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

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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 [email protected] 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 [email protected]

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
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