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Before the Subcommittee on Housing and Community Opportunity, 
Committee on Financial Services, House of Representatives: 

United States Government Accountability Office: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Wednesday, April 21, 2010: 

National Flood Insurance Program: 

Continued Actions Needed to Address Financial and Operational Issues: 

Statement of Orice Williams Brown, Director: 
Financial Markets and Community Investment: 


GAO Highlights: 

Highlights of GAO-10-631T, a testimony before the Subcommittee on 
Housing and Community Opportunity, Committee on Financial Services, 
House of Representatives. 

Why GAO Did This Study: 

The National Flood Insurance Program (NFIP), established in 1968, 
provides policyholders with insurance coverage for flood damage. The 
Federal Emergency Management Agency (FEMA) within the Department of 
Homeland Security is responsible for managing NFIP. Unprecedented 
losses from the 2005 hurricane season and NFIP’s periodic need to 
borrow from the U.S. Treasury to pay flood insurance claims have 
raised concerns about the program’s long-term financial solvency. 
Because of these concerns and NFIP’s operational issues, NFIP has been 
on GAO’s high-risk list since March 2006. As of April 2010, NFIP’s 
debt to Treasury stood at $18.8 billion. 

The Subcommittee asked GAO to discuss (1) NFIP’s financial challenges, 
(2) FEMA’s operational and management challenges, and (3) actions 
needed to address these challenges. In preparing this statement, GAO 
relied on its past work on NFIP and GAO’s ongoing review of FEMA’s 
management of NFIP focused on information technology and contractor 
oversight issues. 

What GAO Found: 

While Congress and FEMA intended that NFIP be funded with premiums 
collected from policyholders rather than with tax dollars, the program 
is, by design, not actuarially sound. NFIP cannot do some of the 
things that private insurers do to manage their risks. For example, 
NFIP is not structured to build a capital surplus, is likely unable to 
purchase reinsurance to cover catastrophic losses, cannot reject high-
risk applicants, and is subject to statutory limits on rate increases. 
In addition, its premium rates do not reflect actual flood risk. For 
example, nearly one in four property owners pay subsidized rates, 
“full-risk” rates may not reflect the full risk of flooding, and NFIP 
allows “grandfathered” rates, which allow some property owners to 
continue paying rates that do not reflect reassessments of their 
properties’ flood risk. Further, NFIP cannot deny insurance on the 
basis of frequent losses and thus provides policies for repetitive 
loss properties, which represent only 1 percent of policies but 
account for 25 to 30 percent of claims. NFIP’s financial condition has 
improved slightly due to an increase in the number of policyholders 
and moderate flood losses, and since March 2009, FEMA has taken some 
encouraging steps toward improving its financial position, including 
making $600 million in interest payments to Treasury without 
increasing its borrowings. However, it is unlikely to pay off its full 
$18.8 billion debt, especially if it faces catastrophic loss years. 

Operational and management issues may also limit efforts to address 
NFIP’s financial challenges and meet program goals. Payments to write-
your-own (WYO) insurers, which are key to NFIP operations, represent 
one-third to two-thirds of the premiums collected. But FEMA does not 
systematically consider actual flood insurance expense information 
when calculating these payments and has not aligned its WYO bonus 
structure with NFIP goals or implemented all of its financial controls 
for the WYO program. GAO also found that FEMA did not consistently 
follow its procedures for monitoring non-WYO contractors or coordinate 
contract monitoring responsibilities among departments on some 
contracts. Some contract monitoring records were missing, and no 
system was in place that would allow departments to share information 
on contractor deficiencies. In ongoing GAO work examining FEMA’s 
management of NFIP, some similar issues are emerging. For example, 
FEMA still lacks an effective system to manage flood insurance policy 
and claims data, despite investing roughly 7 years and $40 million on 
a new system whose development has been halted. However, FEMA has 
begun to acknowledge its management challenges and develop a plan of 

Addressing the financial challenges facing NFIP would likely require 
actions by both FEMA and Congress that involve trade-offs, and the 
challenges could be difficult to remedy. For example, reducing 
subsidies could increase collected premiums but reduce program 
participation. At the same time, FEMA must address its operational and 
management issues. GAO has recommended a number of actions that FEMA 
could take to improve NFIP operations, and ongoing work will likely 
identify additional issues. 

What GAO Recommends: 

In past work, GAO recommended, among other things, that FEMA take 
steps to help ensure that premium rates are more reflective of flood 
risks; strengthen its oversight of NFIP and insurance companies 
responsible for selling and servicing flood policies; and strengthen 
its internal controls and the quality of its data. 

View [hyperlink,] or key 
components. For more information, contact Orice Williams Brown at 
(202) 512-8678 or 

[End of section] 

Chairwoman Waters, Ranking Member Capito, and Members of the 

I appreciate the opportunity to participate in today's hearing on the 
National Flood Insurance Program (NFIP) and the challenges that the 
Federal Emergency Management Administration (FEMA) faces in 
administering it. As you know, NFIP is a key component of the federal 
government's efforts to minimize the damage and financial impact of 
floods and is the only source of insurance against flood damage for 
most residents in flood-prone areas. GAO placed NFIP on its high-risk 
list in March 2006, not only because of the program's potential to 
incur billions of dollars in losses and the many financial challenges 
it faces, but also because of operational and management challenges 
within FEMA, many of which we have identified in previous reports to 

As of April 2010, NFIP owed approximately $18.8 billion to the U.S. 
Treasury, primarily as a result of loans the program received to pay 
claims from the 2005 hurricane season. NFIP borrowed additional funds 
from Treasury to make interest payments on this debt and is unlikely 
ever to be able to repay the entire amount. These revenue shortfalls 
reflect both the devastating effects of catastrophic hurricanes and 
structural weaknesses in the way the program is funded. Our previous 
reports identified many of these weaknesses, including subsidized 
premium rates, rate-setting methods that do not reflect the actual 
risk of losses due to flooding, and claims arising from a small number 
of repetitive loss properties.[Footnote 1] We have also previously 
identified management issues, particularly with respect to FEMA's 
oversight of write-your-own (WYO) insurers. We are currently 
conducting a comprehensive review of NFIP management and other ongoing 
challenges that FEMA faces in administering the program. 

My testimony today will revisit and update the challenges we 
identified in previous reports, specifically (1) NFIP's financial 
challenges, (2) FEMA's operational and management challenges relating 
to NFIP, and (3) actions needed to address these challenges. My 
statement is based largely on completed work on the oversight of the 
WYO program, the financial impact of subsidized premium rates, and the 
rate-setting process for flood insurance premiums. We performed our 
work 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 we obtained provides a reasonable basis 
for our findings and conclusions based on our audit objectives. 


Congress and FEMA intended that the NFIP's operating expenses and 
flood insurance claims would be paid with premiums collected by the 
program rather than with tax dollars. But the program is, by design, 
not actuarially sound, for several reasons. First, NFIP does not 
operate like private insurance companies. For example, FEMA is not 
structured to build a capital surplus, is likely unable to purchase 
reinsurance to cover high or catastrophic losses, cannot accept or 
reject applicants to help manage risk, and is subject to statutory 
limits on rate increases. Second, many property owners are paying 
premium rates that do not reflect the full, long-term risk of 
flooding. Almost 25 percent of property owners pay subsidized premium 
rates, and even "full-risk" premium rates may not reflect the actual 
risk of flooding. Further NFIP allows some property owners to continue 
to pay rates that do not reflect reassessments of their properties' 
flood risk ("grandfathered" rates). Finally, NFIP must continue to 
insure repetitive loss properties, which represent only 1 percent of 
flood insurance policies but account for 25 to 30 percent of claims. 
FEMA has taken some encouraging steps toward improving its financial 
position, including making nearly $600 million in interest payments to 
the U.S. Treasury since March 2009 without increasing its borrowing. 
It has also increased its collected premiums by 28 percent since 
September 2006 and expanded its policy base by more than 25 percent, 
due at least in part to its FloodSmart program.[Footnote 2] 

Several operational and management issues may limit FEMA's progress in 
addressing NFIP's financial challenges and achieving the program's 
goals. For example, WYO insurers play a key role in NFIP operations, 
and payments to them represent from one-third to two-thirds of 
premiums received. But in previous reports we found that, among other 
internal control weaknesses, FEMA did not systematically consider 
actual flood insurance expense information when determining payments 
to WYO insurers, had not aligned its WYO bonus structure with NFIP's 
goals, and had not implemented many of its planned financial controls 
for the WYO program.[Footnote 3] Further, contractors other than WYO 
insurers are responsible for performing key NFIP functions, such as 
collecting NFIP data and marketing the program. However, we have also 
found problems with oversight of these contractors. Specifically, FEMA 
did not consistently follow its procedures for monitoring contractors, 
did not always coordinate contract monitoring responsibilities among 
various agency departments on some of the contracts we reviewed, 
lacked contract monitoring records, and did not have a system in place 
that would allow various departments to share information relating to 
contractor deficiencies. Further, preliminary results of our ongoing 
work revealed that FEMA continues to lack an effective system to 
manage flood insurance policy and claims data, despite having invested 
roughly 7 years and $40 million in a new system whose development has 
been halted because it did not meet user needs and was not ready to 
replace the legacy system. 

Addressing the financial and operational challenges facing NFIP would 
require actions from both Congress and FEMA. We recognize that any 
such actions would involve significant trade-offs and that some 
financial challenges would be difficult to remedy. For instance, 
possible reform options to make premium rates more reflective of long-
term flood risks include eliminating, reducing, or targeting premium 
subsidies based on need. But taking any of these steps would raise 
rates and potentially reduce participation in NFIP. FEMA and Congress 
could also address the impact of repetitive loss properties by 
expanding mitigation efforts to target those properties that are at 
highest risk.[Footnote 4] However, doing so would include actions such 
as elevation, relocation, and demolition that would be costly to 
taxpayers and could take years. Congress could also amend laws 
regarding coverage for homeowners who refuse to mitigate and 
streamline the various mitigation grant programs within FEMA. In our 
past work, we also identified a number of management challenges that 
FEMA would have to address, including improvements to oversight of WYO 
insurers and its payments to them, updating the NFIP rate-setting 
process, fully applying internal controls, and strengthening oversight 
of its contractors, among others. 


The National Flood Insurance Act of 1968 established NFIP as an 
alternative to providing direct disaster assistance after floods. 
[Footnote 5] NFIP, which provides government-guaranteed flood 
insurance to homeowners and businesses, was intended to reduce the 
federal government's escalating costs for repairing flood damage after 
disasters. FEMA, which is within the Department of Homeland Security 
(DHS), is responsible for the oversight and management of NFIP. Since 
the program's inception, Congress has enacted several pieces of 
legislation to strengthen it. The Flood Disaster Protection Act of 
1973 made flood insurance mandatory for owners of properties in 
vulnerable areas who had mortgages from federally regulated lenders 
and provided additional incentives for communities to join the 
program.[Footnote 6] The National Flood Insurance Reform Act of 1994 
strengthened the mandatory purchase requirements for owners of 
properties located in special flood hazard areas (SFHA) with mortgages 
from federally regulated lenders.[Footnote 7] Finally, the Bunning-
Bereuter-Blumenauer Flood Insurance Reform Act of 2004 authorized 
grant programs to mitigate properties that experienced repetitive 
flood losses. Owners of these repetitive loss properties who do not 
mitigate face higher premiums.[Footnote 8] 

To participate in NFIP, communities agree to enforce regulations for 
land use and new construction in high-risk flood zones and to adopt 
and enforce state and community floodplain management regulations to 
reduce future flood damage. Currently, more than 20,000 communities 
participate in NFIP. NFIP has mapped flood risks across the country, 
assigning flood zone designations based on risk levels, and these 
designations are a factor in determining premium rates. NFIP offers 
two types of flood insurance premiums: subsidized and full-risk. The 
National Flood Insurance Act of 1968 authorizes NFIP to offer 
subsidized premiums to owners of certain properties. These subsidized 
premium rates, which represent only about 35 to 40 percent of the cost 
of covering the full risk of flood damage to the properties, account 
for about 22 percent of all NFIP policies. To help reduce or eliminate 
the long-term risk of flood damage to buildings and other structures 
insured by NFIP, FEMA has used a variety of mitigation efforts, such 
as elevation, relocation, and demolition. Despite these efforts, the 
inventories of repetitive loss properties and policies with subsidized 
premium rates have continued to grow. In response to the magnitude and 
severity of the losses from the 2005 hurricanes, Congress increased 
NFIP's borrowing authority from the Department of the Treasury 
(Treasury) to $20.775 billion. As of April 2010, FEMA owed Treasury 
$18.8 billion, and the program as currently designed will likely not 
generate sufficient revenues to repay this debt. 

NFIP's Financial Challenges Have Increased the Federal Government's 
and U.S. Taxpayers' Financial Exposure from Flood Losses: 

By design, NFIP is not an actuarially sound program, in part because 
it does not operate like many private insurance companies. As a 
government program, its primary public policy goal is to provide flood 
insurance in flood-prone areas to property owners who otherwise would 
not be able to obtain it. Yet NFIP is also expected to cover its 
claims losses and operating expenses with the premiums it collects, 
much like a private insurer. In years when flooding has not been 
catastrophic, NFIP has generally managed to meet these competing 
goals. In years of catastrophic flooding, however, and especially 
during the 2005 hurricane season, it has not. 

NFIP's operations differ from those of most private insurers in a 
number of ways. First, it operates on a cash-flow basis and has the 
authority to borrow from Treasury. As of April 2010, NFIP owed 
approximately $18.8 billion to Treasury, primarily as a result of 
loans that the program received to pay claims from the 2005 hurricane 
season. NFIP will likely not be able to meet its interest payments in 
most years, and the debt may continue to grow as the program may need 
to borrow to meet the interest payments and potential future flood 
losses. Also unlike private insurance companies, NFIP assumes all the 
risk for the policies it sells. Private insurers typically retain only 
part of the risk that they accept from policyholders, ceding a portion 
of the risk to reinsurers (insurance for insurers). This mechanism is 
particularly important in the case of insurance for catastrophic 
events, because the availability of reinsurance allows an insurer to 
limit the possibility that it will experience losses beyond its 
ability to pay. NFIP's lack of reinsurance, combined with the lack of 
structure to build a capital surplus, transfers much of the financial 
risk of flooding to Treasury and ultimately the taxpayer. 

NFIP is also required to accept virtually all applications for 
insurance, unlike private insurers, which may reject applicants for a 
variety of reasons. For example, FEMA cannot deny insurance on the 
basis of frequent losses. As a result, NFIP is less able to offset the 
effects of adverse selection--that is, the phenomenon that those who 
are most likely to purchase insurance are also the most likely to 
experience losses. Adverse selection may lead to a concentration of 
policyholders in the riskiest areas. This problem is further 
compounded by the fact that those at greatest risk are required to 
purchase NFIP insurance if they have a mortgage from a federally 
regulated lender. Finally, by law, FEMA is prevented from raising 
rates on each flood zone by more than 10 percent each year. While most 
states regulate premium prices for private insurance companies on 
other lines of insurance, they generally do not set limits on premium 
rate increases, instead focusing on whether the resulting premium 
rates are justified by the projected losses and expenses. 

NFIP's Premium Rates Do Not Reflect the Full Risk of Flooding: 

As we have seen, NFIP does not charge rates that reflect the full risk 
of flooding. NFIP could be placed on a sounder fiscal footing by 
addressing several elements of its premium structure. For example, as 
we have pointed out in previous reports, NFIP provides subsidized and 
grandfathered rates that do not reflect the full risk of potential 
flood losses to some property owners, operates in part with unreliable 
and incomplete data on flood risks that make it difficult to set 
accurate rates, and has not been able to overcome the challenge of 
repetitive loss properties.[Footnote 9] Subsidized rates, which are 
required by law, are perhaps the best-known example of premium rates 
that do not reflect the actual risk of flooding. These rates, which 
were authorized from when the program began, were intended to help 
property owners during the transition to full-risk rates. But today, 
nearly one out of four of NFIP policies continue to be based on a 
subsidized rate. These rates allow policyholders with structures that 
were built before floodplain management regulations were established 
in their communities to pay premiums that represent about 35 to 40 
percent of the actual risk premium. Moreover, FEMA estimates that 
properties covered by policies with subsidized rates experience as 
much as five times more flood damage than compliant new structures 
that are charged full-risk rates. As we have pointed out, the number 
of policies receiving subsidized rates has grown steadily in recent 
years and without changes to the program will likely continue to grow, 
increasing the potential for future NFIP operating deficits. 

Further, potentially outdated and inaccurate data about flood 
probabilities and damage claims, as well as outdated flood maps, raise 
questions about whether full-risk premiums fully reflect the actual 
risk of flooding. First, some of the data used to estimate the 
probability of flooding have not been updated since the 1980s. 
Similarly, the claims data used as inputs to the model may be 
inaccurate because of incomplete claims records and missing data. 
Further, some of the maps FEMA uses to set premium rates remain out of 
date despite recent modernization efforts. For instance, as FEMA 
continues these modernization efforts, it does not account for ongoing 
and planned development, making some maps outdated shortly after their 
completion. Moreover, FEMA does not map for long-term erosion, further 
increasing the likelihood that data used to set rates are inaccurate. 
FEMA also sets flood insurance rates on a nationwide basis, failing to 
account for many topographic factors that are relevant to flood risk 
for individual properties. Some patterns in historical claims and 
premium data suggest that NFIP's rates may not accurately reflect 
individual differences in properties' flood risk. Not accurately 
reflecting the actual risk of flooding increases the risk that full- 
risk premiums may not be sufficient to cover future losses and add to 
concerns about NFIP's financial stability. 

Further contributing to NFIP's financial challenges, FEMA made a 
policy decision to allow certain properties remapped into riskier 
flood zones to keep their previous lower rates. Like subsidized rates, 
these "grandfathered" rates do not reflect the actual risk of flooding 
to the properties and do not generate sufficient premiums to cover 
expected losses. FEMA officials told us that the decision to 
grandfather rates was based on considerations of equity, ease of 
administration, and goals of promoting floodplain management. However, 
FEMA does not collect data on grandfathered properties or measure 
their financial impact on the program. As a result, it does not know 
how many such properties exist, their exact location, or the volume of 
losses they generate. As FEMA continues its efforts to modernize flood 
maps across the country, it has continued to face resistance from 
communities and homeowners when remapping places properties into 
higher-risk flood zones with higher rates. As a result, FEMA has often 
grandfathered in previous premium rates that are lower than the 
remapped rates. However, homeowners who are remapped into high-risk 
areas and do not currently have flood insurance may be required to 
purchase it at the full-risk rate. 

In reauthorizing NFIP in 2004, Congress noted that repetitive loss 
properties--those that have had two or more flood insurance claims 
payments of $1,000 or more over 10 years--constituted a significant 
drain on NFIP resources. These properties account for about 1 percent 
of all policies but are estimated to account for up to 30 percent of 
all NFIP losses. Not all repetitive loss properties are part of the 
subsidized property inventory, but a high proportion receive 
subsidized rates, further contributing to NFIP's financial risks. 
While Congress has made efforts to target these properties, the number 
of repetitive loss properties has continued to grow, making them an 
ongoing challenge to NFIP's financial stability. 

Despite Its Financial Challenges, NFIP Has Experienced Some Positive 

According to FEMA, expanded marketing efforts through its FloodSmart 
campaign have contributed to an increase in NFIP policies. This 
program was designed to educate and inform partners, stakeholders, 
property owners, and renters about insuring their homes and businesses 
against flood damage. Since the start of the FloodSmart campaign in 
2004, NFIP has seen policy growth of more than 25 percent and as of 
February 2010 had 5.6 million policies in force. Moreover, despite the 
economic downturn, both policy sales and retention grew in 2009. 
Correspondingly, NFIP's collected premiums have risen 28 percent since 
September 2006. This increase, combined with a relatively low loss 
experience in recent years, has enabled FEMA to make nearly $600 
million in interest payments to Treasury with no additional borrowing 
since March 2009. FEMA has also adjusted its expense reimbursement 
formula. While these are all encouraging developments, FEMA is still 
unlikely to ever pay off its current $18.8 billion debt. 

FEMA's Operational and Management Issues May Further Limit Progress in 
Achieving NFIP Goals: 

We have identified a number of operational issues that affect NFIP, 
including weaknesses in FEMA's oversight of WYO insurers and 
shortcomings in its oversight of other contractors, as well as new 
issues from ongoing work. For example, we found that FEMA does not 
systematically consider actual flood insurance expense information 
when determining the amount it pays WYO insurers for selling and 
servicing flood insurance policies and adjusting claims. Instead, FEMA 
has used proxies, such as average industry operating expenses for 
property insurance, to determine the rates at which it pays these 
insurers, even though their actual flood insurance expense information 
has been available since 1997. Because FEMA does not systematically 
consider these data when setting its payment rates, it cannot 
effectively estimate how much insurers are spending to carry out their 
obligations to FEMA. Further, FEMA does not compare the WYO insurers' 
actual expenses to the payments they receive each year and thus cannot 
determine whether the payments are reasonable in terms of expenses and 
profits. When GAO compared payments FEMA made to six WYO insurers to 
their actual expenses for calendar years 2005 through 2007, we found 
that the payments exceeded actual expenses by $327.1 million, or 16.5 
percent of total payments made. By considering actual expense 
information, FEMA could provide greater transparency and 
accountability over payments to WYO insurers and potentially save 
taxpayer money. 

FEMA also has not aligned its bonus structure for WYO insurers with 
NFIP goals such as increasing penetration in low-risk flood zones and 
among homeowners in all zones that do not have mortgages from 
federally regulated lenders. FEMA uses a broad-based distribution 
formula that primarily rewards companies that are new to NFIP and can 
relatively easily increase their percentage of net policies from a 
small base. We also found that most WYO insurers generally offered 
flood insurance when it was requested but did not strategically market 
the product as a primary insurance line. FEMA has set only one 
explicit marketing goal--to increase policy growth by 5 percent each 
year--and does not review the WYO insurers' marketing plans. It 
therefore lacks the information needed to assess the effectiveness of 
either the WYO insurers' efforts to increase participation or the 
bonus program itself. For example, FEMA does not know the extent to 
which sales increases may reflect external factors such as flood 
events or its own FloodSmart marketing campaign rather than any effort 
on the part of the insurers. Having intermediate targeted goals could 
also help expand program participation, and linking such goals 
directly to the bonus structure could help ensure that NFIP and WYO 
goals are in line with each other. 

Finally, FEMA has explicit financial control requirements and 
procedures for the WYO program but has not implemented all aspects of 
its Financial Control Plan. FEMA's Financial Control Plan provides 
guidance for WYO insurers to help ensure compliance with the statutory 
requirements for NFIP. It contains several checks and balances to help 
ensure that taxpayers' funds are spent appropriately. For an earlier 
report, we reviewed 10 WYO insurers and found that while FEMA 
performed most of the required biennial audits and underwriting and 
claims reviews required under the plan, it rarely or never implemented 
most of the required audits for cause, state insurance department 
audits, or marketing, litigation, and customer service operational 
reviews.[Footnote 10] In addition, FEMA did not systematically track 
the outcomes of the various audits, inspections, and reviews that it 
performed. We also found that multiple units had responsibility for 
helping ensure that WYO insurers complied with each component of the 
Financial Control Plan; that FEMA did not maintain a single, 
comprehensive monitoring system that would allow it to ensure 
compliance with all components of the plan; and that there was no 
centralized access to all of the documentation produced. Because FEMA 
does not implement all aspects of the Financial Control Plan, it 
cannot ensure that WYO insurers are fully complying with program 

In another review, we found that weak internal controls impaired 
FEMA's ability to maintain effective transaction-level accountability 
with WYO insurers from fiscal years 2005 through 2007, a period that 
included the financial activity related to the 2005 Gulf Coast 
hurricanes.[Footnote 11] NFIP had limited assurance that its financial 
data for fiscal years 2005 to 2007 were accurate. This impaired data 
reliability resulted from weaknesses at all three levels of the NFIP 
transaction accountability and financial reporting process. At the WYO 
level, WYO insurer claims loss files did not include the documents 
necessary to support the claims, and some companies filed reports 
late, undermining the reliability of the data they did report. Second, 
contractor-level internal control activities were ineffective in 
verifying the accuracy of the data that WYO insurers submitted, such 
as names and addresses. Lastly, at the agency level, financial 
reporting process controls were not based on transaction-level data. 
Instead, FEMA relied primarily on summary data compiled using error-
prone manual data entry. 

FEMA's Oversight of Non-WYO Contractor Activities Is Also Lacking: 

Also in a previous report, we pointed out that FEMA lacked records of 
monitoring activities for other contractors, inconsistently followed 
its procedures for monitoring these contractors, and did not 
coordinate contract monitoring responsibilities for the two major 
contracts we reviewed.[Footnote 12] At FEMA, a Contracting Officer's 
Technical Representative (COTR) and staff (referred to as "monitors") 
are responsible for, respectively, ensuring compliance with contract 
terms and regularly monitoring and reporting on the extent to which 
NFIP contractors meet standards in performance areas specified in the 
contracts. Internal control standards for the federal government state 
that records should be properly managed and maintained. But FEMA 
lacked records for the majority of the monitoring reports we requested 
and did not consistently follow the monitoring procedures for 
preparing, reviewing, and maintaining monitoring reports. 

Further, FEMA offices did not coordinate information and actions 
relating to contractors' deficiencies and payments, and in some cases 
key officials were unaware of decisions that were made about 
contractors' performance. In particular, our review of monitoring 
reports for one contract revealed a lack of coordination between the 
COTR and the contracting officer. As a result, FEMA could not ensure 
that the contractor had adhered to the contract's requirements and 
lacked information critical to effective oversight of key NFIP data 
collection, reporting, and insurance functions. Given NFIP's reliance 
on contractors, it is important that FEMA have in place adequate 
controls that are consistently applied to all contracts. Consistent 
with our findings in prior work, the DHS inspector general has also 
identified weaknesses in FEMA's internal controls and financial 
reporting related to NFIP.[Footnote 13] 

FEMA Continues to Lack an Effective System to Manage Flood Insurance 
Policy and Claims Data: 

To manage the flood policy and claims information that it obtains from 
insurance companies, NFIP's Bureau and Statistical Agent (BSA) relies 
on a flood insurance management system from the 1980s that is 
difficult and costly to sustain and that does not adequately support 
NFIP's mission needs. This system consists of over 70 interfaced 
applications that utilize monthly tape and batch submissions of policy 
and claims data from insurance companies. The system also provides 
limited access to NFIP data. Further, identifying and correcting 
errors in submission requires between 30 days and 6 months, and the 
general claims processing cycle itself is 2 to 3 months. 

To address the limitations of this system, NFIP launched a program in 
2002 to acquire and implement a modernization and business improvement 
system, known as NextGen. As envisioned, NextGen was to accelerate 
updates to information obtained from insurance companies, identify 
errors before flood insurance policies went into effect, and enable 
FEMA to expedite business transactions and responses to NFIP claims 
when policyholders required urgent support. As such, the system would 
support the needs of a wide range of NFIP stakeholders, including FEMA 
headquarters and regional staff, WYO insurers, vendors, state hazard 
mitigation officers, and NFIP state coordinators. 

As part of our ongoing review of FEMA's management of NFIP, 
preliminary results reveal that despite having invested roughly $40 
million over 7 years, FEMA had yet to implement NextGen. Initial 
versions of NextGen were first deployed for operational use in May 
2008. However, shortly thereafter system users reported major problems 
with the system, including significant data and processing errors. As 
a result, use of NextGen was halted, and the agency returned to 
relying exclusively on its mainframe-based legacy system while NextGen 
underwent additional testing. In late 2009, after this testing showed 
that the system did not meet user needs and was not ready to replace 
the legacy system, further development and deployment of NextGen was 
stopped, and FEMA's Chief Information Officer began an evaluation to 
determine what, if anything, associated with the system could be 
salvaged. This evaluation is currently under way, and a date for 
completing it has yet to be established. 

Our ongoing review of FEMA's management of NFIP includes identifying 
lessons learned about how NextGen was defined, developed, tested, and 
deployed, including weaknesses in requirements development and 
management, test management, risk management, executive oversight, and 
program office staffing that have collectively contributed to the 
program's failure. In completing its evaluation and deciding how to 
proceed in meeting its policy and claims processing needs, FEMA could 
benefit from correcting these weaknesses. In the interim, the agency 
continues to rely on its outdated legacy system and thus does not have 
the kind of robust analytical support and information needed to help 
address the reasons that NFIP remains on GAO's high-risk list of 
federal programs. 

Addressing NFIP's Challenges Would Require Actions from FEMA and 

To address the challenges NFIP faces, FEMA would have to address its 
own operational and management challenges. Further, legislative reform 
would be needed to address structural issues. However, as you know 
addressing many of these issues involves public policy trade-offs that 
would have to be made by Congress. Moreover, part of this process 
requires determining whether NFIP is or should be structured as an 
insurance program and how much liability the government can and is 
willing to accept. For example, if Congress wants to structure NFIP as 
an insurance company and limit borrowing from Treasury in future high- 
or catastrophic loss years, NFIP would have to build a capital surplus 
fund. Our prior work has shown that building such a fund would require 
charging premium rates that, in some cases, could be more than double 
or triple current rates and would take a number of years without 
catastrophic losses to implement. Additionally, while private insurers 
generally use reinsurance to hedge their risk of catastrophic losses, 
it is unclear whether the private reinsurance market would be willing 
to offer coverage to NFIP. In the absence of reinsurance and a surplus 
fund, Treasury will effectively continue to act as the reinsurer for 
NFIP and be the financial backstop for the program. 

Premium Rates Could Be Made More Reflective of Flood Risk: 

Making premium rates more reflective of flood risk would require 
actions by FEMA and Congress. Because subsidized premium rates are 
required by law, addressing their associated costs would require 
congressional action. As previously reported, two potential options 
would be to eliminate or reduce the use of the subsidies over time or 
target them based on need. However, these options involve trade-offs. 
For example, eliminating or reducing the subsidies would help ensure 
that premium rates more accurately reflected the actual risk of loss 
and could encourage mitigation efforts. But 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 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. Unlike other agencies that provide--and are allocated funds 
for--traditional subsidies, NFIP does not receive an appropriation to 
pay for shortfalls in collected premiums caused by its subsidized 
rates. However, one option to maintain the subsidies but improve 
NFIP's financial stability would be to rate all policies at the full-
risk rate and to appropriate subsidies for qualified policyholders. In 
this way, the cost of such subsidies would be more transparent, and 
policyholders would be better informed of their flood risk. Depending 
on how such a program was implemented, NFIP might be able to charge 
more participants rates that more accurately reflected their risk of 
flooding. However, raising premium rates for some participants could 
also decrease program participation, and low-income property owners 
and renters could be discouraged from participating in NFIP if they 
were required to prove that they met the requirements for a subsidy. 
FEMA might also face challenges in implementing this option in the 
midst of other ongoing operational and management challenges. 

NFIP's rate-setting process for full-risk premiums may not ensure that 
those premium rates reflect the actual risk of flooding and therefore 
may increase NFIP's financial risk. Moreover, FEMA's rate-setting 
process for subsidized properties depends, in part, on the accuracy of 
the full-risk rates, raising concerns about how subsidized rates are 
calculated as well. To address these concerns, we have identified 
actions that FEMA could take. For example, we recommended that FEMA 
take steps to help ensure that its rate-setting methods and the data 
it uses to set rates result in full-risk premium rates that accurately 
reflect the risk of losses from flooding. In particular, we pointed 
out that these steps should include verifying the accuracy of flood 
probabilities, damage estimates, and flood maps and reevaluating the 
practice of aggregating risks across zones. While FEMA disagreed with 
our analysis of its rate-setting methods, this area continues to 
warrant attention. 

Similarly, because NFIP allows grandfathered rates for those remapped 
into high-risk flood zones, it would also be in the position to 
address some of the challenges associated with this practice. FEMA 
could end grandfathered rates, but it decided to allow grandfathering 
after consulting with Congress, its oversight committees, and other 
stakeholders and considering issues of equity, fairness, and the goal 
of promoting floodplain management. We recommended that the agency 
take steps both to ensure that information was collected on the 
location, number, and losses associated with existing and newly 
created grandfathered properties in NFIP and to analyze the financial 
impact of these properties on the flood insurance program.[Footnote 
14] With such information, FEMA and Congress will be better informed 
on the extent to which these rates contribute to NFIP's financial 

Another statutory requirement that could be revisited is the 10-
percent cap on rate increases. As with all the potential reform 
options, determining whether such action is warranted would 
necessitate weighing the law's benefits--including limiting financial 
hardship to policyholders--against the benefits that increasing or 
removing such limits would provide to NFIP, Treasury, and ultimately 
the taxpayer. However, as long as caps on rate increases remain, FEMA 
will continue to face financial challenges. 

Solutions for addressing the impact of repetitive loss properties 
would also require action by both Congress and FEMA. For example, we 
have reported that one option for Congress would be to substantially 
expand mitigation efforts and target these efforts toward the highest-
risk properties.[Footnote 15] Mitigation criteria could be made more 
stringent--for example, by requiring all insured properties that have 
filed two or more flood claims (even for small amounts) to mitigate, 
denying insurance to property owners who refuse or do not respond to a 
mitigation offer, or some combination of these approaches. While these 
actions would help reduce losses from flood damage and could 
ultimately limit costs to taxpayers by decreasing the number of 
subsidized properties, they would require increased funding for FEMA's 
mitigation programs to elevate, relocate, or demolish the properties, 
would be costly to taxpayers, and could take years to complete. 
Congress could also consider changes to address loopholes in 
mitigation and repurchase requirements that allow policyholders to 
avoid mitigating by simply not responding to FEMA's requests that they 
do so. FEMA could be required to either drop coverage for such 
properties or use eminent domain to seize them if owners failed to 
respond to FEMA's mitigation requests. Moreover, Congress could 
streamline the various mitigation grant programs to make them more 
efficient and effective.[Footnote 16] 

FEMA Could Take Further Actions to Help Address Operational and 
Management Challenges: 

Over the last several years, we have made many recommendations for 
actions that FEMA could take to improve its management of NFIP. FEMA 
has implemented some recommendations, including, among other things, 
introducing a statistically valid method for sampling flood insurance 
claims for review, establishing a regulatory appeals process for 
policyholders, and ensuring that WYO insurance agents meet minimum 
education and training requirements.[Footnote 17] FEMA has also taken 
steps to make analyzing the overall results of claims adjustments 
easier after future flood events. The efforts will help in determining 
the number and type of claims adjustment errors made and deciding 
whether new, cost-efficient methods for adjusting claims that were 
introduced after Hurricane Katrina are feasible to use after other 
flood events.[Footnote 18] However, as mentioned previously, many of 
our other previous recommendations have not yet been implemented. For 
example, we have recommended that FEMA: 

* Address challenges to oversight of the WYO program, specifically the 
lack of transparency of and accountability for the payments FEMA makes 
to WYO insurers, by determining in advance the amounts built into the 
payment rates for estimated expenses and profit, annually analyzing 
the amounts of actual expenses and profit in relation to the estimated 
amounts used in setting payment rates, and by immediately reassessing 
the practice of paying WYO insurers an additional 1 percent of written 
premiums for operating expenses. 

* Take steps to better oversee WYO insurers and ensure that they are 
in compliance with statutory requirements for NFIP and that taxpayers' 
funds are spent appropriately by consistently following the Financial 
Control Plan and ensuring that each component is implemented; ensuring 
that any revised Financial Control Plan covers oversight of all 
functions of participating WYO insurers, including customer service 
and litigation expenses; systematically tracking insurance companies' 
compliance with and performance under each component of the Financial 
Control Plan; and ensuring centralized access to all the audits, 
reviews, and data analyses performed for each participating insurance 
company under the Financial Control Plan. 

* Improve NFIP's transaction-level accountability and assure that 
financial reporting is accurate and that insurance company operations 
conform to program requirements by augmenting NFIP policies to require 
contractors to develop procedures for analyzing financial reports in 
relation to the transaction-level information that WYO insurers submit 
for statistical purposes; revising required internal control 
activities for contractors to provide for verifying and validating the 
reliability of WYO-reported financial information based on a review of 
a sample of the underlying transactions or events; and obtaining 
verification that these objectives have been met through independent 
audits of the WYO insurers. 

* Address contract and management oversight issues that GAO has 
identified in previous reports, including determining the feasibility 
of integrating and streamlining numerous existing NFIP financial 
reporting processes to reduce the risk of errors inherent in the 
manual recording of accounting transactions into multiple systems; 
establishing and implementing procedures that require the review of 
available information, such as the results of biennial audits, 
operational reviews, and claim reinspections to determine whether the 
targeted audits for cause should be used; establishing and 
implementing procedures to schedule and conduct all required 
operational reviews within the prescribed 3-year period; and 
establishing and implementing procedures to select statistically 
representative samples of all claims as a basis for conducting 
reinspections of claims by general adjusters. 

* Address challenges to oversight of contractor activities, including 
implementing processes to ensure that monitoring reports are submitted 
on time and systematically reviewed and maintained by the COTR and the 
Program Management Office; that staff clearly monitor each performance 
standard the contractor is required to meet in the specified time 
frames and clearly link monitoring reports and performance areas; that 
written guidance is implemented for all NFIP-related contracts on how 
to consistently handle the failure of a contractor to meet performance 
standards; that written policies and procedures are established 
governing coordination among FEMA officials and offices when 
addressing contractor deficiencies; and that financial disincentives 
are appropriately and consistently applied. 

Building on our prior work and these recommendations, we are in the 
process of conducting a comprehensive review of FEMA's overall 
management of NFIP that could help FEMA develop a roadmap for 
identifying and addressing many of the root causes of its operational 
and management challenges. This review focuses on a wide range of 
internal management issues including acquisition, contractor 
oversight, information technology (NextGen), internal controls, human 
capital, budget and resources, records management, and financial 
management.[Footnote 19] While our work is ongoing, we have observed 
some positive developments in the agency's willingness to begin to 
acknowledge its management issues and the need to address them. FEMA 
has also taken steps to improve our access to key NFIP staff and 
information by providing us with an on-site office at one of FEMA's 
locations, facilitating our ability to access and review documents. 

Recent Proposals Could Provide Some Benefits but Also Raise Concerns: 

As part of our past work, we have also evaluated other proposals 
related to NFIP. Each of those proposals has potential benefits as 
well as challenges. 

* In a previous report, we discussed some of the challenges associated 
with implementing a combined federal flood and wind insurance program. 
[Footnote 20] While such a program could provide coverage for wind 
damage to those unable to obtain it in the private market and simplify 
the claims process for some property owners, it could also pose 
several challenges. For example, FEMA would need to determine wind 
hazard prevention standards, adapt existing programs to accommodate 
wind coverage, create a new rate-setting process, raise awareness of 
the program, enforce new building codes, and put staff and procedures 
in place. FEMA would also need to determine how to pay claims in years 
with catastrophic losses, develop a plan to respond to potential 
limited participation and adverse selection, and address other trade- 
offs, including delays in reimbursing participants, litigation, lapses 
in coverage, underinsured policyholders, and larger-than-expected 

* As we have previously reported, private business interruption 
coverage for flood damage is expensive and is generally purchased only 
by large companies.[Footnote 21] Adding business interruption 
insurance to NFIP could help small businesses obtain coverage that 
they could not obtain in the private market, but NFIP currently lacks 
resources and expertise in this area. Adding business interruption 
insurance could increase NFIP's existing debt and potentially amplify 
its ongoing management and financial challenges. Insurers told us that 
underwriting this type of coverage, properly pricing the risk, and 
adjusting claims was complex. 

* Finally, we have reported that creating a catastrophic loss fund to 
pay larger-than-average annual losses would be challenging, for 
several reasons.[Footnote 22] For example NFIP's debt to Treasury 
would likely prevent NFIP from ever being able to contribute to such a 
fund. Further, such a fund might not eliminate NFIP's need to borrow 
for larger-than-expected losses that occurred before the fund was 
fully financed. Building a fund could also require significant premium 
rate increases, potentially reducing participation in NFIP. 

Closing Comments: 

FEMA faces a number of ongoing challenges in managing and 
administering NFIP that, if not addressed, will continue to work 
against improving the program's long-term financial condition. As you 
well know, improving NFIP's financial condition involves a set of 
highly complex, interrelated issues that are likely to involve many 
trade-offs and have no easy solutions, particularly when the solutions 
to problems involve balancing the goals of charging rates that reflect 
the full risk of flooding and encouraging broad participation in the 
program. In addition, addressing NFIP's current challenges will 
require the cooperation and participation of many stakeholders. 

As we noted when placing NFIP on the high-risk list in 2006, 
comprehensive reform will likely be needed to address the financial 
challenges facing the program. In addressing these financial 
challenges, FEMA will also need to address a number of operational and 
management challenges before NFIP can be eligible for removal from the 
list. Our previous work has identified many of the necessary actions 
that FEMA should take, and preliminary observations from our ongoing 
work have revealed additional operational and management issues. By 
addressing both the financial challenges as well as the operational 
and management issues, NFIP will be in a much stronger position to 
achieve its goals and ultimately to reduce its burden on the taxpayer. 

Chairwoman Waters and Ranking Member Capito, this concludes my 
prepared statement. I would be pleased to respond to any of the 
questions you or other members of the Subcommittee may have at this 

GAO Contact and Staff Acknowledgments: 

Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this statement. For further 
information about this testimony, please contact Orice Williams Brown 
at (202) 512-8678 or This statement was prepared 
under the direction of Patrick Ward. Key contributors were Tania 
Calhoun, Emily Chalmers, Nima Patel Edwards, Elena Epps, Christopher 
Forys, Randy Hite, Tonia Johnson, and Shamiah Kerney. 

[End of section] 

Related GAO Products: 

Financial Management: Improvements Needed in National Flood Insurance 
Program's Financial Controls and Oversight. [hyperlink,]. Washington, D.C.: December 22, 

Flood Insurance: Opportunities Exist to Improve Oversight of the WYO 
Program. [hyperlink,]. 
Washington, D.C.: August 21, 2009. 

Results-Oriented Management: Strengthening Key Practices at FEMA and 
Interior Could Promote Greater Use of Performance Information. 
[hyperlink,]. Washington, D.C.: 
August 17, 2009. 

Information on Proposed Changes to the National Flood Insurance 
Program. [hyperlink,]. 
Washington, D.C.: February 27, 2009. 

High-Risk Series: An Update. [hyperlink,]. Washington, D.C.: January 

Flood Insurance: Options for Addressing the Financial Impact of 
Subsidized Premium Rates on the National Flood Insurance Program. 
[hyperlink,]. Washington, D.C.: 
November 14, 2008. 

Flood Insurance: FEMA's Rate-Setting Process Warrants Attention. 
[hyperlink,]. Washington, D.C.: 
October 31, 2008. 

National Flood Insurance Program: Financial Challenges Underscore Need 
for Improved Oversight of Mitigation Programs and Key Contracts. 
[hyperlink,]. Washington, D.C.: 
June 16, 2008. 

Natural Catastrophe Insurance: Analysis of a Proposed Combined Federal 
Flood and Wind Insurance Program. [hyperlink,]. Washington, D.C.: April 25, 

National Flood Insurance Program: Greater Transparency and Oversight 
of Wind and Flood Damage Determinations Are Needed. [hyperlink,]. Washington, D.C.: December 28, 

National Disasters: Public Policy Options for Changing the Federal 
Role in Natural Catastrophe Insurance. [hyperlink,]. Washington, D.C.: November 26, 

Federal Emergency Management Agency: Ongoing Challenges Facing the 
National Flood Insurance Program. [hyperlink,]. Washington, D.C.: October 2, 

National Flood Insurance Program: FEMA's Management and Oversight of 
Payments for Insurance Company Services Should Be Improved. 
[hyperlink,]. Washington, 
D.C.: September 5, 2007. 

National Flood Insurance Program: Preliminary Views on FEMA's Ability 
to Ensure Accurate Payments on Hurricane-Damaged Properties. 
[hyperlink,]. Washington, 
D.C.: June 12, 2007. 

Coastal Barrier Resources System: Status of Development That Has 
Occurred and Financial Assistance Provided by Federal Agencies. 
[hyperlink,]. Washington, D.C.: 
March 19, 2007. 

National Flood Insurance Program: New Processes Aided Hurricane 
Katrina Claims Handling, but FEMA's Oversight Should Be Improved. 
[hyperlink,]. Washington, D.C.: 
December 15, 2006. 

Federal Emergency Management Agency: Challenges for the National Flood 
Insurance Program. [hyperlink,]. Washington, D.C.: January 
25, 2006. 

Federal Emergency Management Agency: Improvements Needed to Enhance 
Oversight and Management of the National Flood Insurance Program. 
[hyperlink,]. Washington, D.C.: 
October 18, 2005. 

Determining Performance and Accountability Challenges and High Risks. 
[hyperlink,]. Washington, 
D.C.: November 2000. 

[End of section] 


[1] Repetitive loss properties are properties that have had two or 
more paid NFIP claims in a 10-year period. 

[2] 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. 

[3] See GAO, Flood Insurance: Opportunities Exist to Improve Oversight 
of the WYO Program, [hyperlink,] (Washington, D.C.: Aug. 21, 

[4] Mitigation involves taking steps to reduce a property's flood 
risk--for example, elevating a house above a certain flood level. 

[5] Pub. L. No. 90-448, Title XIII, 82 Stat. 476 (1968). 

[6] Pub. L. No. 93-234, § 102, 87 Stat. 975, 978 (1973). 

[7] Pub. L. No. 103-325, 108 Stat. 2255 (1994). 

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

[9] See GAO, Flood Insurance: FEMA's Rate-Setting Process Warrants 
Attention, [hyperlink,] 
(Washington, D.C.: Oct. 31, 2008); and Flood Insurance: Options for 
Addressing the Financial Impact of Subsidized Premium Rates on the 
National Flood Insurance Program, GAO-09-20 (Washington, D.C.: Nov. 
14, 2008). 

[10] See [hyperlink,]. 

[11] See GAO, Financial Management: Improvements Needed in National 
Flood Insurance Program's Financial Controls and Oversight, 
[hyperlink,] (Washington, D.C.: 
Dec. 22, 2009). 

[12] See GAO, Natural Flood Insurance Program: Financial Challenges 
Underscore Need for Improved Oversight of Mitigation Programs and Key 
Contracts, [hyperlink,] 
(Washington, D.C.: June 16, 2008). 

[13] See Department of Homeland Security, Office of the Inspector 
General, Independent Auditor's Report on DHS' FY 2009 Financial 
Statements and Internal Control over Financial Reporting, DHS-OIG-10-
11 (Washington, D.C.: Nov. 13, 2009). 

[14] See [hyperlink,]. 

[15] See [hyperlink,]. 

[16] FEMA has five different mitigation grant programs, each with 
different types of requirements, purposes, and appropriations: Flood 
Mitigation Assistance (FMA), Repetitive Flood Claims (RFC), Severe 
Repetitive Loss Pilot Program (SRL), Hazard Mitigation Grant Program 
(HMGP), and Pre-Disaster Mitigation (PDM). 

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

[18] See GAO, National Flood Insurance Program: New Processes Aided 
Hurricane Katrina Claims Handling, but FEMA's Oversight Should Be 
Improved, [hyperlink,] 
(Washington, D.C.: Dec. 15, 2006). 

[19] We plan to issue this report later this year. We also are 
currently reviewing FEMA's flood mapping program at the request of the 
Chairman of the Subcommittee on Economic Policy, Senator Sherrod 
Brown, as well as Senators Charles E. Schumer and Jeff Bingaman. In 
particular, we are determining the extent to which FEMA ensures that 
flood maps accurately reflect flood risk and how FEMA promotes the 
community acceptance of flood maps. We plan to issue this report in 
December 2010. 

[20] See GAO, Natural Catastrophe Insurance: Analysis of a Proposed 
Combined Federal Flood and Wind Insurance Program, [hyperlink,] (Washington, D.C.: Apr. 25, 

[21] See GAO, Information on Proposed Changes to the National Flood 
Insurance Program, [hyperlink,] (Washington, D.C.: Feb. 27, 

[22] See [hyperlink,]. 

[End of section] 

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