National Flood Insurance Program
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 Further, an outdated policy and claims management system has also placed the program at risk.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.
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.
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.
GAO-17-36: Published: Dec 8, 2016. Publicly Released: Jan 9, 2017.
The Federal Emergency Management Agency (FEMA) has yet to revise its compensation practices for Write-Your-Own (WYO) companies to reflect actual expenses as required by the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act), and as GAO recommended in 2009. FEMA continues to rely on insurance industry expense information for other lines of property insurance to set compensation...
GAO-16-766: Published: Aug 24, 2016. Publicly Released: Aug 24, 2016.
The Federal Emergency Management Agency (FEMA) used reasonable objectives and methodology for its study on community-based flood insurance (CBFI)—flood insurance that a community would purchase to cover all properties located within it. FEMA contracted with the National Academy of Sciences (NAS) to conduct the study, and worked with NAS to design a study that would provide a high-level, independ...
GAO-16-611: Published: Jul 14, 2016. Publicly Released: Jul 14, 2016.
Lenders and their regulators have taken some action to implement provisions on private flood insurance in the Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act). Specifically, lenders told GAO they send notifications to borrowers that encourage borrowers to compare private and National Flood Insurance Program (NFIP) policies. Lenders with whom GAO spoke accepted private policie...
GAO-16-59: Published: Mar 17, 2016. Publicly Released: Apr 18, 2016.
The Federal Emergency Management Agency (FEMA) sets National Flood Insurance Program (NFIP) full-risk rates using a model that includes some characteristics of catastrophe models used by private insurers. In particular, both models assess flood probability and damage to estimate potential flood losses. Like private insurers, NFIP also uses variables specific to each structure in estimating the deg...
GAO-16-190: Published: Feb 10, 2016. Publicly Released: Mar 10, 2016.
Options for targeting assistance to subsidized policyholders of primary residences who may experience difficulty paying full-risk rates for their National Flood Insurance Program (NFIP) policies include means testing assistance based on the income level of policyholders or geographic areas, setting premium caps, and basing assistance on the cost of mitigating the risk of damage to their homes. Cur...
GAO-15-178: Published: Feb 19, 2015. Publicly Released: Feb 19, 2015.
The Federal Emergency Management Agency (FEMA) has established some practices for managing its implementation of required changes under the Biggert-Waters Flood Insurance Reform Act (Biggert-Waters Act), as amended by the Homeowner Flood Insurance Affordability Act (HFIAA). Consistent with related federal internal control standards, FEMA has collaborated with stakeholders on prioritizing legislati...
GAO-15-111: Published: Dec 11, 2014. Publicly Released: Dec 11, 2014.
The actual forgone premiums—the difference between subsidized and full-risk premiums—to the National Flood Insurance Program (NFIP) due to subsidies cannot be measured. The Federal Emergency Management Agency (FEMA) does not collect flood risk information for all subsidized policies, which is needed to calculate their full-risk premium rates. GAO recommended in July 2013 that FEMA develop and...
GAO-14-297R: Published: Apr 9, 2014. Publicly Released: May 9, 2014.
Over the past 11 years, GAO has identified a variety of challenges facing the National Flood Insurance Program (NFIP) and has made numerous recommendations to the Federal Emergency Management Agency (FEMA) to improve its administration of the program. FEMA has generally agreed with GAO's recommendations and has taken steps to address them. However, FEMA has not fully addressed all of the issues we...
GAO-14-127: Published: Jan 22, 2014. Publicly Released: Jan 22, 2014.
According to stakeholders with whom GAO spoke, several conditions must be present to increase private sector involvement in the sale of flood insurance. First, insurers need to be able to accurately assess risk to determine premium rates. For example, stakeholders told GAO that access to National Flood Insurance Program (NFIP) policy and claims data and upcoming improvements in private sector comp...
GAO-14-160: Published: Jan 15, 2014. Publicly Released: Jan 15, 2014.
The Federal Emergency Management Agency (FEMA) has made progress in improving its processes for monitoring NFIP contracts since GAO last reported on these issues in 2008 and 2011. For example, GAO recommended in 2011 that FEMA complete the development and implementation of its revised acquisition process to be consistent with a Department of Homeland Security (DHS) directive. FEMA updated its cont...
GAO-13-607: Published: Jul 3, 2013. Publicly Released: Jul 3, 2013.
The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) immediately eliminated subsidies for about 438,000 National Flood Insurance Program (NFIP) policies, but subsidies on an estimated 715,000 policies across the nation remain. Depending on factors such as policyholder behavior, the number of subsidized policies will continue to decline over time. For example, as properties ar...
GAO-11-297: Published: Jun 9, 2011. Publicly Released: Jun 9, 2011.
The National Flood Insurance Program (NFIP) has been on GAO's high-risk list since March 2006 because of concerns about its long-term financial solvency and related operational issues. Significant management challenges also affect the Federal Emergency Management Agency's (FEMA) ability to administer NFIP. This report examines (1) the extent to which FEMA's management practices affect the administ...