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entitled 'Flood Insurance: Options of Addressing the Financial Impact 
of Subsidized Premium Rates on the National Flood Insurance Program' 
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Report to the Ranking Member, Committee on Banking, Housing, and Urban 
Affairs, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

November 2008: 

Flood Insurance: 

Options for Addressing the Financial Impact of Subsidized Premium Rates 
on the National Flood Insurance Program: 

Flood Insurance: 

GAO-09-20: 

GAO Highlights: 

Highlights of GAO-09-20, a report to the Ranking Member, Committee on 
Banking, Housing, and Urban Affairs, U.S. Senate. 

Why GAO Did This Study: 

The Federal Emergency Management Agency (FEMA), the Department of 
Homeland Security (DHS) agency that administers the National Flood 
Insurance Program (NFIP), estimates that subsidized properties—those 
that receive discounted premium rates that do not fully reflect the 
properties’ actual flood risk—experience as much as five times the 
flood damage as properties that do not qualify for subsidized rates. 
Almost one in every four residential policies has subsidized rates that 
are on average 35-40 percent of the full-risk rate. Unprecedented 
losses from the 2005 hurricane season and NFIP’s periodic need to 
borrow from the Department of the Treasury to pay flood insurance 
claims has raised concerns about the impact that subsidized premium 
rates have on the long-term financial solvency of NFIP. GAO designated 
NFIP as high-risk in March 2006; as of June 2008, NFIP’s debt stood at 
$17.4 billion. 

This report (1) provides information on NFIP’s inventory of subsidized 
properties and (2) examines NFIP’s current approach to subsidized 
properties and the advantages and disadvantages of options for reducing 
the costs associated with these properties. To do this work, GAO 
analyzed data on policies and claims and collected available data about 
subsidized properties. GAO also reviewed applicable reports and 
interviewed relevant agency, state, and private sector officials. In 
its written comments, DHS expounded upon several topics discussed in 
this report. 

What GAO Found: 

While it constitutes a declining percentage of all NFIP policies, the 
number of properties receiving subsidized premium rates has grown since 
1985; by 2007 it was at its highest point in almost 30 years. According 
to FEMA, this growth resulted from several factors, including a growing 
number of mortgages with mandatory flood insurance purchase 
requirements and greater enforcement of these requirements, the longer-
than-expected life of the structures that are eligible for subsidies, 
and increased awareness of the dangers of floods from several major 
recent disasters and increased NFIP marketing efforts. To date, more 
than half of the subsidized policies are concentrated in five states 
with relatively high flood risk—California, Florida, Louisiana, New 
Jersey, and Texas. Current low participation rates—around 50 percent of 
single-family homes in high-risk areas—leave room for substantial 
growth in the number of NFIP policies, many of which would be likely to 
receive subsidized rates. Because of their relatively high loss 
experience and lower premium rates, the policies receiving subsidized 
rates have been a financial burden on the program, with total claims 
exceeding premiums by $962 million over the period from 1986 through 
2004, before the large losses from the 2005 hurricanes. Without changes 
to the program, the number of subsidized properties will likely 
continue to grow, increasing the potential for future NFIP operating 
deficits. 

As Congress evaluates the impact of subsidized premium rates, it is 
faced with balancing the public policy goals of charging premium rates 
that fully reflect actual risks, encouraging broad program 
participation through affordable rates, and limiting costs to 
taxpayers. While the current program of property-based subsidies and 
voluntary mitigation efforts—steps taken to reduce a property’s flood 
risk such as relocation or elevation—encourages broad program 
participation, it is unlikely to substantially reduce the adverse 
financial impact of subsidized properties. GAO identified three options 
for addressing the financial impact of subsidized properties on the 
NFIP, each with advantages and disadvantages. One option would be to 
increase mitigation efforts, including making mitigation mandatory. 
Mitigation could help reduce flood losses, but the increased funding 
for such efforts could be high. A second option, eliminating or 
reducing subsidies, could improve NFIP’s financial stability by 
increasing the number of policies that more accurately reflect the risk 
of flooding. However, the resulting higher premium rates could reduce 
NFIP participation and could meet resistance from local communities. A 
third option would be to target subsidies based on financial need, 
which could help ensure that only those in need receive subsidies, with 
the rest paying full-risk rates. However, it could be challenging for 
FEMA to develop and administer such a program in the midst of ongoing 
management challenges. While the inherent difficulty in determining 
premium rates adequate to cover potentially volatile and at times 
catastrophic flood losses means that the potential for the program to 
incur future operating deficits will always exist, implementing any or 
a combination of these options could significantly reduce the adverse 
financial impact of subsidies on NFIP. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-20]. For more 
information, contact Orice Williams at (202) 512-8678 or 
williamso@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

The Growing Inventory of Subsidized Properties Has Contributed to 
NFIP's Operating Losses: 

Several Options Exist for Addressing the Financial Impact of Subsidized 
Properties on NFIP, but Each Option Involves Trade-offs: 

Agency Comment and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Some Areas of the Country That Appear to Have a Potential 
for an Increase in the Number of NFIP Policies: 

Appendix III: Comments from the Department of Homeland Security: 

Appendix IV: GAO Contact and Staff Acknowledgements: 

Tables: 

Table 1: Overview of the Authorities, Purpose and Funding, and Planning 
and Cost-Share Requirements of FEMA Mitigation Assistance Options: 

Table 2: Number of Subsidized Policies, Repetitive Loss Properties, and 
Properties Mitigated by Program Type, Fiscal Years 1997-2008: 

Table 3: Advantages and Disadvantages of Options for Addressing NFIP's 
Subsidized Premium Rates: 

Table 5: Demographics and Other Characteristics of the Five Counties 
Selected for Site Visits: 

Table 6: NFIP Policies in Force and Cumulative Claims Paid in the Five 
Selected Counties: 

Table 7: Comparison of Repetitive Loss Properties Historically (1978- 
2007) and Current (as of December 31, 2007) in the Five Selected 
Counties: 

Figures: 

Figure 1: Changes in the Percentage and Number of Residential NFIP- 
Subsidized Policies by Year, from 1978 to 2007: 

Figure 2: Subsidized and Total Flood Insurance Policies by State as of 
December 31, 2007: 

Abbreviations: 

BFE: base flood elevation: 

CBO: Congressional Budget Office: 

DHS: Department of Homeland Security: 

FEMA: Federal Emergency Management Agency: 

FIRM: Flood Insurance Rate Map: 

FMA: Flood Mitigation Assistance: 

HMGP: Hazard Mitigation Grant Program: 

ICC: Increased Cost of Compliance: 

PDM: Pre-Disaster Mitigation: 

RFC: Repetitive Flood Claims: 

NFIP: National Flood Insurance Program: 

SBA: Small Business Administration: 

SFHA: Special Flood Hazard Area: 

SRL: Severe Repetitive Loss Pilot Program: 

United States Government Accountability Office: 
Washington, DC 20548: 

November 14, 2008: 

The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban affairs: 
United States Senate: 

Dear Senator Shelby: 

In 2007, about 1.2 million--or almost one out of four--residential 
flood insurance policies covered by the National Flood Insurance 
Program (NFIP) continued to be sold at highly discounted rates that did 
not fully reflect the actual risk of flood damage (known as subsidized 
rates).[Footnote 1] The Federal Emergency Management Agency (FEMA), 
which is the Department of Homeland Security agency that administers 
NFIP, estimates that properties covered by policies with subsidized 
rates experience as much as five times more flood damage than compliant 
new structures experience that are charged rates that aim to reflect 
the actual risk of flooding (full-risk rates). Given that subsidized 
rates average 35 to 40 percent of what full-risk rates would be on the 
same properties, these policies represent a financial drain on the 
program. Over the years, the program has had to borrow periodically 
from the U.S. Treasury. Largely as a result of claims associated with 
the 2005 hurricane season, the program's outstanding debt stands at 
$17.4 billion as of June 2008. 

The National Flood Insurance Act of 1968 authorized subsidized rates to 
encourage participation in NFIP.[Footnote 2] Specifically, the act 
authorizes subsidized rates for many existing properties in high-risk 
locations known as Special Flood Hazard Areas (SFHA) that otherwise 
would have been charged higher premiums, with the justification that 
these properties were built before Flood Insurance Rate Maps (FIRM) 
became available and the level of risk was clearly understood.[Footnote 
3] But critics of the subsidies have argued that subsidized rates 
should be discontinued for several reasons. Critics argue, for example, 
that some of the individuals receiving subsidies may be able to afford 
full-risk premiums and that the availability of subsidized rates may 
actually create a disincentive for property owners to mitigate their 
properties to reduce the risk of flood damage.[Footnote 4] 

In March 2006, we designated NFIP as high-risk, in part because of the 
program's financial condition and inability to repay funds borrowed 
from the U.S. Treasury to cover the catastrophic flood losses resulting 
from the 2005 hurricanes. More recent flooding in the Midwest and from 
the 2008 hurricane season are likely to reignite persistent questions 
about the program's long-term financial solvency and the impact of 
subsidized premiums on its long-term financial health. To address these 
questions, as agreed with your staff, this study (1) provides 
information on NFIP's inventory of subsidized properties and their 
financial impact on the program and (2) examines NFIP's current 
approach to managing its inventory of subsidized properties and the 
advantages and disadvantages of options for reducing or eliminating the 
financial impact of properties insured at subsidized rates. 

To address these objectives, we analyzed NFIP data on flood insurance 
policies, including both subsidized and full-risk premiums and claims. 
We assessed the reliability of these data by gathering and analyzing 
available information about how the data were created and maintained 
and performed electronic tests of required data elements. We determined 
that the data were sufficiently reliable for the purposes of this 
report. We also analyzed NFIP's legislative history and examined FEMA's 
implementation of legislative requirements authorizing subsidized rates 
for certain properties in high risk locations. In addition, we 
judgmentally selected and visited five counties that experienced 
various types of flooding and had large numbers of subsidized 
properties in order to more fully understand similarities and 
differences in how NFIP operated at the local level.[Footnote 5] During 
our site visits we met with local floodplain managers, property tax 
assessors, building permit officials, civil engineers, real estate 
agents, insurance agents, claims adjusters, and other relevant parties. 
We interviewed officials from the five FEMA regional offices 
responsible for these counties and spoke with representatives from 
private companies that collected and sold data on real estate 
transactions and values, for marketing purposes. Finally, we spoke with 
Congressional Budget Office (CBO) staff about its study of NFIP 
properties and we analyzed various other studies on relevant flood 
insurance issues.[Footnote 6] Further details about our scope and 
methodology are included in appendix I. 

We conducted this performance audit from December 2006 to November 2008 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Results in Brief: 

While it constitutes a declining percentage of all NFIP policies, the 
number of properties receiving subsidized premium rates has grown 
fairly consistently over the last 20 years, and the relatively high 
loss experience of these properties has continued to undermine the 
financial condition of the program. Despite initial expectations that 
the number of properties eligible for subsidized rates would decline 
over time, the number of policies with subsidized rates are at their 
highest point in almost 30 years. As of December 2007, there were about 
1.2 million active residential policies--or almost 23 percent of all 
properties covered by NFIP. According to FEMA, the increase in the 
number of policies receiving subsidized rates is the result of several 
factors, including the following: (1) a growing number of mortgages 
with mandatory flood insurance purchase requirements and greater 
enforcement of those requirements, (2) the longer-than-expected life of 
the structures that are eligible for subsidies, and (3) an increased 
awareness in recent years of the dangers of floods following several 
major disasters and increased NFIP marketing efforts.[Footnote 7] Of 
these approximately 1.2 million policies, 57 percent are located in 
five states with relatively high flood risk: California, Florida, 
Louisiana, New Jersey, and Texas. In addition, current low program 
participation rates leave room for substantial growth in the number of 
NFIP policies, including subsidized properties. According to a 2006 
study, for instance, only about half of the single-family homes in 
SFHAs had flood insurance.[Footnote 8] While it is not clear what 
percentage of any new policies might receive subsidized rates, FEMA 
officials said that any increase would depend largely on the location 
of future policyholders. Policies receiving subsidized rates have been 
a financial burden on the program, resulting in an operating deficit of 
$962 million for the years 1986 through 2004, a period before the large 
losses resulting from the hurricanes of 2005.[Footnote 9] Adding the 
2005 hurricanes to this period, the operating deficit for subsidized 
policies increased to $6.3 billion. Policies receiving subsidized rates 
also account for the majority of repetitive loss properties--properties 
that have experienced multiple flood losses--which make up only around 
1 percent of the total polices but have accounted for about 30 percent 
of claims dollars paid. Without changes to the program, the number of 
subsidized properties will likely continue to grow, increasing the 
likelihood that NFIP will experience ongoing operating deficits. 

As Congress evaluates whether to maintain the current system of NFIP 
subsidies or make changes, it is faced with balancing the often 
competing public policy goals of charging premium rates that fully 
reflect actual risks (and thus helping improve the financial condition 
of NFIP), encouraging broad participation in natural catastrophe 
insurance programs by maintaining affordable rates, and limiting 
taxpayer costs before and after a disaster. While the current system of 
subsidies and primarily voluntary mitigation might promote broad 
participation, it results in rates that do not reflect the actual risks 
of flooding and an inventory of subsidized properties that is not 
likely to be reduced in number. We discuss three broad public policy 
options for addressing the financial impact of subsidized properties on 
the financial solvency of NFIP: 

* increase mitigation efforts, 

* eliminate or reduce use of subsidies, and: 

* target use of subsidies based on the financial need of the property 
owner. 

Each of the options we identified has both advantages and disadvantages 
in terms of the impact on the program's public policy goals and would 
involve trade-offs that would have to be weighed. For instance, 
substantially expanding mitigation efforts would help reduce losses 
from flood damage and could ultimately limit costs to taxpayers by 
decreasing the number of subsidized properties, but would require 
increased funding for FEMA's mitigation programs. Eliminating or 
reducing the subsidies would help ensure that premium rates more 
accurately reflect the actual risk of loss, an outcome that could 
motivate more homeowners to mitigate. However, the resulting higher 
premiums could lead some homeowners to discontinue or not purchase 
coverage, thus reducing participation in NFIP and potentially 
increasing the costs to taxpayers of providing disaster assistance in 
the event of a catastrophe. Targeting subsidies based on need--through 
a means test, for example--is an approach used by other federal 
programs and could help ensure that those needing the subsidy would 
have access to it and retain their coverage. Depending on how such a 
program was implemented, NFIP might be able to charge more participants 
full-risk rates. However, raising premium rates for some participants 
could also decrease program participation, and may discourage low- 
income property owners from participating in NFIP if they were required 
to prove that they met the requirements for a subsidy. It might also be 
a challenge for FEMA to implement this option in the midst of other 
ongoing management challenges. While the inherent difficulty in setting 
premium rates adequate to cover potentially volatile and at times 
catastrophic flood losses means that the potential for the program to 
incur future operating deficits will always exist, implementing any or 
a combination of these options could significantly reduce the adverse 
financial impact of subsidies on NFIP. 

We provided a draft of this report to the Department of Homeland 
Security (DHS) for comment. It provided written comments that are 
reprinted in appendix III. In its written comments, DHS expounded upon 
several topics discussed in this report. First, DHS noted that it is 
aware of the financial impact of subsidized and repetitive loss 
properties on NFIP, and stated that while it has proposed a number of 
initiatives through the years, most of these were not welcomed by 
stakeholders. Second, DHS noted that amendments to current statutes and 
rules would be needed if FEMA were to require mitigation via a grant 
program beyond the substantial damage provision that currently is the 
only provision that triggers mandatory mitigation. Third, DHS 
recognized that a needs-based subsidy could be beneficial, but it 
recommended that the burden of making needs-based determinations be 
placed on someone other than the insurance agent and that a discussion 
be held on how the costs of discounted premiums would be borne. DHS 
also provided technical comments, which we have incorporated as 
appropriate. 

Background: 

Flooding is the most widespread natural hazard in the country, 
affecting virtually every state. From February 1978 through August 
2008, there were 90 significant flood events.[Footnote 10] Since its 
inception in 1968, NFIP has sought to have local communities adopt 
floodplain management ordinances and offered flood insurance to their 
residents in an effort to reduce the need for government assistance 
after a flood event. Premium subsidies were seen as a way to achieve 
the program's objectives by ensuring that owners of existing properties 
in flood zones could afford flood insurance. The authority for 
subsidized rates was therefore included in the National Flood Insurance 
Act of 1968 as an incentive for communities to join the program by 
adopting and enforcing floodplain management ordinances that would 
reduce future flood losses, with the intent that the subsidies would be 
only a part of an interim solution to long-term adjustments in land 
use. The first $35,000 of any subsidized policy for a one-to-four 
family residential property, and the first $100,000 of any other 
residential property, receives the NFIP subsidy; amounts of insurance 
in excess of $35,000 and $100,000, respectively, are charged full-risk 
rates.[Footnote 11] On average, the premium for a subsidized policy in 
a high-risk flood zone is higher than the premium on a full-risk policy 
in the same zone because properties with full-risk rates have either 
been built to newer flood-resistant building codes or have been 
mitigated to reduce flood risks and thus are generally less flood prone 
than properties that are eligible for subsidized rates. For example, 
the average annual subsidized premium in 2007 for properties located in 
the highest-risk zones was about $880, while the average annual premium 
for properties in the same zones paying full-risk rates was about $379. 

The program has three components: (1) the provision of flood insurance, 
as mentioned above; (2) the requirement that participating communities 
adopt and enforce floodplain management regulations; and (3) the 
identification and mapping of floodplains. Community participation in 
NFIP is voluntary. However, communities must join NFIP and adopt FEMA- 
approved building standards and floodplain management strategies in 
order for their residents to purchase flood insurance. Participating 
communities can receive discounts on flood insurance if they establish 
floodplain management programs that go beyond the minimum requirements 
of NFIP. FEMA can suspend communities that do not comply with the 
program, and communities can withdraw from the program. Currently, more 
than 20,000 communities participate in NFIP. 

FIRMs, which show the level of flood risk in various areas and assign a 
flood zone designation to each area based on its risk level, are used 
to set premium rates, among other things.[Footnote 12] The risk levels 
range from high to low risk depending on the risk of flooding.[Footnote 
13] Structures used to secure loans from a federally regulated lending 
institution that are deemed high-risk or high-risk coastal are required 
to have flood insurance. For structures deemed to have moderate to low 
risk of flooding, the purchase of flood insurance is voluntary. FIRMs 
are also used to determine whether a structure is eligible for rate 
subsidies. Structures built after a community's FIRM was published must 
be built to NFIP building standards and pay full-risk rates. 
Communities also use the maps to establish minimum building standards 
designed to reduce the impact of flooding, and lenders use them to 
identify which property owners are required to purchase flood 
insurance. 

Once communities join NFIP and are mapped, structures that were built 
before the FIRM--pre-FIRM structures--become eligible for subsidized 
rates. Pre-FIRM structures generally are at a high risk of flooding 
because they are located below the area's base flood elevation (BFE), 
which is the computed elevation to which floodwater is anticipated to 
rise during a flood that is estimated to have a 1 percent chance of 
occurring annually. To lessen the flood risk level, pre-FIRM structures 
can be mitigated. FEMA recognizes the following steps for mitigating 
residential pre-FIRM structures: (1) elevation of structures to or 
above their BFE, (2) relocation of structures to a higher area, or (3) 
demolition of structures. Mitigation of pre-FIRM properties is 
voluntary unless a property is substantially damaged or the owner 
undertakes substantial improvement.[Footnote 14] In these cases, the 
structure must be repaired or renovated to meet the same standards as 
new construction. Unmitigated existing pre-FIRM properties are eligible 
for subsidized rates for the life of the properties. As owners sell 
their subsidized properties, the new owners also become eligible for 
the subsidized rates, and subsidies apply even if the owners 
discontinue their insurance coverage and do not purchase insurance 
again until years later. 

Mitigation activities have always been part of NFIP, but it was not 
until the 1988 passage of the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act that FEMA received the authority to fund 
mitigation projects for all types of disasters, including 
flooding.[Footnote 15] Later, the National Flood Insurance Reform Act 
of 1994 gave FEMA the authority to carry out a flood-only mitigation 
assistance program to help policyholders reduce the risk of flood 
damage to individual properties.[Footnote 16] In 2004, the Bunning- 
Bereuter-Blumenauer Flood Insurance Reform Act of 2004 authorized two 
additional grant programs specifically for properties that experienced 
repetitive flooding and mandated increased premiums if property owners 
refused to mitigate.[Footnote 17] Each program has different types of 
requirements, purposes, and appropriations. FEMA uses a cost-benefit 
analysis to determine the cost-effectiveness of proposed mitigation 
projects and to rank the projects in order of priority. Policyholders 
can also buy Increased Cost of Compliance (ICC) Coverage--a component 
of the standard flood insurance policy--which provides up to $30,000 
above the insured policy amount for mitigating flood-damaged properties 
that meet certain criteria. Table 1 summarizes the five mitigation 
programs and ICC. 

Table 1: Overview of the Authorities, Purpose and Funding, and Planning 
and Cost-Share Requirements of FEMA Mitigation Assistance Options: 

Program: Flood Mitigation Assistance (FMA); 
Authorities: Section 1366 of the National Flood Insurance Act of 1968, 
as added by the National Flood Insurance Reform Act of 1994; 
Purpose and fiscal year 2007 funding levels: To implement cost-
effective measures that reduce or eliminate the long-term risk of flood 
damage to buildings, manufactured homes, and other structures insured 
under NFIP. Appropriation for fiscal year was $34 million; 
Planning requirements: FEMA approved local flood mitigation plan 
meeting required prior to award; no state plan required; 
Cost-share requirement: Up to 75 percent federal, minimum 25 percent 
nonfederal match required. Reduced match (10 percent nonfederal) for 
states with approved state mitigation plans meeting hazard mitigation 
planning requirements. 

Program: Repetitive Flood Claims (RFC); 
Authorities: Section 1323 of the NFIA of 1968, as added by the Flood 
Insurance Reform Act of 2004; 
Purpose and fiscal year 2007 funding levels: To reduce or eliminate the 
long-term risk of flood damage to structures insured under NFIP that 
have had one or more claim payments for flood damage. Appropriation for 
fiscal year 2008 was $10 million; 
Planning requirements: FEMA approved State/Tribal Standard or Enhanced 
hazard mitigation plan required prior to award; no local plan required; 
Cost-share requirement: Up to 100 percent federal funding (no 
nonfederal match requirement). 

Program: Severe Repetitive Loss Pilot Program (SRL); 
Authorities: Section 1361A of the NFIA of 1968, as added by the Bunning-
Bereuter- Blumenauer Flood Insurance Reform Act of 2004; 
Purpose and fiscal year 2007 funding levels: To reduce or eliminate the 
long-term risk of flood damage to severe repetitive loss residential 
properties and the associated drain on the National Flood Insurance 
Fund from such properties. Combined appropriation for fiscal year 2006 
through FY2008 was $160 million.[A]; 
Planning requirements: FEMA approved State/Tribal Standard or Enhanced 
hazard mitigation plan required prior to award; 
Cost-share requirement: Up to 75 percent federal, minimum 25 percent 
nonfederal match required. Reduced match (10 percent nonfederal) for 
states with approved state mitigation plans meeting hazard mitigation 
planning requirements. 

Program: Hazard Mitigation Grant Program (HMGP); 
Authorities: Section 404 of the Robert T. Stafford Disaster Relief and 
Emergency Relief Act; 
Purpose and fiscal year 2007 funding levels: To provide funds to 
states, territories, Indian Tribal governments, and communities to 
reduce or eliminate future risks to lives and property from natural 
hazards, in accordance with identified priorities. Appropriation for 
fiscal year 2008 was $324.7 million; 
Planning requirements: FEMA approved local mitigation plan prior to 
award; 
Cost-share requirement: Up to 75 percent federal; nonfederal match does 
not need to be in cash; in-kind services or materials may be used. 

Program: Pre-Disaster Mitigation (PDM); 
Authorities: Title I of the Disaster Mitigation Act of 2000; 
Purpose and fiscal year 2007 funding levels: To provide funds to 
states, territories, Indian Tribal governments, and communities for 
hazard mitigation planning and the implementation of mitigation 
projects prior to a disaster event. Appropriation for fiscal year 2008 
was $114 million; 
Planning requirements: FEMA-approved State/Tribal Standard or Enhanced 
hazard mitigation plan; 
Cost-share requirement: Up to 75 percent federal, minimum 25 percent 
nonfederal match required although small, impoverished communities may 
be eligible for up to 90 percent federal cost-share. 

Program: Increased Cost of Compliance (ICC) Coverage; 
Authorities: Section 1304 of the NFIA of 1968, as amended by the 
National Flood Insurance Reform Act of 1994; 
Purpose and fiscal year 2007 funding levels: To provide up to $30,000 
to policyholders to help cover the cost of mitigation measures for 
flood-damaged properties. This amount is in addition to building 
coverage under the standard flood insurance policy. Funded from 
premiums collected; 
Planning requirements: Not applicable; 
Cost-share requirement: No cost-share requirement. However, ICC may be 
used in concert as nonfederal matching funds with the FEMA mitigation 
grants. 

Source: FEMA. 

[A] Fiscal year 2006 and fiscal year 2007 appropriations had not been 
used and therefore were combined with fiscal year 2008 appropriations. 

[End of table] 

The Growing Inventory of Subsidized Properties Has Contributed to 
NFIP's Operating Losses: 

NFIP's inventory of properties receiving subsidized premium rates has 
grown over the past 20 years, hindering the program's ability to pay 
claims without borrowing from the Treasury. While the percentage of 
policies receiving subsidies has dropped since 1978 to 23 percent of 
all policies as of December 2007, the number of subsidized properties 
has continued to increase. In addition, despite earlier expectations 
that the number of subsidized properties would decrease over time, for 
several reasons the number of policies with subsidized rates is at its 
highest point since 1980. Further, because of current low NFIP 
participation rates, there appears to be room for substantial growth in 
the number of NFIP policies, many of which are likely to receive 
subsidized premium rates. The properties receiving subsidized rates 
have been a financial burden on the program because of their relatively 
high loss experience and subsidized rates that do not reflect the 
actual risk of flooding.[Footnote 18] Subsidized properties also 
account for the majority of repetitive loss properties--properties that 
have experienced multiple flood losses--which make up around 1 percent 
of the total policies but 30 percent of the claims dollars paid. 

The Number of Policies Receiving Subsidized Rates Has Increased due to 
a Number of Factors: 

While the percentage of residential subsidized properties has dropped 
over time, the number of subsidized properties has fluctuated since 
NFIP began but has grown fairly consistently over the last 20 years 
(see figure 1). Specifically, the percentage of residential subsidized 
policies has dropped since the early years of the program from 77 
percent in 1978 to 23 percent of all policies as of December 2007. 
[Footnote 19] But the number of policies with subsidized rates is 
at its highest point since 1978, despite earlier expectations that the 
number of subsidized properties would decrease substantially. According 
to FEMA, in the early years of the program it used subsidies to 
encourage participation in the program, and because of the high number 
of pre-FIRM structures, the number of policies with subsidized rates 
reached a high of about 1.09 million in 1980. Subsequently, between 
1980 and 1985, aggressive annual rate increases for subsidized policies 
corresponded with a reduction in the number of subsidized policies, 
which fell to a low of about 705,000 in 1985. However, the number of 
policies with subsidized rates has increased nearly every year since 
1986, reaching a high of almost 1.13 million in 2007.[Footnote 20] 

Figure 1: Changes in the Percentage and Number of Residential NFIP- 
Subsidized Policies by Year, from 1978 to 2007: 

This figure is a combination line graph showing changes in the 
percentage and number of residential NFIP-subsidized policies by year, 
from 1978 to 2007. The X axis represents the year, and the Y axis 
represents number of policies in millions. The lines represent the 
number of subsidized residential units (in millions) and percentage of 
total units. 

Year: 1978; 
Number of subsidized residential units (in millions): 0.74; 
Percentage of total units: 76.6%. 

Year: 1980; 
Number of subsidized residential units (in millions): 1.09; 
Percentage of total units: 60.2%. 

Year: 1985; 
Number of subsidized residential units (in millions): 0.71; 
Percentage of total units: 39.4%. 

Year: 1990; 
Number of subsidized residential units (in millions): 0.85; 
Percentage of total units: 38.3. 

Year: 1995; 
Number of subsidized residential units (in millions): 0.99; 
Percentage of total units: 32.6%. 

Year: 2000; 
Number of subsidized residential units (in millions): 1.04; 
Percentage of total units: 25.6%. 

Year: 2004; 
Number of subsidized residential units (in millions): 1.05; 
Percentage of total units: 24.4%. 

Year: 2005; 
Number of subsidized residential units (in millions): 1.07; 
Percentage of total units: 24.0%. 

Year: 2006; 
Number of subsidized residential units (in millions): 1.11; 
Percentage of total units: 22.7%. 

Year: 2007; 
Number of subsidized residential units (in millions): 1.13; 
Percentage of total units: 21.7%. 

[Refer to PDF for image] 

Source: GAO analysis of NFIP data. 

Note: Policies measured by earned exposure. 

[End of figure] 

A number of factors help explain this increase. Specifically, according 
to FEMA, there has been an increase in the number of mortgages with 
mandatory purchase requirements for flood insurance--that is, mortgages 
on structures that are located in SFHAs. The Flood Disaster Protection 
Act of 1973 made flood insurance mandatory for mortgages from federally 
regulated lenders on buildings located in SFHAs. These lenders are 
required to check the current FIRM to determine whether the structure 
is in the SFHA at the time a mortgage is made.[Footnote 21] FEMA 
officials also told us that since the 1973 act, the increase in the 
number of mortgages subject to the flood insurance requirement, coupled 
with greater enforcement of this requirement by financial regulators in 
recent years, had resulted in an increased number of flood insurance 
policies, including policies with subsidized rates. According to FEMA, 
many of these mortgages were on buildings that were constructed before 
the most recent FIRMs were in place, making the policies eligible for 
the subsidized rates. Additionally, the populations of coastal 
communities have grown steadily over the last 28 years. These 
communities have relatively high concentrations of properties in SFHAs 
that are required to have flood insurance, including properties that 
qualified for subsidized premiums. 

Moreover, FEMA said that the longer-than-expected life of structures 
eligible for subsidies has made decreasing the subsidized property 
inventory more difficult. Some in Congress, at the time NFIP was 
created, assumed that buildings would be torn down as they aged and any 
new structures, which would have to meet more strict building codes, 
would be ineligible for subsidized rates. However, according to FEMA, 
existing structures have been demolished at a much lower rate than 
expected and reductions in the overall subsidized property inventory 
have not occurred. Moreover, some older structures have been renovated 
and thus may retain their subsidies. And because subsidized premiums 
are tied to the property and not the policyholder, properties have 
retained their subsidies even as ownership has changed. 

Other factors have also contributed to the increase in the number of 
subsidized properties. For example, FEMA told us that SFHA boundaries 
have been modified through its map modernization program, resulting in 
more properties in SFHAs, and many of these properties are eligible for 
subsidized rates. Moreover, FEMA told us that many homeowners purchased 
flood insurance after seeing the devastation caused by the hurricanes 
of 2005. FEMA officials commented that many homeowners believed that 
there was little to no chance that their homes would be flooded, but 
that after the 2005 hurricanes, these homeowners had a better 
understanding of the reality of their actual flood risk. FEMA noted 
that a community's policy inventory often increases sharply after 
experiencing a flood. Another possible reason for the increase is that 
disaster assistance for repair or replacement of buildings or 
manufactured (mobile) homes and/or personal property in SFHAs can 
trigger a requirement to purchase flood insurance. In addition, 
according to FEMA, the recent increase in its marketing efforts through 
its FloodSmart campaign has contributed to the increase in policies. 
[Footnote 22] This program was designed to educate and inform partners, 
stakeholders, property owners, and renters about insuring their homes 
and businesses against flood damage. In 2004, the year in which 
FloodSmart was implemented, NFIP had 1.05 million policies with 
subsidized rates. By 2007, this number had increased 8 percent to 
almost 1.13 million.[Footnote 23] However, for the reasons discussed 
earlier, proving a causal relationship is difficult. According to FEMA 
officials, most populated floodplains participate in NFIP, but 
communities are still joining.[Footnote 24] For example from 1978 to 
2007, the number of communities participating in NFIP has steadily 
increased from 15,999 to 20,474. Additionally, FEMA expects as many as 
300 new communities to join NFIP in fiscal year 2008, and by the end of 
the first quarter, 141 communities had already joined.[Footnote 25] 

As of December 31, 2007, NFIP included almost 5.3 million active flood 
insurance policies on residential properties, nearly 23 percent (1.19 
million) of which were charged subsidized premiums. Figure 2 details 
the number of total residential NFIP policies in each state, as well as 
the number of those policies that received subsidized premium rates. 
Approximately 70 percent (3.69 million) of the total policies were 
concentrated in five states: California, Florida, Louisiana, New 
Jersey, and Texas. Furthermore, 57 percent (673,964) of the almost 1.2 
million residential policies with subsidized premiums were located in 
the same five states. Because of the high number of policies, these 
states have historically accounted for the majority of claims losses 
paid out as well as premium dollars received by the program. According 
to FEMA data, these states accounted for 59 percent of claims losses 
from 1978 to 2004 and 67 percent of premium dollars. Taking the 2005 
hurricanes into account, the same numbers for 1978 to 2007 changed to 
70 percent of claims losses and 66 percent of premium dollars.[Footnote 
26] 

Figure 2: Subsidized and Total Flood Insurance Policies by State as of 
December 31, 2007: 

This figure is a stacked vertical bar graph showing subsidized and 
total flood insurance policies by state as of December 31, 2007, as 
follows: 

[Refer to PDF for image] 

State: Florida; 	
Total: 2,118,690; 
Subsidized: 307,227. 

State: Texas; 	
Total: 638,445; 
Subsidized: 62,875. 

State: Louisiana; 	
Total: 470,597; 
Subsidized: 121,658. 

State: California; 	
Total: 248,092; 
Subsidized: 95,801. 

State: New Jersey; 	
Total: 214,423; 
Subsidized: 86,403. 

State: South Carolina; 	
Total: 190,248; 
Subsidized: 28,891. 

State: New York; 	
Total: 137,758; 
Subsidized: 55,021. 

State: North Carolina; 	
Total: 126,409; 
Subsidized: 15,976. 

State: Virginia; 	
Total: 101,020; 
Subsidized: 17,226. 

State: Georgia; 	
Total: 84,403; 
Subsidized: 16,952. 

State: Mississippi; 
Total: 71,666; 
Subsidized: 15,498. 

State: Maryland; 	
Total: 63,059; 
Subsidized: 11,248. 

State: Pennsylvania; 	
Total: 57,149; 
Subsidized: 27,403. 

State: Hawaii; 	
Total: 55,163; 
Subsidized: 17,689. 

State: Alabama; 	
Total: 51,087; 
Subsidized: 9,219. 

State: Massachusetts; 	
Total: 46,141; 
Subsidized: 22,646. 

State: Illinois; 	
Total: 44,655; 
Subsidized: 28,559. 

State: Ohio; 	
Total: 35,806; 
Subsidized: 20,900. 

State: Connecticut; 	
Total: 33,294; 
Subsidized: 15,954. 

State: Arizona; 	
Total: 33,284; 
Subsidized: 8,788. 

State: Washington; 	
Total: 32,089; 
Subsidized: 12,721. 

State: Oregon; 	
Total: 29,137; 
Subsidized: 9,280. 

State: Indiana; 	
Total: 26,704; 
Subsidized: 18,140. 

State: Michigan; 	
Total: 24,766; 
Subsidized: 14,569. 

State: Delaware; 	
Total: 23,334; 
Subsidized: 3,472. 

State: Tennessee; 	
Total: 22,233; 
Subsidized: 6,065. 

State: Missouri; 	
Total: 19,060; 
Subsidized: 10,041. 

State: Kentucky; 	
Total: 19,002; 
Subsidized: 10,249. 

State: West Virginia; 	
Total: 18,045; 
Subsidized: 10,473. 

State: Nevada; 	
Total: 15,403; 
Subsidized: 1,559. 

State: Arkansas; 	
Total: 14,959; 
Subsidized: 6,946. 

State: Colorado; 	
Total: 14,879; 
Subsidized: 5,507. 

State: New Mexico; 	
Total: 14,490; 
Subsidized: 5,982. 

State: Oklahoma; 	
Total: 13,954; 
Subsidized: 6,755. 

State: Rhode Island; 	
Total: 13,813; 
Subsidized: 6,214. 

State: Wisconsin; 	
Total: 12,165; 
Subsidized: 7,235. 

State: Nebraska; 	
Total: 10,469; 
Subsidized: 6,061. 

State: Kansas; 	
Total: 10,361; 
Subsidized: 5,980. 

State: Iowa; 	
Total: 8,973; 
Subsidized: 6,491. 

State: Minnesota; 	
Total: 7,720; 
Subsidized: 3,333. 

State: Maine; 	
Total: 7,399; 
Subsidized: 2,936. 

State: New Hampshire; 	
Total: 7,384; 
Subsidized: 3,449. 

State: Idaho; 	
Total: 6,252; 
Subsidized: 1,690. 

State: North Dakota; 	
Total: 4,071; 
Subsidized: 1,793. 

State: Utah; 	
Total: 3,820; 
Subsidized: 858. 

State: Montana; 	
Total: 3,300; 
Subsidized: 1,626. 

State: South Dakota; 	
Total: 2,629; 
Subsidized: 1,171. 

State: Vermont; 	
Total: 2,542; 
Subsidized: 1,460. 

State: Alaska; 	
Total: 2,395; 
Subsidized: 463. 

State: Wyoming; 	
Total: 2,336; 
Subsidized: 1,058. 

State: District of Colombia; 	
Total: 1,513; 
Subsidized: 101. 

Source: GAO analysis of NFIP data. 

Note: The numbers in figure 2 represent the number of active policies 
(on residential properties only). 

[End of figure] 

Low Market Penetration Leaves Room for Growth in Policies with 
Subsidized Premium Rates: 

Low market penetration for NFIP flood insurance policies, particularly 
in some areas, leaves room for growth in the number of flood insurance 
policies as FEMA continues to encourage participation in NFIP through 
FloodSmart. According to a 2006 RAND study commissioned by FEMA, there 
were approximately 3.6 million single-family homes in SFHAs nationwide, 
half of which had no flood insurance. The study also found that while 
about a third of NFIP's policies were for homes outside of SHFAs, 
NFIP's market penetration rate for such properties was only about 1 
percent. Another indicator of the potential for growth is that, 
according to FEMA data, approximately 2,000 communities do not 
participate in NFIP, and of the 20,400 that do participate, 
approximately 3,500 had no NFIP policies and 1,700 others each had only 
one policy. 

FEMA is aware of the low market penetration rates and has been making 
efforts to increase the number of flood insurance policies, largely 
through its FloodSmart campaign. To aid in this effort, FEMA recently 
purchased more detailed market penetration data, which could allow FEMA 
to target areas with particularly low participation in NFIP. While 
these data are not yet finalized, initial calculations suggest that the 
actual market penetration rate for SFHA structures could be even lower 
than what the RAND study estimated. For example, some areas of the 
Midwest and Northeast appear to have considerably lower policy volumes 
than other areas of the country, based on their flood declarations, 
cumulative flood claims payments, and population. (See app. II for a 
more detailed analysis of market penetration.) Similarly, the RAND 
study found that the Midwest and Northeast had a much lower market 
penetration than other regions of the United States. 

While it is uncertain what percentage of any new policies might be 
eligible to receive subsidized rates, FEMA officials said that any 
increase would largely depend on the location of future program 
participants. Because older structures are more likely to be pre-FIRM, 
areas of the country with older structures, such as the Midwest, are 
more likely to have a higher percentage of potentially subsidized 
properties. The lower market penetration in the Midwest, combined with 
flood risk awareness resulting from the recent Midwest floods as well 
as the FloodSmart campaign, could increase participation in NFIP, 
resulting in a higher proportion of subsidized rates than the current 
23 percent. On the other hand, FEMA said that areas of the country with 
newer structures, such as the Gulf Coast, are likely to have a lower 
percentage of subsidized policies. Most recent policy growth has been 
in these regions, so if this trend continues, future additional 
policies could have a lower proportion of subsidized rates. 

Subsidized Properties Have Contributed to NFIP's Historical Operating 
Deficits and Account for the Majority of Repetitive Loss Properties: 

The large number of subsidized properties has contributed to NFIP's 
historical operating losses through its relatively high loss experience 
and rates that do not reflect the actual risk of flooding. Therefore, 
despite the increase in policies with full-risk rates relative to 
policies with subsidized rates, policies with subsidized rates have 
continued to be a drain on the program's overall financial condition. 
For example, while there have been fewer policies with subsidized rates 
than policies with full-risk rates in every year since 1982, subsidized 
properties have accounted for more claims payments than properties 
paying full-risk premium rates in all but 5 of those years. As 
previously mentioned, subsidized premiums average about 35 to 40 
percent of the premium that would fully reflect the associated risk of 
loss. As a result, NFIP has not collected enough in premiums to cover 
the claims that FEMA estimates will be made on these properties in an 
average year.[Footnote 27] From 1986 to 2004, policies receiving 
subsidized rates resulted in a $962 million operating deficit.[Footnote 
28] This deficit occurred despite the fact that in 1986, among other 
things, FEMA finished a series of aggressive rate increases on 
subsidized properties to ensure that the premiums collected better 
reflected expected losses.[Footnote 29] However, in 2005, Hurricanes 
Katrina, Rita, and Wilma resulted in claims losses that far exceeded 
those in previous years. As a result of these Gulf Coast hurricanes, 
FEMA had to borrow $17.5 billion to pay NFIP claims. Moreover, in 2008, 
FEMA had to borrow additional funds from the Treasury to pay its 
interest payment on its outstanding debt to the Treasury. Prior to 
2005, policies with subsidized rates accounted for 58 percent of claims 
dollars paid, but because of the extraordinary nature of the 2005 
hurricanes, including that many losses occurred on properties that were 
located in moderate-to low-risk areas, properties with both subsidized 
and full-risk rated policies experienced significant losses. Of the 
total losses from the 2005 hurricanes, 29 percent were from claims paid 
on subsidized properties, while 71 percent were from full-risk 
policies. However, the operating deficit for subsidized policies 
increased substantially, to $6.3 billion. 

Properties with repetitive losses, the majority of which receive 
subsidized premium rates, have also contributed to NFIP's operating 
deficit. As previously reported, these properties account for about 1 
percent of all policies but are estimated to account for up to 30 
percent of all NFIP losses.[Footnote 30] As of March 2008, there were 
126,351 repetitive loss properties, just over 60 percent of which had 
subsidized rates. Although not all repetitive loss properties are part 
of the subsidized property inventory, given that a high proportion of 
these properties receive subsidized rates, their propensity for flood 
losses contributes to the financial risks faced by NFIP. While Congress 
has made efforts to target these properties, the number of subsidized 
properties that are also repetitive loss properties has continued to 
grow, making them an ongoing challenge to the financial stability of 
the program. 

Several Options Exist for Addressing the Financial Impact of Subsidized 
Properties on NFIP, but Each Option Involves Trade-offs: 

Because of the financial condition of NFIP and mounting losses, the 
negative financial impact that subsidized premium rates have on the 
program continues to be an area warranting ongoing attention, as we 
pointed out when placing NFIP on the high-risk list in 2006. As 
Congress continues to evaluate the appropriate role of the federal 
government in insuring natural catastrophes in light of recent events 
in the Gulf Coast region, evaluating whether to maintain the current 
system of NFIP subsidies or make changes has been an ongoing part of 
the debate, as evidenced by various bills that have been introduced in 
Congress. However, balancing the public policy goals of charging 
premium rates that fully reflect actual risks, encouraging broad 
participation in natural catastrophe insurance programs by maintaining 
affordable rates, and limiting taxpayer costs before and after a 
disaster will be an ongoing challenge. While the current system of 
subsidies and voluntary mitigation might promote broad program 
participation, it does create some exposure for taxpayers and allows 
rates that do not reflect actual risks. We discuss three broad public 
policy options for addressing the financial impact of subsidized 
properties on the financial solvency of NFIP: 

* increase mitigation efforts, 

* eliminate or reduce use of subsidies, and: 

* target use of subsidies based on the financial need of the property 
owner. 

Each of the options has both advantages and disadvantages in terms of 
how it affects the program's public policy goals. 

The Current System of Subsidies and Limited Mitigation Does Little to 
Address the Long-Term Financial Instability of NFIP: 

Subsidizing premiums can encourage participation in NFIP, especially 
among those who might not be able to afford premium rates that fully 
reflect the actual risk of flooding. Some proponents believe that 
charging actuarial risk rates could result in some property owners not 
buying any flood insurance and NFIP receiving less in total premiums 
than it would if it allowed subsidized rates. The proponents also 
assert that continuing the subsidies is also preferable to charging 
full-risk rates, because while subsidized rates do not cover the actual 
risk of loss, they at least offset a portion of the cost of providing 
postdisaster assistance to property owners who might otherwise have no 
flood insurance and pay no premiums. 

One disadvantage of the current approach is that those who receive 
subsidies are not paying premium rates that reflect the full risk of 
loss from flooding. As noted previously, not charging full-risk rates 
contributes to FEMA's challenges in maintaining the financial stability 
of NFIP. In addition, charging less than full-risk rates can send 
incorrect signals to property owners about the risks associated with 
living in certain areas and reduce incentives to undertake mitigation 
efforts because subsidized rates may distort a property owners view 
about the financial benefits of mitigation. Further, policies with 
subsidized rates could result in higher financial losses for NFIP than 
policies with full-risk rates. 

Another disadvantage of the current approach is that although FEMA has 
stated that it is generally cost-beneficial to mitigate properties, 
depending on the properties' flooding history and expected future 
losses, among others, it faces several limitations in attempting to 
reduce the number of properties receiving subsidized premium rates, 
including those properties that have the greatest negative financial 
impact on NFIP. To begin with, mitigation is generally voluntary, 
except when there has been substantial damage to the insured structure, 
and participating communities interested in NFIP mitigation funding are 
required to compete for available funding through one of the available 
mitigation programs. In addition, even when funds are made available to 
a community and property owners are interested in mitigating their 
properties, the property owners may still have to pay a portion of the 
mitigation expenses, a fact that could discourage mitigation among 
those unable or unwilling to contribute to the cost of mitigation. For 
example, local officials and real estate agents in Sonoma County, 
California, told us that ICC was the primary financial tool used by 
flooded homeowners to elevate their homes, but because ICC limits 
mitigation assistance to $30,000 and the cost of elevating a house in 
Sonoma County typically is more than twice that, some residents were 
not able to cover the additional cost and therefore could not take 
advantage of ICC funds. 

In addition, although FEMA has provided communities with information on 
which properties have had the most severe repetitive flood losses, 
current mitigation efforts in participating communities are not 
necessarily targeted at properties receiving subsidized premium rates 
that have flooded repeatedly. States and local communities determine 
their priorities, and some communities, therefore, may focus their 
mitigation efforts on activities that benefit more than one property, 
such as regrading the land to control the flow of water and building 
retaining ponds. 

Finally, although mitigation is mandatory when a property has been 
substantially damaged or renovated, mitigation may not always 
occur.[Footnote 31] If the cost of repairing a pre-FIRM structure to 
its condition before the damage occurred is equal to or greater than 50 
percent of that structure's market value before the damage, NFIP 
requires that the structure be mitigated. However, participating 
communities, not FEMA, are responsible for enforcing compliance with 
NFIP regulations and building codes, although FEMA can suspend a 
community that is not in compliance with NFIP. According to some local 
stakeholders, not all communities enforce or are able to enforce 
compliance. For example, local officials in Harris County, Texas, 
identified one pre-FIRM property owner in the county who has refused 
the county's offers to buy his property despite repeated 
offers.[Footnote 32] According to the county tax office, that property 
had a market value of $153,330 in 2007. According to NFIP data, that 
policyholder had collected over $975,000 in 15 flood claim payments 
from 1979 through 2006 for structural damage, ranging from over $3,000 
to $185,000 per payment. 

In spite of these limitations, existing mitigation efforts have 
resulted in the reduced risk of loss for a number of properties. 
However, the number of properties mitigated is small compared with the 
total number of properties receiving subsidized rates. As shown in 
table 2, nearly 30,000 properties have been mitigated with FEMA funds 
since fiscal year 1997. However, the number of policies with subsidized 
rates still increased during that same period from 1.03 million in 1997 
to almost 1.13 million in 2007.[Footnote 33] FEMA officials have 
acknowledged that mitigating properties can be difficult, at least in 
part due to the cost, time, and resources required. According to FEMA, 
the current average cost to mitigate a residential property ranges from 
$143,000 for elevating a property to $176,000 for acquiring a property. 

Table 2: Number of Subsidized Policies, Repetitive Loss Properties, and 
Properties Mitigated by Program Type, Fiscal Years 1997-2008: 

Fiscal year: 1997; 
Number of repetitive loss properties: 76,202; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
4,843; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
N/A; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 205; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/ A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: N/A. 

Fiscal year: 1998; 
Number of repetitive loss properties: 77,816; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
1,630; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
N/A; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 189; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/ A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 12. 

Fiscal year: 1999; 
Number of repetitive loss properties: 86,489; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
2,476; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
N/A; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 248; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 157. 

Fiscal year: 2000; 
Number of repetitive loss properties: 90,084; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
462; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
N/A; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 187; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 229. 

Fiscal year: 2001; 
Number of repetitive loss properties: 94,555; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
2,097; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
N/A; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 201; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 189. 

Fiscal year: 2002; 
Number of repetitive loss properties: 95,160; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
619; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
N/A; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 89; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 222. 

Fiscal year: 2003; 
Number of repetitive loss properties: 99,429; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
1,069; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
515; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 78; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 492. 

Fiscal year: 2004; 
Number of repetitive loss properties: 102,789; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
678; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
[Empty]; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 216; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 647. 

Fiscal year: 2005; 
Number of repetitive loss properties: 112,768; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
684; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
727; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 246; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): N/A; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 866. 

Fiscal year: 2006; 
Number of repetitive loss properties: 123,927; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
129; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
42; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 244; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): 41; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 1,870. 

Fiscal year: 2007; 
Number of repetitive loss properties: 127,268; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
59; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
152; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 352; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): 40; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 4,309. 

Fiscal year: 2008; 
Number of repetitive loss properties: [Empty]; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
N/A; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
[Empty]; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): N/A; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): [Empty]; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 2,447. 

Fiscal year: Total; 
Number of repetitive loss properties: [Empty]; 
Number of Properties Mitigated: Hazard Mitigation Grant Program (HMGP): 
14,746; 
Number of Properties Mitigated: Pre-Disaster Mitigation Program (PDM): 
1,436; 
Number of Properties Mitigated: Flood Mitigation Assistance (FMA): 
2,255; 
Number of Properties Mitigated: Repetitive Flood Claims (RFC): 81; 
Number of Properties Mitigated: Increased Cost of Compliance Coverage 
(ICC)a: 11,440. 

Source: GAO analysis of FEMA data. 

N/A = not applicable: 

[A] Because ICC funds can be used in concert as non-matching Federal 
funds with the FEMA mitigation grant programs that require a non- 
matching Federal fund, there may be some instances of double-counting 
among the ICC and the other programs. 

Note: Mitigation projects include elevation, relocation, and 
acquisition. HMGP, PDM, and FMA data are as of May 5, 2008. ICC data 
are as of February 29, 2008. Fiscal year 2004 and fiscal year 2005 PDM 
data were combined into a single application period. The Severe 
Repetitive Loss (SRL) Pilot Program is not included because no funding 
has been obligated as of May 2008 ($160 million has been appropriated). 
Repetitive loss property numbers are as of the end of each fiscal year. 
These numbers are slightly different from similar numbers listed in a 
prior report (GAO-08-437) because the numbers in the prior report are 
as of the end of each calendar year. PDM program started in fiscal year 
2003. The first year of RFC appropriations was fiscal year 2006. 

[End of table] 

After the passage of the Bunning-Bereuter-Blumenauer Flood Insurance 
Reform Act of 2004, FEMA officials made mitigating repetitive loss 
properties a priority, especially those with severe repetitive losses. 
FEMA has identified approximately 7,000 properties as having had 
experienced severe repetitive losses. Over 1,400 properties of these 
severe repetitive loss properties have received cumulative claims 
payments ranging from $200,000 to over several million dollars per 
property. Although each property must be subject to an individual cost- 
benefit determination to reflect its unique characteristics and 
expected future losses, because these aggregate payments were above the 
average mitigation costs, mitigation may be cost-effective for many of 
them if similar losses were expected in the future. However, FEMA 
officials told us that they did not anticipate being able to totally 
eliminate severe repetitive loss properties given the current funding 
level for the Severe Repetitive Loss Pilot Program of $160 million for 
fiscal years 2006 through 2008, and uncertainty over ongoing 
appropriations for this program. 

Options Exist That Could Help Reduce the Number of Subsidized 
Properties and Their Financial Impact on NFIP: 

Reducing the financial impact of subsidized properties on NFIP would 
generally involve either reducing the number of properties receiving 
subsidized premium rates, reducing the losses associated with these 
properties, reducing the amount of the subsidy, or some combination of 
these approaches. Whether maintaining the current program or making 
changes to NFIP subsidies, Congress will be faced with balancing often- 
competing public policy goals, which include charging premium rates 
that more fully reflect actual flood risks and help better ensure NFIP 
solvency, encouraging broad participation in natural catastrophe 
insurance programs by offering affordable rates, and limiting taxpayer 
costs before and after a disaster.[Footnote 34] We discuss three broad 
options that could help address NFIP's financial situation: (1) 
increase mitigation efforts, (2) eliminate or reduce use of subsidies, 
and (3) target use of subsidies on the financial need of property 
owners. Each of the three options has both advantages and disadvantages 
in terms of its effect on these public policy goals, which we highlight 
in table 4. We also note that the options are not mutually exclusive 
and may be used in conjunction with others, and that how an option is 
implemented can affect its advantages and disadvantages. 

Table 3: Advantages and Disadvantages of Options for Addressing NFIP's 
Subsidized Premium Rates: 

Option: Increase mitigation efforts; 
Advantages: 
* Could reduce flood losses, especially by focusing 
mitigation efforts on properties with repetitive losses; 
* Could increase the number of property owners paying full-risk rates 
by denying subsidized rates to those who refuse mitigation offers; 
* Could receive support from local communities because of potential 
positive effect of mitigation on property values; 
Disadvantages: 
* Maintaining subsidies could reduce subsidized property 
owners' motivation to undertake mitigation efforts that would reduce 
their risk of loss and their premium rate; 
* Extensive mitigation efforts could be expensive to taxpayers; 
* Extensive mitigation efforts could take years to complete and 
subsidized rates would continue to negatively affect NFIP's financial 
health in the interim; 
* Effectiveness of mitigation efforts could be limited by heavy 
reliance on local communities with varying resources. 

Option: Reduce or eliminate subsidies across the board; 
Advantages: 
* Would charge more property owners premium rates that more 
accurately reflect the risk of flood loss (decrease the inventory of 
subsidized properties); 
* Higher premium rates could motivate property owners to undertake 
mitigation in order to reduce their rates; 
* Would provide more accurate information to homeowners about their 
risk of flooding; 
Disadvantages: 
* Increased premium rates could reduce program 
participation, both at the policyholder and community level, 
potentially resulting in increased costs to taxpayers of providing 
disaster assistance for catastrophic events; 
* Could be resisted by local communities because of potential negative 
impact on residents and local economy. 

Option: Base subsidies on the financial need of policyholder; 
Advantages: 
* Would charge more property owners premium rates that more 
accurately reflect the risk of flood loss (decrease the inventory of 
subsidized properties); 
* Would continue to benefit those in greatest financial need by keeping 
rates affordable; 
* Higher premium rates for some could motivate property owners to 
undertake mitigation in order to reduce their rates; 
Disadvantages: 
* Increased premium rates for some could reduce program 
participation; 
* Requiring property owners to apply for subsidies could reduce 
participation for those in greatest need; 
* Implementing a new program in the midst of existing management and 
oversight challenges could pose additional challenges for FEMA and the 
insurance companies that sell and service flood insurance. 

Source: Summarized views of FEMA officials, state and local officials, 
insurance experts, and other stakeholders. 

Note: Variations in how each of the options is ultimately implemented 
could result in additional advantages and disadvantages. 

[End of table] 

Expanding Mitigation Efforts Could Reduce the Number of Subsidized 
Properties and Associated Losses but Would Be Costly to Taxpayers: 

One option to address the financial impact of subsidized premium rates 
on NFIP would be to substantially expand flood mitigation efforts, 
including targeting those properties that have been most costly to the 
program. This option would substantially expand the requirements of the 
Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, which 
mandated mitigation for insured properties that have received four or 
more flood claims payments totaling more than $20,000 or two claims 
payments whose total exceeds the value of the property and created the 
Severe Repetitive Loss Pilot Program to help carry out such mitigation. 
This option would have a more restrictive criterion, which could 
increase the number of subsidized properties for which mitigation is 
required. Mitigation could be required for all insured properties that 
have filed two or more flood claims, irrespective of claims total; 
subsidies could be eliminated for property owners who refuse or do not 
respond to a mitigation offer; or some combination of these 
approaches.[Footnote 35] This option would require increased funding 
for mitigation purposes. 

This option has several advantages. First, it could reduce flood losses 
by ensuring that more homes were better protected from flooding through 
mitigation, whether it was through elevation, relocation, or 
demolition. Because many repetitive loss properties have subsidized 
premiums--that is, rates that do not reflect their actual risk of 
flooding--increased mitigation could reduce the claims payments the 
program makes on these properties and could ultimately reduce taxpayer 
exposure in the long term. As the congressional findings in the Bunning-
Bereuter-Blumenauer Flood Insurance Reform Act of 2004 noted, and as 
FEMA officials concurred, mitigating repetitive loss properties through 
buyouts, elevations, relocation, flood-proofing, or regrading and other 
engineering projects would produce savings for policyholders and for 
federal taxpayers through reduced flood insurance losses and federal 
disaster assistance. Second, denying subsidies to those who refuse or 
do not respond to mitigation offers could increase the number of 
property owners paying full-risk rates and encourage mitigation. Third, 
FEMA could build upon its existing mitigation programs and thus 
continue targeting those properties that have been most costly in terms 
of claims paid while maintaining current subsidy rates. As we have 
noted, subsidies have been used to encourage participation in the 
program. Local officials generally support increased mitigation 
efforts. Reducing flood risk generally increases property values and, 
as a consequence, the local tax base. And as we have seen, 
participation from local communities is critical for successful 
mitigation efforts. 

However, there are several disadvantages associated with this option. 
First, because subsidized rates do not reflect a property's actual 
flood risk, subsidized property owners might not be motivated to 
undertake mitigation efforts that would reduce the risk of flood and 
their premium rate. Second, substantially increasing mitigation efforts 
would be costly and would require increased funding for FEMA's 
mitigation programs. As stated earlier, about 1.2 million policies 
received subsidized rates in 2007, including approximately 7,000 severe 
repetitive loss properties. FEMA estimates that the average mitigation 
cost would range from about $143,000 to about $176,000 per residential 
property. Buyouts and relocations would be more costly in areas of the 
country with relatively expensive real estate. Applying FEMA's 
mitigation cost range per property to the number of severe repetitive 
loss properties results in an estimated cost range of approximately $1 
billion to approximately $1.2 billion. Applying the same calculation to 
the rest of the repetitive loss properties would add over $17 billion 
to over $22 billion to the estimate. However, mitigation costs would 
have to be weighed against the possible savings from a decrease in 
flood damage that would result from mitigation.[Footnote 36] 

Third, the mitigation process is often lengthy, and mitigating a large 
number of properties could take a number of years to complete, and 
until then, subsidized premium rates would continue to negatively 
affect the program's financial health. Fourth, FEMA's reliance on local 
communities to undertake and enforce mitigation activities could limit 
the effectiveness of these efforts. Despite being a national program, 
NFIP relies on state and local communities to ensure the program's 
implementation and success. While local communities recognize the 
importance of mitigation, not all communities have the staff or 
resources to fully carry out current mitigation efforts, meet the cost- 
sharing requirement (generally 25 percent of the eligible project 
costs, which either the community or the property owner could provide) 
that four of the five mitigation programs require, and enforce 
noncompliance requirements. Some communities, in fact, require the 
homeowner to provide the cost-sharing requirement. Moreover, it is the 
responsibility of the local floodplain management agencies to enforce 
compliance with the ordinances by, for example, ensuring that property 
owners undertake proper mitigation efforts and by issuing appropriate 
work permits for the damaged property. Some communities may not have 
sufficient resources for expanded efforts in these areas. In addition, 
certain types of mitigation, such as relocation or demolition, might be 
met with resistance by communities that rely on those properties for 
tax revenues, such as coastal communities with significant development 
in areas prone to flooding. 

Eliminating or Reducing Subsidies Would Ensure That Rates Better 
Reflect Actual Risk but Could Reduce Participation: 

A second option--eliminating or reducing the subsidies--would meet the 
public policy goals of charging premium rates that more fully reflect 
actual risks. Because FEMA would be able to charge more policyholders 
premium rates that more closely represent actual flood risk, the 
premiums collected would more closely reflect the losses that the 
agency expected to incur, contributing to the financial health of NFIP. 
One way to implement a reduction of the subsidies is to base the rate 
on the number and amounts of flood claims per property. In other words, 
if a property has a certain number of claims, the subsidy would be 
rerated and the policyholder could be required to pay a higher premium. 
Another way is to eliminate subsidies for certain categories of 
subsidized properties, such as nonprimary residences (vacation homes or 
rental properties) or to limit subsidies to existing property owners. 

Another advantage to eliminating or reducing subsidies is that the 
resulting higher premium rates could motivate property owners to 
undertake mitigation efforts in order to reduce those premium rates. 
More mitigation could, in turn, result in less flood damage, lower 
losses for NFIP, and potentially lower taxpayer exposure. Moreover, by 
paying the rate that more closely reflects the actual risk of flooding, 
property owners who previously had paid subsidized premiums would 
better understand the actual costs and risks associated with living in 
certain areas. 

However, this option has at least two disadvantages. First, while many 
current NFIP policyholders are required by their lenders to maintain 
those policies, the elimination of subsidies, according to various 
stakeholders and a 1999 study commissioned by FEMA, would on average 
more than double these policyholders' premium rates and may result in 
reduced participation in NFIP over time as people either dropped their 
policies or were priced out of the market. Even reducing subsidies 
could increase the financial burden on some existing policyholders-- 
particularly low-income policyholders--and could cause some of them to 
leave the program. As a result, if owners of pre-FIRM structures, which 
suffer the greatest flood loss, cancel their insurance policies, the 
federal government--and ultimately taxpayers--could likely face 
increased costs in the form of FEMA disaster assistance grants and low- 
interest disaster loans from the Small Business Administration (SBA) in 
future floods.[Footnote 37] To the extent that higher premium rates 
would lead some property owners to decide not to purchase flood 
insurance, those property owners would not be eligible for NFIP 
mitigation assistance, reducing the likelihood that they would 
undertake mitigation efforts to reduce their flood risk.[Footnote 38] 
Furthermore, some FEMA officials said that a lack of subsidies could 
cause communities to drop out of NFIP. These communities would no 
longer be eligible for federal mitigation assistance or be subject to 
mandatory purchase requirements. Moreover, they would not have to 
comply with NFIP floodplain management standards and building codes, 
raising the possibility that residents would construct properties that 
had a high risk of being damaged by a flood. 

Second, we found that some communities might resist the elimination or 
reduction of subsidies because of the potential effect on residents. 
For example, some officials in one Texas community with a large rental 
population and low-income residents said that eliminating or reducing 
the subsidy would negatively affect their residents. Premium rate 
increases on rental properties likely would be passed to the tenants, 
some of whom are low-income tenants, thus creating a potential 
hardship. Officials in an Ohio community we visited said that many 
businesses would be unable to afford full-risk premiums, which would 
have a negative effect on their economy. 

Need-Based Subsidies Could Ensure That More Policyholders Paid Full- 
Risk Rates but Could Create Implementation Challenges: 

A third option would be to target premium rate subsidies to those 
policyholders who had the greatest financial need based on a means- 
based test. As currently structured, the subsidy is tied to the 
property, not the property owner, and any pre-FIRM property located in 
an SFHA in a participating community is eligible for a subsidy. And as 
mentioned previously, when a pre-FIRM property is sold, the new owner 
is also eligible for the subsidy. Additionally, the program does not 
take into account any characteristics of the owner, such as income 
level, or consider how the property is used--for example, as a 
residence, vacation home, or rental. FEMA does currently offer a 
temporary subsidized premium rate based on the financial need of the 
property owner through its Group Flood Insurance Policy (GFIP) program. 
Under that program, property owners in federally declared disaster 
areas apply to state based Individual and Family Grant (IFG) programs 
and, if accepted based on their financial need, are eligible to receive 
a flat premium rate of $200 per year for three years. After the three 
year period the rates would be adjusted to the appropriate rate for 
that location and property. 

This needs-based option would remove the subsidy from the property and 
instead attach it to the policyholder on the basis of need as 
determined by specified financial requirements and eligibility 
criteria. Means-tested programs are not new to the federal government. 
Over the years, Congress has established about 80 separate programs to 
provide cash and noncash assistance to low-income individuals and 
families. Such programs provide a means of delivering assistance to 
those in need, and we have made recommendations to simplify the process 
for determining financial eligibility for various programs.[Footnote 
39] 

Depending on how the option was implemented, a potential advantage to 
this option would be that more policyholders would have to pay the full-
risk rate and that those eligible for the subsidy would be made aware 
of the full-risk rate before applying for the subsidy. As a result, 
more policyholders would be aware that they were receiving subsidies 
and would better understand the actual costs and risks associated with 
living in certain areas. In addition, because some policyholders would 
no longer be receiving a subsidy, FEMA would be collecting more in 
premiums. Increased premium collection would improve NFIP's ability to 
make claims payments, reduce its need to borrow from the U.S. Treasury, 
and potentially limit taxpayer exposure. Further, because the only 
policyholders who would lose their subsidies generally would be those 
who were deemed able to afford full-risk rates, to the extent that 
higher rates would negatively affect the program, potentially fewer 
property owners may drop their insurance as compared with other 
nontargeted options for reducing subsidies. The program would benefit 
those in greatest financial need. Finally, charging higher rates that 
more accurately reflect the risk of flooding may motivate policyholders 
to undertake mitigation to reduce their premium rates. 

However, this option has several disadvantages. Eliminating subsidies 
and requiring those who are deemed able to afford them to pay full-risk 
rates could cause some property owners to stop buying flood insurance. 
Even though a means-based test might determine that some property 
owners did not qualify for subsidies, the higher cost of the full-risk 
rate premiums could lead some to decide not to purchase coverage and 
instead rely on federal disaster assistance, which generally requires 
that they purchase flood insurance as a condition of the assistance. In 
addition, requiring property owners to go through an application 
process to receive subsidized premium rates, rather than receiving them 
on the basis of their property's characteristics, could discourage some 
property owners with limited resources and in greatest need of coverage 
from applying for the subsidy. 

This option also would involve certain implementation challenges in the 
midst of other ongoing management challenges for NFIP. To implement 
this option, FEMA first would need to determine how to design the 
program and determine how to conduct the means test. Depending on how 
the program was designed, FEMA might need to collect or purchase data 
on income and wealth of property owners to help determine eligibility 
benchmarks. In addition, FEMA would need to devote resources, including 
staff, to developing, implementing, and monitoring the means test 
program. For example, FEMA would need to develop eligibility benchmarks 
and a process for applying for and awarding subsidies. The agency would 
need to determine who would conduct the tests and certify the results-
-that is, whether FEMA, state and community officials, the Write-Your- 
Own insurance companies that currently serve as the delivery system for 
NFIP, or some other entity would perform these activities.[Footnote 40] 
FEMA also would need to establish an oversight mechanism to ensure that 
the program was operating as intended. Finally, FEMA would have to 
ensure that costs of the subsidies and the costs associated with 
administering means-based testing did not result in costs that were 
larger than the current subsidies. FEMA could use existing programs in 
other agencies to formulate a template for means testing in order to 
make implementation easier. 

Moreover, addressing these challenges could be difficult for the 
agency, which is already in the process of addressing management and 
oversight challenges. As we have previously reported, FEMA faces 
challenges in providing oversight of its contractors, state and local 
partners, and Write-Your-Own insurance companies, as well as overseeing 
claims adjustments and its map modernization program.[Footnote 41] New 
management challenges created by implementing a means-based test could 
make addressing these existing challenges more difficult and may 
require additional staff. 

While any of these options--or a combination of them--could help reduce 
the adverse impact of subsidies on the financial health of NFIP, the 
potential would still exist for claims to exceed losses in any given 
year. As we have seen in 2008, flood losses are volatile and highly 
unpredictable, and estimating future losses and determining premium 
rates adequate to cover those losses is an inherently difficult 
process. In addition, even if subsidized rates were eliminated, the 
potential for catastrophic losses could still result in NFIP needing to 
borrow from the Treasury to pay losses. Absent a change in the NFIP's 
use of subsidized premium rates, however, the subsidies will continue 
to hinder the financial stability of the program, and the potential 
further increases in the number of properties receiving subsidies could 
make the situation worse. Therefore, implementing any or a combination 
of these options could significantly reduce the adverse financial 
impact of subsidies on NFIP. 

Agency Comment and Our Evaluation: 

We provided a draft of this report to the Department of Homeland 
Security (DHS) for comment. It provided written comments that are 
reprinted in appendix III. In its written comments, DHS expounded upon 
several topics discussed in the report. First, DHS noted that it is 
aware of the financial impact of subsidized and repetitive loss 
properties on the NFIP, and stated that while it has proposed a number 
of initiatives through the years, most of these were not welcomed by 
stakeholders. Second, DHS noted that amendments to current statutes and 
rules would be needed if FEMA were to require mitigation via a grant 
program beyond the substantial damage provision that currently is the 
only provision that triggers mandatory mitigation. We recognize that 
some aspects of the options discussed in this report would require 
legislative changes. However, we would encourage FEMA to continue to 
pursue actions to address the financial drain on NFIP brought about by 
subsidized premium rates, such as the planned 2009 increase in the 
standard deductible for subsidized policyholders as mentioned in its 
comments. Third, DHS recognized that a needs-based subsidy could be 
beneficial, but it recommended that the burden of making needs-based 
determinations be placed on someone other than the insurance agent and 
that a discussion be held on how the costs of discounted premiums would 
be borne. We noted in the report that a needs-based program could be 
implemented in a number of ways, and agree that careful study would 
have to be done before implementing such a program. DHS also described 
a current program where some participants receive subsidized premium 
rates based on their short-term financial need, with the needs 
determination performed by a third party. We have added a discussion of 
this program to the report and note that this may provide useful 
insights to a broader-based approach. DHS also provided technical 
comments, which we have incorporated as appropriate. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of this report 
until 30 days from the report date. At that time, we will provide 
copies to the Chairman, Senate Committee on Banking, Housing, and Urban 
Affairs; the Chairman and Ranking Member of the Senate Committee on 
Homeland Security and Governmental Affairs; the Chairman and Ranking 
Member of the House Committee on Financial Services; the Chairman and 
Ranking Member of the House Committee on Homeland Security; and other 
interested committees. We are also sending a copy of this report to the 
Secretary of Homeland Security and other interested parties. In 
addition, the report will available at no charge on our Web site at 
[hyperlink, http://www.gao.gov]. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. 

If you or your staff has any questions about this report, please 
contact me at (202) 512-8678 or williamso@gao.gov. GAO contact and 
staff acknowledgments are listed in appendix IV. 

Sincerely yours, 

Signed by: 

Orice M. Williams: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Scope and Methodology: 

To provide information on the National Flood Insurance Program's (NFIP) 
inventory of subsidized properties in terms of size, location, and 
financial impact on NFIP, we obtained data on policies, claims, and 
repetitive losses from the Federal Emergency Management Agency's (FEMA) 
private contractor, Computer Sciences Corporation, that maintains 
various NFIP databases. We obtained data pertaining to NFIP and NFIP 
subsidized and full-risk policies from 1978 through June 2008, 
including information on policies, premiums, and claims. We used these 
data to analyze the size, growth, costs, geographic distribution, and 
market penetration of the subsidized inventory and total inventory 
nationwide and for states and counties. We also reviewed relevant FEMA 
reports and analysis on these factors. We assessed the reliability of 
FEMA's policy and claims data by (1) reviewing existing information 
about the data and the system that produced them, (2) interviewing 
agency officials knowledgeable about the data, and (3) performing 
electronic testing of required data elements. We determined that the 
data were sufficiently reliable for the purposes of this report. 

Originally, we planned to construct a comprehensive nationwide profile 
of subsidized properties and policyholders by merging vendor data 
containing market values of subsidized properties and income data of 
owners with NFIP policy and claims data. To do this, we met with 
private vendors that, for marketing purposes, collect and sell 
nationwide statistics on real estate market values and transactions and 
household incomes. Specifically, we explored ways to develop nationwide 
comparisons of subsidized and full-risk properties--for example, 
comparing market values and household income--within and across 
geographic areas. However, we were unable to identify data sources that 
would enable us to pull statistically valid samples of subsidized 
properties and policyholders nationwide that could be projected to the 
entire inventory of subsidized and full-risk properties. While we were 
able to identify sources that had nationwide data, the vendors we 
contacted lacked data on real estate values in certain areas of the 
country. The omitted areas not only included rural areas, but also some 
areas with large populations, such as parts of Louisiana and Texas-- 
both of which have large numbers of subsidized properties. We also 
determined that matching individual property addresses maintained on an 
NFIP database and a vendor database would create inconsistencies that 
would prohibit a valid nationwide sample, thereby preventing us from 
extrapolating any results nationwide. In 2007, the Congressional Budget 
Office (CBO) attempted to produce a similar nationwide profile by 
merging vendor and NFIP data, but its match rates for addresses between 
databases were too low and thus the results from its study were limited 
to the properties that they were able to match and could not be 
generalized nationally. We spoke with CBO officials regarding their 
study. 

As an alternative to the national profile, we planned to construct 
profiles for the five counties that we judgmentally selected for site 
visits (our methodology and purpose for the site visits are discussed 
below). This alternative effort involved matching NFIP data on 
individual properties with county tax records, local real estate 
listings, and other local sources that might have data on those 
properties. However, we determined that this approach also would not 
produce match rates high enough to produce countywide profiles for 
three of the five counties, and data from the two remaining counties 
were not usable for our purposes. For example, we found that 
conventions for mailing addresses varied considerably across the five 
counties and differed from the NFIP data. While counties and NFIP use 
U.S. Postal Service's address standardization format, NFIP also permits 
descriptive addresses, such as "Third Cabin on Beulah Lake," "N Side of 
Shell Belt Rd," and "5 Houses From Johnson's Seafood," which made 
address matching difficult. In addition, we found certain data not to 
be useful for our purposes. For example, local property tax records did 
not maintain comparable market values of properties. In one county we 
found that tax records contained last sale information that, for many 
properties, could be several years old if the properties were not sold 
annually, and did not reflect current market values of those 
properties. In another county, tax records did not have information on 
selling prices of properties because state law prohibited public 
disclosure of this information. Thus we decided not to pursue this 
alternative effort. 

Finally, to satisfy the objective, we selected and visited a judgmental 
sample of five counties across the country (Sonoma County, California; 
Pinellas County, Florida; Jefferson County, Missouri; Washington 
County, Ohio; and Harris County, Texas). Our purpose was to obtain 
available information on the characteristics of subsidized properties 
in these counties (such as types of structures, flooding history, and 
market values) and characteristics of their policyholders (such as 
income and perceived benefits obtained from subsidized rates). We also 
sought to understand similarities and differences in how NFIP is 
implemented within each locality. We selected counties with NFIP 
communities that had completed NFIP's map modernization in order to 
have timely data to help construct profiles of properties in these 
counties. We selected a mix of coastal and inland counties in order to 
capture coastal and riverine types of flooding. We selected from 
counties that had large numbers or percentages of subsidized 
properties, large numbers of repetitive loss properties, and large 
cumulative historical dollars of claims losses paid in order to capture 
areas likely to have had meaningful, if not extensive, experience 
dealing with flooding and NFIP. During our visits to the five counties, 
we met with local floodplain managers, property tax appraisers and 
assessors, building permit officials, civil engineers, real estate 
agents, flood insurance agents, flood claims adjusters, and other 
relevant parties. We discussed local flooding history, flood plain 
management, building standards, flood claims adjusting, and real estate 
values and taxes as they pertained to implementation of NFIP generally, 
and NFIP subsidized properties in particular. We also spoke with 
officials from the five FEMA regional offices responsible for these 
counties. Tables 5 through 7 compare the five counties using a number 
of factors. While these five counties are not a complete representation 
of the entire body of NFIP communities, their diversity across multiple 
factors contributed to our understanding of the administration of NFIP 
at the local level. 

Table 5 compares the five counties by population, area, population 
density, housing density, household income and housing values and shows 
the ranges in these factors across the counties, as well as the types 
of flooding and the percentages of land area in the floodplain. 

Table 5: Demographics and Other Characteristics of the Five Counties 
Selected for Site Visits: 

2006 ACS estimates[A]: County population; 
Pinellas County, Florida: 2006 ACS estimates[A]: 924,413; 
Harris County, Texas: 2006 ACS estimates[A]: 3,886,207; 
Washington County, Ohio: 2006 ACS estimates[A]: 61,867; 
Jefferson County, Missouri: 2006 ACS estimates[A]: 216,469; 
Sonoma County, California: 2006 ACS estimates[A]: 466,891. 

2006 ACS estimates[A]: Median household income; 
Pinellas County, Florida: 2006 ACS estimates[A]: $41,945; 
Harris County, Texas: 2006 ACS estimates[A]: $47,129; 
Washington County, Ohio: 2006 ACS estimates[A]: $34,275; 
Jefferson County, Missouri: 2006 ACS estimates[A]: $53,434; 
Sonoma County, California: 2006 ACS estimates[A]: $60,821. 

2006 ACS estimates[A]: Median value of owner occupied home; 
Pinellas County, Florida: 2006 ACS estimates[A]: $205,200; 
Harris County, Texas: 2006 ACS estimates[A]: $126,000; 
Washington County, Ohio: 2006 ACS estimates[A]: $80,400; 
Jefferson County, Missouri: 2006 ACS estimates[A]: $150,900; 
Sonoma County, California: 2006 ACS estimates[A]: $618,500. 

2000 Census[B]: County population; 
Pinellas County, Florida: 2006 ACS estimates[A]: 921,482; 
Harris County, Texas: 2006 ACS estimates[A]: 3,400,578; 
Washington County, Ohio: 2006 ACS estimates[A]: 63,251; 
Jefferson County, Missouri: 2006 ACS estimates[A]: 198,099; 
Sonoma County, California: 2006 ACS estimates[A]: 458,614. 

2000 Census[B]: Square miles of land; 
Pinellas County, Florida: 2006 ACS estimates[A]: 280; 
Harris County, Texas: 2006 ACS estimates[A]: 1,729; 
Washington County, Ohio: 2006 ACS estimates[A]: 635; 
Jefferson County, Missouri: 2006 ACS estimates[A]: 657; 
Sonoma County, California: 2006 ACS estimates[A]: 1,576. 

2000 Census[B]: Square miles of water; 
Pinellas County, Florida: 2006 ACS estimates[A]: 328; 
Harris County, Texas: 2006 ACS estimates[A]: 49; 
Washington County, Ohio: 2006 ACS estimates[A]: 5; 
Jefferson County, Missouri: 2006 ACS estimates[A]: 7; 
Sonoma County, California: 2006 ACS estimates[A]: 192. 

2000 Census[B]: Population per square mile; 
Pinellas County, Florida: 2006 ACS estimates[A]: 3,292; 
Harris County, Texas: 2006 ACS estimates[A]: 1,967; 
Washington County, Ohio: 2006 ACS estimates[A]: 100; 
Jefferson County, Missouri: 2006 ACS estimates[A]: 302; 
Sonoma County, California: 2006 ACS estimates[A]: 291. 

2000 Census[B]: Housing units per square mile; 
Pinellas County, Florida: 2006 ACS estimates[A]: 1,720; 
Harris County, Texas: 2006 ACS estimates[A]: 751; 
Washington County, Ohio: 2006 ACS estimates[A]: 44; 
Jefferson County, Missouri: 2006 ACS estimates[A]: 115; 
Sonoma County, California: 2006 ACS estimates[A]: 116. 

Other characteristics: County seat or major city[C]; 
Pinellas County, Florida: 2006 ACS estimates[A]: St. Petersburg; 
Harris County, Texas: 2006 ACS estimates[A]: Houston; 
Washington County, Ohio: 2006 ACS estimates[A]: Marietta; 
Jefferson County, Missouri: 2006 ACS estimates[A]: Arnold (St. Louis 
suburb); 
Sonoma County, California: 2006 ACS estimates[A]: Santa Rosa. 

Other characteristics: Percentage of county's land in floodplain[D]; 
Pinellas County, Florida: 2006 ACS estimates[A]: 44.50%; 
Harris County, Texas: 2006 ACS estimates[A]: 24.50%; 
Washington County, Ohio: 2006 ACS estimates[A]: 5.90%; 
Jefferson County, Missouri: 2006 ACS estimates[A]: 11.00%; 
Sonoma County, California: 2006 ACS estimates[A]: 0.40%. 

Other characteristics: Types of flooding[E]; 
Pinellas County, Florida: 2006 ACS estimates[A]: Coastal, inland; 
Harris County, Texas: 2006 ACS estimates[A]: Shallow and flash 
flooding, effects from tropical storms; 
Washington County, Ohio: 2006 ACS estimates[A]: Convergence of two 
Rivers over bank and back-water flooding; 
Jefferson County, Missouri: 2006 ACS estimates[A]: Riverine, inland; 
Sonoma County, California: 2006 ACS estimates[A]: Russian River over 
bank flooding and runoffs from local rivers. 

Sources: None listed. 

[A] U.S. Census Bureau, 2006 American Community Survey, except for 
Washington County, OH, where 2000 ACS data are used. 

[B] U.S. Census Bureau, American Fact Finder, Geographic Comparison 
Table, United States - County by State, GCT-PH1 - Population, Housing 
Units, Area, and Density, Census 2000. 

[C] Encyclopedia Britannica Online for four of the counties, and 
Jefferson County, Missouri web site [hyperlink, 
http://www.jeffcomo.org/clerk/serv/census.html] and Arnold web site 
[hyperlink, http://www.arnoldmo.org/] for City of Arnold: 

[D] GAO analysis of county digital flood maps from FEMA. 

[E] From GAO interviews with flood plain managers and others during 
site visits. 

[End of table] 

Table 6 shows policies in force and cumulative claims paid broken down 
by subsidized and total and the percentages for subsidized for the five 
counties. In each of the five counties, cumulative claims paid on 
subsidized policies were a higher percentage of cumulative total claims 
paid than were subsidized policies in force as a percentage of total 
policies in force. 

Table 6: NFIP Policies in Force and Cumulative Claims Paid in the Five 
Selected Counties: 

Number of policies in force as of December 31, 2007: Total NFIP 
policies; 
Pinellas County, Florida: Number of policies in force as of December 
31, 2007: 145,409; 
Harris County, Texas: Number of policies in force as of December 31, 
2007: 141,000; 
Washington County, Ohio: Number of policies in force as of December 31, 
2007: 870; 
Jefferson County, Missouri: Number of policies in force as of December 
31, 2007: 1,167; 
Sonoma County, California: Number of policies in force as of December 
31, 2007: 3,323. 

Number of policies in force as of December 31, 2007: Total subsidized 
policies; 
Pinellas County, Florida: Number of policies in force as of December 
31, 2007:: 53,629; 
Harris County, Texas: Number of policies in force as of December 31, 
2007: 3,886; 
Washington County, Ohio: Number of policies in force as of December 31, 
2007: 552; 
Jefferson County, Missouri: Number of policies in force as of December 
31, 2007: 677; 
Sonoma County, California: Number of policies in force as of December 
31, 2007: 1,432. 

Number of policies in force as of December 31, 2007: Subsidized 
policies as a percentage of total policies; 
Pinellas County, Florida: Number of policies in force as of December 
31, 2007: 36.9 %; 
Harris County, Texas: Number of policies in force as of December 31, 
2007: 2.8%; 
Washington County, Ohio: Number of policies in force as of December 31, 
2007: 63.4%; 
Jefferson County, Missouri: Number of policies in force as of December 
31, 2007: 58.0%; 
Sonoma County, California: Number of policies in force as of December 
31, 2007: 43.1%. 

Cumulative claims paid from 1978 through 2007: Total claims paid; 
Pinellas County, Florida: Number of policies in force as of December 
31, 2007: $274,495,724; 
Harris County, Texas: Number of policies in force as of December 31, 
2007: $1,054,140,647; 
Washington County, Ohio: Number of policies in force as of December 31, 
2007: $7,602,961; 
Jefferson County, Missouri: Number of policies in force as of December 
31, 2007: $55,338,351; 
Sonoma County, California: Number of policies in force as of December 
31, 2007: $113,781,148. 

Cumulative claims paid from 1978 through 2007: Claims paid on 
subsidized policies; 
Pinellas County, Florida: Number of policies in force as of December 
31, 2007: $251,808,017; 
Harris County, Texas: Number of policies in force as of December 31, 
2007: $380,030,682; 
Washington County, Ohio: Number of policies in force as of December 31, 
2007: $5,115,876; 
Jefferson County, Missouri: Number of policies in force as of December 
31, 2007: $51,380,048; 
Sonoma County, California: Number of policies in force as of December 
31, 2007: $98,258,616. 

Cumulative claims paid from 1978 through 2007: Claims from subsidized 
properties as a percentage of total claims paid; 
Pinellas County, Florida: Number of policies in force as of December 
31, 2007: 91.7%; 
Harris County, Texas: Number of policies in force as of December 31, 
2007: 36.1%; 
Washington County, Ohio: Number of policies in force as of December 31, 
2007: 67.3%; 
Jefferson County, Missouri: Number of policies in force as of December 
31, 2007: 92.4%; 
Sonoma County, California: Number of policies in force as of December 
31, 2007: 86.4%. 

Source: GAO analysis of data from FEMA: 

[End of table] 

Table 7 compares repetitive loss properties across the five counties 
using the number of repetitive loss properties still insured versus the 
number of repetitive loss properties no longer insured, and the number 
and dollars of loss payments for these groups. 

Table 7: Comparison of Repetitive Loss Properties Historically (1978- 
2007) and Current (as of December 31, 2007) in the Five Selected 
Counties: 

Number of Repetitive Loss Properties: Total from 1978-2007; 
Pinellas County, Florida: Number of Repetitive Loss Properties: 1,502; 
Harris County, Texas: Number of Repetitive Loss Properties: 7,904; 
Washington County, Ohio: Number of Repetitive Loss Properties: 195; 
Jefferson County, Missouri: Number of Repetitive Loss Properties: 589; 
Sonoma County, California: Number of Repetitive Loss Properties: 891. 

Number of Repetitive Loss Properties: Still insured by NFIP on 
12/31/2007[A]; 
Pinellas County, Florida: Number of Repetitive Loss Properties: 912; 
Harris County, Texas: Number of Repetitive Loss Properties: 3,762; 
Washington County, Ohio: Number of Repetitive Loss Properties: 146; 
Jefferson County, Missouri: Number of Repetitive Loss Properties: 91; 
Sonoma County, California: Number of Repetitive Loss Properties: 516. 

Number of Repetitive Loss Properties: Percent insured by NFIP on 
12/31/2007; 
Pinellas County, Florida: Number of Repetitive Loss Properties: 60.7%; 
Harris County, Texas: Number of Repetitive Loss Properties: 47.6%; 
Washington County, Ohio: Number of Repetitive Loss Properties: 74.9%; 
Jefferson County, Missouri: Number of Repetitive Loss Properties: 
15.4%; 
Sonoma County, California: Number of Repetitive Loss Properties: 57.9%. 

Number of Losses: On all repetitive loss properties, 1978-2007; 
Pinellas County, Florida: Number of Repetitive Loss Properties: 4,360; 
Harris County, Texas: Number of Repetitive Loss Properties: 26,260; 
Washington County, Ohio: Number of Repetitive Loss Properties: 472; 
Jefferson County, Missouri: Number of Repetitive Loss Properties: 
1,904; 
Sonoma County, California: Number of Repetitive Loss Properties: 2,826. 

Number of Losses: On repetitive loss properties still insured on 
12/31/2007; 
Pinellas County, Florida: Number of Repetitive Loss Properties: 2,775; 
Harris County, Texas: Number of Repetitive Loss Properties: 12,458; 
Washington County, Ohio: Number of Repetitive Loss Properties: 363; 
Jefferson County, Missouri: Number of Repetitive Loss Properties: 334; 
Sonoma County, California: Number of Repetitive Loss Properties: 1,756. 

Number of Losses: Percent on properties still insured on 12/31/2007; 
Pinellas County, Florida: Number of Repetitive Loss Properties: 63.6%; 
Harris County, Texas: Number of Repetitive Loss Properties: 47.4%; 
Washington County, Ohio: Number of Repetitive Loss Properties: 76.9%; 
Jefferson County, Missouri: Number of Repetitive Loss Properties: 
17.5%; 
Sonoma County, California: Number of Repetitive Loss Properties: 62.1%. 

Dollars of Loss Payments: On all repetitive loss properties, 1978-
2007; 
Pinellas County, Florida: Number of Repetitive Loss Properties: 
$71,362,594; 
Harris County, Texas: Number of Repetitive Loss Properties: 
$773,672,643; 
Washington County, Ohio: Number of Repetitive Loss Properties: 
$11,017,041; 
Jefferson County, Missouri: Number of Repetitive Loss Properties: 
$25,942,075; 
Sonoma County, California: Number of Repetitive Loss Properties: 
$64,122,633. 

Dollars of Loss Payments: Percent on repetitive loss properties still 
insured on 12/31/ 2007[B]; 
Pinellas County, Florida: Number of Repetitive Loss Properties: 66.7%; 
Harris County, Texas: Number of Repetitive Loss Properties: 51.0%; 
Washington County, Ohio: Number of Repetitive Loss Properties: 85.8%; 
Jefferson County, Missouri: Number of Repetitive Loss Properties: 
20.2%; 
Sonoma County, California: Number of Repetitive Loss Properties: 68.1%. 

Source: GAO analysis of NFIP data from BureauNet. 

[A] Repetitive loss properties that have been mitigated through buyout 
and demolition are no longer considered insured. 

[B] "Still insured" refers to repetitive loss properties insured by 
NFIP as of December 31, 2007 either through Write Your Own companies or 
Special Direct Facilities. 

[End of table] 

To evaluate NFIP's existing structure and identify and evaluate options 
for reducing or eliminating the costs of properties insured at 
subsidized premium rates and the advantages and disadvantages of these 
options, we analyzed NFIP's legislative history, which described the 
objectives of NFIP overall and NFIP subsidies in particular, and 
original expectations about the subsidized inventory. We also reviewed 
more recent legislation, including the Robert T. Stafford Disaster 
Assistance and Emergency Relief Act and the Bunning-Bereuter-Blumenauer 
Flood Insurance Reform Act of 2004, which established the Severe 
Repetitive Loss Pilot Program. We discussed nationwide mitigation 
strategies and related efforts and costs for repetitive loss 
properties, including severe repetitive loss properties with FEMA 
officials. In our visits with local entities in the five counties as 
noted above, we also obtained available information on resources, 
expenditures, and costs of individual mitigation efforts. We also 
discussed these issues with FEMA regional offices responsible for the 
five counties. 

Finally, we analyzed FEMA's statistics on repetitive loss properties 
including cumulative historical claims costs and the number of these 
properties mitigated in the five counties we visited and nationwide. We 
also analyzed relevant information in various other studies, including 
two of our studies discussing public policy goals for federal 
involvement in catastrophe insurance.[Footnote 42] 

We conducted our work between December 2006 and November 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Some Areas of the Country That Appear to Have a Potential 
for an Increase in the Number of NFIP Policies: 

Recent flooding, especially in the Midwest in 2008, highlights the 
devastation that can be caused from flooding. This appendix provides 
examples of areas of the country that appear to have higher populations 
and flooding risks relative to their policy volumes when compared to 
other areas, and thus have the potential for increases in the number of 
NFIP policies. As we noted in the report, an increase in market 
penetration would also likely bring an increase in the number of 
subsidized policies. We identified the examples by comparing the number 
of NFIP policies in a given area, as of September 2006, with the total 
number of county flood declarations from January 1980 to June 2008, 
cumulative flood claims payments from January 1978 to April 2008, and 
population as of 2004 for counties and 2005 for states. 

Example 1: Some Midwestern and Northeastern states and counties that 
appeared to have a higher history of flood losses relative to policy 
counts than other areas of the country: 

* The five combined states of Iowa, Michigan, Minnesota, Missouri, and 
Wisconsin, when compared to Collier County, Florida, had more county 
flood disaster declarations (2,092 versus 12), significantly more flood 
claims payments ($704,706,000 versus $12,483,000), and a much larger 
population (28,906,000 versus 297,000), but a similar number of NFIP 
policies (80,572 versus 85,246). 

* Maine, when compared to Idaho, had significantly more flood claim 
payments ($36,332,000 versus $4,754,000) and county flood disaster 
declarations (159 versus 42), but a similar number of NFIP policies 
(7,891 versus 7,079). The states also had similar populations: 
1,285,000 for Maine and 1,480,000 for Idaho. 

* Wisconsin, when compared to Rhode Island, had many more county flood 
disaster declarations (276 versus 11), but had similar flood claims 
payments ($32,693,000 versus $34,219,000). Even though Wisconsin has a 
much larger population (5,479,000 versus 1,012,000), it has a similar 
number of NFIP policies (12,945 versus 14,432). 

* Iowa, when compared to New Mexico, had almost 10 times more county 
flood disaster declarations (558 versus 56), and about eight times more 
in flood claims payments ($65.915.000 versus $8,038,000) but almost 30 
percent fewer policies (10,185 versus 14,455). Iowa's population was 
larger than New Mexico's (2,941,000 versus 2,016,000). 

* The four combined states of Kansas, Nebraska, South Dakota, and North 
Dakota, when compared to Oregon, had more county flood disaster 
declarations (1,346 versus 124) and three times more in flood claims 
payments ($244,828,499 vs. $76,727,971), but a similar number of 
policies (30,683 versus 29,780) for a much larger population (6,009,000 
versus 3,613,000). 

Example 2: Counties with flood disaster declarations but no communities 
in NFIP: 

We found 66 counties that had flood disaster declarations but no 
communities that had joined NFIP. Below are selected examples from 
those counties. 

* Clay County, Alabama (population 14,092) has had seven flood 
declarations. 

* San Francisco County, California (population 744,230) has had three 
flood declarations. 

* Henry County, Iowa (population 20,258) has had six flood 
declarations. 

* Winneshiek County, Iowa (population 21,188) has had seven flood 
declarations. 

* Adair County, Kentucky (population 17,575) has had six flood 
declarations. 

* Dallas County, Missouri (population 16,328) has had eight flood 
declarations. 

Example 3: Counties with flood disaster declarations but very few NFIP 
policies: 

We found 14 counties, all with populations over 100,000, that had one 
or more flood declarations but very few NFIP policies. Below are 
selected examples from those counties. 

* Potter County, Texas (population 118,000) has had three flood 
disaster declarations but had only six policies. 

* Bibb County, Georgia (population 155,000) has had four flood disaster 
declarations but had only 13 policies. 

* Carroll County, Georgia (population 102,000) has had six flood 
disaster declarations but had only 83 policies. 

[End of section] 

Appendix III: Comments from the Department of Homeland Security: 

U.S. Department of Homeland Security: 
Washington, DC 20528: 

Homeland Security: 

November 3, 2008: 

Ms. Orice M. Williams: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G St., NW: 
Washington, DC 20548: 

Re: GAO-09-20 (250327): 

Dear Ms. Williams: 

The U.S. Department of Homeland Security (DHS) appreciates the 
opportunity to review and comment on the U.S. Government Accountability 
Office's (GAO) Draft Report GAO-09-20, Options for Addressing the 
Financial Impact of Subsidized Premium Rates on the National Flood 
Insurance Program (250327). Technical comments have been provided under 
separate cover. 

DHS commends the GAO for writing a report that clearly explains the 
basis for certain properties being charged less than their full risk 
premiums. GAO has also done a commendable job of describing the 
demographics of those policyholders as well as investigating the impact 
of those policies on the financial integrity of the National Flood 
Insurance Program (NFIP) and providing a discussion of several options 
to address that impact. 

We would like to expound upon several topics cited in this report. 
First, as GAO mentions in their report, the U.S. Federal Emergency 
Management Agency (FEMA) has been aware of the impact of subsidized 
policies on the financial soundness of the Program. In particular, FEMA 
has been aware of the outsized impact that repetitive loss properties 
have had. Through the years, FEMA has developed a number of initiatives 
to address those issues more aggressively. However, we have shared 
those proposed initiatives with our stakeholders in the past and they 
have not been welcomed -- primarily due to concerns of equity to 
existing property owners, their uneven impact on specific communities, 
and uncertainty on how they would impact low income individuals. The 
one exception was in the early 1980s when FEMA managed to implement a 
series of large premium increases to subsidized policyholders. The most 
recent proposal was presented to stakeholders in 2000-2001 and 
consisted of a seven-step approach of reducing the number of 
individuals eligible for subsidized premiums, a series of aggressive 
premium increases, coverage restrictions and targeted mitigation 
activity. Although at the time the proposal was not received favorably, 
with the passage of the Flood Insurance Reform Act of 2004 and the 
increased awareness of the flood risk as a result of the 2004 and 2005 
hurricane seasons, FEMA has been able to proceed with two aspects of 
that proposal: targeted mitigation activity and more aggressive rate 
increases. The NFIP will also increase the standard deductible for 
subsidized policyholders beginning in May, 2009. 

Second, as GAO discusses in the report, targeted mitigation activity 
has resulted in the elimination of some subsidized and repetitive loss 
properties from the insurance pool. Under current parameters, 
participation in the FEMA mitigation grant programs is voluntary on the 
part of the property owner, local government, and State government. 
Successfully securing a mitigation grant requires capacity and 
capability within each of these entities. This capacity includes a 
requirement for some non-Federal financial or in-kind contributions to 
mandatory mitigation activity. FEMA notes that requiring mitigation via 
the mitigation grant programs would represent a shift in current 
policies and procedures and require amendments in current statutes and 
rules. 

FEMA believes that a mandatory mechanism for certain mitigation 
activities of pre-Flood Insurance Rate Map (pre-FIRM) properties exists 
through the administration of the substantial damage provision of a 
local floodplain management ordinance. To facilitate compliance with 
the local ordinance, up to $30,000 is typically available to policy 
holders undertaking required mitigation activities. 

Third, with regard to the GAO discussion of Need-Based Subsides, FEMA 
believes that while there is probably merit to such a proposal, the 
insurance agents that sell flood insurance policies should not be asked 
to do double duty in making "needs-based" determinations. Such 
determinations are well outside the scope of their normal activities in 
flood insurance or any other line of insurance. FEMA recommends that if 
Congress desires to address the flood risk of low income individuals, 
they should consider placing the eligibility determination on someone 
other than the insurance agent. Further, discussion should be held on 
how such discounted premiums would be borne by the NFIP. Would it 
simply be revenue foregone by the NFIP (as is the case with current 
subsidized policyholders) or should it take the form of General Revenue 
funds being transferred to the NFIP? 

Finally, there is a group of NFIP policyholders who currently qualify 
for heavily discounted premiums as a result of needs-based testing. 
These are the Group Flood Insurance Policyholders (GFIP) who were 
recipients of Individual Family Grants (IFG). Since IFG recipients must 
agree to buy flood insurance for as long as they own or reside at that 
property, the NFIP introduced the GFIP to assist these individuals in 
meeting that requirement. These recipients are eligible for IFG because 
they have suffered a major financial setback. It would be very 
difficult for them to be able to pay the required flood insurance 
premium in order to satisfy the IFG requirement. In order to resolve 
that dilemma, the NFIP has coordinated with the IFG administrators so 
that a small amount of the IFG grant is transferred to the NFIP and in 
exchange the NFIP issues a three-year group policy for all recipients 
following a disaster. We cite the example of the GFIP as one case where 
we are able to meet the short-term needs of some low income individuals 
by relying on the needs-based determination made by a third party (the 
IFG grants personnel). 

The U.S. Department of Homeland Security would like to thank you for 
the opportunity to provide comments on this draft report. We look 
forward to working with you on future homeland security issues. 

Sincerely, 

Signed by: 

Jerald E. Levine: 
Director: 
Departmental DHS GAO/OIG Liaison Office: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgements: 

GAO Contact: 

Orice M. Williams, (202) 512-8678, or williamso@gao.gov: 

Staff Acknowledgements: 

In addition to the contact named above, Patrick Ward, Assistant 
Director; Lawrence Cluff, Assistant Director; Tania Calhoun; Emily 
Chalmers; William (Rudy) Chatlos; Martha Chow; Nima Patel Edwards; 
Christopher Forys; Catherine Hurley; Karen Jarzynka; and Melvin Thomas 
made significant contributions to this report. 

[End of section] 

Footnotes: 

[1] Unless otherwise noted, all policy counts referenced in this report 
represent only active residential policies as of December 31, 2007. An 
insurance premium rate is the price charged for coverage. 

[2] National Flood Insurance Act of 1968, Pub. L. No. 90-448, Title 
XIII, 82 Stat. 476 (1968). 

[3] Buildings eligible for subsidized rates are those that were built 
before FIRMs were created, identifying flood-prone areas, and before 
participating communities established and enforced NFIP building codes. 
Flood-prone areas that are estimated to have a 1 percent chance of 
flooding in any given year are also known as Special Hazard Flood Areas 
or 100-year flood plains. The 1 percent chance of flood, or 100-year 
flood, is also known as the base flood. The FIRMs also identified areas 
that are of low or moderate flood risk (such as the 0.2 percent chance 
of flooding or the 500-year flood plains). NFIP building codes require, 
among other things, that the lowest level of a structure must be at or 
above the area's base flood elevation, the land elevation that has a 1 
percent chance of flooding. 

[4] Steps taken to reduce flood risk are known as mitigation. According 
to FEMA, the key mitigation steps for residential properties are 
elevating a building to or above the area's base flood elevation, 
relocating the building to an area of less flood risk, or demolishing 
the building and turning the property into green space. A community can 
also take steps to reduce flood risk to an area, by diverting the flow 
of water through well designed channels and retaining walls, or by 
containing the water, through ponds and green space. 

[5] Flooding types include floods from hurricanes, flash floods, and 
overland floods. 

[6] Congressional Budget Office, Value of Properties in the National 
Flood Insurance Program (June 2007). 

[7] The Flood Disaster Protection Act of 1973, Pub. L. No. 93-234, 
§102, 87 Stat. 975, 978 (1973), mandated that policyholders with 
mortgages or loans from federally regulated and insured lending 
institutions buy flood insurance for the life of the mortgage or loan. 

[8] RAND, The National Flood Insurance Program's Market Penetration 
Rate: Estimates and Policy Implications (Santa Monica, California: 
2006). 

[9] In 1981, FEMA initiated a multiyear series of coverage changes and 
large rate increases for all subsidized policies, which FEMA claims 
placed NFIP on a financially sound basis by 1986. Therefore, we only 
included financial data since 1986 to account for these modifications. 

[10] FEMA generally considers a significant flood event as one with 
1,500 or more paid losses. 

[11] For more information on NFIP rate-setting, see GAO, Flood 
Insurance: FEMA's Rate-Setting Process Warrants Attention, GAO-09-12 
(Washington, D.C.: Oct. 31, 2008). 

[12] For more information on all FEMA flood zones, please see appendix 
VII of GAO, National Flood Insurance Program: Financial Challenges 
Underscore Need for Improved Oversight of Mitigation Programs and Key 
Contracts, [hyperlink, http://www.gao.gov/products/GAO-08-437] 
(Washington, D.C.: June 16, 2008). 

[13] FEMA also has a category of properties whose flood risk has not 
yet been determined but flooding is possible. Mandatory purchase 
requirements do not apply. 

[14] If the cost of restoring a flood-damaged structure to its 
predamage condition or renovating an insured structure is equal to or 
greater than 50 percent of that structure's market value before the 
damage or renovation, the structure must be mitigated and meet other 
applicable local ordinance requirements. See 44 C.F.R. § 9.11 

[15] Pub. L. No. 100-707, 102 Stat. 4689 (1988). 

[16] Pub. L. No. 103-325, §553, 108 Stat. 2255, 2270 (1994). 

[17] Pub. L. No. 108-264, §§ 102, 104, 118 Stat. 712, 714, 722 (2004). 

[18] NFIP's overall operating deficit for 1986-2004 was $928 million. 
This number is less than the operating deficit for subsidized policies 
because that operating deficit was offset by slight operating surpluses 
in some policies that were not included in the subsidized or full-risk 
categories. 

[19] December 2007 number is measured by active residential policies in 
force. Because full-risk policies do not collect more in premiums than 
their expected average losses over the long term, an increase in the 
proportion of full-risk policies to policies with subsidized rates does 
not decrease the expected dollar amount of operating deficit caused by 
claims on subsidized properties. 

[20] We calculated the number of policies using earned exposure, which 
is a measure of how many policies were in effect throughout the year 
based on the duration of the policy. For example, a 1-year policy that 
became effective on December 22, 2006, has an earned exposure for 
calendar year 2006 of 10/365, while the earned exposure for 2007 is 
355/365. 

[21] The Flood Disaster Protection Act of 1973, Pub. L. No. 93-234, 
§102, 87 Stat. 975, 978 (1973). 

[22] FloodSmart is an integrated mass marketing campaign FEMA launched 
in 2004 to educate the public about the risks of flooding and to 
encourage the purchase of flood insurance. 

[23] The number of policies in force during the year is calculated 
based on earned exposure as explained in footnote 20. 

[24] Given the voluntary nature of the program, a participating 
community may not have any flood insurance policies. Participation 
means, among other things, that a community's residents are eligible to 
buy flood insurance. 

[25] Some newly incorporated communities do not cause an increase in 
overall policies because residents had already been participating in 
NFIP through their county. 

[26] The increase in percentage of claims losses is primarily the 
result of the $13.3 billion paid on Louisiana policies in 2005. 

[27] In addition to covering claims, premium income is also intended to 
cover the costs of administering the program, including costs 
associated with servicing policies and processing claims. 

[28] NFIP's overall operating deficit for 1986-2004 was $928 million. 
This number is less than the operating deficit for subsidized policies 
because that operating deficit was offset by slight operating surpluses 
in some policies that were not included in the subsidized or full-risk 
categories. 

[29] During the 1980s and 1990s, FEMA also implemented other measures 
that substantially limited the scope of coverage, such as restricting 
basement coverage and increasing deductibles. 

[30] GAO, National Flood Insurance Program: Financial Challenges 
Underscore Need for Improved Oversight of Mitigation Programs and Key 
Contracts, [hyperlink, http://www.gao.gov/products/GAO-08-437] 
(Washington, D.C.: June 16, 2008). 

[31] 44 C.F.R. § 9.11. 

[32] According to officials of the Harris County Flood Control 
District, while the Control District can spearhead mitigation 
activities throughout Harris County, it does not have enforcement 
authorities. The floodplain management office for the community in 
which a property is located is responsible for ensuring compliance with 
NFIP building codes and regulations. 

[33] This is the number of subsidized policies measured using earned 
exposure. 

[34] Over the years Congress has considered a variety of reforms to 
NFIP, including targeting subsidized policies. Current bills include 
the Flood Insurance Reform and Modernization Act, H.R. 3121, 110th 
Cong. (2007) and the Flood Insurance Reform and Modernization Act, S. 
2284, 110th Cong. (2007). Our options are not based on any particular 
legislation or proposal but rather reflect broad public policy 
concepts. 

[35] This more restrictive criterion mandating mitigation for 
repetitive loss properties was considered by Congress in a bill related 
to the legislation that became the Bunning-Bereuter-Blumenauer Act, 
which established the current criterion of four or more claims. 

[36] In 2000, FEMA estimated that mitigation efforts on all post-FIRM 
properties, not just repetitive loss properties, could result in 
savings with a present value of $18.7 billion over the period from 2000 
to 2010, including savings from locally administered flood mitigation 
requirements and NFIP flood mitigation grants. 

[37] As mentioned previously, homeowners receiving disaster assistance 
are generally required to purchase flood insurance. SBA makes federally 
subsidized loans to repair or replace homes, personal property, or 
businesses that sustain damages not covered by insurance. 

[38] However, they are still eligible for disaster assistance 
authorized by the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act. 

[39] GAO, Means-Tested Programs: Determining Financial Eligibility Is 
Cumbersome and Can Be Simplified, [hyperlink, 
http://www.gao.gov/products/GAO-02-58] (Washington, D.C.: Nov. 2, 
2001). 

[40] Write-Your-Own companies are private insurers that sell and 
service policies and adjust claims for NFIP. 

[41] See [hyperlink, http://www.gao.gov/products/GAO-08-437]. 

[42] GAO, Natural Disasters: Public Policy Options For Changing The 
Federal Role In Natural Catastrophe Insurance, [hyperlink, 
http://www.gao.gov/products/GAO-08-7] (Washington, D.C.: Nov. 26, 
2007); and Natural Catastrophe Insurance: Analysis of a Proposed 
Combined Federal Flood and Wind Insurance Program, [hyperlink, 
http://www.gao.gov/products/GAO-08-504] (Washington, D.C.: Apr. 25, 
2008) 

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