National Flood Insurance Program: Continued Actions Needed to Address Financial and Operational Issues Page: 2 of 26
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Accountability* Integrity* Reliability
Highlights of GAO-10-631T, a testimony
before the Subcommittee on Housing and
Community Opportunity, Committee on
Financial Services, House of
Why GAO Did This Study
The National Flood Insurance
Program (NFIP), established in
1968, provides policyholders with
insurance coverage for flood
damage. The Federal Emergency
Management Agency (FEMA)
within the Department of
Homeland Security is responsible
for managing NFIP. Unprecedented
losses from the 2005 hurricane
season and NFIP's periodic need to
borrow from the U.S. Treasury to
pay flood insurance claims have
raised concerns about the
program's long-term financial
solvency. Because of these
concerns and NFIP's operational
issues, NFIP has been on GAO's
high-risk list since March 2006. As
of April 2010, NFIP's debt to
Treasury stood at $18.8 billion.
The Subcommittee asked GAO to
discuss (1) NFIP's financial
challenges, (2) FEMA's operational
and management challenges, and
(3) actions needed to address these
challenges. In preparing this
statement, GAO relied on its past
work on NFIP and GAO's ongoing
review of FEMA's management of
NFIP focused on information
technology and contractor
In past work, GAO recommended,
among other things, that FEMA
take steps to help ensure that
premium rates are more reflective
of flood risks; strengthen its
oversight of NFIP and insurance
companies responsible for selling
and servicing flood policies; and
strengthen its internal controls and
the quality of its data.
View GAO-10-631T or key components.
For more information, contact Orice Williams
Brown at (202) 512-8678 or
NATIONAL FLOOD INSURANCE PROGRAM
Continued Actions Needed to Address Financial and
What GAO Found
While Congress and FEMA intended that NFIP be funded with premiums
collected from policyholders rather than with tax dollars, the program is, by
design, not actuarially sound. NFIP cannot do some of the things that private
insurers do to manage their risks. For example, NFIP is not structured to build
a capital surplus, is likely unable to purchase reinsurance to cover
catastrophic losses, cannot reject high-risk applicants, and is subject to
statutory limits on rate increases. In addition, its premium rates do not reflect
actual flood risk. For example, nearly one in four property owners pay
subsidized rates, "full-risk" rates may not reflect the full risk of flooding, and
NFIP allows "grandfathered" rates, which allow some property owners to
continue paying rates that do not reflect reassessments of their properties'
flood risk. Further, NFIP cannot deny insurance on the basis of frequent
losses and thus provides policies for repetitive loss properties, which
represent only 1 percent of policies but account for 25 to 30 percent of claims.
NFIP's financial condition has improved slightly due to an increase in the
number of policyholders and moderate flood losses, and since March 2009,
FEMA has taken some encouraging steps toward improving its financial
position, including making $600 million in interest payments to Treasury
without increasing its borrowings. However, it is unlikely to pay off its full
$18.8 billion debt, especially if it faces catastrophic loss years.
Operational and management issues may also limit efforts to address NFIP's
financial challenges and meet program goals. Payments to write-your-own
(WYO) insurers, which are key to NFIP operations, represent one-third to two-
thirds of the premiums collected. But FEMA does not systematically consider
actual flood insurance expense information when calculating these payments
and has not aligned its WYO bonus structure with NFIP goals or implemented
all of its financial controls for the WYO program. GAO also found that FEMA
did not consistently follow its procedures for monitoring non-WYO
contractors or coordinate contract monitoring responsibilities among
departments on some contracts. Some contract monitoring records were
missing, and no system was in place that would allow departments to share
information on contractor deficiencies. In ongoing GAO work examining
FEMA's management of NFIP, some similar issues are emerging. For example,
FEMA still lacks an effective system to manage flood insurance policy and
claims data, despite investing roughly 7 years and $40 million on a new system
whose development has been halted. However, FEMA has begun to
acknowledge its management challenges and develop a plan of action.
Addressing the financial challenges facing NFIP would likely require actions
by both FEMA and Congress that involve trade-offs, and the challenges could
be difficult to remedy. For example, reducing subsidies could increase
collected premiums but reduce program participation. At the same time,
FEMA must address its operational and management issues. GAO has
recommended a number of actions that FEMA could take to improve NFIP
operations, and ongoing work will likely identify additional issues.
.United States Government Accountability Office
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United States. Government Accountability Office. National Flood Insurance Program: Continued Actions Needed to Address Financial and Operational Issues, text, April 21, 2010; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc293129/m1/2/: accessed October 17, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.