• FEMA Has Yet To Address Some National Flood Insurance Program Administrative Challenges, GAO Says
  • May 20, 2014
  • Law Firm: Colodny Fass P.A. - Fort Lauderdale Office
  • The Federal Emergency Management Agency ("FEMA") has yet to fully address certain administrative recommendations relating to the National Flood Insurance Program ("NFIP") that have been noted in the past by the U. S. Government Accountability Office ("GAO"), the GAO explained in a report issued to the public on May 9, 2014.

    Because of its significant financial management challenges over the years, the NFIP has been on the GAO's list of High-Risk federal programs since 2006. However, even prior to that, the GAO has identified a variety of challenges facing the NFIP, many of which FEMA has generally agreed with and taken steps to address.

    In its 61-page May 9 report, however, the GAO noted that FEMA has not fully dealt with the remaining issues. Further, FEMA will need to address provisions in both the Biggert-Waters Insurance Reform Act of 2012 ("Biggert-Waters"), as well as the recently enacted Homeowner Flood Insurance Affordability Act of 2014 ("2014 Act") that affect many aspects of the NFIP, including its finances, rate setting and participation.

    Among other NFIP-related challenges, the GAO found the following:

    Finances. As of December 31, 2013, FEMA owed the U.S. Department of the Treasury ("U.S. Treasury") $24 billion--primarily to pay claims associated with Superstorm Sandy (2012) and Hurricane Katrina (2005)--and had not made a principal payment since 2010. The Biggert-Waters Act required FEMA to issue a report to Congress by January 2013 on a repayment plan setting forth options to repay FEMA's total debt to Treasury within 10 years. However, as of January 2014, FEMA had not issued such a report. According to FEMA officials, preliminary analysis suggests that, under FEMA's planned implementation of the Biggert-Waters Act, the agency will not be able to repay its debt within the 10-year time frame. FEMA officials said their report would contain options for retiring the debt within 10 years, but that most of the options would require Congressional action. As required by the Biggert-Waters Act, FEMA is establishing a reserve fund that could help reduce the need for future borrowing from the Treasury. However, FEMA is unlikely to initially meet the Biggert-Waters Act's annual targets for building up the reserve, due partly to statutory limitations on annual premium increases.

    Premium Rate Setting. FEMA's methodology for determining full-risk premium rates may not fully reflect the actual risk of flood damage as intended. Consistent with recommendations made by the GAO in 2008, FEMA has initiated actions to improve the accuracy of full-risk rates, including updating data used in the model it uses to set rates. However, these actions are in the preliminary stages. FEMA had begun implementing the Biggert-Waters Act provisions to reduce and eventually eliminate most subsidized rates on remaining policies. The 2014 Act reinstated some of these subsidies. Phasing out and eventually eliminating subsidies remaining after the 2014 Act poses challenges for FEMA. For example, to appropriately revise rates for policies that were previously subsidized (that is, had discounted insurance premiums), FEMA will need information on the relative risk of flooding and property elevations, which generally had not been required for subsidized policies prior to the Biggert-Waters Act. FEMA is evaluating approaches to obtain this information in response to a recommendation the GAO made in a 2013 report. Premium rate increases arising from the Biggert-Waters Act may also pose affordability challenges for some homeowners. The 2014 Act's repeal of certain rate increases in the Biggert-Waters Act is expected to address affordability concerns, but may also reduce program revenues and weaken the financial soundness of the NFIP program.

    Participation. Overall NFIP penetration rates-the proportion of all properties with flood insurance-are low, according to estimates based on available limited data. In addition, while some homeowners are required to purchase flood insurance for the life of their mortgage loans, information on the extent of compliance with this requirement is limited. As of September 31, 2013, there were more than 5.5 million NFIP policies in force, but several factors have negatively affected program participation. These include inaccurate perceptions about the risk of flooding and the cost of purchasing policies, as well as the inaccurate assumption that flood perils are included in homeowner's insurance policies. FEMA has taken a number of steps to broaden participation in NFIP, including development of a national outreach strategy. In addition, the Biggert-Waters Act includes several provisions to strengthen enforcement of the mandatory purchase requirement and to address some of the factors that limit participation.

    The May 9 GAO report summarizes its prior work on NFIP issues in a number of key areas, including finances, premium rate setting and program participation. To accomplish this work, the GAO reviewed its prior relevant reports issued from April 2003 through February 2014 and reviewed FEMA documentation on the status of prior GAO recommendations. The GAO also analyzed FEMA policy data as of the end of fiscal year 2013, along with FEMA policy and claims data for calendar years 2010 and 2012.