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 Treasury  to about $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. Unlike private insurance companies, NFIP does  not purchase reinsurance to cover catastrophic losses. Increasing  mitigation efforts could further reduce flood damage to properties and  communities, helping to put NFIP on a firmer financial footing and  reducing taxpayers’ exposure. 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. However, identifying ways to achieve that end has generally  been elusive. 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,  most recently we have identified a number of issues impairing the  program’s effectiveness in areas that include the reasonableness of  payments to Write-Your-Own (WYO) insurers, the adequacy of financial  controls over the WYO program, and the adequacy of oversight of non- WYO contractors. In our report, which reviews FEMA’s management of  NFIP, we addressed, among other things, (1) the extent to which FEMA’s  management practices affect the agency’s ability to meet NFIP’s mission  and (2) lessons to be learned from the cancellation of FEMA’s most recent  attempt to modernize NFIP’s flood insurance policy and claims processing  system. Unless it takes  further steps to address these management challenges, FEMA will be  limited in its ability to manage NFIP’s operations or better ensure program  effectiveness. DHS agreed with these recommendations and FEMA has  begun to take steps to begin addressing some of 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. These include improving its strategic planning, human capital  planning, intra-agency collaboration, records management, acquisition  management, and information technology. While FEMA continues to make  some progress in some areas, fully addressing these issues is vital to its  long-term operational efficiency and financial stability. GAO-11-17. Financial Management: Improvements Needed in National Flood  Insurance Program’s Financial Controls and Oversight. Federal Emergency Management Agency: Ongoing Challenges Facing the  National Flood Insurance Program. Federal Emergency Management Agency: Improvements Needed to  Enhance Oversight and Management of the National Flood Insurance  Program. GAO/AIMD-00-21.3.1.
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 June 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, including a June 2011 report on FEMA's management of NFIP, which focused on its planning, policies, processes, and systems. The management review included 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, 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 need it, limiting postdisaster assistance for flooding, and phasing in premium rates that fully reflect 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 are 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 are 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 numerous past reports, GAO identified weaknesses in areas that include financial controls and oversight of private insurers and contractors, and made many recommendations to address them. While FEMA has made progress in addressing some areas, GAO's June 2011 report identified a number of management challenges facing the program, including strategic and human capital planning, records management, collaboration among offices, and financial and acquisition management. In this report, we also made a number of recommendations to address these challenges. FEMA agreed with the recommendations and discussed the steps being taken to address some of them.

What GAO Recommends

GAO has made numerous recommendations aimed at improving financial controls, oversight of private insurers and contractors, and FEMA's management of NFIP. DHS generally agreed with our recommendations.