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National Flood Insurance Program

This information appears as published in the 2017 High Risk Report.

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The National Flood Insurance Program (NFIP) is a key component of the federal government’s efforts to limit the damage and financial effect of floods. However, it likely will not generate sufficient revenues to repay the billions of dollars borrowed from the Department of the Treasury (Treasury) to cover claims from the 2005 and 2012 hurricanes or potential claims related to future catastrophic losses. This lack of sufficient revenue highlights what have been structural weaknesses in how the program is funded. Since the program offers rates that do not fully reflect the risk of flooding, NFIP’s overall rate-setting structure was not designed to be actuarially sound in the aggregate, nor was it intended to generate sufficient funds to fully cover all losses.

Instead, Congress authorized the Federal Emergency Management Agency (FEMA)—the agency within the Department of Homeland Security (DHS) responsible for managing NFIP—to borrow from Treasury, within certain limits, when needed. Until the 2005 hurricanes, FEMA had used its authority to borrow intermittently and was able to repay the loans. As of March 2016, FEMA owed Treasury $23 billion, up from $20 billion as of November 2012. FEMA made a $1 billion principal repayment at the end of December 2014—its first such payment since 2010.

The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) contained provisions to help strengthen the financial solvency of the program, including phasing out almost all discounted insurance premiums (for example, subsidized premiums). However, the extent to which its changes would have reduced NFIP’s financial exposure is unclear. In July 2013, we reported that FEMA was starting to implement some of the required changes. However, on March 21, 2014, the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) was enacted. HFIAA reinstated certain premium subsidies and slowed down certain premium rate increases that had been included in the Biggert-Waters Act. Aspects of HFIAA were intended to address affordability concerns for certain property owners, but may also increase NFIP’s long-term financial burden on taxpayers. Further, an outdated policy and claims management system has also placed the program at risk. As a result of its substantial financial exposure and management and operations challenges, the program has been on our High-Risk List since 2006.

National Flood Insurance Program

Congress and FEMA have made progress in meeting the criteria for removing NFIP from the High-Risk List. In July 2012, the Biggert-Waters Act was enacted. The Biggert-Waters Act contained provisions to help strengthen the financial solvency of the program, including phasing out almost all discounted insurance premiums (for example, subsidized premiums). In March 2014, HFIAA was enacted. HFIAA reinstated certain premium subsidies and slowed down certain premium rate increases that had been included in the Biggert-Waters Act.

FEMA leadership has also shown a commitment to taking a number of actions to implement our recommendations. However, implementing required changes under the Biggert-Waters Act, as amended by HFIAA, and addressing allegations of improper claims adjusting practices after Hurricane Sandy have created capacity challenges for FEMA in addressing the financial exposure created by NFIP as well as improving program administration. FEMA has identified actions to implement our recommendations, but it has not yet developed a comprehensive plan to address all the issues that have placed NFIP on our High-Risk List.

For example, FEMA has a process in place to monitor progress in taking actions to implement our recommendations related to NFIP. But broader monitoring of the effectiveness and sustainability of its actions would help ensure that FEMA takes appropriate corrective actions. While FEMA has demonstrated progress toward improving NFIP’s financial stability and program efficiency, these efforts are not complete. For example, FEMA has addressed our recommendations to improve the monitoring and reporting of NFIP contractor performance and validate data system changes before they become effective.

FEMA also has initiated actions to improve the accuracy of full-risk rates, but some of these efforts will continue over the next 5 to 10 years. In addition, we estimate that policyholders with certain subsidized premiums paid $216 million more in premiums as of the end of fiscal year 2015 than they would have paid prior to the enactment of the Biggert-Waters Act as a result of changes FEMA made in rates for these properties. However, FEMA still does not have all the necessary information to appropriately revise premium rates for certain subsidized properties. Other important actions, such as modernizing its policy and claims management system, also remain to be completed.

Additional Details on What GAO Found are in the full report.

While FEMA leadership has displayed a commitment to addressing the challenges that have placed NFIP on the High-Risk List and has made progress in a number of areas, FEMA needs to take the following actions.

  • Complete Biggert-Waters Act and HFIAA requirements that have not been fully met.
  • Develop a comprehensive plan for removing NFIP from the High-Risk List.
  • Initiate broader monitoring of the effectiveness and sustainability of its actions to help ensure that appropriate corrective actions are being taken.
  • Continue ongoing efforts to improve its NFIP rate-setting methods and evaluate approaches to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates.
  • Complete efforts to establish a new information technology system for NFIP.

By completing the actions noted above, FEMA will likely improve its ability to address the financial exposure of the program and help ensure that the funds allocated to NFIP and premiums paid to the program are used effectively.

In addition, Congress should continue to consider changing the program to further address the competing goals of financial solvency and affordability.

Looking for our recommendations? Click on any report to find each associated recommendation and its current implementation status.
  • portrait of Alicia Puente Cackley
    • Alicia Puente Cackley
    • Director, Financial Markets and Community Investment
    • cackleya@gao.gov
    • (202) 512-8678