This is the accessible text file for GAO report number GAO-09-12 
entitled 'Flood Insurance: FEMA's Rate-Setting Process Warrants 
Attention' which was released on December 1, 2008.

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. 

Report to the Ranking Member, Committee on Banking, Housing, and Urban 
Affairs, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

October 2008: 

Flood Insurance: 

FEMA's Rate-Setting Process Warrants Attention: 

GAO-09-12: 

GAO Highlights: 

Highlights of GAO-09-12, a report to the Ranking Member, Committee on 
Banking, Housing, and Urban Affairs, U.S. Senate. 

Why GAO Did This Study: 

Questions about the financial status of the National Flood Insurance 
Program (NFIP) have increased since the 2005 hurricanes, which left the 
program with an unprecedented $17.4 billion deficit—a debt that 
resulted in GAO placing NFIP on its high-risk list in March 2006. Among 
the concerns are the subsidized rates NFIP must provide for about 25 
percent of the policies, mostly for older buildings in high-risk flood 
zones. And although fully risk-based rates are supposed to reflect 
actual flood risk, concerns have been raised that they do not. This 
report evaluates (1) the Federal Emergency Management Agency’s (FEMA) 
process for setting full-risk rates to determine whether it produces 
rates that accurately reflect the risk of flooding and (2) the process 
that FEMA uses to set subsidized rates and their effect on the 
financial condition of NFIP. To do this work, GAO evaluated the NFIP 
rate model, examined data from FEMA, surveyed relevant literature, and 
interviewed other relevant agencies and risk-modeling firms. 

What GAO Found: 

FEMA’s method for setting its full-risk rates may not ensure that the 
rates accurately reflect the actual risk of flood damage. The NFIP 
model combines estimated flood risk with expected flood damage, but a 
number of factors may affect the accuracy of the rates the model 
generates. First, some data inputs are outdated or inaccurate. FEMA 
relies on flood probabilities from the 1980s and damage estimates that 
do not fully reflect recent NFIP damage experience. Moreover, while 
FEMA has made updating its flood maps a priority, most of the maps used 
in rate setting have not yet been updated. Second, FEMA does not 
require all properties remapped into higher-risk areas to pay rates 
based on the new designation. This policy, known as grandfathering, 
erodes NFIP’s ability to charge rates that reflect the risk of 
flooding. The policy is intended to increase participation, but FEMA 
does not track the number of grandfathered properties and cannot 
determine their financial impact on the program. Third, FEMA uses a 
nationwide rating system that combines flood zones across many 
geographic areas, so individual policies do not always reflect 
topographical features that affect flood risk. In fact, some patterns 
in historical claims and premium data suggest that NFIP’s full-risk 
rates may not always reflect actual flood risk. Collectively, these 
factors increase the risk that premiums collected on full-risk policies 
may be insufficient to cover future losses, adding to concerns about 
NFIP’s financial stability. 

FEMA’s rate-setting process for subsidized properties depends in part 
on the accuracy of the full-risk rates, raising concerns about how 
these rates are calculated as well. To set subsidized rates, FEMA first 
subtracts the total amount it expects to collect in full-risk premiums 
from the average historical loss year—that is, the minimum (target) 
amount that the program needs to collect from all premiums to cover at 
least average annual losses, as determined by historical data. The 
remainder becomes the aggregate target amount the program must collect 
in subsidized premiums. To set individual subsidized rates, FEMA 
officials then consider their knowledge of flood risk, previous rate 
increases for various locations, and statutory limits on increases. The 
resulting subsidized premiums continue to be a financial strain on the 
NFIP and contribute to its ongoing financial instability. Evidence 
suggests that flooding is likely to become more severe in the future, 
resulting in increased risk exposure, the potential for more 
catastrophic losses, and ongoing financial instability for the program. 
Currently, the annual amount that NFIP collects in both full-risk and 
subsidized premiums is not enough to cover its operating costs, claim 
losses, and principal and interest payments to the Department of the 
Treasury, thereby exposing the federal government and ultimately 
taxpayers to ever-greater financial risks, especially in years of 
catastrophic flooding. 

What GAO Recommends: 

GAO recommends that FEMA (1) ensure that its rate-setting methods 
result in rates that accurately reflect flood risks and (2) collect 
data to analyze the impact of newly created grandfathered properties on 
the NFIP. FEMA generally concurred with both recommendations but 
expressed two reservations with our recommendation regarding rate 
setting. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-12]. For more 
information, contact Orice M. Williams at (202) 512-8678 or 
williamso@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

FEMA's Method of Setting Full-Risk Premiums May Not Ensure That Rates 
Accurately Reflect Risk: 

FEMA's Process for Setting Subsidized Rates May Further Compromise the 
Ongoing Financial Stability of the Program: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: State-by-State Analysis of Claims and Premiums Data: 

Appendix III: Comments from FEMA: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Amounts of NFIP Insurance Available, as of May 1, 2008: 

Table 2: Average Premium per Policy in Force by Flood Zone, 1997-2006: 

Table 3: States Where Claims Frequently or Rarely Exceeded Premiums, 
1978-2007: 

Table 4: Claims and Premiums Data (in constant 2007 dollars), 1978- 
2007: 

Abbreviations: 

BFE: base flood elevation: 

CBO: Congressional Budget Office: 

CRS: Congressional Research Service: 

DELV: damage by elevation: 

DHS: Department of Homeland Security: 

FEMA: Federal Emergency Management Agency: 

FIRM: Flood Insurance Rate Map: 

GAAP: Generally Accepted Accounting Principles: 

GDP: gross domestic product: 

NFIP: National Flood Insurance Program: 

PELV: probability of elevation: 

SFHA: Special Flood Hazard Area: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

October 31, 2008: 

The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

Dear Senator Shelby: 

As of June 2008, the National Flood Insurance Program (NFIP) owed 
approximately $17.4 billion to the U.S. Treasury, primarily as a result 
of loans that the program received to pay claims resulting from the 
2005 hurricane season. According to the Federal Emergency Management 
Agency (FEMA) of the Department of Homeland Security (DHS), which 
administers the program, this debt is greater than the sum of all 
previous losses since the program's inception in 1968. Until 2004, NFIP 
was able to cover most of its losses with the premiums it collected and 
occasional loans from the Treasury that were either repaid or retired 
by Congress. However, after the 2005 hurricanes--primarily Hurricane 
Katrina--the program borrowed $16.8 billion from the Treasury to cover 
the enormous number of claims. As a result, in part because of the 
level of indebtedness, we placed NFIP on our high-risk list in March 
2006.[Footnote 1] 

As a result of this unprecedented deficit, questions have been raised 
about the fiscal sustainability of the flood insurance program, 
particularly given the potential for similar natural disasters in the 
future. Congress and others have raised questions about the scope of 
the information and quality of the data on which the program relies to 
set premium rates and the accuracy of the maps NFIP uses to assess the 
risk of flooding.[Footnote 2] FEMA's process for setting premium rates 
determines how much policyholders will pay for their flood insurance 
policies and thus the income available to FEMA for losses and expenses. 
By statute, NFIP was not designed to be actuarially sound. Premium 
rates for most properties--around 75 percent--are intended to fully 
reflect the risk of flooding, but the remaining 25 percent are 
subsidized, as mandated by statute. While these subsidized premiums do 
not contribute sufficient revenues to cover potential losses, according 
to FEMA officials, they promote participation in the program, an 
important program goal. But as a result, the program does not collect 
sufficient premium income to build capital to cover flood losses. 

In response to the questions that have been raised about NFIP's 
financial condition, this report evaluates (1) FEMA's process for 
setting full-risk premiums to determine whether it produces rates that 
accurately reflect the risk of flooding and (2) the process that FEMA 
uses to set subsidized rates and their financial impact on NFIP. 

To address these objectives, we obtained and reviewed FEMA's flood risk 
model and related methods for assessing risk and setting premium rates 
for policyholders. We discussed FEMA's method for setting rates with 
officials from FEMA, the National Oceanic and Atmospheric 
Administration, U.S. Army Corps of Engineers (the Corps), and the U.S. 
Geological Survey. We also met with risk-modeling firms, academics, and 
the American Academy of Actuaries and reviewed studies of flood risk 
and flood insurance, including reviews from the Congressional Research 
Service (CRS) and the Congressional Budget Office (CBO). We also 
analyzed premiums received and losses paid by NFIP for the period from 
1978 to 2007. We assessed the reliability of these data, and found them 
to be reliable for the purposes of this report. In addition, we 
obtained and reviewed information on FEMA's current and past borrowings 
and repayments. We also analyzed FEMA's premiums and claims data to 
determine the number of high-loss years on a state-by-state basis in 
order to assess each state's financial impact on NFIP. In order to 
conduct the state loss analysis, we reviewed the claims and premium 
data from NFIP's BureauNet database.[Footnote 3] Appendix I provides 
additional details about our scope and methodology. 

We conducted this performance audit from December 2007 to September 
2008 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
The evidence we obtained provides a reasonable basis for our findings 
and conclusions based on our audit objectives. 

Results in Brief: 

FEMA's method for setting full-risk rates may not ensure that the rates 
accurately reflect the actual risk of flood damage.[Footnote 4] FEMA's 
model for setting these rates incorporates data on flood risks 
generated by a hydrologic model that is based on largely the same 
principles as hazard risk models used by private insurers and other 
federal agencies.[Footnote 5] More specifically, FEMA generates rates 
for flood insurance according to estimates of flood risk and expected 
flood damage. However, a number of factors may affect the accuracy of 
rates generated by the process. First, the data that FEMA uses to 
define flood probabilities are outdated or inaccurate. For example, 
some of the data used to estimate the probability of flooding have not 
been updated since the 1980s. Similarly, the claims data used as inputs 
to the model may be inaccurate because of incomplete claims records and 
missing data. Further, the maps FEMA uses to set premium rates remain 
substantially out of date despite recent modernization efforts. In 
addition, an NFIP policy decision allows certain properties remapped 
into riskier flood zones to keep their previous lower rates, which, 
like subsidized rates, do not reflect the actual risk of flooding to 
the properties and do not generate sufficient premiums to cover 
expected losses.[Footnote 6] Moreover, FEMA does not collect data on 
these properties--known as grandfathered properties--or measure their 
financial impact on the program and does not know how many of these 
properties exist, their exact location, or how much they generate in 
losses. FEMA's rate-setting process also does not fully take into 
account ongoing and planned development, long-term trends in erosion, 
or the effects of global climate change, although private sector models 
are incorporating some of these factors. Finally, FEMA sets flood 
insurance rates on a nationwide basis, combining and averaging many 
topographic factors that are relevant to flood risk, so that these 
factors are not specifically accounted for in setting rates for 
individual properties. Moreover, some patterns in historical claims and 
premium data suggest that NFIP's rates may not accurately reflect 
differences in flood risk. Collectively, these factors increase the 
risk that full-risk premiums may be insufficient to cover future 
losses, adding to concerns about NFIP's financial stability. 

FEMA's rate-setting process for subsidized properties depends in part 
on the accuracy of the full-risk rates, raising concerns about how 
subsidized rates are calculated as well. To determine subsidized rates, 
FEMA first subtracts the total amount that it expects to collect on 
full-risk rate premiums from the average historical loss year target. 
This target is the minimum amount of premiums the program needs to 
collect to cover at least average annual losses, as determined by 
historical loss data. The amount remaining from this calculation is the 
aggregate target amount of subsidized premiums that the program needs 
to collect. To set individual subsidized rates, FEMA officials then 
consider their knowledge of flood risks, previous rate increases for 
various areas, and statutory limits on increases. According to FEMA 
documents, the method for determining the average historical loss year 
target was changed in 2006 because fully incorporating the 2005 loss 
year, with its catastrophic losses, would have resulted in substantial 
increases in subsidized rates. Currently, the annual amount that NFIP 
collects in both full-risk and subsidized premiums is not enough to 
cover its operating costs, claim losses, and principal and interest 
payments to the Department of the Treasury. Evidence suggests that 
flooding is likely to become more severe in the future, resulting in 
increased risk exposure, the potential for more catastrophic losses, 
and ongoing financial instability for the program. Without changes to 
its current rate-setting processes, NFIP premiums will be unlikely to 
be able to cover the program's claims, expenses, and debt, exposing the 
federal government and ultimately taxpayers to ever-greater financial 
risks, especially in years of catastrophic flooding. 

This report makes two recommendations aimed at helping improve NFIP's 
rate-setting process. First, we recommend that FEMA take steps to 
ensure that its rate-setting methods and data used to set rates result 
in full-risk premiums rates that accurately reflect the risk of losses 
from flooding. Second, we recommend that FEMA collect information on 
the location, number, and losses associated with existing and newly 
created grandfathered properties and analyze the financial impact of 
these properties on the program. 

We provided the Secretary of Homeland Security with a draft of this 
report for review and comment. On October 14, 2008, FEMA provided 
written comments on a draft of this report (see appendix III). FEMA 
generally concurred with both of the report's recommendations but had 
two reservations about our recommendation to ensure that FEMA's rate- 
setting methods result in full-risk rates that accurately reflect the 
risk of losses from flooding. FEMA also took exception to some of our 
analyses and characterizations, which it believes overstate the 
potential effect of different factors on the accuracy of the rate- 
setting process. While we acknowledge the complexity of FEMA's rate- 
setting process, the issues we have identified raise questions about 
the accuracy of the resulting premium rates and highlights areas that 
warrant additional analysis by FEMA. FEMA's comments are summarized 
near the end of this report, and FEMA's letter is reprinted in appendix 
III. FEMA also provided us with technical comments, which we 
incorporated as appropriate. 

Background: 

NFIP is a federal program created by the National Flood Insurance Act 
of 1968 that enables property owners in participating communities to 
purchase insurance protection against losses from flooding. This 
program is administered by FEMA. Participation in NFIP is based on an 
agreement between local communities and the federal government. The 
federal government makes flood insurance available to any community 
that adopts and enforces a floodplain management ordinance to reduce 
future flood risks to new construction in areas known as Special Flood 
Hazard Areas (SFHA).[Footnote 7] Property owners located in the SFHA 
with mortgages from federally regulated lenders are required to 
purchase and maintain flood insurance policies. In these areas, new 
construction and substantial improvements must conform to NFIP's 
building standards.[Footnote 8] For example, the lowest floor of a 
structure must be elevated to or above the base flood elevation (BFE)-
-the level at which there is a 1 percent chance of flooding in a given 
year.[Footnote 9] 

NFIP offers two types of flood insurance premiums: subsidized and full 
risk. The National Flood Insurance Act of 1968 requires that NFIP offer 
subsidized premiums to owners of certain properties. These subsidized 
rates are not based on flood risk and, according to FEMA, represent 
only about 35 to 40 percent of the full flood risk. Subsidized 
properties account for about 25 percent of all NFIP policies, while 
those with full-risk premiums account for the remaining 75 percent. The 
type of policy and the subsequent rate a policyholder pays depend on 
several property characteristics--for example, whether the structure 
was built after or prior to the development of the community's Flood 
Insurance Rate Map (FIRM) and where the structure is located relative 
to the floodplain. NFIP studies and maps flood risks, assigning flood 
zone designations based on the risk level for flooding. For our 
purposes, in this report we generally refer to risk levels as moderate- 
to low-risk, high-risk, high-risk coastal, and undetermined risk. 
[Footnote 10] Potential policyholders can purchase both building and 
contents flood insurance for residential and commercial properties 
(table 1).[Footnote 11] 

Table 1: Amounts of NFIP Insurance Available, as of May 1, 2008: 

Type of coverage: Building coverage: Single-family dwelling; 
Emergency program: $35,000; 
Regular program: Basic limit: $50,000; 
Regular program: Additional limit: $200,000; 
Regular program: Total limit: $250,000. 

Type of coverage: Building coverage: Two-to-four-family dwelling; 
Emergency program: $35,000; 
Regular program: Basic limit: $50,000; 
Regular program: Additional limit: $200,000; 
Regular program: Total limit: $250,000. 

Type of coverage: Building coverage: Other residential; 
Emergency program: $100,000; 
Regular program: Basic limit: $150,000; 
Regular program: Additional limit: $100,000; 
Regular program: Total limit: $250,000. 

Type of coverage: Building coverage: Nonresidential; 
Emergency program: $100,000; 
Regular program: Basic limit: $150,000; 
Regular program: Additional limit: $350,000; 
Regular program: Total limit: $500,000. 

Type of coverage: Contents coverage: Residential; 
Emergency program: $10,000; 
Regular program: Basic limit: $20,000; 
Regular program: Additional limit: $80,000; 
Regular program: Total limit: $100,000. 

Type of coverage: Building coverage: Nonresidential; 
Emergency program: $100,000; 
Regular program: Basic limit: $130,000; 
Regular program: Additional limit: $370,000; 
Regular program: Total limit: $500,000. 

Source: NFIP rate manual. 

Note: Alaska, Hawaii, Guam and the U.S. Virgin Islands have different 
amounts of coverage for the first and second layers of coverage; 
however, their total limit is also $250,000. The Emergency Flood 
Insurance Program is intended as a program to provide a first layer 
amount of insurance on all insurable structures before the effective 
date of the initial FIRM. 

[End of table] 

Congress mandated the use of subsidized premiums to encourage 
communities to join the program and mitigate concerns that charging 
rates that fully and accurately reflected flood risk would be a burden 
to some property owners. The Flood Disaster Protection Act of 1973 made 
the purchase of flood insurance mandatory for the protection of 
properties within SFHAs that are secured by mortgages from federally 
regulated lenders, thus expanding the use of subsidized premiums. In 
addition, NFIP was authorized to begin charging full-risk premiums for 
all construction built after 1974 or the date of the community's 
initial FIRM. According to FEMA, Congress made these changes to 
encourage further participation in NFIP through low premiums. More 
recently, legislation has been introduced that would limit NFIP 
subsidies aimed at improving the financial stability of the program. 
[Footnote 12] 

Pre-FIRM structures generally are more prone to flood damage (that is, 
riskier) than structures built later because they were not constructed 
according to the program's building standards. Owners of post-FIRM 
structures generally are not eligible to receive subsidized rates. 
Largely because subsidized properties tend to be riskier than 
properties insured at full-risk premiums, in 2007, the average annual 
premium for a subsidized policy was about $869, while the average 
annual premium for a full-risk policy was about $378.[Footnote 13] 
Flood insurance rates are calculated for each flood zone. However, as 
shown in table 2, flood insurance rates also depend on flood zone. 

Table 2: Average Premium per Policy in Force by Flood Zone, 1997-2006:
(In constant 2006 dollars): 

Calendar year: 1997; 
High-risk: $521; 
High-risk coastal: $1,039; 
Moderate-to low-risk: $377; 
Undetermined risk level: $794. 

Calendar year: 1998; 
High-risk: $538; 
High-risk coastal: $1,041; 
Moderate-to low-risk: $384; 
Undetermined risk level: $814. 

Calendar year: 1999; 
High-risk: $525; 
High-risk coastal: $1,053; 
Moderate-to low-risk: $380; 
Undetermined risk level: $824. 

Calendar year: 2000; 
High-risk: $497; 
High-risk coastal: $1,049; 
Moderate-to low-risk: $363; 
Undetermined risk level: $788. 

Calendar year: 2001; 
High-risk: $482; 
High-risk coastal: $1,059; 
Moderate-to low-risk: $350; 
Undetermined risk level: $766. 

Calendar year: 2002; 
High-risk: $472; 
High-risk coastal: $1,118; 
Moderate-to low-risk: $343; 
Undetermined risk level: $775. 

Calendar year: 2003; 
High-risk: $478; 
High-risk coastal: $1,232; 
Moderate-to low-risk: $349; 
Undetermined risk level: $824. 

Calendar year: 2004; 
High-risk: $492; 
High-risk coastal: $1,343; 
Moderate-to low-risk: $344; 
Undetermined risk level: $842. 

Calendar year: 2005; 
High-risk: $502; 
High-risk coastal: $1,398; 
Moderate-to low-risk: $340; 
Undetermined risk level: $912. 

Calendar year: 2006; 
High-risk: $521; 
High-risk coastal: $1,463; 
Moderate-to low-risk: $336; 
Undetermined risk level: $980. 

Source: GAO analysis of NFIP data. 

[End of table] 

The insurance operations of NFIP differ from those of most private 
insurers in a number of ways. First, unlike private insurers that can 
reject applicants with properties whose potential losses would not be 
offset by premiums, NFIP is required to accept virtually all 
applications for insurance. Therefore, NFIP is less able to offset the 
effects of adverse selection--that is, the phenomenon that those who 
are most likely to purchase insurance are also most likely to 
experience losses.[Footnote 14] Adverse selection may lead to a 
concentration of policyholders in the riskiest areas; the problem is 
compounded by the fact that those at greatest risk are required to 
purchase NFIP insurance if they have a mortgage from a federally 
insured lender. 

Second, NFIP's ability to adjust premiums is limited by statute. While 
most states regulate premium prices, they tend to allow private 
insurers considerable flexibility in their ability to set prices. 
Third, NFIP assumes all the risks for the policies it sells. Private 
insurers typically retain only part of the risk that they accept from 
policyholders, ceding a portion of the risk to reinsurers.[Footnote 15] 
This mechanism is particularly important in the case of insurance for 
catastrophic events, because the availability of reinsurance allows an 
insurer to limit the possibility that it will experience losses beyond 
its ability to pay. 

Finally, NFIP is not authorized to charge premiums that are sufficient 
to build the capital that most private insurers have to offset losses 
or purchase reinsurance in the private global market. For example, 
private insurers have a capital surplus that they use to pay expected 
claims. In contrast, NFIP operates on a cash flow basis, backed by 
borrowing authority from the U.S. Treasury. As a result, NFIP does not 
follow all of the traditional accounting practices that private 
insurers use--for example, NFIP reports using only Generally Accepted 
Accounting Principles (GAAP) accounting, which is an ongoing operations 
accounting basis, while private insurers must report both GAAP and 
statutory accounting basis.[Footnote 16] 

FEMA's Method of Setting Full-Risk Premiums May Not Ensure That Rates 
Accurately Reflect Risk: 

FEMA uses a rate model to generate prices for flood insurance according 
to flood risk and expected flood damage. However, we found that in some 
cases these full-risk premiums may not accurately reflect actual risk 
because of limitations in the data used as inputs for the model and the 
effects of certain policy decisions. For instance: 

* Some data FEMA used in rate setting are outdated or inaccurate, 
including data on flood probabilities, damage estimates, and flood 
maps. 

* FEMA allows some properties that were remapped into riskier flood 
zones to keep their previous lower rates. 

* FEMA's rate-setting process does not fully take into account ongoing 
and planned development, long-term trends in erosion, and effects of 
global climate change. 

* FEMA sets rates on a nationwide basis, combining and averaging across 
many geographically diverse areas.[Footnote 17] 

Furthermore, our analysis of the difference between claims payments and 
premiums collected for all 50 states and the District of Columbia 
suggests that NFIP's pricing has not accurately reflected differences 
in flood risk. Collectively, these factors increase the risk that 
premiums collected on full-risk rates do not accurately reflect the 
risks of flooding and therefore may not be sufficient to cover future 
losses. 

FEMA's Rate-Setting Process Uses a Model That Is Based on Flood Risk 
and Expected Flood Damage: 

According to FEMA, rates that are based on the probability of a given 
level of flooding, damage estimates based on that level of flooding, 
and accepted actuarial principles are considered to be "full risk." 
[Footnote 18] To set rates for flood insurance that accurately reflect 
risk, information about the differential risk of flooding is key, with 
greater flood risks resulting in higher rates. Rates also vary 
depending on how much insurance is purchased. As claims are more likely 
to be made against the first several thousand dollars of coverage than 
against much higher levels of coverage (that is, smaller dollar-value 
losses are generally expected to occur more frequently than larger ones 
and thus pose a greater risk), rates per $100 of insurance coverage are 
lower for higher levels of coverage.[Footnote 19] 

FEMA uses a model to set rates for flood insurance for post-FIRM 
construction within the 1 percent, or 100-year, floodplain according to 
flood risk and expected resulting flood damage.[Footnote 20] This 
method of estimating flood damage is based on the hydrologic model 
described in a 1966 report by the Department of Housing and Urban 
Development, which was based on studies conducted in the 1960s and 
developed and used by the Corps for a number of years.[Footnote 21] 
While the Corps has revised its model for estimating flood damage, it 
still makes use of the hydrologic model to estimate flood damage. 

In the high-risk and high-risk coastal zones, the model combines 
estimates of the frequency of flooding with estimates of the magnitude 
of damage caused by flooding, producing "pure premium" costs intended 
to cover the actual flood losses. FEMA uses such inputs as the 
elevation of the lowest floor of the building, the type of building, 
the number of floors, the presence of a basement, claims data, and 
mapping information to generate the estimates. This pure premium amount 
is then adjusted to capture certain program costs, compensate for 
underinsurance by policyholders, and reflect the fact that the program 
has a deductible.[Footnote 22] For the moderate-to low-risk and other 
full-risk premium zones, rates have been developed based on actuarial 
and engineering judgments, using the rates generated by the model and 
the historical experience of the high-risk zones as benchmarks. 
[Footnote 23] 

While other entities employing flood models may use more sophisticated 
computer modeling techniques, the NFIP rate model is based largely on 
the same principles. In 2000, FEMA completed a feasibility study on 
using private market reinsurance to cover a portion of its flood risk 
that required modeling the frequency and size of catastrophic flood 
events, and determined that the results of the study were not 
inconsistent with the results of NFIP's rating structure. For other 
lines of catastrophe insurance, private insurers rely heavily on 
computer models of simulated damage over many possible events to price 
their products.[Footnote 24] Like NFIP, other federal agencies and 
private insurers involved in flood modeling also rely on flood maps and 
data on the likelihood of flooding and damages. According to FEMA, it 
has contracted for actuarial services with an external consultant to 
assess the current state of hazard modeling and the possible 
applicability of those models to NFIP. 

Some Key Data Elements Used in the Rate-Setting Model Are Outdated or 
Based on Erroneous Information: 

Questions remain about the age and quality of the underlying data FEMA 
uses in its model to calculate full-risk premiums. The NFIP model for 
setting full-risk premium rates relies on flood probability estimates 
and expected damage data, which rely in part on outdated or potentially 
inaccurate information, including outdated FIRMs. As discussed more 
fully below, flood probability estimates have not been updated since 
the 1970s and 1980s, most FIRMs are out of date despite FEMA's recent 
modernization efforts, and the claims data used to calculate full-risk 
premiums may be inaccurate. As a result, the premium rates set by NFIP 
may not fully reflect the risk of loss due to flooding. 

Data Used to Determine Flood Probabilities Have Not Been Updated since 
the 1970s and 1980s: 

FEMA's estimates of probabilities that floods of different severities 
(relative to the BFE) will occur in a given year, or "probability of 
elevation" (PELV) values, were generated in the 1970s. Within any zone, 
the risk that floodwaters will reach the BFE in any year is 1 percent, 
but across zones the likelihood that floodwaters will reach a foot 
above or below that level varies. PELV tables provide detailed 
information, by zone, about the frequency with which floods of 
different elevations are expected to occur. These data were generated 
using detailed engineering studies, available flood data, simulations, 
and professional judgment and were established for each flood zone to 
meet generally accepted scientific parameters and legal considerations 
of the time. FEMA later concluded that flood probabilities were likely 
underestimated in some cases because of the short flood histories used 
in some of the studies. As a result, according to FEMA officials, some 
of the original PELV values were modified in the early 1980s to account 
for this statistical bias. They have not been revisited or updated 
since that time. 

FEMA currently uses both the original and modified PELV values in the 
rate-setting process. The original PELV values contribute 80 percent to 
the ultimate results and the modified values 20 percent, reflecting 
weights set out by policies from the early 1980s, according to FEMA 
officials. Flood risk experts have suggested that flood probabilities 
(and thus flood insurance rates) are likely to change as land use (such 
as urban or suburban development), infrastructure (such as new bridges 
and culverts), and weather patterns change. FEMA could capture such 
changes by updating its flood probability data but has not done so. 

FEMA officials also acknowledged that the weighting for the original 
and modified PELV values was likely out of date but said that other 
competing priorities, including supporting post-Katrina-related 
activities and other studies had been given priority.[Footnote 25] 
Moreover, a FEMA official noted that the weighting might introduce a 
degree of "conservatism" to the rate-setting process because it would 
lead to higher rather than lower premium rates.[Footnote 26] Further, 
according to the officials, the geographic mix of NFIP policies had 
become more concentrated in Florida and other communities where the 
PELV values were more accurate. Nevertheless, FEMA has not updated the 
PELV data since the 1980s or updated the weighting of the original and 
modified PELV data. As a result, the accuracy of the flood probability 
estimates and the probability of elevation values are uncertain, and we 
could not determine whether the rates based on such data were accurate. 
Moreover, FEMA was not able to provide any analysis that it had done to 
determine that the current weighting remained appropriate or that the 
probabilities had not changed in over 30 years. 

The Claims Data Used in the Model May Be Inaccurate: 

In addition, some claims data--which are updated on a periodic basis-- 
may suffer from errors and thus misinform damage estimates and, in 
turn, the rates generated by the model. FEMA relies on estimates of the 
percentage of the value of a structure that is expected to be damaged 
when a flood occurs, or the "damage by elevation" (DELV) values. DELV 
information is measured in 1-foot increments of the flood level within 
the structure and is expressed as the expected percentage of the 
property's value that will be damaged by a flood of that elevation. 
[Footnote 27] As with the PELV data, information used in establishing 
DELV values was obtained primarily from engineering studies. In 1973, 
data for DELVs were selected on the basis of studies done by the Corps 
and available flood claims at that time. Currently, FEMA modifies the 
Army Corps DELV values based on its NFIP claims experience. When FEMA 
determines that its own loss data are "credible," it uses these data 
rather than the original data generated by the Corps.[Footnote 28] 
However, FEMA also currently uses updated Corps damage data to 
supplement NFIP claims data where it lacks sufficient credible loss 
data. According to a FEMA official, for the most common type of 
property insured by NFIP, the claims process has become fully credible 
for a wide range of water depths in the structure. 

However, evidence suggests that there are inaccuracies in the actual 
claims data used to update the DELV values. An external study noted 
some internal control problems with NFIP's claims database.[Footnote 
29] For instance, claims records were often incomplete because the 
claims data had been collected in the field by local adjustors for 
purposes of processing claims. As a result, many records did not 
indicate BFE or depth of flooding, clearly differentiate between wind 
and water losses, or capture losses above the insurance limit when 
damage exceeded coverage limits. In addition, Corps officials told us 
that they had reviewed FEMA's claims between 1998 and 2000 databases 
and found the data to be unreliable for their purposes. For example, 
according to the Corps, in some cases the claims data indicated flood 
damage, but flood height data were missing. FEMA's database recorded 
these missing height data as a flood height of zero. Our analysis of 
NFIP claims paid between 1978 and 2007 further supports what the Corps 
told us. We found an increasing percentage of claims with "0" water 
depth until they leveled off at between 44 and 49 percent from 1998 
until 2004. In 2005 when the Gulf Coast hurricanes occurred, this 
percentage dropped to about 13 percent, but has risen above 22 percent 
in the more recent years. Thus, an erroneous data combination of 
positive flood damage and zero flood height was being used to develop 
damage curves. As a result, the Corps began to collect its own damage 
data, which FEMA now uses to supplement its own data. 

While FEMA has acknowledged that some problems exist, it believes that 
these types of errors relate primarily to the most severe flooding 
events, which have a lower probability of occurring, involve greater 
water depths, and would contribute only marginally to insurance rates. 
FEMA officials said that they had reviewed the possible impact of such 
data errors and did not consider them to be significant because they 
believed that the zero-elevation water depth errors would overstate the 
amount of damage from zero amount of water in a property.[Footnote 30] 
However, this analysis is incomplete because it does not evaluate the 
impact of omitting these damage amounts from the actual flood depth 
levels. As a result, FEMA may be unable to fully assess the overall 
impact of these errors or omissions on its full-risk rates, creating a 
risk that these premiums may not accurately reflect the actual risk of 
flood loss. 

Maps That Provide Information for Base Flood Elevations Remain 
Substantially Out of Date despite Modernization Efforts: 

FIRMs provide the information that determines BFEs, a key input in the 
rate-setting model. FEMA formally undertook map modernization efforts 
in fiscal year 2003. According to FEMA, the agency undertook map 
modernization for several reasons: 

* Flood hazard conditions are dynamic, and many NFIP maps may not 
reflect recent development and/or natural changes in the environment. 

* Updated NFIP maps can take advantage of revised data and improved 
technologies for identifying flood hazards. 

* Up-to-date maps support a flood insurance program that is more 
closely aligned with actual risk, encourages wise community-based 
floodplain management, and improves citizens' flood hazard awareness. 

* Local communities and various stakeholders want more timely updates 
of flood maps and easier access to the flood hazard data used to create 
the maps. 

In 2005, FEMA adjusted its goals and currently expects to provide 
updated flood boundaries for 75 percent of stream miles reflected on 
FEMA's issued maps and 0.30 percent of those mapped stream miles will 
be based on new or updated engineering studies by the end of the 
program in 2010. FEMA also revised its goal of having digitized maps 
that covered 100 percent of the population to having digitized maps for 
92 percent of the population so that it could better focus its efforts 
and thus improve map quality. FEMA undertook these changes in response 
to concerns expressed by Congress and DHS's Inspector General's office 
and in response to our prior work on this issue.[Footnote 31] FEMA 
officials stated that changes in land use and structural development 
that had occurred over time would be captured when FEMA updated the 
FIRMs, each of which is required to be reassessed every 5 years. 
[Footnote 32] 

According to FEMA, as of May 2008, approximately 4 percent of U.S. 
counties had maps that accurately reflect the current risk of flooding 
(fully updated) and were newly digitized and 2 percent had old maps 
that may or may not accurately reflect the actual risk of flooding but 
were newly digitized. For the remaining 94 percent of U.S. counties, 
the maps were a combination of new and old mapping data that were in 
production or have not yet begun the process. According to FEMA 
officials, although maps for 94 percent of U.S. counties had not been 
fully updated or newly digitized, all counties had received a partial 
update to their flood hazard information and more than a third had 
received updates that exceeded one of FEMA's national map quality 
targets.[Footnote 33] FEMA further stated that in March 2008, 
approximately 68 percent of the nation's population had received a map 
that met, exceeded or at least approached map quality targets of map 
modernization. An additional 27 percent of the population has received 
a preliminary map. FEMA informed us that it anticipates that 92 percent 
of the nation's population will have a modernized map by 2010. 

However, although FEMA has been working to update FIRMs and improve 
their quality, a significant portion of the maps reflect data at least 
15 years old, which may or may not accurately reflect actual risk of 
flooding. As of April 2008, 50 percent of the nation's approximately 
105,700 flood maps were at least 15 years old, 58 percent were more 
than 10 years old, and 70 percent were at least 5 years old. To the 
extent that these older maps are inaccurate and the risk of flooding 
has changed, reliance on these older maps could lead to inaccurate 
flood risk assessments, which in turn could lead to inaccurate premium 
rates. 

FEMA Does Not Track the Number or Location of Remapped Grandfathered 
Properties That Pay Less than Full-Risk Premiums: 

FEMA made a policy decision to grandfather into the program certain 
properties, that is, it allowed properties that have been remapped into 
riskier flood zones to keep their previous lower rates. FEMA is in the 
process of updating FIRMs through its Map Modernization program, but 
these new maps may not lead to more accurate pricing due to this policy 
decision, which was based primarily on concerns about the affordability 
of the resulting rates.[Footnote 34] FEMA documents state that 
properties are grandfathered in order to recognize policyholders who 
have complied with their original FIRM, have remained loyal NFIP 
customers, or both. In general, two categories of buildings may be 
grandfathered into the program: (1) those built in compliance with the 
FIRM that was in effect at the time of construction and (2) those built 
before a FIRM was in effect or that were not in compliance at the time 
of construction.[Footnote 35] For those buildings in compliance at the 
time of construction, property owners need to provide documentation of 
the date of the original FIRM and the property's flood zone, BFE, and 
other map-related information. Properties that were not in compliance 
generally can be grandfathered if they have had continuous flood 
insurance and if the building has not been altered in certain ways. 
FEMA officials told us that while grandfathering can work as a 
disincentive for sound floodplain management, the decision to 
grandfather rates was based on consideration of (1) equity, (2) ease of 
administration, and (3) goals of promoting flood plain management. 
[Footnote 36] 

While FEMA does not consider the premiums on these properties to be 
subsidized because they are based on the average risk for the whole 
class to which they had been assigned previously, they share two 
characteristics with subsidized rates. First, rates based on new FIRMs 
should more accurately reflect flood risk, but grandfathered properties 
will not be charged those rates. Second, the grandfathered status of a 
property continues indefinitely, even when the property is sold. FEMA 
officials acknowledged that property owners that obtain grandfathered 
rates for their homes are being cross-subsidized by other policyholders 
in the same zone that are paying higher rates.[Footnote 37] For 
example, under grandfathering, repetitive loss properties remapped into 
a higher-risk zone instead would pay a rate generally charged to lower- 
risk properties. 

While grandfathered rates are used to keep existing policyholders, FEMA 
has not taken steps to measure the impact of these rates on the 
program's financial condition. FEMA officials said that they currently 
had limited data on new or existing grandfathered properties and are 
just beginning to explore ways to track these properties. For example, 
they had not tracked the number of grandfathered properties or 
calculated how much lower grandfathered premiums are than the actual 
rates. As a result, they did not know the effect of grandfathered 
properties on the program's total premium collection and the extent to 
which these rates deviate from fully risk-based rates. Without this 
information, FEMA's ability to address the financial impact of such 
properties on NFIP's financial health is limited. FEMA officials 
acknowledged the importance of tracking information related to 
grandfathered properties and told us they plan to start a tracking 
process in May 2009.[Footnote 38] However, they said that this process 
will not capture the inventory of existing grandfathered properties. 

FEMA Does Not Consider Risk Factors Such as Erosion and Climate Change 
when Setting Flood Insurance Rates: 

Some experts with whom we spoke have suggested that incorporating 
ongoing and planned development, erosion trends, and climate change 
into flood risk modeling would more fully capture longer-term flood 
risk exposure, but FEMA does not take these variables into account. 
FEMA's present policy is to map SFHAs based on current development 
conditions. However, as floodplains are developed and more ground 
surfaces are paved or made impervious (nonabsorbent), the risks and 
expected elevations of flooding increase. As the predicted elevation of 
the base flood increases, SFHAs subsequently spread beyond mapped 
boundaries. As a result, in rapidly developing watersheds or where 
characteristics change significantly due to flood control projects or 
other natural events, some FIRMs may become outdated shortly after 
their completion. In addition, some properties could be constructed 
without proper protection from the flood hazard they may face 
throughout their life span, and others could be uninsured or subject to 
insurance rates that do not accurately reflect flood risk. 

FEMA's current flood hazard mapping procedures for coastal areas 
incorporate storm-induced coastal erosion but not long-term erosion. 
[Footnote 39] While shorelines, dunes, and bluffs can retreat during a 
single storm, long-term erosion at a shoreline is the net result of a 
variety of factors such as sediment losses from storms and inundation 
from sea level rise, averaged over several decades.[Footnote 40] A 2000 
study conducted for FEMA by the H. John Heinz Center estimated that 
over the next 60 years, losses due to the effects of coastal erosion 
would average $80 million annually.[Footnote 41] If coastal development 
continues at its current pace, or if sea levels rise as some scientists 
have predicted, such losses could be even greater. In the absence of 
the authority needed to establish erosion zones, FEMA has taken action 
based on the results of the study, namely, a steady annual increase in 
rates for the high-risk coastal zone at a pace it says is commensurate 
with the study's projections.[Footnote 42] In addition, according to 
FEMA officials, they formed an internal working group to determine 
additional actions that could be taken to implement the report's 
recommendations under the existing laws and regulations that govern 
NFIP. The working group concluded that because of the statutory 
limitations, implementing the recommendations would require direct 
congressional authorization.[Footnote 43] Therefore, FEMA, which does 
not currently map erosion hazard areas, is unable, through its rate-
setting process, to inform policyholders of the risk to their property 
from erosion. Consequently, in some cases flood insurance rates may 
send a false signal that understates the risk exposure faced by current 
policyholders or prospective development. 

FEMA also does not incorporate the potential effects of climate change 
into its rate-setting considerations. Our 2007 report on climate change 
discussed the effects of climate change on weather-related events and, 
subsequently, insured and uninsured losses. We found that leading 
scientific bodies expect warmer temperatures to increase the frequency 
and severity of damaging extreme weather-related events.[Footnote 44] 
In addition, population growth in hazard-prone areas and the resulting 
development and increasing real estate values have increased the 
exposure of federal and private insurers. In particular, heavily 
populated areas along the Northeast, Southeast, and Texas coasts, which 
are at the highest risk for major hurricanes, also have some of the 
highest value properties in the United States. Because of these and 
other factors, our report estimates that NFIP's exposure has grown 
substantially, quadrupling since 1980 and nearing $1 trillion. 

While many private insurers are beginning to take climate change into 
account, FEMA has done little to develop the kind of information needed 
to understand the long-term exposure of NFIP to climate change for a 
variety of reasons. For instance, NFIP's goals are fundamentally 
different from those of private insurers. Specifically, private 
insurers stress the financial success of their business operations, but 
the law authorizing the federal flood insurance program promotes 
affordable coverage and broad participation by individuals at risk. In 
addition, although FEMA manages its risk within statutory guidelines, 
unlike private insurers, NFIP is neither required nor permitted to 
limit its catastrophic risk strictly within its ability to pay claims 
on an annual basis. One important implication of this lack of limits on 
managing catastrophic risk is that FEMA has little reason to develop 
information on NFIP's long-term exposure to the potential risk of 
increased low-frequency, high-severity weather events associated with 
climate change. NFIP's risk management processes adapt to near-term 
changes in weather as they affect existing data. As a result, NFIP is 
designed to assess and insure against current--not future--risks and 
currently does not have the information necessary to adjust rates for 
the potential impacts of events associated with climate.[Footnote 45] 
FEMA told us that it has commissioned a study to assess the long-term 
exposure to climate change that will investigate changes in sea levels, 
intensity and frequency of hurricanes, and precipitation patterns. 

FEMA's Rating System Combines and Averages Many Different Risks to 
Create Nationwide Rates: 

FEMA classifies properties according to flood risk using a single, 
nationwide class-rating system rather than an individual property or 
community-by-community rating system. That is, all properties grouped 
into a class--based on structure type and elevation relative to the 
BFE--are assumed to have the same risk.[Footnote 46] Further, FEMA 
charges the same rate for a given class in the high-risk zone (or 
separately, in the high-risk coastal zone) regardless of location 
within the zone. Thus, two properties in the same class but located on 
vastly different terrain--for example, one in a shallow floodplain and 
the other in a steep and narrow mountain valley--are charged the same 
rate per $100 of insurance coverage despite the fact that they may have 
different expected loss. 

The NFIP model can incorporate specific topographic (that is, flood 
zone) information in rate setting. However, according to FEMA, it was 
determined that more averaging could be justified, because the 
differences in rates across flood zones were not significant enough to 
warrant that level of detail. According to FEMA officials, the class- 
rating approach balanced the need to recognize significant differences 
in risk with a simplified process for determining rates that was easier 
for the sales force and others to use. FEMA has not revisited its class-
rating approach since its inception although certain program elements 
have changed since that time. For example, program participation has 
more than doubled from just over 2 million policies to more than 5.2 
million from the late 1980s to 2007 and increased numbers of properties 
have been constructed on SFHAs. As a result of the growth in the 
program, the rate classes may not accurately reflect the actual flood 
risk to individual properties and averaging may no longer accurately 
reflect differences in rates within zones. 

Our Analysis of Historical Claims and Premium Data Raises Questions 
about a Potential Mismatch between Rates and Risk: 

We analyzed 30 years of NFIP data on claims and premiums and found 
patterns based on differences among states indicating that NFIP rates 
may not have always accurately reflected differences in flood risk. 
[Footnote 47] As we have seen, FEMA sets premium rates that apply 
nationwide. Our state-by-state analysis of annual claims and premiums 
data dating back to 1978 showed that some states consistently had more 
years in which claims exceeded premiums than did other states over this 
period, raising questions about a potential mismatch between rates and 
risk.[Footnote 48] It is important to note that claims equaling 
premiums in a given year would not indicate a break-even year, because 
in addition to covering expected claims in a year, a portion of 
premiums is also intended to cover expenses necessary to operate NFIP. 
For example, in the year ending May 1, 2008, NFIP projects about 53 
percent of its total expenses would pay for claims, while the rest 
would cover other expenses such as interest on debt, loss adjustment 
expense, and agents' commissions. For the purposes of this report, we 
assigned the title of high-loss year to any year in which a state's 
claims exceeded its premiums, because in these years, these states 
would not have had any premium dollars left over to contribute toward 
administrative expenses once claims had been paid. 

On an annual basis, we found that for 1978-2007, nine states had high- 
loss years more often than once every 4 years (table 3). Missouri and 
West Virginia had the most high-loss years, with 11; Alabama, Illinois, 
Louisiana, Mississippi, New Hampshire, Ohio, and Texas followed, with 
from 8 to 10 such years. Other states had very few high-loss years, and 
some had none. For example, Alaska, Colorado, and New Mexico had no 
high-loss years, while Florida, Idaho, Oregon, South Carolina, and 
Vermont had 1, and Nevada, Utah, and Wyoming had 2.[Footnote 49] The 
consistency with which some states were at one extreme of the high- 
loss-year distribution or the other since the late 1970s suggests that 
NFIP's method of setting flood insurance rates on a nationwide basis 
may not accurately reflect differences in flood risk among states, 
because rates for similar properties do not vary by state. 

Table 3: States Where Claims Frequently or Rarely Exceeded Premiums, 
1978-2007 (In constant 2007 dollars): 

State: Missouri; 
1978-2004 premiums minus claims: ($384,344,855); 
1978-2007 premiums minus claims: ($350,344,220); 
1978-2007 Number of years that claims exceeded premiums: 11. 

State: West Virginia; 
1978-2004 premiums minus claims: ($146,896,812); 
1978-2007 premiums minus claims: ($118,874,830); 
1978-2007 Number of years that claims exceeded premiums: 11. 

State: Mississippi; 
1978-2004 premiums minus claims: ($40,584,822); 
1978-2007 premiums minus claims: ($2,498,544,520); 
1978-2007 Number of years that claims exceeded premiums: 10. 

State: Louisiana; 
1978-2004 premiums minus claims: $428,383,041; 
1978-2007 premiums minus claims: ($11,777,260,456); 
1978-2007 Number of years that claims exceeded premiums: 10. 

State: Texas; 
1978-2004 premiums minus claims: ($728,796,632); 
1978-2007 premiums minus claims: ($222,265,084); 
1978-2007 Number of years that claims exceeded premiums: 9. 

State: Alabama; 
1978-2004 premiums minus claims: ($505,212,107); 
1978-2007 premiums minus claims: ($746,166,995); 
1978-2007 Number of years that claims exceeded premiums: 9. 

State: Illinois; 
1978-2004 premiums minus claims: $90,321,291; 
1978-2007 premiums minus claims: $162,050,972; 
1978-2007 Number of years that claims exceeded premiums: 9. 

State: Ohio; 
1978-2004 premiums minus claims: $101,547,985; 
1978-2007 premiums minus claims: $100,111,514; 
1978-2007 Number of years that claims exceeded premiums: 9. 

State: New Hampshire; 
1978-2004 premiums minus claims: $36,648,547; 
1978-2007 premiums minus claims: $21,531,170; 
1978-2007 Number of years that claims exceeded premiums: 8. 

State: Utah; 
1978-2004 premiums minus claims: $15,372,336; 
1978-2007 premiums minus claims: $21,207,776; 
1978-2007 Number of years that claims exceeded premiums: 2. 

State: Wyoming; 
1978-2004 premiums minus claims: $16,597,320; 
1978-2007 premiums minus claims: $21,134,460; 
1978-2007 Number of years that claims exceeded premiums: 2. 

State: Nevada; 
1978-2004 premiums minus claims: $70,283,808; 
1978-2007 premiums minus claims: $82,293,838; 
1978-2007 Number of years that claims exceeded premiums: 2. 

State: Vermont; 
1978-2004 premiums minus claims: $23,425,436; 
1978-2007 premiums minus claims: $30,590,342; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: Idaho; 
1978-2004 premiums minus claims: $32,991,914; 
1978-2007 premiums minus claims: $42,892,136; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: Oregon; 
1978-2004 premiums minus claims: $104,014,018; 
1978-2007 premiums minus claims: $133,186,375; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: South Carolina; 
1978-2004 premiums minus claims: $313,400,772; 
1978-2007 premiums minus claims: $590,371,633; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: Florida; 
1978-2004 premiums minus claims: $8,035,673,802; 
1978-2007 premiums minus claims: $9,938,638,592; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: Alaska; 
1978-2004 premiums minus claims: $23,003,446; 
1978-2007 premiums minus claims: $27,770,628; 
1978-2007 Number of years that claims exceeded premiums: 0. 

State: New Mexico; 
1978-2004 premiums minus claims: $79,909,374; 
1978-2007 premiums minus claims: $97,876,034; 
1978-2007 Number of years that claims exceeded premiums: 0. 

State: Colorado; 
1978-2004 premiums minus claims: $135,763,975; 
1978-2007 premiums minus claims: $170,139,136; 
1978-2007 Number of years that claims exceeded premiums: 0. 

Source: GAO analysis of FEMA data. 

Note: We analyzed two time periods so we could separately consider the 
impact of the 2005 Hurricanes Katrina, Rita, and Wilma. The numbers in 
parenthesis denote negative values. 

[End of table] 

We recognize that flooding is a highly variable event, with losses 
varying widely from year to year, and that even an analysis of nearly 
three decades of historical data could lead to unreliable conclusions 
about the actual flood risk faced by a given state. In addition, we 
note that Florida, Texas, and Louisiana are among the states with the 
most NFIP policies, and therefore have a more significant impact on the 
amount of premiums collected than other states. Some discrepancies in 
high-loss years among states are to be expected and do not necessarily 
indicate that NFIP premium rates are mispriced. However, if some states 
frequently have high-loss years or rarely or never have such years, 
questions arise about the rate structure, because policyholders in 
states with frequent high-loss years are paying the same rates as 
policyholders with similar properties in states with fewer losses. 

Additional study would be required to determine whether policyholders 
in some states with lower losses are paying a higher premium than is 
appropriate for their risk, and others paying too little. For example, 
our analysis did not control for differences in the type of policy 
purchased, such as the mix of certain property types across states and 
insurance coverage amounts, which could affect both premiums and 
claims. In addition, we did not control for differences in the mix of 
subsidized and full-risk policies or the impact of subsidized premiums 
on our results, which could also affect the results.[Footnote 50] 
Despite these limitations, however, this analysis raises a number of 
questions that may warrant further study that could provide useful 
insights into the use of nationwide rates as well as other aspects of 
the program. 

Collectively, these factors raise questions about FEMA's rate-setting 
process and increase the risk that NFIP full-risk premiums rates may 
not accurately reflect the underlying risk of flood loss. As a result, 
the premiums collected by FEMA for full-risk policies may not be 
sufficient to cover the risks associated with those policies. If the 
premiums are not sufficient, FEMA will likely have to continue to 
borrow from the Treasury and could face a future of financial 
instability because of its ongoing inability to cover claims and 
expenses. 

FEMA's Process for Setting Subsidized Rates May Further Compromise the 
Ongoing Financial Stability of the Program: 

FEMA's rate-setting process for subsidized properties, which depends in 
part on the accuracy of the full-risk rates, has evolved over time. 
Currently, to determine subsidized rates, FEMA first subtracts the 
total amount that it expects to collect on full-risk rate premiums from 
the average historical loss year target--the minimum amount of premiums 
the program needs to collect to cover at least average annual losses 
based on historical loss data. The amount remaining from this 
calculation is the aggregate target amount of subsidized premiums that 
the program needs to collect. Then to set individual subsidized rates, 
FEMA officials consider their knowledge of flood risks, previous rate 
increases for various areas, and statutory limits on rate increases. 
Currently, the annual amount that NFIP collects in both full-risk and 
subsidized premiums is not enough to cover its operating costs, claim 
losses, and principal and interest payments to the Department of the 
Treasury. Without changes to its current rate-setting processes, NFIP 
premiums will be unlikely to be able to cover the program's claims, 
expenses, and debt, exposing the federal government and ultimately 
taxpayers to ever-greater financial risks, especially in years of 
catastrophic flooding. 

The Process Used to Set Subsidized Rates Has Evolved over Time: 

In designing NFIP, Congress required that premiums for certain 
properties be offered at prices below those for full-risk premiums to 
encourage participation in the program and to ensure that premiums were 
affordable for existing structures in the floodplain. However, the 
statute does not provide a formula or methodology for setting the 
subsidies, leaving it up to the program to develop one. When the 
program began, NFIP administrators set the subsidized rates on the 
basis of what they believed would be affordable, but this process 
resulted in losses that had to be covered by borrowings as discussed 
previously. Some of the resulting deficit was later forgiven by 
Congress. 

In 1981, NFIP administrators, after discussions with Congress, started 
setting NFIP's subsidized premium rates based on the average historical 
loss year calculations.[Footnote 51] According to FEMA, this change 
allowed the agency to resist external pressures in setting premium 
rates and provided a more objective standard for determining subsidized 
rates. FEMA documents from most years between 2001 and 2006 state that 
the average historical loss year target, which is based on losses from 
previous years averaged over time, generally is considered a floor for 
premium collection. To account for the potential of catastrophic 
losses, and the additional funds required to pay such losses, FEMA sets 
premium rates so that the total premiums collected will be 
approximately 15 to 25 percent greater than the average historical loss 
year estimate. 

However, FEMA can adjust, and has recently adjusted, the way it 
calculates the average historical loss year. Although loss years can 
vary markedly, none of those taken into account before 2005 included 
the kinds of catastrophic losses seen after Katrina, Rita, and Wilma. 
According to FEMA officials, including the 2005 losses in calculations 
of the average historical loss year would have resulted in premium 
increases well above the 10 percent statutory limit.[Footnote 52] As a 
result, FEMA officials instituted a weighting factor for the 2005 
losses, and as a result the full amount of the losses was not 
incorporated into the rate-setting model. According to FEMA officials, 
they incorporated losses of $2.1 billion of the estimated $23.2 billion 
in losses from 2005.[Footnote 53] NFIP set the 2007 and 2008 flood 
insurance rates based on this modified methodology. 

Although FEMA has incorporated more objective criteria against which to 
set rates for subsidized premiums, the process also depends on the 
accuracy of calculations for full-risk premiums.[Footnote 54] After 
FEMA derives the full-risk premiums, it deducts the total amount of 
full-risk premiums that it expects to collect from the average 
historical loss year target; the remainder is the amount in premiums 
that it needs to collect from subsidized policies. Subsidized rates are 
then set based on this amount. Thus, the level of subsidized rates 
charged to policyholders depends, in part, on the full-risk premiums 
determined by FEMA. For example, if full-risk premiums are too low 
because they do not accurately reflect flood risk, the total amount 
FEMA will need to collect from subsidized policies will be higher, 
resulting in higher subsidized premiums. 

Finally, according to FEMA, the rate-setting process for subsidized 
premiums also involves other considerations. Officials said once they 
had calculated the aggregate amount of subsidized premiums they would 
need, they determined the subsidized rate increases and ultimately the 
rates for the individual zones based on their knowledge and 
understanding of flood risks. FEMA officials told us that their 
decisions on how much to raise rates on various zones took into account 
concerns about the effect of increases on policyholders, the level and 
extent of past rate increases, and knowledge of relative flood risks in 
those areas. FEMA did not provide us with any written documentation 
describing how these decisions were reached. As mentioned previously, 
by law FEMA can raise rates on each zone by no more than 10 percent a 
year. Our review of FEMA documents show that FEMA raised rates 
significantly for a small number of policies and by very little for a 
large number of policies from 2002 through 2006. For example, FEMA 
raised rates by an average of more than 9 percent on about 1 percent of 
all NFIP policies--specifically, on certain subsidized policies located 
in high-risk coastal zones. In contrast, FEMA raised rates by an 
average of around 2 percent on 40 percent of total policies in high- 
risk zones that were paying full-risk rates. Ultimately, the generally 
small increases will not help ensure NFIP's financial stability and may 
in fact decrease it by adding to its operating deficit. 

NFIP's Current Rate-Setting Processes Result in Premiums That Are Not 
Sufficient to Cover Current Debt and Future Claims: 

The processes and policies that FEMA uses to set both full-risk and 
subsidized premium rates have contributed to NFIP's inability to 
generate enough in premiums to cover the program's operating costs, 
claims losses, and debt to the Treasury. From 1978 through 2004, NFIP 
had a net loss of $2 billion. These years had historically low 
flooding, but NFIP had yearly deficits for about half of these years. 
Over that period, Congress retired about $1.2 billion of this total 
debt. However, the introduction of average historical loss year targets 
in the 1980s resulted in a series of rate increases that contributed to 
a sizeable reduction of the net loss. 

The 2005 hurricanes significantly altered NFIP's financial landscape. 
The 2005 hurricanes, especially Katrina, left the program with debt of 
more than $17.4 billion as of June 2008. To service the debt to the 
Treasury, FEMA owes two annual interest payments of around $365 million 
that are generally due in April and October of each year. FEMA 
officials told us that they were able to make the two payments in 2007 
without borrowing because, according to FEMA documents, NFIP faced 
unusually light flooding in 2006 and 2007. In addition, FEMA made an 
unscheduled principal payment of $225 million in November 2007. 
However, in April 2008, FEMA borrowed $50 million to pay the $364 
million interest payment owed to the Treasury. FEMA estimates that it 
will owe a total of $734 million in interest charges in fiscal year 
2008. 

FEMA officials informed us that they did not know whether NFIP would be 
able to make future interest payments without borrowing because of 
uncertainty about future flooding. According to FEMA documents, FEMA 
has paid $1.6 billion in interest to the Treasury since 2005. NFIP 
currently has about 5.6 million policies in force, resulting in 
approximately $2.6 billion in total premium. Historically, program 
expenses (excluding loss and allocated loss adjustment expenses) have 
averaged around 38 percent of premiums, or $1 billion of current total 
premium collection. As of June 2008, NFIP's average noncatastrophic 
historical loss year (which excludes Hurricanes Katrina, Rita, and 
Wilma) is about $1.3 billion. The combined outlays for loss and loss 
adjustment expenses of around $1.3 billion, administrative expenses of 
approximately $1 billion, and interest payments of approximately $0.7 
billion exceed the program's current premium collection of 
approximately $2.6 billion. Under current conditions, it is unlikely 
that NFIP will be able to meet its interest payments in most years, and 
the program's debt will likely grow as the program borrows to meet the 
interest payments. 

Conclusions: 

Over the years, FEMA has taken a number of steps to improve the rate- 
setting process, which was established more than two decades ago, but a 
number of factors raise questions about whether the resulting rates 
reflect the actual flood risk. First, potentially outdated and 
inaccurate data about flood probabilities, damage claims, and flood 
maps are increasing the risk that full-risk premiums do not reflect 
actual risk of flooding. Second, unlike many insurers in the private 
sector, FEMA has done little to understand the long-term impact of 
planned and ongoing development on damage estimates. While this is due, 
in part, to the fact that FEMA lacks the authority to factor potential 
or long-term development into potential flood damage, FEMA has not, for 
example, evaluated how such developments could affect the accuracy of 
its maps. Finally, FEMA's continued use of a nationwide rating 
structure that combines zones across geographic areas despite the 
substantial growth of the program introduces additional uncertainties. 
While additional analysis of the data is needed, our analysis found 
that some patterns in historical claims and premiums collected raise 
questions about whether this approach is still appropriate and 
reasonable given the growth in the program. Collectively, these factors 
call into question the accuracy of the full-risk rates generated by 
FEMA's rate model. By updating elements of its flood rate model and 
certain rate-setting policies, FEMA could help ensure that data used in 
its model such as flood probabilities, damage estimates, and 
information from flood maps are as accurate as possible. In addition, 
by reconsidering risk aggregation across flood zones and the effects of 
development and climate change into the rate-setting process, FEMA has 
the opportunity to make its model more robust and increase the accuracy 
of its rates. 

Similarly, FEMA's policy of allowing properties that have been remapped 
to higher-risk zones to retain lower rates results in rates that do not 
accurately reflect flood risk. Because the premiums are not based on 
the actual risk of flooding, these policyholders are receiving a 
subsidy from other policyholders in the same zone and the federal 
government--and ultimately from taxpayers. We are encouraged that FEMA 
plans to implement a monitoring process for grandfathered properties, 
which would allow it to better determine the impact of these properties 
on the program's financial stability. However, because FEMA plans to 
track only grandfathered properties in the future, not existing 
properties, it will not be able to fully evaluate whether 
grandfathering actually is fulfilling the desired goals in a cost- 
effective way. Unless there is a full accounting of grandfathered 
properties, these properties expose the program to an unknown level of 
risk. Prompt attention to this issue could allow NFIP to refine its 
rate-setting process in the short term and provide valuable information 
on the effects of its policy decision on the financial stability of the 
program. 

Finally, FEMA's rate-setting process for subsidized properties depends 
in part on the accuracy of full-risk rates, raising concerns about how 
these rates are calculated as well. While FEMA is statutorily required 
to subsidize rates, the method used for setting subsidized rates has 
evolved from one that is based largely on affordability to one based on 
the average historical loss year estimate. The resulting subsidized 
premiums continue to be a financial strain on NFIP and contribute to 
its ongoing financial instability. Based on NFIP's current premium 
collections, it is not only unlikely that NFIP will be unable to repay 
its debt but also unlikely that it will be able to make interest 
payments in years with any significant amount of flood activities, and 
the program's debt will likely grow as it borrows to meet the interest 
payments, as was the case in mid-2008. Unless NFIP addresses issues 
with its rate-setting processes, premiums collected will remain 
insufficient in the face of future flood losses--even in average flood 
loss years--leaving both the program and taxpayers at increased 
financial risk. While a robust rate-setting process that accurately 
reflects underlying flood risk is a key step in helping to improve the 
long-term financial stability of NFIP, no process can ensure that 
premiums will always cover losses because of the potential for large 
claim losses associated with catastrophic events. However, any efforts 
to improve the accuracy of the premiums charged by the program will 
help reduce the financial risk to which the federal government and, 
ultimately, taxpayers are exposed from the flood insurance program. 

Recommendations for Executive Action: 

We recommend that the Secretary of the Department of Homeland Security 
direct FEMA to take steps to ensure that its rate-setting methods and 
the data it uses to set rates result in full-risk premiums rates that 
accurately reflect the risk of losses from flooding. These steps should 
include, for example, verifying the accuracy of flood probabilities, 
damage estimates, and flood maps; ensuring that the effects of long- 
term planned and ongoing development, as well as climate change, are 
reflected in the flood probabilities used; and reevaluating the 
practice of aggregating risks across zones. 

We also recommend that the Secretary of the Department of Homeland 
Security direct FEMA to ensure that information is collected on the 
location, number, and losses associated with existing and newly created 
grandfathered properties in NFIP and to analyze the financial impact of 
these properties on the flood insurance program. 

Agency Comments and Our Evaluation: 

We provided the Secretary of Homeland Security with a draft of this 
report for review and comment. On October 14, 2008, FEMA provided 
written comments on a draft of this report. FEMA generally concurred 
with both of the report's recommendations but had two reservations 
about our recommendation to ensure that FEMA's rate-setting methods 
result in full-risk rates that accurately reflect the risk of losses 
from flooding. Moreover, while FEMA noted that the report makes a 
number of constructive suggestions, it took exception to some of our 
analyses and characterizations, which it believes overstate their 
potential impact on the accuracy of the rate-setting process. These 
comments are summarized below and FEMA's letter is reprinted in 
appendix III. FEMA also provided us with technical comments, which we 
incorporated as appropriate. 

FEMA generally concurred with our recommendation that it take steps to 
ensure that FEMA's rate-setting methods result in full-risk rates that 
accurately reflect the risk of losses from flooding, but expressed two 
reservations. First, it said that the report taken as a whole presents 
a view of the accuracy of the current FEMA rate-setting process that is 
"far too negative," especially given the complexity and difficulty of 
setting flood insurance premium rates. We recognize that determining 
full-risk premium rates for flood insurance is an inherently 
challenging process, especially given the potential for catastrophic 
losses in any given year. However, in objectively reviewing the rate- 
setting process and applying generally accepted principles of insurance 
and actuarial rate setting, we found a number of areas that, when 
considered collectively, raise questions about the accuracy of the 
resulting rates and highlight areas that warrant additional analysis by 
FEMA. For example, for the period of 1978-2003, prior to the 
catastrophic losses resulting from the hurricanes of 2005, the low to 
moderate full-risk zones had a cumulative deficit of approximately $685 
million. This deficit would seem to indicate that the rates for these 
risk classes were not adequate to cover the expected losses--a basic 
actuarial principle. And while the entire full-risk portion of the 
program did have an overall surplus of approximately $382 million over 
the same period, this would appear only to indicate the existence of a 
large cross subsidy between the rated zones, which reinforces our 
recommendation that FEMA revisit its nationwide class-rating system. 

Second, FEMA said that the report does not accurately present the 
status of its map modernization efforts and their impact on premium 
rates. Specifically, with respect to map modernization, FEMA stated 
that (1) our characterization of the progress on the updating of flood 
maps was misleading; (2) we overstate the impact of older maps on rate 
setting; and (3) we failed to note that FEMA allows communities to 
reflect future conditions in flood maps the communities help develop. 
With respect to the progress of map modernization, FEMA provided the 
data that we presented in the report, which represents a status of 
modernization efforts to date. FEMA appears to take issue with 
measuring the status of map modernization in terms of the number of 
flood maps that had been updated. We note that in its comment letter, 
FEMA analyzed progress in terms of the population living within areas 
covered by updated maps. Each form of analysis provides a different 
picture of the progress of map modernization, and we have now added 
FEMA's data to reflect population measures in order to present an 
additional perspective. With respect to the impact of older maps on 
rate setting, FEMA states that older maps are not always outdated, and 
that in many areas the flood hazard has not changed or is possibly 
decreasing. While some maps may not have changed over the past 10 to 15 
years, it is uncertain how many maps fall into this category and FEMA 
provided no analysis to support this contention. In addition, as we 
note in our report, FEMA stated that it undertook map modernization for 
several reasons, including that flood hazard conditions are dynamic and 
many flood maps may not reflect recent development or environmental 
changes; updated maps can take advantage of revised data and improved 
technologies for identifying flood hazards; and up-to-date maps support 
a flood insurance program that is more aligned with actual risks. These 
reasons would seem to reflect a concern that older maps can become 
outdated. Moreover, we also note that FEMA plans to update its maps 
every 5 years to make sure they remain accurate. With respect to 
allowing communities to voluntarily reflect future conditions in flood 
maps, we were not made aware of these efforts in time to evaluate them 
for inclusion in this report but we plan to review these efforts in 
future work. FEMA had additional comments on how we characterized its 
rate-setting process. We address these comments below. 

First, FEMA stated that our finding that probability curves for 
floodwaters exceeding a specific elevation had not been updated since 
the 1980s was unfounded because these probabilities are relative to the 
base flood elevation (BFE), and BFEs are revised as flood maps are 
updated. As we noted in our report, flood risk experts told us that 
flood probabilities are likely to change as land use, infrastructure, 
and weather patterns change. As a result, even if the probability 
curves are adjusted to reflect a new BFE, other changes since the 1980s 
could result in the probability curves themselves no longer being 
accurate. FEMA stated that it prepared a sensitivity analysis that 
showed that reestimating the probability curves would have a minimal 
impact on rates. We were not provided this analysis until FEMA gave us 
its comments on this report, and therefore cannot comment on the 
accuracy of the analysis. Nonetheless, it illustrates the type of 
analysis that FEMA should perform periodically to ensure the integrity 
of its rate-setting process and are encouraged by this effort. Finally, 
while we understand that the data used to develop probability curves 
were based on detailed engineering studies, available flood data, 
simulations, and professional judgments, neither FEMA nor the Corps was 
able to provide us with the specific data set used to develop the 
original probability curves. As a result, we could not review the 
reliability of those data. 

Second, in response to FEMA comments about the Corps' use of the 
hydrologic model that underlies FEMA's flood insurance rate-setting 
process, we have clarified the language in our report to make clear 
that while the Corps has revised its model for estimating flood damage, 
it continues to use the hydrologic model. 

Third, FEMA stated that we dismissed its contention that it is 
adequately pricing the premiums for the class of business that includes 
grandfathered properties. Considering the class of grandfathered 
properties as a subset of policyholders, owners of grandfathered 
properties pay less than full-risk premiums. Although FEMA may raise 
premiums for others to compensate for the potential shortfall from this 
subset, the extent and effect of this cross-subsidization deserves 
scrutiny and should be analyzed. FEMA concurred with our recommendation 
to gather additional information on grandfathered properties and 
analyze their financial impact on NFIP. 

Fourth, FEMA challenged our discussion about the number of risk groups 
used for rate setting and contended that we failed to consider the 
complexity and cost of using more refined risk classifications. We did 
recognize and consider the challenges associated with using more 
refined risk groups and therefore did not specifically recommend that 
FEMA change its risk rating system. Instead, we recommended that FEMA 
reevaluate its practice of aggregating risks across zones in light of 
the program's expansion to determine whether the current risk groups 
are still relevant. As we noted in our report, FEMA has not revisited 
its class rating approach since its inception, when it had around 2 
million policyholders. The program currently has over 5.5 million 
policyholders. Since then, there have been significant changes in both 
the number and location of properties insured by NFIP that would 
warrant revisiting of FEMA's approach to aggregating risks. 

Finally, concerning our analysis of historical claims data, FEMA 
commented that we did not compare historical losses across states to a 
theoretical distribution and stated that it believed that the 
distribution we observed could be explained by analyzing the 
interaction of the variability of flood risk and the declining number 
of policyholders receiving discounted premiums. However, FEMA provided 
no analytical basis for this belief and has not conducted any such 
analysis to support this assertion. Moreover, FEMA also commented that 
until such analysis is done, it cannot be sure of the results. We would 
encourage FEMA to build upon our analysis and continue to explore ways 
to leverage existing data to evaluate the effective of its rate-setting 
process and identify ways to strengthen the process. In addition, FEMA 
expressed its disappointment that we did not include the results of our 
analysis of losses across states in our report. While we included a 
shorter version of this analysis in the body of the report, we 
continued to present the full results of our analysis in appendix II of 
the report. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of this report 
until 30 days from the report date. At that time, we will provide 
copies to the Chairman, Senate Committee on Banking, Housing and Urban 
Affairs; the Chairman and Ranking Member of the Senate Committee on 
Homeland Security and Governmental Affairs; the Chairman and Ranking 
Member of the House Committee on Financial Services; the Chairman and 
Ranking Member of the House Committee on Homeland Security; and other 
interested committees. We are also sending a copy of this report to the 
Secretary of Homeland Security and other interested parties. In 
addition, the report will available at no charge on our Web site at 
[hyperlink, http://www.gao.gov]. 

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-8678 or williamso@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix IV. 

Sincerely, 

Signed by: 

Orice Williams: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Scope and Methodology: 

To assess the Federal Emergency Management Agency's (FEMA) rate-setting 
process and determine whether it produces rates that accurately reflect 
the risk of flooding for properties that do not receive subsidies, we 
reviewed and analyzed FEMA's model for evaluating potential flood 
damage to properties as well as the methods used for assessing risk and 
setting premium rates for policyholders. We discussed FEMA's method for 
rate setting with officials from FEMA, the National Oceanic and 
Atmospheric Administration, U.S. Army Corps of Engineers (the Corps), 
and the U.S Geological Survey. We met with risk-modeling agencies, 
academics and the American Academy of Actuaries to obtain views on 
FEMA's model and information on private sector flood-risk-modeling 
methods and data sources. We met with FEMA officials to obtain relevant 
information and data on FEMA's Map Modernization program. We reviewed 
FEMA documents and met with FEMA officials in order to understand 
FEMA's process and policies for grandfathering properties and the 
impact on the program. We analyzed FEMA's premiums and claims data to 
determine the number of high-loss years on a state-by-state basis in 
order to assess each state's financial impact on NFIP. In order to 
conduct the state loss analysis, we reviewed the claims and premium 
data from NFIP's BureauNet database. For premium data, we used 
"Historical Policy Summary" and "All States" each year, individually 
from 1978 through 2007. For the claims data, we used "Claims Data 
Summary" and obtained Closed Claims, CWOP, and Open Claims by using the 
"State Name" and "Calendar Year" sort fields. These numbers were then 
adjusted for inflation using historic calendar year gross domestic 
product (GDP) data. Finally, we subtracted claims values from the 
premiums values, and sorted the states by the number of years in which 
each state experienced a high-loss year, or a year in which claims 
exceeded premiums. We also calculated aggregate inflation adjusted 
claims amounts for each state. Because of the catastrophic effects of 
the 2005 hurricanes, we also calculated pre-Katrina (1978 through 2004) 
numbers, which were displayed in table 3. To assess the impact of the 
rate-setting process and other factors on NFIP's long-term financial 
stability, we interviewed officials to obtain specific information on 
NFIP's current and past financial status. We also collected and 
analyzed information on NFIP's financial status and reviewed existing 
FEMA documents. 

To evaluate the process that NFIP uses to set subsidized rates, we 
interviewed officials from FEMA to obtain the methodology used to 
assess total premium needs and set subsidized rates. We collected and 
analyzed information on FEMA's process for setting rates for subsidized 
flood insurance and reviewed documents on NFIP program subsidies and 
recommendations to eliminate them. We also reviewed academic and other 
studies of studies of flood risk and flood insurance including reviews 
from the Congressional Research Service and the Congressional Budget 
Office. 

We conducted this work from December 2007 to September 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We note that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: State-by-State Analysis of Claims and Premiums Data: 

Because rare but large events can account for a large portion of the 
long-term aggregate experience, we supplemented the aggregate data 
analysis with the annual high-loss year analysis. Nevertheless, on a 
cumulative basis for 1978-2004, a period before Hurricanes Katrina and 
Rita policyholders in several states received markedly more in claims 
paid out than NFIP collected from them in premiums.[Footnote 55] Five 
of the nine states with at least 8 high-loss years--Alabama, Missouri, 
Mississippi, Texas, and West Virginia--had more in aggregate claims 
than policyholders paid out in aggregate premiums. Five other states-- 
Kentucky, Minnesota, North Carolina, North Dakota, and Oklahoma--had 
aggregate claims exceeding aggregate premiums, all of them experiencing 
between 5 and 7 high-loss years. By expanding the totals to include all 
years through 2007, Louisiana joins the other nine states with 
aggregate claims exceeding aggregate premiums, primarily because of 
Hurricanes Katrina and Rita. On the other extreme, three states-- 
California, Florida, and New Jersey--had aggregate premiums exceed 
aggregate claims by more than $1 billion, with Florida having an $8 
billion surplus. 

Table 4: Claims and Premiums Data (in constant 2007 dollars), 1978- 
2007: 

State: Missouri; 
1978-2004 Premiums minus claims: ($384,344,855); 
1978-2007 premiums minus claims: ($350,344,220); 
1978-2007 Number of years that claims exceeded premiums: 11. 

State: West Virginia; 
1978-2004 Premiums minus claims: ($146,896,812); 
1978-2007 premiums minus claims: ($118,874,830); 
1978-2007 Number of years that claims exceeded premiums: 11. 

State: Mississippi; 
1978-2004 Premiums minus claims: ($40,584,822); 
1978-2007 premiums minus claims: ($2,498,544,520); 
1978-2007 Number of years that claims exceeded premiums: 10. 

State: Louisiana[A]; 
1978-2004 Premiums minus claims: $428,383,041; 
1978-2007 premiums minus claims: ($11,777,260,456); 
1978-2007 Number of years that claims exceeded premiums: 10. 

State: Texas[A]; 
1978-2004 Premiums minus claims: ($728,796,632); 
1978-2007 premiums minus claims: ($222,265,084); 
1978-2007 Number of years that claims exceeded premiums: 9. 

State: Alabama; 
1978-2004 Premiums minus claims: ($505,212,107); 
1978-2007 premiums minus claims: ($746,166,995); 
1978-2007 Number of years that claims exceeded premiums: 9. 

State: Illinois; 
1978-2004 Premiums minus claims: $90,321,291; 
1978-2007 premiums minus claims: $162,050,972; 
1978-2007 Number of years that claims exceeded premiums: 9. 

State: Ohio; 
1978-2004 Premiums minus claims: $101,547,985; 
1978-2007 premiums minus claims: $100,111,514; 
1978-2007 Number of years that claims exceeded premiums: 9. 

State: New Hampshire; 
1978-2004 Premiums minus claims: $36,648,547; 
1978-2007 premiums minus claims: $21,531,170; 
1978-2007 Number of years that claims exceeded premiums: 8. 

State: Oklahoma; 
1978-2004 Premiums minus claims: ($18,199,240); 
1978-2007 premiums minus claims: ($25,642,039); 
1978-2007 Number of years that claims exceeded premiums: 7. 

State: South Dakota; 
1978-2004 Premiums minus claims: $5,295,971; 
1978-2007 premiums minus claims: $8,404,092; 
1978-2007 Number of years that claims exceeded premiums: 7. 

State: Kansas; 
1978-2004 Premiums minus claims: $20,948,695; 
1978-2007 premiums minus claims: $20,247,134; 
1978-2007 Number of years that claims exceeded premiums: 7. 

State: Washington; 
1978-2004 Premiums minus claims: $85,320,803; 
1978-2007 premiums minus claims: $66,244,958; 
1978-2007 Number of years that claims exceeded premiums: 7. 

State: Indiana; 
1978-2004 Premiums minus claims: $131,316,681; 
1978-2007 premiums minus claims: $166,958,946; 
1978-2007 Number of years that claims exceeded premiums: 7. 

State: North Carolina; 
1978-2004 Premiums minus claims: ($169,814,330); 
1978-2007 premiums minus claims: ($8,457,439); 
1978-2007 Number of years that claims exceeded premiums: 6. 

State: Minnesota; 
1978-2004 Premiums minus claims: ($63,190,911); 
1978-2007 premiums minus claims: ($52,511,837); 
1978-2007 Number of years that claims exceeded premiums: 6. 

State: Arkansas; 
1978-2004 Premiums minus claims: $52,001,936; 
1978-2007 premiums minus claims: $74,966,251; 
1978-2007 Number of years that claims exceeded premiums: 6. 

State: Pennsylvania; 
1978-2004 Premiums minus claims: $84,458,562; 
1978-2007 premiums minus claims: $23,509,354; 
1978-2007 Number of years that claims exceeded premiums: 6. 

State: Connecticut; 
1978-2004 Premiums minus claims: $209,580,515; 
1978-2007 premiums minus claims: $266,043,856; 
1978-2007 Number of years that claims exceeded premiums: 6. 

State: North Dakota; 
1978-2004 Premiums minus claims: ($111,305,692); 
1978-2007 premiums minus claims: ($103,851,773); 
1978-2007 Number of years that claims exceeded premiums: 5. 

State: Kentucky; 
1978-2004 Premiums minus claims: ($56,850,302); 
1978-2007 premiums minus claims: ($42,009,555); 
1978-2007 Number of years that claims exceeded premiums: 5. 

State: District of Columbia; 
1978-2004 Premiums minus claims: $1,030,982; 
1978-2007 premiums minus claims: $1,734,592; 
1978-2007 Number of years that claims exceeded premiums: 5. 

State: Maine; 
1978-2004 Premiums minus claims: $39,784,737; 
1978-2007 premiums minus claims: $46,807,732; 
1978-2007 Number of years that claims exceeded premiums: 5. 

State: Tennessee; 
1978-2004 Premiums minus claims: $47,004,528; 
1978-2007 premiums minus claims: $82,337,301; 
1978-2007 Number of years that claims exceeded premiums: 5. 

State: Virginia; 
1978-2004 Premiums minus claims: $60,909,715; 
1978-2007 premiums minus claims: $172,548,603; 
1978-2007 Number of years that claims exceeded premiums: 5. 

State: Rhode Island; 
1978-2004 Premiums minus claims: $127,856,579; 
1978-2007 premiums minus claims: $152,323,748; 
1978-2007 Number of years that claims exceeded premiums: 5. 

State: New York; 
1978-2004 Premiums minus claims: $574,475,012; 
1978-2007 premiums minus claims: $648,183,499; 
1978-2007 Number of years that claims exceeded premiums: 5. 

State: Iowa; 
1978-2004 Premiums minus claims: $15,016,861; 
1978-2007 premiums minus claims: $32,394,824; 
1978-2007 Number of years that claims exceeded premiums: 4. 

State: Massachusetts; 
1978-2004 Premiums minus claims: $165,750,753; 
1978-2007 premiums minus claims: $227,224,840; 
1978-2007 Number of years that claims exceeded premiums: 4. 

State: New Jersey[A]; 
1978-2004 Premiums minus claims: $1,071,199,191; 
1978-2007 premiums minus claims: $1,271,686,111; 
1978-2007 Number of years that claims exceeded premiums: 4. 

State: California[A]; 
1978-2004 Premiums minus claims: $2,042,968,575; 
1978-2007 premiums minus claims: $2,431,519,768; 
1978-2007 Number of years that claims exceeded premiums: 4. 

State: Montana; 
1978-2004 Premiums minus claims: $20,618,089; 
1978-2007 premiums minus claims: $26,387,334; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Maryland; 
1978-2004 Premiums minus claims: $63,198,089; 
1978-2007 premiums minus claims: $139,162,073; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Wisconsin; 
1978-2004 Premiums minus claims: $68,781,850; 
1978-2007 premiums minus claims: $90,093,940; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Nebraska; 
1978-2004 Premiums minus claims: $77,523,305; 
1978-2007 premiums minus claims: $98,540,480; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Delaware; 
1978-2004 Premiums minus claims: $79,318,937; 
1978-2007 premiums minus claims: $115,022,170; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Michigan; 
1978-2004 Premiums minus claims: $173,141,113; 
1978-2007 premiums minus claims: $222,803,680; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Hawaii; 
1978-2004 Premiums minus claims: $185,512,050; 
1978-2007 premiums minus claims: $245,450,036; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Arizona; 
1978-2004 Premiums minus claims: $204,216,092; 
1978-2007 premiums minus claims: $251,713,046; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Georgia; 
1978-2004 Premiums minus claims: $265,586,974; 
1978-2007 premiums minus claims: $389,183,828; 
1978-2007 Number of years that claims exceeded premiums: 3. 

State: Utah; 
1978-2004 Premiums minus claims: $15,372,336; 
1978-2007 premiums minus claims: $21,207,776; 
1978-2007 Number of years that claims exceeded premiums: 2. 

State: Wyoming; 
1978-2004 Premiums minus claims: $16,597,320; 
1978-2007 premiums minus claims: $21,134,460; 
1978-2007 Number of years that claims exceeded premiums: 2. 

State: Nevada; 
1978-2004 Premiums minus claims: $70,283,808; 
1978-2007 premiums minus claims: $82,293,838; 
1978-2007 Number of years that claims exceeded premiums: 2. 

State: Vermont; 
1978-2004 Premiums minus claims: $23,425,436; 
1978-2007 premiums minus claims: $30,590,342; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: Idaho; 
1978-2004 Premiums minus claims: $32,991,914; 
1978-2007 premiums minus claims: $42,892,136; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: Oregon; 
1978-2004 Premiums minus claims: $104,014,018; 
1978-2007 premiums minus claims: $133,186,375; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: South Carolina; 
1978-2004 Premiums minus claims: $313,400,772; 
1978-2007 premiums minus claims: $590,371,633; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: Florida[A]; 
1978-2004 Premiums minus claims: $8,035,673,802; 
1978-2007 premiums minus claims: $9,938,638,592; 
1978-2007 Number of years that claims exceeded premiums: 1. 

State: Alaska; 
1978-2004 Premiums minus claims: $23,003,446; 
1978-2007 premiums minus claims: $27,770,628; 
1978-2007 Number of years that claims exceeded premiums: 0. 

State: New Mexico; 
1978-2004 Premiums minus claims: $79,909,374; 
1978-2007 premiums minus claims: $97,876,034; 
1978-2007 Number of years that claims exceeded premiums: 0. 

State: Colorado; 
1978-2004 Premiums minus claims: $135,763,975; 
1978-2007 premiums minus claims: $170,139,136; 
1978-2007 Number of years that claims exceeded premiums: 0. 

Source: GAO analysis of FEMA data. 

Note: We analyzed two time periods so we could separately consider the 
impact of the 2005 Hurricanes Katrina, Rita, and Wilma. 

[A] Denotes the five states with the highest number of subsidized 
policies. 

[End of table] 

As noted in the report, additional study would be required to determine 
whether policyholders in some states with lower losses are paying a 
higher premium than is appropriate for their risk, and others paying 
too little. For example, our analysis did not control for differences 
in the type of policy purchased, such as the mix of certain property 
types across states and insurance coverage amounts, which could affect 
both premiums and claims. In addition, we did not control for 
differences in the mix of subsidized and full-risk policies or the 
impact of subsidized premiums on our results, which could also affect 
the results. For example, some states have a relatively large number or 
proportion of subsidized properties (including grandfathered 
properties) that generally would lead to higher expected claims 
relative to premiums, but we were unable to link the separate NFIP 
claims and premiums data at the state and zone levels in a way that 
would allow us to perform a more refined analysis. The limitations in 
setting full-risk rates that we have discussed could result in 
systematic mispricing relative to risk that becomes apparent only over 
long periods; however, our analysis included both subsidized and full- 
risk properties, and so the results should be considered in this 
context. 

[End of section] 

Appendix III: Comments from FEMA: 

Homeland Security: 
Washington, DC 20538: 

October 14, 2008: 

Ms. Orice M. Williams: 
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G St, NW: 
Washington, DC 20548: 

Dear Ms. Williams: 

The US, Department of Homeland Security (DI-IS) appreciates the 
opportunity to review and comment on the U.S. Government Accountability 
Office's (GAO) draft report GAO-09-12 titled Flood Insurance: FEMA's 
Rate-Setting Process Warrants Attention (250387). 

While the GAO raises valid concerns, DHS believes that the analysis 
does not grasp some generally accepted principles of insurance and 
actuarial rate-setting and misrepresents the status of the Map 
Modernization effort and its impact on rate adequacy. We appreciate GAO 
presenting a generally accurate description of the methodology and 
National Flood Insurance Program (NFIP) premium rates. Few individuals 
understand the model and methodology and we appreciate GAO staff 
learning many of the intricacies of the rate-setting process. The 
report has made a number of constructive suggestions, some of which DHS 
is actively pursuing, others that we will take under advisement and, as 
discussed below, a few with which we disagree. 

GAO raised concerns in several areas of the NFIP rate-setting 
methodology, including: (1) data quality of probability estimates, 
claim severity estimates, and maps; (2) future conditions impacted by 
climate change, erosion. and future development; and (3) underwriting 
results. OHS believes that GAO is overestimating the potential impact 
of each of these areas. Below, is our response to the major points 
highlighted in the report; they are sorted by the headings used in the 
report, 

Data Used to Determine Flood Probabilities Have Not Been Updated Since 
the 1970s and 1980s: 

GAO expressed concern that the probability curves for floodwater 
exceeding a specific elevation had not been updated since the I 980s. 
Since these probabilities are expressed relative to the Base Flood 
Elevation (BFE), GAO concerns are unfounded. As flood maps are updated 
to reflect revised BFEs, the PELV curves are automatically re-
benchmarked to the revised BFEs. Since the various PELV curves for 
zones A01 through A30 arc based on the relative elevation difference 
between a "10-year flood" and a "100-year flood" it is very likely
that the floodwater depths for the "250-year flood" or the "500-year 
flood" remain stable within a specific zone. If the water depth for the 
"500-year flood" changes significantly in relation to the BEE, then it 
is likely that the "10-year flood" has also changed in relation to the 
BFE, resulting in a flood zone change. When the zone changes, the PELV 
associated with the new zone would be reflected in the appropriate 
probabilities. FEMA updates its probabilities by re-estimating the 
annual chance of exceeding the one percent flood (i.e., the BFE). FEMA 
prepared a sensitivity analysis of the impact on rates and 
preliminarily concluded there would be a minimal impact. 

The Claims Data Used in the Model May Be Inaccurate: 

Water Depth Data: 

FEMA agrees with the suggestion to improve the collection of data on 
water depth in the structure. GAO correctly describes FEMA's method of 
handling claims where the depth of water is missing or erroneously 
reported as zero in the claims database. As GAO notes, the effect will 
he to overstate the flood damage for flood events with only a few 
inches of water in the structure, However, GAO points out that the 
impact is unknown for the flood events of greater water depth. FEMA 
believes this is worth investigating and will conduct a sensitivity 
analysis of the impact of this type of claim on the rate setting 
method. As the GAO report points out. FEMA has reviewed the impact of 
such errors in the past and believes that they generally would result 
in more conservative premium rates. 

Army Corps of Engineers Use of NFIP Claims Data: 

GAO contends that the United States Army Corps of Engineers (USACE) has 
moved away from the hydrologic model that underlies the NFIP rate model 
and developed independent damage estimates for their use. 

We reviewed the USACE document ER-1105-2-101. We disagree with the
characterization that it no longer relies on the hydrologic model 
described in FEMA material. The document describes the change they made 
to their methodology. The "Standard Project Flood" (SPF) is defined in 
several documents. In the context of ER 1105-2-100 and risk analysis 
guidance, the SPF is no longer a valid design target. Instead, a full 
range of floods, including those that would exceed the SPF is to be 
used in formulation and evaluation of alternatives. Based on that 
description, we believe that their revision now much more closely 
follows FEMA methodology. The USACE's historical methodology seems to 
model only one possible loss event, which they labeled the SPF.
By contrast, the NFIP Rate Model has always considered "a full range of 
floods" by use of the PELV and PELV500 curves. Instead, based on our 
read of that document, it appears that the U.S. Army Corp of Engineers 
has revised its model to resemble closely the NFIP Rate Model. We 
believe that new approach, which considers a MI range of floods, is a 
much more robust approach which is the reason why we have always used 
it. 

GAO states that "As a result [of NFIP claims data quality issues], the 
Corps began to collect its own damage data, which FEMA now uses to 
supplement its own data." It is true that FEMA has always used the 
USACE's data to supplement NFIP claims data where NFIP claims data is 
too thin to be actuarially credible. However, we provide in Table 1 an 
analysis of the previous and newly revised USACE data compared to NFIP 
claims data. It appears either that the USACE is still using NFIP data 
or that the alternative data that they now use is very similar to NFIP 
data. 

Table 1: Comparison of USACE Studies to NFIP Data: One story, no 
basement structures, percent damage by depth: 

Depth: -1; 
1973 USACE Study: [Empty]; 
Revised USACE Study: 2.50%; 
NFIP Experience: 11.23%. 

Depth: 0; 
1973 USACE Study: 7.00%; 
Revised USACE Study: 13.40%; 
NFIP Experience: 19.52%. 

Depth: 1; 
1973 USACE Study: 10.00%; 
Revised USACE Study: 23.30%; 
NFIP Experience: 22.34%. 

Depth: 2; 
1973 USACE Study: 14.00%; 
Revised USACE Study: 32.10%; 
NFIP Experience: 31.16%. 

Depth: 3; 
1973 USACE Study: 26.00%; 
Revised USACE Study: 40.10%; 
NFIP Experience: 37.55%. 

Depth: 4; 
1973 USACE Study: 28.00%; 
Revised USACE Study: 47.10%; 
NFIP Experience: 48.26%. 

Depth: 5; 
1973 USACE Study: 29.00%; 
Revised USACE Study: 53.20%; 
NFIP Experience: 60.11%. 

Depth: 6; 
1973 USACE Study: 41.00%; 
Revised USACE Study: 58.60%; 
NFIP Experience: 58.43%. 

Depth: 7; 
1973 USACE Study: 43.00%; 
Revised USACE Study: 63.20%; 
NFIP Experience: 70.50%. 

Depth: 8; 
1973 USACE Study: 44.00%; 
Revised USACE Study: 67.20%; 
NFIP Experience: 68.73%. 

Depth: 9; 
1973 USACE Study: 45.00%; 
Revised USACE Study: 70.50%; 
NFIP Experience: 72.23%. 

Depth: 10; 
1973 USACE Study: 46.00%; 
Revised USACE Study: 73.20%; 
NFIP Experience: 79.68%. 

[End of table] 

Maps that Provide Information for Base Flood Elevations	Remain 
Substantially Out-of-Date Despite Modernization Efforts: 

Maps will never be fully up-to-date everywhere in the country and thus 
never fully reflect the current flood risk. FEMA believes that GAO 
significantly understates the overall quality of current maps and, as a 
result, is over-estimating the possible impact of these older maps on 
pricing. FEMA believes that the Hydrologic Rate Model used in 
estimating rates has sufficient additional conservatism to compensate 
for these factors and can state with confidence that the premiums from 
the Rate Model are it reasonable estimate of the full risk premium 
based on the full range of flood loss probabilities. 

FEMA is concerned that the figures GAO references regarding the number 
of maps that are at least 5, 10, or 15 years old may be misleading. 
Many of those maps are still being updated as part of Map 
Modernization. It generally takes between two to three years to 
finalize flood map changes in coordination with state and local 
governments. That being the case, current map age can be misleading. As 
of March 2008, approximately 68% of the nation's population has already 
received updated maps that met, exceed, or at least approach the map 
quality targets of Map Modernization, while another 27% of the 
population has received a preliminary map. By the end of FY 2010, FEMA 
anticipates that at least 92% of the nation's population will have a 
modernized flood map. 

GAO seems to have a concern that an old map is an incorrect map that 
understates the flood risk and therefore adversely affects insurance 
pricing. Older maps are not always outdated. In many areas with older 
flood maps, the flood hazard has not significantly changed or is
possibly decreasing. Further, there are instances where areas have not 
been re-studied because the stream gauge or historical data does not 
include any new flooding events, even of small magnitude, so there is 
no additional data with which to update the maps. 

GAO has also expressed concern about the possible deterioration of a 
map's quality between the scheduled five-year update. While this 
happens in some areas of the country for a variety of reasons, it is 
also true that some States or local communities attempt to lessen the 
impact of the changes in the flood risk. When deterioration of the 
flood risk occurs, local communities are required to communicate to 
FEMA as soon as practical, but no later than six months, appropriate 
data to use to update the community's maps to reflect current flooding 
conditions. In this way, FEMA assures that maps are updated more 
frequently than every live years to reflect changing conditions, These 
and other changes to the maps are usually done through the Letter of 
Map Amendment/Letter of Map Revision process. These amendments and 
revisions currently average about 22,000 a year. 

GAO fails to note the advancements FEMA has made in allowing 
communities to reflect future conditions in maps they develop. 
Currently, communities can choose to use future conditions hydrology 
for mapping per a Federal Register notice published on November 27, 
2001. Future conditions hydrology are based on projected land-use 
conditions of the watershed, which could increase surface water runoff 
such as an increase in impervious areas created by future parking lots 
or structures or future construction/improvement of drainage networks 
that accompany urbanization. While FEMA does not require future 
conditions mapping, we are working to encourage local communities to 
adopt it voluntarily through these procedures and through NFIP 
Community Rating System credits. 

FEMA Does Not Track the Number or Location of Remapped Grandfathered 
Properties That Pay Less Than Full Risk Premiums: 

The report correctly describes the current FEMA program of 
grandfathering currently. GAO acknowledges FEMA's belief that it is 
adequately pricing the premiums for the class of business which 
includes the grandfathered policies because the methodology that the 
NEW uses in setting rates for the X-Standard risk group includes these 
grandfathered properties. However, GAO dismisses this contention. We 
allow X-Standard policies to continue to use the X-Zone for rating 
purpose but set the overall premium level that we estimate to reflect 
the full-risk of that risk group as a whole. The report does not 
mention that the grandfathered X-Standard premium is substantially 
higher than the previous X-Preferred Risk that most of these 
policyholders had been charged. FEMA provided GAO premium charts that 
showed that the X-Zone standard premium is now higher than the premium 
for some AE-Zone compliant strictures. In addition a significant 
portion of these grandfathered policies are older Pre-FIRM policies 
that would be eligible for subsidized premiums and would no longer be 
part of a risk class that is charged on average their full-risk 
premiums. 

FEMA Does Not Consider Risk Factors Such as Erosion and Climate Chance 
When Setting Flood Insurance Rates: 

Although FEMA has not investigated the issue of climate change and its 
impact on the NFIP in totality, we conducted a study in 1991 that 
focused on one aspect of climate change, sea level rise, The study, 
titled Projected Impact of Relative Sea Level Rise on the National
Flood Insurance Program[Footnote 56] concluded that the NFIP would not 
be impacted significantly under sea level rise scenarios put forth in 
the first Intergovernmental Panel on Climate Change (IPCC) report 
released in 1990. FEMA has initiated a new study on climate change 
titled, Impact of Climate Change on the NFIP and Improving Coastal 
Floodplain Mapping. The study will include an investigation of the 
impacts of sea level rise, changes in hurricane frequency and 
intensity, and changes in precipitation patterns and how they might 
affect the NFIP. FEMA will use the latest information contained in the 
most recent IPCC and Climate Change Science Program (CCSP) projections 
and findings in the conduct of this study. We expect to complete the 
study in early 2010 and will carefully evaluate its findings to 
determine how to best account for climate change in setting flood 
insurance rates. 

In the absence of the authority to establish erosion zones, FEMA has 
taken actions based on the Heinz Center study an coastal erosion, which 
projected increased damages due to the effects of long-term coastal 
erosion over a 60-year period. We have increased rates for all V-Zone 
properties at apace commensurate with the Heinz Center projections, 
since we cannot explicitly identify those properties most at risk from 
erosion. 

The FEMA Rating System Combines and Averages Many Different Risks to 
Create Nationwide Rates: 

GAO concerns regarding the current amount of risk groups are misplaced. 
CIAO correctly notes that the flood risk for individual policyholders 
varies within the current risk groups. This is also true for risk 
groups in the private insurance industry. In establishing risk groups, 
FEMA must balance the administrative complexity of a highly refined 
number of risk groups against the degree of heterogeneity of risk 
within those groups. FEMA continues to believe that we have found the 
appropriate balance, GAO does not consider the amount of complexity 
that their recommendation for more highly refined risk groups would 
create. The size of the rate manual would increase many-fold, as would 
the difficulty of making accurate zone determinations in those 
communities that have a variety of A-numbered zones. 

FEMA has considered the implications on our current risk group 
classifications if future legislative changes require the NFIP to 
reduce significantly the classes of buildings that are eligible far 
premium subsidies. Whereas, the current risk groups may not result in 
significant cross-subsidization among compliant structures that will 
probably not be true for older non-compliant structures. Simply 
extending the current practice of manually rating non-compliant 
structures to these older structures, will not work since FEMA does not 
have the staff to support the increased workload. FEMA has begun 
considering how to revise its rate structure if future subsidy 
reduction is mandated. 

Our Analysis of Historical Claims and Premium Data Raises Questions 
about a Potential Mismatch between Rates and Risk: 

GAO conclusions from this analysis appear to inject its expectations as 
to how the results should have behaved if rates were actuarial. We 
believe the NFIP actual experience compares to estimates of the 
theoretical distribution, which GAO did not do. Unfortunately, FEMA did 
not have time to develop a theoretical distribution to make this 
comparison. We believe that the distribution of the results that GAO 
observed in their analysis is explained by understanding the 
interaction of the variable flood risk and the greatly declining 
percentage through the years of policyholders who receive discounted 
premiums, However, until a more refined model is constructed, we will 
not know which is correct. 

GAO had prepared an analysis of how often the annual loss experience 
for a state was above or below the median result for the year. We were 
disappointed to see GAO did not include this analysis in the report. 
FEMA believes that with more refinement and adjustments the analysis 
had the potential to be useful. 

The FEMA Process for Setting Subsidized Rates May Further Compromise 
the Ongoing Financial Stability of the Program: 

The report is critical of FEMA methodology for setting the premium 
rates for the subsidized policies. The process used to set subsidized 
rates has evolved over time, and the report accurately describes the 
current process. We consider many factors in setting subsidized rates, 
and the 2005 hurricanes have had a major impact on those 
considerations. FEMA is in the process of reviewing its methodology 
with respect to the premium rates of the subsidized business. We are 
looking for guidance from the Congress on who should continue to be 
eligible for subsidized rates and the level of subsidy provided to 
them. 

DHS generally concurs with both of the report's recommendation with two 
reservations. Following are our recommendation-specific comments; 
technical comments were provided under separate covet, 

GAO Recommendation 1: We recommend that FEMA take steps to ensure that 
its rate setting methods and data used to set rates result in full-risk 
premiums rates that accurately reflect the risk of losses from 
flooding. For example, verifying the accuracy of flood probabilities, 
damage estimates, and flood maps; ensuring that the effects of long-
term planned and ongoing development, as well as climate change, are 
reflected in the flood probabilities used; and reevaluating the 
practice of aggregating risks across zones. 

DHS Response: Concur with reservation. In general. FEMA concurs with 
the first recommendation with two reservations. One, the GAO commentary 
taken as a whole presents far too negative a picture of the accuracy of 
the current NFIP pricing model and methodology. FEMA notes that the 
NFIP rate-setting process has evolved over a number of years and is 
dependent on many complicated inputs, estimations, modeling techniques 
and actuarial judgments. This type of process is always an inexact 
science, and we are always looking for, and will continue to 
incorporate, improvements in each of those areas as the needs and our 
resources allow, Two, FEMA believes that the report does not accurately 
present the status of the Map Modernization effort and its impact on 
rate adequacy. 

There are many lines of insurance where precise measurement is 
practically impossible. As an example, in Workers' Compensation 
insurance there is uncertainty as to how workplace safety will vary 
over time due to technological advancements, workplace safety measures, 
the size of court awards to injured plaintiffs, future interest rates 
that will affect benefit levels, and future medical costs. The 
challenges and practical impossibility of precisely quantifying these 
factors do not mean that workers compensation insurance is not 
actuarially sound. 

Rather in workers compensation insurance, like flood insurance, 
actuaries make judgments to establish rates that deal with a variety of 
uncertainties. Like Workers' Compensation insurance, where there is 
imprecision in estimating the parameters of the Rate Model or in the 
application of those indicated rates in the real world of selling flood 
insurance, FEMA actuaries have a history of consulting with other 
subject matter experts, such as hydrologic and/or hydraulic scientists, 
and the building science and mapping experts within FEMA. This has 
allowed them to estimate appropriately the impact of these parameters 
of the rate model. 

GAO Recommendation 2: We also recommend that the Secretary of Homeland 
Security direct FEMA to ensure that information is collected on the 
location, number, and losses associated with existing and newly created 
grandfather properties in NFIP and to analyze the financial impact of 
these properties on the flood insurance. 

DHS Response: Concur. DHS agrees with the need to start identifying the 
number of grandfather policies, While there are sound public policy 
reasons why the NFIP introduced and has maintained its grandfathered 
policies, there are also benefits to charging these policyholders a 
premium that is close to their specific risk instead of a premium based 
on a wider class of risks. Such as change would more fully communicate 
to the property owner the flood risk faced and encourage the property 
owner to take action to reduce that risk. 

We are implementing a data collection effort for all newly 
grandfathered policies effective on or alter May 1, 2009. However, 
collecting such data on currently insured structures is far more 
difficult. FEMA intends to work out a methodology to do that and to 
develop the financial analysis recommended. 

FEMA believes that the NFIP rate setting process is sound and is 
conducted in accordance with the body of statutory and regulatory 
authority governing the NFIP and within the standards of actuarial 
practice and acknowledge there is always room for improvement. We thank 
the GAO staff for presenting in this report a number of constructive 
suggestions for improvements in our rate-setting process. 

U.S. Department of Homeland Security would like to thank you for the 
opportunity to review and provide comments on the draft report. We look 
forward to working with you on future homeland security issues. 

Sincerely, 

Signed by: 

Jerald E. Levine: 
Director: 
Departmental DHS GAO/OIG Liaison Office: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Orice M. Williams, (202) 512-8678 or williamso@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Lawrence Cluff (retired) and 
Patrick Ward, Assistant Directors, Nima Patel Edwards, Christopher 
Forys, Emily Chalmers, Martha Chow, Melvin Thomas, Joseph Applebaum, 
Tania Calhoun, Christopher Krzeminski and Rudy Chatlos and Richard 
Vagnoni made significant contributions to this report. 

[End of section] 

Footnotes: 

[1] GAO, High-Risk Program: National Flood Insurance Program, 
[hyperlink, http://www.gao.gov/products/GAO-06-497T] (Washington D.C.: 
Mar. 15, 2006). 

[2] To assess the risk of flooding, FEMA uses Flood Insurance Rate Maps 
(FIRM) that show the level of flood risk in communities that 
participate in NFIP. 

[3] BureauNet is the system that FEMA uses to collect, manage, and 
access its policy, claims, and policyholder data. 

[4] We use the term "full risk" to describe rates that FEMA refers to 
as "actuarial." These are the risk premium rates specified in the 
National Flood Insurance Act of 1968, which FEMA maintains accurately 
reflect flood risk and thus are not explicitly subsidized--that is, 
these rates contemplate the full range of loss potential including 
catastrophic levels, according to FEMA. The National Flood Insurance 
Act of 1968, as amended, is codified at 42 U.S.C. §§ 4001 et. seq. 

[5] A hydrologic model is a static or dynamic representation of the 
process that affects surface water runoff. Hydrologic models are used 
to describe present conditions or predict future behavior of the 
hydrologic regime at a specific area of land that "caches" and 
"releases" surface water runoff (referred to as catchment.) Examples of 
hydrologic model inputs are precipitation and snow melt and example 
outputs are stream discharge and evapotranspiration. According to 
insurance market participants, to generate the loss estimates, private 
insurance companies and state authorities use models, which are 
computer programs with large databases that catalog the past incidence 
and severity of natural catastrophes, as well as proprietary insurance 
company data on policies written in particular states or areas. Using 
the estimates provided by these computer programs, insurers can attempt 
to manage their exposures in particular high-risk areas. See GAO, 
Catastrophe Risk: U.S. and European Approaches to Insure Natural 
Catastrophe and Insurance Risks, [hyperlink, 
http://www.gao.gov/products/GAO-05-199] (Washington, D.C.: Feb. 28, 
2005) 

[6] A flood zone is an area that is designated to have a predicted 
likelihood of experiencing flood damage. 

[7] SFHAs, which are depicted on NFIP maps, represent the land area 
that would be submerged by the floodwaters of the "base," or 1 percent 
annual chance of flood. The SFHA is also referred to as the 100-year or 
1 percent floodplain. NFIP's floodplain management regulations must be 
enforced in, and the mandatory purchase of flood insurance applies to, 
SFHAs. 

[8] A substantial improvement is any reconstruction, rehabilitation, 
addition, or other improvement of a structure, the cost of which equals 
or exceeds 50 percent of the market value of the structure before the 
"start of construction" of the improvement. If a building is 
"substantially damaged" or "substantially improved," it must be brought 
into compliance with local flood damage prevention regulations, 
including elevating the building to or above the 100-year flood 
elevation. 

[9] The BFE is the elevation relative to mean sea level at which there 
is a 1 percent chance of floodwaters rising in a given year. The level 
of the BFE within a community can change throughout the floodplain. 

[10] Some programs are also designated as having Emergency Program 
status. The Emergency Flood Insurance Program is intended as a program 
to provide a first layer amount of insurance on all insurable 
structures before the effective date of the initial FIRM. 

[11] The rate-setting methods discussed in this report are used for the 
building structure as well as the insured's personal belongings, or the 
"contents," contained within the structure. Rates differ for these 
types of coverage, and insurance buyers specifically purchase each type 
of coverage in order to be covered for both. However, most of our 
discussion focuses on coverage for the structure. 

[12] The Flood Insurance Reform and Modernization Act, H.R. 3121, 110th 
Cong. (2007) and the Flood Insurance Reform and Modernization Act, S. 
2289, 110th Cong. (2007), both include provisions aimed at limiting 
subsidized properties. 

[13] Various factors such as flood zone, structure elevation, type of 
structure, and amount of coverage affect the premiums. 

[14] Adverse selection occurs when insurers cannot distinguish between 
less risky and more risky properties, although homeowners can. When 
premiums do not reflect differences in risk that are known to potential 
policyholders, those who buy insurance are often those at greatest risk 
for the hazards covered. Adverse selection in the market for natural 
catastrophe suggests that homeowners who are at the highest risk of 
experiencing a natural catastrophe will buy available insurance. 

[15] Reinsurance is essentially insurance for insurers--that is, 
companies buy coverage for all or a part of a policy's liability from 
other insurers in order to offset exposure. 

[16] This is on a conservative basis required by state insurance 
regulators. 

[17] Two properties that are of the same NFIP risk class (for example, 
both are one-story, single-family homes with no basement and are 
elevated a certain number of feet above a reference level) are charged 
the same rate per $100 of insurance although they may be located in 
different states with differing flood experiences or rest on different 
topography such as a shallow floodplain versus a steep, mountainous 
valley. 

[18] A premium system for a given insurance coverage typically takes 
into account expected claims costs, based on projections from relevant, 
credible prior experience; the administrative cost of providing the 
coverage, including but not limited to underwriting, sales, and claims 
administration; and, a margin for profits and for losses that are worse 
than expected. In addition, for a rate-setting system to be considered 
actuarially based, the premium charged to each insured should be 
reasonably related to the risk posed by coverage of that insured. 

[19] For example, for a given property type, the rate per $100 of 
insurance on the first $50,000 of coverage for a single-family 
structure in the Regular Program (that is, what NFIP terms "basic" 
coverage) is $1.31. The rate per $100 of insurance on amounts in excess 
of $50,000 (that is, what NFIP terms "additional" coverage) is $0.10. 

[20] The "1 percent annual chance flood," also known as the "100-year 
flood," is a statistical construct: It is a flood that has a certain 
discharge that produces a specific flood elevation and an estimated 1 
percent chance of occurrence in any one year. In reality, the 1 percent 
flood represents a range of discharge and elevation values because of 
the uncertainties and other limitations in the information available 
for its computation and the resulting need to use specific types of 
probability distributions to portray the possibilities. The SFHA flood 
zones on the FIRMs can reflect varying degrees of analysis, in some 
cases using approximate methods while in others using more detailed 
methods. The accuracy of the flood hazard data depicted on the FIRMs 
and the delineation of the SFHA are dependent on the data limitations 
of the computation of the 1 percent flood and the topographic 
information available for the area being mapped. The variety of factors 
and uncertainties involved in generating flood maps render these maps 
less definitive and authoritative than communities frequently assume 
them to be--for example, many interpret the 1 percent flood line as an 
assurance that development above that elevation or outside that line is 
guaranteed to be safe from the 1 percent flood. The 1 percent flood 
zones reflect only existing conditions and not future development. 

[21] U.S. Department of Housing and Urban Development, "Insurance and 
Other Programs for Financial Assistance to Flood Victims: A Report from 
the Secretary of the Department of Housing and Urban Development to the 
President, as Required by the Southeast Hurricane Disaster Relief Act 
of 1965," Public Law 89-339, 89th Congress, H.R. 11539, Nov. 8, 1965 
(Washington, D.C.: August 1966). 

[22] Property owners are underinsured when they purchase insurance 
coverage for less than the value of the property, either by or because 
of limits on the amount of available coverage. To compensate for this 
possibility, FEMA increases premium rates by an "underinsurance factor" 
that is based on claims data going back to 1978 for different zones and 
types of structures. More recent experience is given a greater weight 
in determining the factors. 

[23] FEMA has taken this approach for pricing in these zones because it 
believes the cost of obtaining the information necessary to develop 
detailed flood frequency-magnitude relationships for use in the 
hydrologic model would be extremely high in relation to the benefits. 

[24] Highly variable events (events with losses varying widely from 
year to year) and greatly skewed events (very rare but very large 
catastrophic events) such as floods, hurricanes, and earthquakes do not 
lend themselves to traditional actuarial pricing techniques. Results 
can vary dramatically from year to year and average results have little 
predictive value even when gathered over a long period of time, thus 
rendering the use of historical flood loss experience for setting rates 
problematic. 

[25] Studies include those by CRS, CBO, GAO, and the DHS Office of 
Inspector General. 

[26] A FEMA official explained to us that by not updating the PELV 
data, NFIP essentially was assuming that the difference between the 10 
percent annual chance of flood (that is, the 10-year flood) and the 1 
percent annual chance of flood has not changed since the data were 
published in the 1970s and 1980s. FEMA told us that the PELV data have 
been used in such a way as to make the rates less sensitive to factors 
such as changes in land use, structural development, or climate trends. 
FEMA also noted that actuarial judgments during rate setting deal with 
a variety of uncertainties, such as those that go beyond simply relying 
on the calculation based on the hydrologic model. According to FEMA, 
other efforts, such as contingency loading or across-the-board rate 
increases on a zone, and improved floodplain management, have been made 
to compensate for the impact of these factors. 

[27] For DELV estimates, if water reached a depth of 2 feet relative to 
the BFE within a one-story, no-basement structure located in the high- 
risk zone, 25 percent of the property's value would be damaged; 
however, if water reached a depth of 4 feet within the same structure, 
30 percent of the property's value would be damaged. 

[28] "Credible" refers to the degree of belief that the entity's prior 
experience is a valid predictor of future costs. 

[29] American Institutes for Research, Assessing the Adequacy of the 
National Flood Insurance Program's 1 Percent Flood Standard, American 
Institutes for Research, prepared under subcontract to the American 
Institutes for Research as part of the 2001-2006 Evaluation of the 
National Flood Insurance Program, Water Policy Collaborative, (College 
Park, Md.: University of Maryland, October 2006). 

[30] According to FEMA officials, zero elevation water is a depth that 
encompasses up to the first 5 inches of floodwater in a property. This 
depth is also sometimes referred to as a "carpet soaker" flood. 

[31] See GAO, Flood Map Modernization: Program Strategy Shows Promise, 
but Challenges Remain, [hyperlink, 
http://www.gao.gov/products/GAO-04-417] (Washington, D.C.: Mar. 31, 
2004). 

[32] FEMA has produced FIRMs that depict SFHAs for approximately 20,000 
communities nationwide. The SFHA represents the flood that has a 1 
percent annual chance of occurring in any given year, sometimes 
referred to as the "base flood." The base flood is the national 
standard used by NFIP and all federal agencies for the purposes of 
regulating development and requiring the purchase of flood insurance. 
Reliance on the 100-year flood as an adequate standard was brought into 
question in a recent report. See American Institutes for Research, 
Assessing the Adequacy of the National Flood Insurance Program's 1 
Percent Flood Standard. 

[33] FEMA has established national map quality targets under Map 
Modernization by tracking compliance with the Floodplain Boundary 
Standard and the new, validated, or updated Engineering metric. 
Compliance with the boundary standard indicates that the mapped 
floodplain matches the underlying topographic information. Compliance 
with the engineering metric indicates that engineering analyses used to 
determine the extent of the flood hazard have been either newly 
established or updated. The national map quality targets under Map 
Modernization are 75 percent of mapped stream miles compliant with 
boundary standard and 30 percent of mapped stream miles compliant with 
the engineering metric. 

[34] According to FEMA, an important reason for making the 
grandfathering decision was that policyholders who were in compliance 
with their existing FIRMs should not be required to pay higher prices 
for new conditions of which they were previously unaware. 

[35] These are pre-FIRM properties that were built before detailed 
flood hazard data and flood elevations were provided to the community 
and usually before the community enacted comprehensive regulations on 
floodplain regulation. 

[36] FEMA officials stated that grandfathering presented a disincentive 
for sound floodplain management because grandfathered owners would be 
unaware of the true risk of flooding to their properties and would 
therefore be less likely to mitigate. But the officials also stated 
that in making this decision they took into consideration several 
concerns: (1) potentially higher rates that could cause property owners 
not to buy insurance or to lose their properties, (2) adverse reactions 
to FEMA as the result of these higher rates, (3) the burden on 
insurance agents of obtaining new map determinations and information 
for every policyholder, and (4) the likelihood of communities resisting 
new maps due to the potential for large rate increases. 

[37] In most property and casualty insurance lines, state assessments 
are often passed through to policyholders. As a result, policyholders 
living in less risky locations also contribute to cover the shortfall-
-a scenario known as cross-subsidization. In those states where 
assessments cannot be passed through in some manner, private insurers 
must pay the assessments while at the same time paying large claims 
from their own policyholders. In such instances, some companies may be 
reluctant to continue offering coverage in the state or may become 
insolvent. 

[38] The two types of policies in the moderate-to low-risk zones are 
referred to as preferred risk policies and the standard policy. The 
preferred risk policyholders generally pay the lowest flood rates. 
Preferred risk policies are available on buildings that are outside of 
the SFHA and have not flooded more than once. 

[39] Coastal erosion is long-term erosion such that a shoreline 
retreats at or around an average rate over a period of decades. 

[40] Shorelines rarely recede at a constant rate; instead, erosion 
occurs in a cyclic fashion, with seasonal and episodic influences 
resulting in periods of erosion, periods of stability, and periods of 
accretion. On shorelines suffering from long-term erosion, the periods 
of erosion outweigh or overwhelm the periods of stability and 
accretion. 

[41] The H. John Heinz III Center for Science, Economics and the 
Environment, Evaluation of Erosion Hazards, Prepared for the Federal 
Emergency Management Agency Contract EMW-97-CO-0375, (Washington D.C.: 
April 2000). 

[42] The National Flood Insurance Act of 1968, as amended, authorizes 
FEMA to carry out NFIP to enable persons to buy insurance against 
losses arising from flood. The statute defines flood as including 
sudden, flood-event-triggered collapses or subsidences of land along 
the shore of a body of water, but the statute's definition of flood 
does not include the gradual, long-term erosion that may endanger 
coastal communities. See 42 USC 4001, 4002 and 42 USC 4121(c). 

[43] FEMA officials told us that they could likely map erosion hazard 
areas on FIRMs for informational, but not rate-setting, purposes under 
its existing authority. However, FEMA estimates the total cost of this 
effort could range between $50 million and $100 million. 

[44] GAO, Climate Change: Financial Risks to Federal and Private 
Insurers in Coming Decades Are Potentially Significant, [hyperlink, 
http://www.gao.gov/products/GAO-07-285] (Washington, D.C.: Mar. 16, 
2007). 

[45] This is consistent with standard actuarial practice for pricing 1- 
year term insurance. 

[46] NFIP implemented the nationwide class-rating system because of the 
nature of the program and the desire to make it less complex and easier 
for agents and customers to understand. In the early years of the 
program, rates were set on a community-by-community basis. But as the 
number of communities participating grew, this system became unwieldy 
and costly to maintain. FEMA analysis indicated that from a technical 
perspective, this system was not essential to the estimation of flood 
damages since, for example, flood frequency data were found to be 
similar across communities. 

[47] We computed the difference between the dollar amount of losses on 
claims paid out in that state by NFIP and the dollar amount of premiums 
collected in that state by NFIP. 

[48] Because of the data limitations, our analysis was performed using 
claims and premiums data from both full-risk and explicitly subsidized 
policies. 

[49] See appendix II for a full listing of states. 

[50] Some states have a relatively large number or proportion of 
subsidized properties (including grandfathered properties) that 
generally would lead to higher expected claims relative to premiums, 
but we were unable to link the separate NFIP claims and premiums data 
at the state and zone levels in a way that would allow us to perform a 
more refined analysis. The limitations in setting full-risk rates that 
we have discussed could result in systematic mispricing relative to 
risk that becomes apparent only over long periods; however, our 
analysis included both subsidized and full risk properties, and so the 
results should be considered in this context. 

[51] The average historical loss is calculated by adjusting the loss 
payouts of prior years to account for inflation and increases in the 
number of NFIP policies. 

[52] By statute, rates may not be increased by an amount that would 
result in the average of such rate increases for properties within the 
risk classification during any 12-month period exceeding 10 percent of 
the average of the risk premium rates for properties within the zone. 

[53] FEMA officials told us that through various calculations, they 
updated the $17.4 billion in losses from Katrina in 2006 to $23.2 
billion presently. These calculations included an increase of 20 
percent in NFIP policies and an increase of 10 percent for inflation. 

[54] According to FEMA, this process was established jointly by 
Congress and FEMA. 

[55] We found qualitatively similar results for the period 1978-2007, 
which includes the effects of Hurricanes Katrina, Rita, and Wilma. 

[56] FEMA, Projected Impact of Relative Sea Level Rise on the National 
Flood Insurance Program, October 1991, available at [hyperlink, 
http://www.epa.gov/climatechange/effects/downloads/flood_insurance.pdf] 
The Heinz Center, Evaluation of Erosion Hazards, April 2000, available 
at [hyperlink, http://www.fema.gov/pdf/linrary/erosion.pdf]. 

[End of section] 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "E-mail Updates." 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO’s Web site, 
[hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional 
information. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Ralph Dawn, Managing Director, dawnr@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548: 

Public Affairs: 

Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: