Officials for each of the regulators  acknowledged that the 2009 Questions and Answers cite the rescinded  FEMA Guidelines but stated that the overall guidance remains in effect. The Biggert-Waters Act requires that regulated  lending institutions disclose to a borrower that  flood insurance is available from private insurance companies that  issue standard flood insurance policies on behalf of NFIP or directly  from NFIP;  flood insurance that provides the same level of coverage as a  standard flood insurance policy under NFIP may be available from a  private insurance company that issues policies on behalf of the  company; and  the borrower is encouraged to compare the flood insurance coverage,  deductibles, exclusions, conditions, and premiums associated with  flood insurance policies issued on behalf of NFIP and policies issued  on behalf of private insurance companies and to direct inquiries on the  availability, cost, and comparisons of flood insurance coverage to an  insurance agent. Regulatory Uncertainty, Certain NFIP Changes, and Market Challenges Cited as Potentially Inhibiting Use of Private Flood Insurance

Stakeholders cited regulatory uncertainty, such as the lack of final  implementing regulations and the scope of the definition of private flood  insurance in the Biggert-Waters Act, as some of the potential barriers  lenders may face in fulfilling their responsibilities regarding private flood  insurance and the mandatory purchase requirement. Finally, a state insurance regulator and federal regulator noted  that the lack of final rules has led to uncertainty among lenders about  which private policies should be accepted. They also noted the need for  regulated lending institutions to retain some discretion when evaluating  private flood policies. Lender expertise. Two private insurers told us that in their experience,  some lenders find it difficult to compare private policies with NFIP  policies. However,  FEMA could have taken steps to revise the SFIP to allow for such  refunds. Allowing this type of refund would be in line with industry practice  to allow for refunds of paid premiums as well as Congress’s interest in  transferring some of the federal government’s exposure to flood  insurance risk to the private sector. Limited Use of Private Flood Insurance Also Due to Market Challenges

Many stakeholders with whom we spoke said that low private-sector  participation in the flood insurance market also was due to certain market  challenges that presented barriers to the private sector such as NFIP’s  discounted rates, a topic on which we reported previously and also have  ongoing work. Conclusions

The Biggert-Waters Act took steps to encourage greater participation by  the private sector in flood insurance, but aspects of the act’s provisions  on private flood insurance have created some regulatory uncertainty  among insurers and lenders. FEMA no longer allows policyholders to  cancel their NFIP policy and obtain a refund, on a prorated basis, if they  obtained a non-NFIP policy (private flood insurance policy). FEMA officials stated  that FEMA can only allow the cancellation of policies and refunds  according to the terms and conditions of NFIP’s standard policy, which  does not directly address the refunds of premiums when a non-NFIP  policy is obtained. Recommendation

To address a potential challenge for consumers who wish to opt for  private flood insurance and who must have insurance under the  mandatory purchase requirement, we recommend that the FEMA  Administrator should consider reinstating the cancellation reason code  allowing policyholders to cancel their NFIP policy and be eligible for  premium refunds, on a prorated basis, if they obtain a non-NFIP policy  after their NFIP policy became effective. This report  describes (1) regulated lending institutions’ and federal regulators’  implementation of statutory provisions governing the use of private flood  insurance to satisfy the mandatory purchase requirement; and (2) views  on any regulatory, or other barriers, to the increased use of private flood  insurance to satisfy the mandatory purchase requirement. The federal regulators  involved in implementing the provisions of the flood insurance laws  governing the mandatory purchase requirement are the Office of the  Comptroller of the Currency (OCC), Board of Governors of the Federal  Reserve System (Federal Reserve), Federal Deposit Insurance  Corporation (FDIC), Farm Credit Administration (FCA), and National  Credit Union Administration (NCUA). Appendix II: Private Flood Insurance Criteria in FEMA’s Guidelines (2007) and the Biggert-Waters Act Definition (2012)

Appendix II: Private Flood Insurance Criteria in  FEMA’s Guidelines (2007) and the Biggert- Waters Act Definition (2012)
The following table compares the guidance provided by Federal  Emergency Management Agency (FEMA) in the 2007 Mandatory  Purchase of Flood Insurance Guidelines (rescinded in February 2013) for  use of private flood insurance to satisfy the mandatory purchase  requirement with the statutory definition of private flood insurance in the  Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act).
Why GAO Did This Study

NFIP was created, in part, because private insurers historically have been unwilling to insure against flood damage. The private flood insurance market remains small. The 2012 Biggert-Waters Act took steps to encourage private-sector participation by requiring regulators to direct lenders to accept private flood insurance to satisfy the mandatory purchase requirement—a federal requirement to purchase flood insurance on certain properties.
GAO was asked to examine if the regulatory environment posed barriers to private flood insurance. This report describes (1) lender and regulator implementation of provisions on private flood insurance; and (2) views on regulatory, or other, barriers to using private flood insurance to satisfy the mandatory purchase requirement. GAO reviewed laws, regulations and guidance and interviewed officials from FEMA, five federal regulators, government-sponsored enterprises, and the National Association of Insurance Commissioners. GAO interviewed various stakeholders, selected based on their flood insurance experience and size, among other factors: a nongeneralizable sample of eight lenders; 13 organizations; five state insurance regulators; and four private flood insurers.

What GAO Found

Lenders and their regulators have taken some action to implement provisions on private flood insurance in the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act). Specifically, lenders told GAO they send notifications to borrowers that encourage borrowers to compare private and National Flood Insurance Program (NFIP) policies. Lenders with whom GAO spoke accepted private policies and generally said they used Federal Emergency Management Agency (FEMA) guidelines and interagency guidance to evaluate private policies. Federal regulators (Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, National Credit Union Administration, and Farm Credit Administration) issued interagency questions and answers on private insurance in 2009, which cite the FEMA guidelines. However, FEMA rescinded its guidelines in 2013, citing a lack of authority to rule on the acceptability of private insurance policies. Federal regulators have issued joint proposed rules to implement the Biggert-Waters Act definition of private flood insurance, but have not yet finalized them. Regulators stated that the information provided in the 2009 Questions and Answers remains in effect until final rules implementing the private flood insurance provisions of the Biggert-Waters Act are adopted.
Stakeholders cited a number of challenges as potentially inhibiting the use of private flood insurance to satisfy the mandatory purchase requirement.
Regulatory uncertainty . Without final regulations implementing the Biggert-Waters Act requirement to accept private flood insurance, there was uncertainty among stakeholders about which private policies would satisfy the mandatory purchase requirement. Many stakeholders, including some lenders, emphasized that lenders needed discretion when evaluating policies and that ensuring policies met the Biggert-Waters Act definition would be challenging for lenders, in part due to their lack of insurance expertise.
Recent NFIP changes . Stakeholders noted that a recent NFIP policy change could discourage consumers' use of private insurance. FEMA recently stopped allowing policyholders to obtain a refund of their unused NFIP premium if they obtained a non-NFIP policy. FEMA officials stated that, based on their recent review of NFIP cancellation policies, this practice was not explicitly permitted in the NFIP standard flood insurance policy terms and conditions. Due to this change, consumers who wish to obtain private coverage would forfeit any unused portion of their premium if they switched after the NFIP policy's effective date. While FEMA's standard policy terms do not specifically address refunds when a non-NFIP policy is obtained, FEMA could revise the standard policy to allow for such refunds. Allowing this type of refund would be in line with industry practice to allow refunds of paid premiums when cancelling insurance policies, as well as Congressional interest in transferring some of the federal government's exposure to flood insurance risk to the private sector.
Market challenges . Many stakeholders noted that low private sector participation in flood insurance was also due to market challenges, some citing the inability to compete with discounted NFIP rates as a primary barrier—a finding that GAO also reported in previous work (GAO-14-127).

What GAO Recommends

GAO recommends that FEMA reconsider allowing policyholders who cancel their NFIP policy to be refunded, on a prorated basis, when obtaining a non-NFIP policy and take any necessary steps to amend the NFIP standard policy to do so. FEMA agreed with our recommendation.