Various Options Exist for Targeting Assistance, but Each Involves Challenges That FEMA Would Have to Overcome

Although any pre-FIRM property located in an SFHA in a participating  community is currently generally eligible for a subsidy, according to some  stakeholders we interviewed and our analysis of literature we reviewed,  options for targeting assistance to subsidized NFIP policyholders who  may experience difficulty paying full-risk rates include means testing  based on the income level of policyholders or geographic areas, setting  premium caps, and basing assistance on the cost of mitigating the risk of  damage to a home. However, they all involve trade-offs, and implementing any of them would  likely be challenging. In contrast, a means- tested program would decouple the subsidy from the property and instead  attach it to the policyholder or a group of policyholders on the basis of  need, as determined by specified financial requirements and eligibility  criteria. Because the current  NFIP structure attaches the assistance to the property rather than the  policyholder, FEMA does not collect income information for policyholders  who receive subsidies. Further, FEMA continues to work on  implementing required changes under the Biggert-Waters Act, as  amended by HFIAA. However,  estimating the cost of providing assistance under various targeting  options with precision is difficult because FEMA lacks the elevation data  needed to calculate full-risk rates for currently subsidized properties. Estimation of Eligible Policyholders Based on Individuals’ Financial Need

Our analysis of ACS data showed that, depending on the income  threshold used, 47 percent to 74 percent of subsidized policyholders  (approximately 285,000 to 451,000) would likely be eligible to receive  assistance under a means-tested approach that considers individuals’  financial need. For example, if the  eligibility threshold were increased to 140 percent of AMI, we estimated  that the percentage of policyholders who would likely be eligible to  receive assistance would increase to about 87 percent. FEMA Lacks Information Needed to Estimate the Cost of Assistance

As previously discussed, FEMA does not collect certain flood risk  information that would be needed to calculate the full-risk rate for most  subsidized policies; as a result, estimating the cost of providing subsidy  assistance under various targeting options is difficult. As a result, we recommended that FEMA  develop and implement a plan to obtain information needed to determine  full-risk rates for subsidized properties. FEMA generally agreed with the  recommendation and has taken limited action to implement it. Information about flood  risk is needed to correctly charge full-risk rates for an increasing number  of policies as FEMA phases out subsidies. Each mechanism involves trade-offs among affordability and four policy  goals for federal involvement in natural catastrophe insurance. We  identified these four policy goals, which have not changed, in our 2007  report on the federal role in natural catastrophe insurance: (1) charging  premium rates that fully reflect actual risks; (2) encouraging private  markets to provide natural catastrophe insurance; (3) encouraging broad  participation in natural catastrophe insurance programs; and (4) limiting  costs to taxpayers before and after a disaster. The other delivery mechanisms we identified— vouchers, tax expenditures, and grants and loans for mitigation—would  likely help support these goals. With tax expenditures, policyholders would be charged a full-risk rate  premium before having their tax liability reduced when they file their  taxes. Appendix I: Objectives, Scope, and Methodology

Our objectives in this report were to describe (1) options to target  assistance to National Flood Insurance Program (NFIP) subsidized  policyholders who may experience difficulty paying full-risk rates, (2) the  number of currently subsidized policyholders who might be eligible for  assistance under certain options and the cost of implementing these  options, and (3) potential delivery mechanisms for providing assistance to  eligible policyholders. In addition, we interviewed officials  from the Federal Emergency Management Agency (FEMA), Department  of Housing and Urban Development (HUD), the Department of the  Treasury’s (Treasury) Federal Insurance Office (FIO), Florida Office of  Insurance Regulation, Louisiana Department of Insurance, and New  Jersey Department of Banking and Insurance and representatives from  18 organizations with flood insurance knowledge to obtain input on (1)  options that could be used to target assistance for NFIP; (2) different  mechanisms that other federal programs have used to deliver assistance  and the extent to which they could be used to deliver assistance in NFIP;  and (3) to the extent possible, any benefits and challenges of using these  options and delivery mechanisms. We interviewed officials at the following 18 organizations:
Allstate Insurance Company
American Academy of Actuaries
Association of State Floodplain Managers, Inc.
Center for Economic Justice
Consumer Federation of America
National Academy of Sciences
National Association of Insurance Commissioners
National Association of Mutual Insurance Companies
National Association of Realtors
Property Casualty Insurers Association of America
RAND Corporation
SmartSafer.org
USAA General Indemnity Company
Risk Management and Decision Processes Center at the Wharton  Independent Insurance Agents and Brokers of America  Insurance Information Institute  Joint Center for Housing Studies of Harvard University  School of the University of Pennsylvania
Wright National Flood Insurance Company  On the basis of our literature review and interviews, we identified three  general options that could potentially be used to target assistance to NFIP  policyholders who may experience difficulty paying full-risk rates: means  testing based on the income level of policyholders or local geographic  areas, setting premium caps based on a percentage of total insurance  coverage, and basing assistance on the cost of mitigating the risk of  damage to a home. Because  FEMA does not collect income information for its NFIP policyholders, we  attempted to obtain income data from IRS for subsidized policyholders as  of September 30, 2013.
Why GAO Did This Study

As of May 30, 2015, FEMA, which administers NFIP, subsidized about 996,000 flood insurance policies. The National Flood Insurance Act of 1968 authorized these highly discounted premiums. To help strengthen NFIP's financial solvency, the Biggert-Waters Flood Insurance Reform Act of 2012 required FEMA to eliminate or phase out almost all subsidized premiums. However, affected policyholders raised concerns about the resulting rate increases. The Homeowner Flood Insurance Affordability Act of 2014 sought to address affordability concerns by repealing or altering some Biggert-Waters Act requirements.
GAO was asked to identify options for policyholders who may face affordability issues if charged full-risk rate premiums. This report describes options to target assistance to policyholders, estimates of eligible policyholders and associated costs of these options, and mechanisms for delivering assistance. GAO reviewed literature on approaches for targeting and delivering assistance, interviewed 18 organizations familiar with flood insurance and officials from FEMA and other agencies, and analyzed NFIP premium data and Census income data for 2009-2013 (most recent).

What GAO Found

Options for targeting assistance to subsidized policyholders of primary residences who may experience difficulty paying full-risk rates for their National Flood Insurance Program (NFIP) policies include means testing assistance based on the income level of policyholders or geographic areas, setting premium caps, and basing assistance on the cost of mitigating the risk of damage to their homes. Currently, NFIP subsidies are tied to the property. Implementing a means-tested approach would decouple the subsidy from the property and instead attach it to the policyholder or a group of policyholders on the basis of financial need. All of these options involve trade-offs, and implementing any of them would present challenges because the Federal Emergency Management Agency (FEMA) would have to collect data that it does not currently collect, such as policyholders' income and flood-risk information needed to calculate full-risk rates.
Although data are limited, they suggest that many policyholders who currently receive a subsidy would likely be eligible for assistance under certain targeting options GAO identified. For example, using Census data, under the means-tested approach based on individual policyholders' income and using an eligibility threshold of 80 percent of area median income, about 47 percent of subsidized policyholders, as of September 2013, would likely be eligible to receive assistance. If the eligibility threshold were increased to 140 percent of area median income, 74 percent would likely be eligible to receive assistance. Under this and other targeting options, however, it is not possible to estimate the cost of providing assistance with precision because FEMA lacks the information needed to calculate full-risk rates for currently subsidized properties. GAO recommended in July 2013 that FEMA collect information from all policyholders necessary to determine flood risk. FEMA agreed with the recommendation but has taken limited action to implement it, citing the considerable time and cost involved in obtaining the information. FEMA officials stated that they plan to continue to rely on subsidized policyholders to voluntarily obtain this information. Without proper flood-risk information, the cost of the existing subsidy or other assistance—which would be important for Congress in considering options to address affordability—cannot be determined accurately.
Several mechanisms are available for delivering assistance to eligible policyholders, but each involves trade-offs among four public policy goals. For NFIP, these goals are (1) charging premium rates that fully reflect risk, (2) encouraging private markets to provide flood insurance, (3) encouraging broad program participation, and (4) limiting administrative costs. NFIP currently uses discounted rates to deliver subsidies to certain policyholders but could choose from a variety of delivery mechanisms, including vouchers, tax expenditures, and grants and loans, depending on policy priorities. For example, while tax expenditures do not have the stigma that some individuals may associate with government spending programs, policyholders could face cash flow challenges because they would generally need to pay the full premium before they receive the tax benefit. Finally, alternative mechanisms could increase administrative costs because FEMA would incur additional costs associated with setting up and administering a new assistance program or tax benefit, among other reasons.

What GAO Recommends

GAO makes no recommendations in this report. GAO recommended in GAO-13-607 that FEMA obtain information needed to determine full-risk rates for subsidized properties and maintains the importance of implementing the recommendation. FEMA and the Department of Housing and Urban Development provided technical comments.