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Flood Insurance: FEMA's Rate-Setting Process Warrants Attention

GAO-09-12 Published: Oct 31, 2008. Publicly Released: Dec 01, 2008.
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Questions about the financial status of the National Flood Insurance Program (NFIP) have increased since the 2005 hurricanes, which left the program with an unprecedented $17.4 billion deficit--a debt that resulted in GAO placing NFIP on its high-risk list in March 2006. Among the concerns are the subsidized rates NFIP must provide for about 25 percent of the policies, mostly for older buildings in high-risk flood zones. And although fully risk-based rates are supposed to reflect actual flood risk, concerns have been raised that they do not. This report evaluates (1) the Federal Emergency Management Agency's (FEMA) process for setting full-risk rates to determine whether it produces rates that accurately reflect the risk of flooding and (2) the process that FEMA uses to set subsidized rates and their effect on the financial condition of NFIP. To do this work, GAO evaluated the NFIP rate model, examined data from FEMA, surveyed relevant literature, and interviewed other relevant agencies and risk-modeling firms.

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Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Homeland Security
Priority Rec.
The Secretary of the Department of Homeland Security should direct FEMA to take steps to ensure that its rate-setting methods and the data it uses to set rates result in full-risk premiums rates that accurately reflect the risk of losses from flooding. These steps should include, for example, verifying the accuracy of flood probabilities, damage estimates, and flood maps; ensuring that the effects of long-term planned and ongoing development, as well as climate change, are reflected in the flood probabilities used; and reevaluating the practice of aggregating risks across zones.
Closed – Implemented
In February 2018, FEMA officials told us they had begun to redesign NFIP's risk rating system to help ensure policy rates better reflect the risk of flooding. The redesign, known as Risk Rating 2.0, includes efforts to use catastrophe models, stochastic approaches, and updated map information to better reflect the variation in flood risk. These reforms are also intended to improve how FEMA's rating process accounts for general and specific factors that affect flood probabilities and damage. While FEMA initially announced that new rates for all single-family homes would go into effect nationwide on October 1, 2020, it announced in November 2019 that it would defer implementation to October 1, 2021. FEMA said this would allow it to conduct a comprehensive analysis of the proposed rating structure so as to protect policyholders and minimize any unintentional negative effects of the transition, and that the new implementation date would cover all NFIP policies. In February 2021, FEMA officials told us that implementation was still on track for October 2021, and in April 2021, they provided us with additional details on the updated methodology. Based on FEMA's progress in creating a more accurate and modernized rate setting methodology that better reflects the full risk of loss, we are closing this recommendation as implemented.
Department of Homeland Security The Secretary of the Department of Homeland Security should direct FEMA to ensure that information is collected on the location, number, and losses associated with existing and newly created grandfathered properties in NFIP and to analyze the financial impact of these properties on the flood insurance program.
Closed – Implemented
As of February 2020, FEMA officials said they had finished identifying properties with grandfathered premium rates and that they planned to analyze their economic implications as part of their efforts to update their premium rate setting approach, known as Risk Rating 2.0. FEMA plans to implement this redesign on October 1, 2021. In February 2021, FEMA officials said that this effort was still on track for beginning in October 2021. In April 2021, FEMA officials provided additional details on their analysis of grandfathered properties, and how Risk Rating 2.0 will be used to identify the full risk of loss for every insured property and communicate that to policyholders. Based on information on FEMA's progress in analyzing the effect of grandfathered properties, provided by FEMA in May 2021, we are closing this recommendation as implemented.

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Claims processingDamage claimsData collectionData integrityDisaster mitigationDisaster relief aidFinancial analysisFinancial managementFlood insuranceFloodsInsurance claimsInsurance premiumsLossesNatural disastersProgram evaluationProgram managementProperty damagesProperty lossesRatesRisk assessmentRisk factorsRisk managementSubsidiesInsurance risk classificationProgram coordinationProgram costsProgram goals or objectives