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United States Government Accountability Office: 


Before the Committee on Banking, Housing, and Urban Affairs, U.S. 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
June 23, 2011: 

Flood Insurance: 

Public Policy Goals Provide a Framework for Reform: 

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


GAO Highlights: 

Highlights of GAO-11-670T, a testimony before the Committee on 
Banking, Housing, and Urban Affairs, U.S. Senate. 

Why GAO Did This Study: 

The National Flood Insurance Program (NFIP) has been on GAO’s high-
risk list since 2006, when the program had to borrow from the U.S. 
Treasury to cover losses from the 2005 hurricanes. The outstanding 
debt is $17.8 billion as of June 2011. This sizeable debt, plus 
operational and management challenges that GAO has identified at the 
Federal Emergency Management Agency (FEMA), which administers NFIP, 
have combined to keep the program on the high-risk list. NFIP’s need 
to borrow to cover claims in years of catastrophic flooding has raised 
concerns about the program’s long-term financial solvency. This 
testimony (1) discusses ways to place NFIP on a sounder financial 
footing in light of public policy goals for federal involvement in 
natural catastrophe insurance and (2) highlights operational and 
management challenges at FEMA that affect the program. 

In preparing this statement, GAO relied on its past work on NFIP, 
including a June 2011 report on FEMA’s management of NFIP, which 
focused on its planning, policies, processes, and systems. The 
management review included areas such as strategic and human capital 
planning, acquisition management, and intra-agency collaboration. 

GAO has made numerous recommendations aimed at improving financial 
controls, oversight of private insurers and contractors, and FEMA’s 
management of NFIP. DHS generally agreed with our recommendations. 

What GAO Found: 

Congressional action is needed to increase the financial stability of 
NFIP and limit taxpayer exposure. GAO previously identified four 
public policy goals that can provide a framework for crafting or 
evaluating proposals to reform NFIP. These goals are: 

* charging premium rates that fully reflect risks, 

* limiting costs to taxpayers before and after a disaster, 

* encouraging broad participation in the program, and, 

* encouraging private markets to provide flood insurance. 

Successfully reforming NFIP would require trade-offs among these often 
competing goals. For example, nearly one in four policyholders does 
not pay full-risk rates, and many pay a lower subsidized or 
“grandfathered” rate. Reducing or eliminating less than full-risk 
rates would decrease costs to taxpayers but substantially increase 
costs for many policyholders, some of whom might leave the program, 
potentially increasing post-disaster federal assistance. However, 
these trade-offs could be mitigated by providing assistance only to 
those who need it, limiting post-disaster assistance for flooding, and 
phasing in premium rates that fully reflect risks. Increasing 
mitigation efforts to reduce the probability and severity of flood 
damage would also reduce flood claims in the long term but would have 
significant up-front costs that might require federal assistance. One 
way to address this trade-off would be to better ensure that current 
mitigation programs are effective and efficient. Encouraging broad 
participation in the program could be achieved by expanding mandatory 
purchase requirements or increasing targeted outreach to help 
diversify the risk pool. Such efforts could help keep rates relatively 
low and reduce NFIP’s exposure but would have to be effectively 
managed to help ensure that outreach efforts are broadly based. 
Encouraging private markets is the most difficult challenge because 
virtually no private market for flood insurance exists for most 
residential and commercial properties. FEMA’s ongoing efforts to 
explore alternative structures may provide ideas that could be 
evaluated and considered. 

Several operational and management issues also limit FEMA’s progress 
in addressing NFIP’s challenges, and continued action by FEMA will be 
needed to help ensure the stability of the program. For example, in 
numerous past reports, GAO identified weaknesses in areas that include 
financial controls and oversight of private insurers and contractors, 
and made many recommendations to address them. While FEMA has made 
progress in addressing some areas, GAO’s June 2011 report identified a 
number of management challenges facing the program, including 
strategic and human capital planning, records management, 
collaboration among offices, and financial and acquisition management. 
In this report, we also made a number of recommendations to address 
these challenges. FEMA agreed with the recommendations and discussed 
the steps being taken to address some of them. 

View [hyperlink,] or key 
components. For more information, contact Orice Williams Brown at 
(202) 512-9678 or 

[End of section] 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee: 

I appreciate the opportunity to participate in today's hearing on 
National Flood Insurance Program (NFIP) reform. As you know, NFIP is 
the key component of the federal government's efforts to minimize the 
damage from and financial impact of floods and is the only source of 
insurance against flood damage for most residents in vulnerable areas. 
NFIP has been on GAO's high-risk list since March 2006 after incurring 
billions of dollars in catastrophic losses from the 2005 hurricanes. 
Further contributing to NFIP's high-risk classification are 
operational and management challenges that we have identified within 
the Federal Emergency Management Agency (FEMA) that affect the 
program. As of June 2011, NFIP still owed almost $17.8 billion to the 
Department of the Treasury (Treasury) for loans used to cover losses 
from the 2005 hurricanes. The magnitude of this debt highlights the 
many financial challenges the program faces, including structural 
weaknesses in the way it is funded, and the managerial challenges that 
have affected FEMA's administration of NFIP. Any efforts to help 
stabilize NFIP will require addressing both the program's financial 
challenges and its operational and management issues. 

My statement today discusses four public policy goals that GAO has 
developed for evaluating federal involvement in the provision of 
natural catastrophe insurance and identifies key program areas needing 
reform, potential ways to better fulfill these goals, and the trade- 
offs that would be required. This statement also sets out the 
operational and managerial challenges facing NFIP that we have 
identified in our past reports, including a report that was issued 
earlier this month.[Footnote 1] The work that this report was based on 
was performed from March 2006 through June 2011. 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. 


The National Flood Insurance Act of 1968 established NFIP as an 
alternative to providing direct assistance after floods.[Footnote 2] 
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 
NFIP's inception, Congress has enacted several pieces of legislation 
to strengthen the program. 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 3] 
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 4] Finally, the Bunning-Bereuter- 
Blumenauer Flood Insurance Reform Act of 2004 authorized grant 
programs to mitigate properties that experienced repetitive flooding 
losses. Owners of these repetitive loss properties who do not mitigate 
may face higher premiums.[Footnote 5] 

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 about 40 percent to 45 percent of the 
cost of covering the full risk of flood damage to the properties, 
apply to 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--generally, as 
defined by FEMA, those that have had two or more flood insurance 
claims payments of $1,000 or more over 10 years--and policies with 
subsidized premium rates have continued to grow.[Footnote 6] In 
response to the magnitude and severity of the losses from the 2005 
hurricanes, Congress increased NFIP's borrowing authority from 
Treasury to about $20.8 billion. 

Efforts to Reform NFIP's Financial Structure Will Require Balancing 
Public Policy Goals: 

We have previously identified four public policy goals for evaluating 
the federal role in providing natural catastrophe insurance: 

* charging premium rates that fully reflect actual risks, 

* limiting costs to taxpayers before and after a disaster, 

* encouraging broad participation in natural catastrophe insurance 
programs, and: 

* encouraging private markets to provide natural catastrophe 
insurance.[Footnote 7] 

Taking action to achieve these goals would benefit both NFIP and the 
taxpayers who fund the program but would require trade-offs. I will 
discuss the key areas that need to be addressed, actions that can be 
taken to help achieve these goals, and the trade-offs that would be 

Charging Full-Risk Rates Would Improve NFIP's Financial Soundness but 
Could Reduce Program Participation: 

As I have noted, NFIP currently does not charge all program 
participants rates that reflect the full risk of flooding to their 
properties.[Footnote 8] First, the act requires FEMA to charge many 
policyholders less than full-risk rates to encourage program 
participation. While the percentage of subsidized properties was 
expected to decline as new construction replaced subsidized 
properties, today nearly one out of four NFIP policies is based on a 
subsidized rate. Second, FEMA may "grandfather" properties that are 
already in the program when new flood maps place them in higher-risk 
zones, allowing some property owners to pay premium rates that apply 
to the previous lower-risk zone. FEMA officials told us they made the 
decision to allow grandfathering because of external pressure to 
reduce the effects of rate increases, and considerations of equity, 
ease of administration, and the goals of promoting floodplain 
management. Similarly, FEMA recently introduced a new rating option 
called the Preferred Risk Policy Eligibility Extension that in effect 
equals a temporary grandfathering of premium rates.[Footnote 9] While 
these policies typically would have to be converted to more expensive 
policies when they were renewed after a new flood map came into 
effect, FEMA has extended eligibility for these lower rates. Finally, 
we have also raised questions about whether NFIP's full-risk rates 
reflect actual flood risks. Because many premium rates charged by NFIP 
do not reflect the full risk of loss, the program is less likely to be 
able to pay claims in years with catastrophic losses, as occurred in 
2005, and may need to borrow from Treasury to pay claims in those 
years.[Footnote 10] 

Increasing premium rates to fully reflect the risk of loss--including 
the risk of catastrophic loss--would generally require reducing or 
eliminating subsidized and grandfathered rates and offers several 
advantages. Specifically, increasing rates could: 

* result in premium rates that more fully reflected the actual risk of 

* decrease costs for taxpayers by reducing costs associated with post-
disaster borrowing to pay claims; and: 

* encourage private market participation, because the rates would more 
closely approximate those that would be charged by private insurers. 

However, eliminating subsidized and grandfathered rates and increasing 
rates overall would increase costs to some homeowners, who might then 
cancel their flood policies or elect not to buy them at all. According 
to FEMA, subsidized premium rates are generally 40 percent to 45 
percent of rates that would reflect the full risk of loss. For 
example, the projected average annual subsidized premium was $1,121 as 
of October 2010, discounted from the $2,500 to $2,800 that FEMA said 
would be required to cover the full risk of loss.[Footnote 11] In a 
2009 report, we also analyzed the possibility of creating a 
catastrophic loss fund within NFIP (one way to help pay for 
catastrophic losses).[Footnote 12] Our analysis found that in order to 
create a fund equal to 1 percent of NFIP's total exposure by 2020, the 
average subsidized premium--which typically is in one of the highest-
risk zones--would need to increase from $840 to around $2,696, while 
the average full-risk premium would increase from around $358 to 
$1,149. Such steep increases could reduce participation, either 
because homeowners could no longer afford their policies or simply 
deemed them too costly, and increase taxpayer costs for post-disaster 
assistance to property owners who no longer had flood insurance. 

However, a variety of actions could be taken to mitigate these 
disadvantages. For example, subsidized rates could be phased out over 
time or not transferred with the property when it is sold. Moreover, 
as we noted in our past work, targeted assistance could be offered to 
those most in need to help them pay increased NFIP premiums.[Footnote 
13] This assistance could take several forms, including direct 
assistance through NFIP, tax credits, or grants. In addition, to the 
extent that those who might forgo coverage were actually required to 
purchase it, additional actions could be taken to better ensure that 
they purchased policies. According to the RAND Corporation, in SFHAs, 
where property owners with loans from federally insured or regulated 
lenders are required to purchase flood insurance, as few as 50 percent 
of the properties had flood insurance in 2006.[Footnote 14] 

Limiting Taxpayer Costs Could Be Achieved by Increasing Premium Rates, 
but Further Mitigation Efforts Could Incur Up-Front Costs: 

In order to reduce expenses to taxpayers that can result when NFIP 
borrows from Treasury, NFIP needs to be able to generate enough in 
premiums to pay its claims, even in years with catastrophic losses--a 
goal that is closely tied to that of eliminating subsidies and other 
reduced rates. Since the program's inception, NFIP premiums have come 
close to covering claims in average loss years but not in years of 
catastrophic flooding, particularly 2005. Unlike private insurance 
companies, NFIP does not purchase reinsurance to cover catastrophic 
losses.[Footnote 15] As a result, NFIP has funded such losses after 
the fact by borrowing from Treasury. As we have seen, such borrowing 
exposes taxpayers to the risk of loss. NFIP still owes approximately 
$17.8 billion of the amount it borrowed from Treasury for losses 
incurred during the 2005 hurricane season. The high cost of servicing 
this debt means it may never be repaid, could in fact increase, and 
will continue to affect the program's solvency and be a burden to 

Another way to limit costs to taxpayers is to decrease the risk of 
losses by undertaking mitigation efforts that could reduce the extent 
of damage from flooding. FEMA has taken steps to help homeowners and 
communities mitigate properties by making improvements designed to 
reduce flood damage--for example, elevation, relocation, and 
demolition. As we have reported, from fiscal year 1997 through fiscal 
year 2007, nearly 30,000 properties were mitigated using FEMA funds. 
[Footnote 16] Increasing mitigation efforts could further reduce flood 
damage to properties and communities, helping to put NFIP on a firmer 
financial footing and reducing taxpayers' exposure. 

FEMA has made particular efforts to address the issue of repetitive 
loss properties through mitigation. These properties account for just 
1 percent of NFIP's insured properties but are responsible for 25 
percent to 30 percent of claims. Despite FEMA's efforts, the number of 
repetitive loss properties increased from 76,202 in 1997 to 132,100 in 
March 2011, or by about 73 percent. FEMA also has some authority to 
raise premium rates for property owners who refuse mitigation offers 
in connection with the Severe Repetitive Loss Pilot Grant Program. 
[Footnote 17] In these situations, FEMA can initially increase 
premiums to up to 150 percent of their current amount and may raise 
them again (by up to the same amount) on properties that incur a claim 
of more than $1,500. However, FEMA cannot increase premiums on 
property owners who pay the full-risk rate but refuse a mitigation 
offer, and in no case can rate increases exceed the full-risk rate for 
the structure. In addition, FEMA is not allowed to discontinue 
coverage for those who refuse mitigation offers. As a result, FEMA is 
limited in its ability to compel owners of repetitive loss properties 
to undertake flood mitigation efforts. 

Mitigation offers significant advantages. As I have noted, mitigated 
properties are less likely to be at a high risk for flood damage, 
making it easier for NFIP to charge them full-risk rates that cover 
actual losses. Allowing NFIP to deny coverage to owners of repetitive 
loss properties who refused to undertake mitigation efforts could 
further reduce costs to the program and ultimately to taxpayers. 

One disadvantage of increased mitigation efforts is that they can 
impose up-front costs on homeowners and communities required to 
undertake them and could raise taxpayers' costs if the federal 
government elected to provide additional mitigation assistance. Those 
costs could increase still further if property owners who were dropped 
from the program for refusing to mitigate later-received federal post-
disaster assistance. These trade-offs are not insignificant, although 
certain actions could be taken to reduce them. For example, federal 
assistance such as low-cost loans, grants, or tax credits could be 
provided to help property owners pay for the up-front costs of 
mitigation efforts. Any reform efforts could explore ways to improve 
mitigation efforts to help ensure maximum effectiveness. For example, 
FEMA has three separate flood mitigation programs.[Footnote 18] Having 
multiple programs may not be the most cost-efficient and effective way 
to promote mitigation and may unnecessarily complicate mitigation 

Depending on How They Were Implemented, Efforts to Encourage Broader 
Participation Could Reduce Costs: 

Increasing participation in NFIP, and thus the size of the risk pool, 
would help ensure that losses from flood damage did not become the 
responsibility of the taxpayer. Participation rates have been 
estimated to be as low as 50 percent in SFHAs, where property owners 
with loans from federally insured and regulated lenders are required 
to purchase flood insurance, and participation in lower-risk areas is 
significantly lower.[Footnote 19] For example, participation rates 
outside of SFHAs have been found to be as low as 1 percent, leaving 
significant room to increase participation. 

Expanding participation in NFIP would have a number of advantages. As 
a growing number of participants shared the risks of flooding, premium 
rates could be lower than they would be with fewer participants. 
Currently, NFIP must take all applicants for flood insurance, unlike 
private insurers, and thus is limited in its ability to manage its 
risk exposure. To the extent that properties added to the program were 
in geographic areas where participation had historically been low and 
in low-and medium-risk areas, the increased diversity could lower 
rates as the overall risk to the program decreased. Further, increased 
program participation could reduce taxpayer costs by reducing the 
number of property owners who might draw on federally funded post-
disaster assistance. 

However, efforts to expand participation in NFIP would have to be 
carefully implemented, for several reasons. First, as we have noted, 
NFIP cannot reject applicants on the basis of risk. As a result, if 
participation increased only in SFHAs, the program could see its 
concentration of high-risk properties grow significantly and face the 
prospect of more severe losses. Second, a similar scenario could 
emerge if mandatory purchase requirements were expanded and newly 
covered properties were in communities that did not participate in 
NFIP and thus did not meet standards--such as building codes--that 
could reduce flood losses. As a result, some of the newly enrolled 
properties might be eligible for subsidized premium rates or, because 
of restrictions on how much FEMA can charge in premiums, might not pay 
rates that covered the actual risk of flooding. Finally, historically 
FEMA has attempted to encourage participation by charging lower rates; 
however, doing so results in rates that do not fully reflect the risks 
of flooding and exposes taxpayers to increased risk. 

Moderating the challenges associated with expanding participation 
could take a variety of forms. Newly added properties could be 
required to pay full-risk rates, and low-income property owners could 
be offered some type of assistance to help them pay their premiums. 
Outreach efforts would need to include areas with low and moderate 
flood risks to help ensure that the risk pool remained diversified. 
For example, FEMA's goals for NFIP include increasing penetration in 
low-risk flood zones, among homeowners without federally related 
mortgages in all zones, and in geographic areas with repetitive losses 
and low penetration rates. 

Encouraging Private Market Participation Could Reduce the Federal 
Government's Exposure but Could Also Decrease NFIP's Stability if Only 
High-Risk Properties Remained: 

Currently, the private market provides only a limited amount of flood 
insurance coverage. In 2009, we reported that while aggregate 
information was not available on the precise size of the private flood 
insurance market, it was considered relatively small.[Footnote 20] The 
2006 RAND study estimated that 180,000 to 260,000 insurance policies 
for both primary and gap coverage were in effect.[Footnote 21] We also 
reported that private flood insurance policies are generally purchased 
in conjunction with NFIP policies, with the NFIP policy covering the 
deductible on the private policy. Finally, we reported that NFIP 
premiums were generally less expensive than premiums for private flood 
insurance for similar coverage.[Footnote 22] For example, one insurer 
told us that for a specified amount of coverage for flood damage to a 
structure, an NFIP policy might be as low as $500, while a private 
policy might be as high as $900. Similar coverage for flood damage to 
contents might be $350 for an NFIP policy but around $600 for a 
private policy. 

Given the limited nature of private sector participation, encouraging 
private market participation could transfer some of the federal 
government's risk exposure to the private markets and away from 
taxpayers. However, identifying ways to achieve that end has generally 
been elusive. In 2007, we evaluated the trade-offs of having a 
mandatory all-perils policies that would include flood risks.[Footnote 
23] For example, it would alleviate uncertainty about the types of 
natural events homeowners insurance covered, such as those that 
emerged following Hurricane Katrina. However, at the time the industry 
was generally opposed to an all-perils policy because of the large 
potential losses a mandatory policy would entail. 

Increased private market participation is also not without potential 
disadvantages. First, if the private markets provide coverage for only 
the lowest-risk properties currently in NFIP, the percentage of high- 
risk properties in the program would increase. This scenario could 
result in higher rates as the amount needed to cover the full risk of 
flooding increased. Without higher rates, however, the federal 
government would face further exposure to loss. Second, private 
insurers, who are able to charge according to risk, would likely 
charge higher rates than NFIP has been charging unless they received 
support from the federal government. As we have seen, such increases 
could create affordability concerns for low-income policyholders. 
Strategies to help mitigate these disadvantages could include 
requiring private market coverage for all property owners--not just 
those in high-risk areas--and, as described earlier, providing 
targeted assistance to help low-income property owners pay for their 
flood coverage. In addition, Congress could provide options to private 
insurers to help lower the cost of such coverage, including tax 
incentives or federal reinsurance. 

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

As Congress weighs NFIP's various financial challenges in its efforts 
to reform the program, it must also consider a number of operational 
and management issues that may limit efforts to meet program goals and 
impair NFIP's stability. For the past 35 years, we have highlighted 
challenges with NFIP and its administration and operations. For 
example, most recently we have identified a number of issues impairing 
the program's effectiveness in areas that include the reasonableness 
of payments to Write-Your-Own (WYO) insurers, the adequacy of 
financial controls over the WYO program, and the adequacy of oversight 
of non-WYO contractors. In our report, which reviews FEMA's management 
of NFIP, we addressed, among other things, (1) the extent to which 
FEMA's management practices affect the agency's ability to meet NFIP's 
mission and (2) lessons to be learned from the cancellation of FEMA's 
most recent attempt to modernize NFIP's flood insurance policy and 
claims processing system.[Footnote 24] 

We found that FEMA faces significant management challenges in areas 
that affect its administration of NFIP. First, FEMA has not finalized 
strategic guidance and direction for NFIP and therefore lacks goals 
and objectives for the program and the necessary starting point for 
developing performance measures that would assess the program's 
effectiveness. Second, FEMA faces a number of human capital challenges 
related to turnover, hiring, and tracking the many contractors that 
play a key role in NFIP. Further, FEMA lacks a plan that would help 
ensure consistent day-to-day operations when it deploys staff to 
respond to federal disasters. Third, collaboration between program and 
support offices that contribute to administering NFIP has at times 
been ineffective, leading to challenges in effectively carrying out 
some key functions, including information technology, acquisition, and 
financial management. Finally, FEMA does not have a comprehensive set 
of processes and systems to guide its operations. Specifically, it 
lacks an updated records management policy, an electronic document 
management system, procedures to effectively manage unliquidated 
obligations, and a fully developed and implemented documentation of 
its business processes. FEMA has begun taking steps to improve its 
acquisition management and document some of its business processes, 
but the results of its efforts remain to be seen. Unless it takes 
further steps to address these management challenges, FEMA will be 
limited in its ability to manage NFIP's operations or better ensure 
program effectiveness. In our report we made eight recommendations 
addressing these issues. DHS agreed with these recommendations and 
FEMA has begun to take steps to begin addressing some of them. For 
example, FEMA has begun developing a strategy for the administration 
of its mitigation and insurance programs, conducting a workforce 
assessment, holding outreach sessions between program and support 
offices to improve collaboration, and developing training and 
certification programs for acquisition management. 

We also found that the canceled development of the Next Generation 
Flood Insurance Management System (NextGen), FEMA's latest attempt to 
modernize NFIP's insurance policy and claims management system, 
illustrated weaknesses in NFIP's acquisition management activities. 
Despite investing roughly 7 years and $40 million, FEMA ultimately 
canceled the effort in November 2009 because it failed to meet user 
expectations, forcing the agency to continue relying on a 30-year-old 
system that does not fully support NFIP's mission needs and is costly 
to maintain and operate. A number of acquisition management weaknesses 
led to NextGen's failure and cancellation. Specifically, business and 
functional requirements were not sufficiently defined; system users 
did not actively participate in determining the requirements for the 
development of system prototypes or in pilot testing activities; test 
planning and project risks were not adequately managed; and project 
management office staffing was limited. As FEMA begins a new effort to 
modernize the existing legacy system, it plans to apply lessons 
learned from its NextGen experience. 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. Unless it develops appropriate acquisitions 
processes and applies lessons learned from the NextGen failure, FEMA 
will be unable to develop an effective policies and claims processing 
system for NFIP. DHS agreed with our recommendations that DHS provide 
regular oversight of FEMA's next attempt to modernize the system and 
help ensure FEMA applies lessons learned. 

Closing Comments: 

Congressional action is needed to increase the financial stability of 
NFIP and limit taxpayer exposure. GAO previously identified four 
public policy goals that can provide a framework for crafting or 
evaluating proposals to reform NFIP. First, any congressional reform 
effort should include measures for charging premium rates that 
accurately reflect the risk of loss, including catastrophic losses. 
Meeting this goal would require changing the law governing NFIP to 
reduce or eliminate subsidized rates, limits on annual rate increases, 
and grandfathered or other rates that do not fully reflect the risk of 
loss. In taking such a step, Congress may choose to provide assistance 
to certain property owners, and should consider providing appropriate 
authorization and funding of such incentives to ensure transparency. 
Second, because of the potentially high costs of individual and 
community mitigation efforts, which can reduce the frequency and 
extent of flood damage, Congress may need to provide funding or access 
to funds for such efforts and consider ways to improve the efficiency 
of existing mitigation programs. Moreover, if Congress wished to allow 
NFIP to deny coverage to owners of properties with repetitive losses 
who refuse mitigation efforts, it would need to give FEMA appropriate 
authority. Third, Congress could encourage FEMA to continue to 
increase participation in the program by expanding targeted outreach 
efforts and limiting post-disaster assistance to those individuals who 
choose not to mitigate in moderate-and high-risk areas. And finally, 
to address the goal of encouraging private sector participation, 
Congress could encourage FEMA to explore private sector alternatives 
to providing flood insurance or for sharing insurance risks, provided 
such efforts do not increase taxpayers' exposure. 

For its part, FEMA needs to take action to address a number of 
fundamental operational and managerial issues that also threaten the 
stability of NFIP and have contributed to its remaining on GAO's high- 
risk list. These include improving its strategic planning, human 
capital planning, intra-agency collaboration, records management, 
acquisition management, and information technology. While FEMA 
continues to make some progress in some areas, fully addressing these 
issues is vital to its long-term operational efficiency and financial 

Chairman Johnson and Ranking Member Shelby, this concludes my prepared 
statement. I would be pleased to respond to any of the questions you 
or other members of the Committee may have at this time. 

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 Christopher 
Forys, Nima Patel Edwards, Emily Chalmers, and Tania Calhoun. 

[End of section] 

Related GAO Products: 

FEMA: Action Needed to Improve Administration of the National Flood 
Insurance Program. [hyperlink,]. Washington, D.C.: June 9, 

Flood Insurance: Public Policy Goals Provide A Framework for Reform. 
[hyperlink,]. Washington, 
D.C.: March 11, 2011. 

FEMA Flood Maps: Some Standards and Processes in Place to Promote Map 
Accuracy and Outreach, but Opportunities Exist to Address 
Implementation Challenges. [hyperlink,]. Washington, D.C.: December 2, 

National Flood Insurance Program: Continued Actions Needed to Address 
Financial and Operational Issues. [hyperlink,]. Washington, D.C.: September 
22, 2010. 

National Flood Insurance Program: Continued Actions Needed to Address 
Financial and Operational Issues. [hyperlink,]. Washington, D.C.: April 21, 

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. 

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. 

Budget Issues: FEMA Needs Adequate Data, Plans, and Systems to 
Effectively Manage Resources for Day-to-Day Operations. [hyperlink,]. Washington, D.C.: January 19, 

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. 

GAO'S High-Risk Program. [hyperlink,]. Washington, D.C.: March 15, 

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. 

Standards for Internal Control in the Federal Government. [hyperlink,]. Washington, D.C.: 
November 1999. 

Budget Issues: Budgeting for Federal Insurance Programs. [hyperlink,]. Washington, D.C.: 
April 23, 1998. 

Budget Issues: Budgeting for Federal Insurance Programs. [hyperlink,]. Washington, D.C.: 
September 30, 1997. 

National Flood Insurance Program: Major Changes Needed If It Is To 
Operate Without A Federal Subsidy. [hyperlink,]. Washington, D.C.: January 
3, 1983. 

Formidable Administrative Problems Challenge Achieving National Flood 
Insurance Program Objectives. [hyperlink,]. Washington, D.C.: April 22, 

[End of section] 


[1] See GAO, FEMA: Action Needed to Improve Administration of the 
National Flood Insurance Program, [hyperlink,] (Washington, D.C.: June 9, 

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

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

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

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

[6] The Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 
amended the existing definition of the term "repetitive loss 
structure" to the current one: a structure covered by a contract for 
flood insurance that has incurred flood-related damage on two 
occasions, in which the cost of repair, on the average, equaled or 
exceeded 25 percent of the value of the structure at the time of each 
such flood event; and at the time of the second incidence of flood-
related damage, the contract for flood insurance contains increased 
cost of compliance coverage, which can help property owners pay for 
the cost of mitigation measures for flood-damaged properties. 42 
U.S.C. § 4121(a). 

[7] See GAO, Natural Disasters: Public Policy Options for Changing the 
Federal Role in Natural Catastrophe Insurance, [hyperlink,] (Washington, D.C.: Nov. 26, 

[8] Premium rates that reflect the "full risk" of flooding can mean 
different things, and there is no standard definition for this term. 
An actuarial approach to ratemaking would produce rates that cover a 
best estimate of average expected losses, plus an additional margin 
for risk. The question then becomes how big the risk margin should be, 
a decision that will be influenced in turn by the characteristics of 
the risk (including the magnitude of potential catastrophic losses), 
the desired margin for safety and speed of building up a contingency 
reserve, and the availability of other sources of capital to cover 
excessive losses. The nature of flood risks is such that, because of 
the potential at any time for catastrophic losses, charging premium 
rates that reflect the full risk cannot ensure that the NFIP will not 
have to borrow from Treasury again in the future. As a corollary, the 
need in any particular year to borrow from Treasury does not, by 
itself, necessarily indicate that the rates charged were inappropriate 
or that the program was not being run properly. 

[9] The Preferred Risk Policy offers low-cost flood insurance to 
owners and tenants of residential and nonresidential buildings located 
in moderate-to low-risk areas as long as the property has not, within 
any 10-year period, incurred two or more flood insurance claim 
payments or disaster relief payments (including loans and grants) of 
more than $1,000 each. 

[10] Implementing rates that reflect the full risk of loss, including 
catastrophic losses, might not eliminate NFIP's need to borrow funds 
for larger-than-expected losses that occurred before sufficient 
reserves had been built. 

[11] This premium that would be required to cover the full risk of 
loss is based upon FEMA's calculation that subsidized premium rates 
are generally 40 percent to 45 percent of those rates. 

[12] See GAO, Information on Proposed Changes to the National Flood 
Insurance Program, [hyperlink,] (Washington, D.C.: Feb. 27, 
2009). The creation of a catastrophic loss fund might not eliminate 
NFIP's need to borrow funds for larger-than-expected losses that 
occurred before the fund had been built. Further borrowing could 
require either a longer period to rebuild the loss fund or debt 
forgiveness from Congress. 

[13] See GAO, Flood Insurance: Options for Addressing the Financial 
Impact of Subsidized Premium Rates on the National Flood Insurance 
Program, [hyperlink,] 
(Washington, D.C.: Nov. 14, 2008). 

[14] RAND, The National Flood Insurance Program's Market Penetration 
Rate: Estimates and Policy Implications (Santa Monica, Calif.: 2006). 

[15] Reinsurance is essentially insurance for insurers--that is, 
companies buy coverage for all or a part of a policy's liability from 
other insurers in order to offset exposure. 

[16] See [hyperlink,]. 

[17] Under this program, for single-family properties, a severe 
repetitive loss is defined as a property covered under a contract for 
flood insurance that has incurred flood-related damage (1) for which 
four or more separate claims payments have been made, with the amount 
of each claim exceeding $5,000, and with the cumulative amount of such 
claims payments exceeding $20,000, or (2) for which at least two 
separate claims payments have been made, with the cumulative amount of 
such claims exceeding the value of the property. 42 U.S.C. § 4102a(b). 

[18] These programs include the Flood Mitigation Assistance Program, 
the Repetitive Flood Claims Program, and the Severe Repetitive Loss 
Program. Moreover, the Hazard Mitigation Grant Program and the Pre- 
Disaster Mitigation Program are two additional hazard mitigation 
programs that are not specific to flooding. 

[19] RAND, The National Flood Insurance Program's Market Penetration 

[20] See [hyperlink,]. 

[21] RAND, The National Flood Insurance Program's Market Penetration 

[22] See [hyperlink,]. 

[23] See [hyperlink,]. 

[24] See [hyperlink,]. 

[End of section] 

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