC
    payments to NFIP claimants that take steps to reduce their risk from
    future flood damage will help cover the elevation of homes to the advisory
    base flood elevation if that standard is adopted by the community. FEMA
    has also warned communities that continued use of flood data on current
    flood insurance rate maps could result in residential and commercial
    buildings that will be vulnerable to flood damage because they will not be
    built high enough or have the structural integrity to resist flood forces
    that may be encountered in future large events.

    23Under the NFIP, communities may exempt historic buildings from NFIP
    substantial improvement and substantial damage requirements by issuing
    variances for historic structures.

    According to a FEMA official, the agency expects to have updated,
    preliminary flood insurance rate maps for the coastal parishes and
    counties in Louisiana and Mississippi by early 2007. However, the maps
    will become effective only after a formal appeals process and community
    adoption; a process that normally takes a minimum of 2 years to complete.
    Once the new flood insurance rate maps are adopted, they will supersede
    all advisory base flood elevations issued by FEMA.

    Results of Monitoring and Oversight of Claims Payments Were Inconclusive because
    FEMA Did Not Reinspect a Statistically Valid Sample of Claims

    As in previous flood events, FEMA's primary method of monitoring and
    overseeing claims adjustments and addressing concerns from claimants was
    its quality reinspection program. As of August 2006, FEMA's program
    contractor had conducted quality assurance reinspections of 4,316
    Hurricane Katrina and Rita claims. In addition, FEMA formed a special task
    force to reinspect an additional 1,696 claims that were adjusted using
    expedited processes. Because FEMA did not reinspect a random sample of all
    claims closed, as we recommended in October 2005, the results of the
    reinspections cannot be projected to a population larger than the 4,316
    claims reinspected. As a result, FEMA is unable to determine the overall
    accuracy of the claims closed. FEMA's Deputy Director of the Mitigation
    Division said that FEMA agrees with our recommendation and plans to do
    quality reinspections in future flood events based on a random sample of
    the population of all claims. Neither FEMA nor its program contractor
    analyzed the overall results of the 4,316 quality reinspections for
    Hurricanes Katrina and Rita to identify the total number of payment errors
    and the magnitude of those errors. FEMA did not have a requirement that
    the overall results of the reinspections for flood events be analyzed. In
    our review of a statistically valid sample of 740 of the 4,316
    reinspection reports, claims payment errors were identified in about 14
    percent of the Hurricane Katrina reinspections of claims adjusted using
    regular processes, in about 1 percent of the reinspections of Hurricanes
    Katrina and Rita claims adjusted using expedited methods of claims
    adjustments, and 2 percent of Hurricane Rita reinspections of claims
    adjusted using regular processes. Because, in the past, FEMA has had
    neither an appropriate sampling methodology nor a requirement that an
    analysis be done of overall results of claims adjustments done after every
    flood event, we do not know how the error rates we identified compare to
    adjusting errors in reinspection reports for other smaller flood events.

    General Adjusters and Disaster Analysts Did Quality Reinspections of About 2.5
    Percent of All Claims and Additional Reinspections of Claims Adjusted Using
    Expedited Processes

    To determine whether claims were correctly adjusted by the large cadre of
    adjusters deployed after Hurricanes Katrina and Rita, FEMA's program
    contractor conducted quality assurance reinspections of 4,316 Hurricane
    Katrina and Rita claims conducted from January to September 2006. The
    number of reinspections done was slightly smaller than the goal
    established by FEMA for the percentage of reinspections to be completed.
    However, FEMA officials told us in a briefing at the conclusion of our
    audit work that 5,198 reinspections had been completed. FEMA's director of
    NFIP claims said that the program contractor was to reinspect about 3
    percent of all claims, about the same percentage of reinspections done
    after other flood events. In addition, the contractor was to review at
    least 10 percent of the expedited claims done by each insurance company
    that decided to use expedited processing procedures for some claims.
    Reinspection reports completed as of September 2006 represented about 2.5
    percent of all Hurricane Katrina and Rita claims that were closed by May
    2006. Reinspection reports were completed for just over 10 percent of the
    17,200 claims closed using expedited processes.

    The quality assurance reinspections are a standard oversight procedure
    after all flood events and are generally done by general adjusters who, in
    addition, are responsible for estimating damage from flood events,
    coordinating claims adjustment activities at disaster locations, and
    conducting adjuster training. When we did audit work for our October 2005
    report, nine general adjusters were employed by FEMA's program contractor.
    Four general adjusters were on board after Hurricanes Katrina and Rita,
    according to the general adjuster in charge. According to FEMA, one reason
    for the loss of general adjusters was that several left to work as
    independent adjusters or for adjusting firms to earn higher pay adjusting
    claims for Hurricanes Katrina and Rita. To supplement the general adjuster
    workforce, FEMA's program contractor hired 22 temporary employees.

    In addition to overseeing the regular quality reinspection program of
    4,136 reinspections of Hurricanes Katrina and Rita claims adjusted using
    regular processes and expedited methods, FEMA formed a special task force
    of 15 adjusters and supervisors to review and reinspect additional claims
    closed using expedited methods. FEMA officials said that they took this
    action because the expedited methods had not been used to adjust claims in
    prior flood events, so they wanted to have additional information on the
    accuracy of payments made.

    Quality Reinspection Program Does Not Rely on a Statistically Valid Sampling
    Methodology

    FEMA did not adopt our October 2005 recommendation that it select the
    claims to be reinspected in its quality reinspection program using a
    random sample of the population of all claims.24 Instead, according to the
    general adjuster in charge of Hurricanes Katrina and Rita, selection of
    claims to reinspect was based upon judgmental criteria including, among
    other items, the size and location of loss and complexity of claims. The
    general adjusters used their judgment to select what they thought were the
    more challenging claims adjustments for reinspection under the premise
    that if difficult adjustments are done accurately, more routine
    adjustments should be handled properly, as well.

    The process the general adjuster described is a nonprobability sampling
    process rather than random sampling. In nonprobability sampling, staff
    selected 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 is to
    generalize about the population from which the sample is taken.

    After discussion, FEMA agreed with GAO's recommendation that it implement
    an approach for random sampling. The Deputy Director of FEMA's Mitigation
    Division said that FEMA plans to do quality reinspections in future flood
    events based on a random sample of the universe of all claims. The
    official advised that FEMA was not able to implement the October 2005
    recommendation in the aftermath of Hurricanes Katrina and Rita because
    other priorities to meet the needs of claimants and communities took
    precedence.

    Because the judgmental criteria were used in selecting reinspections to be
    done, the results of FEMA's NFIP quality reinspection program for
    Hurricanes Katrina and Rita cannot be projected to a larger universe than
    the claims adjustments sampled. As a result, FEMA is unable to determine
    the overall accuracy of claims settled for these flood events--an action
    that is necessary to meet GAO's internal control standard that FEMA have
    reasonable assurance that program objectives are being achieved and its
    operations are effective and efficient.25

    24See [43]GAO-06-119 .

    Limited Information Available on the Overall Results of the Quality
    Reinspections

    Of FEMA's 4,316 claims reinspections, 2,565 (about 59 percent) were for
    claims adjustments done using regular processes that included on-site
    visits by a certified flood adjuster to assess damages, while 1,751 (about
    41 percent) were reinspections of claims adjusted using the expedited
    methods that FEMA authorized to settle some claims at policy limits
    without site visits by flood adjusters. FEMA's program contractor did not
    analyze the overall results of its quality reinspection program for
    Hurricanes Katrina and Rita, another action that is necessary to meet our
    internal control standard that FEMA have reasonable assurance that program
    objectives are being achieved and its operations are effective and
    efficient. FEMA's director of NFIP claims said that FEMA does not
    generally require the program contractor to prepare and analyze reports of
    the overall results of quality reinspections after flood events. According
    to officials of FEMA and its program contractor, in addition to preparing
    written reports of each quality assurance reinspection, general adjusters
    discuss the results of the reinspections they perform with insurance
    company officials that process the claims. If a general adjuster
    determines that an expense was allowed 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. According to officials of FEMA and its
    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 and the
    resolution of overpayments and underpayments is tracked.

    According to the FEMA director of NFIP claims, a special task force of
    adjusters and supervisors reinspected 1,696 expedited claims from
    Hurricane Katrina in addition to the reinspections conducted in the
    quality reinspection program and found a total of 81 erroneous payments
    (about 5 percent). FEMA will take action to recover overpayments of claims
    where it is appropriate to do so. The official also stated that a report
    on the results of the task force review was being prepared, but it was not
    completed during the course of our review. We did not analyze data from
    the special task force as part of our review of a sample of quality
    reinspection reports.

    25GAO, Policy Manual (Washington, D.C.: Jan. 1, 2004).

    Because the NFIP's quality reinspection program does not rely on a
    statistically valid sampling methodology, like FEMA, we are unable to
    project the results of our reviews of 740 reinspection reports to the
    population of all claims closed. However, because our sample is a
    probability sample of all 4,316 reinspections claims, are able to project
    our estimates to this population of claims reinspections.

    Our review of 320 of the quality reinspection reports done for Hurricane
    Katrina regular process claims found that reinspectors identified problems
    in 119 instances (about 37 percent).26 In most instances where quality
    reinspections identified problems with the original claims adjustments,
    reinspectors determined that the claims payment amounts were correct but
    that files did not meet NFIP standards (e.g., they did not include all
    supporting documentation). However, 44 of the 320 quality reinspection
    reports we reviewed for Hurricane Katrina claims adjustments that used
    regular processes (about 14 percent) identified claims overpayments or
    underpayments. Payment errors identified in our review included 8
    underpayments that ranged from more than $131,000 to $543 and 36
    overpayments that ranged from $65,000 to $86. For the expedited process
    reinspection reports, we identified problems in about 12 percent (39 of
    320) reports we reviewed. However, reinspectors identified erroneous
    overpayments in only 4 of these instances (about 1 percent). These payment
    errors were all overpayments that ranged from $40,000 to $80,000. On the
    basis of our review of 100 Hurricane Rita reinspections, we estimate that
    about 2 percent of the reinspections identified erroneous payments. These
    payment errors were between $9,000 and $10,000. Because, in the past, FEMA
    has had neither an appropriate sampling methodology nor a requirement for
    an overall analysis claims adjustment done after every flood event, we do
    not know how the error rates we identified compare to adjusting errors
    identified in reinspections of claims from other smaller flood events. See
    appendix IV for the complete results of our review of 740 quality
    reinspection reports for claims adjustments after Hurricanes Katrina and
    Rita.

    26These estimates are based on a probability sample and are subject to
    sampling error. For Hurricane Katrina regular process reinpsections and
    Hurricanes Katrina and Rita claims processed using expedited methods, we
    are 95 percent confident that the actual percentage is within +/- 5
    percentage points of our estimates. More information about precision of
    estimates is contained in appendix I.

    FEMA Has Made Progress Implementing NFIP Program Changes in the Flood Insurance
    Reform Act of 2004

    Since we last reported in October 2005, FEMA has moved forward on
    implementation of the Flood Insurance Reform Act of 2004.27 However, there
    is still progress to be made. Among other things, the act mandated FEMA to
    (1) develop supplemental materials for explaining NFIP coverage and the
    claims process to policyholders when they purchase and renew policies; (2)
    establish, by regulation, an appeals process for claimants; and (3)
    establish minimum training and education requirements for flood insurance
    agents in cooperation with the insurance industry, state insurance
    regulators, and other interested parties and publish the requirements in
    the Federal Register.28 The statutory deadline for the three mandates was
    December 30, 2004. The act also authorized FEMA to create a pilot program
    to provide financial assistance to states and communities to carry out
    activities including elevating and demolishing structures that have
    suffered severe and repeated damage from flooding.29 The act authorized
    the use of funds from the National Flood Insurance Fund for the pilot
    program for fiscal years 2005 through 2009. FEMA has fully implemented the
    first two requirements to establish notifications on coverage to
    policyholders and an appeals process for claimants. With regard to the
    training and education requirements, FEMA published training and education
    requirements in the Federal Register, stating that it intended to
    implement the standards through existing state licensing schemes for
    insurance agents. Though FEMA has taken a number of actions to improve the
    training and education of agents that sell NFIP policies, only 15 states
    implemented mandatory training and education requirements as of October,
    2006 and as we reported in October 2005, FEMA has not established how or
    when states are to begin imposing education and training requirements.
    Finally, FEMA has not created a pilot program to mitigate damage to severe
    repetitive loss properties.

    27See [44]GAO-06-119 .

    28Pub. L. No. 108-264, SS 202, 203, 204 (codified at 42 U.S.C. S 4011 note
    (2004)) (requiring FEMA to develop informational materials); Pub. L. No.
    108-264, S 205 (codified at 42 U.S.C. S 4011 note (2004)) (requiring FEMA
    to establish appeals process); Pub. L. No. 108-264, S 207 (codified at 42
    U.S.C. S 4011 note (2004)) (requiring FEMA to establish and publish
    minimum training and education requirements).

    29Pub. L. No. 108-264 at S 102 (codified at 42 U.S.C. S 4102a (2004)).

    Informational Materials to Explain Coverage and the Claims Process Are Completed

    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 acknowledgment form that the policyholder received the
    standard flood insurance policy 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. FEMA officials said that acknowledgment forms and new
    insurance program forms to explain coverage to policyholders when they
    purchase and renew their insurance were final as of September 2005. FEMA
    posted a flood insurance claims handbook, dated July 2005, on its Web site
    in September 2005. The handbook contains information on anticipating,
    filing, and appealing a claim. The Director of the FEMA Mitigation
    Division, which oversees the NFIP, said that FEMA distributed the NFIP
    Summary of Coverage and Flood Insurance Claims Handbook to help
    policyholders affected by Hurricane Katrina through the claims process.
    The materials were available in disaster recovery and flood response
    offices and were distributed in town meetings. In addition, according to a
    representative of FEMA's program contractor on-site in Hammond, Louisiana,
    some flood adjusters provided copies of the documents to claimants to help
    to explain the processes for filing claims and resolve any disagreements
    about the claims settlement.

    Formal Appeals Process in Place

    An appeals process that FEMA officials described as informal was in place
    for claimants after Hurricane Katrina and was described in the Flood
    Insurance Claims Handbook that FEMA posted on its Web site in September
    2005. As we have stated in this report, 13 appeals were filed by claimants
    related to settlements of their NFIP claims as a result of Hurricane
    Katrina damage, and no appeals were filed for damage resulting from
    Hurricane Rita, as of April 2006. To establish a formal appeals process,
    FEMA published an interim rule in the Federal Register that became
    effective in June 2006.30 Comments made in the Additional Views section of
    the Senate report on the Flood Insurance Reform and Modernization Act of
    2006, a bill pending in Congress as of November 2006, outlined concerns
    that the rule was not specific on the structure of the appeals process.
    After a public comment period, a final rule was published on October 13,
    2006.31 The final rule included more specific elements on the structure of
    the appeals process in the final rule than were contained in the interim
    rule. For example, the final rule stated that FEMA will provide
    policyholders with an acknowledgment of receipt of an appeal, which will
    also provide the policyholder with a point of contact within FEMA to get
    information on the status of the appeal, and that FEMA is subject to a
    90-day deadline to resolve appeals and issue a written appeal decision to
    the policyholder and insurer. The final regulation also provided examples
    of the types of documentation that policyholders should include in their
    appeals.

    30See Appeal of Decisions Relating to Flood Insurance Claims, 71 Fed. Reg.
    30,294 (May 26, 2006).

    Some States Have Established Minimum Education and Training Requirements

    With respect to the requirement that FEMA establish minimum education and
    training requirements for agents who sell NFIP policies, the Flood
    Insurance Reform Act of 2004 requires 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.32 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 NFIP
    requirements through already established state licensing schemes for
    insurance agents. To that end, FEMA provided suggested language for state
    legislation to require a prelicensing demonstration of knowledge of flood
    insurance and a onetime, 3-hour continuing education course requirement
    for existing licensees. FEMA further 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 also offered incentives to agents who completed NFIP
    training to encourage adoption of the minimum standards.

    31See Appeal of Decisions Relating to Flood Insurance Claims, 71 Fed. Reg.
    60,435 (Oct. 13, 2006)

    32See Flood Insurance Training and Education Requirements for Insurance
    Agents, 70 Fed. Reg. 52,117 (Sept. 1, 2005).

    For fiscal years 2006 and 2007, FEMA adopted performance measures for
    meeting "the objective of the mandate that agents selling flood insurance
    are trained and provide good information to consumers." The performance
    measures center on FEMA activities to encourage agent training activities,
    but do not establish milestones for states to implement the minimum
    training requirements. Specifically, the performance measures are to

               o increase by 7 percent over the previous year the number of
               insurance agents who complete the NFIP Bureau's flood insurance
               training, either live or online;
               o submit a new online training module to states for continuing
               education credit approval, with approval by 40 states by fiscal
               year 2008;
               o encourage write-your-own companies to do their part to ensure
               their agents are sufficiently trained, and
               o foster state adoption of mandatory agent training requirements
               through continued communication with departments of insurance,
               offering technical assistance, and so forth.

    In working toward the final performance measure, FEMA held meetings and
    conferences with state legislators and insurance regulators, as well as
    insurance company officials, and worked with the National Association of
    Insurance Commissioners to develop a model bulletin that state insurance
    commissioners may issue to implement the minimum training requirements.33

    As of October 2006, only 15 states had established minimum training and
    education requirements for insurance agents that sell NFIP policies.34 Two
    states had issued advisory notices, and 1 state had established standards
    for a continuing education course in flood insurance but had not made the
    course mandatory. As we reported in October 2005, FEMA has not developed
    milestones for state adoption of minimum training and education
    requirements. See appendix V for a listing of the state actions taken.

    33NAIC Model Bulletin, available at
    http://www.naic.org/Releases/2006_docs/flood_bulletin.htm.

    34Ten of the 15 states that implemented minimum training standards did so
    through bulletins or advisory opinions, which provide guidelines for
    insurance agents.

    FEMA Has Not Established a Pilot Program to Mitigate Damage to Severe Repetitive
    Loss Properties

    As of October 2006, FEMA had not implemented the pilot program authorized
    by the act to help reduce the inventory of NFIP properties that have
    sustained repeated severe flood losses. As noted in the report of the
    Senate Committee on Banking, Housing, and Urban Affairs accompanying the
    legislation, an important purpose of the act is to address the problem of
    severe repetitive loss properties, which are properties that have been
    flooded numerous times and are thus a financial drain on the NFIP.35 The
    act authorizes financial assistance to states and communities that decide
    to participate in the pilot program to carry out mitigation activities
    that reduce flood damages to severe repetitive loss properties.36 The act
    authorizes the transfer of up to $40 million per fiscal year for fiscal
    years 2005 through 2009 from the NFIP Fund for the pilot program, and
    funds for the program were appropriated in fiscal year 2006. States and
    communities may use funds under this program for the mitigation of severe
    repetitive loss properties. Mitigation actions may include purchase,
    relocation, demolition, elevation, or flood-proofing structures, as well
    as minor physical localized flood control projects. Funds may also be used
    by states and communities to purchase severe repetitive loss properties.
    FEMA officials noted that they had made progress in developing the program
    guidance and implementing regulations for the pilot program and plan to
    combine the fiscal years 2006 and 2007 appropriations and begin funding
    projects under the pilot program in fiscal year 2007.

    Conclusions

    By the measures of number of claims filed, amount of claims paid, losses
    per claim, and debt incurred, Hurricane Katrina was an unprecedented event
    for the NFIP that created challenges to process a record number of claims
    and address needs of claimants and communities that experienced grave
    losses. FEMA approved new methods of adjusting some Hurricane Katrina and
    Rita claims, issued advisory opinions to aid in rebuilding after these
    flood events, and took other actions to address the needs of NFIP
    claimants and communities.

    However, the importance of FEMA taking additional actions to enhance the
    value of its monitoring and oversight processes is also illustrated in the
    aftermath of Hurricanes Katrina and Rita. Not only did these flood events
    involve billions more dollars and hundreds of thousands more claims for
    the NFIP than any previous flood event since the program's inception, but
    they also involved new claims-processing methods that, if proven to result
    in accurate claims adjustments, could lower NFIP payments for claims
    adjustments as compared to fees paid for the more time-consuming
    room-by-room, line-item-by-line-item visual assessments of flood damage
    that the NFIP had exclusively relied upon for all prior flood events.
    FEMA's current use of quality assurance reinspections to discuss
    individual results and specific adjustment errors with insurance company
    officials and seek reimbursements for overpayments is too limited to meet
    our internal control standard that it have reasonable assurance that
    program objectives are being achieved and its operations are effective and
    efficient. For future flood events, when FEMA conducts its quality
    assurance reinspection program for claims adjustments using the
    statistically valid sampling methodology we previously recommended, the
    agency will be well positioned to broaden the scope of its analyses to
    determine the overall results of claims adjustments done for each future
    flood event, including the number and type of claims adjustment errors
    that occurred.

    35S. Rep. No. 108-262, at 2-3 (2004).

    36The act defines single-family severe repetitive loss properties as those
    for which four or more separate NFIP claims payments exceeding $5,000 have
    been made and the cumulative amount of the claims exceeds $20,000, or at
    least two separate claims payments have been made which, cumulatively,
    exceed the value of the property. 42 U.S.C. S 4102a(b)(1) (2004).

    FEMA made progress in implementing provisions of the Flood Insurance
    Reform Act of 2004. However, our recommendation that FEMA establish
    milestones for meeting provisions of the act remains open. In October
    2005, we recommended that FEMA develop a documented plan with milestones
    for ensuring that agents that sell NFIP policies meet minimum training and
    education requirements. FEMA has taken a number of actions, including
    outreach to the states, to encourage the implementation of minimum
    training standards. However, given the somewhat slow progress among states
    to adopt mandatory training requirements, we continue to think that FEMA
    should elaborate on the state implementation performance measure by
    developing a documented plan with milestones for state adoption of minimum
    training and education requirements and our recommendation related to the
    minimum training and education requirements remains open.

    Recommendation for Executive Action

    To strengthen and improve FEMA's monitoring and oversight of the NFIP,
    including ensuring that claims payments are accurately determined, we are
    recommending that for future flood events when FEMA implements our prior
    recommendation to do quality assurance reinspections of a statistically
    valid sample of claims adjustments, the Secretary of the Department of
    Homeland Security also direct the Under Secretary of Homeland Security,
    FEMA, to take the following action:

               o Analyze the overall results of claims adjustments done for each
               future flood events to determine the number and type of claims
               adjustment errors made and to help determine whether new,
               cost-efficient methods for adjusting claims that were introduced
               after Hurricane Katrina are feasible to use after other flood
               events.

    Agency Comments and Our Evaluation

    On December 8, 2006, DHS provided written comments on a draft of this
    report. DHS agreed with our recommendation to improve its quality
    reinspection program and stated that it was revising its guidance
    accordingly and would use the recommended sampling and reporting
    procedures in future flood events.

    DHS reiterated a comment made in FEMA's review of our October 2005 report
    that we did not review all of the controls and processes that FEMA has in
    place to provide oversight for the NFIP. Most of the additional oversight
    and management processes and controls that FEMA has in place are for
    financial management--an area not included in the scope of our work. Our
    work focused on program implementation and oversight in the aftermath of
    Hurricanes Katrina and Rita. During our review, FEMA managers described
    the quality assurance claims reinspection program as the primary method
    for overseeing the accuracy of claims adjustments for these flood events.
    As we have noted in this report, we have work under way to examine the
    cost of operating the NFIP, including fees paid for the services of
    private insurance companies and claims adjusters. For that report, to be
    issued in 2007, we plan to examine the NFIP's financial management and
    controls.

    DHS also provided information on how it determines the number of claims to
    be reinspected in the NFIP's quality reinspection program and additional
    information on its implementation of the requirement of the Flood
    Insurance Reform Act of 2004 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.

    We are sending copies of this report to the Secretary of the Department of
    Homeland Security, the Director of the Federal Emergency Management Agency
    and other interested parties. In addition, the report will be available at
    no charge on the GAO Web site at http://www.gao.gov . Please contact
    William Jenkins at (202) 512-8757 or jenkinswo@gao.gov if you or your
    staff have any questions concerning this report. Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on the
    last page of this report. Key contributors to this report are listed in
    appendix VII.

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

    List of Congressional Committees:

    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

    The Honorable Susan M. Collins
    Chairman
    The Honorable Joseph I. Lieberman
    Ranking Minority Member
    Committee on Homeland Security and Governmental Affairs
    United States Senate

    The Honorable Peter T. King
    Chairman
    The Honorable Bennie G. Thompson
    Ranking Minority Member
    Committee on Homeland Security
    House of
    Representatives

    The Honorable Tom Davis
    Chairman
    The Honorable Henry A. Waxman
    Ranking Minority Member
    Committee on Government Reform
    House of Representatives

    Appendix I: Scope and Methodology

    To describe the impact of Hurricanes Katrina and Rita on the National
    Flood Insurance Program (NFIP) and the extent of the losses paid by
    location and property type, we reviewed congressional actions to increase
    the NFIP borrowing authority, and we interviewed the Director, Deputy
    Director, and other officials of the Federal Emergency Management Agency's
    (FEMA) Mitigation Division on the actions they took to estimate the amount
    of funds they needed to borrow from the U.S. Treasury to cover claims from
    Hurricanes Katrina and Rita and other 2006 flood events. We compared
    claims payments for losses from Hurricanes Katrina and Rita to payments
    for losses from past flood events. We also analyzed statistical data from
    the NFIP data system on claims payments for Hurricanes Katrina and Rita.
    We analyzed the data on losses paid by state, for principal and
    nonprincipal residential properties, within and outside of special flood
    hazard areas, and by type of coverage (i.e., building, contents, or both
    building and contents). We updated our reliability assessment of the
    statistical data base reported in October 2005 by interviewing database
    managers to discuss any system changes that would have an impact on data
    reliability and by replicating statistical analyses by the NFIP to
    determine their accuracy.1 We determined that the database was
    sufficiently reliable for our reporting purposes. We did our analyses and
    reliability testing of FEMA statistical data that were current through May
    31, 2006, when FEMA reported that over 95 percent of Hurricane Katrina and
    Rita claims were closed.

    To describe the challenges FEMA and its private sector partners faced and
    the results of their efforts to process flood claims resulting from
    Hurricanes Katrina and Rita and address the needs of NFIP claimants and
    communities, we interviewed headquarters and field officials of FEMA and
    its program contractor. We also conducted semistructured interviews based
    on our judgment with insurance industry officials involved in the recovery
    effort and visited areas impacted by Hurricane Katrina in New Orleans,
    Louisiana, and Bayou La Batre, Alabama. Interviewees included the owner of
    a firm that specializes in insurance claims adjustments for catastrophes,
    representatives of the three insurance companies that closed the largest
    number of Hurricane Katrina and Rita NFIP claims, and a representative of
    an insurance company that was not a major NFIP insurer for the Gulf Coast
    claimants but did process some claims. Their views are not representative
    of the universe of all insurance industry officials involved in the flood
    recovery effort. We also analyzed statistical data on the number of
    appeals filed by claimants and requests made for reinspections by FEMA's
    program contractor to assist claimants and insurance companies in reaching
    resolutions on disputes. We reviewed documentation and talked with
    officials about new, expedited methods of claims processing FEMA approved.
    We examined preliminary data on claims that may be filed for coverage
    under the standard flood insurance policy for up to $30,000 for some
    property owners to take actions to reduce their risk of future flood
    damage. Finally, we examined documentation and interviewed FEMA officials
    on the status of efforts to provide guidance to communities and property
    owners to assist in recovery and rebuilding efforts and reviewed
    documentation on the status of communities' actions to adopt FEMA's
    advisory base flood elevation standards.

    1See [47]GAO-06-119 .

    To assess FEMA's role in monitoring and overseeing the NFIP and the
    results of that oversight, we interviewed officials of FEMA and its
    program contractor who were involved in the quality assurance
    reinspections of claim adjustments done for Hurricanes Katrina and Rita
    and documented the number of reinspections performed and the methodology
    used to select claims for reinspection. We reviewed documentation of
    FEMA's procedures for monitoring and overseeing claims adjustments. We
    observed a disaster analyst for FEMA's program contractor performing
    several quality assurance reinspections in Bayou La Batre. We followed up
    on the status of our prior recommendation for improvements in the quality
    assurance reinspection program and discussed actions taken or planned to
    implement it.2 We selected a statistically valid sample of 740
    reinspection reports done for Hurricanes Katrina and Rita to review to
    determine, among other things, errors that were identified in the claims
    adjustments. Using a data collection instrument, we reviewed the results
    of these randomly selected reinspection reports of Hurricane Katrina and
    Rita claims to determine whether reinspectors identified errors, including
    overpayment, underpayments, or adjustments that did not meet NFIP
    standards (i.e. did not contain appropriate documentation).

    Table 3 shows the number of quality assurance reinspection reports of
    claims adjustments done using regular processes we examined, including
    site visits by flood adjusters and expedited methods FEMA approved for
    some Hurricane and Rita claims.

    2See [48]GAO-06-110 .

    Table 3: Number of FEMA Quality Assurance Reinspection Reports and the
    Sample We Reviewed, by Process Type and Flood Event

                                            Number of FEMA Number of reinspection
    Process type/flood event       reinspection reports    reports we reviewed
    Regular process claims                        2,258                    320
    adjustments for Hurricane
    Katrina
    Regular process claims                          307                    100
    adjustments for Hurricane Rita
    Expedited methods for                         1,751                    320
    Hurricanes Katrina and Rita
    Total                                         4,316                    740

    Source: GAO.

    To assess the status of FEMA's efforts to implement provisions of the
    Flood Insurance Reform Act of 2004 after Hurricanes Katrina and Rita, we
    interviewed officials and examined documentation of the actions FEMA took.
    We also analyzed FEMA's actions to determine whether they met the legal
    requirements of the act.

    We conducted our work in accordance with generally accepted government
    auditing standards from December 2005 through November 2006.

    Appendix II: Statistical Information on NFIP Claims Paid for Hurricanes
    Katrina and Rita

    Table 4: Hurricane Katrina Principal and Nonprincipal Residential Paid
    Losses by State (as of May 31, 2006)

                                          Principal          Nonprincipal
    State                              residence             residence Unknown
    Alabama                                2,350                 1,904      13
    Florida                                4,497                   584       0
    Louisiana                            107,960                18,739   1,263
    Mississippi                           12,074                 3,284     205
    Total nonondominium                  126,881                24,511   1,481
    residential

    Source: GAO analysis of FEMA data.

    Table 5: Hurricane Rita Principal and Nonprincipal Residential Paid Losses
    by State (as of May 31, 2006)

                                  Principal residence        Nonprincipal
    State                                indicated residence indicated Unknown
    Louisiana                                5,191               1,287     313
    Texas                                    1,285                 199      10
    Total noncondominium                     6,476               1,486     323
    residential

    Source: GAO analysis of FEMA data.

    Table 6: Hurricane Katrina Paid Residential Losses for Dwellings and
    Contents by State (as of May 31, 2006)

                    Coverage for  Coverage for
    State       dwelling only contents only Coverage for dwelling and contents
    Alabama             2,606            90                              1,861
    Florida             2,202            98                              2,913
    Louisiana          30,404        12,876                             85,867
    Mississippi         3,725           418                             11,852
    Total              38,937        13,482                            102,493

    Source: GAO analysis of FEMA data

    Table 7: Hurricane Rita Paid Residential Losses for Dwellings and Contents
    by State (as of May 31, 2006)

                         Coverage for         Coverage for  Coverage for dwelling
    State            dwelling only        contents only           and contents
    Louisiana                3,117                  368                  3,326
    Texas                      503                   56                    938
    Total                    3,620                  424                  4,264

    Source: GAO analysis of FEMA data.

    Appendix III: Parishes and Counties Where FEMA Issued Advisory Flood
    Elevation Guidance

    Table 8: Parishes and Counties Where FEMA Issued Advisory Flood Elevation
    Guidance

                            Calcasieu, Cameron, Iberia, Jefferson, Lafourche,
                            Orleans, Plaquemines, St. Bernard, St. Charles, St.
                            John the Baptist, St. Mary, St. Tammany, Tangipahoa,
    Louisiana parishes   Terrebonne, Vermillion
    Mississippi counties Hancock, Harrison, Jackson

    Source: FEMA.

    At the time of our review, 11 of the 15 Louisiana parishes where FEMA
    issued advisory flood elevation guidance had adopted FEMA's advisories.
    Two parishes, St. John the Baptist and Lafourche, had decided not to adopt
    the advisories; and two others, Plaquemines and St. Bernard, were
    considering them. The Lafourche Parish council rejected the advisory
    because it considered some advisory map data to be wrong and determined
    that adopting the advisory would have a high negative economic impact on
    homeowners. The council also noted that the advisory information was
    intended to be only advisory and preliminary. Fourteen cities within the 3
    Mississippi counties where FEMA issued advisory flood elevation guidance
    had taken some new action to guide rebuilding efforts.

    Appendix IV: Results of GAO Review of a Random
    Selection of Reinspection Reports for Hurricanes Katrina and Rita

    Figure 13: Results of GAO Review of Quality Reinspections of Hurricanes
    Katrina and Rita Claims Processed Using Expedited Procedures

    Figure 14: Results of GAO Review of Quality Reinspections of Hurricane
    Katrina Claims Processed Using Regular Claims Adjustment Procedures

    Note: In instances in which reinspectors did not complete reinspection
    reports. We were unable to determine whether they identified problems.

    Figure 15: Results of GAO Review of Quality Reinspections of Hurricane
    Rita Claims Processed Using Regular Claims Adjustment Procedures

    Note: In instances in which reinspectors did not complete reinspection
    reports. We were unable to determine whether they identified problems.

    Appendix V: State Actions on Training of Agents That Sell NFIP Policies

    States That Have Taken Action Regarding Training of Agents that Sell NFIP
    Policies (as of October 2006)

    State          Action taken
    Delaware       Department of Insurance required agents authorized to write
                      homeowners or personal lines of insurance to complete a
                      2-hour continuing education course on flood insurance and
                      the NFIP.
    Iowa           Commissioner of Insurance required agents who sell flood
                      insurance to comply with the minimum training and education
                      requirements and demonstrate that compliance upon request
                      of the Commissioner.
    Kansas         Commissioner of Insurance required agents who sell flood
                      insurance to complete a onetime, 3-hour course related to
                      the NFIP, beginning with license renewals on January 1,
                      2007.
    Kentucky       Office of Insurance issued advisory opinion stating
                      requirement that agents selling NFIP policies complete a
                      onetime, 3-hour course related to the NFIP.
    Louisiana      Legislature required a onetime, 3-hour course on flood
                      insurance to be completed by agents authorized to write
                      property and casualty lines of insurance for initial
                      licensure and/or license renewal.
    Maine          Superintendent of Insurance directed licensed insurance
                      agents who sell NFIP policies to comply with the minimum
                      training and education requirements and demonstrate that
                      compliance upon request of the bureau.
    Maryland       Department of Insurance required property casualty
                      insurance producers who sell flood insurance to complete at
                      least two of their required continuing education credits in
                      flood insurance by September 30, 2006, regardless of when
                      their licenses renew, and each renewal period thereafter.
    Massachusetts  Commissioner of Insurance required agents licensed after
                      April 4, 1983, who sell flood insurance to complete 3 hours
                      of continuing education on flood insurance by December 31,
                      2006.
    Missouri       Department of Insurance required agents who sell flood
                      insurance to complete at least 3 hours of NFIP-related
                      training by December 31, 2009.
    Nebraska       Department of Insurance required agents who sell flood
                      insurance to complete a onetime, 3-hour course on flood
                      insurance beginning with license renewals on January 1,
                      2007.
    Nevada         Commissioner of Insurance directed licensed insurance
                      agents who sell NFIP policies to complete a onetime, 3-
                      hour course on flood insurance.
    North Carolina Commissioner of Insurance sent letters to insurance agents
                      who met their 2005 continuing education requirements that
                      encouraged them to take a continuing education course on
                      flood insurance.
    Pennsylvania   Insurance Department issued a notice advising insurance
                      companies and agents of the training and education
                      requirements and encouraging agents to attend NFIP flood
                      insurance program workshops.
    Rhode Island   Department of Business Regulation directed licensed
                      insurance agents who sell NFIP policies to comply with the
                      minimum training and education requirements and demonstrate
                      that compliance upon request of the department.
    South Dakota   Director of the Division of Insurance directed licensed
                      insurance agents who sell NFIP policies to comply with the
                      minimum training and education requirements and demonstrate
                      that compliance upon request of the division.
    Texas          Department of Insurance adopted new sections of its
                      Insurance Code establishing standards for a
                      department-certified continuing education course on the
                      NFIP and flood insurance.
    Utah           Commissioner of Insurance directed licensed insurance
                      agents who sell NFIP policies to comply with the minimum
                      training and education requirements and demonstrate that
                      compliance upon request of the department.
    Washington     Commissioner of Insurance directed agents who sell flood
                      insurance policies to complete a onetime, 3-hour course on
                      flood insurance.

    Source: FEMA.

    Appendix VI: Comments from the Department of Homeland Security

    Appendix VII: GAO Contact and Staff Acknowledgments

    GAO Contact

    William O. Jenkins, Jr. (202) 512-8777 or jenkinswo@goa.gov

    Acknowledgments

    Christoper Keisling, Assistant Director; Richard Ascarate, John Bagnulo,
    Amy Bernstein, Christine Davis, Dewi Djunaidy, Wilfred Holloway, Tracey
    King, Deborah Knorr, Jan Montgomery, Mark Ramage, and Jesus Ramoz made
    significant contributions to this report.

    (440476)

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    Highlights of [56]GAO-07-169 , a report to congressional committees.

    December 2006

    NATIONAL FLOOD INSURANCE PROGRAM

    New Processes Aided Hurricane Katrina Claims Handling, but FEMA's
    Oversight Should Be Improved

    In August and September 2005, Hurricanes Katrina and Rita caused
    unprecedented destruction to property along the Gulf Coast, resulting in
    billions of dollars of damage claims to the National Flood Insurance
    Program (NFIP). This report, which we initiated under the authority of the
    Comptroller General, examines (1) the impact of Hurricanes Katrina and
    Rita on the NFIP and paid losses by location and property type; (2) the
    challenges the Federal Emergency Management Agency (FEMA) and others faced
    in addressing the needs of NFIP claimants and communities; (3) FEMA's
    methods of monitoring and overseeing claims adjustments; and (4) FEMA's
    efforts to meet the requirements of the Flood Insurance Reform Act of 2004
    to establish policyholder coverage notifications, an appeals process for
    claimants, and education and training requirements for agents. To conduct
    these assessments, GAO interviewed FEMA and insurance officials, analyzed
    claims data, and examined a sample of reports done on the accuracy of
    claims adjustments.

    [57]What GAO Recommends

    GAO recommends that FEMA analyze the overall results of reinspection
    reports on the accuracy of claims adjustments for future floods. The
    Department of Homeland Security reviewed a copy of this report and agreed
    with our recommendation.

    NFIP paid an unprecedented dollar amount for a record number of claims
    from Hurricanes Katrina and Rita. Congress increased NFIP's borrowing
    authority with the U.S. Treasury from a pre-Katrina level of $1.5 billion
    to about $20.8 billion in March 2006, but FEMA will probably not be able
    to repay this debt on annual premium revenues of about $2 billion. As of
    May 2006, NFIP had paid approximately 162,000 flood damage claims from
    Hurricane Katrina and another 9,000 claims from Hurricane Rita. Most paid
    claims were for primary residences where flood insurance was generally
    required.

    FEMA and its private sector partners faced several challenges in
    processing a record number of flood claims from Hurricanes Katrina and
    Rita, among them were (1) reaching insured properties in a timely way
    because of blocked roadways and flood water contamination and (2)
    identifying badly damaged homes to be inspected in locations where street
    signs had washed away. Despite these and other obstacles, FEMA reported
    that over 95 percent of Gulf Coast claims had been closed by May 2006, a
    time frame comparable to those for closing claims in other, smaller recent
    floods. To help keep pace with the volume of claims filed, FEMA approved
    expedited methods for claims processing that were unique to Hurricanes
    Katrina and Rita.

    To provide oversight of the claims adjustment process, FEMA's program
    contractor did quality assurance reinspections of Hurricane Katrina and
    Rita claims adjustments. FEMA did not adopt our October 2005
    recommendation that it select the claims to be reinspected from a random
    sample of the universe of all closed claims; thus, the results of the
    reinspections cannot be projected to a universe larger than the 4,316
    claims adjustments that were reinspected. FEMA agrees with our prior
    recommendation and plans to do quality reinspections in future flood
    events based on a random sample of all claims. FEMA did not analyze the
    overall results of the quality reinspections for Hurricanes Katrina and
    Rita.

    FEMA has made progress but has not fully implemented the NFIP program
    changes mandated by the Flood Insurance Reform Act. For example, 15 states
    had adopted minimum education and training requirements for insurance
    agents who sell NFIP policies, as of October 2006.

    References

    Visible links
      33. http://www.gao.gov/cgi-bin/getrpt?GAO-06-497T
      34. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
      35. http://www.gao.gov/cgi-bin/getrpt?GAO-06-174T
      36. http://www.gao.gov/cgi-bin/getrpt?GAO-06-183T
      37. http://www.gao.gov/cgi-bin/getrpt?GAO-06-335T
      38. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
      39. http://www.gao.gov/cgi-bin/getrpt?GAO-06-335T
      40. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
      41. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
      42. http://www.gao.gov/cgi-bin/getrpt?GAO-06-335T
      43. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
      44. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
      47. http://www.gao.gov/cgi-bin/getrpt?GAO-06-119
      48. http://www.gao.gov/cgi-bin/getrpt?GAO-06-110
      56. http://www.gao.gov/cgi-bin/getrpt?GAO-07-169
    *** End of document. ***