National Flood Insurance Program: Major Changes Needed if It Is To Operate Without a Federal Subsidy

Highlights

Pursuant to a congressional request, GAO examined: (1) how the Federal Emergency Management Agency (FEMA) establishes rates for the National Flood Insurance Program (NFIP); (2) whether it is possible to eliminate the federal subsidy and make the program self-sustaining; and (3) whether the flood insurance revolving fund is an appropriate mechanism for financing the program.

Recommendations

Matter for Congressional Consideration

Matter	Status	Comments
If Congress finances the program through a direct appropriation, it should amend the act to eliminate the National Flood Insurance Fund to: (1) establish instead an emergency fund to pay unanticipated losses; (2) require periodic appropriations to repay expenditures from this fund; and (3) require a business-type budget which determines the surplus or deficiency associated with the risk premium and chargeable rates.	Closed – Not Implemented	No further action is intended by the responsible committees.
If Congress retains the National Flood Insurance Fund to increase its oversight and direct control of how FEMA finances its losses, it should amend the National Flood Insurance Act of 1968 to: (1) limit FEMA borrowings to extraordinary losses; (2) require regular appropriations to pay the federal subsidy and repay the prior year's earnings; (3) require FEMA to notify Congress when it borrows; and (4) require periodic congressional review of the fund's borrowing authority.	Closed – Not Implemented	No further action is intended by the responsible committees.
Congress needs to consider: (1) telling FEMA whether it agrees with the shift in direction toward as yet undetermined rate increases or coverage reductions; and (2) giving FEMA specific guidance on how the subsidy should be eliminated.	Closed – Not Implemented	The concerned committees have initiated a continuing review of proposed flood insurance rate increases, but have not provided guidance to FEMA on how the subsidy should be eliminated, a sensitive issue with constituents in flood-prone areas.

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Federal Emergency Management Agency	To develop a risk premium rate structure, which produces adequate premium income and is in line with accepted actuarial principles, the Director, FEMA, should estimate and establish a catastrophic reserve.	Closed – Implemented FIA and its appropriation committees have adopted a mechanism for increasing flood insurance rates so that the flood insurance program can be self-supporting in years of normal flooding. Catastrophic losses are to be funded by supplemental appropriations or increased borrowing authority rather than insurance premiums.
Federal Emergency Management Agency	To develop a risk premium rate structure, which produces adequate premium income and is in line with accepted actuarial principles, the Director, FEMA, should increase reliance on recent loss experience in setting rates.	Closed – Implemented The insurance rates were set based on loss experience through December 1986, adjusted for inflation, to provide adequate premium income to cover losses and other program expenses in an average year.
Federal Emergency Management Agency	To develop a risk premium rate structure, which produces adequate premium income and is in line with accepted actuarial principles, the Director, FEMA, should develop a rate structure which appropriately reflects variations in risk without unnecessary complexity.	Closed – Implemented This change in the program simplifies insurance activities and improves program administration, but it does not produce direct cost savings.
Federal Emergency Management Agency	To develop a risk premium rate structure, which produces adequate premium income and is in line with accepted actuarial principles, the Director, FEMA, should develop and implement a plan to correct the identified data and methodological weaknesses in the current FEMA rate-setting approach.	Closed – Implemented A plan has been adopted, but the results of this plan will not be known for several years.
Federal Emergency Management Agency	The Director, FEMA, should state chargeable rates for the regular program so that the amount of intended federal subsidy can be accurately and readily determined.	Closed – Implemented FEMA now estimates the total subsidy as part of its annual rate review. FEMA and the congressional committees, however, have not established the amount of the intended subsidy so that it and the unintended subsidy are not determined.
Federal Emergency Management Agency	The Director, FEMA, should establish a monitoring program to detect any adverse impacts which increases in chargeable rates or decreases in coverage provided at chargeable rates could have on NFIP objectives.	Closed – Implemented FEMA has initiated efforts to measure the program's impact on its financial structure and is also relying on correspondence from those affected by the changes to identify impacts.

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Economic Development

Congressional oversightEmergency managementEmergency preparednessFederal aid programsFlood insuranceFloodsProgram managementRatesRevolving fundsInsurance rates