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National Flood Insurance Program

This information appears as published in the 2013 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 impact of floods; however, it likely will not generate sufficient revenues to repay the billions of dollars borrowed from the Treasury to cover claims from the 2005 hurricanes or future catastrophic losses. This lack of sufficient revenues highlights what have been structural weaknesses in how the program is funded. The Biggert-Waters Flood Insurance Reform Act of 2012 (the act) addresses a number of these weaknesses, but the extent to which the changes included in the act will reduce the financial exposure created by the program is not yet clear. Weaknesses in NFIP management and operations, including financial reporting processes and internal controls, and oversight of contractors have also placed the program at risk. The Federal Emergency Management Agency (FEMA), within the Department of Homeland Security, is responsible for managing NFIP. While FEMA has taken some steps to address these issues, it continues to face complex challenges. In October 2012, Superstorm Sandy caused extensive damages in several states on the eastern coast of United States, raising the prospect that NFIP would not be able to pay all the resulting claims without borrowing additional funds from the Treasury. In January 2013, Congress, passed legislation to temporarily increase NFIP’s borrowing authority by $9.7 billion, from $20.7 billion to $30.4 billion to address these claims.

The potential losses generated by NFIP have created substantial financial exposure for the federal government and U.S. taxpayers. While Congress and FEMA intended that NFIP be funded with premiums collected from policyholders and not with tax dollars, the program was, by design, not actuarially sound. As of November 2012, FEMA owes the Treasury approximately $20 billion, up from $17.8 billion pre-Sandy, and had not repaid any principal on the loan since 2010. GAO added NFIP to the High Risk List in 2006. The act addresses some structural challenges that have contributed to the program’s financial instability. It excludes subsidized premium rates for new flood insurance policies and phases them out for many other properties, including those that have sustained repeated, severe losses and second homes. In addition, it requires FEMA to establish a reserve fund to be available for meeting the expected future obligations of NFIP, including the payment of claims and the repayment of all amounts outstanding. While these changes may help increase NFIP’s long-term financial stability, the program still faces several challenges and the ultimate effect of the changes is not yet known. For example, in order to repay the program’s existing debt and build up a reserve fund, FEMA will need to increase premium rates significantly. In a 2009 report, GAO noted that building a loss fund, even if NFIP’s debt was forgiven, might increase annual subsidized premium rates anywhere from 150 to 325 percent. Such rate increases could have negative effects on participation in NFIP, particularly among lower income property owners. In addition, catastrophic losses can occur before the targeted total for a reserve fund is reached, which would require the program to borrow funds to pay losses.

Weaknesses in the management and operations of NFIP also create a risk that funds allocated to NFIP and premiums paid by policyholders are not being used efficiently or effectively. As noted in GAO’s June 2011 report, FEMA faces significant management challenges in areas that affect NFIP, including strategic and human capital planning; collaboration among offices; and records, financial, and acquisition management. For example, because FEMA has not developed goals, objectives, or performance measures for NFIP, it needs a strategic focus for ensuring program effectiveness. FEMA has begun to address some of these challenges, but the results of its efforts remain to be seen. GAO also found that FEMA faces challenges modernizing NFIP’s insurance policy and claims management system. After 7 years and $40 million, FEMA ultimately canceled its latest effort (NextGen) in November 2009 because the system did not meet user expectations. As a result, the agency continues to rely on an ineffective and inefficient 30-year old system. While FEMA has begun implementing some changes to its acquisition management practices, it remains to be seen if they will help FEMA avoid some of the problems that led to NextGen’s failure. In GAO’s December 2010 report, GAO also noted that while FEMA has taken a number of actions to increase the accuracy of flood maps—which are used in determining NFIP premium rates—challenges remain. For example, while FEMA has adopted a risk-based method to prioritize mapping projects, and implemented mapping standards and guidance, the standards and FEMA’s quality control process for ensuring the accuracy of flood maps could be improved.[1] Unless these management issues are addressed, FEMA risks ongoing challenges in effectively and efficiently managing NFIP, including its management and use of information, data, and technology.

Similarly, in June 2011, GAO noted that external factors continue to complicate the administration of NFIP and affect its financial stability. Specifically, FEMA historically has not been authorized to account for long-term erosion—which results from climate change and rising sea levels—when updating flood maps used to set premium rates for NFIP. The purpose of flood maps are supposed to accurately estimate the likelihood of flooding in specific areas given certain characteristics including elevation and topography, but they can quickly become inaccurate because of changes from long-term erosion, particularly in coastal areas. Not accurately reflecting the actual risk of flooding increases the likelihood that even full-risk premiums will not cover future losses and adds to concerns about NFIP’s financial stability. Consequently, among a range of other recommendations, GAO in June 2011 suggested that Congress authorize NFIP to account for long-term flood erosion in its flood maps. The Biggert-Waters Flood Insurance Reform Act of 2012 requires FEMA to include, among other things, relevant information on topography, coastal erosion areas, changing lake levels, future changes in sea levels, and intensity of hurricanes.

[1] For more information about FEMA’s challenges related to flood maps, see GAO, FEMA Flood Maps: Some Standards and Processes in Place to Promote Map Accuracy and Outreach, but Opportunities Exist to Address Implementation Challenges, GAO-11-17 (Washington, D.C.: Dec. 2, 2010).

The financial reforms included in the act could go a long way toward reducing the financial exposure created by the program, but they will be phased in over time and in order to be fully effective, FEMA will need to successfully implement them. For example, FEMA will need to determine and charge actuarially sound premium rates that account for the creation of a reserve fund as well as the phasing out of subsidized premium rates on certain properties. FEMA officials have taken some actions to improve NFIP operations, including many of GAO’s recommendations, and must continue to demonstrate strong commitment and support for these actions. These actions should include, among other things, the completion of strategic planning efforts for NFIP and the implementation of a new insurance policy and claims management system using improved contactor oversight processes. Finally, the growing debt owed to Treasury continues to highlight the financial challenges associated with this program.

Looking for our recommendations? Click on any report to find each associated recommendation and its current implementation status.
Flood Insurance: Public Policy Goals Provide a Framework for Reform

GAO-11-670T: Published: Jun 23, 2011. Publicly Released: Jun 23, 2011.
Flood Insurance: FEMA's Rate-Setting Process Warrants Attention

GAO-09-12: Published: Oct 31, 2008. Publicly Released: Dec 1, 2008.
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