This is the accessible text file for GAO report number GAO-06-174T 
entitled 'Federal Emergency Management Agency: Challenges Facing the 
National Flood Insurance Program' which was released on October 18, 
2005. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

Testimony Before the Chairman, Committee on Banking, Housing and Urban 
Affairs, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Tuesday, October 18, 2005: 

Federal Emergency Management Agency: 

Challenges Facing the National Flood Insurance Program: 

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

GAO-06-174T: 

GAO Highlights: 

Highlights of GAO-06-174T, a testimony before the Chairman, Banking, 
Housing, and Urban Affairs Committee, U.S. Senate: 

Why GAO Did This Study: 

The disastrous hurricanes that have struck the Gulf Coast and Eastern 
seaboard in recent years—including Katrina, Rita, Ivan, and Isabel—have 
focused attention on federal flood management efforts. The National 
Flood Insurance Program (NFIP), established in 1968, provides property 
owners with some insurance coverage for flood damage. The Federal 
Emergency Management Agency (FEMA) within the Department of Homeland 
Security is responsible for managing the NFIP. 

This testimony offers information from past GAO work on (1) the 
financial structure of the NFIP; (2) why the NFIP insures properties 
for repetitive flood losses and the impact on NFIP resources; and (3) 
compliance with requirements for mandatory purchase of NFIP policies. 
The testimony also discusses recommendations from a report GAO is 
issuing today on FEMA’s oversight and management of the NFIP. 

What GAO Found: 

As GAO has reported, the NFIP, by design, is not actuarially sound. The 
program does not collect sufficient premium income to build reserves to 
meet long-term future expected flood losses, in part because Congress 
authorized subsidized insurance rates to be made available for some 
properties. FEMA has generally been successful in keeping the NFIP on a 
sound financial footing, but the catastrophic flooding events of 2004 
(involving four separate hurricanes) required FEMA, as of August 2005, 
to borrow $300 million from the U.S. Treasury to help pay an estimated 
$1.8 billion on flood insurance claims. Following Hurricane Katrina in 
August 2005, legislation was enacted to increase FEMA’s borrowing 
authority from $1.5 billion to $3.5 billion through fiscal year 2008. 

Properties that suffer repeated flooding but generally pay subsidized 
flood insurance rates—so-called repetitive-loss properties—constitute a 
significant drain on NFIP resources. These properties account for 
roughly 1 percent of properties insured under the NFIP, but account for 
25 percent to 30 percent of all claim losses. The Flood Insurance 
Reform Act of 2004 established a pilot program requiring owners of 
repetitive-loss properties to elevate, relocate, or demolish houses, 
with NFIP bearing some of those costs. Future studies of the NFIP 
should analyze the progress made to reduce the inventory of subsidized 
repetitive-loss properties, and determine whether additional regulatory 
or congressional action is needed. 

In 1973 and again in 1994, legislation was enacted requiring the 
mandatory purchase of NFIP policies by some property owners in high-
risk areas. In June 2002, GAO reported that the extent to which lenders 
were required to enforce mandatory purchase requirements was unknown. 
While FEMA officials believed that many lenders often were 
noncompliant, neither side could substantiate its claims regarding 
compliance. 

FEMA did not use a statistically valid method for sampling files to be 
reviewed in its monitoring and oversight activities. As a result, FEMA 
cannot project the results of these reviews to determine the overall 
accuracy of claims settled for specific flood events or assess the 
overall performance of insurance companies and their adjusters in 
fulfilling responsibilities for the NFIP—actions necessary for FEMA to 
have reasonable assurance that program objectives are being achieved. 

FEMA has not yet fully implemented provisions of the Flood Insurance 
Reform Act of 2004 requiring the agency to develop new materials to 
explain coverage and the claims process to policyholders when they 
purchase and renew policies, establish an appeals process for 
claimants, and provide insurance agent education and training 
requirements. The statutory deadline for implementing these changes was 
December 30, 2004, and as of September 2005 FEMA had not developed 
documented plans with milestones for meeting the provisions of the act. 

What GAO Recommends: 

In the report released today, GAO is recommending, among other things, 
that FEMA and its partners use a statistically valid approach to sample 
NFIP insurance claim files for quality assurance purposes, and that DHS 
and FEMA develop and document plans for implementing requirements of 
the Flood Insurance Reform Act of 2004, which reauthorized the NFIP. 
FEMA disagreed with those recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-06-174T. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact William O. Jenkins, Jr., 
at (202) 512-8777 or jenkinswo@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to participate in today's hearing on the 
future of the National Flood Insurance Program (NFIP) to discuss issues 
related to the future financial stability of the NFIP and 
recommendations we have made for improvements to the management and 
oversight of the program. The NFIP combines property insurance for 
flood victims, mapping to identify the boundaries of the areas at 
highest risk of flooding, and incentives for communities to adopt and 
enforce floodplain management regulations and building standards to 
reduce future flood damage. The effective integration of all three of 
these elements is needed for the NFIP to achieve its goals of: 

* providing property flood insurance coverage for a high proportion of 
property owners who would benefit from such coverage; 

* through this insurance coverage reducing taxpayer-funded disaster 
assistance when flooding strikes, and: 

* reducing flood damage through flood plain management and the 
enforcement of building standards (such as elevating structures). 

The Federal Emergency Management Agency (FEMA) within the Department of 
Homeland Security (DHS) is responsible for the oversight and management 
of the program.[Footnote 1] Under the program, the federal government 
assumes the liability for the insurance coverage and sets rates and 
coverage limitations, among other responsibilities. 

Floods are the most common and destructive natural disaster in the 
United States. According to NFIP statistics, 90 percent of all natural 
disasters in the United States involve flooding. However, flooding is 
generally excluded from homeowner policies that typically cover damage 
from other losses, such as wind, fire, and theft. Because of the 
catastrophic nature of flooding and the inability to adequately predict 
flood risks, private insurance companies have largely been unwilling to 
underwrite and bear the risk of flood insurance. 

Congress established the NFIP pursuant to the National Flood Insurance 
Act of 1968[Footnote 2] to provide policyholders with some insurance 
coverage for flood damage, as an alternative to disaster assistance, 
and to try to reduce the escalating costs of repairing flood damage. In 
creating the NFIP, Congress found that a flood insurance program with 
"large-scale participation of the Federal Government and carried out to 
the maximum extent practicable by the private insurance industry is 
feasible and can be initiated."[Footnote 3] In keeping with this 
purpose, FEMA has contractual agreements with 95 private insurance 
company partners to sell policies and adjust and process claims. 

As of August 2005, the NFIP was estimated to have approximately 4.6 
million policyholders in about 20,000 communities. Since its inception, 
the program has paid about $14.6 billion in insurance claims, primarily 
from policyholder premiums that otherwise would have been paid through 
taxpayer-funded disaster relief or borne by home and business owners 
themselves. According to FEMA, every $3 in flood insurance claims 
payments saves about $1 in disaster assistance payments, and the 
combination of flood plain management and mitigation efforts save about 
$1 billion in flood damage each year. 

The unprecedented damage wrought by Hurricanes Katrina and Rita are 
also likely to result in unprecedented claims on the NFIP. GAO is 
beginning a body of work on the preparation for, response to, and 
recovery from Hurricanes Katrina and Rita. As GAO moves forward with 
this work, we will continue to work with this and other congressional 
committees and the accountability community--federal inspector 
generals, state and city auditors--regarding the scope of our future 
work on emergency management issues, including the NFIP. Our goal is to 
apply our resources and expertise to address long-term concerns, such 
as those we are discussing today, and to avoid duplicating the work of 
others. Currently, we have teams in the Gulf Coast states collecting 
data and observations from hurricane victims and federal, state, local, 
and private participants in the preparation for, response to, and 
recovery from these devastating hurricanes, including the flooding they 
caused. 

Past experience can provide context for considering future policy 
options. In this spirit, my testimony today is based on a body of work 
that GAO has done over the past several years before the nation began 
the struggle to respond to the devastating effects of Hurricanes 
Katrina and Rita in our Gulf Coast states. This prior work has 
addressed the issues of the program's structure and financing, 
repetitive loss properties, mandatory and voluntary purchase of flood 
insurance, and revising and improving the nation's flood maps. Together 
they provide information useful in assessing efforts over the NFIP's 
history to enhance the program's financial stability and effectiveness. 
Today, we are also releasing a report on FEMA's management and 
oversight of the flood insurance program that includes several 
recommendations for improvement.[Footnote 4] This report was mandated 
by the Flood Insurance Reform Act of 2004.[Footnote 5] It includes 
recommendations on two pre-Hurricane Katrina flood-insurance related 
issues that pose a challenge for FEMA. These are (1) improving FEMA's 
management and oversight of the NFIP and (2) FEMA's implementation of 
provisions of the Flood Insurance Reform Act of 2004 to provide 
policyholders a flood insurance claims handbook that meets statutory 
requirements, to establish a regulatory appeals process, and to ensure 
that flood insurance agents meet minimum NFIP education and training 
requirements. 

The report we are releasing today is based on interviews with FEMA 
officials, documentation of its monitoring and oversight processes, and 
our field observations of FEMA's monitoring and oversight activities. 
In addition, we analyzed the National Flood Insurance Act of 1968, as 
amended, its legislative history, and FEMA's implementing regulations, 
and we examined documentation and interviewed officials about FEMA's 
efforts to comply with provisions of the 2004 Flood Insurance Reform 
Act. We did our work from December 2004 to August 2005 in accordance 
with generally accepted government auditing standards. 

Major Program Issues--A Summary: 

A key characteristic of the NFIP is the extent to which FEMA must rely 
on others to achieve the program's goals. FEMA's role is principally 
one of establishing policies and standards that others generally 
implement on a day-to-day basis and providing financial and management 
oversight of those who carry out those day-to-day responsibilities. 
These responsibilities include ensuring that property owners who are 
required to purchase flood insurance do so, enforcing flood plain 
management and building regulations, selling and servicing flood 
insurance policies, and updating and maintaining the nation's flood 
maps. In our prior work, we have identified several major challenges 
facing the NFIP: 

* Reducing losses to the program resulting from policy subsidies and 
repetitive loss properties.[Footnote 6] The program is not actuarially 
sound because of the number of policies in force that are subsidized-- 
about 29 percent at the time of our 2003 report. As a result of these 
subsidies, some policyholders pay premiums that represent about 35-40 
percent of the true risk premium. Moreover, at the time of our 2004 
report, there were about 49,000 repetitive loss properties--those with 
two or more losses of $1,000 or more in a 10-year period--representing 
about 1 percent of the 4.4 million buildings insured under the program. 
From 1978 until March 2004, these repetitive loss properties 
represented about $4.6 billion in claims payments. 

* Increasing property owner participation in the program. As little as 
half of eligible properties may participate in the flood insurance 
program. Moreover, the extent of noncompliance with the mandatory 
purchase requirement by affected property owners is unknown. 

* Developing accurate, digital flood maps.[Footnote 7] In our report on 
the NFIP's flood map modernization program, we discussed the multiple 
uses and benefits of accurate, digitized flood plain maps. However, the 
NFIP faces a major challenge in working with its contractor and state 
and local partners of varying technical capabilities and resources to 
produce accurate, digital flood maps. In developing those maps, we 
recommended that FEMA develop and implement data standards that will 
enable FEMA, its contractor, and its state and local partners to 
identify and use consistent data collection and analysis methods for 
developing maps for communities with similar flood risk. 

* Providing effective oversight of flood insurance operations. In the 
report we are releasing today, we note that FEMA faces a challenge in 
providing effective oversight of the 95 insurance companies and 
thousands of insurance agents and claims adjusters who are primarily 
responsible for the day-to-day process of selling and servicing flood 
insurance policies. 

The NFIP Pays Expenses and Claims with Premiums, but Its Financial 
Structure Is Not Designed to be Actuarially Sound: 

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 with tax dollars. However, as we have reported, 
the program, by design, is not actuarially sound because Congress 
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.[Footnote 8] FEMA has statutory authority to borrow funds from 
the Treasury to keep the NFIP solvent.[Footnote 9] 

Until the 2004 hurricane season, FEMA had been generally successful in 
keeping the NFIP on sound financial footing. It had exercised its 
authority to borrow from the Treasury three times in the last decade 
when losses were heavy and repaid all funds with interest. As of August 
2005, the program had borrowed $300 million to cover an estimated $1.8 
billion in claims from the major disasters of 2004, including 
hurricanes Charley, Frances, Ivan, and Jean, which hit Florida and 
other East and Gulf Coast states. The large number of claims arising 
from Hurricanes Katrina and Rita will require FEMA to borrow heavily 
from the Treasury, because the NFIP does not have the financial 
reserves necessary to offset heavy losses in the short-term. Following 
Hurricane Katrina in August 2005, legislation was enacted that 
increased FEMA's borrowing authority from $1.5 billion to $3.5 billion 
through fiscal year 2008.[Footnote 10] Additional borrowing authority 
may be needed to pay claims arising from Hurricanes Katrina and Rita. 

Premium Subsidies and Repetitive-Loss Properties Affect NFIP's 
Actuarial Soundness: 

In reauthorizing the NFIP in 2004, Congress noted that "repetitive-loss 
properties"--those that had resulted in two or more flood insurance 
claims payments of $1,000 or more over 10 years--constituted a 
significant drain on the resources of the NFIP. [Footnote 11] These 
repetitive loss properties are problematic not only because of their 
vulnerability to flooding but also because of the costs of repeatedly 
repairing flood damages. While these properties make up only about 1 
percent of the properties insured under the NFIP, they account for 25 
to 30 percent of all claims losses. At the time of our March 2004 
report on repetitive loss properties, nearly half of all nationwide 
repetitive loss property insurance payments had been made in Louisiana, 
Texas, and Florida. According to a recent Congressional Research 
Service report, as of December 31, 2004, FEMA had identified 11,706 
"severe repetitive loss" properties defined as those with four or more 
claims or two or three losses that exceeded the insured value of the 
property.[Footnote 12] Of these 11,706 properties almost half (49 
percent) were in three states--3,208 (27 percent) in Louisiana, 1,573 
(13 percent) in Texas, and 1,034 (9 percent) in New Jersey. 

As the destruction caused by horrendous 2004 and 2005 hurricanes are a 
driving force for improving the NFIP today, devastating natural 
disasters in the 1960s were a primary reason for the national interest 
in creating a federal flood insurance program. In 1963 and 1964, 
Hurricane Betsy and other hurricanes caused extensive damage in the 
South, and, in 1965, heavy flooding occurred on the upper Mississippi 
River. In studying insurance alternatives to disaster assistance for 
people suffering property losses in floods, a flood insurance 
feasibility study found that premium rates in certain flood-prone areas 
could be extremely high. As a result, the National Flood Insurance Act 
of 1968, which created the NFIP, mandated that existing buildings in 
flood-risk areas would receive subsidies on premiums because these 
structures were built before the flood risk was known and identified on 
flood insurance rate maps.[Footnote 13] Owners of structures built in 
flood-prone areas on or after the effective date of the first flood 
insurance rate maps in their areas or after December 31, 1974, would 
have to pay full actuarial rates.[Footnote 14] Because many repetitive 
loss properties were built before either December 31, 1974 or the 
effective date of the first flood insurance rate maps in their areas, 
they were eligible for subsidized premium rates under provisions of the 
National Flood Insurance Act of 1968. 

The provision of subsidized premiums encouraged communities to 
participate in the NFIP by adopting and agreeing to enforce state and 
community floodplain management regulations to reduce future flood 
damage. In April 2005, FEMA estimated that floodplain management 
regulations enforced by communities participating in the NFIP have 
prevented over $1.1 billion annually in flood damage. However, some of 
the properties that had received the initial rate subsidy are still in 
existence and subject to repetitive flood losses, thus placing a 
financial strain on the NFIP. 

For over a decade, FEMA has pursued a variety of strategies to reduce 
the number of repetitive loss properties in the NFIP. In a 2004 
testimony, we noted that congressional proposals have been made to 
phase out coverage or begin charging full and actuarially based rates 
for repetitive loss property owners who refuse to accept FEMA's offer 
to purchase or mitigate the effect of floods on these 
buildings.[Footnote 15] The 2004 Flood Insurance Reform Act created a 5-
year pilot program to deal with repetitive-loss properties in the NFIP. 
In particular, the act authorized FEMA to provide financial assistance 
to participating states and communities to carry out mitigation 
activities or to purchase "severe repetitive loss properties."[Footnote 
16] During the pilot program, policyholders who refuse a mitigation or 
purchase offer that meets program requirements will be required to pay 
increased premium rates. In particular, the premium rates for these 
policyholders would increase by 150% following their refusal and 
another 150% following future claims of more than $1,500.[Footnote 17] 
However, the rates charged cannot exceed the applicable actuarial rate. 

It will be important in future studies of the NFIP to continue to 
analyze data on progress being made to reduce the inventory of 
subsidized NFIP repetitive loss properties, how the reduction of this 
inventory contributes to the financial stability of the program, and 
whether additional FEMA regulatory steps or congressional actions could 
contribute to the financial solvency of the NFIP, while meeting 
commitments made by the authorizing legislation. 

Data Inconclusive on Compliance with Requirements for Mandatory 
Purchase of NFIP Policies: 

In 1973 and 1994, Congress enacted requirements for mandatory purchase 
of NFIP policies by some property owners in high risk areas. From 1968 
until the adoption of the Flood Disaster Protection Act of 1973, the 
purchase of flood insurance was voluntary. However, because voluntary 
participation in the NFIP was low and many flood victims did not have 
insurance to repair damages from floods in the early 1970s, the 1973 
act required the mandatory purchase of flood insurance to cover some 
structures in special flood hazard areas of communities participating 
in the program. Homeowners with mortgages issued by federally-regulated 
lenders on property in communities identified to be in special flood 
hazard areas are required to purchase flood insurance on their 
dwellings for the amount of their outstanding mortgage balance, up to a 
maximum of $250,000 in coverage for single family homes. The owners of 
properties with no mortgages or properties with mortgages held by 
lenders who are not federally regulated were not, and still are not, 
required to buy flood insurance, even if the properties are in special 
flood hazard areas--the areas NFIP flood maps identify as having the 
highest risk of flooding. 

FEMA determines flood risk and actuarial ratings on properties through 
flood insurance rate mapping and other considerations including the 
elevation of the lowest floor of the building, the type of building, 
the number of floors, and whether or not the building has a basement, 
among other factors. FEMA flood maps designate areas for risk of 
flooding by zones. For example, areas subject to damage by waves and 
storm surge are in zone with the highest expectation for flood loss. 

Between 1973 and 1994, many policyholders continued to find it easy to 
drop policies, even if the policies were required by lenders. Federal 
agency lenders and regulators did not appear to strongly enforce the 
mandatory flood insurance purchase requirements.[Footnote 18] According 
to a recent Congressional Research Service study,[Footnote 19] the 
Midwest flood of 1993 highlighted this problem and reinforced the idea 
that reforms were needed to compel lender compliance with the 
requirements of the 1973 Act. In response, Congress passed the National 
Flood Insurance Reform Act of 1994. Under the 1994 law, if the property 
owner failed to get the required coverage, lenders were required to 
purchase flood insurance on their behalf and then bill the property 
owners. Lenders became subject to civil monetary penalties for not 
enforcing the mandatory purchase requirement. 

In June 2002, we reported that the extent to which lenders were 
enforcing the mandatory purchase requirement was unknown. Officials 
involved with the flood insurance program developed contrasting 
viewpoints about whether lenders were complying with the flood 
insurance purchase requirements primarily because the officials used 
differing types of data to reach their conclusions. Federal bank 
regulators and lenders based their belief that lenders were generally 
complying with the NFIP's purchase requirements on regulators' 
examinations and reviews conducted to monitor and verify lender 
compliance. In contrast, FEMA officials believed that many lenders 
frequently were not complying with the requirements, which was an 
opinion based largely on noncompliance estimates computed from data on 
mortgages, flood zones, and insurance policies; limited studies on 
compliance; and anecdotal evidence indicating that insurance was not 
always in place where required. Neither side, however, was able to 
substantiate its differing claims with statistically sound data that 
provide a nationwide perspective on lender compliance. [Footnote 20] 

Accurate, Updated Flood Maps Are The Foundation of the NFIP: 

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 has embarked on 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) the approximately 20,000 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 accurate flood insurance policy rates 
based on flood risk, and (3) federal regulated mortgage lenders to 
identify those property owners who are statutorily required to purchase 
federal flood insurance. Under the NFIP, property owners whose 
properties are within the designated "100-year floodplain" and have a 
mortgage from a federally regulated financial institution are required 
to purchase flood insurance in an amount equal to their outstanding 
mortgage balance (up to the statutory ceiling of $250,000). 

FEMA expects that by producing more accurate and accessible digital 
flood maps, the NFIP and the nation will benefit in three ways. First, 
communities can use more accurate digital maps to reduce flood risk 
within floodplains by more effectively regulating development through 
zoning and building standard. Second, accurate digital maps available 
on the Internet will facilitate the identification of property owners 
who are statutorily required to obtain or who would be best served by 
obtaining flood insurance. Third, accurate and precise data will help 
national, state, and local officials to accurately locate 
infrastructure and transportation systems (e.g., power plants, sewage 
plants, railroads, bridges, and ports) to help mitigate and manage risk 
for multiple hazards, both natural and man-made. 

Success in updating the nation's flood maps requires clear standards 
for map development; the coordinated efforts and shared resources of 
federal, state, and local governments; and the involvement of key 
stakeholders who will be expected to use the maps. In developing the 
new data system to update flood maps across the nation, FEMA's intent 
is to develop and incorporate flood risk data that are of a level of 
specificity and accuracy commensurate with communities' relative flood 
risks. Not every community may need the same level of specificity and 
detail in its new flood maps. However, it is important that FEMA 
establish standards for the appropriate data and level of analysis 
required to develop maps for all communities of a similar risk level. 
In its November 2004 Multi-Year Flood Hazard Identification Plan, FEMA 
discussed the varying types of data collection and analysis techniques 
the agency plans to use to develop flood hazard data in order to relate 
the level of study and level of risk for each of 3,146 counties. 

FEMA has developed targets for resource contribution (in-kind as well 
as dollars) by its state and local partners in updating the nation's 
flood maps. At the same time, it has developed plans for reaching out 
to and including the input of communities and key stakeholders in the 
development of the new maps. These expanded outreach efforts reflect 
FEMA's understanding that it is dependent upon others to achieve the 
benefits of map modernization. 

Monitoring and Oversight of NFIP Identifies Specific Problems, but Does 
Not Provide Comprehensive Information on Overall Program Performance: 

To meet its monitoring and oversight responsibilities, FEMA is to 
conduct periodic operational reviews of the 95 private insurance 
companies that participate in the NFIP. In addition, FEMA's program 
contractor is to check the accuracy of claims settlements by doing 
quality assurance reinspections of a sample of claims adjustments for 
every flood event. For operational reviews, FEMA examiners are to do a 
thorough review of the companies' NFIP underwriting and claims 
settlement processes and internal controls, including checking a sample 
of claims and underwriting files to determine, for example, whether a 
violation of policy has occurred, an incorrect payment has been made, 
and if files contain all required documentation. Separately, FEMA's 
program contractor is responsible for conducting quality assurance 
reinspections of a sample of claims adjustments for specific flood 
events in order to identify, for example, whether an insurer allowed an 
uncovered expense, or missed a covered expense in the original 
adjustment. 

The operational reviews and follow-up visits to insurance companies 
that we analyzed during 2005 followed FEMA's internal control 
procedures for identifying and resolving specific problems that may 
occur in individual insurance companies' processes for selling and 
renewing NFIP policies and adjusting claims. According to information 
provided by FEMA, the number of operational reviews completed between 
2000 and August 2005 were done at a pace that allows for a review of 
each participating insurance company at least once every 3 years, as 
FEMA procedures require. In addition, the processes FEMA had in place 
for operational reviews and quality assurance reinspections of claims 
adjustments met our internal control standard for monitoring federal 
programs. 

However, the process FEMA used to select a sample of claims files for 
operational reviews and the process its program contractor used to 
select a sample of adjustments for reinspections were not randomly 
chosen or statistically representative of all claims. We found that the 
selection processes used were, instead, based upon judgmental criteria 
including, among other items, the size and location of loss and 
complexity of claims. As a result of limitations in the sampling 
processes, FEMA cannot project the results of these monitoring and 
oversight activities to determine the overall accuracy of claims 
settled for specific flood events or assess the overall performance of 
insurance companies and their adjusters in fulfilling their 
responsibilities for the NFIP--actions necessary for FEMA to meet our 
internal control standard that it have reasonable assurance that 
program objectives are being achieved and that its operations are 
effective and efficient. 

To strengthen and improve FEMA's monitoring and oversight of the NFIP, 
we are recommending in today's report that FEMA use a methodologically 
valid approach for sampling files selected for operational reviews and 
quality assurance claims reinspections. 

FEMA Has Not Fully Implemented NFIP Program Changes Mandated by the 
Flood Insurance Reform Act of 2004: 

As of September 2005, FEMA had not yet fully implemented provisions of 
the Flood Insurance Reform Act of 2004. Among other things, the act 
requires FEMA to provide policyholders a flood insurance claims 
handbook; to establish a regulatory appeals process for claimants; and 
to establish minimum education and training requirements for insurance 
agents who sell NFIP policies.[Footnote 21] The 6-month statutory 
deadline for implementing these changes was December 30, 2004. 

In September 2005, FEMA posted a flood insurance claims handbook on its 
Web site. The handbook contains information on anticipating, filing and 
appealing a claim through an informal appeals process, which FEMA 
intends to use pending the establishment of a regulatory appeals 
process. However, because the handbook does not contain information 
regarding the appeals process that FEMA is statutorily required to 
establish through regulation, it does not yet meet statutory 
requirements. With respect to this appeals process, FEMA has not stated 
how long rulemaking might take to establish the process by regulation, 
or how the process might work, such as filing requirements, time frames 
for considering appeals, and the composition of an appeals board. 
Therefore, it remains unclear how or when FEMA will establish the 
statutorily required appeals process. With respect to minimum training 
and education requirements for insurance agents who sell NFIP policies, 
FEMA published a Federal Register notice on September 1, 2005, which 
included an outline of training course materials. 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 the NFIP requirements 
through already established state licensing schemes for insurance 
agents. The notice did not specify how or when states were to begin 
implementing the NFIP training and education requirements. Thus, it is 
too early to tell the extent to which insurance agents will meet FEMA's 
minimum standards. FEMA officials said that, because changes to the 
program could have broad reaching and significant effects on 
policyholders and private-sector stakeholders upon whom FEMA relies to 
implement the program, the agency is taking a measured approach to 
addressing the changes mandated by Congress. Nonetheless, without plans 
with milestones for completing its efforts to address the provisions of 
the act, FEMA cannot hold responsible officials accountable or ensure 
that statutorily required improvements are in place to assist victims 
of future flood events. 

We are recommending in today's report that FEMA developed documented 
plans with milestones for implementing requirements of the Flood 
Insurance Reform Act of 2004 to provide policyholders a flood insurance 
claims handbook that meets statutory requirements, to establish a 
regulatory appeals process, and to ensure that flood insurance agents 
meet minimum NFIP education and training requirements. 

FEMA did not agree with our recommendations. It noted that its current 
sampling methodology of selecting a sample based on knowledge of the 
population to be sampled was more appropriate for identifying problems 
than the statistically random probability sample we recommended. 
Although FEMA's current nonprobability sampling strategy may provide an 
opportunity to focus on particular areas of risk, it does not provide 
management with the information needed to assess the overall 
performance of private insurance companies and adjusters participating 
in the program--information that FEMA needs to have reasonable 
assurance that program objectives are being achieved. 

FEMA also disagreed with our characterization of the extent to which 
FEMA has met provisions of the Flood Insurance Reform Act of 2004. We 
believe that our description of those efforts and our recommendations 
with regard to implementing the Act's provisions are valid. For 
example, although FEMA commented that it was offering claimants an 
informal appeals process in its flood insurance claims handbook, it 
must establish regulations for this process, and those are not yet 
complete. 

Concluding Observations: 

The most immediate challenge for the NFIP is processing the flood 
insurance claims resulting from Hurricanes Katrina and Rita. Already, 
according to FEMA, the NFIP has received about twice as many claims in 
2005 as it did in all of 2004, which was itself a record year. The need 
for effective communication and consistent and appropriate application 
of policy provisions will be particularly important in working with 
anxious policyholders, many of whom have been displaced from their 
homes. 

In the longer term, Congress and the NFIP face a complex challenge in 
assessing potential changes to the program that would improve its 
financial stability, increase participation in the program by property 
owners in areas at risk of flooding, reduce the number of repetitive 
loss properties in the program, and maintain current and accurate flood 
plain maps. These issues are complex, interrelated, and are likely to 
involve trade-offs. For example, increasing premiums to better reflect 
risk may reduce voluntary participation in the program or encourage 
those who are required to purchase flood insurance to limit their 
coverage to the minimum required amount (i.e., the amount of their 
outstanding mortgage balance). This in turn can increase taxpayer 
exposure for disaster assistance resulting from flooding. There is no 
"silver bullet" for improving the current structure and operations of 
the NFIP. It will require sound data and analysis and the cooperation 
and participation of many stakeholders. 

Mr. Chairman and Members of the Committee, this concludes my prepared 
statement. I would be pleased to respond to any questions you and the 
Committee Members may have. 

GAO Contacts and Staff Acknowledgments: 

Contact points for our Office of Congressional Relations and Public 
Affairs may be found on the last page of this statement. For further 
information about this testimony, please contact Norman Rabkin at (202) 
512-8777 or at rabkinn@gao.gov, or William O. Jenkins, Jr. at (202) 512-
8757 or at jenkinswo@gao.gov. This statement was prepared under the 
direction of Christopher Keisling. Key contributors were Amy Bernstein, 
Christine Davis, Deborah Knorr, Denise McCabe, and Margaret Vo. 

FOOTNOTES 

[1] In March 2003, FEMA and its approximately 2,500 staff became part 
of the Department of Homeland Security (DHS). Most of FEMA--including 
its Mitigation Division, which is responsible for administering the 
NFIP--is now part of the department's Emergency Preparedness and 
Response Directorate. However, FEMA retained its name and individual 
identity within the department. Under a reorganization plan proposed by 
the current Secretary of DHS, the Emergency Preparedness and Response 
Directorate would be abolished, and FEMA would report directly to the 
Undersecretary and Secretary of DHS. 

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

[3] 42 U.S.C. 4001(b)(2). 

[4] 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). 

[5] Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004, 
Pub. L. No. 108-264, 118 Stat. 712, 727 (2004). 

[6] GAO, Flood Insurance: Challenges Facing the National Flood 
Insurance Program,GAO-03-606T (Washington, D.C.: April 1, 2003); 
National Flood Insurance Program: Actions to Address Repetitive Loss 
Properties,GAO-04-401T (Washington, D.C.: March 25, 2004). 

[7] GAO, Flood Map Modernization: Program Strategy Shows Promise, but 
Challenges Remain, GAO-04-417 (Washington, D.C.: March 31, 2004). 

[8] GAO, Flood Insurance: Information on the Financial Condition of the 
National Flood Insurance Program, GAO-01-992T (Washington, D.C.: July 
2001). 

[9] See 42 U.S.C. 4016. 

[10] The National Flood Insurance Program Enhanced Borrowing Authority 
Act of 2005, Pub. L. No. 109-65 (Sept. 20, 2005). 

[11] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 
2(3),(4), (5), 118 Stat. 712, 713 (2004). 

[12] Congressional Research Service, Federal Flood Insurance: The 
Repetitive Loss Problem, RL32972 (Washington, D.C.: June 30, 2005). 

[13] 42 U.S.C. 4014(a)(2), 4015(a), (b). 

[14] 42 U.S.C. 4014(a)(1), 4015(c) 

[15] GAO, National Flood Insurance Program: Actions to Address 
Repetitive Loss Properties, GAO-04-401T (Washington, D.C.: Mar. 25, 
2004). 

[16] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, section 
102(b), (c), 118 Stat. 712, 714 (2004). The act defines a "severe 
repetitive loss property" to mean single-family properties that have 
received at least $20,000 in flood insurance payments based on 4 or 
more claims of at least $5,000 each. The act requires FEMA to define in 
future regulation which multi-family properties constitute "severe 
repetitive loss properties." 

[17] Id., section 102(h)(1), (2), (3). 

[18] The federal entities for lending regulation are the Board of 
Governors of the Federal Reserve System, the Office of the Comptroller 
of the Currency, the Office of Thrift Supervision, the Federal Deposit 
Insurance Corporation, the National Credit Union Administration, and 
the Farm Credit Administration. 

[19] Congressional Research Service, Federal Flood Insurance: The 
Repetitive Loss Problem (June 30, 2005). 

[20] GAO, Flood Insurance: Extent of Noncompliance with Purchase 
Requirements is Unknown, GAO-02-396 (Washington, D.C: June 21, 2002). 

[21] Flood Insurance Reform Act of 2004, Pub. L. No. 108-264, sections 
204, 205, and 207.