Flood Zone Designations

NFIP studies and maps flood risks, assigning flood zone designations  from high to low depending on the risk of flooding. Subsidized rates are not based on actual flood risk. 1). Most Subsidized Policies Continue to Receive Discounted Rates and Have Mixed Characteristics Relative to Financial Indicators

The Biggert-Waters Act eliminated subsidies on approximately 438,000  policies, and with the continuing implementation of the act, more of the  subsidies on the approximately 715,000 remaining policies are expected  to be eliminated over time. Our analysis of NFIP data on the location of properties that would  continue to receive subsidized rates shows that remaining subsidized  policies would cover properties in every state and territory in which NFIP  operates. Data Constraints Limit FEMA’s Ability to Estimate the Cost of Subsidies and Establish Full-Risk Rates on Previously Subsidized Policies

The cost of subsidized policies to NFIP can be measured in terms of  forgone net premiums (the difference between subsidized and full-risk  rates, adjusted for premium-related expenses). FEMA also does not have information on the flood risk of  properties with previously subsidized rates, which is needed to establish  full-risk rates for these properties going forward. Historical Cost of Subsidies Difficult to Estimate

FEMA does not have sufficient data to estimate the aggregate cost of  subsidies. In 1978 about 76  percent of policies were subsidized compared with about 20 percent  in 2012. FEMA Lacks the Information Needed to Establish Full-Risk Rates That Reflect Risk of Flooding for Remaining Subsidized Policies

FEMA generally lacks information to establish full-risk rates that reflect  flood risk for active policies that no longer qualify for subsidies as a result  of the Biggert-Waters Act and also lacks a plan for proactively obtaining   The act requires FEMA to phase in full-risk rates on  such information.these policies. Federal internal control standards state that agencies  should identify and analyze risks associated with achieving program  objectives, and use this information as a basis for developing a plan for  mitigating the risks. Although subsidized policies have been identified as a risk to the program  because of the financial drain they represent, FEMA does not have a plan  to expeditiously and proactively obtain the information needed to set full- risk rates for all of them. Instead, FEMA will rely on certain policyholders  to voluntarily obtain elevation certificates. Several Options Exist for Reducing the Financial Impact of Remaining Subsidized Policies

Through our previous work as well as interviews we conducted and  literature we reviewed for this report, we identified three broad options  that could help address NFIP’s financial situation: (1) adjust the pace of  the elimination of subsidies, (2) target assistance or remaining subsidies  by the financial need of property owners, and (3) increase mitigation  efforts. NFIP has been on our high-risk list since 2006 because of concerns  about its long-term financial solvency and management issues. As a result, the rates that FEMA plans  to implement may not adequately reflect a property’s actual flood risk, and  some policyholders may be charged too much and some too little for their  premiums. This report discusses (1) the number, location, and financial  characteristics of properties that continue to receive subsidized rates  compared with full-risk rate properties, (2) information needed to estimate  the historic financial impact of subsidies and establish rates that reflect  the risk of flooding on properties with previously subsidized rates, and (3)  options to reduce the financial impact of remaining subsidized properties. We applied the Federal Emergency Management  Agency’s (FEMA) algorithm to determine which policies were subsidized,  and applied FEMA’s interpretation of the provisions in the Biggert-Waters  Act that eliminate subsidies to determine which policies would retain their  subsidies.FEMA’s implementation of legislative requirements authorizing subsidized  rates for certain properties in high-risk locations. In addition, we interviewed NFIP officials and representatives of  insurance industry organizations and floodplain managers. We analyzed home value and household income indicators together and  found that counties with the highest median household incomes and  highest median home values had higher percentages of remaining  subsidized policies than nonsubsidized policies in SFHAs.
Why GAO Did This Study

FEMA, which administers NFIP, estimated that in 2012 more than 1 million of its residential flood insurance policies--about 20 percent--were sold at subsidized rates; nearly all were located in high-risk flood areas. Because of their relatively high losses and lower premium rates, subsidized policies have been a financial burden on the program. Due to NFIP's financial instability and operating and management challenges, GAO placed the program on its high-risk list in 2006. The Biggert-Waters Act eliminated subsidized rates on certain properties and mandated GAO to study the remaining subsidized properties. This report examines (1) the number, location, and characteristics of properties that continue to receive subsidized rates compared with full-risk rate properties; (2) the information needed to estimate the historic cost of subsidies and establish rates for previously subsidized policies that reflect the risk of flooding; and (3) options to reduce the financial impact of remaining subsidized policies. GAO analyzed NFIP data on types of policies, premiums, and claims and publicly available home value and household income data. GAO also interviewed representatives from FEMA, insurance industry associations, and floodplain managers.

What GAO Found

The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) immediately eliminated subsidies for about 438,000 National Flood Insurance Program (NFIP) policies, but subsidies on an estimated 715,000 policies across the nation remain. Depending on factors such as policyholder behavior, the number of subsidized policies will continue to decline over time. For example, as properties are sold and the Federal Emergency Management Agency (FEMA) resolves data limitations and defines key terms, more subsidies will be eliminated. GAO analysis found that remaining subsidized policies would cover properties in every state and territory where NFIP operates, with the highest numbers in Florida, Louisiana, and California. In comparing remaining subsidized and nonsubsidized policies GAO found varying characteristics. For example, counties with the highest and lower home values had a larger percentage of subsidized versus nonsubsidized policies.
Data constraints limit FEMA's ability to estimate the aggregate cost of subsidies and establish rates reflecting actual flood risks on previously subsidized policies. FEMA does not have sufficient historical program data on the percentage of full-risk rates that subsidized policyholders have paid to estimate the financial impact--in terms of the difference between subsidized and full-risk premium rates--to NFIP of subsidies. Also, because not all policyholders are required to provide documentation about their flood risk, FEMA generally lacks information needed to apply full-risk rates (as required by the Biggert-Waters Act) on previously subsidized policies. FEMA is encouraging these policyholders to voluntarily submit this documentation. Federal internal control standards state that agencies should identify and analyze risks associated with achieving program objectives and develop a plan for obtaining needed data. Without this documentation, the new rates may not accurately reflect a property's full flood risk, and policyholders may be charged rates that are too high or too low relative to their risk of flooding.
Options from GAO's previous and current work for reducing the financial impact of subsidies on NFIP include (1) adjusting the pace of subsidy elimination, (2) targeting assistance or subsidies based on financial need, or (3) increasing mitigation efforts, such as relocation or elevation that reduce a property's flood risk. However, these options have advantages and disadvantages. Moreover, the options are not mutually exclusive, and combining them could help offset some disadvantages.FEMA should develop and implement a plan to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates. FEMA agreed with the recommendation.

What GAO Recommends

FEMA should develop and implement a plan to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates. FEMA agreed with the recommendation.