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National Flood Insurance Program

This information appears as published in the 2015 High Risk Report.

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The National Flood Insurance Program (NFIP) is a key component of the federal government’s efforts to limit the damage and financial impact of floods. However, it likely will not generate sufficient revenues to repay the billions of dollars borrowed from the Department of the Treasury (Treasury) to cover claims from the 2005 and 2012 hurricanes or potential claims related to future catastrophic losses. This lack of sufficient revenue highlights what have been structural weaknesses in how the program is funded. While Congress and the Federal Emergency Management Agency (FEMA)—the agency within the Department of Homeland Security (DHS) responsible for managing NFIP—intended that NFIP be funded with premiums collected from policyholders and not with tax dollars, the program was, by design, not actuarially sound. As of December 31, 2014, FEMA owed the Treasury $23 billion, up from $20 billion as of November 2012. FEMA made a $1 billion principal repayment at the end of December 2014—FEMA’s first such payment since 2010.

The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) contained provisions to help strengthen the financial solvency of the program, including phasing out almost all discounted insurance premiums (for example, subsidized premiums). However, the extent to which its changes would have reduced NFIP’s financial exposure is unclear. In July 2013, we reported that FEMA was starting to implement some of the required changes. However, on March 21, 2014, the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) was enacted. HFIAA reinstated certain premium subsidies and slowed down certain premium rate increases that had been included in the Biggert-Waters Act. Aspects of HFIAA were intended to address affordability concerns for certain property owners, but may also increase NFIP’s long-term financial burden on taxpayers. Further, weaknesses in NFIP management and operations, including weaknesses in contractor oversight and an outdated policy and claims management system, have also placed the program at risk. As a result of its substantial financial exposure and management and operations challenges, the program has been on our High-Risk List since 2006.

National Flood Insurance Program

FEMA has partially met all five criteria for removing NFIP from the high-risk list. FEMA leadership has shown a commitment to taking a number of actions to implement our recommendations. However, the recent enactment of HFIAA and limitations in FEMA’s oversight of contractors has created capacity challenges for FEMA in addressing the financial exposure created by NFIP as well as improving program administration. FEMA has developed corrective action plans for implementing our recommendations, but it has not yet developed a comprehensive plan to address all the issues that have placed NFIP on our high-risk list. For example, FEMA has a process in place to monitor progress in taking actions to implement our recommendations related to NFIP. But, broader monitoring of the effectiveness and sustainability of its actions would help ensure that appropriate corrective actions are being taken. While FEMA has demonstrated progress towards improving NFIP’s financial stability and program efficiency, these efforts are not complete. With respect to financial stability, FEMA has initiated actions to improve the accuracy of full-risk rates, but does not have all the necessary information to appropriately revise premium rates for previously subsidized properties. FEMA has demonstrated progress in improving areas of the program’s operations, such as continuity planning. But, important actions, such as modernizing its policy and claims management system, remain to be completed.

The losses already generated by NFIP, as well as the potential for future losses, have created substantial financial exposure for the federal government. In addition, weaknesses in management and program operations create risks that funds allocated to NFIP and premiums paid to the program are not being used efficiently or effectively. FEMA leadership has shown a commitment to taking a number of actions to implement our recommendations. These recommendations are designed to improve both the program’s financial stability and operations. However, the 2014 enactment of HFIAA has presented administrative challenges for FEMA leadership and also impacted the program’s capacity to address the financial exposure created by NFIP. For example, HFIAA reinstates certain premium subsidies and slowed down some premium rate increases that had been included in the Biggert-Waters Act, requiring FEMA to refund premiums to certain policyholders. In addition, the Biggert-Waters Act requires that FEMA establish a reserve fund to be available for meeting the expected future obligations of NFIP, and HFIAA includes an annual surcharge for all policies ($25 for most policies) to be added to the reserve fund. However, FEMA stated in its December 2014 annual report to Congress that it would be unlikely that the required reserve fund balance (approximately $13 billion) would be achieved in the next 20 years. FEMA’s analysis also concluded that, under the current NFIP operating environment, the agency will be unable to repay its debt within the 10-year time frame designated in Biggert-Waters.

While FEMA has begun taking some actions to improve its capacity to administer NFIP, it is unclear how the resources required to implement both the Biggert-Waters Act and HFIAA will affect its ability to continue and complete these efforts. For example, the acts require FEMA to complete multiple studies and take a number of actions within the next several years. This would require resources FEMA would normally have committed to other efforts. We have also recently reported on weaknesses in FEMA’s oversight of contractors that could limit FEMA’s ability to effectively and efficiently implement NFIP. In a January 2014 report where we reviewed the three largest NFIP contractors, we reported that while FEMA had made progress in improving its processes for monitoring NFIP contracts and had largely followed its procedures, it did not develop a quality assurance surveillance plan for one of the three contractors we reviewed—a best practice and a key requirement identified in regulations and guidance. In 2010 and 2011, FEMA identified persistent issues with the contractor’s deliverables, including quality and timeliness, and faced challenges in resolving those issues. This might have been avoided if a quality assurance surveillance plan had been developed and used. In addition, for two of the three contracts, FEMA staff did not enter performance evaluations in the Contractor Performance Assessment Reporting System, a database DHS uses to record assessments of the performance of government contractors. We recommended that FEMA take a number of actions to improve the monitoring and reporting of contractor performance. In December 2014, we found that FEMA did not validate that its contractor fully implemented changes and system checks or verify the changes in vendors’ software before certain premium rate changes became effective in October 2013. As a result, incorrect rates were charged to certain policyholders. We recommended that FEMA institute controls to validate the implementation of data system changes and track their progress toward completion in its contractor monitoring reports. FEMA agreed to implement these recommendations.

While FEMA has developed plans for addressing all of the recommendations from our individual reports, it has not developed a comprehensive plan to address all the issues that have placed NFIP on our high-risk list. While addressing our recommendations is part of such a plan, a comprehensive plan also defines the root causes, identifies effective solutions, and provides for substantially completing corrective measures near term. According to a DHS official, the individual action plans collectively represent their plan for addressing these issues, as the recommendations cover steps needed to improve the program’s financial stability as well as its administration. The official added that DHS had developed more comprehensive plans for other high-risk areas that had been helpful, and may consider doing so for NFIP. Such a plan could help FEMA ensure that all important issues, and all aspects of those issues, are addressed.

FEMA has a process in place to monitor progress in taking actions to implement our recommendations related to NFIP. For example, the status of efforts to address the recommendations is regularly discussed both within the Flood Insurance and Mitigation Administration (FIMA), which administers NFIP within FEMA, and, at the DHS level, according to a DHS official. However, it does not have a specific process for independently validating the effectiveness or sustainability of those actions. According to a DHS official, once a recommendation related to NFIP is implemented, the effects of the actions taken to do so are not tracked separately, but instead regular reviews of the effectiveness of the entire program are conducted. Additional monitoring of the effectiveness and sustainability of its specific actions taken to address our recommendations would help ensure that appropriate corrective actions are being taken.

FEMA has demonstrated progress toward improving NFIP’s financial stability and program operations; however, these efforts are not complete. With respect to financial stability, FEMA has initiated actions to improve the accuracy of full-risk rates, but does not have all the necessary information to appropriately revise premium rates for previously subsidized properties. We reported in 2013 that FEMA generally lacks information needed to apply full-risk rates to certain subsidized properties. Also, data constraints limit FEMA’s ability to estimate the aggregate cost of subsidies. While HFIAA reinstated certain subsidies, provisions under both the Biggert-Waters Act and HFIAA changed the implementation of subsidies and decreased the size of subsidies by annually increasing subsidized rates. In 2013, we recommended that FEMA develop and implement a plan to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates. As of December 2014, FEMA officials said that they are evaluating different approaches for obtaining flood risk information without requiring policyholders to incur the costs of obtaining property-specific information required to determine full risk rates.

FEMA has demonstrated progress in improving areas of the program’s operations, such as continuity planning. However, some important actions, such as modernizing its information technology systems—including those for financial reporting and its policy and claims management system—remain to be completed. In 2011, we recommended that FEMA develop guidance and a related plan for continuing operations during federal disasters to help ensure consistent day-to-day operations when staff are deployed to disaster sites or reassigned to work on disaster-related issues. As part of the development of FIMA’s 2012 continuity plan, FIMA has identified critical staff as well as the key operations that need to continue when staff are deployed in response to a federal disaster and how operations will continue during such periods. In 2011, in our review of FEMA’s financial management we reported that staff faced multiple challenges in their day-to-day operations due to limitations in the systems they must use to perform these operations. In this same report, we also noted that FEMA faces challenges modernizing NFIP’s insurance policy and claims management system. After 7 years and $40 million, FEMA ultimately canceled its latest effort (NextGen) in November 2009 because the system did not meet user expectations. As a result, the agency continues to rely on an ineffective and inefficient 30-year old system. FEMA had since established a steering committee tasked with overseeing FEMA’s next attempt to modernize its policy and claims processing system. In addition, while FEMA has begun implementing some changes to its acquisition management practices, it remains to be seen if it will help FEMA avoid some of the problems that led to NextGen’s failure. In late-November 2014, FEMA officials told us that the agency is in the acquisition stage for a new system called “Phoenix” that will serve as the new information technology system for all of NFIP. It will replace NextGen and NFIP’s current financial and reporting system. FEMA hopes to award the contract to begin development and implementation in fiscal year 2016 or 2017.

While FEMA leadership has displayed a commitment to addressing the challenges that have placed NFIP on the high-risk list and has made progress in a number of areas, FEMA needs to initiate or complete additional actions. As previously discussed, HFIAA, enacted in March 2014 in part to address affordability concerns for property owners, amended the Biggert-Waters Act and created challenges for FEMA in addressing the financial exposure created by the program by lengthening the phase out of subsidized premiums for certain properties. In addition, FEMA is unlikely to generate sufficient revenue to cover future catastrophic losses or repay billions of dollars borrowed from Treasury.

Congress should continue to consider changes to the program that further address the competing goals of financial solvency and affordability. To improve its capacity for administering NFIP, FEMA should implement recent recommendations from our 2014 reports intended to improve contractor oversight. Further, while FEMA has plans for addressing and tracking progress on our specific recommendations, it has yet to address many of them and has not developed a comprehensive plan for removing NFIP from the high-risk list. In addition, while FEMA has a process in place to monitor progress in taking actions to implement our recommendations related to the NFIP, broader monitoring of the effectiveness and sustainability of its actions would help ensure that appropriate corrective actions are being taken. As a step towards improving the financial stability of the program, FEMA should develop and implement a plan to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates. While FEMA has taken steps, such as establishing a steering committee to oversee the next modernization of its claims and policy management, it needs to complete its efforts to establish a new information technology system for NFIP. By completing all actions discussed previously, FEMA will likely improve its ability to address the financial exposure of the program and help ensure that the funds allocated to NFIP and premiums paid to the program are used effectively.

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  • portrait of Alicia Puente Cackley
    • Alicia Puente Cackley
    • Director, Financial Markets and Community Investment
    • cackleya@gao.gov
    • (202) 512-8678