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Testimony: 

Before the Committee on Banking, Housing and Urban Affairs, U.S. 
Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:30 a.m. EDT: 

Tuesday, October 2, 2007: 

Federal Emergency Management Agency: 

Ongoing Challenges Facing the National Flood Insurance Program: 

Statement of Orice Williams, Director: 

Financial Markets and Community Investments: 

Flood Insurance: 

GAO-08-118T: 

GAO Highlights: 

Highlights of GAO-08-118T, a testimony before the Committee on Banking, 
Housing and Urban Affairs, U.S. Senate. 

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. 

Given the challenges facing the NFIP and the need for legislative 
reform to ensure the financial stability and ongoing viability of this 
program, GAO placed the NFIP on its high-risk list in March 2006. This 
testimony updates past work and provides information about ongoing GAO 
work on issues including (1) NFIP’s financial structure, (2) the extent 
of compliance with mandatory requirements, (3) the status of map 
modernization efforts, and (4) FEMA’s oversight of the NFIP. 

Building on our previous and ongoing work on the NFIP, GAO collected 
data from FEMA to update efforts, including information about claims, 
policies, repetitive loss properties, and mitigation efforts. 

What GAO Found: 

The most significant challenge facing the NFIP is the actuarial 
soundness of the program. As of August 2007, FEMA owed over $17.5 
billion to the U.S. Treasury. FEMA is unlikely to be able to pay this 
debt, primarily because the program’s premium rates have been set to 
cover an average loss year, which until 2005 did not include any 
catastrophic losses. This challenge is compounded by the fact that some 
policyholders with structures that were built before floodplain 
management regulations were established in their communities generally 
pay premiums that represent about 35 to 40 percent of the true risk 
premium. Moreover, about 1 percent of NFIP-insured properties that 
suffer repetitive losses account for between 25 and 30 percent of all 
flood claims. FEMA is also creating a new generation of “grandfathered” 
properties—properties that are mapped into higher-risk areas but may be 
eligible to receive a discounted premium rate equal to the 
nonsubsidized rate for their old risk designation. Placing the program 
on a more sound financial footing will involve trade-offs, such as 
charging more risk-based premiums and expanding participation in the 
program. 

The NFIP also faces challenges expanding its policyholder base by 
enforcing compliance with mandatory purchase requirements and promoting 
voluntary purchase by homeowners who live in areas that are at less 
risk. One recent study estimated that compliance with the mandatory 
purchase requirement was about 75 to 80 percent but that penetration 
elsewhere in the market was only 1 percent. Since 2004, FEMA has 
implemented a massive media campaign called “FloodSmart” to increase 
awareness of flooding risk nationwide by educating everyone about the 
risks of flooding and encouraging the purchase of flood insurance. 
While the numbers of policyholders increased following Hurricane 
Katrina, it is unclear whether these participants will remain in the 
program as time goes on. 

The impact of the 2005 hurricanes highlighted the importance of up-to-
date flood maps that accurately identify areas at greatest risk of 
flooding. These maps are the foundation of the NFIP. In 2004 FEMA began 
its map modernization efforts, and according to FEMA, about 34 percent 
of maps have been remapped. Completing the map modernization effort and 
keeping these maps current is also going to be an ongoing challenge for 
FEMA. 

Finally, FEMA also faces significant challenges in providing effective 
oversight over the insurance companies and thousands of insurance 
agents and claims adjusters who are primarily responsible for the day-
to-day process of selling and servicing flood insurance policies. As 
GAO recommended in a an interim report issued in September 2007, FEMA 
needs to take steps to ensure that it has a reasonable estimate of 
actual expenses that the insurance companies incur to help determine 
whether payments for services are appropriate and that required 
financial audits are performed. GAO, in its ongoing work, plans to 
further explore FEMA oversight of the private insurance companies and 
the cost of selling and servicing NFIP flood policies. 

What GAO Recommends: 

In past work, GAO recommended that FEMA strengthen its oversight of the 
NFIP and insurance companies responsible for selling and servicing 
flood policies, among other things. FEMA generally agreed with our 
recommendations. 

To view the full product, including the scope and methodology, click on 
GAO-08-118T.
For more information, contact Orice M. Williams at (202) 512-8678 or 
williamso@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to participate in today's hearing on the 
National Flood Insurance Program (NFIP) and the challenges facing the 
Federal Emergency Management Agency (FEMA), which oversees it. As you 
know, the NFIP has been on GAO's high-risk list since March 2006, and 
my statement today focuses on the ongoing challenges facing the 
program. Over the past three decades, we have identified numerous 
challenges to the program that affect its day-to-day operations and 
future financial stability. Recently, we reported on NFIP's 
unprecedented financial and regulatory strains in the aftermath of the 
2005 hurricane season.[Footnote 1] As a result, the program has had to 
borrow extensively from the U.S. Treasury in order to pay claims and 
expenses. With the current program expiring next September, this and 
other issues warrant review and debate, including how best to structure 
the NFIP so that it provides financial protection for those who need 
and would benefit from flood insurance while enhancing the program's 
financial foundation. 

My testimony today will revisit and update the four major challenges 
facing the NFIP: 

* Reducing losses to the program from policy subsidies and repetitive 
loss properties--that is, properties in high-risk areas that flood 
repeatedly and that make repeated claims on the NFIP; 

* Increasing property owner participation in the program to include not 
only homeowners in high-risk areas, but also those who live in less 
flood-prone areas that are still at risk of experiencing losses from 
flooding; 

* Developing accurate, digital flood maps that can provide the 
information the program needs to determine which areas are most at risk 
of flooding; and: 

* Providing effective oversight of flood insurance operations to ensure 
that the NFIP is making appropriate payments to the insurance 
companies, insurance agents, and claims adjusters responsible for the 
day-to-day process of selling and servicing flood insurance policies. 

My statement is based largely on completed work on the 2005 claims 
process and subsequent payments to insurance companies for services 
rendered and ongoing work on subsidized properties; the rate-setting 
process for flood insurance premiums; financial and statistical 
information on the NFIP from a variety of sources; and the Write-Your- 
Own (WYO) program, under which insurance companies enter into 
agreements with FEMA to sell and service flood insurance policies and 
adjust claims after flood losses; and FEMA's oversight. In conducting 
our work, we collected relevant data from FEMA; analyzed statutes, 
regulations, and payment data relevant to the NFIP; and interviewed 
FEMA officials, FEMA contractors, insurance company officials, and 
state and local officials to obtain information relevant to their 
experience with NFIP. Some of the work was also based on interviews 
with individual policyholders, insurance agents, and claims adjusters, 
and on audits of private insurance companies that sell and service 
flood insurance on behalf of FEMA. We performed our work in accordance 
with generally accepted government auditing standards. 

In summary: 

One of the biggest challenges facing the NFIP is the actuarial 
soundness of the program. As of August 2007, FEMA owed over $17.5 
billion to the U.S. Treasury, largely resulting from losses during the 
2005 hurricanes. FEMA is unlikely to be able to pay this debt primarily 
because many of the program's premium rates have been set to cover 
losses in an average historical year based on program experience that 
did not include any catastrophic losses. To keep the cost of flood 
insurance affordable, Congress included premium subsidies, and as a 
result the program does not take in as much in premiums as it pays out 
in claims. With these subsidies, some policyholders with structures 
that were built before floodplain management regulations were 
established in their communities pay premiums that represent about 35 
to 40 percent of the true risk premium. Moreover, about 1 percent of 
NFIP-insured properties that suffer repetitive losses account for 
between 25 and 30 percent of all flood claims. FEMA is also creating a 
new generation of "grandfathered" properties that are mapped into 
higher-risk areas and that have an existing policy or purchase a new 
flood insurance policy prior to the adoption of new maps. The 
properties may be eligible to receive a discounted or "grandfathered" 
premium rate equal to the nonsubsidized rate for their old risk 
designation. Placing the program on more sound financial footing will 
involve trade-offs in how best to balance the need for charging higher 
premiums, which would put the program on a sounder financial basis 
while continuing to encourage participation in the program. 

The NFIP also faces challenges expanding its policyholder base by 
enforcing compliance with mandatory purchase requirements and promoting 
voluntary purchase by other homeowners, some of whom live in areas that 
are at less risk. While flood insurance is mandatory for homeowners who 
live in certain high-risk areas and have mortgages held by federally 
regulated financial institutions, determining the extent of compliance 
can be complicated. One recent study estimated that compliance with the 
mandatory purchase requirement was about 75 to 80 percent but that the 
penetration elsewhere in the market was only 1 percent. Moreover, since 
2004, FEMA has implemented a mass media campaign called "FloodSmart" to 
educate the public about the risks of flooding and to encourage the 
purchase of flood insurance. While the numbers of policyholders has 
increased following Hurricane Katrina, it is unclear whether these 
policyholders will remain in the program as time goes on. 

The impact of the 2005 hurricanes highlighted the importance of having 
accurate, up-to-date flood maps that identify areas that are at risk of 
flooding and thus the areas where property owners would benefit from 
purchasing flood insurance. While requirements for purchasing flood 
insurance apply only to certain properties in high-risk areas, 
according to FEMA about half of all flood damage occurs outside of 
areas currently mapped as high-risk areas. In response to 
recommendations from Congress, GAO, and others, FEMA has taken steps to 
adjust its map modernization efforts by changing its mapping standards 
and guidelines and adjusting risk-based mapping priorities. However, 
managing its relationship with its contractor and with state and local 
partners--all with varying technical capabilities and resources--to 
produce accurate digital flood maps is an ongoing challenge. Likewise, 
assuring that map standards are consistently applied across communities 
once the maps are created is a similar challenge. 

FEMA, which oversees the NFIP program, also faces significant 
challenges in providing effective oversight over the insurance 
companies and thousands of insurance agents and claims adjusters that 
are primarily responsible for the day-to-day process of selling and 
servicing flood insurance policies. In response to our recommendations 
an interim report issued in September 2007, FEMA has agreed to take 
steps to ensure that it has a reasonable estimate of the actual 
expenses the insurance companies incur to help determine whether 
payments for services are appropriate and to ensure that required 
financial audits are performed.[Footnote 2] 

Background: 

The NFIP provides property insurance for flood victims, maps the 
boundaries of the areas at highest risk of flooding, and offers 
incentives for communities to adopt and enforce floodplain management 
regulations and building standards to reduce future flood damage. The 
effective integration of all three of these elements is needed for the 
NFIP to achieve its goals. These include: 

* providing property flood insurance coverage for the many property 
owners who would benefit from such coverage; 

* reducing taxpayer-funded disaster assistance for property damage when 
flooding strikes; and: 

* reducing flood damage to properties through floodplain management 
that is based on accurate, useful flood maps and the enforcement of 
relevant building standards. 

Floods are the most common and destructive natural disaster in the 
United States. According to NFIP statistics, 90 percent of all natural 
disasters in the United States involve flooding. Our analysis of FEMA 
data found that over the past 25 years, about 97 percent of the U.S. 
population lived in a county that had at least one declared flood 
disaster, and 45 percent lived in a county that that had six or more 
flood disaster declarations.[Footnote 3] However, flooding is generally 
excluded from homeowner insurance policies that typically cover damage 
from other losses, such as wind, fire, and theft. Because of the 
catastrophic nature of flooding and the difficulty of adequately 
predicting flood risks, as well as the fact that those who are most at 
risk are the most likely to buy coverage, private insurance companies 
have largely been unwilling to underwrite and bear the risk of flood 
insurance.[Footnote 4] 

The NFIP was established by the National Flood Insurance Act of 1968 to 
provide policyholders with some insurance coverage for flood damage, as 
an alternative to disaster assistance, and to try to reduce the 
escalating costs of repairing flood damage.[Footnote 5] In creating the 
NFIP, Congress found that a flood insurance program with the "large- 
scale participation of the Federal Government and carried out to the 
maximum extent practicable by the private insurance industry is 
feasible and can be initiated."[Footnote 6] In keeping with this 
purpose, 92 private insurance companies were participating in the WYO 
program as of September 2007. NFIP pays these insurers fees to sell and 
service policies and adjust and process claims. FEMA, which is within 
the Department of Homeland Security (DHS), is responsible for the 
oversight and management of the NFIP. We reported in September 2007 
that about 68 FEMA employees, assisted by about 170 contract employees, 
manage and oversee the NFIP and the National Flood Insurance Fund, into 
which premiums are deposited and claims and expenses are paid. As of 
April 2007, the NFIP was estimated to have over 5.4 million policies in 
about 20,300 communities.[Footnote 7] To ensure that NFIP can cover 
claims after catastrophic events, FEMA has statutory authority to 
borrow funds from the Treasury to keep the program solvent.[Footnote 8] 

According to FEMA, an estimated $1.2 billion in flood losses are 
avoided annually because communities have implemented the NFIP's 
floodplain management requirements. Flood maps identify the boundaries 
of the areas that are most at risk of flooding. Property owners whose 
properties are within special flood hazard areas and who have mortgages 
from a federally regulated lender are required to purchase flood 
insurance for the amount of their outstanding mortgage balance, up to 
the maximum policy limit of $250,000 for single-family homes. According 
to FEMA, Excess Flood Protection coverage above these amounts is 
available in the private insurance markets. Personal property coverage 
is available for contents, such as furniture and electronics, for an 
additional $100,000. Business owners may purchase up to $500,000 of 
coverage for buildings and $500,000 for contents. The owners of 
properties with no mortgages or properties with mortgages held by 
lenders who are not federally regulated are not required to buy flood 
insurance, even if the properties are in a special flood hazard area. 
Optional lower-cost coverage is available under the NFIP to protect 
homes in areas of low to moderate risk. 

The NFIP's Financial Structure is Not Designed to be Actuarially Sound: 

To the extent possible, the NFIP is designed to pay operating expenses 
and flood insurance claims with premiums collected on flood insurance 
policies rather than with tax dollars. However, as we have reported, 
the program, by design, is not actuarially sound because Congress 
authorized subsidized insurance rates for policies covering some 
properties in order to encourage communities to join the 
program.[Footnote 9] As a result, the program does not collect 
sufficient premium income to build capital to cover long-term future 
flood losses. Moreover, the premiums collected are often not sufficient 
to pay for losses even in years without catastrophic flooding. This 
shortfall is exacerbated by repetitive loss properties that file 
repeated claims with NFIP. 

FEMA's current debt to the Treasury--over $17.5 billion--is almost 
entirely for payment of claims from the 2005 hurricanes. Legislation 
increased FEMA's borrowing authority from a total of $1.5 billion prior 
to Hurricane Katrina to $20.8 billion in March 2006. As we have 
testified previously, it is unlikely that FEMA will be able to repay a 
debt of this size and cover future claims, given that the program 
generates premium income of about $2 billion a year, which must first 
cover ongoing loss and expenses.[Footnote 10] 

To date, the program has gone through almost two full seasons without a 
major hurricane, and according to FEMA about $524 million of premium 
income has been used to pay interest on the debt owed to the Treasury 
in 2006. FEMA officials also noted that because fiscal year 2007 had 
been a relatively low flood loss year, the agency should be able to pay 
its next scheduled interest payment from premium income and would not 
have to borrow additional funds from Treasury to pay interest on its 
outstanding debt.[Footnote 11] Attention has been focused on the extent 
of the federal government's exposure for claims payments in future 
catastrophic loss years and on ways to improve the program's financial 
solvency.[Footnote 12] For example, some in Congress have recommended 
phasing in actuarial rates for vacation homes and nonresidential 
properties.[Footnote 13] 

Policy Subsidies Significantly Reduce NFIP's Income from Premiums: 

About 25 percent of NFIP's over 5.4 million policies have premiums that 
are substantially less than the true risk premiums. Properties 
constructed before their communities joined the NFIP and were issued a 
Flood Insurance Rate Map (or FIRM), which shows the community's flood 
risk, are eligible for subsidized rates. These policyholders typically 
pay premiums that represent about 35 to 40 percent of the true risk 
premium. 

In January 2006, FEMA estimated a shortfall in annual premium income 
because of policy subsidies at $750 million. In response to concerns 
about the historical basis for the subsidies and questions about the 
characteristics of the homes receiving subsidies, we were asked by the 
Ranking Member of this committee to collect certain demographic 
information about the portfolio of subsidized properties and property 
owners. This work will provide information on residential pre-FIRM 
subsidized properties in selected counties of the country.[Footnote 14] 
To the extent that reliable data is available, we plan to capture the 
variations that exist by type of flooding (e.g., coastal or riverine), 
fair market values for subsidized and nonsubsidized properties in each 
location, average income levels for each county, claims data for 
subsidized and nonsubsidized properties in each location, and the 
mitigation efforts being used. Our work will build upon the work of the 
Congressional Budget Office on values of properties in the 
NFIP.[Footnote 15] 

As part of this review, we are also examining the extent to which 
FEMA's nonsubsidized rates are truly actuarially based. We will assess 
how NFIP sets rates for its nonsubsidized and subsidized premiums, 
determine the total premiums the NFIP collects, and compare that amount 
to claims and related costs. Our analysis of FEMA's premiums and claims 
data should help provide insights into how FEMA sets rates. 

We also have work under way that will provide a description of 
financial and statistical trends, by flood zone, for the past 10 years. 
Specifically, we have been asked to describe average premium and claim 
amounts by flood zone, FEMA's estimates of likely losses, and the 
extent to which losses are attributable to repetitive loss properties 
or hurricanes. We will also describe the extent to which flood-damaged 
properties have been purchased through NFIP-funded mitigation programs. 
However, our ability to report on these issues will depend on the 
quality of FEMA's claims data. Finally, we are evaluating the adequacy 
of FEMA's procedures for monitoring selected contracts that support the 
NFIP. 

Repetitive Loss Properties Continue to be a Drain on the Program: 

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.[Footnote 16] These 
repetitive loss properties are problematic not only because of their 
vulnerability to flooding, but also because of the costs of repeatedly 
repairing flood damages.[Footnote 17] Although these properties account 
for only about 1 percent of NFIP-covered properties, they account for 
between 25 and 30 percent of claims. As of September 2007 over 70,000 
repetitive loss properties were insured by the NFIP. 

The 2004 Flood Insurance Reform Act authorized a 5-year pilot program 
to encourage mitigation efforts on severe repetitive loss properties in 
the NFIP.[Footnote 18] According to FEMA, as of September 2007 about 
8,100 properties insured by the NFIP were categorized as severe 
repetitive loss properties. Under the pilot, FEMA is required to adjust 
its rules and rates to ensure that homeowners pay higher premiums if 
they refuse an offer to mitigate the property. The pilot program was 
funded in fiscal year 2006, and according to FEMA officials, FEMA has 
not yet developed the regulations, guidance, and administrative 
documents necessary for implementation. 

Remapping Is Creating A New Generation of Properties That May Not Pay 
Risk-based Premiums: 

FEMA is also creating a new generation of properties that may not pay 
risk-based premiums. Properties that are remapped into higher flood 
risk areas may be able to keep or "grandfather" the nonsubsidized rates 
associated with their risk level prior to being remapped into a higher 
flood risk area. As a result, eligible property owners who have an 
existing policy or who purchase new flood insurance policies before 
they are mapped into higher-risk areas will go on paying the same 
nonsubsidized premium rate.[Footnote 19] Moreover, these grandfathered 
rates can be permanent. Although this option is a major selling point 
of encouraging broader participation in the program, such actions may 
further erode the actuarial soundness and financial stability of the 
program. 

FEMA Has Expanded Participation in the NFIP, but Ensuring Compliance 
with Requirements Need Ongoing Attention: 

From 1968 until the adoption of the Flood Disaster Protection Act of 
1973, buying flood insurance was voluntary. However, voluntary 
participation in the NFIP was low, and many flood victims did not have 
insurance to repair damages from floods in the early 1970s. In 1973 and 
again in 1994, Congress enacted laws requiring that some property 
owners in special flood hazard areas buy NFIP insurance. The owners of 
properties with no mortgages or properties with mortgages held by 
lenders that were not federally regulated were not, and still are not, 
required to buy flood insurance, even if the properties are in special 
flood hazard areas. 

As we have reported in the past, viewpoints differ about whether 
lenders were complying with the flood insurance purchase requirements, 
primarily because the officials we spoke with did not use the same 
types of data to reach their conclusions.[Footnote 20] For example, 
federal bank regulators and lenders based their belief that lenders 
were generally complying with the NFIP's purchase requirements on 
regulators' examinations and reviews that were conducted to monitor and 
verify lender compliance. In contrast, FEMA officials believed that 
many lenders frequently were not complying with the requirements, an 
opinion that they based largely on estimates computed from data on 
mortgages, flood zones, and insurance policies; limited studies on 
compliance; and anecdotal evidence indicating that insurance was not 
always purchased when it was required. At the time of our report in 
2002, neither side was able to substantiate these claims with 
statistically sound data. However, a FEMA-commissioned study of 
compliance with the mandatory purchase requirement estimated that 
compliance with purchase requirements, under plausible assumptions, was 
75 to 80 percent in special flood hazard areas for single-family homes 
that had a high probability of having a mortgage.[Footnote 21] The 
analysis conducted did not provide evidence that compliance declined as 
mortgages aged. At the same time, the study showed that about half of 
single-family homes in special flood hazard areas had flood insurance. 

The 2006 study also found that while one-third of NFIP policies were 
written outside of special flood hazard areas, the market penetration 
rate was only about 1 percent. Yet according to FEMA about half of all 
flood damage occurs outside of high risk areas. FEMA has efforts under 
way to increase participation by improving the quality of information 
that is available on the NFIP and on flood risks and by marketing to 
retain policyholders currently in the program. In October 2003, FEMA 
contracted for a new integrated mass marketing campaign called 
"FloodSmart" to educate the public about the risks of flooding and to 
encourage the purchase of flood insurance. Marketing elements being 
used include direct mail, national television commercials, print 
advertising, and Web sites that are designed for communities, 
consumers, and insurance agents. According to FEMA officials, in the 
little more than 3 years since the contract began, net policy growth 
has been almost 24 percent, and policy retention has improved from 88 
percent to almost 92 percent. However, the success of the program will 
be measured by retention rates as policyholders' memories of the 
devastation from Hurricane Katrina begin to fade over time. 

FEMA Faces Challenges in Producing Accurate, Updated Flood Maps: 

Accurate flood maps that identify the areas that are at greatest risk 
of flooding are the foundation of the NFIP. These maps, which show the 
extent of flood risk across the country, allow the program to determine 
high-risk areas for designation both as special hazard zones and as 
areas that can benefit the most from mitigation. Flood maps must be 
periodically updated to assess and capture changes in the boundaries of 
floodplains resulting from community growth, development, erosion, and 
other factors that affect the boundaries of areas at risk of flooding. 
The maps are principally used by (1) the communities participating in 
the NFIP, to adopt and enforce the program's minimum building standards 
for new construction within the maps' identified floodplains; (2) FEMA, 
to develop flood insurance policy rates based on flood risk; and (3) 
federal regulated mortgage lenders, to identify those property owners 
who are statutorily required to purchase federal flood insurance. As we 
reported in 2004, FEMA has embarked on a multiyear effort to update the 
nation's flood maps at a cost in excess of $1 billion.[Footnote 22] At 
that time we noted that NFIP faced major challenges in working with its 
contractor and state and local partners to produce accurate digital 
flood maps. 

FEMA has taken steps to improve these working relationships by 
developing a number of guidelines and procedures. According to FEMA, 
the agency has developed a plan for prioritizing and delivering 
modernized maps nationwide, including developing risk-based mapping 
priorities. Moreover, FEMA has recognized that a maintenance program 
will be needed to keep the maps current and relevant. For example, 
several strategies are under consideration for maintaining map 
integrity, including reviewing the flood map inventory every 5 years, 
as required by law; updating data and maps more regularly, as needed; 
addressing any unmet flood mapping needs and assessing the quality and 
quantity of maps; and examining risk management more broadly.[Footnote 
23] However, the effectiveness of these strategies will depend on 
available funding and FEMA's ongoing commitment to ensuring the 
integrity of the maps. As of September 2007 FEMA had remapped 34 
percent of its maps.[Footnote 24] 

FEMA's Monitoring and Oversight Have Identified Specific Problems but 
Have Not Produced Comprehensive Information on Overall Program 
Performance: 

To meet its monitoring and oversight responsibilities, FEMA is required 
to conduct periodic operational reviews of the private insurance 
companies that participate in the WYO program. In addition, FEMA's 
program contractor is required to check the accuracy of claims 
settlements by doing quality assurance reinspections of a sample of 
claims adjustments for every flood event. For operational reviews, FEMA 
examiners must thoroughly examine the companies' NFIP underwriting and 
claims settlement processes and internal controls, including checking a 
sample of claims and underwriting files to determine, for example, 
whether a violation of procedures has occurred, an incorrect payment 
has been made, or a file does not contain all required documentation. 
Separately, FEMA's program contractor is responsible for conducting 
quality assurance reinspections of a sample of claims adjustments for 
specific flood events in order to identify, among other things, 
expenses that were paid that were not covered and covered expenses that 
were not paid. In our December 2006 report, we found that a new claims 
handling process aided the claims handling following the 2005 hurricane 
season and resulted in few complaints. As a result, 95 percent of 
claims were closed by May 2006, a time frame that compared favorably 
with those of other, smaller recent floods.[Footnote 25] However, we 
noted that FEMA had not implemented a recommendation from a prior 
report that it do quality reinspections based on a random sample of all 
claims.[Footnote 26] We also found that FEMA had not analyzed the 
overall results of the quality reinspections following the 2005 
hurricane season. In response, FEMA has agreed to (1) analyze the 
overall results of the reinspection reports on the accuracy of claims 
adjustments for future events, and (2) plan its reinspections based on 
a random sample of claims. 

FEMA faces challenges in providing effective oversight of the insurance 
companies and thousands of insurance agents and claims adjusters that 
are primarily responsible for the day-to-day process of selling and 
servicing flood insurance policies. For example, as we reported in 
September 2007, 94 WYO insurance companies had written 96 percent of 
the flood insurance policies for the NFIP as of December 2006, up from 
the 48 companies that were writing 50 percent of the policies in 
1986.[Footnote 27] We also reported that for fiscal years 2004 through 
2006, total operating costs that FEMA paid to the WYO insurance 
companies ranged from $619 million to $1.6 billion, or from more than a 
third to almost two-thirds of the total premiums paid by policyholders 
to the NFIP, as a result of unprecedented flood losses caused by the 
2005 hurricanes. FEMA regulations require each participating company to 
arrange and pay for audits by independent certified public accounting 
firms. However, many WYO insurance companies have not complied with the 
schedule in recent years. For example, for fiscal years 2005 and 2006, 
5 of 94 participating companies had biennial financial statement audits 
performed. In response to our recommendations, FEMA has agreed to take 
steps to ensure that it has reasonable estimates of the actual expenses 
that WYO insurance companies incurred to help determine whether 
payments for services are appropriate and that required financial 
audits are performed. 

Building on this body of work, we are beginning a follow-up engagement 
that will analyze the expenses WYO insurance companies incur from 
selling and servicing NFIP policies and determine whether the total 
operating costs paid to the companies are equitable relative to those 
costs. We will also examine how FEMA oversees the WYO program, 
including reinspecting claims and performing operational reviews. 
Finally, we will evaluate alternatives for selling and servicing flood 
insurance policies and processing claims. 

We are also completing an engagement that looks at the inherent 
conflict of interest that exists when a WYO insurance company sells 
both property-casualty and flood policies to a single homeowner who is 
subject to a multiple peril event such as a hurricane. We testified 
before the House Committees on Financial Services and Homeland Security 
in June 2007 about our preliminary views on the sufficiency of data 
available to and collected by FEMA to ensure the accuracy of claims 
payments.[Footnote 28] FEMA has determined that it does not have the 
authority to collect wind damage claims data from WYO insurance 
companies, even when the insurer services both the wind and flood 
policies on the same property. Hence, FEMA generally does not know the 
extent to which wind may have contributed to total property damages. 
However, FEMA officials do not believe that the agency needs to know 
the dollar amount of wind damages paid by a WYO insurance company to 
verify the accuracy of a flood claim. While they may not need this 
information for many flood claims, the inherent conflict of interest 
that exists when a single WYO insurance company is responsible for 
adjusting both the wind and flood claim on a single property calls for 
the institution of strong internal controls to ensure the accuracy of 
FEMA's claims payments. Without internal controls that include access 
to the entire claim file for certain properties (both wind and flood), 
FEMA's ability to confirm the accuracy of certain flood claims may be 
limited. While the DHS Inspector General is currently examining this 
issue by reviewing both wind and flood claims on selected properties. 
Its interim report, issued in July 2007, was generally 
inconclusive.[Footnote 29] 

Concluding Observations: 

As our prior work reveals, FEMA faces a number of ongoing challenges in 
managing the NFIP that, if not addressed, will continue to threaten the 
program's financial solvency even if the program's current debt is 
forgiven. As we noted when we placed the NFIP on the high-risk list in 
2006, comprehensive reform will likely be needed to stabilize the long- 
term finances of this program. Our ongoing work is designed to provide 
FEMA and Congress with useful information to help assess ways to 
improve the sufficiency of NFIP's financial resources and its current 
funding mechanism, mitigate expenses from repetitive loss properties, 
increase compliance with mandatory purchase requirements, and expedite 
FEMA's flood map modernization efforts. 

As you well know, placing the program on more sound financial footing 
involves a set of highly complex, interrelated issues that are likely 
to involve many trade-offs. For example, increasing premiums to better 
reflect risk would put the program on a sounder financial footing but 
could also reduce voluntary participation in the program or encourage 
those who are required to purchase flood insurance to limit their 
coverage to the minimum required amount (i.e., the amount of their 
outstanding mortgage balance). As a result, taxpayer exposure for 
disaster assistance resulting from flooding could increase. As we have 
said before, meeting the NFIP's current challenges will require sound 
data and analysis and the cooperation and participation of many 
stakeholders. 

Mr. Chairman and Members of the Committee, this concludes my prepared 
statement. I would be pleased to respond to any questions you and the 
Committee Members may have. 

GAO Contact and Staff Acknowledgments: 

Contact point for our Office of Congressional Relations and Public 
Affairs may be found on the last page of this statement. For further 
information about this testimony, please contact Orice M. Williams at 
(202) 512-8678 or williamso@gao.gov. This statement was prepared under 
the direction of Andy Finkel. Key contributors were Emily Chalmers, 
Martha Chow, Nima Patel Edwards, Grace Haskins, Lisa Moore, and Roberto 
Pinero. 

[End of section] 

Footnotes: 

[1] GAO, National Flood Insurance Program: New Process Aided Hurricane 
Katrina Claims Handling, but FEMA's Oversight Should Be Improved, GAO-
07-169 (Washington, D.C.: Dec. 15, 2006). 

[2] GAO, National Flood Insurance Program: FEMA's Management and 
Oversight of Payments for Insurance Company Services Should Be 
Improved, GAO-07-1078 (Washington D.C.: Sept. 5, 2007). 

[3] GAO, Natural Hazard Mitigation: Various Mitigation Efforts Exist, 
but Federal Efforts Do Not Provide a Comprehensive Strategic Framework, 
GAO-07-403 (Washington, D.C.: Aug. 22, 2007). 

[4] According to FEMA, many private insurers offer Excess Flood 
Protection, which provides higher limits of coverage than the NFIP, in 
the event of catastrophic loss by flooding. 

[5] The National Flood Insurance Act of 1968, as amended, is codified 
at 42 U.S.C. §§ 4001 et seq. 

[6] 42 U.S.C.§ 4001(b). 

[7] FEMA defines a community as, any state or area or political 
subdivision thereof, or any Indian tribe or authorized tribal 
organization, which has authority to adopt and enforce floodplain 
management regulations for the areas within its jurisdiction. 44 C.F.R. 
§ 59.1 . In most cases, a community is an incorporated city, town, 
township, borough, or village, or an unincorporated area of a county or 
parish. 

[8] See 42 U.S.C. 4016. 

[9] GAO, Flood Insurance: Information on the Financial Condition of the 
National Flood Insurance Program, GAO-01-992T (Washington, D.C.: July 
2001). 

[10] GAO, Federal Emergency Management Agency: Challenges for the 
National Flood Insurance Program, GAO-07-335T (Washington, D.C.: Jan. 
25, 2006). 

[11] According to FEMA officials, the next scheduled payment is October 
1, 2007. 

[12] See, e.g., S. 3589, § 11, 109th Cong. (2006). 

[13] H.R.3121, §121,110th Cong. (2007). 

[14] Our key criteria for selecting the case study counties include 
high number and/or percent of subsidized policies, repetitive loss 
properties, and number of claims paid; the type of flooding experienced 
by the community (e.g., coastal, riverine); geographic location (urban/ 
rural, east and west coast, inland/coastal); population demography 
(racial/ethnic groups and income levels); availability of digitally 
enhanced-FIRM maps to enable us to overlay on Census maps; and 
availability of electronic county tax assessment data to enable us to 
match with NFIP database by property. 

[15] CBO, Value of Properties in the National Flood Insurance Program 
(Washington, D.C.: June 2007). 

[16] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 
2(3),(4), (5), 118 Stat. 712, 713 (2004). 

[17] GAO, National Flood Insurance Program: Actions to Address 
Repetitive Loss Properties, GAO-04-401T (Washington, D.C.: Mar. 25, 
2004). 

[18] A severe repetitive loss property is defined as a single family 
property or a multifamily property that is covered under flood 
insurance by the NFIP and has incurred flood-related damage for which 4 
or more separate claims payments have been paid under flood insurance 
coverage, with the amount of each claim payment exceeding $5,000 and 
with cumulative amount of such claims payments exceeding $20,000; or 
for which at least 2 separate claims payments have been made with the 
cumulative amount of such claims exceeding the reported value of the 
property. 42 U.S.C. § 4102a(b) 

[19] Generally, post-Flood Insurance Rate Map (Post-FIRM) buildings 
built in compliance with the floodplain management regulations will 
continue to have favorable rate treatment even though higher base flood 
elevations or more restrictive, greater risk zone designations result 
from Flood Insurance Rate Map revisions. Property owners can also 
purchase policies after they are remapped by proving that the property 
was previously mapped. 

[20] GAO, Flood Insurance: Extent of Noncompliance with Purchase 
Requirements Is Unknown, GAO-02-396 (Washington, D.C: June 21, 2002). 

[21] RAND Corporation, The National Flood Insurance Program's Market 
Penetration Rate: Estimates and Policy Implications, 2006. This range 
is based on calculations, using estimates from a stratified random 
sample of data from 2004. Given the nature of the sample the estimates 
cannot be extrapolated to communities excluded from NFIP, New York 
City, and communities in Puerto Rico, Virgin Islands, Guam, and 
American Samoa. Assumptions made in calculating compliance rate were: 
(1) The number of policies underwritten by private insurers is 7 
percent of the number in Special Flood Hazard Areas (SFHA) by NFIP; (2) 
85 percent of mortgages in SFHAs are subject to the mandatory purchase 
requirement; and (3) The market penetration rates for homes that have 
mortgages but are not subject to the mandatory purchase requirement is 
38 percent (the market penetration rate for homes where the probability 
of a mortgage is low or uncertain). As with any statistical sample 
there is error associated with the estimates. Certain regions included 
estimates with considerable uncertainty, and a larger sample size would 
be needed to make more definitive conclusions. 

[22] GAO, Flood Map Modernization: Program Strategy Shows Promise, but 
Challenges Remain, GAO-04-417 (Washington, D.C.: Mar. 31, 2004). 

[23] National Flood Insurance Reform Act of 1994, § 575. 42 U.S.C. 
§4101. 

[24] According to FEMA, the almost 34 percent includes both new 
preliminary and effective maps. 

[25] GAO-07-169. 

[26] GAO, Federal Management Emergency Management Agency: Improvements 
Needed to Enhance Oversight and Management of the National Flood 
Insurance Program, GAO-06-119 (Washington, D.C.: Oct. 18, 2005). 

[27] GAO-07-1078. 

[28] GAO, National Flood Insurance Program: Preliminary Views on FEMA's 
Ability to Ensure Accurate Payments on Hurricane-Damaged Properties, 
GAO-07-991T (Washington, D.C.: June 2007). 

[29] Department of Homeland Security, Office of Inspector General, 
Interim Report: Hurricane Katrina: A Review of Wind Versus Flood 
Issues, OIG-07-62. (Washington, D.C.: July 2007). 

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