NFIP offers two types of flood insurance premiums to property owners  who live in participating communities: subsidized and full-risk. These subsidized rates are not  based on flood risk and, according to FEMA, represent only about 40-45  percent of the full flood risk. NFIP largely has relied on the private insurance industry to sell and  service policies. NFIP Remains on GAO’s High-Risk List Due to Financial Instability and Other Challenges

NFIP was added to GAO’s High-Risk List in 2006 due to losses from the  2005 hurricanes and the financial exposure the program created for the  federal government. As of July 31, 2013, the program owed Treasury  approximately $24 billion. NFIP’s financial condition highlights structural weaknesses in program  funding—primarily its rate structure. As a result, the  annual amount that NFIP collects in both full-risk and subsidized  premiums is generally not enough to cover its operating costs, claim  payments, and principal and interest payments to Treasury, especially in  years of catastrophic flooding. This arrangement results in much of the  financial risk of flooding being transferred to the federal government and  ultimately the taxpayer. The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters  Act) addressed some of the structural challenges that have contributed to  the program’s financial instability.policies will not receive subsidized premium rates, subsidies on existing   For example, new flood insurance  policies for many other properties will be phased out, and policies for  properties that are remapped to a higher risk level will be subject to  higher premium rates. Furthermore, weaknesses in NFIP management and operations, including  financial reporting processes and internal controls, strategic and human  capital planning, and oversight of contractors, also have placed the  program at risk. Change to Subsidized Policies and Implications of Additional Program Changes

The Biggert-Waters Act mandates that GAO conduct a number of studies  related to actual and potential changes to NFIP, including analyses of  remaining subsidized properties, and the effect of increasing coverage  limits or adding coverage options. In one of our studies responding to  these mandates, of remaining subsidized properties, we estimated that  with the changes in the Biggert-Waters Act approximately 438,000  policies are no longer eligible for subsidies, including about 345,000  nonprimary residential policies, about 87,000 business policies, and about  9,000 single-family, severe-repetitive-loss policies.the approximately 715,000 remaining subsidized policies are expected to  be eliminated over time. Target assistance for remaining subsidies. Mitigation efforts  could be used to help reduce or eliminate the long-term risk of flood  damage; especially if FEMA targeted the properties that were most  costly to the program, such as those with repetitive losses. In our October 2008 study of NFIP’s rate-setting, we found that the losses  generated by NFIP have created substantial financial exposure for the  federal government and U.S. taxpayers—due in part to the program’s  rate-setting process. Partly because of the rate-setting issues, in our July 2013 report on  raising coverage limits or adding optional coverage types, we found that  the advantages and disadvantages to making more changes to the  program, such as these, would need to be carefully weighed. Additional Challenges for FEMA to Address

In July 2013, we reported that FEMA will require several years to fully  implement the Biggert-Waters Act and FEMA officials acknowledged that  they have data limitations and other challenges to resolve before  eliminating some subsidies as required in the act. FEMA has data on  whether a policy covers a primary residence, but officials stated that  the data may be outdated or incorrect. Currently, FEMA is unable  to make this determination as it does not maintain data on the fair  market value of properties insured by subsidized policies. The act eliminates subsidies for severe repetitive loss policies and  provides a definition of severe repetitive loss for single-family homes. The act also requires FEMA to phase in full-risk rates on active policies  that no longer are eligible for subsidies, but we found that FEMA  generally lacks information needed to establish full-risk rates that reflect  flood risk for the properties involved and also lacks a plan for proactively  obtaining such information. FEMA agreed with this recommendation and plans to  evaluate the appropriate approach to obtain or require the submittal of  this information.
Why GAO Did This Study

NFIP, established in 1968, provides policyholders with insurance coverage for flood damage. FEMA, within the Department of Homeland Security, is responsible for managing the program. NFIP offers two types of flood insurance premiums to property owners: subsidized and full-risk. The subsidized rates are not based on flood risk and, according to FEMA, represent only about 40-45 percent of the full flood risk. GAO placed NFIP on its high-risk list in 2006 because of concerns about its long-term solvency and related operational issues. GAO was asked to testify about NFIP issues and its recent work on NFIP. This statement discusses (1) the reasons that NFIP is considered high-risk, (2) changes to subsidized policies and implications of potential additional program changes, and (3) additional challenges for FEMA to address. In preparing this statement, GAO relied on its past work on NFIP, including GAO-13-607 , GAO-13-568 , and GAO-13-283 .

What GAO Found

The National Flood Insurance Program (NFIP) was added to GAO's high-risk list in 2006 and remains high risk due to losses incurred from the 2005 hurricanes and subsequent losses, the financial exposure the program represents for the federal government, and ongoing management and operational challenges. As of July 31, 2013, the program owed approximately $24 billion to the U.S. Treasury (Treasury). NFIP's financial condition highlights structural weaknesses in how the program has been funded--primarily its rate structure. The annual amount that NFIP collects in both full-risk and subsidized premiums is generally not enough to cover its operating costs, claim payments, and principal and interest payments for the debt owed to Treasury, especially in years of catastrophic flooding, such as 2005. This arrangement results in much of the financial risk of flooding being transferred to the federal government and ultimately the taxpayer. Furthermore, weaknesses in NFIP management and operations, including financial reporting processes and internal controls, strategic and human capital planning, and oversight of contractors have placed the program at risk.
The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) mandated that GAO conduct a number of studies related to actual and potential changes to NFIP, including analyses of remaining subsidies and the effect of increasing coverage limits or adding coverage options. In a study of remaining subsidies, GAO estimated that with the changes in the Biggert-Waters Act approximately 438,000 policies no longer are eligible for subsidies, including about 345,000 policies for nonprimary residences, about 87,000 business policies, and about 9,000 policies for single-family properties that had severe-repetitive losses. Subsidies on most of the approximately 715,000 remaining subsidized policies are expected to be eliminated over time as properties are sold or coverage lapses, as are previous exemptions from rate increases after flood zone map revisions. Reducing the financial impact of remaining subsidized policies on NFIP generally could involve accelerating elimination of subsidies, targeting assistance for subsidies, or expanding mitigation efforts, or some combination. Each approach has advantages and disadvantages. In GAO's 2008 study about rate-setting, GAO noted that the losses generated by NFIP have created substantial financial exposure for the federal government and U.S. taxpayers--due in part to its rate-setting process. Partly because of these rate-setting issues, GAO concluded in a July 2013 report that the advantages and disadvantages to additional changes to the program, such as raising coverage limits or adding optional coverage types, would need to be carefully weighed.
The Federal Emergency Management Agency (FEMA) will require several years to fully implement the Biggert-Waters Act. FEMA officials acknowledged that they have challenges to resolve. These include updating and correcting information on whether a policy is for a primary or secondary residence, determining the fair market value of insured properties, and developing a definition of severe repetitive loss for multifamily properties. Further, FEMA must establish full-risk rates that reflect flood risk for active policies that no longer are eligible for subsidies; but it does not have a plan to do so. In an effort to update payment formulas to insurance companies, as GAO recommended, FEMA has begun receiving actual flood-related information from some insurance companies but all companies are not reporting the information consistently.

What GAO Recommends

GAO continues to support its previous recommendations made to FEMA that focus on the need to address management and operational challenges, ensure that the methods and data used to set NFIP rates accurately reflect the risk of losses from flooding, and that oversight of NFIP and insurance companies responsible for selling and servicing flood policies is strengthened. FEMA agreed with these recommendations and is taking steps to address them.