Federal Emergency Management Agency: Ongoing Challenges Facing the National Flood Insurance Program Page: 2 of 20
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Accountability. Integrity. Reliability
Highlights of GAO-07-118T, 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), established in
1968, provides property owners
with some insurance coverage for
flood damage. The Federal
Emergency Management Agency
(FEMA) within the Department of
Homeland Security is responsible
for managing the NFIP.
Given the challenges facing the
NFIP and the need for legislative
reform to ensure the financial
stability and ongoing viability of
this program, GAO placed the NFIP
on its high-risk list in March 2006.
This testimony updates past work
and provides information about
ongoing GAO work on issues
including (1) NFIP's financial
structure, (2) the extent of
compliance with mandatory
requirements, (3) the status of map
modernization efforts, and (4)
FEMA's oversight of the NFIP.
Building on our previous and
ongoing work on the NFIP, GAO
collected data from FEMA to
update efforts, including
information about claims, policies,
repetitive loss properties, and
In past work, GAO recommended
that FEMA strengthen its oversight
of the NFIP and insurance
companies responsible for selling
and servicing flood policies, among
other things. FEMA generally
agreed with our recommendations.
To view the full product, including the scope
and methodology, click on GAO-07-118T.
For more information, contact Orice M.
Williams at (202) 512-8678 or
FEDERAL EMERGENCY MANAGEMENT
Ongoing Challenges Facing the National Flood
What GAO Found
The most significant challenge facing the NFIP is the actuarial soundness of
the program. As of August 2007, FEMA owed over $17.5 billion to the U.S.
Treasury. FEMA is unlikely to be able to pay this debt, primarily because the
program's premium rates have been set to cover an average loss year, which
until 2005 did not include any catastrophic losses. This challenge is
compounded by the fact that some policyholders with structures that were
built before floodplain management regulations were established in their
communities generally pay premiums that represent about 35 to 40 percent of
the true risk premium. Moreover, about 1 percent of NFIP-insured properties
that suffer repetitive losses account for between 25 and 30 percent of all flood
claims. FEMA is also creating a new generation of "grandfathered"
properties-properties that are mapped into higher-risk areas but may be
eligible to receive a discounted premium rate equal to the nonsubsidized rate
for their old risk designation. Placing the program on a more sound financial
footing will involve trade-offs, such as charging more risk-based premiums
and expanding participation in the program.
The NFIP also faces challenges expanding its policyholder base by enforcing
compliance with mandatory purchase requirements and promoting voluntary
purchase by homeowners who live in areas that are at less risk. One recent
study estimated that compliance with the mandatory purchase requirement
was about 75 to 80 percent but that penetration elsewhere in the market was
only 1 percent. Since 2004, FEMA has implemented a massive media campaign
called "FloodSmart" to increase awareness of flooding risk nationwide by
educating everyone about the risks of flooding and encouraging the purchase
of flood insurance. While the numbers of policyholders increased following
Hurricane Katrina, it is unclear whether these participants will remain in the
program as time goes on.
The impact of the 2005 hurricanes highlighted the importance of up-to-date
flood maps that accurately identify areas at greatest risk of flooding. These
maps are the foundation of the NFIP. In 2004 FEMA began its map
modernization efforts, and according to FEMA, about 34 percent of maps have
been remapped. Completing the map modernization effort and keeping these
maps current is also going to be an ongoing challenge for FEMA.
Finally, FEMA also faces significant challenges in providing effective
oversight over the insurance companies and thousands of insurance agents
and claims adjusters who are primarily responsible for the day-to-day process
of selling and servicing flood insurance policies. As GAO recommended in a
an interim report issued in September 2007, FEMA needs to take steps to
ensure that it has a reasonable estimate of actual expenses that the insurance
companies incur to help determine whether payments for services are
appropriate and that required financial audits are performed. GAO, in its
ongoing work, plans to further explore FEMA oversight of the private
insurance companies and the cost of selling and servicing NFIP flood policies.
United States Government Accountability Office
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United States. Government Accountability Office. Federal Emergency Management Agency: Ongoing Challenges Facing the National Flood Insurance Program, text, October 2, 2007; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc291590/m1/2/: accessed September 18, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.