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Chairman, Subcommittee on Housing and Community Opportunity, Committee 
on Financial Services, U.S. House of Representatives: 

United States Government Accountability Office: 

GAO: 

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

Thursday, October 20, 2005: 

Federal Emergency Management Agency: 

Oversight and Management of the National Flood Insurance Program: 

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

GAO-06-183T: 

GAO Highlights: 

Highlights of GAO-06-183T, a testimony before the Subcommittee on 
Housing and Community Opportunity, Committee on Financial Services, 
U.S. House of Representatives: 

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. GAO issued a 
report earlier this week that was mandated by the Flood Insurance 
Reform Act of 2004. This testimony discusses findings and 
recommendations from that report and information from past GAO work. 
Specifically, the testimony discusses (1) the statutory and regulatory 
limitations on coverage for homeowners under the NFIP; (2) FEMA’s role 
in monitoring and overseeing the NFIP; (3) the status of FEMA’s 
implementation of provisions of the Flood Insurance Reform Act of 2004. 
It also offers observations on broader issues facing the NFIP including 
its financial structure and updating flood maps. 

What GAO Found: 

The amount of insurance coverage available to homeowners under the NFIP 
is limited by requirements set forth in statute and FEMA’s implementing 
regulations, which include FEMA’s standard flood insurance policy. As a 
result of these limitations, insurance payments to claimants for flood 
damage may not cover all of the costs of repairing or replacing 
flooddamaged property. For example, homes that could sustain more than 
$250,000 in damage cannot be insured to their full replacement cost, 
thus limiting claims to this statutory ceiling. In addition, NFIP 
policies cover only direct physical loss by or from flood. Therefore, 
losses resulting primarily from a preexisting structural weakness in a 
home, or losses resulting from events other than flood such as 
windstorms, are not covered by NFIP policies. 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, and 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. FEMA did not use a 
statistically valid method for sampling files to be reviewed in these 
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 provide policyholders with a flood 
insurance claims handbook that meets statutory requirements, to 
establish a regulatory appeals process, and to ensure that insurance 
agents meet minimum education and training requirements. The statutory 
deadline for implementing these changes was December 30, 2004. Efforts 
to implement the provisions are under way, but have not yet been 
completed. FEMA has not developed plans with milestones for assigning 
accountability and projecting when program improvements will be made, 
so that improvements are in place to assist victims of future flood 
events. As GAO has previously 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 major 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. 

What GAO Recommends: 

GAO 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. FEMA expressed concerns about findings 
related to its management. 

www.gao.gov/cgi-bin/getrpt?GAO-06-183T.

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 Subcommittee: 

I appreciate the opportunity to participate in today's hearing on the 
National Flood Insurance Program (NFIP) to discuss the Federal 
Emergency Management Agency's (FEMA) role in the management and 
oversight of the NFIP. The NFIP combines property insurance for flood 
victims, mapping to identify the boundaries of the areas at 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 are 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. Flood 
insurance is available to owners and occupants of insurable property in 
flood-prone areas. Our work focused on insurance coverage for 
homeowners. However, coverage is also available for other structures, 
such as apartment buildings, schools, churches, businesses, cooperative 
associations, and condominium associations. 

As of August 2005, the NFIP was estimated to have approximately 4.6 
million policyholders in about 20,000 communities with $828 billion of 
insurance in force. 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 saves about $1 billion in flood 
damage each year. 

As we finalized the report released this week, the exact extent of the 
devastation from Hurricanes Katrina and Rita in August and September 
2005 was still being assessed; however, the acting director of FEMA's 
Mitigation Division testified on October 18, 2005 that the NFIP would 
pay $15 to 25 billion in claims for damage resulting from these two 
storms. As of October 13, 2005, FEMA had received 192,809 flood 
insurance claims and the NFIP had paid nearly $1.3 billion to settle 
7,664 of these claims. The number of claims filed is more than twice as 
many as were filed in all of 2004, itself a record year. Clearly, these 
two disasters will challenge the NFIP with demands the program has 
never before faced in its more than 35 year history. Already, a record 
number of flood insurance claims have been filed in 2005, and Congress 
has increased the NFIP's authority to borrow from the United States 
Treasury from $1.5 billion to $3.5 billion. 

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. 

My testimony today discusses the report we issued on October 18, 2005 
that discusses FEMA's management and oversight of the flood insurance 
program.[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 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. 

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. We have issued reports and testified before this and other 
congressional committees on these and other issues related to the 
program.[Footnote 6] 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. 

My testimony today addresses four topics: 

* insurance coverage available under the NFIP, including coverage 
limitations; 

* FEMA's role in monitoring and oversight of the program; 

* FEMA's progress in implementing the requirements of the National 
Flood Insurance Reform Act of 2004; and: 

* Some broader challenges facing the program. 

Available Insurance Coverage and Limitations Under the NFIP: 

The amount of insurance coverage available to homeowners under the NFIP 
is limited by requirements set forth in statute and regulation. As a 
result of these limitations, insurance payments to claimants for flood 
damage may not cover all the costs of repairing or replacing flood- 
damaged property. For example, there is a $250,000 statutory ceiling on 
the amount of flood insurance homeowners can purchase for the building 
structure and a $100,000 ceiling on the amount they can purchase for 
certain personal property. Thus, homes that might sustain more than 
$250,000 in damage cannot be insured to their full replacement cost. 

In addition, to the statutory limitations on coverage amounts, Congress 
also gave FEMA broad authority to issue regulations establishing "the 
general terms and conditions of insurability," [Footnote 7] including 
the classes, types, and locations of properties that are eligible for 
flood insurance; the nature and limits of loss that may be covered, the 
classification, limitation, and rejection of any risks that FEMA 
considers advisable; and the amount of appropriate loss deductibles. 
Pursuant to this delegation of authority, FEMA has issued regulations, 
including a "Standard Flood Insurance Policy," that further delineate 
the scope of coverage.[Footnote 8] All flood insurance made available 
under the NFIP is subject to the express terms and conditions of the 
statute and regulations, including the standard policy.[Footnote 9] The 
Federal Insurance Administrator within FEMA is charged with 
interpreting the scope of coverage under the standard policy.[Footnote 
10] 

In addition, NFIP policies cover only direct physical loss by or from 
flood. Therefore, losses resulting primarily from a preexisting 
structural weakness in a home or prior water damage, and losses 
resulting from events other than flood, such as windstorms or or earth 
movements, are not covered by the NFIP. Personal property is covered, 
with certain limitations, only if the homeowner has purchased separate 
NFIP personal property insurance in addition to coverage for the 
building. Finally, the method of settling losses affects the amount 
recovered. For example, homes that qualify only for an actual cash 
value settlement--which represents the cost to replace damages 
property, less the value of physical depreciation--would presumably 
receive payments that are less than homes that qualify for a 
replacement cost settlement, which does not deduct for depreciation. 
Finally, the amount recoverable under the SFIP is limited to the amount 
that exceeds the applicable deductible.[Footnote 11] Our report 
discusses the limitations on coverage and recoverable losses in greater 
detail. 

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

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 offering 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 assure that the NFIP is 
administered properly. 

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. 

Operational reviews of flood insurance companies participating in the 
NFIP that are conducted by FEMA staff are FEMA's primary internal 
control mechanism for monitoring, identifying, and resolving problems 
related to how insurers sell and review NFIP policies and adjust 
claims. For all aspects of operational reviews, the examiners are to 
determine whether files are maintained in good order, whether current 
forms are used and whether staff has a proficient knowledge of 
requirements and procedures to properly underwrite and process flood 
claims. Examiners are also to look at internal controls in place at 
each company. When problems are identified, examiners are to classify 
the severity of the errors. Each file reviewed is to be classified as 
satisfactory or unsatisfactory. Unsatisfactory files contain either a 
critical error (e.g., a violation of policy or an incorrect payment) or 
three non-critical errors (e.g., violations of procedures that did not 
delay actions or claims). 

Write-your-own companies with error rates of 20 percent or higher of 
the total number of files reviewed for the specific underwriting or 
claims operation review would always receive an unsatisfactory 
designation. In such cases, FEMA requires that the company develop an 
action plan to correct the problems identified and is to schedule a 
follow-up review in 6 months to determine whether progress has been 
made. 

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. 

Program Contractor Reinspections of NFIP Claims: 

In addition to operational reviews done by FEMA staff, FEMA's program 
contractor conducts quality assurance reinspections of claims for 
specific flood events. The program contractor employs nine general 
adjusters who conduct quality assurance reinspections of a sample of 
open claims for each flood event.[Footnote 12] Procedures for the 
general adjusters to follow are outlined in FEMA's Write Your Own 
Financial Control Plan. According to the general adjusters we 
interviewed, in addition to preparing written reports of each 
reinspection, general adjusters discuss the results of the 
reinspections they perform with officials of write-your-own companies 
that process the claims. If a general adjuster determines that the 
insurance company allowed an expense that should not have been covered, 
the company is to reimburse the NFIP. Conversely, if a general adjuster 
finds that the private-sector adjuster missed a covered expenses in the 
original adjustment, the general adjuster is to take steps to provide 
additional payment to the policyholder. 

An instructor at an adjuster refresher training session, while 
observing that adjusters had performed very well overall during the 
2004 hurricane season, cited several errors that he had identified in 
reinspections of claims, including improper room dimension measurements 
and improper allocation of costs caused by wind damage (covered by 
homeowners' policies) versus costs caused by flood damage. In addition, 
the instructor identified as a problem poor communication with 
homeowners on the processes followed to inspect the homeowner's 
property and settle the claim. Overall error rates for write-your-own 
companies are monitored. Procedures require additional monitoring, 
training, or other action if error rates exceed 3 percent. According to 
the general adjusters we interviewed and FEMA's program contractor, 
qualify assurance reinspections are forwarded from general adjusters to 
the program contractor where results of reinspections are to be 
aggregated in a reinspection database as a method of providing for 
broad-based oversight of the NFIP as its services are delivered by the 
write-your-own companies, adjusting firms and independent flood 
adjusters. 

Sampling Methods Used to Conduct Operational Reviews and Quality 
Assurance Reinspections Do Not Provide Management Information On 
Overall Performance: 

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 13] 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 develop 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 for both its sampling 
methodology and implementation of the requirements of the Flood 
Insurance Reform Act of 2004. 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. 

Some Broader Issues Facing the NFIP: 

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 14] FEMA has statutory authority to borrow funds from 
the Treasury to keep the NFIP solvent.[Footnote 15] 

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 more than $1.8 
billion in claims from the major disasters of 2004, including 
hurricanes Charley, Frances, Ivan, and Jeanne, 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 16] Additional borrowing authority 
may be needed to pay claims arising from Hurricanes Katrina and Rita. 

Some Repetitively-Flooded Properties Are Subsidized under Provisions of 
Authorizing Legislation and Continue to Financially Strain the Program: 

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 17] 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 18] 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 19] 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 20] 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 21] 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 
22] 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 23] 
However, the rates charged cannot exceed the applicable actuarial 
rate.[Footnote 24] 

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 from 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 zones 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 25] According 
to a recent Congressional Research Service study,[Footnote 26] 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 27] 

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. 

Concluding Observations: 

The most immediate challenge for the NFIP is processing the flood 
insurance claims resulting from Hurricanes Katrina and Rita. FEMA 
reported, as of October 13th, that it had received 192,809 flood 
insurance claims and had paid nearly $1.3 billion to settle 7,664 of 
these claims. The number of claims is more than twice as many as were 
filed in all of 2004, 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] See, for example, the following GAO reports and testimonies: Flood 
Insurance: Extent of Noncompliance with Purchase Requirements Unknown, 
GAO-02-326 (Washington, D.C.: June 21, 2002); National Flood Insurance 
Program: Actions to Address Repetitive Loss Properties, GAO-04-401T 
(Washington, D.C.: March 25, 2004); Flood Map Modernization: Program 
Strategy Shows Promise, but Challenges Remain, GAO-04-117 (Washington, 
D.C.: March 31, 2004); Federal Emergency Management Agency: Challenges 
Facing the National Flood Insurance Program, GAO-06-174T (Washington, 
D.C.: Oct. 18, 2005). 

[7] 42 U.S.C. 4013(a). 

[8] The insurance coverage regulations appear at 44 C.F.R. Part 61, and 
the Standard Flood Insurance Policy is an appendix to these 
regulations, set forth at 44 C.F.C. Part 61, appendix A(1), "Standard 
Flood Insurance Policy Dwelling Form." 

[9] 44 C.F.R. 61.4. 

[10] Id. 61.4(b), 61.14. 

[11] SFIP section VI, Deductibles. Applicable deductible amounts are 
not listed in the SFIP itself, but are shown on the Declarations Page, 
a computer-generated summary of the information provided by the insured 
in the insured's application. This page is part of each insured's flood 
insurance policy. 

[12] In addition to doing reinspections, these general adjusters are 
responsible for estimating damage from flood events, coordinating 
claims adjustment activities at disaster locations, and conducting 
adjuster training. 

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

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

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

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

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

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

[19] 42 U.S.C. 4014(a)(2), 4015(a), (b). 

[20] 42 U.S.C. 4014(a)(1), 4015(c). 

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

[22] Flood Insurance Reform Act of 2004, 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." 

[23] Id., , 118 Stat. 712, 717-718 (2004). 

[24] DHS' proposed appropriation for fiscal year 2006 includes $40 
million to carry out the pilot program. Both houses of Congress passed 
the bill, and it was presented to the President on October 14, 2005, 
but, as of October 17, 2005, the President had not signed the 
legislation. Department of Homeland Security Appropriations Act, 2006, 
H.R. 2360, 109th Cong., title III (2005). 

[25] 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. 

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

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