The National Flood Insurance Program (NFIP) is a key component of the federal government’s efforts to improve resilience to flood damage. However, we’ve found that the program has experienced significant challenges because FEMA is tasked with pursuing competing goals—keeping flood insurance affordable and keeping the program fiscally solvent. Emphasizing affordability has led to premium rates that in many cases do not reflect the full risk of loss and produce insufficient premiums to pay for claims. In turn, this has transferred some of the financial burden of flood risk from individual property owners to taxpayers as a whole.
Consequently, NFIP has had to borrow from the Department of the Treasury to pay claims from major natural disasters. Most notably, FEMA borrowed $17.5 billion for claims related to Hurricanes Katrina, Rita, and Wilma in 2005; $6.25 billion for claims related to Superstorm Sandy in 2012; and $1.6 billion for claims related to a series of floods in 2016. As of March 2017, FEMA’s debt stood at $24.6 billion, but later that year, Hurricanes Harvey, Irma, and Maria produced policyholder claims that FEMA would be unable to pay before reaching its borrowing limit. In October 2017, the Additional Supplemental Appropriations for Disaster Relief Requirements Act canceled $16 billion of NFIP’s debt to enable FEMA to pay these claims.
Without reforms, the financial condition of NFIP could continue to worsen. As Congress considers reforms to NFIP, we suggested that it consider comprehensive reform to improve the program’s solvency and enhance the nation’s resilience to flood risk.
Six Areas That Constitute Comprehensive Flood Insurance Reform
Source: GAO. | GAO-17-425
We’ve also recommended several ways that FEMA, which administers NFIP, could improve its administration of this program, such as updating its compensation practices for private insurers, allowing prorated refunds for certain customers who switch to private insurance, improving its rate-setting methods, and providing affordability assistance.
GAO’s Key Reports on the National Flood Insurance Program
GAO-17-425: Published: Apr 27, 2017. Publicly Released: Apr 27, 2017.
Based on discussions with stakeholders and GAO's past work, reducing federal exposure and improving resilience to flooding will require comprehensive reform of the National Flood Insurance Program (NFIP) that will need to include potential actions in six key areas (see figure below). Comprehensive reform will be essential to help balance competing programmatic goals, such as keeping flood insuranc...
GAO-16-59: Published: Mar 17, 2016. Publicly Released: Apr 18, 2016.
The Federal Emergency Management Agency (FEMA) sets National Flood Insurance Program (NFIP) full-risk rates using a model that includes some characteristics of catastrophe models used by private insurers. In particular, both models assess flood probability and damage to estimate potential flood losses. Like private insurers, NFIP also uses variables specific to each structure in estimating the deg...
GAO-16-190: Published: Feb 10, 2016. Publicly Released: Mar 10, 2016.
Options for targeting assistance to subsidized policyholders of primary residences who may experience difficulty paying full-risk rates for their National Flood Insurance Program (NFIP) policies include means testing assistance based on the income level of policyholders or geographic areas, setting premium caps, and basing assistance on the cost of mitigating the risk of damage to their homes. Cur...
GAO-15-111: Published: Dec 11, 2014. Publicly Released: Dec 11, 2014.
The actual forgone premiums—the difference between subsidized and full-risk premiums—to the National Flood Insurance Program (NFIP) due to subsidies cannot be measured. The Federal Emergency Management Agency (FEMA) does not collect flood risk information for all subsidized policies, which is needed to calculate their full-risk premium rates. GAO recommended in July 2013 that FEMA develop and...