But in years of catastrophic flooding, such as 2005, it  has not done so and has exercised its authority to borrow from Treasury  to pay claims. As of September 2012, about 85 WYO insurance  companies accounted for about 85 percent of the more than 5.5 million  policies in force. Less Than Half of Policyholders Purchase Maximum Coverage from NFIP for Buildings and Contents

Our analysis of NFIP’s database of policies showed that fewer than half of  all residential and commercial policyholders had maximum flood coverage  for buildings, a possible indicator of how many policyholders might  purchase additional coverage if the limits were increased. In comparing maximum coverage rates  in individual states, we found that, in general, states with higher median  home values also had a higher percentage of policyholders purchasing  coverage at the maximum limit. In addition to high costs, staff at consumer advocacy organizations and  insurance industry organizations described a number of other reasons  that a consumer might decide not to purchase flood insurance in general. Opinions also  vary regarding the potential effects of lowering coverage limits. As  with the baseline scenario, the results from these additional scenarios all  suggest that higher coverage limits would have been associated with  increased net revenue in most of the years analyzed, except for the years  with catastrophic losses. Overall, the financial impact on the program of raising coverage limits  would depend on the adequacy of the rates that would be charged for the  additional coverage. This would lessen the premiums collected and overall  risk exposure of the private flood insurance market. As we noted earlier, the percentage of residential and  commercial policies at the maximum coverage amounts increased from  2002 through 2012, suggesting possible additional demand for increased  coverage limits. Some brokers we interviewed also  said that adding business interruption coverage to NFIP could result in  less uninsured risk in the market. Under the assumption that FEMA’s  rates would be lower than private market industry rates, industry  stakeholders told us that more small- and medium-sized companies might  be able to purchase this coverage because it would be more affordable to  them. NFIP officials stated that they would need to hire  In addition to these challenges, if the rates NFIP charged for business  interruption coverage were not adequately risk-based, adding such  coverage could negatively impact the program’s financial stability and  thus further increase taxpayer exposure. Business interruption coverage is  expensive through the private market and is generally only purchased by  large companies. However,  FEMA does not have historical data on additional living expense losses  for flood, and the usefulness of any data from private insurers that offer  this coverage is limited because these policies typically cover only a  specific subset of the market and may not account for the larger number  of policyholders that NFIP would cover in a disaster-stricken area. First, WYOs would need  to adjust for changes in claims processing. For  example, according to the FEMA study, this coverage can be added to  some excess flood insurance policies, with limits from $7,500 up to  $107,500. Because the excess market is generally  selective, NFIP coverage for additional living expenses could allow  additional consumers the ability to purchase this type of coverage,  although FEMA officials noted that depending on how the coverage was  structured, it could be fairly expensive. The Department noted  that it concurred with our prior recommendation directing FEMA to take  steps to ensure that methods and data used to set NFIP rates result in  premiums that accurately reflect the risk of losses from flooding. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) existing flood insurance coverage; (2)  the potential effects on the National Flood Insurance Program’s (NFIP)  financial condition, the private insurance market, and consumers of  raising or lowering NFIP coverage limits; and (3) the potential effects on  NFIP’s financial condition, the private insurance market, and consumers  of allowing NFIP to offer optional coverage for business interruption and  additional living expenses. To further address the effects on the private insurance market, NFIP, and  consumers if NFIP were to change its coverage limits, or if NFIP were to  offer optional coverage for business interruption and additional living  expenses, we obtained some data in an industry survey last updated in  2010 pertaining to flood insurance programs outside NFIP that offered  private flood insurance, catastrophe insurance that included coverage for  flood, and other non-lender-placed and lender-placed flood coverage.
Why GAO Did This Study

NFIP was created in 1968 and is the only federal flood insurance available. It may be the sole source of insurance to some residents of flood-prone areas. Mainly due to catastrophic losses in 2005, the program became indebted to the U.S. Treasury and has been unable to repay this debt. Because of NFIPs financial instability and management challenges, GAO placed the program on its High-Risk List in 2006. The Biggert-Waters Flood Insurance Reform Act of 2012 introduced many changes to the program and mandates GAO to study the effects of increasing the maximum coverage limits ($250,000 for residential buildings and $500,000 for commercial buildings) and providing optional coverage for business interruption and additional living expenses. This report discusses (1) existing flood insurance coverage, (2) the potential effects of changing NFIP coverage limits, and (3) the potential effects of allowing NFIP to offer optional coverage for business interruption and additional living expenses. To address these objectives, GAO analyzed data from NFIPs databases of policies and claims, reviewed prior reports, and interviewed brokers, insurers, and representatives from consumer advocacy and industry organizations.

What GAO Found

The National Flood Insurance Program (NFIP) currently has more than 5.5 million policyholders insured for about $1.3 trillion who pay about $3.5 billion in annual premiums, but less than half purchase maximum coverage--a possible indicator of how many might purchase additional coverage were it offered. However, from 2002 through 2012, the proportion of residential and commercial policies at maximum building coverage rose substantially--from 11 to 42 percent and from 21 to 36 percent, respectively. States along the Gulf and East Coasts have the most residential policyholders with maximum coverage. In addition, states with higher median home values generally have a higher percentage of policyholders purchasing coverage up to the limit. Industry stakeholders said that an unknown number of policyholders with higher-value properties choose to purchase additional, or excess, coverage above the NFIP limit through the private flood insurance market--a small and selective group of insurers.
Increasing coverage limits could increase the net revenue of the program and have varying effects on NFIP, the private insurance market, and consumers. Assuming that higher coverage limits had been in effect from 2002 through 2011, GAO's analysis suggests that NFIP still would have suffered losses during years with catastrophic floods, such as 2004 and 2005, but would have experienced net increases in revenue in other years. Such increases could have offset future losses or helped avoid additional debt, but the overall financial impact and risk to the program would depend on the adequacy of the rates charged, which GAO has questioned in the past, and the number of policyholders opting for additional coverage. Regarding the private flood insurance market and consumers, higher NFIP coverage limits could decrease participating insurers' overall risk exposure and provide more options to consumers, but might lessen participation of private insurers, as consumers might need to purchase less private insurance.
Adding optional coverage to NFIP for business interruption and additional living expenses could result in less uninsured risk in the market, but further negatively impact the financial stability of the program. Industry stakeholders told GAO that business interruption coverage is generally purchased by only larger companies, as its high cost prohibits small- and medium-sized companies from being able to afford it. In addition, adding business interruption coverage to NFIP could be particularly challenging. For example, properly pricing risk, underwriting, and claim processing can be complex. NFIP officials have stated that they would have to hire additional expertise in-house to offer this coverage. Similarly, offering optional coverage for additional living expenses has many of the same potential effects on NFIP, the private market, and consumers, although this coverage is generally less complex to administer.

What GAO Recommends

GAO continues to support previous recommendations to the Federal Emergency Management Agency (FEMA) that address the need to ensure that the methods and data used to set NFIP rates accurately reflect the risk of losses from flooding. FEMA agreed and has taken some steps to begin to implement them.