	NFIP Is Not Designed to Cover All Flood Losses

As a result of coverage limits, restrictions, and exclusions in NFIP policies,  insurance payments for flood damage may not pay all of the costs of  repairing or replacing flood-damaged property. Certain NFIP limitations  are embedded in statute; others have been promulgated by FEMA  pursuant to its statutory authority. FEMA officials said that the coverage  limitations are necessary to keep the NFIP self-supporting and actuarially  sound. Thus, the program is designed to strike a balance between  premium prices and coverage. The value of physical depreciation is  based on the age and condition of the item. A homeowner may choose not to insure personal property under the  program. Basements, which are defined as building areas below grade level on all  sides, have limited coverage that does not include payment to repair or  replace finished walls, floors, furniture, and other personal property. It was insured under the  NFIP for $30,000. Private Insurers Sell, Service, and Adjust Claims under FEMA Management and Oversight

The work of selling, servicing, and adjusting claims on NFIP policies is  carried out by thousands of private sector insurance agents and adjusters  who work independently or are employed by insurance companies or  vendors under subcontract to insurance companies to handle their flood  business. In contrast, according to a FEMA official, about 40 FEMA  employees are responsible for regulating, managing, and overseeing the  program, which is expected to grow to about 4.7 million policies in 2005. FEMA is assisted in this effort by about 170 contractor employees. Independent Agents Are the Main Point of Contact for Policyholders

It is clear that some agents do not understand the program. However, other than requiring that agents  meet basic state insurance licensing requirements, neither FEMA nor the  four insurance companies have historically required that agents complete  training or demonstrate a basic level of knowledge of the NFIP to sell  flood policies. Unlike agents who sell flood insurance policies, adjusters must be certified  by FEMA to work on NFIP claims. I have seen the NFIP do great good for many people.”
Each of the interviewees, when asked how the NFIP could be improved,  said that FEMA should look for ways to make the program less complex  and more similar to other property insurance programs. FEMA Continues Efforts to Comply with Legislative Mandates

Congress mandated that within 6 months of the enactment of the Flood  Insurance Reform Act, FEMA establish (1) insurance agent education and  training requirements, (2) new processes for explaining coverage to  policyholders when they purchase and renew policies, and (3) an appeals  process for claimants who are dissatisfied with the settlement of their  claims. FEMA Is Coordinating with the States to Establish Training and Education Requirements

To address the requirement in the Flood Insurance Reform Act of 2004 to  establish insurance agent education and training requirements, FEMA is  working with state insurance commissions. An official said FEMA is still in  the planning stages of meeting the requirement and is discussing options  with state insurance commissions, but has not yet developed an action  plan. The draft material includes:    a supplemental form that would explain the policy, such as the amount of  deductibles, the exact coverage being purchased, exclusions from  coverage, and an explanation of how lost items and damages will be  valued under the policy at the time of loss;   a flood insurance handbook to describe procedures to be followed to file a  claim and provide detailed information on an appeals process that FEMA  is to develop; and   an acknowledgment form that the policyholder has received the flood  insurance policy and that the policy only covers building property for the  dwelling and does not provide coverage for contents or personal property. FEMA expects to have these forms  and handbook finalized by October 2005.
Why GAO Did This Study

According to the National Flood Insurance Program (NFIP), 90 percent of all natural disasters in the United States involve flooding. Because of the catastrophic and unpredictable nature of floods, private insurance companies do not typically cover flood losses. Congress established the NFIP in 1968 to provide an insurance alternative to disaster assistance in response to the escalating costs of repairing flood damage. During congressional hearings on provisions of the Flood Insurance Reform Act of 2004, several legislators testified on NFIP shortcomings, as reported by constituents whose properties had been flooded by Hurricane Isabel in September 2003. The act required GAO to study coverage provided under the NFIP. It also required the Federal Emergency Management Agency (FEMA), the administrator of the NFIP, to take steps to address concerns about coverage and claims procedures. Today's testimony is based on work in progress to address this mandate. It provides preliminary information on (1) the types of coverage limits, restrictions, and exclusions under the NFIP; (2) how FEMA, in partnership with private insurers, manages and oversees the NFIP and the views of selected private sector program managers on how the program is working; and (3) the status of FEMA's efforts to comply with provisions of the Flood Insurance Reform Act.

What GAO Found

As a result of policy limits, restrictions, and exclusions, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing damaged property. Some limitations are embedded in statute and others have been promulgated by FEMA pursuant to its statutory authority. FEMA officials said that the coverage limitations are necessary to keep the NFIP self-supporting and actuarially sound. Thus, the program is designed to strike a balance between premium prices and coverage. For example, homeowners may choose not to insure personal property under the program. If they do elect to have this coverage, the value of personal property is depreciated. Basement coverage does not include payment to repair or replace finished walls and floors. The work of selling, servicing, and adjusting claims on NFIP policies is carried out by thousands of private sector insurance agents and adjusters under the regulation, management, and oversight of about 40 FEMA employees assisted by about 170 contractor employees. Agents are the main point of contact for policyholders. Four private sector NFIP managers we interviewed said that the agents have varying levels of NFIP knowledge. While training and support are available, historically neither FEMA nor the insurance companies have required completion of training or demonstration of basic program knowledge. Flood-certified adjusters are responsible for assessing damage and estimating losses when flooding occurs. Unlike agents, adjusters have mandatory training requirements. FEMA has oversight mechanisms in place to review the operations of the insurance companies and the work of adjusters. The private sector NFIP managers GAO interviewed were generally supportive of the program. However, they said that FEMA should find ways to make it less complex than and more similar to other property insurance programs. FEMA has taken steps to address its mandates in the Flood Insurance Reform Act, but it did not meet the 6-month timeframe specified. For example, to establish an insurance agent training requirement, an official said FEMA is discussing options but has not developed an action plan. To meet the requirement to provide "simple and complete information" to NFIP policyholders, FEMA has drafted materials explaining coverage, deductibles, and claim- and appeals-related procedures that it expects to have finalized by October 2005.