HFIAA did not affect the phase out  schedule of these subsidies—which represented about 41 percent of all  subsidized policies, as of September 30, 2013 (see fig. FEMA Lacks Data to Measure Forgone Premiums Accurately and Estimates Vary Widely

		Because Flood Risk Information Is Limited, the Forgone Premiums Associated with Subsidized Policies Cannot Be Measured Accurately

FEMA does not collect the flood risk information for most subsidized  policies and therefore cannot accurately determine forgone premiums  (the difference between subsidized premiums paid and the premiums that  would be required to cover the full risk of losses) associated with  subsidized policies. However, according to FEMA officials, FEMA will not  continue to collect this information with the restoration of these subsidies  under HFIAA. We recommended that FEMA develop and implement a plan to  obtain the flood risk information needed to determine full-risk rates for  properties with subsidized rates. Although FEMA has taken some steps, we maintain the importance of  fully implementing this recommendation and obtaining flood risk  information to measure accurately forgone premiums associated with  subsidies. We estimated forgone premiums at $16–25 billion during 2002–2013,  using FEMA’s statement that eliminating subsidies would increase NFIP  premiums 50–75 percent after expenses. This amount—as  much as $1 billion a year—could have been available for losses or debt  repayment. As FEMA also would have  incurred additional expenses if it had been able to collect the forgone  premiums, we estimated that FEMA might have had $13–16 billion in  premiums net of expenses. The changes became effective on  October 1, 2013. FEMA maintained  documentation of change requests and responses provided to the  contractor’s questions and has regular reports from the contractor to  monitor performance, but these documents did not capture critical  information needed to oversee the contractor’s progress toward  completion of the data system changes. As a result of not proactively monitoring or verifying the implementation of  data system changes, premium data for the policies between the  implementation of the Biggert-Waters Act and enactment of HFIAA were  unreliable and some policyholders were charged inaccurate rates. FEMA  agreed with our previous recommendation (from July 2013) that it develop  and implement a plan to obtain information on the relative risk of flooding  and property elevations for subsidized policies. In addition, FEMA was  unaware of the extent of delays and errors in its data system. Federal  internal control standards call for agencies to have controls in place to  help ensure the accuracy of all transactions and to determine if data  system changes have been made properly. FEMA’s contracting officer’s  representative handbook also states that a contractor’s performance  should be monitored to ensure progress toward completion of specified  requirements. However, FEMA lacked sufficient controls to oversee its  contractor’s and software vendors’ implementation of data system  changes before the changes were effective and therefore premium data  and other information on policies subject to full-risk rates between  October 1, 2013, and March 21, 2014 (the enactment of HFIAA) are  unreliable. Moreover, FEMA is planning further changes to its system  in 2015. Recommendations for Executive Action

To better ensure that future data system changes are fully and accurately  implemented before they become effective, we recommend that the  Secretary of the Department of Homeland Security (DHS) direct the  FEMA Administrator to take the following three actions:  Institute internal controls, such as testing a sample of policies, to  validate that the data system contractor fully implemented changes  and edit checks before program changes become effective. Appendix I: Objectives, Scope, and Methodology

The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters  Act) mandated that we conduct a number of studies about the National  Flood Insurance Program (NFIP), including a study on the cost of forgone  premiums of the properties that receive subsidized rates. We therefore calculated a premium based on FEMA’s rates and  found additional problems with the premiums in the data.
Why GAO Did This Study

As of September 30, 2013, FEMA, which administers NFIP, had more than 1.1 million subsidized flood insurance policies—about 21 percent of all of its policies. Because their premiums do not reflect the full risk of losses, subsidized policies have been a financial burden on the program. Due to NFIP's financial instability and operating and management challenges, GAO placed the program on its high-risk list in 2006. The Biggert-Waters Act mandated GAO to report on the forgone premiums from subsidies in NFIP.
This report examines the forgone premiums associated with subsidies during 2002–2013 along with data reliability issues discovered in GAO's examination. Data for earlier periods were unavailable. GAO analyzed NFIP premium data, published statements about the size of the subsidies, and expenses associated with premiums. GAO also interviewed FEMA officials.

What GAO Found

The actual forgone premiums—the difference between subsidized and full-risk premiums—to the National Flood Insurance Program (NFIP) due to subsidies cannot be measured. The Federal Emergency Management Agency (FEMA) does not collect flood risk information for all subsidized policies, which is needed to calculate their full-risk premium rates. GAO recommended in July 2013 that FEMA develop and implement a plan to obtain this information. FEMA agreed with the recommendation, but has not yet fully implemented it. Although FEMA is phasing out subsidies through statutorily required rate increases, collecting this information remains important because the number of subsidized policies—and associated financial impacts—could grow over time with the restoration of certain subsidies under the Homeowner Flood Insurance Affordability Act of 2014 that previous legislation had eliminated. Working with available data and FEMA's published statements describing the size of the subsidies, GAO estimated forgone premiums in the range of $16–25 billion for 2002–2013 but estimates vary based on the calculation used. As FEMA would have incurred additional expenses if it had been able to collect the forgone premiums, GAO estimated that FEMA might have had $11–17 billion in premiums net of expenses, or as much as $1 billion a year, for losses or debt repayment.
FEMA did not have sufficient controls or monitoring in place to validate system changes (made because of the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act)) before they became effective, and some premium data were unreliable. Federal internal control standards suggest that agencies have controls, such as validating implementation of changes, to help ensure the accuracy of transactions. A FEMA contracting handbook also calls for monitoring a contractor's progress toward completion of specified requirements. However, FEMA did not validate that its contractor fully implemented changes and system checks, or verify the changes in vendors' software, before program changes became effective in October 2013. FEMA's monitoring reports also did not capture critical information to oversee the contractor's progress toward completion of the required changes. As a result, premium data on policies GAO analyzed are unreliable in the time period studied, some policyholders were charged inaccurate rates, and the full extent of delays and errors went undetected for nearly a year. Without better monitoring and controls over future changes, FEMA risks further inaccuracies in its data system.

What GAO Recommends

GAO recommends that FEMA institute controls to validate implementation of data system changes and track progress toward completion in its monitoring reports. GAO also maintains its position that a recommendation made in July 2013 ( GAO-13-607 ) that FEMA develop and implement a plan to obtain flood-risk information needed to determine full-risk rates for properties with subsidized rates is valid and should be fully implemented. FEMA agreed with the new recommendations and discussed its approach for addressing the July 2013 recommendation.