However, as we have reported, the  program, by design, is not actuarially sound because Congress authorized  subsidized insurance rates to be made available for policies covering some  properties to encourage communities to join the program. As a result, the  program does not collect sufficient premium income to build reserves to  meet the long-term future expected flood losses. FEMA has statutory  authority to borrow funds from the Treasury to keep the NFIP solvent. Until the 2004 hurricane season, FEMA had been generally successful in  keeping the NFIP on sound financial footing. As of August 2005, the  program had borrowed $300 million to cover an estimated $1.8 billion in  claims from the major disasters of 2004, including hurricanes Charley,  Frances, Ivan, and Jean, which hit Florida and other East and Gulf Coast  states. Following Hurricane Katrina in August 2005, legislation  was enacted that increased FEMA’s borrowing authority from $1.5 billion  to $3.5 billion through fiscal year 2008. Premium Subsidies and Repetitive-Loss Properties Affect NFIP’s Actuarial Soundness

In reauthorizing the NFIP in 2004, Congress noted that “repetitive-loss  properties”—those that had resulted in two or more flood insurance  claims payments of $1,000 or more over 10 years—constituted a significant  drain on the resources of the NFIP. While these  properties make up only about 1 percent of the properties insured under  the NFIP, they account for 25 to 30 percent of all claims losses. It will be important in future studies of the NFIP to continue to analyze  data on progress being made to reduce the inventory of subsidized NFIP  repetitive loss properties, how the reduction of this inventory contributes  to the financial stability of the program, and whether additional FEMA  regulatory steps or congressional actions could contribute to the financial  solvency of the NFIP, while meeting commitments made by the  authorizing legislation. Data Inconclusive on Compliance with Requirements for Mandatory Purchase of NFIP Policies

In 1973 and 1994, Congress enacted requirements for mandatory purchase  of NFIP policies by some property owners in high risk areas. In June 2002, we reported that the extent to which lenders were enforcing  the mandatory purchase requirement was unknown. As a result of limitations in the sampling processes, FEMA cannot project  the results of these monitoring and oversight activities to determine the  overall accuracy of claims settled for specific flood events or assess the  overall performance of insurance companies and their adjusters in  fulfilling their responsibilities for the NFIP—actions necessary for FEMA  to meet our internal control standard that it have reasonable assurance  that program objectives are being achieved and that its operations are  effective and efficient. FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the Flood Insurance Reform Act of 2004

As of September 2005, FEMA had not yet fully implemented provisions of  the Flood Insurance Reform Act of 2004. The 6-month statutory deadline for  implementing these changes was December 30, 2004. We are recommending in today’s report that FEMA developed documented  plans with milestones for implementing requirements of the Flood  Insurance Reform Act of 2004 to provide policyholders a flood insurance  claims handbook that meets statutory requirements, to establish a  regulatory appeals process, and to ensure that flood insurance agents meet  minimum NFIP education and training requirements. FEMA did not agree with our recommendations.
Why GAO Did This Study

The disastrous hurricanes that have struck the Gulf Coast and Eastern seaboard in recent years--including Katrina, Rita, Ivan, and Isabel--have focused attention on federal flood management efforts. The National Flood Insurance Program (NFIP), established in 1968, provides property owners with some insurance coverage for flood damage. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for managing the NFIP. This testimony offers information from past GAO work on (1) the financial structure of the NFIP; (2) why the NFIP insures properties for repetitive flood losses and the impact on NFIP resources; and (3) compliance with requirements for mandatory purchase of NFIP policies. The testimony also discusses recommendations from a report GAO is issuing today on FEMA's oversight and management of the NFIP.

What GAO Found

As GAO has reported, the NFIP, by design, is not actuarially sound. The program does not collect sufficient premium income to build reserves to meet long-term future expected flood losses, in part because Congress authorized subsidized insurance rates to be made available for some properties. FEMA has generally been successful in keeping the NFIP on a sound financial footing, but the catastrophic flooding events of 2004 (involving four separate hurricanes) required FEMA, as of August 2005, to borrow $300 million from the U.S. Treasury to help pay an estimated $1.8 billion on flood insurance claims. Following Hurricane Katrina in August 2005, legislation was enacted to increase FEMA's borrowing authority from $1.5 billion to $3.5 billion through fiscal year 2008. Properties that suffer repeated flooding but generally pay subsidized flood insurance rates==so-called repetitive-loss properties--constitute a significant drain on NFIP resources. These properties account for roughly 1 percent of properties insured under the NFIP, but account for 25 percent to 30 percent of all claim losses. The Flood Insurance Reform Act of 2004 established a pilot program requiring owners of repetitive-loss properties to elevate, relocate, or demolish houses, with NFIP bearing some of those costs. Future studies of the NFIP should analyze the progress made to reduce the inventory of subsidized repetitive-loss properties, and determine whether additional regulatory or congressional action is needed. In 1973 and again in 1994, legislation was enacted requiring the mandatory purchase of NFIP policies by some property owners in high-risk areas. In June 2002, GAO reported that the extent to which lenders were required to enforce mandatory purchase requirements was unknown. While FEMA officials believed that many lenders often were noncompliant, neither side could substantiate its claims regarding compliance. FEMA did not use a statistically valid method for sampling files to be reviewed in its monitoring and oversight activities. As a result, FEMA cannot project the results of these reviews to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling responsibilities for the NFIP-actions necessary for FEMA to have reasonable assurance that program objectives are being achieved. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to develop new materials to explain coverage and the claims process to policyholders when they purchase and renew policies, establish an appeals process for claimants, and provide insurance agent education and training requirements. The statutory deadline for implementing these changes was December 30, 2004, and as of September 2005 FEMA had not developed documented plans with milestones for meeting the provisions of the act.