The program is not actuarially sound  because of the number of policies in force that are subsidized—about  29 percent at the time of our 2003 report. As a result of these subsidies,  some policyholders with dwellings that were built before flood plain  management regulations were established in their communities pay  premiums that represent about 35 to 40 percent of the true risk  premium. From 1978 until March 2004, these  repetitive loss properties represented about $4.6 billion in claims  payments. The extent of  noncompliance with current mandatory purchase requirements by  affected property owners is unknown. Some interest has been  expressed in Congress in assessing the feasibility of expanding  mandatory purchase requirements beyond current special high-risk  flood hazard areas. FEMA and its private insurance partners also have  efforts underway to increase participation in the NFIP by marketing  flood insurance policies in areas where purchase is not mandatory. 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. FEMA’s  current debt with the Treasury is almost entirely for payment of claims  from Hurricanes Katrina and Rita and other flood events that occurred in  2005. In January 2006, FEMA estimated an annual shortfall in premium  income of $750 million because of policy subsidies. Because of the financial drain that repetitive loss properties have posed  for the program, 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 properties, particularly those with repetitive losses;  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. For example, areas subject to damage by waves and storm surge  are in the zone with the highest expectation for flood loss. To expand the NFIP policyholder base, there has been some  congressional interest in the feasibility of extending the current mandatory  purchase requirement to properties in a 500-year flood plain, which  statistically have a 1 in 500 chance of flooding in any given year. It would be difficult to effectively assess the impacts, effectiveness, and  feasibility of such a change in the structure of the NFIP. We share FEMA’s  concerns related to enforcing and assessing compliance. FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the Flood Insurance Reform Act of 2004

As of January 2006, 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 recommended that FEMA develop 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. In the longer term, Congress and the NFIP face a complex challenge in  assessing potential changes to the program that would improve its  financial stability, increase participation in the program by property  owners in areas at risk of flooding, reduce the number of repetitive loss  properties in the program, and maintain current and accurate flood plain  maps.
Why GAO Did This Study

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. The unprecedented magnitude and severity of the flood losses from hurricanes in 2005 challenged the NFIP to process a record number of claims. These storms also illustrated the extent to which the federal government has exposure for claims coverage in catastrophic loss years. FEMA estimates that Hurricanes Katrina, Rita, and Wilma will generate claims and payments of about $23 billion--far surpassing the total claims paid in the entire history of the NFIP. This testimony provides information from past and ongoing GAO work on issues including: (1) NFIP's financial structure; (2) the impact of properties with repetitive flood losses on NFIP's resources; (3) proposals to increase the number of policies in force; and (4) the status of past GAO recommendations.

What GAO Found

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 November 2005, FEMA's authority to borrow from the Treasury was increased from $1.5 billion to $18.5 billion through fiscal year 2008 to help pay claims from the 2005 hurricane season. It is highly unlikely that the NFIP as presently funded could generate sufficient revenues to repay a debt of this size. One reason the NFIP is not actuarially sound is because a number of its policies on dwellings that were built before flood plain management regulations were established in their communities are subsidized and pay premiums of 35-40 percent of the true risk premium. In January 2006, FEMA estimated an annual shortfall in premium income of $750 million because of such policy subsidies. Some subsidized properties, called repetitive loss properties, also suffer repetitive flood losses, which accounted for about $4.6 billion in claims payments from 1978 to March 2004. We need to analyze the progress made to reduce the inventory of subsidized repetitive-loss properties and determine whether additional regulatory or congressional action is needed. A challenge for FEMA is to expand the NFIP policyholder base by enforcing mandatory purchase requirements and encouraging voluntary purchase by homeowners who live in areas at lower risk of flooding. The extent of noncompliance with current mandatory purchase requirements for property owners in special flood hazard areas is unknown. There has been some congressional interest in the feasibility of expanding mandatory purchase requirements beyond the current special high-risk areas, however, there are a number of difficulties to assessing the impacts, effectiveness, and feasibility of such a change in the structure of the NFIP, as well as concerns related to enforcing and assessing compliance. For example, more precise flood mapping of areas outside the current high-risk areas would be required to accurately identify affected property owners. FEMA and its private insurance partners also have efforts underway to increase NFIP participation by marketing policies in areas where purchase is not mandatory. 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, 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 January 2006, FEMA had not developed documented plans with milestones for meeting the provisions of the act, as recommended by GAO.