National Flood Insurance Program

Why It's High Risk

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 Department to cover claims from the 2005 hurricanes or future catastrophic losses.

• The lack of sufficient revenues highlights structural weaknesses in how the program is funded.
• Also, weaknesses in NFIP management and operations, including financial reporting processes and internal controls, and oversight of contractors place 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, including increasing the number of policyholders and implementing new contractor oversight processes, it continues to face complex challenges, and Congress needs to act to restructure the program.

^ Back to topWhat We Found

The potential losses generated by NFIP create 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 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 risks.

• 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.
• 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 that allow some property owners to continue paying rates that do not reflect reassessments of their properties’ flood risk.
• 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 percent 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 reducing its debt to Treasury by almost $850 million since August 2009. However, FEMA will likely not be able to repay the $18.5 billion owed to Treasury as of November 30, 2010, especially if it faces catastrophic loss years or increased borrowing rates.

Weaknesses in the management and operations of NFIP also create a risk that the funds allocated to NFIP and the premiums paid by policyholders are not being used efficiently or effectively.

• Payments to write-your-own (WYO) insurers—the private insurers who sell NFIP policies and administer claims—generally represent one-third to two-thirds of the premiums collected in a given year. But FEMA does not systematically consider actual expense information when calculating these payments or implement all of its financial controls for the WYO program.
• 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.
• FEMA does not have an effective system to manage flood insurance policy and claims data, although it invested roughly 7 years and $40 million on a new system whose development has been halted because it did not meet users’ needs.

GAO will be issuing a detailed report on underlying management and operational challenges facing NFIP in March 2011. FEMA has begun to acknowledge its management challenges and develop a plan of action, but unless these operational and management issues are addressed, FEMA risks ongoing challenges in effectively and efficiently managing NFIP, including its management and use of information, data, and technology.

^ Back to topWhat Needs to Be Done

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. 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 high-risk list. FEMA officials have acknowledged the need for actions to improve NFIP operations, including the many recommended by GAO, and must FEMA must demonstrate a continued strong commitment and support for these actions. 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.

^ Back to topKey Reports

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