	Available Insurance Coverage and Limitations Under the NFIP

The amount of insurance coverage available to homeowners under the  NFIP is limited by requirements set forth in statute and regulation. As a  result of these limitations, insurance payments to claimants for flood  damage may not cover all the costs of repairing or replacing flood- damaged property. Thus, homes that might sustain more than  $250,000 in damage cannot be insured to their full replacement cost. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural  weakness in a home or prior water damage, and losses resulting from  events other than flood, such as windstorms or or earth movements, are  not covered by the NFIP. To meet its monitoring and oversight responsibilities, FEMA is to conduct  periodic operational reviews of the 95 private insurance companies that  participate in the NFIP. In addition, FEMA’s program contractor is to  check the accuracy of claims settlements by doing quality assurance  reinspections of a sample of claims adjustments for every flood event. As a result of  limitations in the sampling processes, FEMA cannot project the results of  these monitoring and oversight activities to determine the overall accuracy  of claims settled for specific flood events or assess the overall  performance of insurance companies and their adjusters in fulfilling their  responsibilities for the NFIP—actions necessary for FEMA to meet our  internal control standard that it have reasonable assurance that program  objectives are being achieved and that its operations are effective and  efficient. FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the Flood Insurance Reform Act of 2004

As of September 2005, FEMA had not yet fully implemented provisions of  the Flood Insurance Reform Act of 2004. The 6-month statutory deadline for  implementing these changes was December 30, 2004. Nonetheless,  without plans with milestones for completing its efforts to address the  provisions of the act, FEMA cannot hold responsible officials accountable  or ensure that statutorily required improvements are in place to assist  victims of future flood events. We are recommending in today’s report that FEMA develop documented  plans with milestones for implementing requirements of the Flood  Insurance Reform Act of 2004 to provide policyholders a flood insurance  claims handbook that meets statutory requirements, to establish a  regulatory appeals process, and to ensure that flood insurance agents meet  minimum NFIP education and training requirements. Some Broader Issues Facing the NFIP

		The NFIP Pays Expenses and Claims with Premiums, but Its Financial Structure Is Not Designed to be Actuarially Sound

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 with tax dollars. However, as we have reported, the  program, by design, is not actuarially sound because Congress 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. Until the 2004 hurricane season, FEMA had been generally successful in  keeping the NFIP on sound financial footing. As of August 2005, the  program had borrowed $300 million to cover more than $1.8 billion in  claims from the major disasters of 2004, including hurricanes Charley,  Frances, Ivan, and Jeanne, which hit Florida and other East and Gulf Coast  states. Following Hurricane Katrina in August 2005, legislation  was enacted that increased FEMA’s borrowing authority from $1.5 billion  to $3.5 billion through fiscal year 2008. FEMA has embarked on a multi- year effort to update the nation’s flood maps at a cost in excess of $1  billion.
Why GAO Did This Study

The disastrous hurricanes that have struck the Gulf Coast and Eastern seaboard in recent years--including Katrina, Rita, Ivan, and Isabel--have focused attention on federal flood management efforts. 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. GAO issues a report earlier this week that was mandated by the Flood Insurance Reform Act of 2004. This testimony discusses findings and recommendations from that report and information from past GAO work. Specifically, the testimony discusses (1) the statutory and regulatory limitations on coverage for homeowners under the NFIP; (2) FEMA's role in monitoring and overseeing the NFIP; (3) the status of FEMA's implementation of provisions of the Flood Insurance Reform Act of 2004. It also offers observations on broader issues facing the NFIP including its financial structure and updating flood maps.

What GAO Found

The amount of insurance coverage available to homeowners under the NFIP is limited by requirements set forth in statute and FEMA's implementing regulations, which include FEMA's standard flood insurance policy. As a result of these limitations, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing flood-damaged property. For example, homes that could sustain more than $250,000 in damage cannot be insured to their full replacement cost, thus limiting claims to this statutory ceiling. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural weakness in a home, or losses resulting from events other than flood such as windstorms, are not covered by NFIP policies. To meet its monitoring and oversight responsibilities, FEMA is to conduct periodic operational reviews of the 95 private insurance companies that participate in the NFIP, and FEMA's program contractor is to check the accuracy or claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. FEMA did not use a statistically valid method for sampling files to be reviewed in these monitoring and oversight activities. As a result, FEMA cannot project the results of these reviews to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling responsibilities for the NFIP--actions necessary for FEMA to have reasonable assurance that program objectives are being achieved. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to provide policyholders with a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that insurance agents meet minimum education and training requirements. The statutory deadline for implementing these changes was December 30, 2004. Efforts to implement the provisions are under way, but have not yet been completed. DEMA has not developed plans with milestones for assigning accountability and projecting when program improvements will be made, so that improvements are in place to assist victims of future flood events. As GAO has previously reported, the NFIP, by design, is not actuarially sound. The program does not collect sufficient premium income to build reserves to meet long-term future expected flood losses, in part because Congress authorized subsidized insurance rates to be made available for some properties. FEMA has generally been successful in keeping the NFIP on a sound financial footing, but the catastrophic flooding events of 2004 (involving 4 major hurricanes) required FEMA, as of August 2005, to borrow $300 million from the U.S. Treasury to help pay an estimated $1.8 billion on flood insurance claims. Following Hurricane Katrina in August 2005, legislation was enacted to increase FEMA's borrowing authority from $1.5 billion to $3.5 billion through fiscal year 2008.