The NFIP was established by the National Flood Insurance Act of 1968 to  provide policyholders with some insurance coverage for flood damage, as  an alternative to disaster assistance, and to try to reduce the escalating  costs of repairing flood damage. In creating the NFIP, Congress found that  a flood insurance program with the “large-scale participation of the  Federal Government and carried out to the maximum extent practicable  by the private insurance industry is feasible and can be initiated.” In  keeping with this purpose, 92 private insurance companies were  participating in the WYO program as of September 2007. FEMA, which is within the Department of Homeland Security (DHS), is  responsible for the oversight and management of the NFIP. FEMA’s current debt to the Treasury—over $17.5 billion—is almost  entirely for payment of claims from the 2005 hurricanes. As we have testified  previously, it is unlikely that FEMA will be able to repay a debt of this size  and cover future claims, given that the program generates premium  income of about $2 billion a year, which must first cover ongoing loss and  expenses. These policyholders typically pay  premiums that represent about 35 to 40 percent of the true risk premium. Although  these properties account for only about 1 percent of NFIP-covered  properties, they account for between 25 and 30 percent of claims. Remapping Is Creating A New Generation of Properties That May Not Pay Risk-based Premiums

FEMA is also creating a new generation of properties that may not pay  risk-based premiums. Moreover, these grandfathered rates can be permanent. Although this  option is a major selling point of encouraging broader participation in the  program, such actions may further erode the actuarial soundness and  financial stability of the program. However, a FEMA-commissioned study of  compliance with the mandatory purchase requirement estimated that  compliance with purchase requirements, under plausible assumptions,  was 75 to 80 percent in special flood hazard areas for single-family homes  that had a high probability of having a mortgage. The 2006 study also found that while one-third of NFIP policies were  written outside of special flood hazard areas, the market penetration rate  was only about 1 percent. Yet according to FEMA about half of all flood  damage occurs outside of high risk areas. In October 2003, FEMA contracted  for a new integrated mass marketing campaign called “FloodSmart” to  educate the public about the risks of flooding and to encourage the  purchase of flood insurance. FEMA Faces Challenges in Producing Accurate, Updated Flood Maps

Accurate flood maps that identify the areas that are at greatest risk of  flooding are the foundation of the NFIP. The maps are  principally used by (1) the communities participating in the NFIP, to adopt  and enforce the program’s minimum building standards for new  construction within the maps’ identified floodplains; (2) FEMA, to develop  flood insurance policy rates based on flood risk; and (3) federal regulated  mortgage lenders, to identify those property owners who are statutorily  required to purchase federal flood insurance. As of September 2007  FEMA had remapped 34 percent of its maps. FEMA faces challenges in providing effective oversight of the insurance  companies and thousands of insurance agents and claims adjusters that  are primarily responsible for the day-to-day process of selling and  servicing flood insurance policies. In response to our  recommendations, FEMA has agreed to take steps to ensure that it has  reasonable estimates of the actual expenses that WYO insurance  companies incurred to help determine whether payments for services are  appropriate and that required financial audits are performed. Its interim report, issued in July 2007, was generally  inconclusive. As we noted when we placed the NFIP on the high-risk list in 2006,  comprehensive reform will likely be needed to stabilize the long-term  finances of this program. Our ongoing work is designed to provide FEMA  and Congress with useful information to help assess ways to improve the  sufficiency of NFIP’s financial resources and its current funding  mechanism, mitigate expenses from repetitive loss properties, increase  compliance with mandatory purchase requirements, and expedite FEMA’s  flood map modernization efforts. As you well know, placing the program on more sound financial footing  involves a set of highly complex, interrelated issues that are likely to  involve many trade-offs.
Why GAO Did This Study

The National Flood Insurance Program (NFIP), established in 1968, provides property owners with some insurance coverage for flood damage. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for managing the NFIP. Given the challenges facing the NFIP and the need for legislative reform to ensure the financial stability and ongoing viability of this program, GAO placed the NFIP on its high-risk list in March 2006. This testimony updates past work and provides information about ongoing GAO work on issues including (1) NFIP's financial structure, (2) the extent of compliance with mandatory requirements, (3) the status of map modernization efforts, and (4) FEMA's oversight of the NFIP. Building on our previous and ongoing work on the NFIP, GAO collected data from FEMA to update efforts, including information about claims, policies, repetitive loss properties, and mitigation efforts.

What GAO Found

The most significant challenge facing the NFIP is the actuarial soundness of the program. As of August 2007, FEMA owed over $17.5 billion to the U.S. Treasury. FEMA is unlikely to be able to pay this debt, primarily because the program's premium rates have been set to cover an average loss year, which until 2005 did not include any catastrophic losses. This challenge is compounded by the fact that some policyholders with structures that were built before floodplain management regulations were established in their communities generally pay premiums that represent about 35 to 40 percent of the true risk premium. Moreover, about 1 percent of NFIP-insured properties that suffer repetitive losses account for between 25 and 30 percent of all flood claims. FEMA is also creating a new generation of "grandfathered" properties--properties that are mapped into higher-risk areas but may be eligible to receive a discounted premium rate equal to the nonsubsidized rate for their old risk designation. Placing the program on a more sound financial footing will involve trade-offs, such as charging more risk-based premiums and expanding participation in the program. The NFIP also faces challenges expanding its policyholder base by enforcing compliance with mandatory purchase requirements and promoting voluntary purchase by homeowners who live in areas that are at less risk. One recent study estimated that compliance with the mandatory purchase requirement was about 75 to 80 percent but that penetration elsewhere in the market was only 1 percent. Since 2004, FEMA has implemented a massive media campaign called "FloodSmart" to increase awareness of flooding risk nationwide by educating everyone about the risks of flooding and encouraging the purchase of flood insurance. While the numbers of policyholders increased following Hurricane Katrina, it is unclear whether these participants will remain in the program as time goes on. The impact of the 2005 hurricanes highlighted the importance of up-to-date flood maps that accurately identify areas at greatest risk of flooding. These maps are the foundation of the NFIP. In 2004 FEMA began its map modernization efforts, and according to FEMA, about 34 percent of maps have been remapped. Completing the map modernization effort and keeping these maps current is also going to be an ongoing challenge for FEMA. Finally, FEMA also faces significant challenges in providing effective oversight over the insurance companies and thousands of insurance agents and claims adjusters who are primarily responsible for the day-to-day process of selling and servicing flood insurance policies. As GAO recommended in a an interim report issued in September 2007, FEMA needs to take steps to ensure that it has a reasonable estimate of actual expenses that the insurance companies incur to help determine whether payments for services are appropriate and that required financial audits are performed. GAO, in its ongoing work, plans to further explore FEMA oversight of the private insurance companies and the cost of selling and servicing NFIP flood policies.