The National Flood Insurance Reform Act of 1994 expanded  the purchase requirement for federally backed mortgages on properties  located in special flood hazard areas. The Homeowner Flood Insurance Affordability  Act of 2014 was enacted in March 2014 and sought largely to address  affordability concerns by repealing or altering some Biggert-Waters Act  requirements. In this context, HFIAA included provisions that FEMA  produce a study and submit a report that assess and recommend options,  methods, and strategies for making voluntary CBFI available through  NFIP. Policy Goals for Federal Involvement in Natural Catastrophe Insurance

In 2007, we identified four broad policy goals for federal involvement 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. We  have previously used these policy goals to evaluate potential changes to  NFIP. FEMA’s Study and Report Provided Relevant Information and Concluded that FEMA Should Not Implement CBFI

		The Design of FEMA’s Study Was Reasonable, with Methodology Supporting Study Objectives

We determined that the CBFI study objectives and methodology agreed  upon by FEMA and NAS were reasonable. The objectives were clearly  stated and designed to provide relevant, high-level considerations that  could help FEMA decide whether CBFI should be implemented before  determining how it should be implemented, which FEMA officials said was  an important step. The methodology was consistent with the study’s  objectives and was reasonable given the limitations identified by FEMA:  short time frames, the need to obtain informed opinions, and unavailable  data. FEMA and NAS took several steps to design the objectives and  methodology of the CBFI study. According to FEMA and NAS officials, FEMA and NAS agreed that the  study’s objectives were to examine future prospects for CBFI by  identifying and discussing issues that would require further evaluation in  order for FEMA and others to better evaluate CBFI’s strengths and  weaknesses. To execute the CBFI study, NAS convened an expert committee to  produce a report using a consensus report process. The committee was  composed of 12 members that represented academia, the private sector,  and state and federal government. Further, FEMA  officials said that alternative approaches they considered would have  faced various limitations. To further assess FEMA’s study, we evaluated relevant elements of its  findings against the four public policy goals for federal involvement in  natural catastrophe insurance that we have previously identified. The  public policy goals, along with examples of elements from the study,  follow. The study also outlined  concepts for innovative uses of CBFI that could help NFIP charge full- risk rates, such as requiring communities interested in CBFI to provide  comprehensive analysis of flood risk in their communities, which  would enhance NFIP’s knowledge of flood risk at the community level. Our prior work has shown that covering flood-related  losses through NFIP involves significant federal expense, and  Congress has shown interest in reducing the federal government’s  role in flood insurance by transferring its exposure to the private  sector. FEMA’s study  discusses ways in which CBFI could encourage or discourage private  market participation in flood insurance markets. However, the study also suggests several challenges that may  outweigh these potential benefits. FEMA officials explained that, after reviewing the results of the study,  they concluded that FEMA should not conduct further related research or  implement CBFI for several reasons:
The challenges outlined in the study—such as administrative burden  on communities and FEMA, unavailable data, unclear cost distribution  among community members, and potential legislative requirements— are significant and likely outweigh the benefits. Dedicating FEMA’s resources to other potential NFIP reforms and  strengthening existing programs would be a better use of these  resources. Based on the factors cited by FEMA officials and our prior work, we agree  that FEMA’s conclusion that it was not advisable to implement CBFI at  this time was reasonable. Agency Comments

We provided a draft of this report to FEMA for its review.
Why GAO Did This Study

Floods are the most common and destructive natural disaster in the United States. The National Flood Insurance Program, which FEMA administers, has struggled financially to both pay for flood losses and keep rates affordable. To address these and other challenges, Congress has passed legislation including the Homeowners Flood Insurance Affordability Act of 2014 (HFIAA). HFIAA included provisions for FEMA to conduct a study and submit a report that assesses and recommends options, methods, and strategies for making CBFI available through NFIP. FEMA presented the study and related report to Congress in March 2016.
HFIAA also includes a provision for GAO to review the FEMA report, which is to include the study and submit a related report to Congress. To review the study and report FEMA submitted to Congress, GAO analyzed the FEMA study's objectives, methodology, and findings, and evaluated the FEMA report's conclusions.
GAO analyzed the appropriateness of the objectives, the reasonableness of the methodology, and the extent to which the conclusions were supported by the findings. GAO also evaluated relevant study findings against public policy goals for federal involvement in catastrophe insurance previously identified by GAO, and interviewed FEMA and NAS officials.
GAO is not making recommendations in this report.

What GAO Found

The Federal Emergency Management Agency (FEMA) used reasonable objectives and methodology for its study on community-based flood insurance (CBFI)—flood insurance that a community would purchase to cover all properties located within it. FEMA contracted with the National Academy of Sciences (NAS) to conduct the study, and worked with NAS to design a study that would provide a high-level, independent discussion of issues related to CBFI. According to FEMA officials, such a study would help FEMA decide whether CBFI should be implemented, an important step before developing any plans to implement CBFI. Once the study was designed, NAS conducted the study independently, using input obtained from an expert committee that met twice in early 2015. The members of the committee represented academia, the private sector, and state and federal government. GAO determined that the study objectives were designed to meet FEMA's needs, the methodology supported the objectives, and alternative methodologies that were considered would have faced various limitations.
In its report submitted to Congress, which contained the study, FEMA concluded that it should not conduct further related research or implement CBFI. Specifically, it concluded that the challenges outlined in the study outweigh any potential benefit when considered against limited community interest. FEMA officials further cited the need to dedicate FEMA's resources to effective National Flood Insurance Program (NFIP) reform. Based on the factors cited by FEMA officials, and the consistency of these factors with findings in prior GAO reports on NFIP, GAO determined that FEMA's conclusion was reasonable. For example, prior GAO work has highlighted challenges FEMA faces in balancing reform efforts with limited resources.
In prior work, GAO identified four public policy goals for federal involvement in natural catastrophe insurance and used them to evaluate changes to NFIP. While the FEMA study did not use these goals, as part of its assessment GAO evaluated relevant elements of the study against them. For example, one of these goals is charging premium rates that fully reflect actual risk, and the study discussed innovative uses of CBFI that could help NFIP charge such rates. Another goal is encouraging private markets to provide natural catastrophe insurance, and the study discusses ways in which CBFI could encourage private market participation in flood insurance markets, as well as challenges that CBFI would pose to private insurers.