To help reduce or eliminate the long-term risk of flood damage to  buildings and other structures insured by NFIP, FEMA has used a variety  of mitigation efforts, such as elevation, relocation, and demolition. In response to the magnitude and  severity of the losses from the 2005 hurricanes, Congress increased NFIP’s  borrowing authority from the Treasury to $20.8 billion. Efforts to Reform NFIP’s Financial Structure Will Require Balancing Public Policy Goals

We have previously identified four public policy goals for evaluating the  federal role in providing natural catastrophe insurance:    charging premium rates that fully reflect actual risks,   limiting costs to taxpayers before and after a disaster,    encouraging broad participation in natural catastrophe insurance    encouraging private markets to provide natural catastrophe insurance. I will  discuss the key areas that need to be addressed, actions that can be taken  to help achieve these goals, and the trade-offs that would be required. First, the act  requires FEMA to charge many policyholders less than full-risk rates to  encourage program participation. Specifically, increasing rates could:  result in premium rates that more fully reflected the actual risk of loss;    decrease costs for taxpayers by reducing costs associated with  postdisaster borrowing to pay claims; and    encourage private market participation, because the rates would more  closely approximate those that would be charged by private insurers. Limiting Taxpayer Costs Could Be Achieved by Increasing Premium Rates, but Further Mitigation Efforts Could Incur Up- Front Costs

In order to reduce expenses to taxpayers that can result when NFIP  borrows from Treasury, NFIP needs to be able to generate enough in  premiums to pay its claims, even in years with catastrophic losses—a goal  that is closely tied to that of eliminating subsidies and other reduced rates. For example, FEMA has three separate flood mitigation programs. Outreach efforts  would need to include areas with low and moderate flood risks to help  ensure that the risk pool remained diversified. FEMA’s Operational and Management Issues May Limit Progress in Achieving NFIP Goals

As Congress weighs NFIP’s various financial challenges in its efforts to  reform the program, it must also consider a number of operational and  management issues that may limit efforts to meet program goals and  impair NFIP’s stability. For example, preliminary results of our ongoing work show that  FEMA:    does not have a strategic plan specific to NFIP with goals, objectives, and  performance measures for guiding and measuring the program;  lacks a strategic human capital plan that addresses the critical  competencies required for its workforce;    does not have effective collaborative practices that would improve the  functioning of program and support offices;  lacks a centralized electronic document management system that would  allow its various offices to easily access and store documents;    has only recently implemented or is still developing efforts to improve  some acquisition management functions, making it difficult to assess the  effects of these actions; and    does not have an effective system to manage flood insurance policy and  claims data, despite having invested roughly 7 years and $40 million on a  new system whose development has been halted. While FEMA has begun to acknowledge and address some of these  management challenges, additional work remains to be done to address  these issues. Our final report will include recommendations to address  them. Closing Comments

Congressional action is needed to increase the financial stability of NFIP  and limit taxpayer exposure. GAO previously identified four public policy  goals that can provide a framework for crafting or evaluating proposals to  reform NFIP. Third, Congress could encourage FEMA to  continue to increase participation in the program by expanding targeted  outreach efforts and limiting postdisaster assistance to those individuals  who choose not to mitigate in moderate- and high-risk areas. For its part, FEMA needs to take action to address a number of  fundamental operational and managerial issues that also threaten the  stability of NFIP and have contributed to its remaining on GAO’s high-risk  list. Financial Management: Improvements Needed in National Flood  Insurance Program’s Financial Controls and Oversight. GAO’S High-Risk Program. Federal Emergency Management Agency: Improvements Needed to  Enhance Oversight and Management of the National Flood Insurance  Program.
Why GAO Did This Study

The National Flood Insurance Program (NFIP) has been on GAO's high-risk list since 2006, when the program had to borrow from the U.S. Treasury to cover losses from the 2005 hurricanes. The outstanding debt is $17.8 billion as of March 2011. This sizeable debt, plus operational and management challenges that GAO has identified at the Federal Emergency Management Agency (FEMA), which administers NFIP, have combined to keep the program on the high-risk list. NFIP's need to borrow to cover claims in years of catastrophic flooding has raised concerns about the program's long-term financial solvency. This testimony 1) discusses ways to place NFIP on a sounder financial footing in light of public policy goals for federal involvement in natural catastrophe insurance and 2) highlights operational and management challenges at FEMA that affect the program. In preparing this statement, GAO relied on its past work on NFIP and on its ongoing review of FEMA's management of NFIP, which focuses on its planning, policies, processes, and systems. The management review includes areas such as strategic and human capital planning, acquisition management, and intra-agency collaboration.

What GAO Found

Congressional action is needed to increase the financial stability of NFIP and limit taxpayer exposure. GAO previously identified four public policy goals that can provide a framework for crafting or evaluating proposals to reform NFIP. These goals are: (1) charging premium rates that fully reflect risks, (2) limiting costs to taxpayers before and after a disaster, (3) encouraging broad participation in the program, and (4)encouraging private markets to provide flood insurance. Successfully reforming NFIP would require trade-offs among these often competing goals. For example, currently nearly one in four policyholders does not pay full-risk rates, and many pay a lower subsidized or "grandfathered" rate. Reducing or eliminating less than full-risk rates would decrease costs to taxpayers but substantially increase costs for many policyholders, some of whom might leave the program, potentially increasing postdisaster federal assistance. However, these trade-offs could be mitigated by providing assistance only to those who needed it, limiting postdisaster assistance for flooding, and phasing in premium rates that fully reflected risks. Increasing mitigation efforts to reduce the probability and severity of flood damage would also reduce flood claims in the long term but would have significant up-front costs that might require federal assistance. One way to address this trade-off would be to better ensure that current mitigation programs were effective and efficient. Encouraging broad participation in the program could be achieved by expanding mandatory purchase requirements or increasing targeted outreach to help diversify the risk pool. Such efforts could help keep rates relatively low and reduce NFIP's exposure but would have to be effectively managed to help ensure that outreach efforts were broadly based. Encouraging private markets is the most difficult challenge because virtually no private market for flood insurance exists for most residential and commercial properties. FEMA's ongoing efforts to explore alternative structures may provide ideas that could be evaluated and considered. Several operational and management issues also limit FEMA's progress in addressing NFIP's challenges, and continued action by FEMA will be needed to help ensure the stability of the program. For example, in previous reports GAO has identified weaknesses in areas that include financial controls and oversight of private insurers and contractors, and has made many recommendations to address them. While FEMA has made progress in addressing some areas, preliminary findings from GAO's ongoing work indicate that these issues persist and need to be addressed as Congress works to more broadly reform NFIP.

What GAO Recommends

GAO has made numerous recommendations aimed at improving financial controls and oversight of private insurers and contractors, among others.