This is the accessible text file for GAO report number GAO-07-169 
entitled 'National Flood Insurance Program: New Processes Aided 
Hurricane Katrina Claims Handling, but FEMA's Oversight Should Be 
Improved' which was released on December 15, 2006. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

December 2006: 

National Flood Insurance Program: 

New Processes Aided Hurricane Katrina Claims Handling, but FEMA's 
Oversight Should Be Improved: 

GAO-07-169: 

GAO Highlights: 

Highlights of GAO-07-169, a report to congressional committees. 

Why GAO Did This Study: 

In August and September 2005, Hurricanes Katrina and Rita caused 
unprecedented destruction to property along the Gulf Coast, resulting 
in billions of dollars of damage claims to the National Flood Insurance 
Program (NFIP). This report, which we initiated under the authority of 
the Comptroller General, examines (1) the impact of Hurricanes Katrina 
and Rita on the NFIP and paid losses by location and property type; (2) 
the challenges the Federal Emergency Management Agency (FEMA) and 
others faced in addressing the needs of NFIP claimants and communities; 
(3) FEMA’s methods of monitoring and overseeing claims adjustments; and 
(4) FEMA’s efforts to meet the requirements of the Flood Insurance 
Reform Act of 2004 to establish policyholder coverage notifications, an 
appeals process for claimants, and education and training requirements 
for agents. To conduct these assessments, GAO interviewed FEMA and 
insurance officials, analyzed claims data, and examined a sample of 
reports done on the accuracy of claims adjustments. 

What GAO Found: 

NFIP paid an unprecedented dollar amount for a record number of claims 
from Hurricanes Katrina and Rita. Congress increased NFIP’s borrowing 
authority with the U.S. Treasury from a pre-Katrina level of $1.5 
billion to about $20.8 billion in March 2006, but FEMA will probably 
not be able to repay this debt on annual premium revenues of about $2 
billion. As of May 2006, NFIP had paid approximately 162,000 flood 
damage claims from Hurricane Katrina and another 9,000 claims from 
Hurricane Rita. Most paid claims were for primary residences where 
flood insurance was generally required. 

FEMA and its private sector partners faced several challenges in 
processing a record number of flood claims from Hurricanes Katrina and 
Rita, among them were (1) reaching insured properties in a timely way 
because of blocked roadways and flood water contamination and (2) 
identifying badly damaged homes to be inspected in locations where 
street signs had washed away. Despite these and other obstacles, FEMA 
reported that over 95 percent of Gulf Coast claims had been closed by 
May 2006, a time frame comparable to those for closing claims in other, 
smaller recent floods. To help keep pace with the volume of claims 
filed, FEMA approved expedited methods for claims processing that were 
unique to Hurricanes Katrina and Rita. 

To provide oversight of the claims adjustment process, FEMA’s program 
contractor did quality assurance reinspections of Hurricane Katrina and 
Rita claims adjustments. FEMA did not adopt our October 2005 
recommendation that it select the claims to be reinspected from a 
random sample of the universe of all closed claims; thus, the results 
of the reinspections cannot be projected to a universe larger than the 
4,316 claims adjustments that were reinspected. FEMA agrees with our 
prior recommendation and plans to do quality reinspections in future 
flood events based on a random sample of all claims. FEMA did not 
analyze the overall results of the quality reinspections for Hurricanes 
Katrina and Rita. 

FEMA has made progress but has not fully implemented the NFIP program 
changes mandated by the Flood Insurance Reform Act. For example, 15 
states had adopted minimum education and training requirements for 
insurance agents who sell NFIP policies, as of October 2006. 

What GAO Recommends: 

GAO recommends that FEMA analyze the overall results of reinspection 
reports on the accuracy of claims adjustments for future floods. The 
Department of Homeland Security reviewed a copy of this report and 
agreed with our recommendation. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-169]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact William O. Jenkins at 
(202) 512-8757. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Hurricanes Katrina and Rita Had a Far-Reaching Impact on the Financial 
Solvency of the NFIP: 

FEMA and Private Sector NFIP Partners Were Challenged to Process a 
Record Number of Claims and Address the Needs of NFIP Claimants and 
Communities: 

Results of Monitoring and Oversight of Claims Payments Were 
Inconclusive because FEMA Did Not Reinspect a Statistically Valid 
Sample of Claims: 

FEMA Has Made Progress Implementing NFIP Program Changes in the Flood 
Insurance Reform Act of 2004: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Statistical Information on NFIP Claims Paid for Hurricanes 
Katrina and Rita: 

Appendix III: Parishes and Counties Where FEMA Issued Advisory Flood 
Elevation Guidance: 

Appendix IV: Results of GAO Review of a Random Selection of 
Reinspection Reports for Hurricanes Katrina and Rita: 

Appendix V: State Actions on Training of Agents That Sell NFIP 
Policies: 

Appendix VI: Comments from the Department of Homeland Security: 

Appendix VII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Hurricane Katrina Loss Information by State: 

Table 2: Hurricane Rita Loss Information by State: 

Table 3: Number of FEMA Quality Assurance Reinspection Reports and the 
Sample We Reviewed, by Process Type and Flood Event: 

Table 4: Hurricane Katrina Principal and Nonprincipal Residential Paid 
Losses by State: 

Table 5: Hurricane Rita Principal and Nonprincipal Residential Paid 
Losses by State: 

Table 6: Hurricane Katrina Paid Residential Losses for Dwellings and 
Contents by State: 

Table 7: Hurricane Rita Paid Residential Losses for Dwellings and 
Contents by State: 

Table 8: Parishes and Counties Where FEMA Issued Advisory Flood 
Elevation Guidance: 

Figures: 

Figure 1: NFIP Policies in Force, 1978-2006 1: 

Figure 2: Total NFIP Payments to Claimants, 1972-2005 1: 

Figure 3: Average Loss Payments for Hurricanes Katrina and Rita and 
Flood Events from 2002 to 2004 1: 

Figure 4: Hurricane Katrina Losses by Location 1: 

Figure 5: Hurricane Katrina Paid Losses for Principal and Nonprincipal 
Noncondominium Residential Properties: 

Figure 6: Hurricane Rita Paid Losses for Principal and Nonprincipal 
Noncondominium Residential Properties: 

Figure 7: Hurricane Katrina Claims Paid In and Out of Special Flood 
Hazard Areas: 

Figure 8: Hurricane Rita Claims Paid In and Out of Special Flood Hazard 
Areas: 

Figure 9: Hurricane Katrina Paid Residential Losses for Dwellings and 
Contents: 

Figure 10: Hurricane Rita Paid Residential Losses for Dwellings and 
Contents: 

Figure 11: Flood Adjusters Were Challenged to Get To and Identify 
Heavily Damaged Houses: 

Figure 12: A New Orleans House Is Elevated Using ICC Coverage to Pay 
Some Costs: 

Figure 13: Results of GAO Review of Quality Reinspections of Hurricanes 
Katrina and Rita Claims Processed Using Expedited Procedures: 

Figure 14: Results of GAO Review of Quality Reinspections of Hurricane 
Katrina Claims Processed Using Regular Claims Adjustment Procedures: 

Figure 15: Results of GAO Review of Quality Reinspections of Hurricane 
Rita Claims Processed Using Regular Claims Adjustment Procedures: 

Abbreviations: 

DHS: Department of Homeland Security: 
FEMA: Federal Emergency Management Agency: 
FIRM: Flood Insurance Rate Map: 
ICC: increased cost of compliance: 
NFIP: National Flood Insurance Program: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

December 15, 2006: 

In late August 2005, Hurricane Katrina came ashore and destroyed or 
made uninhabitable an estimated 300,000 homes along the Gulf Coast of 
the United States. Hurricane Rita followed a few weeks later, making 
landfall in Texas and Louisiana and adding to the devastation, with 
Louisiana suffering the most damaging effects from both hurricanes. 
Much of the damage all along the Gulf Coast was the result of 
catastrophic flooding. As a result, the National Flood Insurance 
Program (NFIP) had a large role to play in the region's recovery. 
Federal Emergency Management Agency (FEMA) officials estimate that half 
of Hurricane Katrina and Rita flood victims were insured by the NFIP. 
Those who did have coverage filed more than five times the number of 
claims, through May 31, 2006, at 10 times the cost of any other prior 
flood event in NFIP history. 

The NFIP was established in 1968 in part to provide some insurance 
protection for flood victims because private insurers were and are 
still largely unwilling to bear the economic risks associated with the 
potentially catastrophic impact of flooding. Under statute, homeowners 
may purchase up to $250,000 of NFIP coverage on their dwellings and up 
to an additional $100,000 for coverage of personal property (i.e., 
furniture and electronic equipment), and business owners may purchase 
up to $500,000 of coverage on their building structures and $500,000 on 
the contents. 

As of June 2006, the NFIP had a little over 5.1 million policies in 
force. About 3 million of the policies, about 62 percent, were for 
properties in the five states affected by Hurricanes Katrina and Rita, 
and Florida had the largest number of policies of any state in the 
nation, with almost 2.1 million.[Footnote 1] Homeowners are required to 
purchase flood insurance at least equal to the amount of their 
outstanding mortgage up to the maximum policy limit if (1) their 
property is within a designated special high-risk flood hazard area and 
(2) their mortgage was issued by a federally regulated lender. 
Optional, lower-cost coverage is available under the NFIP to protect 
homes in areas of low to moderate risk. 

The NFIP is intended to pay operating expenses and insurance claims 
with flood insurance policy premiums rather than tax dollars, but it 
has statutory authority to borrow funds from the U. S. Treasury to keep 
solvent in heavy loss years.[Footnote 2] Historically, the NFIP has 
been able to repay funds borrowed from the Treasury to meet its claims 
obligations. However, the magnitude and severity of losses from 
Hurricane Katrina and other 2005 hurricanes required the NFIP to obtain 
borrowing authority of $20.8 billion from the Treasury, an amount the 
program is unlikely to be able to repay while paying future claims with 
its current premium income of about $2 billion annually. As a result of 
the catastrophic losses, we designated the program as a high-risk area 
in March 2006, and Congress is considering a number of legislative 
changes to improve the NFIP's financial solvency.[Footnote 3] 

The Federal Emergency Management Agency, within the Department of 
Homeland Security, administers the NFIP. FEMA pays 88 private insurance 
companies to perform the administrative functions of selling and 
servicing flood insurance policies and settling claims, although the 
companies do not assume risk for losses. To settle claims, including 
those from Hurricanes Katrina and Rita, insurance companies work with 
certified flood adjusters who assess damages and estimate losses. The 
NFIP pays for adjuster services according to a standard fee schedule. 
For example, for the average claims settlement amount for Hurricane 
Katrina, $94,803, the NFIP fee schedule authorizes payment of 3 percent 
of the claim amount, or $2,844, for adjusting services. FEMA is 
responsible for the management and oversight of the NFIP and is 
assisted in performing these functions by a program contractor. The 
NFIP also provides incentives for communities to adopt and enforce 
floodplain management regulations to reduce future flood damage. 

After NFIP policyholders cited concerns regarding the processing and 
payments of claims after Hurricane Isabel in 2003, Congress passed the 
Flood Insurance Reform Act. This act reauthorized the program and 
directed FEMA to take actions to provide policyholders with additional 
information on their coverage, establish a regulatory appeals process 
for those who disagree with actions taken to settle their claims, and 
establish minimum education and training requirements for agents that 
sell policies. In addition, the Flood Insurance Reform Act authorized a 
pilot program to help reduce the inventory of properties that have had 
repetitive claims for flood damage.[Footnote 4] 

The unprecedented number of losses from Hurricanes Katrina and Rita 
confronted the NFIP with management and accountability challenges never 
before faced in its almost 40-year history. This report, prepared under 
the authority of the Comptroller General to initiate reviews on his 
own, (1) describes the impact of Hurricanes Katrina and Rita on the 
NFIP and the extent of the losses paid by location and type of 
property; (2) describes the challenges FEMA and its private sector 
partners faced and the results of their efforts to process flood claims 
from Hurricanes Katrina and Rita and address the needs of NFIP 
claimants and communities; (3) assesses FEMA's method of monitoring and 
overseeing claims adjustments and the results of that monitoring and 
oversight; and (4) assesses FEMA's efforts to implement the provisions 
of the Flood Insurance Reform Act of 2004 by establishing notifications 
on coverage to policyholders, an appeals process for claimants, agent 
education and training requirements, and a pilot program to help reduce 
the number of insured properties that have sustained repeated severe 
flood losses. 

We have recently completed or have under way several other reports and 
testimonies related to FEMA's administration and management of the 
NFIP. In October 2005, we issued a report that reviewed, among other 
things, FEMA's monitoring and oversight of the NFIP and the status of 
its implementation of provisions of the Flood Insurance Reform Act of 
2004. In that report, we recommended that FEMA use a statistically 
valid method to select claims for review and establish milestones for 
meeting provisions of the Flood Insurance Reform Act. We testified on 
the results of that work before the Senate Committee on Banking, 
Housing and Urban Affairs and the House Financial Services Committee 
Subcommittee on Housing and Community Opportunity.[Footnote 5] In 
January 2006, we testified again before the Senate Committee on 
Banking, Housing and Urban Affairs on challenges facing the 
NFIP.[Footnote 6] In addition, we have work under way to examine the 
cost of operating the NFIP, including fees paid for the services of 
private insurance companies and claims adjusters. We anticipate issuing 
a report on that work in 2007. In other related work on catastrophe 
insurance issues, we are reviewing natural hazard loss mitigation 
activities and assessments of hurricane damages caused by wind versus 
flooding. We also anticipate reporting on this work in 2007. 

To describe the impact of Hurricanes Katrina and Rita on the NFIP and 
the extent of the losses paid by location and property type, we 
reviewed congressional actions to increase the NFIP borrowing 
authority, and we interviewed the Director and other officials of 
FEMA's Mitigation Division. We also analyzed data on claims payments 
from the NFIP management information system. We tested the reliability 
of the NFIP database to assure ourselves that the information we 
obtained from it was sufficiently reliable for our reporting purposes. 

To describe the challenges FEMA and its private sector partners faced 
and the results of their efforts to process flood claims resulting from 
Hurricanes Katrina and Rita and address the needs of NFIP claimants and 
communities, we interviewed selected headquarters and field officials 
of FEMA and its program contractor. We conducted semistructured 
interviews with insurance industry officials involved in the recovery 
effort selected on the basis of our judgment. Their views are not 
representative of the universe of all insurance industry officials 
involved in the flood recovery effort. We documented policies and 
procedures in place for claimants who disagreed with actions taken to 
settle their claims, and we collected and analyzed available NFIP data 
on complaints and appeals filed by claimants. We also interviewed 
selected officials regarding actions taken to develop and issue 
advisory opinions on elevations for rebuilding after the hurricanes in 
15 Louisiana and Mississippi communities, and we reviewed the 
advisories and analyzed impacts on the communities' recovery efforts. 

To assess FEMA's role in monitoring and overseeing the NFIP and the 
results of that oversight, we examined guidance for the quality 
assurance reinspections that FEMA's program contractor conducts for a 
sample of claims adjustments after every flood event and followed up on 
action taken on our prior recommendation for improvements in the 
quality reinspection program.[Footnote 7] We interviewed FEMA and 
program contractor officials involved in the quality assurance process, 
and we conducted a review of a random sample of the quality 
reinspections done of Hurricane Katrina and Rita claims 
adjustments.[Footnote 8] 

To assess the status of FEMA's efforts to implement provisions of the 
Flood Insurance Reform Act of 2004 after Hurricanes Katrina and Rita, 
we interviewed FEMA officials and examined documentation of the actions 
FEMA took. We assessed FEMA's actions to comply with the provisions to 
determine whether they met the legal requirements of the act. We 
performed our work from December 2005 through November 2006 in 
accordance with generally accepted government auditing standards. Our 
scope and methodology are discussed in greater detail in appendix 1. 

Results in Brief: 

Hurricane Katrina, closely followed by Hurricane Rita, had a far- 
reaching impact on the NFIP. Both the number of claims paid and the 
value of claims payments were unprecedented. As a result, claims for 
damages from the 2005 hurricane season far exceeded the ability of the 
NFIP to pay for them. The NFIP's borrowing authority with the U.S. 
Treasury was increased from $1.5 billion before Hurricane Katrina to 
about $20.8 billion in March 2006. As we have reported, it is unlikely 
that the NFIP will be able to repay this debt and pay future claims 
with annual insurance premium revenue of about $2 billion.[Footnote 9] 
Legislation has been introduced in Congress to forgive the debt, and 
attention has focused on the extent of the federal government's 
exposure for future catastrophic losses and ways to improve the 
program's financial solvency. As of May 2006, with over 95 percent of 
the claims reported by FEMA to be closed, the NFIP had paid claims for 
about 162,000 losses for flood damage from Hurricane Katrina in 
Alabama, Florida, Louisiana, and Mississippi. About 135,000 of these 
claims (about 83 percent) were in Louisiana. As of July 2006, more than 
83,500 claims resulted from property damage in the New Orleans area. 
About 9,000 additional NFIP claims, over 7,000 of them in Louisiana, 
were paid as a result of losses from Hurricane Rita. To put the number 
of loss claims in perspective, the NFIP processed a little more than 
30,000 claims in each of the two largest single flood events prior to 
Hurricane Katrina, a 1995 Louisiana flood and Tropical Storm Allison in 
2001. The average amount paid per claim for Hurricane Katrina flood 
damages, about $94,800, was about three times the average paid per 
claim in the previous record year, 2004, for damages from flood events 
including Hurricanes Charley, Ivan, Frances, and Jeanne in Florida and 
other East Coast and Gulf Coast states. Most paid losses were for 
primary residences within special flood hazard areas in which flood 
insurance was generally required, but about 16 percent of claims for 
noncondominium residential losses from Hurricane Katrina (24,511) were 
for nonprincipal residences (i.e., second homes), and (about 22 
percent) of claims paid for Hurricane Katrina (about 36,000) were on 
properties outside of the special flood hazard areas where purchase of 
flood insurance is optional. 

The magnitude and severity of the damages from Hurricane Katrina 
closely followed by Hurricane Rita presented FEMA and its private 
sector NFIP partners with challenges to accurately process a record 
number of flood claims in a timely manner and address other needs of 
NFIP claimants and communities. Among the challenges FEMA and private 
sector officials we interviewed said they faced were difficulties in 
(1) reaching the insured properties for up to a month because debris 
blocked roadways and flood waters contaminated houses, and (2) 
identifying the demolished homes to be inspected on streets where signs 
had washed away. Despite these and other obstacles, FEMA reported that 
over 95 percent of the Gulf Coast claims were closed by May 2006, about 
9 months after the storms struck. The time periods for closing claims 
were comparable to those for closing claims in other, smaller recent 
flood events. Concerns from claimants about actions taken to settle 
their claims were relatively few in relation to the large number of 
claims filed. For example, as of April 2006, 13 appeals had been filed 
by claimants related to settlements of their claims for Hurricane 
Katrina damage, and no appeals had been filed on claims for damage from 
Hurricane Rita. To help keep pace with the volume of claims filed and 
assist policyholders, FEMA approved expedited methods for claims 
processing that were unique to Hurricanes Katrina and Rita and took 
other special actions to assist claimants. In some circumstances where 
data showed that flood losses exceeded policy limits, FEMA authorized 
claims payments to policy limits without site visits by certified flood 
claims adjusters or allowed the use of models that paid claims based on 
the square footage of the home and general classification by adjusters 
of the quality of its building materials (i.e., flooring and doors). 
FEMA authorized payments to its private insurance company partners of 
$750 per expedited claim adjustment--a lower fee than would have been 
paid for a more time-consuming room-by-room, line-item-by-line-item 
visual assessment of flood damage. 

As in previous flood events, FEMA's primary method of monitoring and 
overseeing claims settlements and addressing concerns from claimants 
was its quality reinspection program. Employees of FEMA's program 
contractor are to reinspect a sample of claims adjustments for every 
flood event to identify errors, among other things. As of August 2006, 
FEMA's program contractor had conducted quality assurance reinspections 
of 4,316 Hurricane Katrina and Rita claims. FEMA also organized a 
special task force to review an additional 1,696 claims adjusted using 
expedited methods. However, FEMA neither used a random sample of all 
claims closed for its reinspections nor analyzed the overall results of 
those reinspections to determine the total number of payment errors and 
their potential causes--actions that we have reported are necessary to 
meet our internal control standard that FEMA have reasonable assurance 
that program objectives are being achieved (e.g., claims are settled 
accurately) and its operations are effective and efficient. Instead of 
using a random sample of all closed claims, as we recommended in 
October 2005, FEMA's sample selection was based upon judgmental 
criteria including, among other items, the size and location of loss 
and complexity of claims. Consequently, the results of FEMA's NFIP 
quality reinspection program for Hurricanes Katrina and Rita cannot be 
projected to a population larger than the 4,316 claims adjustments that 
were reinspected. As a result, FEMA is unable to determine the overall 
accuracy of claims settled for specific flood events. A FEMA official 
told us that FEMA expects to use a random sample for future flood 
events, as we recommended, but was not able to do so in the aftermath 
of Hurricanes Katrina and Rita because other priorities to meet the 
needs of claimants and communities took precedence. Neither FEMA nor 
its program contractor analyzed the overall results of the 4,316 
quality reinspections for Hurricanes Katrina and Rita done between 
January and September 2006 to identify the total number of payment 
errors and the magnitude of those errors. We reviewed a random sample 
of these 4,316 reinspections and estimated there were payment errors in 
about 14 percent of the Hurricane Katrina reinspected claims adjusted 
using regular processes, 1 percent of the Hurricanes Katrina and Rita 
reinspected claims adjusted using expedited methods, and 2 percent of 
Hurricane Rita reinspected claims adjusted using regular processes. 
Payment errors identified in our review of reinspection reports for 
Hurricane Katrina claims settled using regular processes included 8 
underpayments that ranged from more than $131,000 to $543 and 36 
overpayments that ranged from $65,000 to $86.[Footnote 10] Because, in 
the past, FEMA has had neither an appropriate sampling methodology nor 
a requirement for an overall analysis of the accuracy of the claims 
adjustments after every flood event, we do not know how the error rates 
we identified compare to adjusting errors in other smaller flood 
events. FEMA has procedures in place to recover overpayments made by 
insurance companies and adjust payments to policyholders for 
underpayments. 

FEMA made progress in implementing the NFIP program changes provided 
for in the Flood Insurance Reform Act of 2004, since we last reported 
on the status of the implementation in October 2005.[Footnote 11] 
However, implementation is not yet complete. The act mandated FEMA by 
December 30, 2004, to (1) develop supplemental materials for explaining 
NFIP coverage and the claims process to policyholders when they 
purchase and renew policies; (2) establish, by regulation, an appeals 
process for claimants; and (3) establish, in cooperation with the 
insurance industry, state insurance regulators, and other interested 
parties, minimum training and education requirements for flood 
insurance agents and publish the requirements in the Federal Register. 
The act also authorized FEMA to create a pilot program to provide 
financial assistance to states and communities to carry out certain 
activities, including elevating and demolishing structures that have 
suffered severe and repeated damage from flooding.[Footnote 12] FEMA 
has met the requirements of the act to establish notifications on 
coverage to policyholders and an appeals process for claimants. With 
respect to the requirement that it establish minimum education and 
training requirements for agents who sell NFIP policies, FEMA published 
a notice in the Federal Register in September 2005, stating that it 
intended to implement the standards through existing state licensing 
schemes for insurance agents. To that end, FEMA has actively solicited 
partnerships with state legislators and the insurance industry to 
implement training standards. However, as we reported in October 2005, 
FEMA has not developed milestones for state adoption of minimum 
training and education requirements.[Footnote 13] As of October 2006, 
15 states have established minimum training and education requirements 
for insurance agents that sell NFIP policies. Two states have issued 
advisory notices, and 1 state has established standards for a 
continuing education course in flood insurance but has not made the 
course mandatory.[Footnote 14] As of October 2006, FEMA had not 
developed and issued guidance for implementing the pilot program 
authorized by the act to help reduce the inventory of NFIP properties 
that have sustained repeated severe flood losses. However, officials 
said that they had made progress in developing the program guidance and 
implementing regulations. 

To strengthen and improve FEMA's monitoring and oversight of the NFIP, 
including ensuring that claims payments are accurately determined, we 
are recommending that FEMA analyze the overall results of a 
statistically valid sample of claims adjustments to be completed for 
each future flood event to determine the number and types of claims 
adjustment errors made and to help determine whether new, cost- 
efficient methods for adjusting claims that were introduced after 
Hurricane Katrina are feasible to use after other flood events. 

In commenting on a draft of this report, the Department of Homeland 
Security (DHS) agreed with our recommendation to improve its quality 
reinspection program and stated that it was revising its guidance 
accordingly and would use the recommended sampling and reporting 
procedures in future flood events. DHS reiterated a comment made in 
FEMA's review of our October 2005 report that we did not review all of 
the controls and processes that FEMA has in place to provide oversight 
for the NFIP. Most of the additional oversight and management processes 
and controls that FEMA has in place are for financial management--an 
area not included in the scope of our work for this report but to be 
addressed in work that we have under way. DHS also provided additional 
information about the determination of the number of quality control 
reinspections to be performed after flood events and actions it has 
taken to implement the provision of the Flood Insurance Reform Act of 
2004 to establish, in cooperation with the insurance industry, state 
insurance regulators, and other interested parties, minimum training 
and education requirements for flood insurance agents and publish the 
requirements in the Federal Register. DHS's comments are contained in 
appendix VI. In addition, DHS provided a technical comment, which we 
incorporated into the report. 

Background: 

Ninety percent of all natural disasters in the United States involve 
flooding. Although homeowner insurance policies typically cover damage 
and losses from fire or theft and often from wind-driven rain, they do 
not cover flood damage because private insurance companies are largely 
unwilling to bear the economic risks associated with the potentially 
catastrophic impact of flooding. To provide some insurance protection 
for flood victims, as well as incentives for communities to adopt and 
enforce floodplain management regulations to reduce future flood 
damage, and to reduce the amount of federal disaster assistance 
payments, federal law established the NFIP in 1968.[Footnote 15] The 
legislative history of the National Flood Insurance Act recognized that 
insurance for existing buildings constructed before the NFIP was 
established would be extremely expensive because most of them were 
flood prone and did not comply with NFIP floodplain management 
standards that went into effect after they were built. The authorizing 
legislation included provisions for subsidized insurance rates to be 
made available for policies covering certain structures to encourage 
communities to join the program. Under the NFIP, the properties are 
generally referred to as Pre-FIRM (Flood Insurance Rate Map) buildings. 

As shown in figure 1, the NFIP has grown from about 1.5 million 
policies in 1978 to 5.1 million policies in July 2006. 

Figure 1: Figure 1: NFIP Policies in Force, 1978-2006: 

[See PDF for image] 

Source: FEMA. 

[End of figure] 

NFIP Provides Insurance and Maps Flood Risk for Communities That Agree 
to Enforce Land Use Regulations: 

More than 20,100 communities nationwide participate in the NFIP. To 
participate in the program, communities agree to enforce regulations 
for land use and new construction in high-risk flood zones. In 
exchange, the NFIP studies and maps flood risks and makes federally 
backed flood insurance available to homeowners and other property 
owners. The maps identify special high-risk flood hazard areas, also 
known as the 100-year floodplain. These areas have a 1 percent chance 
of being flooded in any given year or at least a 26 percent chance of 
being flooded over the 30-year life of a typical home mortgage. 

Property owners in the special high-risk flood hazard areas whose 
communities participate in the NFIP and who have mortgages from 
federally regulated lenders are required to purchase flood insurance on 
their dwellings for at least the outstanding amount of their mortgages 
up to the maximum policy limit of $250,000. Optional lower-cost 
coverage is also available under the NFIP to protect homes in areas of 
low to moderate risk. To insure furniture and other personal property 
items against flood damage, homeowners may purchase separate NFIP 
personal property coverage. Maximum coverage amounts under the NFIP are 
$250,000 for dwellings and $100,000 for personal property. 

Accurate flood maps that identify the areas at greatest risk of 
flooding are the foundation of the NFIP. Flood maps must be 
periodically updated to assess and map changes in the boundaries of 
floodplains that result from community growth, development, erosion, 
and other factors that affect the boundaries of areas at risk of 
flooding. FEMA is in the midst of a multi-year effort to update the 
nation's flood maps at a cost in excess of $1 billion. The maps are 
principally used by (1) more than 20,100 communities participating in 
the NFIP to adopt and enforce the program's minimum building standards 
for new construction within the maps' identified flood plains, (2) FEMA 
to develop flood insurance policy rates based on flood risk, and (3) 
federally regulated mortgage lenders to identify those property owners 
who are required to purchase federal flood insurance. 

Private Insurers Sell Policies and Adjust NFIP Claims under FEMA 
Oversight and Management: 

The work of selling, servicing, and adjusting NFIP claims is carried 
out by thousands of private sector insurance agents and adjusters who 
work independently or are employed by insurance companies, adjusting 
firms, or designated subcontractors under the oversight and management 
of FEMA within the Department of Homeland Security. According to FEMA, 
about 95 percent of the NFIP policies in force are written by insurance 
agents who represent 88 private insurance companies that are paid fees 
for performing administrative services for the NFIP but do not have 
exposure for claims losses.[Footnote 16] The companies, called write- 
your-own companies, receive an expense allowance from FEMA of about one-
third of the premium amounts for their services and are required to 
remit premium income in excess of this allowance to the National Flood 
Insurance Fund.[Footnote 17] The write-your-own companies also receive 
a percentage fee--about 3.3 percent of the incurred loss--for adjusting 
and settling claims.[Footnote 18] 

To settle claims, including those from Hurricanes Katrina and Rita, 
insurance companies work with certified flood adjusters. When flood 
losses are reported, the write-your-own companies assign a flood 
adjuster to assess damages. Flood adjusters may be independent or 
employed by an insurance or adjusting company. These adjusters are 
responsible for assessing damage, estimating losses, and submitting 
required reports, work sheets, and photographs to the insurance 
company, where the claim is reviewed and, if approved, processed for 
payment. Adjusters determine the price for repairs by reviewing 
estimates of costs prepared by policyholders and their contractors, 
consulting pricing software, and checking local prices for materials. 

Adjusters are paid for their services according to a standard fee 
schedule that is paid in addition to the fees paid to the insurance 
companies. Adjusters who work for an adjusting company share the fees 
with the company in exchange for adjusting assignments and 
administrative support. For example, for the average claims settlement 
amount for Hurricane Katrina, $94,803, the NFIP fee schedule authorizes 
payment of 3 percent of the claim amount, or $2,844, for adjusting 
services. For claims adjusted under the expedited claims processing 
procedures that were introduced after Hurricane Katrina, FEMA 
authorized payment of $750 for each claim plus an additional $400 if a 
site visit was required later in the claims adjustment process. 

Among the requirements for certification as a claims adjuster for the 
NFIP are at least 4 consecutive years of full-time property loss 
adjusting experience, attendance each year at an NFIP adjuster 
workshop, and demonstration of knowledge of the standard flood 
insurance policy by passing a written examination. In 2002, FEMA 
modified the minimum experience requirement to allow adjusters who do 
not have the requisite experience to work with a seasoned flood 
adjuster until the write-your-own company determines that the adjuster 
is able to work independently. 

Claimants who have questions or concerns about actions taken to resolve 
their claims have several avenues of recourse. Claims amounts may be 
adjusted after the initial settlement is paid if claimants submit 
documentation that some costs to repair or replace damaged items were 
higher than estimated. If a claimant is not satisfied with the 
adjuster's answers or does not agree with decisions, the claimant or 
the write-your-own company can request FEMA's program contractor for 
assistance in reaching a resolution by conducting a special assistance 
reinspection of the claim. Also, under provisions of the Flood 
Insurance Reform Act of 2004, claimants may contact FEMA directly to 
resolve concerns that were not addressed through the other channels. 
Finally, claimants may bring a claim in federal district court against 
the insurer. 

About 40 FEMA employees, assisted by about 170 contractor employees, 
are responsible for managing the NFIP. Management responsibilities 
include establishing and updating NFIP regulations, administering the 
National Flood Insurance Fund, analyzing data to actuarially determine 
flood insurance rates and premiums, and providing training to insurance 
agents and adjusters. In addition, FEMA and its program contractor are 
responsible for monitoring and overseeing the quality of the 
performance of the write-your-own companies to ensure that the NFIP is 
administered properly (i.e., appropriate claims settlements are made 
and program objectives are achieved). 

Hurricanes Katrina and Rita Had a Far-Reaching Impact on the Financial 
Solvency of the NFIP: 

Hurricane Katrina, followed closely by Hurricane Rita, had a far- 
reaching impact on the financial solvency of the NFIP. By all measures, 
the flood losses were unprecedented in the history of the NFIP. FEMA 
projects that when all claims are settled, claims from NFIP 
policyholders who suffered flood damage from Hurricanes Katrina and 
Rita will total more than $20 billion. In contrast, the NFIP reports 
that from its inception in 1968 until August 2005, it paid a cumulative 
total of about $14.6 billion in claims. In the two largest single flood 
events prior to Hurricane Katrina, the NFIP reports that it processed a 
little more than 30,000 claims after a Louisiana flood in 1995 and 
Tropical Storm Allison in 2001. Figure 2 illustrates the magnitude of 
the flood losses in 2005 compared to losses over the history of the 
NFIP. 

Figure 2: Figure 2: Total NFIP Payments to Claimants, 1972-2005: 

[See PDF for image] 

Source: FEMA. 

[End of figure] 

Not only were the total cost and number of Hurricane Katrina and Rita 
claims far greater than in prior flood events, the amount paid per loss 
was also greater. As shown in figure 3, the average amounts paid per 
claim for Hurricanes Katrina and Rita flood damages--about $94,800 and 
$46,000, respectively--were much larger than average claims amounts 
reported as paid in the 3 prior years. Average paid losses for 
Hurricane Katrina were about three times the average paid losses 
reported by the NFIP for damage from flood events in 2004, including 
Hurricanes Charley, Ivan, Frances, and Jeanne in Florida and other East 
Coast and Gulf Coast states. 

Figure 3: Figure 3: Average Loss Payments for Hurricanes Katrina and 
Rita and Flood Events from 2002 to 2004: 

[See PDF for image] 

Source: GAO analysis of NFIP data. 

[End of figure] 

As a result of the number and amount of claims for damages from the 
2005 hurricane season and particularly Hurricane Katrina, losses to be 
paid far exceeded the NFIP's existing borrowing authority with the U.S. 
Treasury. The borrowing authority was subsequently increased from $1.5 
billion before Hurricane Katrina to $18.5 billion in November 2005, and 
then to $20.8 billion in March 2006 to pay claims and expenses from 
Hurricane Katrina and other 2005 hurricanes. As of September 30, 2006, 
FEMA's debt to the Treasury was $16.9 billion. As we reported in 
January 2006, it is unlikely that FEMA will be able to repay a debt of 
this size and pay future claims in a program that generated premium 
income of about $2 billion in fiscal year 2005.[Footnote 19] 

To the extent possible, the NFIP is designed to pay operating expenses 
and flood insurance claims with premiums collected on flood insurance 
policies rather than by tax dollars. However, by design, the program is 
not actuarially sound because federal law authorized subsidized 
insurance rates to be made available for policies covering some 
properties to encourage communities to join the program. As a result, 
the program does not collect sufficient premium income to build 
reserves to meet the long-term future expected flood losses. 

In November 2006, legislation was pending in both houses of Congress to 
reform the NFIP. A Senate provision would forgive the NFIP debt and 
bills in both houses had provisions to improve the financial solvency 
of the program and reduce the extent of the federal government's 
exposure for losses in catastrophic loss years. For example, proposed 
legislation in both the Senate and the House of Representatives contain 
provisions that would allow premium increases of up to 15 percent 
annually on NFIP policies, up from the current cap of 10 percent on 
premium increases. Additionally, legislation in both houses of Congress 
would phase out subsidized rates for some properties built before flood 
insurance rate maps were put into effect in their communities, 
including nonresidential properties and those that are not primary 
residences. However, none of the proposals, if enacted, would make 
changes to the NFIP that would result in collecting enough premium 
income to cover losses for any future flood events of the magnitude of 
Hurricane Katrina. 

Until the 2004 hurricane season, FEMA had been generally successful in 
keeping the NFIP on sound financial footing, exercising its borrowing 
authority three times in the last decade when losses exceeded available 
fund balances. In each instance, FEMA repaid the funds with interest. 
According to FEMA officials, as of August 31, 2005, FEMA had 
outstanding borrowing of $225 million with cash on hand totaling $289 
million. FEMA had substantially repaid the borrowing it had undertaken 
to pay losses incurred for the 2004 hurricane season, which, until 
Hurricane Katrina struck, had been the worst hurricane season on record 
for the NFIP. FEMA's current debt with the Treasury is almost entirely 
for payment of claims from Hurricanes Katrina and Rita and other flood 
events that occurred in 2005. 

Most NFIP Loss Claims Were in Louisiana for Primary Residences in 
Special Flood Hazard Areas: 

As shown in figure 4, the majority of NFIP claims for flood damage from 
Hurricane Katrina were in Louisiana, and a large portion of the 
Louisiana Hurricane Katrina claims were in New Orleans. 

Figure 4: Figure 4: Hurricane Katrina Losses by Location: 

[See PDF for image] 

Sources: GAO analysis of FEMA data, Map Resource, and NASA. 

Note: Number of claims rounded to the nearest thousand. 

[End of figure] 

As of May 2006, the NFIP had paid about 162,000 claims for losses from 
flood damage from Hurricane Katrina in Alabama, Florida, Louisiana, and 
Mississippi. About 135,000 of these losses (about 83 percent) were in 
Louisiana. As of July 2006, about 83,500 Louisiana claims were made for 
property damage in the New Orleans area, where flood waters breached 
levees and floodwalls. Almost 9,000 additional NFIP claims, over 7,000 
of them from Louisiana, were paid as a result of losses from Hurricane 
Rita. 

Tables 1 and 2 provide a state-by-state breakdown of the number of paid 
losses, the number of losses paid at policy limits, and the average 
payment amounts per loss for Hurricanes Katrina and Rita, through May 
2006. 

Table 1: Hurricane Katrina Loss Information by State (as of May 31, 
2006): 

State: Alabama; 
Number of paid losses: 4,915; 
Amount paid (dollars in millions): $257.4; 
Number of losses paid at policy limits: 633; 
Average loss payment: $54,374. 

State: Florida; 
Number of paid losses: 5,382; 
Amount paid (dollars in millions): 109.4; 
Number of losses paid at policy limits: 19; 
Average loss payment: 20,319. 

State: Louisiana; 
Number of paid losses: 134,829; 
Amount paid (dollars in millions): 12,635.3; 
Number of losses paid at policy limits: 66,140; 
Average loss payment: 93,713. 

State: Mississippi; 
Number of paid losses: 16,939; 
Amount paid (dollars in millions): 2,362.2; 
Number of losses paid at policy limits: 11,593; 
Average loss payment: 139,454. 

State: Total; 
Number of paid losses: 162,065; 
Amount paid (dollars in millions): $15,364.3; 
Number of losses paid at policy limits: 78,385; 
Average loss payment: $94,803. 

Source: GAO analysis of NFIP data. 

[End of table] 

Table 2: Hurricane Rita Loss Information by State (as of May 31, 2006): 

State: Louisiana; 
Number of paid losses: 7,251; 
Amount paid (dollars in millions): $360.9; 
Number of losses paid at policy limits: 2,264; 
Average loss payment: $49,767. 

State: Texas; 
Number of paid losses: 1,603; 
Amount paid (dollars in millions): 46.9; 
Number of losses paid at policy limits: 80; 
Average loss payment: 29,264. 

Total; 
Number of paid losses: 8,854; 
Amount paid (dollars in millions): $407.8; 
Number of losses paid at policy limits: 2,344; 
Average loss payment: $46,055. 

Source: GAO analysis of NFIP data. 

[End of table] 

The majority of Hurricane Katrina and Rita paid losses were for flood 
damage to residences. About 96 percent of Hurricane Katrina paid losses 
and about 94 percent of Hurricane Rita paid losses were for residential 
properties including condominiums, while 4 percent and 6 percent of the 
paid losses, respectively, were for nonresidential properties including 
businesses and public buildings (i.e., schools and churches). 

As shown in figures 5 and 6, the majority of paid losses for 
noncondominium residential properties were for principal 
residences.[Footnote 20] About 16 percent of paid claims for residences 
damaged by Hurricane Katrina were nonprincipal residences, which 
include secondary homes. About 18 percent of paid losses for residences 
damaged by Hurricane Rita were for nonprincipal residences. See 
appendix II for detailed information on principal and nonprincipal 
residential paid losses by state. 

Figure 5: Figure 5: Hurricane Katrina Paid Losses for Principal and 
Nonprincipal Noncondominium Residential Properties (as of May 31, 
2006): 

[See PDF for image] 

Source: GAO analysis of NFIP data. 

Note: Nonprincipal residences include secondary homes. "Unknown" 
indicates that claims folders did not provide information on the type 
of residence that could be captured in the NFIP statistical database. 

[End of figure] 

Figure 6: Figure 6: Hurricane Rita Paid Losses for Principal and 
Nonprincipal Noncondominium Residential Properties (as of May 31, 
2006): 

[See PDF for image] 

Source: GAO analysis of NFIP data. 

Note: Nonprincipal residences include secondary homes. "Unknown" 
indicates that claims folders did not provide information on the type 
of residence that could be captured in the NFIP statistical database. 

[End of figure] 

Most of the paid losses were for properties located within the special 
flood hazard areas where homeowners with mortgages from federally 
regulated lenders are required to purchase flood insurance on their 
dwellings for at least the amount of their outstanding mortgage. As 
shown in figure 7, about 78 percent of the paid losses for Hurricane 
Katrina through May 2006, were in special flood hazard areas subject to 
flooding or flooding and wave action where purchase of flood insurance 
is mandatory on properties with mortgages from federally regulated 
lenders. However, claims were also paid on 36,325 losses (about 22 
percent) on properties outside of the special flood hazard areas where 
purchase of flood insurance is optional. As shown in figure 8, of 8,851 
paid loses for Hurricane Rita through May 2006, 6,746 (about 76 
percent) were in special flood hazard areas. 

Figure 7: Figure 7: Hurricane Katrina Claims Paid In and Out of Special 
Flood Hazard Areas (as of May 31, 2006): 

[See PDF for image] 

Source: GAO analysis of FEMA data. 

Note: We could not determine the flood zone for 46 additional claims. 
However, we have determined that these data are sufficiently reliable 
for the purposes of our analysis. 

[End of figure] 

Figure 8: Figure 8: Hurricane Rita Claims Paid In and Out of Special 
Flood Hazard Areas (as of May 31, 2006): 

[See PDF for image] 

Source: GAO analysis of FEMA data. 

Note: We could not determine the flood zone for 3 additional claims. 
However, we have determined that these data are sufficiently reliable 
for the purposes of our analysis. 

[End of figure] 

While homeowners who live in specially designated flood hazard areas 
are required to purchase NFIP insurance on their dwellings at least for 
the amount of any federally regulated mortgage, the purchase of 
coverage for the home's contents, including furniture and personal 
property, is optional and may be purchased separately. NFIP 
policyholders who live in, for example, rental units, cooperatives, or 
condominium buildings may elect to purchase NFIP policies for contents 
coverage only. Figures 9 and 10 show that most paid Hurricane Katrina 
and Hurricane Rita residential losses were for both dwellings and 
contents. See appendix III for detailed information on residential paid 
losses for dwellings and contents by state. 

Figure 9: Figure 9: Hurricane Katrina Paid Residential Losses for 
Dwellings and Contents (as of May 31, 2006): 

[See PDF for image] 

Source: GAO analysis of NFIP data. 

Note: Includes condominiums: 

[End of figure] 

Figure 10: Figure 10: Hurricane Rita Paid Residential Losses for 
Dwellings and Contents (as of May 31st, 2006): 

[See PDF for image] 

Source: GAO analysis of NFIP data. 

Note: Includes condominiums: 

[End of figure] 

FEMA and Private Sector NFIP Partners Were Challenged to Process a 
Record Number of Claims and Address the Needs of NFIP Claimants and 
Communities: 

The magnitude and severity of the damages from Hurricane Katrina 
closely followed by Hurricane Rita presented FEMA and its private 
sector NFIP partners with challenges to accurately process a record 
number of flood claims in a timely manner under adverse conditions and 
address other needs of NFIP claimants and communities. 

Officials Described Challenges to Processing Flood Claims: 

Challenges to addressing the needs of NFIP claimants after Hurricane 
Katrina were not limited to managing and processing a record volume of 
claims for damage in four Gulf Coast states. An official of FEMA's NFIP 
contractor described some of the adverse conditions faced by NFIP and 
write-your-own company officials and flood adjusters after Hurricane 
Katrina: 

"A month after Hurricane Katrina, our adjusters couldn't get to flooded 
properties because roadways were blocked by debris and houses were 
contaminated by flood waters. In many cases, adjusters could not even 
identify the houses they were trying to inspect because street signs 
were washed away and houses were piled on top on one another as a 
result of the storm surge. Adjusters went to some addresses only to 
find nothing left standing but the foundation. Making contact with 
claimants was in some cases impossible because they were scattered 
across the country and relocating frequently from one temporary address 
to another. In many cases, the documentation we normally use to adjust 
claims no longer existed. Claimants' files at local insurance agencies, 
mortgage records, and other documents were gone in the flood." 

According to a representative of FEMA's program contractor on-site in 
Hammond, Louisiana, about 8,000 adjusters were working on claims from 
Hurricanes Katrina and Rita at the high point, from October through 
December 2005. An owner of a firm that specializes in insurance claims 
adjustments for catastrophes described the problems he faced in getting 
adjusters to the affected areas. The majority of adjusters who worked 
under contract for this firm were staying in Mobile, Alabama, a 2˝-to 3-
hour drive from the New Orleans area. Highways were jammed, and lodging 
and fuel were in short supply. The business owner said that he bought 
more than 30 houses in the Mobile area, several tanker trucks of oil, 
and a gas station to meet adjusters' housing and transportation needs. 

Figure 11 shows photographs of flooded neighborhoods that illustrate 
some of the challenges faced by flood adjusters in getting to and 
identifying the heavily damaged houses they were assigned to inspect. 

Figure 11: Figure 11: Flood Adjusters Were Challenged to Get To and 
Identify Heavily Damaged Houses: 

[See PDF for image] 

Top Left: Access to a flooded New Orleans neighborhood was limited for 
weeks after Hurricane Katrina. 

Top right: Homes that were heavily damaged by storm surge were 
difficult to locate and identify. 

Bottom: A bridge in Empire, La., was closed almost 60 days after 
Hurricane Katrina came through the area. 

Source: FEMA. 

[End of figure] 

Over 95 Percent of Claims Were Closed within 9 Months with Relatively 
Few Complaints: 

Despite the large volume of claims and adverse conditions for settling 
them, the NFIP was successful in closing 92 percent of NFIP claims for 
Hurricane Katrina and 86 percent for Hurricane Rita by March 2006, 
about 7˝ months after the storms struck. By May 2006, about 9 months 
after the storms, FEMA reported that over 95 percent of the Gulf Coast 
claims were closed. These time frames for closing claims are comparable 
to time frames for closing claims in other, smaller flood events. For 
example, in Florida, where the largest number of claims for flood 
damage were filed in the 2004 hurricane season, the NFIP closed about 
88 percent of the 33,888 claims from Hurricanes Charley, Ivan, Frances, 
and Jeanne within 7 months and about 92 percent within 9 months. 

Concerns from claimants about actions taken to settle their claims were 
relatively few in relation to the large number of claims filed. For 
example, as of April 2006, 13 appeals had been filed by claimants 
related to settlements of their claims for Hurricane Katrina damage, 
and no appeals had been filed on claims for damage from Hurricane Rita. 
In February 2006, FEMA's program contractor had received about 500 
requests for special assist reinspections. These requests occur when 
claimants and insurance companies do not agree on aspects of the claims 
adjustment and ask for assistance in reaching a resolution. FEMA was 
not able to provide comparison data from prior years or updated 
information on the number of appeals filed after April 2006 and the 
number of special assist reinspections for Hurricanes Katrina and Rita 
after February 2006. 

FEMA Approved the Use of Expedited and Square Foot Claims Adjustment 
Methods Unique to Hurricane Katrina: 

To try to assist NFIP policyholders despite many obstacles, FEMA 
approved expedited claims processing methods that were unique to 
Hurricanes Katrina and Rita. In some circumstances, claims could be 
adjusted without site visits by certified flood claims adjusters. For 
flooding from Lake Pontchartrain in New Orleans caused by the failure 
of the levees, FEMA allowed the use of aerial and satellite photography 
and flood depth data to identify structures that had been severely 
affected. If data on the depth and duration of the water in the 
building showed that it was likely that covered damage exceeded policy 
limits, the claim could be settled without a site visit by a claims 
adjuster. Similarly, for some other losses in Louisiana, Alabama and 
Mississippi, FEMA authorized claims adjustments without site visits 
where structures were washed off of their foundations by flood waters 
and square foot measurements of the dwellings were known. While FEMA 
authorized the use of these approaches, the write-your-own companies 
made the decision on whether they wished to use expedited processes to 
adjust claims. In addition, FEMA authorized the use of a square foot 
measurement methodology for homes that had been flooded off of their 
slabs, pilings, or posts. In those instances, damages could be 
calculated by a certified flood adjuster based on measurements of room 
dimensions and classification of building materials as high, medium, or 
low level, rather than a room-by-room, item-by-item calculation of loss 
amounts. FEMA authorized payments to its private insurance company 
partners of $750 per expedited claim adjustment--a lower fee than would 
have been paid for a more time-consuming room-by-room, line-item-by- 
line-item visual assessment of flood damage. 

According to the FEMA director of NFIP claims, about 17,200 claims for 
damage, mostly from Hurricane Katrina (about 11 percent of all 
Hurricane Katrina claims), were adjusted using expedited procedures. 
Although a relatively small number of claims were adjusted using 
expedited processes, officials of FEMA, its program contractor, 
representatives of two of the five private insurance companies we 
interviewed, and a flood claims adjusting service official said that 
having the option to do some expedited adjustments enabled the NFIP to 
keep up with demands for adjuster services and close the claims as 
quickly as it did. 

Representatives of the three insurance companies we visited that did 
not use expedited processes to a significant extent said they did not 
do so for reasons including concerns over the accuracy of flood depth 
data, delays in the availability of flood depth data, and because their 
companies did not write homeowners' policies on the dwellings in 
question, they lacked necessary information (i.e., square foot 
measurements of the home) that were needed to process claims without 
site inspections. 

According to the FEMA director of NFIP claims, two large write-your-own 
insurance companies developed models that were approved by FEMA for use 
in making square foot estimates of damage for some claims from 
Hurricanes Katrina and Rita instead of sending certified flood 
adjusters to the sites to assess and document damage room by room and 
item by item. According to the FEMA official, the square foot models 
paid claims based on the square footage of the property and a 
classification of the building materials as low, middle, or high level. 
For example, claims paid on a flooded high-level kitchen would be more 
than payments for a middle-level kitchen of the same square footage. If 
one or two high-end items were in a middle-level home (i.e., a custom 
front door or exotic hardwood floors), an adjustment to the middle-end 
rate would be made for those specific items. According to the official, 
the NFIP had experimented briefly with a much less sophisticated 
approach to square foot estimating about 10 years ago but had not used 
any form of claims adjusting since that time other than the traditional 
approach of sending a certified flood adjuster to the site to assess 
damage and estimate losses with required reports, work sheets, and 
photographs to document damage room by room and line item by line item. 

The director of NFIP claims said that FEMA did not track the number of 
estimates done using the square foot method. He said that FEMA plans to 
examine the accuracy of the models carefully and consider using them 
for other catastrophic flooding events in the future. Because usage of 
the square foot method by the two companies with approved models was 
not carefully tracked during Hurricanes Katrina and Rita, FEMA paid the 
same fee for square foot adjustments as it did for regular line-item- 
by-line-item adjustments that took longer to perform and required more 
extensive documentation. However, the director of NFIP claims said that 
if the square foot methodology is approved for future use, the fee 
schedule paid for these adjustments would probably be lower than the 
current schedule for regular claims adjustments, with a resulting 
savings for the NFIP. 

In addition to approving expedited and square foot claims adjusting 
methods, FEMA took several other actions to expedite claims adjustments 
and meet the needs of claimants in the aftermath of Hurricanes Katrina 
and Rita. These were actions that, according to officials, FEMA had 
also used to a more limited extent in prior large flood events. 
Specifically, FEMA: 

* waived the requirement that property owners furnish proof of loss 
statements that list their losses for all Hurricane Katrina and Rita 
claims, 

* allowed telephone adjustments for some claims below $25,000, 

* established special toll-free telephone lines to assist policyholders 
who had questions about filing claims, 

* liberalized adjuster training requirements to deploy more adjusters 
to flood-damaged areas, and: 

* authorized insurance companies and independent flood adjusting firms 
to use adjusters who did not meet FEMA's minimum flood certification 
requirements provided that they worked under the direction of seasoned 
adjusters until the company certified that they were trained. 

NFIP Adjustment Process Will Continue with Claims for Help to Elevate 
or Remove Substantially Damaged Properties: 

As part of its floodplain management strategy, FEMA policies encourage 
the elevation or removal of damaged properties from the 
floodplain.[Footnote 21] In addition to paying claims for flood damage, 
NFIP policies pay up to $30,000 to owners of substantially damaged or 
repetitive loss properties for the cost of taking mitigation actions 
such as elevation, floodproofing, relocation or demolition, in order to 
comply with state or local floodplain management laws or ordinances. 
The payments are made under the increased cost of compliance (ICC) 
coverage of the standard flood insurance policy. As a first step to 
making claims for this coverage, adjusters are required to file 
preliminary damage assessment forms with FEMA for properties that may 
be substantially damaged. Figure 12 shows renovations in process on a 
New Orleans house that is being elevated to mitigate against future 
flood damage using ICC coverage to pay some of the costs. 

Figure 12: Figure 12: A New Orleans House Is Elevated Using ICC 
Coverage to Pay Some Costs: 

[See PDF for image] 

Source: FEMA. 

This New Orleans house is in the process of being elevated above the 
base flood elevation adopted by the community after flooding from the 
Hurricane Katrina. The homeowner received the ICC benefit included with 
his NFIP policy to cover some of the costs of elevating the house 11 
feet to comply with the local floodplain management ordinance. 

[End of figure] 

As of April 26, 2006, adjusters had completed almost 50,000 preliminary 
damage assessment forms for properties flooded by Hurricane Katrina and 
a little more than 1,000 forms for properties flooded by Hurricane 
Rita. Over 40,000 of the forms for damage in the two storms were for 
properties located in Louisiana. Through May 2006, FEMA had made ICC 
payments of about $7 million on Hurricane Katrina and Rita claims. 
Anticipating a large number of ICC claims as a result of the 2005 
hurricane season, FEMA increased the time frame for property owners to 
complete the mitigation actions from 2 years to 4 years after a state 
or community issued a substantial damage declaration. In an upcoming 
revision to the standard flood insurance policy, FEMA plans to make 
permanent the increase in time for property owners to complete work and 
receive ICC payments. 

FEMA Issued Advisory Base Flood Elevations to Guide Rebuilding Efforts 
in the Aftermath of Hurricanes Katrina and Rita: 

In addition to approving new methods for expedited processing of some 
NFIP claims after Hurricane Katrina, FEMA also took new steps to guide 
communities' rebuilding efforts. For the first time, FEMA issued 
advisory guidance on coastal flood elevations that communities can use 
in the reconstruction process until more detailed data become 
available. According to FEMA officials, this guidance--called advisory 
base flood elevations--was necessary because a risk assessment showed 
that base flood elevations in effect for coastal Louisiana and 
Mississippi did not reflect the true risk to the areas from flooding. 
According to a FEMA official, FEMA expects to have updated rate maps 
for coastal areas by early 2007 so that communities can begin the 
process of considering to adopt them. 

Accurate flood maps that identify the areas at high risk of flooding 
are the foundation of the NFIP, and the flood maps for some areas of 
the Gulf Coast affected by Hurricanes Katrina and Rita were out of 
date. The maps identify base flood elevation levels--the height at 
which there is a 1 percent chance of a flood occurring in a given year, 
also known as the 100-year flood. FEMA uses the 100-year flood as the 
standard for setting premium rates and requirements for NFIP. 

Prior to Hurricanes Katrina and Rita, FEMA was conducting a coastal 
study of hurricane storm flooding as a part of its map modernization 
program.[Footnote 22] According to a FEMA official, the agency was 
about to issue several new preliminary flood insurance rate maps in the 
Gulf Coast region when the storms hit. However, the storm surges from 
Hurricanes Katrina and Rita far exceeded the base flood elevations in 
many areas of the Gulf Coast, raising questions about the validity of 
the base flood elevations and current flood insurance rate maps. In 
response, FEMA conducted risk assessments using the most current and 
accurate flood risk data available. The analyses incorporated storm 
data from the past 35 years, including data from Hurricanes Katrina and 
Rita, tide (water level) gauge data, and other engineering studies. The 
analyses showed that base flood elevations on the flood insurance rate 
maps in effect for coastal Louisiana and Mississippi did not reflect 
the true risk from flooding because the elevations were between 1 and 9 
feet too low. Also, the analyses showed that higher storm surges and 
larger waves can be expected to spread farther inland than previously 
estimated because of land subsidence and the loss of the protective 
coastal barrier over the past 10 to 20 years. On completion of the risk 
analyses, FEMA issued advisory base flood elevation maps for 15 
parishes in Louisiana and 3 counties in Mississippi that took into 
account the more accurate and up-to-date flood hazard data. (See app. 
III for a list of the communities for which the advisories were issued 
and the status of the communities' consideration of their adoption.) 

FEMA cannot require communities participating in the NFIP to use the 
advisory base flood elevations. According to FEMA, it issued the 
advisories to parishes and counties, and individual communities within 
those jurisdictions can decide whether or not or to what extent they 
will adopt the guidance. For example, the City of Gulfport, 
Mississippi, adopted the advisories in September 2006 to protect 
citizens from future floods but extended the official adoption of the 
new elevations to November 1, 2006, to allow residents wishing to 
rebuild to less stringent elevation requirements in effect prior to the 
adoption of the advisories adequate time to secure building permits. 
The New Orleans city council approved FEMA's new advisories but made 
exceptions for properties in the French Quarter and other national 
historic structures in the city and those listed with the Historic 
Districts Landmarks Commission.[Footnote 23] Lafourche Parish, 
Louisiana, rejected the advisory because the parish council considered 
some advisory map data to be wrong, determined that adopting the 
advisory would have a high negative economic impact on homeowners, and 
noted that the advisory information was intended to be only advisory 
and preliminary. 

However, FEMA has provided incentives for individual homeowners and 
communities to rebuild using the advisory standards. For example, FEMA 
requires that rebuilding projects it funds, through public assistance 
or mitigation grants, be built to advisory standards. Similarly, FEMA 
grants for repairing and rebuilding public infrastructure such as 
schools, libraries, and police stations will not be available to 
communities unless they rebuild to advisory base flood elevations. NFIP 
policyholders who live in communities that have flood plain management 
standards that exceed the minimum standard are eligible for discounts 
on their premiums. ICC payments to NFIP claimants that take steps to 
reduce their risk from future flood damage will help cover the 
elevation of homes to the advisory base flood elevation if that 
standard is adopted by the community. FEMA has also warned communities 
that continued use of flood data on current flood insurance rate maps 
could result in residential and commercial buildings that will be 
vulnerable to flood damage because they will not be built high enough 
or have the structural integrity to resist flood forces that may be 
encountered in future large events. 

According to a FEMA official, the agency expects to have updated, 
preliminary flood insurance rate maps for the coastal parishes and 
counties in Louisiana and Mississippi by early 2007. However, the maps 
will become effective only after a formal appeals process and community 
adoption; a process that normally takes a minimum of 2 years to 
complete. Once the new flood insurance rate maps are adopted, they will 
supersede all advisory base flood elevations issued by FEMA. 

Results of Monitoring and Oversight of Claims Payments Were 
Inconclusive because FEMA Did Not Reinspect a Statistically Valid 
Sample of Claims: 

As in previous flood events, FEMA's primary method of monitoring and 
overseeing claims adjustments and addressing concerns from claimants 
was its quality reinspection program. As of August 2006, FEMA's program 
contractor had conducted quality assurance reinspections of 4,316 
Hurricane Katrina and Rita claims. In addition, FEMA formed a special 
task force to reinspect an additional 1,696 claims that were adjusted 
using expedited processes. Because FEMA did not reinspect a random 
sample of all claims closed, as we recommended in October 2005, the 
results of the reinspections cannot be projected to a population larger 
than the 4,316 claims reinspected. As a result, FEMA is unable to 
determine the overall accuracy of the claims closed. FEMA's Deputy 
Director of the Mitigation Division said that FEMA agrees with our 
recommendation and plans to do quality reinspections in future flood 
events based on a random sample of the population of all claims. 
Neither FEMA nor its program contractor analyzed the overall results of 
the 4,316 quality reinspections for Hurricanes Katrina and Rita to 
identify the total number of payment errors and the magnitude of those 
errors. FEMA did not have a requirement that the overall results of the 
reinspections for flood events be analyzed. In our review of a 
statistically valid sample of 740 of the 4,316 reinspection reports, 
claims payment errors were identified in about 14 percent of the 
Hurricane Katrina reinspections of claims adjusted using regular 
processes, in about 1 percent of the reinspections of Hurricanes 
Katrina and Rita claims adjusted using expedited methods of claims 
adjustments, and 2 percent of Hurricane Rita reinspections of claims 
adjusted using regular processes. Because, in the past, FEMA has had 
neither an appropriate sampling methodology nor a requirement that an 
analysis be done of overall results of claims adjustments done after 
every flood event, we do not know how the error rates we identified 
compare to adjusting errors in reinspection reports for other smaller 
flood events. 

General Adjusters and Disaster Analysts Did Quality Reinspections of 
About 2.5 Percent of All Claims and Additional Reinspections of Claims 
Adjusted Using Expedited Processes: 

To determine whether claims were correctly adjusted by the large cadre 
of adjusters deployed after Hurricanes Katrina and Rita, FEMA's program 
contractor conducted quality assurance reinspections of 4,316 Hurricane 
Katrina and Rita claims conducted from January to September 2006. The 
number of reinspections done was slightly smaller than the goal 
established by FEMA for the percentage of reinspections to be 
completed. However, FEMA officials told us in a briefing at the 
conclusion of our audit work that 5,198 reinspections had been 
completed. FEMA's director of NFIP claims said that the program 
contractor was to reinspect about 3 percent of all claims, about the 
same percentage of reinspections done after other flood events. In 
addition, the contractor was to review at least 10 percent of the 
expedited claims done by each insurance company that decided to use 
expedited processing procedures for some claims. Reinspection reports 
completed as of September 2006 represented about 2.5 percent of all 
Hurricane Katrina and Rita claims that were closed by May 2006. 
Reinspection reports were completed for just over 10 percent of the 
17,200 claims closed using expedited processes. 

The quality assurance reinspections are a standard oversight procedure 
after all flood events and are generally done by general adjusters who, 
in addition, are responsible for estimating damage from flood events, 
coordinating claims adjustment activities at disaster locations, and 
conducting adjuster training. When we did audit work for our October 
2005 report, nine general adjusters were employed by FEMA's program 
contractor. Four general adjusters were on board after Hurricanes 
Katrina and Rita, according to the general adjuster in charge. 
According to FEMA, one reason for the loss of general adjusters was 
that several left to work as independent adjusters or for adjusting 
firms to earn higher pay adjusting claims for Hurricanes Katrina and 
Rita. To supplement the general adjuster workforce, FEMA's program 
contractor hired 22 temporary employees. 

In addition to overseeing the regular quality reinspection program of 
4,136 reinspections of Hurricanes Katrina and Rita claims adjusted 
using regular processes and expedited methods, FEMA formed a special 
task force of 15 adjusters and supervisors to review and reinspect 
additional claims closed using expedited methods. FEMA officials said 
that they took this action because the expedited methods had not been 
used to adjust claims in prior flood events, so they wanted to have 
additional information on the accuracy of payments made. 

Quality Reinspection Program Does Not Rely on a Statistically Valid 
Sampling Methodology: 

FEMA did not adopt our October 2005 recommendation that it select the 
claims to be reinspected in its quality reinspection program using a 
random sample of the population of all claims.[Footnote 24] Instead, 
according to the general adjuster in charge of Hurricanes Katrina and 
Rita, selection of claims to reinspect was based upon judgmental 
criteria including, among other items, the size and location of loss 
and complexity of claims. The general adjusters used their judgment to 
select what they thought were the more challenging claims adjustments 
for reinspection under the premise that if difficult adjustments are 
done accurately, more routine adjustments should be handled properly, 
as well. 

The process the general adjuster described is a nonprobability sampling 
process rather than random sampling. In nonprobability sampling, staff 
selected a sample based on their knowledge of the population's 
characteristics. The major limitation of this type of sampling is that 
the results cannot be generalized to a larger population, because there 
is no way to establish, by defensible evidence, how representative the 
sample is. A nonprobability sample is therefore not appropriate to use 
is to generalize about the population from which the sample is taken. 

After discussion, FEMA agreed with GAO's recommendation that it 
implement an approach for random sampling. The Deputy Director of 
FEMA's Mitigation Division said that FEMA plans to do quality 
reinspections in future flood events based on a random sample of the 
universe of all claims. The official advised that FEMA was not able to 
implement the October 2005 recommendation in the aftermath of 
Hurricanes Katrina and Rita because other priorities to meet the needs 
of claimants and communities took precedence. 

Because the judgmental criteria were used in selecting reinspections to 
be done, the results of FEMA's NFIP quality reinspection program for 
Hurricanes Katrina and Rita cannot be projected to a larger universe 
than the claims adjustments sampled. As a result, FEMA is unable to 
determine the overall accuracy of claims settled for these flood 
events--an action that is necessary to meet GAO's internal control 
standard that FEMA have reasonable assurance that program objectives 
are being achieved and its operations are effective and 
efficient.[Footnote 25] 

Limited Information Available on the Overall Results of the Quality 
Reinspections: 

Of FEMA's 4,316 claims reinspections, 2,565 (about 59 percent) were for 
claims adjustments done using regular processes that included on-site 
visits by a certified flood adjuster to assess damages, while 1,751 
(about 41 percent) were reinspections of claims adjusted using the 
expedited methods that FEMA authorized to settle some claims at policy 
limits without site visits by flood adjusters. FEMA's program 
contractor did not analyze the overall results of its quality 
reinspection program for Hurricanes Katrina and Rita, another action 
that is necessary to meet our internal control standard that FEMA have 
reasonable assurance that program objectives are being achieved and its 
operations are effective and efficient. FEMA's director of NFIP claims 
said that FEMA does not generally require the program contractor to 
prepare and analyze reports of the overall results of quality 
reinspections after flood events. According to officials of FEMA and 
its program contractor, in addition to preparing written reports of 
each quality assurance reinspection, general adjusters discuss the 
results of the reinspections they perform with insurance company 
officials that process the claims. If a general adjuster determines 
that an expense was allowed that should not have been covered, the 
company is to reimburse the NFIP. If a general adjuster finds that the 
private sector adjuster missed a covered expense in the original 
adjustment, the general adjuster will take steps to provide additional 
payment to the policyholder. According to officials of FEMA and its 
program contractor, quality assurance reinspections are forwarded from 
general adjusters to the program contractor, where results of 
reinspections are to be aggregated in a reinspection database and the 
resolution of overpayments and underpayments is tracked. 

According to the FEMA director of NFIP claims, a special task force of 
adjusters and supervisors reinspected 1,696 expedited claims from 
Hurricane Katrina in addition to the reinspections conducted in the 
quality reinspection program and found a total of 81 erroneous payments 
(about 5 percent). FEMA will take action to recover overpayments of 
claims where it is appropriate to do so. The official also stated that 
a report on the results of the task force review was being prepared, 
but it was not completed during the course of our review. We did not 
analyze data from the special task force as part of our review of a 
sample of quality reinspection reports. 

Because the NFIP's quality reinspection program does not rely on a 
statistically valid sampling methodology, like FEMA, we are unable to 
project the results of our reviews of 740 reinspection reports to the 
population of all claims closed. However, because our sample is a 
probability sample of all 4,316 reinspections claims, are able to 
project our estimates to this population of claims reinspections. 

Our review of 320 of the quality reinspection reports done for 
Hurricane Katrina regular process claims found that reinspectors 
identified problems in 119 instances (about 37 percent).[Footnote 26] 
In most instances where quality reinspections identified problems with 
the original claims adjustments, reinspectors determined that the 
claims payment amounts were correct but that files did not meet NFIP 
standards (e.g., they did not include all supporting documentation). 
However, 44 of the 320 quality reinspection reports we reviewed for 
Hurricane Katrina claims adjustments that used regular processes (about 
14 percent) identified claims overpayments or underpayments. Payment 
errors identified in our review included 8 underpayments that ranged 
from more than $131,000 to $543 and 36 overpayments that ranged from 
$65,000 to $86. For the expedited process reinspection reports, we 
identified problems in about 12 percent (39 of 320) reports we 
reviewed. However, reinspectors identified erroneous overpayments in 
only 4 of these instances (about 1 percent). These payment errors were 
all overpayments that ranged from $40,000 to $80,000. On the basis of 
our review of 100 Hurricane Rita reinspections, we estimate that about 
2 percent of the reinspections identified erroneous payments. These 
payment errors were between $9,000 and $10,000. Because, in the past, 
FEMA has had neither an appropriate sampling methodology nor a 
requirement for an overall analysis claims adjustment done after every 
flood event, we do not know how the error rates we identified compare 
to adjusting errors identified in reinspections of claims from other 
smaller flood events. See appendix IV for the complete results of our 
review of 740 quality reinspection reports for claims adjustments after 
Hurricanes Katrina and Rita. 

FEMA Has Made Progress Implementing NFIP Program Changes in the Flood 
Insurance Reform Act of 2004: 

Since we last reported in October 2005, FEMA has moved forward on 
implementation of the Flood Insurance Reform Act of 2004.[Footnote 27] 
However, there is still progress to be made. Among other things, the 
act mandated FEMA to (1) develop supplemental materials for explaining 
NFIP coverage and the claims process to policyholders when they 
purchase and renew policies; (2) establish, by regulation, an appeals 
process for claimants; and (3) establish minimum training and education 
requirements for flood insurance agents in cooperation with the 
insurance industry, state insurance regulators, and other interested 
parties and publish the requirements in the Federal Register.[Footnote 
28] The statutory deadline for the three mandates was December 30, 
2004. The act also authorized FEMA to create a pilot program to provide 
financial assistance to states and communities to carry out activities 
including elevating and demolishing structures that have suffered 
severe and repeated damage from flooding.[Footnote 29] The act 
authorized the use of funds from the National Flood Insurance Fund for 
the pilot program for fiscal years 2005 through 2009. FEMA has fully 
implemented the first two requirements to establish notifications on 
coverage to policyholders and an appeals process for claimants. With 
regard to the training and education requirements, FEMA published 
training and education requirements in the Federal Register, stating 
that it intended to implement the standards through existing state 
licensing schemes for insurance agents. Though FEMA has taken a number 
of actions to improve the training and education of agents that sell 
NFIP policies, only 15 states implemented mandatory training and 
education requirements as of October, 2006 and as we reported in 
October 2005, FEMA has not established how or when states are to begin 
imposing education and training requirements. Finally, FEMA has not 
created a pilot program to mitigate damage to severe repetitive loss 
properties. 

Informational Materials to Explain Coverage and the Claims Process Are 
Completed: 

For purposes of explaining coverage and the claims process to 
policyholders, the Flood Insurance Reform Act of 2004 required FEMA to 
develop three types of informational materials. The required materials 
are (1) supplemental forms explaining in simple terms the exact 
coverage being purchased; (2) an acknowledgment form that the 
policyholder received the standard flood insurance policy and any 
supplemental explanatory forms, as well as an opportunity to purchase 
coverage for personal property; and (3) a flood insurance claims 
handbook describing the process for filing and appealing claims. FEMA 
officials said that acknowledgment forms and new insurance program 
forms to explain coverage to policyholders when they purchase and renew 
their insurance were final as of September 2005. FEMA posted a flood 
insurance claims handbook, dated July 2005, on its Web site in 
September 2005. The handbook contains information on anticipating, 
filing, and appealing a claim. The Director of the FEMA Mitigation 
Division, which oversees the NFIP, said that FEMA distributed the NFIP 
Summary of Coverage and Flood Insurance Claims Handbook to help 
policyholders affected by Hurricane Katrina through the claims process. 
The materials were available in disaster recovery and flood response 
offices and were distributed in town meetings. In addition, according 
to a representative of FEMA's program contractor on-site in Hammond, 
Louisiana, some flood adjusters provided copies of the documents to 
claimants to help to explain the processes for filing claims and 
resolve any disagreements about the claims settlement. 

Formal Appeals Process in Place: 

An appeals process that FEMA officials described as informal was in 
place for claimants after Hurricane Katrina and was described in the 
Flood Insurance Claims Handbook that FEMA posted on its Web site in 
September 2005. As we have stated in this report, 13 appeals were filed 
by claimants related to settlements of their NFIP claims as a result of 
Hurricane Katrina damage, and no appeals were filed for damage 
resulting from Hurricane Rita, as of April 2006. To establish a formal 
appeals process, FEMA published an interim rule in the Federal Register 
that became effective in June 2006.[Footnote 30] Comments made in the 
Additional Views section of the Senate report on the Flood Insurance 
Reform and Modernization Act of 2006, a bill pending in Congress as of 
November 2006, outlined concerns that the rule was not specific on the 
structure of the appeals process. After a public comment period, a 
final rule was published on October 13, 2006.[Footnote 31] The final 
rule included more specific elements on the structure of the appeals 
process in the final rule than were contained in the interim rule. For 
example, the final rule stated that FEMA will provide policyholders 
with an acknowledgment of receipt of an appeal, which will also provide 
the policyholder with a point of contact within FEMA to get information 
on the status of the appeal, and that FEMA is subject to a 90-day 
deadline to resolve appeals and issue a written appeal decision to the 
policyholder and insurer. The final regulation also provided examples 
of the types of documentation that policyholders should include in 
their appeals. 

Some States Have Established Minimum Education and Training 
Requirements: 

With respect to the requirement that FEMA establish minimum education 
and training requirements for agents who sell NFIP policies, the Flood 
Insurance Reform Act of 2004 requires FEMA, in cooperation with the 
insurance industry, state insurance regulators, and other interested 
parties, to establish minimum training and education requirements for 
all insurance agents who sell flood insurance policies and to publish 
the requirements in the Federal Register. On September 1, 2005, FEMA 
published a Federal Register notice in response to this 
requirement.[Footnote 32] In the notice, FEMA stated that rather than 
establish separate and perhaps duplicative requirements from those that 
may already be in place in the states, it had chosen to work with the 
states to implement NFIP requirements through already established state 
licensing schemes for insurance agents. To that end, FEMA provided 
suggested language for state legislation to require a prelicensing 
demonstration of knowledge of flood insurance and a onetime, 3-hour 
continuing education course requirement for existing licensees. FEMA 
further provided a course outline for flood insurance agents, which 
consisted of eight sections: an NFIP Overview; Flood Maps and Zone 
Determinations, Policies and Products Available, General Coverage 
Rules, Building Ratings, Claims Handling Process, Requirements of the 
Flood Insurance Reform Act of 2004, and Agent Resources. FEMA also 
offered incentives to agents who completed NFIP training to encourage 
adoption of the minimum standards. 

For fiscal years 2006 and 2007, FEMA adopted performance measures for 
meeting "the objective of the mandate that agents selling flood 
insurance are trained and provide good information to consumers." The 
performance measures center on FEMA activities to encourage agent 
training activities, but do not establish milestones for states to 
implement the minimum training requirements. Specifically, the 
performance measures are to: 

* increase by 7 percent over the previous year the number of insurance 
agents who complete the NFIP Bureau's flood insurance training, either 
live or online; 

* submit a new online training module to states for continuing 
education credit approval, with approval by 40 states by fiscal year 
2008; 

* encourage write-your-own companies to do their part to ensure their 
agents are sufficiently trained, and: 

* foster state adoption of mandatory agent training requirements 
through continued communication with departments of insurance, offering 
technical assistance, and so forth. 

In working toward the final performance measure, FEMA held meetings and 
conferences with state legislators and insurance regulators, as well as 
insurance company officials, and worked with the National Association 
of Insurance Commissioners to develop a model bulletin that state 
insurance commissioners may issue to implement the minimum training 
requirements.[Footnote 33] 

As of October 2006, only 15 states had established minimum training and 
education requirements for insurance agents that sell NFIP 
policies.[Footnote 34] Two states had issued advisory notices, and 1 
state had established standards for a continuing education course in 
flood insurance but had not made the course mandatory. As we reported 
in October 2005, FEMA has not developed milestones for state adoption 
of minimum training and education requirements. See appendix V for a 
listing of the state actions taken. 

FEMA Has Not Established a Pilot Program to Mitigate Damage to Severe 
Repetitive Loss Properties: 

As of October 2006, FEMA had not implemented the pilot program 
authorized by the act to help reduce the inventory of NFIP properties 
that have sustained repeated severe flood losses. As noted in the 
report of the Senate Committee on Banking, Housing, and Urban Affairs 
accompanying the legislation, an important purpose of the act is to 
address the problem of severe repetitive loss properties, which are 
properties that have been flooded numerous times and are thus a 
financial drain on the NFIP.[Footnote 35] The act authorizes financial 
assistance to states and communities that decide to participate in the 
pilot program to carry out mitigation activities that reduce flood 
damages to severe repetitive loss properties.[Footnote 36] The act 
authorizes the transfer of up to $40 million per fiscal year for fiscal 
years 2005 through 2009 from the NFIP Fund for the pilot program, and 
funds for the program were appropriated in fiscal year 2006. States and 
communities may use funds under this program for the mitigation of 
severe repetitive loss properties. Mitigation actions may include 
purchase, relocation, demolition, elevation, or flood-proofing 
structures, as well as minor physical localized flood control projects. 
Funds may also be used by states and communities to purchase severe 
repetitive loss properties. FEMA officials noted that they had made 
progress in developing the program guidance and implementing 
regulations for the pilot program and plan to combine the fiscal years 
2006 and 2007 appropriations and begin funding projects under the pilot 
program in fiscal year 2007. 

Conclusions: 

By the measures of number of claims filed, amount of claims paid, 
losses per claim, and debt incurred, Hurricane Katrina was an 
unprecedented event for the NFIP that created challenges to process a 
record number of claims and address needs of claimants and communities 
that experienced grave losses. FEMA approved new methods of adjusting 
some Hurricane Katrina and Rita claims, issued advisory opinions to aid 
in rebuilding after these flood events, and took other actions to 
address the needs of NFIP claimants and communities. 

However, the importance of FEMA taking additional actions to enhance 
the value of its monitoring and oversight processes is also illustrated 
in the aftermath of Hurricanes Katrina and Rita. Not only did these 
flood events involve billions more dollars and hundreds of thousands 
more claims for the NFIP than any previous flood event since the 
program's inception, but they also involved new claims-processing 
methods that, if proven to result in accurate claims adjustments, could 
lower NFIP payments for claims adjustments as compared to fees paid for 
the more time-consuming room-by-room, line-item-by-line-item visual 
assessments of flood damage that the NFIP had exclusively relied upon 
for all prior flood events. FEMA's current use of quality assurance 
reinspections to discuss individual results and specific adjustment 
errors with insurance company officials and seek reimbursements for 
overpayments is too limited to meet our internal control standard that 
it have reasonable assurance that program objectives are being achieved 
and its operations are effective and efficient. For future flood 
events, when FEMA conducts its quality assurance reinspection program 
for claims adjustments using the statistically valid sampling 
methodology we previously recommended, the agency will be well 
positioned to broaden the scope of its analyses to determine the 
overall results of claims adjustments done for each future flood event, 
including the number and type of claims adjustment errors that 
occurred. 

FEMA made progress in implementing provisions of the Flood Insurance 
Reform Act of 2004. However, our recommendation that FEMA establish 
milestones for meeting provisions of the act remains open. In October 
2005, we recommended that FEMA develop a documented plan with 
milestones for ensuring that agents that sell NFIP policies meet 
minimum training and education requirements. FEMA has taken a number of 
actions, including outreach to the states, to encourage the 
implementation of minimum training standards. However, given the 
somewhat slow progress among states to adopt mandatory training 
requirements, we continue to think that FEMA should elaborate on the 
state implementation performance measure by developing a documented 
plan with milestones for state adoption of minimum training and 
education requirements and our recommendation related to the minimum 
training and education requirements remains open. 

Recommendation for Executive Action: 

To strengthen and improve FEMA's monitoring and oversight of the NFIP, 
including ensuring that claims payments are accurately determined, we 
are recommending that for future flood events when FEMA implements our 
prior recommendation to do quality assurance reinspections of a 
statistically valid sample of claims adjustments, the Secretary of the 
Department of Homeland Security also direct the Under Secretary of 
Homeland Security, FEMA, to take the following action: 

* Analyze the overall results of claims adjustments done for each 
future flood events to determine the number and type of claims 
adjustment errors made and to help determine whether new, cost- 
efficient methods for adjusting claims that were introduced after 
Hurricane Katrina are feasible to use after other flood events. 

Agency Comments and Our Evaluation: 

On December 8, 2006, DHS provided written comments on a draft of this 
report. DHS agreed with our recommendation to improve its quality 
reinspection program and stated that it was revising its guidance 
accordingly and would use the recommended sampling and reporting 
procedures in future flood events. 

DHS reiterated a comment made in FEMA's review of our October 2005 
report that we did not review all of the controls and processes that 
FEMA has in place to provide oversight for the NFIP. Most of the 
additional oversight and management processes and controls that FEMA 
has in place are for financial management--an area not included in the 
scope of our work. Our work focused on program implementation and 
oversight in the aftermath of Hurricanes Katrina and Rita. During our 
review, FEMA managers described the quality assurance claims 
reinspection program as the primary method for overseeing the accuracy 
of claims adjustments for these flood events. As we have noted in this 
report, we have work under way to examine the cost of operating the 
NFIP, including fees paid for the services of private insurance 
companies and claims adjusters. For that report, to be issued in 2007, 
we plan to examine the NFIP's financial management and controls. 

DHS also provided information on how it determines the number of claims 
to be reinspected in the NFIP's quality reinspection program and 
additional information on its implementation of the requirement of the 
Flood Insurance Reform Act of 2004 to establish minimum training and 
education requirements for all insurance agents who sell flood 
insurance policies and to publish the requirements in the Federal 
Register. 

We are sending copies of this report to the Secretary of the Department 
of Homeland Security, the Director of the Federal Emergency Management 
Agency and other interested parties. In addition, the report will be 
available at no charge on the GAO Web site at http://www.gao.gov. 
Please contact William Jenkins at (202) 512-8757 or jenkinswo@gao.gov 
if you or your staff have any questions concerning this report. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. Key contributors to this 
report are listed in appendix VII. 

Signed by: 

William O. Jenkins, Jr. 
Director, Homeland Security and Justice Issues: 

List of Congressional Committees: 

The Honorable Richard Shelby: 
Chairman: 
The Honorable Paul Sarbanes: 
Ranking Minority Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Michael Oxley: 
Chairman: 
The Honorable Barney Frank: 
Ranking Minority Member: 
Committee on Financial Services: 
House of Representatives: 

The Honorable Susan M. Collins: 
Chairman: 
The Honorable Joseph I. Lieberman: 
Ranking Minority Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

The Honorable Peter T. King: 
Chairman: 
The Honorable Bennie G. Thompson: 
Ranking Minority Member: 
Committee on Homeland Security: 
House of Representatives: 

The Honorable Tom Davis: 
Chairman: 
The Honorable Henry A. Waxman: 
Ranking Minority Member: 
Committee on Government Reform: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

To describe the impact of Hurricanes Katrina and Rita on the National 
Flood Insurance Program (NFIP) and the extent of the losses paid by 
location and property type, we reviewed congressional actions to 
increase the NFIP borrowing authority, and we interviewed the Director, 
Deputy Director, and other officials of the Federal Emergency 
Management Agency's (FEMA) Mitigation Division on the actions they took 
to estimate the amount of funds they needed to borrow from the U.S. 
Treasury to cover claims from Hurricanes Katrina and Rita and other 
2006 flood events. We compared claims payments for losses from 
Hurricanes Katrina and Rita to payments for losses from past flood 
events. We also analyzed statistical data from the NFIP data system on 
claims payments for Hurricanes Katrina and Rita. We analyzed the data 
on losses paid by state, for principal and nonprincipal residential 
properties, within and outside of special flood hazard areas, and by 
type of coverage (i.e., building, contents, or both building and 
contents). We updated our reliability assessment of the statistical 
data base reported in October 2005 by interviewing database managers to 
discuss any system changes that would have an impact on data 
reliability and by replicating statistical analyses by the NFIP to 
determine their accuracy.[Footnote 37] We determined that the database 
was sufficiently reliable for our reporting purposes. We did our 
analyses and reliability testing of FEMA statistical data that were 
current through May 31, 2006, when FEMA reported that over 95 percent 
of Hurricane Katrina and Rita claims were closed. 

To describe the challenges FEMA and its private sector partners faced 
and the results of their efforts to process flood claims resulting from 
Hurricanes Katrina and Rita and address the needs of NFIP claimants and 
communities, we interviewed headquarters and field officials of FEMA 
and its program contractor. We also conducted semistructured interviews 
based on our judgment with insurance industry officials involved in the 
recovery effort and visited areas impacted by Hurricane Katrina in New 
Orleans, Louisiana, and Bayou La Batre, Alabama. Interviewees included 
the owner of a firm that specializes in insurance claims adjustments 
for catastrophes, representatives of the three insurance companies that 
closed the largest number of Hurricane Katrina and Rita NFIP claims, 
and a representative of an insurance company that was not a major NFIP 
insurer for the Gulf Coast claimants but did process some claims. Their 
views are not representative of the universe of all insurance industry 
officials involved in the flood recovery effort. We also analyzed 
statistical data on the number of appeals filed by claimants and 
requests made for reinspections by FEMA's program contractor to assist 
claimants and insurance companies in reaching resolutions on disputes. 
We reviewed documentation and talked with officials about new, 
expedited methods of claims processing FEMA approved. We examined 
preliminary data on claims that may be filed for coverage under the 
standard flood insurance policy for up to $30,000 for some property 
owners to take actions to reduce their risk of future flood damage. 
Finally, we examined documentation and interviewed FEMA officials on 
the status of efforts to provide guidance to communities and property 
owners to assist in recovery and rebuilding efforts and reviewed 
documentation on the status of communities' actions to adopt FEMA's 
advisory base flood elevation standards. 

To assess FEMA's role in monitoring and overseeing the NFIP and the 
results of that oversight, we interviewed officials of FEMA and its 
program contractor who were involved in the quality assurance 
reinspections of claim adjustments done for Hurricanes Katrina and Rita 
and documented the number of reinspections performed and the 
methodology used to select claims for reinspection. We reviewed 
documentation of FEMA's procedures for monitoring and overseeing claims 
adjustments. We observed a disaster analyst for FEMA's program 
contractor performing several quality assurance reinspections in Bayou 
La Batre. We followed up on the status of our prior recommendation for 
improvements in the quality assurance reinspection program and 
discussed actions taken or planned to implement it.[Footnote 38] We 
selected a statistically valid sample of 740 reinspection reports done 
for Hurricanes Katrina and Rita to review to determine, among other 
things, errors that were identified in the claims adjustments. Using a 
data collection instrument, we reviewed the results of these randomly 
selected reinspection reports of Hurricane Katrina and Rita claims to 
determine whether reinspectors identified errors, including 
overpayment, underpayments, or adjustments that did not meet NFIP 
standards (i.e. did not contain appropriate documentation). 

Table 3 shows the number of quality assurance reinspection reports of 
claims adjustments done using regular processes we examined, including 
site visits by flood adjusters and expedited methods FEMA approved for 
some Hurricane and Rita claims. 

Table 3: Number of FEMA Quality Assurance Reinspection Reports and the 
Sample We Reviewed, by Process Type and Flood Event: 

Process type/flood event: Regular process claims adjustments for 
Hurricane Katrina; 
Number of FEMA reinspection reports: 2,258; 
Number of reinspection reports we reviewed: 320. 

Process type/flood event: Regular process claims adjustments for 
Hurricane Rita; 
Number of FEMA reinspection reports: 307; 
Number of reinspection reports we reviewed: 100. 

Process type/flood event: Expedited methods for Hurricanes Katrina and 
Rita; 
Number of FEMA reinspection reports: 1,751; 
Number of reinspection reports we reviewed: 320. 

Total; 
Number of FEMA reinspection reports: 4,316; 
Number of reinspection reports we reviewed: 740. 

Source: GAO. 

[End of table] 

To assess the status of FEMA's efforts to implement provisions of the 
Flood Insurance Reform Act of 2004 after Hurricanes Katrina and Rita, 
we interviewed officials and examined documentation of the actions FEMA 
took. We also analyzed FEMA's actions to determine whether they met the 
legal requirements of the act. 

We conducted our work in accordance with generally accepted government 
auditing standards from December 2005 through November 2006. 

[End of section] 

Appendix II: Statistical Information on NFIP Claims Paid for Hurricanes 
Katrina and Rita: 

Table 4: Hurricane Katrina Principal and Nonprincipal Residential Paid 
Losses by State (as of May 31, 2006): 

State: Alabama; 
Principal residence: 2,350; 
Nonprincipal residence: 1,904; 
Unknown: 13. 

State: Florida; 
Principal residence: 4,497;
 Nonprincipal residence: 584; 
Unknown: 0. 

State: Louisiana; 
Principal residence: 107,960; 
Nonprincipal residence: 18,739; 
Unknown: 1,263. 

State: Mississippi; 
Principal residence: 12,074; 
Nonprincipal residence: 3,284; 
Unknown: 205. 

Total noncondominium residential; 
Principal residence: 126,881; 
Nonprincipal residence: 24,511; 
Unknown: 1,481. 

Source: GAO analysis of FEMA data. 

[End of table] 

Table 5: Hurricane Rita Principal and Nonprincipal Residential Paid 
Losses by State (as of May 31, 2006): 

State: Louisiana; 
Principal residence indicated: 5,191; 
Nonprincipal residence indicated: 1,287;
Unknown: 313. 

State: Texas; 
Principal residence indicated: 1,285; 
Nonprincipal residence indicated: 199; 
Unknown: 10. 

Total noncondominium residential; 
Principal residence indicated: 6,476; 
Nonprincipal residence indicated: 1,486; 
Unknown: 323. 

Source: GAO analysis of FEMA data. 

[End of table] 

Table 6: Hurricane Katrina Paid Residential Losses for Dwellings and 
Contents by State (as of May 31, 2006): 

State: Alabama; 
Coverage for dwelling only: 2,606; 
Coverage for contents only: 90; 
Coverage for dwelling and contents: 1,861. 

State: Florida; 
Coverage for dwelling only: 2,202; 
Coverage for contents only: 98; 
Coverage for dwelling and contents: 2,913. 

State: Louisiana; 
Coverage for dwelling only: 30,404; 
Coverage for contents only: 12,876; 
Coverage for dwelling and contents: 85,867. 

State: Mississippi; 
Coverage for dwelling only: 3,725; 
Coverage for contents only: 418; 
Coverage for dwelling and contents: 11,852. 

Total; 
Coverage for dwelling only: 38,937; 
Coverage for contents only: 13,482; 
Coverage for dwelling and contents: 102,493. 

Source: GAO analysis of FEMA data: 

[End of table] 

Table 7: Hurricane Rita Paid Residential Losses for Dwellings and 
Contents by State (as of May 31, 2006): 

State: Louisiana; 
Coverage for dwelling only: 3,117; 
Coverage for contents only: 368; 
Coverage for dwelling and contents: 3,326. 

State: Texas; 
Coverage for dwelling only: 503; 
Coverage for contents only: 56; 
Coverage for dwelling and contents: 938. 

Total; 
Coverage for dwelling only: 3,620; 
Coverage for contents only: 424; 
Coverage for dwelling and contents: 4,264. 

Source: GAO analysis of FEMA data. 

[End of table] 

[End of section] 

Appendix III: Parishes and Counties Where FEMA Issued Advisory Flood 
Elevation Guidance: 

Table 8: Parishes and Counties Where FEMA Issued Advisory Flood 
Elevation Guidance: 

Louisiana parishes: Calcasieu, Cameron, Iberia, Jefferson, Lafourche, 
Orleans, Plaquemines, St. Bernard, St. Charles, St. John the Baptist, 
St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermillion. 

Mississippi counties: Hancock, Harrison, Jackson. 

Source: FEMA. 

[End of table] 

At the time of our review, 11 of the 15 Louisiana parishes where FEMA 
issued advisory flood elevation guidance had adopted FEMA's advisories. 
Two parishes, St. John the Baptist and Lafourche, had decided not to 
adopt the advisories; and two others, Plaquemines and St. Bernard, were 
considering them. The Lafourche Parish council rejected the advisory 
because it considered some advisory map data to be wrong and determined 
that adopting the advisory would have a high negative economic impact 
on homeowners. The council also noted that the advisory information was 
intended to be only advisory and preliminary. Fourteen cities within 
the 3 Mississippi counties where FEMA issued advisory flood elevation 
guidance had taken some new action to guide rebuilding efforts. 

[End of section] 

Appendix IV: Results of GAO Review of a Random Selection of 
Reinspection Reports for Hurricanes Katrina and Rita: 

Figure 13: Figure 13: Results of GAO Review of Quality Reinspections of 
Hurricanes Katrina and Rita Claims Processed Using Expedited 
Procedures: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

Figure 14: Figure 14: Results of GAO Review of Quality Reinspections of 
Hurricane Katrina Claims Processed Using Regular Claims Adjustment 
Procedures: 

[See PDF for image] 

Source: GAO. 

Note: In instances in which reinspectors did not complete reinspection 
reports. We were unable to determine whether they identified problems. 

[End of figure] 

Figure 15: Figure 15: Results of GAO Review of Quality Reinspections of 
Hurricane Rita Claims Processed Using Regular Claims Adjustment 
Procedures: 

[See PDF for image] 

Source: GAO. 

Note: In instances in which reinspectors did not complete reinspection 
reports. We were unable to determine whether they identified problems. 

[End of figure] 

[End of section] 

Appendix V: State Actions on Training of Agents That Sell NFIP 
Policies: 

Table 9: States That Have Taken Action Regarding Training of Agents 
that Sell NFIP Policies (as of October 2006): 

State: Delaware; 
Action taken: Department of Insurance required agents authorized to 
write homeowners or personal lines of insurance to complete a 2-hour 
continuing education course on flood insurance and the NFIP. 

State: Iowa; 
Action taken: Commissioner of Insurance required agents who sell flood 
insurance to comply with the minimum training and education 
requirements and demonstrate that compliance upon request of the 
Commissioner. 

State: Kansas; 
Action taken: Commissioner of Insurance required agents who sell flood 
insurance to complete a onetime, 3-hour course related to the NFIP, 
beginning with license renewals on January 1, 2007. 

State: Kentucky; 
Action taken: Office of Insurance issued advisory opinion stating 
requirement that agents selling NFIP policies complete a onetime, 3-
hour course related to the NFIP. 

State: Louisiana; 
Action taken: Legislature required a onetime, 3-hour course on flood 
insurance to be completed by agents authorized to write property and 
casualty lines of insurance for initial licensure and/or license 
renewal. 

State: Maine; 
Action taken: Superintendent of Insurance directed licensed insurance 
agents who sell NFIP policies to comply with the minimum training and 
education requirements and demonstrate that compliance upon request of 
the bureau. 

State: Maryland; 
Action taken: Department of Insurance required property casualty 
insurance producers who sell flood insurance to complete at least two 
of their required continuing education credits in flood insurance by 
September 30, 2006, regardless of when their licenses renew, and each 
renewal period thereafter. 

State: Massachusetts; 
Action taken: Commissioner of Insurance required agents licensed after 
April 4, 1983, who sell flood insurance to complete 3 hours of 
continuing education on flood insurance by December 31, 2006. 

State: Missouri; 
Action taken: Department of Insurance required agents who sell flood 
insurance to complete at least 3 hours of NFIP-related training by 
December 31, 2009. 

State: Nebraska; 
Action taken: Department of Insurance required agents who sell flood 
insurance to complete a onetime, 3-hour course on flood insurance 
beginning with license renewals on January 1, 2007. 

State: Nevada; 
Action taken: Commissioner of Insurance directed licensed insurance 
agents who sell NFIP policies to complete a onetime, 3-hour course on 
flood insurance. 

State: North Carolina; 
Action taken: Commissioner of Insurance sent letters to insurance 
agents who met their 2005 continuing education requirements that 
encouraged them to take a continuing education course on flood 
insurance. 

State: Pennsylvania; 
Action taken: Insurance Department issued a notice advising insurance 
companies and agents of the training and education requirements and 
encouraging agents to attend NFIP flood insurance program workshops. 

State: Rhode Island; 
Action taken: Department of Business Regulation directed licensed 
insurance agents who sell NFIP policies to comply with the minimum 
training and education requirements and demonstrate that compliance 
upon request of the department. 

State: South Dakota; 
Action taken: Director of the Division of Insurance directed licensed 
insurance agents who sell NFIP policies to comply with the minimum 
training and education requirements and demonstrate that compliance 
upon request of the division. 

State: Texas; 
Action taken: Department of Insurance adopted new sections of its 
Insurance Code establishing standards for a department- certified 
continuing education course on the NFIP and flood insurance. 

State: Utah; 
Action taken: Commissioner of Insurance directed licensed insurance 
agents who sell NFIP policies to comply with the minimum training and 
education requirements and demonstrate that compliance upon request of 
the department. 

State: Washington; 
Action taken: Commissioner of Insurance directed agents who sell flood 
insurance policies to complete a onetime, 3-hour course on flood 
insurance. 

Source: FEMA. 

[End of table] 

[End of section] 

Appendix VI: Comments from the Department of Homeland Security: 

U.S, Department of Homeland Security: 
Washington, DC 20528: 

December 8, 2006: 

Mr. William O. Jenkins, Jr: 
Director: 
Homeland Security and Justice: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Jenkins: 

Thank you for the opportunity to review and comment on the Government 
Accountability Office's (GAO's) draft report GAO-07-169 entitled 
National Flood Insurance Program: New Processes Aided Hurricane Katrina 
Claims Handling, but FEMA's Oversight Should Be Improved. 

The Federal Emergency Management Agency's (FEMA's) comments are 
reflected in the following four areas: 

Results of Monitoring and Oversight of Claims Payments Were 
Inconclusive because FEMA Did Not Reinspect a Statistically Valid 
Sample of Claims: 

Comment: To address the issues discussed relating to monitoring and 
oversight of claims payments, the Write Your Own (WYO) Financial 
Control Plan, Part 3, which addresses the claims reinspection program 
is being revised to fully reflect GAO's recommendations and will be 
adhered to in future flooding events. 

General Adjusters and Disaster Analysts Did Quality Reinspections of 
About 2.5 Percent of All Claims and Additional Reinspections of Claims 
Adjusted Using Expedited Processes: 

Comment: FEMA does not have a percentage goal of reinspections to be 
completed. As outlined in the WYO Financial Control Plan, Part 3, the 
reinspection program uses a binomial table and based upon the 
acceptable three percent error rate, the General Adjuster reinspects 
the corresponding number of claims. If, based on the General Adjuster's 
findings, a company's error rate exceeds three percent, the General 
Adjuster will reinspect additional claims that amount to the difference 
between the three percent sample size and the company's actual error 
rate sample size. In addition to these reinspections, FEMA decided to 
review an additional ten percent of the expedited claims which were 
completed by the insurance companies that participated in the expedited 
claims process. 

Quality Reinspection Program Does Not Rely on a Statistically Valid 
Sampling Methodology: 

Comment: FEMA did not have the opportunity to adopt GAO's October 2005 
recommendation that FEMA select the claims to be reinspected in its 
quality reinspection program by using a random sample of the population 
of all claims. Hurricane Katrina hit on August 29, 2005, before GAO's 
recommendation was made, and Hurricane Rita occurred shortly after 
Katrina. Due to the magnitude and timing of these storms, other 
priorities took precedence to meet the needs of claimants and 
communities. FEMA intends to adopt GAO's recommendation in future 
flooding events. 

It is difficult to understand how GAO reached a conclusion that FEMA is 
not meeting an internal control standard without giving a thorough 
consideration of all the controls and processes that FEMA has in place 
to provide oversight of the Program. 

Some States Have Established Minimum Education and Training 
Requirements: 

Comment: In Section 207 of the Flood Insurance Reform Act of 2004 (FIRA 
2004), Congress directed FEMA to work within the existing regulatory 
framework in implementing agent training requirements. The FIRA 2004 
did not establish milestones, deadlines, funding, consequences, or 
incentives for State actions related to flood insurance training. 
Therefore, FEMA's approach has been to set performance measures for 
itself, designed to meet the Congressional objective. These performance 
measures, as cited in the GAO report, include providing technical 
assistance to the State Insurance Departments to encourage and assist 
them in mandating flood insurance training for insurance agents. The 
performance measures are critical action items and FEMA managers and 
staff are held accountable. These measures are reflected in the 
performance "scorecards" of the Mitigation Division's Risk Insurance 
Branch, and Industry and Public Relations Section. Further, they are 
also reflected in the individual employee performance plans of the 
managers of those two organizational components. 

Two major steps forward include: 

* The National Association of Insurance Commissioners (NAIC's) adoption 
on September 10, 2006 of a model flood insurance training bulletin, 
along with the NAIC's action plan to promote and foster state 
implementation. Numerous States, beyond the 14 cited in the GAO report, 
are using the NAIC model to issue their flood insurance training 
requirements for agents. 

* Virginia and Kansas of the National Flood Insurance Program (NFIP) 
have approved online training courses. This online training allows the 
agents who complete the course to earn continuing education credits. 
The online training course has also been sent to all 50 States, and the 
NAIC reciprocity agreement is expected to ease their review and 
approval process. 

Thank you again for the opportunity to comment on this draft report and 
we look forward to working with you on future homeland security issues. 

Sincerely, 

Signed by: 

Steven J. Pecinovsky: 
Director: 
Departmental GAO/OIG Liaison Office: 

[End of section] 

Appendix VII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

William O. Jenkins, Jr. (202) 512-8777 or jenkinswo@goa.gov: 

Acknowledgments: 

Christoper Keisling, Assistant Director; Richard Ascarate, John 
Bagnulo, Amy Bernstein, Christine Davis, Dewi Djunaidy, Wilfred 
Holloway, Tracey King, Deborah Knorr, Jan Montgomery, Mark Ramage, and 
Jesus Ramoz made significant contributions to this report. 

(440476): 

FOOTNOTES 

[1] Alabama, Florida, Louisiana, Mississippi, and Texas are the five 
states in which major disaster declarations were made for Hurricane 
Katrina or Rita. 

[2] 42 U.S.C. § 4001(d) (2000); 42 U.S.C. § 4016 (2000). 

[3] See GAO, GAO's High-Risk Program, GAO-06-497T (Washington, D.C.: 
Mar. 15, 2006). 

[4] Hurricane Isabel caused flood damage in Delaware, Maryland, North 
Carolina, Pennsylvania, South Carolina, Virginia, and Washington, D.C., 
that resulted in 19,523 claims for which the NFIP paid $456 million to 
policyholders. The NFIP reauthorization legislation is the Bunning, 
Bereuter-Blumenauer Flood Insurance Reform Act of 2004, Pub. L. No. 108-
264, 118 Stat 712 (codified in scattered sections of 42 U.S.C. (2004). 

[5] See GAO, Federal Emergency Management Agency: Improvements Needed 
to Enhance Oversight and Management of the National Flood Insurance 
Program, (GAO-06-119 (Washington, D.C.: Oct. 18, 2005); GAO, Federal 
Emergency Management Agency: Challenges Facing the National Flood 
Insurance Program (GAO-06-174T (Washington, D.C.: Oct. 18, 2005); and 
GAO, Federal Emergency Management Agency: Oversight and Management of 
the National Flood Insurance Program, (GAO-06-183T Washington, D.C.: 
Oct. 20, 2005). 

[6] See GAO, Federal Emergency Management Agency: Challenges for the 
National Flood Insurance Program, GAO-06-335T (Washington, D.C.: Jan 
25, 2006). 

[7] See GAO-06-119. 

[8] Percentage estimates from our sample have 95 percent confidence 
intervals of within +/-5 percentage points of the estimate. 

[9] See GAO-06-335T. 

[10] In two instances, we could not identify underpayment amounts and 
in one instance we could not identify an overpayment amount. 

[11] See GAO-06-119. 

[12] Id. At § 102 (codified at 42 U.S.C. § 4102a (2004)). 

[13] See GAO 06-119. 

[14] Eleven of the14 states that implemented minimum training standards 
did so through bulletins or advisory opinions, which are not 
enforceable by law but are enforced in practice. 

[15] The National Flood Insurance Act of 1968, as amended, is codified 
at 42 U.S.C. 4001-4129. 

[16] The other 5 percent of policies are sold and serviced by state- 
licensed insurance agents and brokers who deal directly with FEMA. 

[17] The fund, which was established in the Treasury by the 1968 
legislation authorizing the NFIP, is the account into which premiums 
are deposited and from which losses and operating and administrative 
costs are paid. See 42 U.S.C. 4017. 

[18] The fee is paid by the NFIP for costs to establishing and staffing 
operations centers in flooded communities, according to a FEMA 
official. 

[19] See GAO-06-335T. 

[20] Condominiums are not included because condominium associations are 
required to purchase policies to insure condominium buildings. 
Individual unit owners may elect to purchase separate policies for 
coverage on the contents of their units (i.e., furniture and electronic 
equipment). 

[21] A property is considered to be "substantially damaged" if the cost 
of repairing the property exceeds 50 percent of its market value (or a 
lower trigger if adopted locally), as determined by a state or 
community declaration. 

[22] FEMA embarked on a multiyear map modernization program to update 
the nation's flood maps at a cost in excess of $1 billion. The goal of 
the program is to update the nation's inventory of flood insurance rate 
maps that identify areas of risk of flooding and determine flood 
insurance rates. They are also used for floodplain management and 
mitigation activities. 

[23] Under the NFIP, communities may exempt historic buildings from 
NFIP substantial improvement and substantial damage requirements by 
issuing variances for historic structures. 

[24] See GAO-06-119. 

[25] GAO, Policy Manual (Washington, D.C.: Jan. 1, 2004). 

[26] These estimates are based on a probability sample and are subject 
to sampling error. For Hurricane Katrina regular process reinpsections 
and Hurricanes Katrina and Rita claims processed using expedited 
methods, we are 95 percent confident that the actual percentage is 
within +/-5 percentage points of our estimates. More information about 
precision of estimates is contained in appendix I. 

[27] See GAO-06-119. 

[28] Pub. L. No. 108-264, §§ 202, 203, 204 (codified at 42 U.S.C. § 
4011 note (2004)) (requiring FEMA to develop informational materials); 
Pub. L. No. 108-264, § 205 (codified at 42 U.S.C. § 4011 note (2004)) 
(requiring FEMA to establish appeals process); Pub. L. No. 108-264, § 
207 (codified at 42 U.S.C. § 4011 note (2004)) (requiring FEMA to 
establish and publish minimum training and education requirements). 

[29] Pub. L. No. 108-264 at § 102 (codified at 42 U.S.C. § 4102a 
(2004)). 

[30] See Appeal of Decisions Relating to Flood Insurance Claims, 71 
Fed. Reg. 30,294 (May 26, 2006). 

[31] See Appeal of Decisions Relating to Flood Insurance Claims, 71 
Fed. Reg. 60,435 (Oct. 13, 2006) 

[32] See Flood Insurance Training and Education Requirements for 
Insurance Agents, 70 Fed. Reg. 52,117 (Sept. 1, 2005). 

[33] NAIC Model Bulletin, available at [Hyperlink, 
http://www.naic.org/Releases/2006_docs/flood_bulletin.htm]. 

[34] Ten of the 15 states that implemented minimum training standards 
did so through bulletins or advisory opinions, which provide guidelines 
for insurance agents. 

[35] S. Rep. No. 108-262, at 2-3 (2004). 

[36] The act defines single-family severe repetitive loss properties as 
those for which four or more separate NFIP claims payments exceeding 
$5,000 have been made and the cumulative amount of the claims exceeds 
$20,000, or at least two separate claims payments have been made which, 
cumulatively, exceed the value of the property. 42 U.S.C. § 4102a(b)(1) 
(2004). 

[37] See GAO-06-119. 

[38] See GAO-06-110. 

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