Flood Insurance:

Information on Financial Aspects of the National Flood Insurance Program

T-RCED-00-23: Published: Oct 27, 1999. Publicly Released: Oct 27, 1999.

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Judy A. England Joseph
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Pursuant to a congressional request, GAO discussed the financial condition of the National Flood Insurance Program administered by the Federal Emergency Management Agency's (FEMA) Federal Insurance Administration, focusing on the: (1) financial results of the program's operations since fiscal year 1993; (2) major factors contributing to the financial difficulties faced by the program; and (3) actions taken by and plans of the Federal Insurance Administration that may affect the program's financial health.

GAO noted that: (1) in March 1994, GAO reported that while sufficient to cover flood losses experienced at that time, overall income from the program's premiums was not sufficient to build reserves to meet future expected flood losses; (2) therefore, GAO concluded that it was inevitable that losses from claims and the program's expenses would exceed the funds available to the program in some years; (3) in this regard, during the 6-year period from fiscal years 1993 through 1998, the program experienced losses from floods that were greater than the premiums collected from policyholders; (4) cumulative operating losses to the program (program income less program costs) totalled about $1.56 billion during the 6-year period; (5) to finance these losses, the Federal Insurance Administration has periodically borrowed from the U.S. Treasury; (6) according to FEMA, $541 million was owed by the program to the U.S. Treasury as of August 31, 1999; (7) two major factors contribute to the financial difficulties faced by the program; (8) the program is not actuarially sound because it does not collect sufficient premium income to build reserves to meet the long-term future expected flood losses; (9) the cost of multiple-loss properties (two or more losses greater than $1,000 each within a 10-year period) to the program is large--about 36 percent of all claims paid historically, about $200 million annually; (10) the program, by design, is not actuarially sound because Congress authorized subsidized insurance rates to be made available for policies covering certain structures to encourage communities to join the program; (11) because about 30 percent of the policies were subsidized as of 1998, overall premium income is not sufficient to build reserves to meet future expected flood losses; (12) the Federal Insurance Administration's annual target for the program's overall premium income is at least the amount of loss and expenses in an historical average loss year, which approximates the average annual loss experienced under the program since 1978; (13) since no catastrophic loss years have occurred since 1978, collecting premiums that are based on an historical average loss year does not enable the program to build sufficient reserves to cover a possible catastrophic loss year in the future; and (14) the Federal Insurance Administration has studies under way and has taken other actions recently that may affect the program's financial health.

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