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Testimony: 

Before the Chairman, Committee on Banking, Housing and Urban Affairs, 

U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EST: 

Wednesday, January 25, 2006: 

Federal Emergency Management Agency: 

Challenges for the National Flood Insurance Program: 

Statement of David M. Walker, Comptroller General of the United States: 

GAO-06-335T: 

GAO Highlights: 

Highlights of GAO-06-335T, a testimony to the Chairman, Committee on 
Banking, Housing and Urban Affairs, U.S. Senate: 

Why GAO Did This Study: 

The National Flood Insurance Program (NFIP), established in 1968, 
provides property owners with some insurance coverage for flood damage. 
The Federal Emergency Management Agency (FEMA) within the Department of 
Homeland Security is responsible for managing the NFIP. 

The unprecedented magnitude and severity of the flood losses from 
hurricanes in 2005 challenged the NFIP to process a record number of 
claims. These storms also illustrated the extent to which the federal 
government has exposure for claims coverage in catastrophic loss years. 
FEMA estimates that Hurricanes Katrina, Rita, and Wilma will generate 
claims and payments of about $23 billion—far surpassing the total 
claims paid in the entire history of the NFIP. 

This testimony provides information from past and ongoing GAO work on 
issues including: (1) NFIP’s financial structure; (2) the impact of 
properties with repetitive flood losses on NFIP’s resources; (3) 
proposals to increase the number of policies in force; and (4) the 
status of past GAO recommendations. 

What GAO Found: 

The NFIP, by design, is not actuarially sound. The program does not 
collect sufficient premium income to build reserves to meet long-term 
future expected flood losses. In November 2005, FEMA’s authority to 
borrow from the Treasury was increased from $1.5 billion to $18.5 
billion through fiscal year 2008 to help pay claims from the 2005 
hurricane season. It is highly unlikely that the NFIP as presently 
funded could generate sufficient revenues to repay a debt of this size. 

One reason the NFIP is not actuarially sound is because a number of its 
policies on dwellings that were built before flood plain management 
regulations were established in their communities are subsidized and 
pay premiums of 35-40 percent of the true risk premium. In January 
2006, FEMA estimated an annual shortfall in premium income of $750 
million because of such policy subsidies. Some subsidized properties, 
called repetitive loss properties, also suffer repetitive flood losses, 
which accounted for about $4.6 billion in claims payments from 1978 to 
March 2004. We need to analyze the progress made to reduce the 
inventory of subsidized repetitive-loss properties and determine 
whether additional regulatory or congressional action is needed. 

A challenge for FEMA is to expand the NFIP policyholder base by 
enforcing mandatory purchase requirements and encouraging voluntary 
purchase by homeowners who live in areas at lower risk of flooding. The 
extent of noncompliance with current mandatory purchase requirements 
for property owners in special flood hazard areas is unknown. There has 
been some congressional interest in the feasibility of expanding 
mandatory purchase requirements beyond the current special high-risk 
areas, however, there are a number of difficulties to assessing the 
impacts, effectiveness, and feasibility of such a change in the 
structure of the NFIP, as well as concerns related to enforcing and 
assessing compliance. For example, more precise flood mapping of areas 
outside the current high-risk areas would be required to accurately 
identify affected property owners. FEMA and its private insurance 
partners also have efforts underway to increase NFIP participation by 
marketing policies in areas where purchase is not mandatory. 

FEMA has not yet fully implemented provisions of the Flood Insurance 
Reform Act of 2004 requiring the agency to develop new materials to 
explain coverage and the claims process to policyholders, establish an 
appeals process for claimants, and provide insurance agent education 
and training requirements. The statutory deadline for implementing 
these changes was December 30, 2004, and, as of January 2006, FEMA had 
not developed documented plans with milestones for meeting the 
provisions of the act, as recommended by GAO. 

What GAO Recommends: 

In past work, GAO recommended that FEMA strengthen its oversight of the 
NFIP and develop plans to implement requirements of the Flood Insurance 
Reform Act of 2004. FEMA disagreed with those recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-06-335T. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact William O. Jenkins, Jr., 
at (202) 512-8777 or jenkinswoj@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to participate in today's hearing on the 
future of the National Flood Insurance Program (NFIP) to discuss issues 
related to the future financial stability of the NFIP and 
recommendations we have made for improvements to the management and 
oversight of the program. The NFIP combines property insurance for 
flood victims, mapping to identify the boundaries of the areas at 
highest risk of flooding, and incentives for communities to adopt and 
enforce floodplain management regulations and building standards to 
reduce future flood damage. The effective integration of all three of 
these elements is needed for the NFIP to achieve its goals of: 

* providing property flood insurance coverage for a high proportion of 
property owners who would benefit from such coverage; 

* reducing, through this insurance coverage, taxpayer-funded disaster 
assistance for property damage when flooding strikes; and: 

* reducing property flood damage through flood plain management based 
on accurate, useful flood maps and the enforcement of building 
standards (such as elevating structures). 

Hurricanes Katrina and Rita represent a tragedy for hundreds of 
thousands of our fellow Americans. Their lives have been turned upside 
down, and many who would have benefited from flood insurance did not 
have it. This tragedy offers an opportunity to fundamentally rethink 
the flood insurance program and how it can best be structured to 
provide financial protection from flooding for those who need and would 
benefit from flood insurance while enhancing the program's financial 
foundation. 

The Federal Emergency Management Agency (FEMA) within the Department of 
Homeland Security (DHS) is responsible for the oversight and management 
of the program.[Footnote 1] Under the program, the federal government 
assumes the liability for the insurance coverage and sets rates and 
coverage limitations, among other responsibilities. 

Floods are the most common and destructive natural disaster in the 
United States. According to NFIP statistics, 90 percent of all natural 
disasters in the United States involve flooding. However, flooding is 
generally excluded from homeowner policies that typically cover damage 
from other losses, such as wind, fire, and theft. Because of the 
catastrophic nature of flooding and the inability to adequately predict 
flood risks, private insurance companies have largely been unwilling to 
underwrite and bear the risk of flood insurance. 

The NFIP was established by the National Flood Insurance Act of 
1968[Footnote 2] to provide policyholders with some insurance coverage 
for flood damage, as an alternative to disaster assistance, and to try 
to reduce the escalating costs of repairing flood damage. In creating 
the NFIP, Congress found that a flood insurance program with "large- 
scale participation of the Federal Government and carried out to the 
maximum extent practicable by the private insurance industry is 
feasible and can be initiated."[Footnote 3] In keeping with this 
purpose, FEMA has contractual agreements with 95 private insurance 
company partners to sell policies and adjust and process claims. 

As of November 2005, the NFIP was estimated to have approximately 4.8 
million policyholders in about 20,000 communities. According to FEMA, 
every $3 in flood insurance claims payments saves about $1 in disaster 
assistance payments, and the combination of flood plain management and 
mitigation efforts save about $1 billion in flood damage each year. 

Flood maps identify the boundaries of the areas at the greatest risk of 
flooding. These areas are called special high-risk flood hazard areas, 
often referred to as the 100-year flood plain, that area in which there 
is a 1 percent chance of flooding each year, or a 30 percent chance of 
flooding over the period of a 30-year mortgage. Property owners whose 
properties are within the 100-year flood plain, as identified on the 
flood maps, and whose mortgages are from a federally regulated lender, 
are required to purchase flood insurance for the amount of their 
outstanding mortgage balance, up to the maximum policy limit of 
$250,000 in coverage for single family homes. The owners of properties 
with no mortgages or properties with mortgages held by lenders who are 
not federally regulated were not, and still are not, required to buy 
flood insurance, even if the properties are in the 100-year flood 
plain. Optional, lower-cost coverage is available under the NFIP to 
protect homes in areas of low to moderate risk that are outside the 100-
year flood plain, but owners of properties in these lower-risk areas 
are not required to purchase flood insurance. 

The unprecedented magnitude and severity of the flood losses in 2005 
placed unprecedented challenges on the NFIP to process a record number 
of claims, many in properties flooded by Hurricanes Katrina and Rita 
that were inaccessible for weeks after the flooding occurred. These 
storms also illustrated the extent to which the federal government has 
exposure for claims coverage in catastrophic loss years. From its 
inception in 1968 until August 2005, the NFIP paid about $14.6 billion 
in insurance claims, primarily from policyholder premiums that 
otherwise would have been paid through taxpayer-funded disaster relief 
or borne by home and business owners themselves. As shown in figure 1, 
FEMA estimates that Hurricanes Katrina, Rita, and Wilma are likely to 
generate claims and associated payments of about $23 billion--far 
surpassing the total about $15 billion in claims paid in the entire 
history of the NFIP up to those events. 

Figure 1: NFIP Claims Payments from 1968 to 2004 and Estimated for 
Hurricanes Katrina, Rita, and Wilma: 

[See PDF for image] 

[End of figure] 

The NFIP cannot absorb the total costs of paying these claims. On 
November 21, 2005, FEMA's authority to borrow from the Treasury was 
increased from $1.5 billion to $18.5 billion through fiscal year 
2008.[Footnote 4] The acting director of FEMA's Mitigation Division 
said this borrowing authority will pay NFIP claims and expenses into 
February 2006, when additional legislative action to increase the 
borrowing authority will likely be required. He also said that it is 
highly unlikely that the program could generate sufficient revenues to 
cover a debt of this size. FEMA estimates that given its current 
income--about $2 billion annually---and average historical loss levels, 
it could expect to handle up to about $1.5 billion in debt and still 
have a reasonable chance to repay it within a 3-to 5-year time period. 

GAO has a body of work underway on the preparation for, response to, 
and recovery from Hurricanes Katrina and Rita, including how the NFIP 
was implemented. We have had teams in the Gulf Coast states since the 
weeks immediately following the hurricanes collecting data and 
observations from hurricane victims and federal, state, local, and 
private participants in the preparation for, response to, and recovery 
from the extensive damages. I have also visited the region and spoken 
with governors in some of the affected states, military and civilian 
officials leading the recovery efforts, and others to help inform our 
work. One objective of the work we have underway on the NFIP is to 
assess what changes, if any, could be made to strengthen the NFIP's 
fiscal solvency. To this end, we will review proposals to increase 
revenues, reduce costs, or otherwise make the NFIP more actuarially 
sound. We expect to report on this matter later this year. 

As GAO moves forward with this work, we will continue to coordinate 
with this and other congressional committees and the accountability 
community--federal inspector generals, state and city auditors-- 
regarding the scope of our future work on emergency management issues, 
including the NFIP. Our goal is to apply our resources and expertise to 
address long-term concerns, such as those we are discussing today, and 
to avoid duplicating the work of others. 

Past experience can provide context for considering future policy 
options. In this spirit, my testimony today is based on a body of work 
that GAO has done over the past several years before the nation began 
the struggle to respond to the devastating effects of Hurricanes 
Katrina and Rita in our Gulf Coast states, as well as some preliminary 
results of interviews and review of documentation for work in progress 
on how the NFIP was implemented for these storms. Our prior work has 
addressed the issues of the program's structure and financing, 
oversight and management, repetitive loss properties, mandatory and 
voluntary purchase of flood insurance, and revising and improving the 
nation's flood maps. Together the prior work and work in process 
provide information useful in assessing efforts over the NFIP's history 
to enhance the program's financial stability and effectiveness. Most 
recently, we issued a report in October 2005 on FEMA's management and 
oversight of the flood insurance program that includes several 
recommendations for improvement.[Footnote 5] This report was mandated 
by the Flood Insurance Reform Act of 2004.[Footnote 6] It includes 
recommendations on two pre-Hurricane Katrina flood-insurance related 
issues that pose a challenge for FEMA. These are (1) improving FEMA's 
management and oversight of the NFIP and (2) improving FEMA's 
implementation of provisions of the Flood Insurance Reform Act of 2004 
to provide policyholders a flood insurance claims handbook that meets 
statutory requirements, to establish a regulatory appeals process, and 
to ensure that flood insurance agents meet minimum NFIP education and 
training requirements. 

That report was based on interviews with FEMA officials, documentation 
of its monitoring and oversight processes, and our field observations 
of FEMA's monitoring and oversight activities. In addition, we analyzed 
the National Flood Insurance Act of 1968, as amended, its legislative 
history, and FEMA's implementing regulations, and we examined 
documentation and interviewed officials about FEMA's efforts to comply 
with provisions of the 2004 Flood Insurance Reform Act. We did our work 
from December 2004 to August 2005 in accordance with generally accepted 
government auditing standards. 

Major Program Issues - a Summary: 

A key characteristic of the NFIP is the extent to which FEMA must rely 
on others to achieve the program's goals. FEMA's role for the NFIP is 
principally one of establishing policies and standards that others 
generally implement on a day-to-day basis and providing financial and 
management oversight of those who carry out those day-to-day 
responsibilities. These responsibilities include ensuring that property 
owners who are required to purchase flood insurance do so, enforcing 
flood plain management and building regulations, selling and servicing 
flood insurance policies, and updating and maintaining the nation's 
flood maps. In our prior work, we have identified several major 
challenges facing the NFIP: 

* Reducing losses to the program resulting from policy subsidies and 
repetitive loss properties.[Footnote 7] The program is not actuarially 
sound because of the number of policies in force that are subsidized-- 
about 29 percent at the time of our 2003 report. As a result of these 
subsidies, some policyholders with dwellings that were built before 
flood plain management regulations were established in their 
communities pay premiums that represent about 35 to 40 percent of the 
true risk premium. In January 2006, FEMA estimated a shortfall in 
annual premium income because of policy subsidies at $750 million. 
Moreover, at the time of our 2004 report, there were about 49,000 
repetitive loss properties--those with two or more losses of $1,000 or 
more in a 10-year period--representing about 1 percent of the 4.4 
million buildings insured under the program. From 1978 until March 
2004, these repetitive loss properties represented about $4.6 billion 
in claims payments. 

* Increasing property owner participation in the program. The extent of 
noncompliance with current mandatory purchase requirements by affected 
property owners is unknown. Some interest has been expressed in 
Congress in assessing the feasibility of expanding mandatory purchase 
requirements beyond current special high-risk flood hazard areas. FEMA 
and its private insurance partners also have efforts underway to 
increase participation in the NFIP by marketing flood insurance 
policies in areas where purchase is not mandatory. 

* Developing accurate, digital flood maps.[Footnote 8] The impact of 
Hurricanes Katrina, Rita, and Wilma on homeowners has highlighted the 
importance of having accurate, up-to-date flood maps that identify the 
areas at risk of flooding and, thus, the areas in which homeowners 
would benefit from purchasing flood insurance. In our report on the 
NFIP's flood map modernization program, we discussed the multiple uses 
and benefits of accurate, digital flood plain maps. However, the NFIP 
faces a major challenge in working with its contractor and state and 
local partners of varying technical capabilities and resources to 
produce accurate, digital flood maps. In developing those maps, we 
recommended that FEMA develop and implement data standards that will 
enable FEMA, its contractor, and its state and local partners to 
identify and use consistent data collection and analysis methods for 
developing maps for communities with similar flood risk. 

* Providing effective oversight of flood insurance operations. In our 
October 2005 report, we said that FEMA faces a challenge in providing 
effective oversight of the 95 insurance companies and thousands of 
insurance agents and claims adjusters who are primarily responsible for 
the day-to-day process of selling and servicing flood insurance 
policies. 

The NFIP Pays Expenses and Claims with Premiums to the Extent Possible, 
but Its Financial Structure Is Not Designed to Be Actuarially Sound: 

To the extent possible, the NFIP is designed to pay operating expenses 
and flood insurance claims with premiums collected on flood insurance 
policies rather than with tax dollars. However, as we have reported, 
the program, by design, is not actuarially sound because Congress 
authorized subsidized insurance rates to be made available for policies 
covering some properties to encourage communities to join the program. 
As a result, the program does not collect sufficient premium income to 
build reserves to meet the long-term future expected flood 
losses.[Footnote 9] FEMA has statutory authority to borrow funds from 
the Treasury to keep the NFIP solvent.[Footnote 10] 

Until the 2004 hurricane season, FEMA had been generally successful in 
keeping the NFIP on sound financial footing, exercising its borrowing 
authority three times in the last decade when losses exceeded available 
fund balances. In each instance, FEMA repaid the funds with interest. 
According to FEMA officials, as of August 31, 2005, FEMA had 
outstanding borrowing of $225 million with cash on hand totaling $289 
million. FEMA had substantially repaid the borrowing it had undertaken 
to pay losses incurred for the 2004 hurricane season that, until 
Hurricane Katrina struck, was the worst hurricane season on record for 
the NFIP. FEMA's current debt with the Treasury is almost entirely for 
payment of claims from Hurricanes Katrina and Rita and other flood 
events that occurred in 2005. 

Premium Subsidies and Repetitive-Loss Properties Affect NFIP's 
Actuarial Soundness: 

As the destruction caused by horrendous 2004 and 2005 hurricanes are a 
driving force for improving the NFIP today, devastating natural 
disasters in the 1960s were a primary reason for the national interest 
in creating a federal flood insurance program. In 1963 and 1964, 
Hurricane Betsy and other hurricanes caused extensive damage in the 
South, and, in 1965, heavy flooding occurred on the upper Mississippi 
River. In studying insurance alternatives to disaster assistance for 
people suffering property losses in floods, a flood insurance 
feasibility study found that premium rates in certain flood-prone areas 
could be extremely high. As a result, the National Flood Insurance Act 
of 1968, which created the NFIP, mandated that existing buildings in 
flood-risk areas would receive subsidies on premiums because these 
structures were built before the flood risk was known and identified on 
flood insurance rate maps.[Footnote 11] Owners of structures built in 
flood-prone areas on or after the effective date of the first flood 
insurance rate maps in their areas or after December 31, 1974, would 
have to pay full actuarial rates.[Footnote 12] Because many repetitive 
loss properties were built before either December 31, 1974, or the 
effective date of the first flood insurance rate maps in their areas, 
they were eligible for subsidized premium rates under provisions of the 
National Flood Insurance Act of 1968. 

The provision of subsidized premiums encouraged communities to 
participate in the NFIP by adopting and agreeing to enforce state and 
community floodplain management regulations to reduce future flood 
damage. In April 2005, FEMA estimated that floodplain management 
regulations enforced by communities participating in the NFIP have 
prevented over $1.1 billion annually in flood damage. 

However, the policy subsidies reduce premium income and add risk to the 
NFIP. In January 2006, FEMA estimated an annual shortfall in premium 
income of $750 million because of policy subsidies. FEMA estimated that 
phasing out subsidized rates for non-primary residences and 
nonresidential properties alone would affect about 400,000 properties 
currently insured by the NFIP. Some have questioned whether providing 
flood insurance for second homes in high risk areas--such as barrier 
islands--encourages development in areas at high risk of flooding. 

In addition, some of the properties that had received the initial rate 
subsidy are subject to repetitive flood losses, placing added financial 
strain on the NFIP. In reauthorizing the NFIP in 2004, Congress noted 
that "repetitive-loss properties"--those that had resulted in two or 
more flood insurance claims payments of $1,000 or more over 10 years-- 
constituted a significant drain on the resources of the NFIP. [Footnote 
13] These repetitive loss properties are problematic not only because 
of their vulnerability to flooding but also because of the costs of 
repeatedly repairing flood damages. While these properties make up only 
about 1 percent of the properties insured under the NFIP, they account 
for 25 to 30 percent of all claims losses. At the time of our March 
2004 report on repetitive loss properties, there were about 49,000 
repetitive loss properties, representing about $4.6 billion in claims 
payments from 1978 until March 2004. As of March 2004, nearly half of 
all nationwide repetitive loss property insurance payments had been 
made in Louisiana, Texas, and Florida. According to a recent 
Congressional Research Service report, as of December 31, 2004, FEMA 
had identified 11,706 "severe repetitive loss" properties, defined as 
those with four or more claims or two or three losses that exceeded the 
insured value of the property.[Footnote 14] Of these 11,706 properties 
almost half (49 percent) were in three states--3,208 (27 percent) in 
Louisiana, 1,573 (13 percent) in Texas, and 1,034 (9 percent) in New 
Jersey. A significant number of repetitive loss properties were 
affected by Hurricanes Katrina and Rita. According to NFIP statistical 
data through November 30, 2005, 4,835 repetitive loss properties, 
including 3,183 in Louisiana, had substantial damage from Hurricane 
Katrina.[Footnote 15] Two hundred and forty-three repetitive loss 
properties had substantial damage from Hurricane Rita. Of these 
properties, 213 were located in Louisiana and 30 were located in Texas. 

For over a decade, FEMA has pursued a variety of strategies to reduce 
the number of repetitive loss properties in the NFIP inventory. In a 
2004 testimony, we noted that congressional proposals have been made to 
phase out coverage or begin charging full and actuarially based rates 
for repetitive loss property owners who refuse to accept FEMA's offer 
to purchase or mitigate the effect of floods on these 
buildings.[Footnote 16] The 2004 Flood Insurance Reform Act created a 5-
year pilot program to deal with repetitive-loss properties in the NFIP. 
In particular, the act authorized FEMA to provide financial assistance 
to participating states and communities to carry out mitigation 
activities or to purchase "severe repetitive loss properties."[Footnote 
17] During the pilot program, policyholders who refuse a mitigation or 
purchase offer that meets program requirements will be required to pay 
increased premium rates. Specifically, the premium rates for these 
policyholders would increase by 150 percent following their refusal and 
another 150% following future claims of more than $1,500.[Footnote 18] 
However, the rates charged cannot exceed the applicable actuarial rate. 

Because of the financial drain that repetitive loss properties have 
posed for the program, it will be important in future studies of the 
NFIP to continue to analyze data on progress being made to reduce the 
inventory of subsidized NFIP properties, particularly those with 
repetitive losses; How the reduction of this inventory contributes to 
the financial stability of the program; and whether additional FEMA 
regulatory steps or congressional actions could contribute to the 
financial solvency of the NFIP, while meeting commitments made by the 
authorizing legislation. 

Expansion of the NFIP Policyholder Base: 

Compliance with Mandatory Purchase Requirements Difficult to Determine: 

In 1973 and 1994, Congress enacted requirements for mandatory purchase 
of NFIP policies by some property owners in high-risk areas. From 1968 
until the adoption of the Flood Disaster Protection Act of 1973, the 
purchase of flood insurance was voluntary. However, because voluntary 
participation in the NFIP was low and many flood victims did not have 
insurance to repair damages from floods in the early 1970s, the 1973 
act required the mandatory purchase of flood insurance to cover some 
structures in special flood hazard areas of communities participating 
in the program. Homeowners with mortgages held by federally-regulated 
lenders on property in communities identified by FEMA to be in special 
flood hazard areas are required to purchase flood insurance on their 
dwellings for the amount of their outstanding mortgage balance, up to a 
maximum of $250,000 in coverage for single family homes. The owners of 
properties with no mortgages or properties with mortgages held by 
lenders who are not federally regulated were not, and still are not, 
required to buy flood insurance, even if the properties are in special 
flood hazard areas--the areas NFIP flood maps identify as having the 
highest risk of flooding. 

FEMA determines flood risk and actuarial ratings on properties through 
flood insurance rate mapping and other considerations, including the 
elevation of the lowest floor of the building, the type of building, 
the number of floors, and whether or not the building has a basement, 
among other factors. FEMA flood maps designate areas for risk of 
flooding by zones. For example, areas subject to damage by waves and 
storm surge are in the zone with the highest expectation for flood 
loss. 

Between 1973 and 1994, many policyholders continued to find it easy to 
drop policies, even if the policies were required by lenders. Federal 
agency lenders and regulators did not appear to strongly enforce the 
mandatory flood insurance purchase requirements.[Footnote 19] According 
to a recent Congressional Research Service study,[Footnote 20] the 
Midwest flood of 1993 highlighted this problem and reinforced the idea 
that reforms were needed to compel lender compliance with the 
requirements of the 1973 Act. In response, Congress passed the National 
Flood Insurance Reform Act of 1994. Under the 1994 law, if the property 
owner failed to get the required coverage, federally-regulated lenders 
were required to purchase flood insurance on their behalf and then bill 
the property owners. Lenders became subject to civil monetary penalties 
for not enforcing the mandatory purchase requirement. 

In June 2002, we reported that the extent to which lenders were 
enforcing the mandatory purchase requirement was unknown. Officials 
involved with the flood insurance program developed contrasting 
viewpoints about whether lenders were complying with the flood 
insurance purchase requirements primarily because the officials used 
differing types of data to reach their conclusions. Federal bank 
regulators and lenders based their belief that lenders were generally 
complying with the NFIP's purchase requirements on regulators' 
examinations and reviews conducted to monitor and verify lender 
compliance. In contrast, FEMA officials believed that many lenders 
frequently were not complying with the requirements, which was an 
opinion based largely on noncompliance estimates computed from data on 
mortgages, flood zones, and insurance policies; limited studies on 
compliance; and anecdotal evidence indicating that insurance was not 
always in place where required. Neither side, however, was able to 
substantiate its differing claims with statistically sound data that 
provide a nationwide perspective on lender compliance. [Footnote 21] 

Expansion of Mandatory Purchase Requirements Would Generate More 
Premiums, but Implementation Could Be Problematic: 

Under FEMA's current Mandatory Purchase of Flood Insurance Guidelines, 
properties in a 100-year flood plain with a statistical 1 in 100 chance 
of flooding in any given year or a 30 percent chance of flooding during 
the period of a 30-year mortgage are designated to be in special flood 
hazard areas. Within the boundaries of these areas, homeowners with 
mortgages from federal regulated lenders are required to purchase flood 
insurance for an amount equal to their outstanding mortgage balance, up 
to the maximum policy limit of $250,000 for a single-family home. To 
expand the NFIP policyholder base, there has been some congressional 
interest in the feasibility of extending the current mandatory purchase 
requirement to properties in a 500-year flood plain, which 
statistically have a 1 in 500 chance of flooding in any given 
year.[Footnote 22] FEMA has estimated that expanding NFIP mandatory 
purchase requirements to include structures in the 500-year flood plain 
would generate up to $700 million in additional premiums. The current 
annual premium for a structure in the 500-year flood plain is about 
$280. However, a FEMA official cautioned that the rate of compliance is 
an important component of any estimate of the amount of increase in 
NFIP premiums that would result from expanding mandatory purchase 
requirements. 

It would be difficult to effectively assess the impacts, effectiveness, 
and feasibility of such a change in the structure of the NFIP. We share 
FEMA's concerns related to enforcing and assessing compliance. We also 
believe that it would be difficult to assess the impacts an expansion 
in the mandatory purchase requirements would have upon a range of 
stakeholders, including not only home and business owners, but lenders, 
mortgage servicers, builders, and local governments, among others. 

We also recognize that it would be difficult and costly to determine 
the additional geographic area that would be encompassed in an expanded 
special flood hazard area. Current flood mapping focuses on the 
boundaries of the 100-year flood plain, and FEMA has not estimated the 
additional cost and time required to complete detailed, digitalized 
maps of areas outside of the current 100-year special flood hazard 
area. 

FEMA Has a Marketing Campaign to Attract New Policyholders and Improve 
Rates of Renewal: 

In recent years, the number of NFIP policyholders did not grow 
substantially. FEMA officials reported a pattern in which at the start 
of each hurricane season, the number of polices in force was the same 
or less than the number of policies in previous years. During the 
hurricane season, the number of polices in force would increase 
slightly and then level off or decline again at the end of the season. 

FEMA has efforts underway to increase NFIP participation by improving 
the quality of information that is available on the NFIP and flood 
risks and by marketing to retain policyholders currently in the 
program. In October 2003, FEMA let a contract for a new integrated 
marketing campaign called "FloodSmart." Marketing elements being used 
include direct mail, national television commercials, print 
advertising, and websites designed for consumers and insurance agents. 
According to FEMA officials, in a little more than 2 years since the 
contract began, net policy growth was a little more than 7 percent and 
policy retention improved from 88 percent to 91 percent. 

Accurate, Updated Flood Maps Are the Foundation of the NFIP: 

Accurate flood maps that identify the areas at greatest risk of 
flooding are the foundation of the NFIP. Flood maps must be 
periodically updated to assess and map changes in the boundaries of 
floodplains that result from community growth, development, erosion, 
and other factors that affect the boundaries of areas at risk of 
flooding. FEMA has embarked on a multi-year effort to update the 
nation's flood maps at a cost in excess of $1 billion. The maps are 
principally used by (1) the approximately 20,000 communities 
participating in the NFIP to adopt and enforce the program's minimum 
building standards for new construction within the maps' identified 
flood plains; (2) FEMA to develop accurate flood insurance policy rates 
based on flood risk; and (3) federal regulated mortgage lenders to 
identify those property owners who are statutorily required to purchase 
federal flood insurance. 

FEMA expects that by producing more accurate and accessible digital 
flood maps, the NFIP and the nation will benefit in three ways. First, 
communities can use more accurate digital maps to reduce flood risk 
within floodplains by more effectively regulating development through 
zoning and building standards. Second, accurate digital maps available 
on the Internet will facilitate the identification of property owners 
who are statutorily required to obtain or who would be best served by 
obtaining flood insurance. Third, accurate and precise data will help 
national, state, and local officials to accurately locate 
infrastructure and transportation systems (e.g., power plants, sewage 
plants, railroads, bridges, and ports) to help mitigate and manage risk 
for multiple hazards, both natural and man-made. 

Success in updating the nation's flood maps requires clear standards 
for map development; the coordinated efforts and shared resources of 
federal, state, and local governments; and the involvement of key 
stakeholders who will be expected to use the maps. In developing the 
new data system to update flood maps across the nation, FEMA's intent 
is to develop and incorporate flood risk data that are of a level of 
specificity and accuracy commensurate with communities' relative flood 
risks. Not every community may need the same level of specificity and 
detail in its new flood maps. However, it is important that FEMA 
establish standards for the appropriate data and level of analysis 
required to develop maps for all communities of a similar risk level. 
In its November 2004 Multi-Year Flood Hazard Identification Plan, FEMA 
discussed the varying types of data collection and analysis techniques 
the agency plans to use to develop flood hazard data in order to relate 
the level of study and level of risk for each of 3,146 counties. 

FEMA has developed targets for resource contributions (in-kind as well 
as dollars) by its state and local partners in updating the nation's 
flood maps. At the same time, it has developed plans for reaching out 
to and including the input of communities and key stakeholders in the 
development of the new maps. These expanded outreach efforts reflect 
FEMA's understanding that it is dependent upon others to achieve the 
benefits of map modernization. 

As I have discussed, it is important when considering any expansion of 
mandatory purchase requirements for NFIP policies to understand that 
implementation would require the development of additional detailed 
flood maps. According to a FEMA official, digital mapping of areas 
outside of special flood hazard areas is currently being considered on 
only a selective basis for reasons such as potential changes in risk 
level or population growth. 

Monitoring and Oversight of NFIP Identifies Specific Problems, but Does 
Not Provide Comprehensive Information on Overall Program Performance: 

To meet its monitoring and oversight responsibilities, FEMA is to 
conduct periodic operational reviews of the 95 private insurance 
companies that participate in the NFIP. In addition, FEMA's program 
contractor is to check the accuracy of claims settlements by doing 
quality assurance reinspections of a sample of claims adjustments for 
every flood event. For operational reviews, FEMA examiners are to do a 
thorough review of the companies' NFIP underwriting and claims 
settlement processes and internal controls, including checking a sample 
of claims and underwriting files to determine, for example, whether a 
violation of policy has occurred, an incorrect payment has been made, 
and if files contain all required documentation. Separately, FEMA's 
program contractor is responsible for conducting quality assurance 
reinspections of a sample of claims adjustments for specific flood 
events in order to identify, for example, whether an insurer allowed an 
uncovered expense or missed a covered expense in the original 
adjustment. 

According to FEMA, these monitoring and oversight mechanisms will be in 
place to assess the implementation of the NFIP after Hurricanes Katrina 
and Rita. In addition, FEMA plans to do additional oversight of claims 
for these storms that were handled using expedited procedures. To try 
to assist NFIP policyholders despite obstacles in communicating with 
claimants, reaching flooded properties, and locating records, FEMA 
allowed expedited claims processing procedures that were unique to 
these storms. In some circumstances, claims were settled without site 
visits by certified flood claims adjusters. For flooding caused by the 
failure of the levees in the New Orleans area, resulting in flooding 
from Lake Pontchartrain, FEMA allowed the use of flood depth data to 
identify structures that had been severely affected. If data on the 
depth and duration of the water in the building showed that it was 
likely that covered damage exceeded policy limits, claims could be 
settled without a site visit by a claims adjuster. Similarly, losses in 
other areas of Louisiana and Mississippi were handled without a site 
visit where structures were washed off their foundations by flood 
waters and square-foot measurements of the dwellings were known. 

The operational reviews and follow-up visits to insurance companies 
that we analyzed during 2005 followed FEMA's internal control 
procedures for identifying and resolving specific problems that may 
occur in individual insurance companies' processes for selling and 
renewing NFIP policies and adjusting claims. According to information 
provided by FEMA, the number of operational reviews completed between 
2000 and August 2005 were done at a pace that allows for a review of 
each participating insurance company at least once every 3 years, as 
FEMA procedures require. In addition, the processes FEMA had in place 
for operational reviews and quality assurance reinspections of claims 
adjustments met our internal control standard for monitoring federal 
programs. 

However, the process FEMA used to select a sample of claims files for 
operational reviews and the process its program contractor used to 
select a sample of adjustments for reinspections were not randomly 
chosen or statistically representative of all claims. We found that the 
selection processes used were, instead, based upon judgmental criteria 
including, among other items, the size and location of loss and 
complexity of claims. As a result of limitations in the sampling 
processes, FEMA cannot project the results of these monitoring and 
oversight activities to determine the overall accuracy of claims 
settled for specific flood events or assess the overall performance of 
insurance companies and their adjusters in fulfilling their 
responsibilities for the NFIP--actions necessary for FEMA to meet our 
internal control standard that it have reasonable assurance that 
program objectives are being achieved and that its operations are 
effective and efficient. 

To strengthen and improve FEMA's monitoring and oversight of the NFIP, 
we recommended that FEMA use a methodologically valid approach for 
sampling files selected for operational reviews and quality assurance 
claims reinspections. We also plan to follow up on the results of the 
monitoring and oversight efforts for claims processed using expedited 
processes in our review of the implementation of the NFIP after 
Hurricanes Katrina and Rita. 

FEMA did not agree with our recommendation. It noted that its current 
sampling methodology of selecting a sample based on knowledge of the 
population to be sampled was more appropriate for identifying problems 
than the statistically random probability sample we recommended. 
Although FEMA's current nonprobability sampling strategy may provide an 
opportunity to focus on particular areas of risk, it does not provide 
management with the information needed to assess the overall 
performance of private insurance companies and adjusters participating 
in the program--information that FEMA needs to have reasonable 
assurance that program objectives are being achieved. 

FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the 
Flood Insurance Reform Act of 2004: 

As of January 2006, FEMA had not yet fully implemented provisions of 
the Flood Insurance Reform Act of 2004. Among other things, the act 
requires FEMA to provide policyholders a flood insurance claims 
handbook; to establish a regulatory appeals process for claimants; and 
to establish minimum education and training requirements for insurance 
agents who sell NFIP policies.[Footnote 23] The 6-month statutory 
deadline for implementing these changes was December 30, 2004. 

In September 2005, FEMA posted a flood insurance claims handbook on its 
Web site. The handbook contains information on anticipating, filing and 
appealing a claim through an informal appeals process, which FEMA 
intends to use pending the establishment of a regulatory appeals 
process. However, because the handbook does not contain information 
regarding the appeals process that FEMA is statutorily required to 
establish through regulation, it does not yet meet statutory 
requirements. 

With respect to this appeals process, FEMA has not stated how long 
rulemaking might take to establish the process by regulation, or how 
the process might work, such as filing requirements, time frames for 
considering appeals, and the composition of an appeals board. In 
January 2006, the acting director of FEMA's Mitigation Division said 
that FEMA had submitted a draft rule to DHS. However, milestones for 
future actions were not established. Claimants who wish to appeal 
decisions made on their claims for damage from Hurricanes Katrina and 
Rita can follow a process described by FEMA as an "informal" appeals 
process. As outlined in the Flood Insurance Claims Handbook, to appeal, 
policyholders are to submit statements of their concerns and supporting 
documentation to the director of claims in FEMA's Mitigation Division, 
Risk Insurance Branch. 

With respect to minimum training and education requirements for 
insurance agents who sell NFIP policies, FEMA published a Federal 
Register notice on September 1, 2005, which included an outline of 
training course materials. In the notice, FEMA stated that, rather than 
establish separate and perhaps duplicative requirements from those that 
may already be in place in the states, it had chosen to work with the 
states to implement the NFIP requirements through already established 
state licensing schemes for insurance agents. The notice did not 
specify how or when states were to begin implementing the NFIP training 
and education requirements. Thus, it is too early to tell the extent to 
which insurance agents will meet FEMA's minimum standards. FEMA 
officials said that, because changes to the program could have broad 
reaching and significant effects on policyholders and private-sector 
stakeholders upon whom FEMA relies to implement the program, the agency 
is taking a measured approach to addressing the changes mandated by 
Congress. Nonetheless, without plans with milestones for completing its 
efforts to address the provisions of the act, FEMA cannot hold 
responsible officials accountable or ensure that statutorily required 
improvements are in place to assist victims of future flood events. 

We recommended that FEMA develop documented plans with milestones for 
implementing requirements of the Flood Insurance Reform Act of 2004 to 
provide policyholders a flood insurance claims handbook that meets 
statutory requirements, to establish a regulatory appeals process, and 
to ensure that flood insurance agents meet minimum NFIP education and 
training requirements. We will continue to monitor progress being made. 

FEMA disagreed with our recommendation and characterization of the 
extent to which FEMA has met provisions of the Flood Insurance Reform 
Act of 2004. We believe that our description of those efforts and our 
recommendations with regard to implementing the act's provisions are 
valid. For example, although FEMA commented that it was offering 
claimants an informal appeals process in its flood insurance claims 
handbook, it must establish regulations for this process, and those are 
not yet complete. 

Concluding Observations: 

The most immediate challenge for the NFIP is processing the flood 
insurance claims resulting from Hurricanes Katrina and Rita. Progress 
is being made in that area. In December 2005, according to FEMA, more 
than 70 percent of Hurricane Katrina claims had been paid, totaling 
more than $11 billion, some of them using expedited procedures to 
assist policyholders who were displaced from their homes. 

In the longer term, Congress and the NFIP face a complex challenge in 
assessing potential changes to the program that would improve its 
financial stability, increase participation in the program by property 
owners in areas at risk of flooding, reduce the number of repetitive 
loss properties in the program, and maintain current and accurate flood 
plain maps. These issues are complex, interrelated, and are likely to 
involve trade-offs. For example, increasing premiums to better reflect 
risk may reduce voluntary participation in the program or encourage 
those who are required to purchase flood insurance to limit their 
coverage to the minimum required amount (i.e., the amount of their 
outstanding mortgage balance). This in turn can increase taxpayer 
exposure for disaster assistance resulting from flooding. There is no 
"silver bullet" for improving the current structure and operations of 
the NFIP. It will require sound data and analysis and the cooperation 
and participation of many stakeholders. 

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

GAO Contact and Staff Acknowledgments: 

Contact point for our Office of Congressional Relations and Public 
Affairs may be found on the last page of this statement. For further 
information about this testimony, please contact Norman Rabkin at (202) 
512-8777 or rabkinn@gao.gov, or William O. Jenkins Jr. at (202) 512- 
8757 or jenkinswo@gao.gov. This statement was prepared under the 
direction of Christopher Keisling. Key contributors were John Bagnulo, 
Christine Davis, and Deborah Knorr. 

FOOTNOTES 

[1] In March 2003, FEMA and its approximately 2,500 staff became part 
of DHS. FEMA retained its name and individual identity within the 
department. 

[2] The National Flood Insurance Act of 1968, as amended, is codified 
at 42 U.S.C. 4001 to 4129. 

[3] 42 U.S.C. 4001(b)(2). 

[4] National Flood Insurance Program Further Enhanced Borrowing 
Authority Act of 2005, Pub. L. No. 109-106, 119 Stat. 2288 (2005). 

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

[6] Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, 
Pub. L. No. 108-264, 118 Stat. 712, 727 (2004). 

[7] GAO, Flood Insurance: Challenges Facing the National Flood 
Insurance Program, (GAO-03-606T (Washington, D.C.: Apr. 1, 2003); 
National Flood Insurance Program: Actions to Address Repetitive Loss 
Properties, (GAO-04-401T (Washington, D.C.: Mar. 25, 2004). 

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

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

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

[11] 42 U.S.C. 4014(a)(2), 4015(a), (b). 

[12] 42 U.S.C. 4014(a)(1), 4015(c). 

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

[14] Congressional Research Service, Federal Flood Insurance: The 
Repetitive Loss Problem, RL32972 (Washington, D.C.: June 30, 2005). 

[15] The term "substantial damage" means the cost of repairing the 
damaged building exceeds 50 percent of its market value (or a lower 
trigger if adopted locally). 

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

[17] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 
102, 118 Stat. 712, 714-721 (2004). The act defines a "severe 
repetitive loss property" to mean single-family properties that have 
received at least $20,000 in flood insurance payments based on four or 
more claims of at least $5,000 each. The act requires FEMA to define in 
future regulation which multi-family properties constitute "severe 
repetitive loss properties." 

[18] Id., 118 Stat. 712, 717-718 (2004). 

[19] The federal entities for lending regulation are the Board of 
Governors of the Federal Reserve System, the Office of the Comptroller 
of the Currency, the Office of Thrift Supervision, the Federal Deposit 
Insurance Corporation, the National Credit Union Administration, and 
the Farm Credit Administration. 

[20] Congressional Research Service, Federal Flood Insurance: The 
Repetitive Loss Problem (June 30, 2005). 

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

[22] National Flood Insurance Program Commitment to Policyholders and 
Reform Act of 2005, H.R. 4320, 109th Conress, section 3 (2005). 

[23] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, sections 
204, 205, and 207.