Information on Proposed Changes to the National Flood Insurance Program

GAO-09-420R: Published: Feb 27, 2009. Publicly Released: Mar 30, 2009.

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The National Flood Insurance Program (NFIP) was created in 1968 and currently has more than 5.6 million policyholders that are insured for about $1.1 trillion. The program collects about $2.9 billion in annual premiums. As of January 2009, NFIP owed approximately $19.2 billion to the U.S. Treasury, primarily as a result of loans that the program received to pay claims from the 2005 hurricane season. According to the Federal Emergency Management Agency (FEMA) of the Department of Homeland Security (DHS), which administers the program, this debt is greater than the sum of all previous losses since the program's inception in 1968. While FEMA officials told us that interest payments are estimated to be lower in 2010, as of October 2008, NFIP owed interest payments of $730 million a year to Treasury and has had to borrow more from the Treasury to make these payments. As a result, it is unlikely that NFIP will ever be able to repay the entire debt. Because of NFIP's financial situation, in 2006 GAO placed the program on the high-risk list. In 2008, GAO issued three reports covering issues directly related to NFIP. NFIP is subject to periodic reauthorization and its current authorization has been extended until March 2009. As Congress considers reauthorization of NFIP and potential reforms to the program, Congress asked us to provide a briefing on (1) the percentage and geographic distribution of policyholders that purchase the maximum NFIP coverage, (2) the availability of private commercial and residential flood insurance, (3) the potential effect of adding business interruption coverage to commercial flood insurance, particularly for small and medium-sized businesses, and (4) the challenges and issues surrounding the potential creation of an NFIP loss fund.

Approximately 36 percent of NFIP policyholders nationwide buy the maximum amount of insurance that NFIP offers. The percentages vary across states but are highest in southern and coastal states and in areas with high median home values, which are often coastal areas. (The sole exception is the District of Columbia, which has the highest percentage of maximum-coverage policies.) The state with the lowest percentage of maximum-coverage policies is West Virginia, with 4 percent. As well as the District of Columbia, states with a high percentage of these policies include Hawaii (55 percent) and South Carolina (56 percent). The percentage of policies sold at maximum coverage limits appears to be related not to flood losses in a particular state but to property values. For example, in Louisiana and Texas, where cumulative NFIP flood losses have been higher than in most other states but property values are lower, the percentage of policies sold at the maximum coverage limits has remained below the national average. Aggregate information is not available on the precise size of the private flood insurance markets for residential and commercial properties, but according to industry experts these markets are considered relatively small. According to a 2007 study commissioned by FEMA, an estimated 180,000 to 260,000 primary and excess coverage flood insurance policies were in effect. A small number of insurance companies provide private policies, which are generally marketed to wealthy homeowners. Private flood insurance can be significantly more expensive than NFIP insurance for similar levels of coverage. For example, one insurer told us that the cost for a specified level of residential coverage could be as low as $500 from NFIP and as high as $900 from a private insurer. For contents insurance, the cost averages around $350 from NFIP but around $600 in the private market. Private insurers generally market to clients with homes worth at least $1 million--far above NFIP policy limits---and generally sell "excess coverage" above NFIP policy limits. Large companies are the primary purchasers of private commercial flood insurance, and several insurers and industry officials we spoke with said that private flood insurance for small to medium-sized businesses was prohibitively expensive, although no data on the costs were available. According to one insurer, up to 80 percent of private policies provide excess coverage above the NFIP maximum and are purchased together with NFIP policies, and the remaining 20 percent is considered first dollar coverage. Generally, the NFIP policy covers the deductible on the private policy--commercial policies often set the deductible at NFIP policy limits--and some private insurers told us that they would raise their deductible amounts if NFIP raised the coverage limits. Insurers also told us that they generally determined their premium rates using NFIP rates, data, and flood maps as a starting point and adjusting rates upward according to their own risk analysis. Private business interruption coverage for flood damage is expensive and is generally purchased by only large companies. According to industry officials, coverage for small and medium-size businesses is also generally prohibitively expensive.

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