In 1968, Congress created NFIP to help  reduce escalating costs of providing federal flood assistance to repair  damaged homes and businesses. In January 2017, FEMA borrowed an additional $1.6  billion, increasing the total debt to $24.6 billion. For example, it  required FEMA to  increase rates at 25 percent per year until full-risk rates were reached  for certain subsidized properties, including secondary residences,  businesses, and severe repetitive loss properties;  increase rates over a 5-year period to phase out grandfathered policy  rates; prohibit subsidized rates for properties purchased after, or not  insured, as of July 6, 2012;  create a reserve fund that would maintain at least 1 percent of the  total annual potential loss exposure faced by NFIP based on  outstanding flood insurance policies in force in the prior fiscal year;  improve flood risk mapping; and develop new methods related to compensation for companies that  sell, write, and service flood insurance policies; that is, Write Your  Own (WYO) insurers. Potential Comprehensive Reform of NFIP Would Require Actions in Six Key Areas

Our review of literature and prior GAO reports and interviews, a  questionnaire, and roundtable discussions with industry and nonindustry  stakeholders identified a number of potential reform actions that can be  considered to improve NFIP’s solvency and enhance the nation’s  resilience to flood risk. These potential reform actions fall into the  following six areas: (1) outstanding debt, (2) premium rates, (3)  affordability, (4) consumer participation, (5) barriers to private-sector  involvement, and (6) NFIP flood resilience efforts. However, we  reported that FEMA is unlikely to be able to repay this debt, and some  industry and nonindustry stakeholders with whom we spoke said that  Congress should eliminate it, as Congress has done when FEMA accrued  NFIP debt in the past. That is, in  addition to charging policyholders enough to pay for their current risk of  flood losses (provisions subsequently revised under HFIAA), FEMA also  must collect a surcharge from all NFIP policyholders to help repay  program debt, among other things. According to one industry stakeholder, any shortfall in  premiums needed to pay claims would be made up by using funds from  the insurance company’s surplus. While actuarially sound premium rates that  reflect the full risk of loss would reduce the likelihood of future borrowing,  they would not fully eliminate it. We also have previously concluded, and many industry and nonindustry  stakeholders with whom we spoke affirmed, that because NFIP premium  rates do not reflect the full risk of loss, consumers may not understand  the risk of flood loss associated with a particular property. Some industry and nonindustry stakeholders told us that the surcharges  could cause certain NFIP policyholders to discontinue their NFIP policies,  and they might or might not purchase private flood insurance instead. The cost of obtaining elevation  certificates could be burdensome for some policyholders, but could be  considered as part of an affordability assistance program (see  following section) and also could help some policyholders reduce their  premium rates. Creating an Affordability Assistance Program That Is Funded with Appropriations, Means- Based, and Prioritized to Mitigate Risk

Industry and nonindustry stakeholders with whom we spoke said that rate  increases associated with the transition to full-risk premium rates can  raise affordability concerns for some policyholders and create a risk that  fewer consumers would purchase flood insurance. Reducing flood risk through mitigation also could reduce the need for  federal disaster assistance, further deceasing federal fiscal exposure. Potential Reform Actions

Building on what we previously recommended, Congress could create  an affordability assistance program that (1) is funded through an  appropriation rather than through discounted premiums, (2) is means- tested, (3) considers making any premium assistance temporary, (4)  considers allowing assistance to be used for private policies, (5)  prioritizes investments in mitigation efforts over premium assistance  whenever economically feasible, and (6) prioritizes mitigation loans  over mitigation grants. Prioritizing mitigation over premium assistance could address the  policy goal of enhancing resilience because it would involve taking  steps to reduce the risk of the property, thus reducing the likelihood of  future flood claims and potentially reducing long-term federal fiscal  exposure. If the mandatory purchase requirement  were expanded to more (or all) mortgage loans made by federally  regulated lending institutions for properties in communities participating in  NFIP, consumer participation could increase, more consumers would  have some protection from the financial effects of flooding, and private  insurers would have a greater incentive to offer flood insurance coverage. Some of these stakeholders acknowledged that  flood insurance coverage, and therefore a purchase requirement, might  not be as necessary for some consumers with properties at an extremely  low risk of flooding but noted that in those situations, the premium rate  should be extremely low to reflect the low flood risk of the property. A 2012 study found that public perception of federal post-disaster  assistance creates a moral hazard that not only discourages  consumers from purchasing flood insurance but also discourages  flood risk mitigation and encourages people to live in high-risk  areas. In our previous work, industry and nonindustry stakeholders  said that access to such data would allow private insurance companies to  better estimate losses, price flood insurance premiums, and determine  which properties they might be willing to insure. According to FEMA  officials, the agency would need to address privacy concerns to provide  property-level information to insurers, because the Privacy Act of 1974  prohibits the agency from releasing detailed NFIP policy and claims  data. A requirement for a fee on private flood insurance policies could face  resistance from insurers, and creating a federal appropriation to pay  for mitigation and mapping would be a new cost. There also could be  implementation costs and challenges associated with administering a  fee on private insurers. Taking these actions in concert with other actions mentioned in this report  would be important because doing so could ensure that efforts to  increase private-sector involvement in flood insurance would not harm  resilience efforts, particularly funding for mitigation and mapping, and  community participation in NFIP. Conclusions

NFIP has experienced significant challenges because FEMA is tasked  with pursuing competing programmatic goals—keeping flood insurance  affordable while keeping the program fiscally solvent. In  turn, this has transferred some of the financial burden of flood risk from  individual property owners to taxpayers as a whole and resulted in the  program owing $24.6 billion to Treasury. Actions in six areas could advance programmatic goals, mitigate some of  the trade-offs resulting from the competing goals, and reform the flood  insurance program by (1) promoting flood risk resilience, (2) minimizing  fiscal exposure to the federal government, (3) requiring transparency of  the federal fiscal exposure, (4) encouraging consumer participation in the  flood insurance market, and (5) minimizing transition and implementation  challenges. We recognize that many of the potential reforms, in and of themselves,  involve competing goals, and that taking some actions in isolation could  create challenges for some property owners. As such, they could face resistance because they could create new costs  for the federal government, the private sector, or property owners. Nevertheless, taking actions on multiple fronts represents the best  opportunity to help address the spectrum of challenges confronting NFIP,  advance private-sector participation, reduce federal fiscal exposure, and  enhance resilience to flood risk. Matter for Congressional Consideration

As Congress considers reauthorizing NFIP, it should consider  comprehensive reform to improve the program’s solvency and enhance  the nation’s resilience to flood risk, which could include actions in six  areas: (1) addressing the current debt, (2) removing existing legislative  barriers to FEMA’s revising premium rates to reflect the full risk of loss,  (3) addressing affordability, (4) increasing consumer participation, (5)  removing barriers to private-sector involvement, and (6) protecting NFIP  flood resilience efforts. This report examines potential reform actions Congress  and the Federal Emergency Management Agency (FEMA) could take to  reduce federal fiscal exposure and improve resilience to flood damage. Many industry and nonindustry stakeholders with whom we spoke  believed that as the private sector enters the flood insurance market,  NFIP could naturally become the insurer of last resort, or residual insurer,  and that this would be a more appropriate role for the federal government  in the long term than the current program.
Why GAO Did This Study

Congress created NFIP to reduce the escalating costs of federal disaster assistance for flood damage, but also prioritized keeping flood insurance affordable, which transferred the financial burden of flood risk from property owners to the federal government. In many cases, premium rates have not reflected the full risk of loss, so NFIP has not had sufficient funds to pay claims. As of March 2017, NFIP owed $24.6 billion to Treasury. NFIP's current authorization expires in September 2017.
In this report, GAO focuses on potential actions that can help reduce federal fiscal exposure and improve resilience to flood risk. GAO reviewed laws, GAO reports, and other studies. GAO interviewed officials from FEMA and other agencies. GAO also solicited input from industry stakeholders (including insurers, reinsurers, and actuaries) and nonindustry stakeholders (including academics, consumer groups, and real estate and environmental associations) through interviews, a nongeneralizable questionnaire, and four roundtable discussions.

What GAO Found

Based on discussions with stakeholders and GAO's past work, reducing federal exposure and improving resilience to flooding will require comprehensive reform of the National Flood Insurance Program (NFIP) that will need to include potential actions in six key areas (see figure below). Comprehensive reform will be essential to help balance competing programmatic goals, such as keeping flood insurance affordable while keeping the program fiscally solvent. Taking actions in isolation may create challenges for some property owners (for example, by reducing the affordability of NFIP policies) and therefore these consequences also will need to be considered. Some of the potential reform options also could be challenging to start or complete, and could face resistance, because they could create new costs for the federal government, the private sector, or property owners. Nevertheless, GAO's work suggests that taking actions on multiple fronts represents the best opportunity to help address the spectrum of challenges confronting NFIP.
Through its work, GAO identified the following interrelationships and potential benefits and challenges associated with potential actions that could be taken to reform NFIP in the six areas:
Outstanding debt. The Federal Emergency Management Agency (FEMA), which administers NFIP, owed $24.6 billion as of March 2017 to the Department of the Treasury (Treasury) for money borrowed to pay claims and other expenses, including $1.6 billion borrowed following a series of floods in 2016. FEMA is unlikely to collect enough in premiums to repay this debt. Eliminating the debt could reduce the need to raise rates to pay interest and principal on existing debt. However, additional premiums still would be needed to reduce the likelihood of future borrowing in the long term. Raising premium rates could create affordability issues for some property owners and discourage them from purchasing flood insurance, and would require other potential actions to help mitigate these challenges.
Premium rates. NFIP premiums do not reflect the full risk of loss, which increases the federal fiscal exposure created by the program, obscures that exposure from Congress and taxpayers, contributes to policyholder misperception of flood risk (they may not fully understand the risk of flooding), and discourages private insurers from selling flood insurance (they cannot compete on rates). Eliminating rate subsidies by requiring all rates to reflect the full risk of loss would address an underlying cause of NFIP's debt and minimize federal fiscal exposure. It also would improve policyholder understanding of flood risk and encourage private-sector involvement. However, raising rates makes policies less affordable and could reduce consumer participation. The decreases in affordability could be offset by other actions such as providing means-based assistance.
Affordability. Addressing the affordability issues that some consumers currently face, or might face if premium rates were raised, could help ensure more consumers purchase insurance to protect themselves from flood losses. GAO previously recommended that any affordability assistance should be funded with a federal appropriation (rather than through discounted premiums) and should be means-tested. Means-testing the assistance could help control potential costs to the federal government, and funding with an appropriation would increase transparency of the federal fiscal exposure to Congress. Many industry and nonindustry stakeholders with whom GAO spoke said affordability assistance should focus on helping to pay for mitigation—such as elevating buildings—because mitigation permanently reduces flood risk (thus reducing premium rates). Mitigation efforts can have high up-front costs, and may not be feasible in all cases, but many stakeholders suggested that federal loans could be used to spread consumer costs over time.
Consumer participation. According to many industry and nonindustry stakeholders with whom GAO spoke, some consumers might not purchase flood insurance because they misperceive their flood risk. For example, consumers located outside of the highest-risk areas, who are not required to purchase flood insurance, may mistakenly perceive they are not at risk of flood loss. Consumers also may choose not to purchase flood insurance because they overestimate the adequacy of federal assistance they would expect to receive after a disaster. Expanding the mandatory purchase requirement beyond properties in the highest-risk areas is one option for encouraging consumer participation in flood insurance. However, doing so could face public resistance and create affordability challenges for some, highlighting the importance of an accompanying affordability assistance program. Increasing consumer participation could help ensure more consumers would be better protected from the financial risk of flooding.
Other barriers to private-sector involvement. Industry and nonindustry stakeholders with whom GAO spoke cited regulatory uncertainty and lack of data as barriers to their ability to sell flood insurance, in addition to the less than full-risk rates charged by FEMA. For example, some industry and nonindustry stakeholders told GAO that while lenders must enforce requirements that certain mortgages have flood insurance, some lenders are uncertain whether private policies meet the requirements. Clarifying the types of policies and coverage that would do so could reduce this uncertainty and encourage the use of private flood insurance. In addition, some stakeholders said that access to NFIP claims data by the insurance industry could allow private insurers to better estimate losses and price policies. FEMA officials said they would need to address privacy concerns to provide such information but have been exploring ways to facilitate more data sharing.
NFIP flood resilience efforts. Some industry and nonindustry stakeholders told GAO that greater involvement by private insurers could reduce funding available for some NFIP flood resilience efforts (mitigation, mapping, and community participation). For example, some of these stakeholders said that as the number of NFIP policies decreased, the policy fees FEMA used to help fund mitigation and flood mapping activities also would decrease. Potential actions to offset such a decrease could include appropriating funds for these activities or adding a fee to private policies. This would allow NFIP flood resilience efforts to continue at their current levels as private-sector involvement increased.

What GAO Recommends

To improve NFIP solvency and enhance national resilience to floods, Congress should consider comprehensive reform covering six areas: (1) outstanding debt, (2) premium rates, (3) affordability, (4) consumer participation, (5) barriers to private-sector involvement, and (6) NFIP flood resilience efforts.