The program identifies  flood-prone areas in the country, makes flood insurance available to  property owners in communities that participate in the program, and  encourages floodplain management efforts to mitigate flood hazards. The  program has paid about $12 billion in insurance claims, primarily from  policyholder premiums that otherwise would, to some extent, have  increased taxpayer-funded disaster relief. The administration  has estimated that the program’s standards for new construction are  saving about $1 billion annually in flood damage avoided. When the program was created, the purchase of flood insurance was  voluntary. However, the  Homeland Security Act of 2002 transferred this responsibility to the  Department of Homeland Security (DHS). Over the years, the annual reporting of the program’s premium  revenues and its claims losses and expenses has shown wide fluctuations  in cash-based operating net income or losses. The focus on annual cash flows—the amounts of  funds into and out of a program during a fiscal year—may not reflect the  government’s cost because the time between the extension of the  insurance, the receipt of premiums, the occurrence of an insured event,  and the payment of claims may extend over several fiscal years. For the flood insurance program, cash-based budgeting may not provide  the information necessary to signal emerging problems, make adequate  cost comparisons, or control costs. Under current policy, the  Congress has authorized subsidies to be provided to a significant portion  of the total policies in force, without providing annual appropriations to  cover the potential cost of these subsidies. The use of accrual-based budgeting for the flood insurance program has  the potential to overcome a number of the deficiencies in cash-based  budgeting. Policy Subsidies and Payments for Repetitive Losses Contribute to Program Losses

The National Flood Insurance Program has raised financial concerns  because, over the years, it has lost money and at times has had to borrow  funds from the U.S. Treasury. First, the flood insurance program has  sustained losses, and is not actuarially sound, largely because many  policies in the program are subsidized. The average annual premium for a subsidized policy is $637, representing  about 35-40 percent of the true risk premium for these properties. According to FEMA,  about 38 percent of all claims historically, and about $200 million annually,  represent repetitive losses—properties having two or more losses greater  than $1,000 within a 10-year period. A 1998 study by the National Wildlife Federation noted  that repetitive loss properties represented only 2 percent of all properties  insured by the program, but they tended to have damage claims that  exceeded the value of the insured structure and most were concentrated  in special flood hazard areas. Participation in the Program May Be Low

Not only does the National Flood Insurance Program face challenges with  its financial condition, but also in achieving one of the purposes for which  it was created—to make flood insurance the mechanism for property  owners to cover flood losses. Participation rates—the percentage of  structures in special flood hazard areas that are insured—provide a  measure to indicate the degree to which the owners of properties  vulnerable to flooding are protected from financial loss through insurance,  the financial risk to the government from flood-related disaster assistance  is decreasing, and the program is obtaining high levels of premium income. The level of noncompliance with this mandatory purchase requirement is  unknown. While we have not fully analyzed these actions, on the basis of a  preliminary assessment, they appear to address some of the challenges to  the flood insurance program, including two of the key challenges—the  program’s financial losses and the perceived low level of participation in  the program by property owners in flood-prone areas.
Why GAO Did This Study

Floods have been, and continue to be, the most destructive natural hazard in terms of economic loss to the nation. The National Flood Insurance Program is a key component of the federal government's efforts to minimize the damage and financial impact of floods. The program identifies flood-prone areas of the country, makes flood insurance available in the nearly 20,000 communities that participate in the program, and encourages flood-plain management efforts. Since its inception in 1969, the National Flood Insurance has provided $12 billion in insurance claims to owners of flood-damaged properties, and its building standards are estimated to save $1 billion annually. The program has been managed by the Federal Emergency Management Agency, but along with other activities of the agency, it was recently placed into the Department of Homeland Security. GAO has issued a number of reports on the flood insurance program and was asked to discuss the current challenges to the widespread success of the program.

What GAO Found

The program faces the following challenges in operating the program effectively and protecting property owners from loss from floods. Improving information on the program's financial condition: Cash-based budgeting, which focuses on the amount of funds that go in and out of a program in a fiscal year, obscures the program's costs and does not provide information necessary to signal emerging problems, such as shortfalls in funds to cover the program's risk exposure. Accrual-based budgeting better matches revenues and expenses, recognizes the risk assumed by the government, and has the potential to overcome the deficiencies of cash-based budgeting. Reducing losses to the program resulting from policy subsidies and repetitive loss properties: The program has lost money and is not actuarially sound because about 29 percent of the policies in force are subsidized but appropriations are not provided to cover the subsidies. Owners of structures built before the flood zone was included in the program pay reduced premiums that represent only about 35-40 percent of the true risk premium. Further, repetitive loss properties--properties with two or more losses in a 10-year period--add to program losses as they represent 38 percent of claims losses but account for 2 percent of insured properties. Increasing property owner participation in the program: The administration has estimated that less than 50 percent of eligible properties in flood plains participate in the program. Additionally, even when the purchase of insurance is mandatory, the extent of noncompliance with the mandatory purchase requirement is unknown and remains a concern. Actions have been initiated or proposed by the administration or in the Congress to address some of the challenges. However, the affect of some actions on the program is not clear. For example, reducing subsidies may cause some policyholders to cancel their policies, reducing program participation and leaving them vulnerable to financial loss from floods. Further, placement of the program within the Department of Homeland Security has the potential to decrease the attention, visibility, and support the program receives.