GAO-23-105977, FLOOD INSURANCE: FEMA’s New Rate-Setting Methodology Improves Actuarial Soundness but Highlights Need for Broader Program Reform

FLOOD INSURANCE

FEMA's New Rate-

Setting Methodology

Improves Actuarial

Soundness but

Highlights Need for

Broader Program

Reform

Report to Congressional Addressees

July 2023

GAO-23-105977

United States Government Accountability Office

Highlights of GAO-23-105977, a report to

congressional

addressees

July 2023

FLOOD INSURANCE

FEMA’s New Rate

-Setting Methodology Improves

Actuarial Soundness

but Highlights Need

for Broader

Program

Reform

What GAO Found

In October 2021, the Federal Emergency Management Agency (FEMA) began

implementing Risk Rating 2.0, a new methodology for setting premiums for the

National Flood Insurance Program (NFIP). The new methodology substantially

improves ratemaking by aligning premiums with the flood risk of individual

properties, but some other aspects of NFIP still limit actuarial soundness. For

example, in addition to the premium, policyholders pay two charges that are not

risk based. Unless Congress authorizes FEMA to align these charges with a

property’s risk, the total amounts paid by policyholders may not be actuarially

justified, and some policyholders could be over- or underpaying. Further,

Congress does not have certain information on the actuarial soundness of NFIP,

such as the risk that the new premiums are designed to cover and projections of

fiscal outlook under a variety of scenarios. By producing an annual actuarial

report that includes these items, FEMA could improve understanding of Risk

Rating 2.0 and facilitate congressional oversight of NFIP.

Risk Rating 2.0 is aligning premiums with risk, but affordability concerns

accompany the premium increases. FEMA had been increasing premiums for a

number of years prior to implementing Risk Rating 2.0. By December 2022, the

median annual premium was $689, but this will need to increase to $1,288 to

reach full risk. Under Risk Rating 2.0, about one-third of policyholders are

already paying full-risk premiums. Many of these policyholders had their

premiums reduced upon implementation of Risk Rating 2.0. All others will require

higher premiums, including 9 percent who will eventually require increases of

more than 300 percent. Further, Gulf Coast states are among those experiencing

the largest premium increases. Policies in these states have been among the

most underpriced, despite having some of the highest flood risks.

Estimated Premium Changes under Risk Rating 2.0, as of December 2022

Annual premium increases for most policyholders are limited to 18 percent by

statute. These caps help address some affordability concerns in the near term,

but have several limitations.

• First, the caps perpetuate an unfunded premium shortfall. GAO

estimated it would take until 2037 for 95 percent of current policies to

reach full-risk premiums, resulting in a $27 billion premium shortfall (see

figure below). The costs of shortfalls are not transparent to Congress or

the public because they are not recognized in the federal budget and

become evident only when NFIP must borrow from the Department of

the Treasury after a catastrophic flood event.

View GAO-23-105977. For more information,

contact

Alicia Puente Cackley at (202) 512-

8678 or

[email protected] or Frank Todisco

at (202) 512

-2700 or todiscof@gao.gov.

Why GAO Did This Study

NFIP was created with competing

policy goals

—keeping flood insurance

affordable and the program fiscally

solvent. A historical focus on

affordability has led to premiums that

do not fully reflect

flood risk,

insufficient

revenue

to pay claims, and, ultimately,

$36.5 billion in borrowing from

Treasury since 2005.

FEMA

’s new Risk Rating 2.0

methodology is intended to better align

premium

s with underlying flood risk at

the individual property level.

This report

examines several

objectives,

including (1) the actuarial

soundness of

Risk Rating 2.0, (2) how

premium

s are changing, (3) efforts to

address affordability for policyholders,

(4)

options for addressing the debt,

and (5) implications for the private

market

GAO reviewed

FEMA documentation

and analyzed NFIP

, Census Bureau,

and private flood

insurance data. GAO

also interviewed FEMA officials

actuarial organizations, private flood

insurers, and insurance agent

association

What GAO Recommends

GAO recommends

six matters for

congressional consideration

Specifically, Congress should consider

the following:

•

Authorizing and requiring

FEMA to

replace two policyholder charges

with risk-based premium charges

•

Replacing discounted premiums

with a means-based assistance

program that is reflected in the

federal budget

United States Government Accountability Office

• Second, the caps address affordability poorly. For example, they are not

cost-effective because some policyholders who do not need assistance

likely are still receiving it. Concurrently, some policyholders needing

assistance likely are not receiving it, and the discounts will gradually

disappear as premiums transition to full risk.

• Third, the caps keep NFIP premiums artificially low, which undercuts

private-market premiums and hinders private-market growth.

An alternative to caps on annual premium increases is a means-based

assistance program that would provide financial assistance to policyholders

based on their ability to pay and be reflected in the federal budget. Such a

program would make NFIP’s costs transparent and avoid undercutting the private

market. If affordability needs are not addressed effectively, more policyholders

could drop coverage, leaving them unprotected from flood risk and more reliant

on federal disaster assistance. Addressing affordability needs is especially

important as actions to better align premiums with a property’s risk could result in

additional premium increases.

Estimated Premium Shortfall and Percentage of National Flood Insurance Program Policies at

Full-Risk Premiums, by Calendar Year

FEMA has had to borrow from Treasury to pay claims in previous years and

would have to use revenue from current and future policyholders to repay the

debt. NFIP’s debt largely is a result of discounted premiums that FEMA has been

statutorily required to provide. In addition, a statutorily-required assessment has

the effect of charging current and future policyholders for previously incurred

losses, which violates actuarial principles and exacerbates affordability concerns.

Even with this assessment, it is unlikely that FEMA will ever be able to repay the

debt as currently structured. For example, with the estimated premium shortfalls,

repaying the debt in 30 years at 2.5 percent interest would require an annual

payment of about $1.9 billion, equivalent to a 60 percent surcharge for each

policyholder in the first year. Such a surcharge could cause some policyholders

to drop coverage, leaving them unprotected from flood risk and leaving NFIP with

fewer policyholders to repay the debt. Unless Congress addresses this debt—for

example, by canceling it or modifying repayment terms—and the potential for

future debt, NFIP’s debt will continue to grow, actuarial soundness will be

delayed, and affordability concerns will increase.

Risk Rating 2.0 does not yet appear to have significantly changed conditions in

the private flood insurance market because NFIP premiums generally remain

lower than what a private insurer would need to charge to be profitable. Further,

certain program rules continue to impede private-market growth. Specifically,

NFIP policyholders are discouraged from seeking private coverage because

statute requires them to maintain continuous coverage with NFIP to have access

to discounted premiums, and they do not receive refunds for early cancellations if

they switch to a private policy. By authorizing FEMA to allow private coverage to

satisfy NFIP’s continuous coverage requirements and to offer risk-based partial

refunds for midterm cancellations replaced by private policies, Congress could

promote private-market growth and help to expand consumer options.

•

Addressing NFIP’s current debt—

for example, by canceling it or

modifying repayment terms—and

potential for future debt

• Authorizing and requiring FEMA to

revise NFIP rules hindering the

private market related to (1)

continuous coverage and (2)

partial refunds for midterm

cancellations

GAO is also making five

recommendatons to FEMA, including

that it publish an annual report on

NFIP’s actuarial soundness and fiscal

outlook. The Department of Homeland

Security agreed with the

recommendations.

View GAO-23-105977. For more information,

contact

Alicia Puente Cackley at (202) 512-

8678 or

[email protected] or Frank Todisco

at (202) 512

-2700 or todiscof@gao.gov.

Page i GAO-23-105977 Flood Insurance

Letter 1

Background 4

Risk Rating 2.0 Significantly Improves Ratemaking, but Certain

Aspects of NFIP Limit Actuarial Soundness 12

Risk Rating 2.0 Is Aligning Premiums with Risks, but Some

Policyholders Face Increasing Affordability Concerns 23

Means-Based Assistance Could Address Affordability More

Transparently and Efficiently Than Discounted Premiums 34

Options Exist to Address NFIP’s Legacy Debt and the Potential for

Future Debt 47

Risk Rating 2.0 Has Not Yet Significantly Affected the Private

Insurance Market, but Some NFIP Rules Hinder Market Growth 56

FEMA Has Released Detailed Information on Risk Rating 2.0, but

Has Not Provided It to Policyholders 60

Conclusions 62

Matters for Congressional Consideration 65

Recommendations for Executive Action 66

Agency Comments 67

Appendix I Objectives, Scope, and Methodology 69

Appendix II Additional Data on Glidepath and Means-Based Assistance

Estimates 76

Appendix III Comments from the Department of Homeland Security 78

Appendix IV GAO Contacts and Staff Acknowledgments 84

Tables

Table 1: National Flood Insurance Program (NFIP) Policyholder

Assessments, Surcharges, and Fees 8

Table 2: Estimated Median National Flood Insurance Program

(NFIP) Premiums, by Race and Ethnicity 32

Table 3: Glidepath Time and Premium Shortfall Estimates 76

Contents

Page ii GAO-23-105977 Flood Insurance

Table 4: Estimated Participants and Costs of Alternative Means-

Based Assistance Programs 77

Figures

Figure 1: Policyholder Costs for a Hypothetical National Flood

Insurance Program Policy 10

Figure 2: National Flood Insurance Program (NFIP) Flow of Funds 11

Figure 3: Estimated Future Premium Changes under Risk Rating

2.0, as of December 2022 25

Figure 4: Median Percent Change from Legacy NFIP Premium to

Full-Risk Premium under Risk Rating 2.0, by State, as of

December 31, 2022 27

Figure 5: Median NFIP Premium, by State, as of December 31,

2022 29

Figure 6: Median Full-Risk NFIP Premiums as a Percentage of

Household Income, by State, as of December 31, 2022 31

Figure 7: Affordability of National Flood Insurance Program (NFIP)

Premiums, by Race and Ethnicity 33

Figure 8: Illustration of the Premium Shortfall and Transition to

Full-Risk Premium for a Hypothetical National Flood

Insurance Program Policy 35

Figure 9: Estimated Premium Shortfall and Percentage of National

Flood Insurance Program Policies at Full-Risk Premiums,

by Calendar Year 36

Figure 10: National Flood Insurance Program Policies Remaining

on the Glidepath under Alternative Annual Premium

Increase Caps, by Year 37

Figure 11: Cost Estimates of a Means-Based Assistance

Program—Alternative 1 42

Figure 12: Cost Estimates of a Means-Based Assistance

Program—Alternative 2 43

Figure 13: Number of National Flood Insurance Program Policies,

2019–2022 46

Figure 14: National Flood Insurance Program Annual Year-End

Outstanding Debt to the Department of the Treasury,

Fiscal Years 1995–2022 48

Figure 15: Estimated Effects of Various Requirements for

Repaying National Flood Insurance Program (NFIP) Debt

over 30 Years 52

Figure 16: Private Flood Insurance Share of Flood Insurance

Policies, by Number of Policies 57

Page iii GAO-23-105977 Flood Insurance

Abbreviations

AMI area median income

BISG Bayesian Improved Surname Geocoding

CRS Community Rating System

FEMA Federal Emergency Management Agency

FIRM Flood Insurance Rate Map

HFIAA Homeowner Flood Insurance Affordability Act of 2014

HHI household income

MBA means-based assistance

NAIC National Association of Insurance Commissioners

NFIP National Flood Insurance Program

SFHA special flood hazard area

WYO Write Your Own

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Page 1 GAO-23-105977 Flood Insurance

441 G St. N.W.

Washington, DC 20548

July 31, 2023

The Honorable Sherrod Brown

Chairman

The Honorable Tim Scott

Ranking Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Patrick McHenry

Chairman

The Honorable Maxine Waters

Ranking Member

Committee on Financial Services

House of Representatives

The Honorable Bennie G. Thompson

Ranking Member

Committee on Homeland Security

House of Representatives

The Honorable Troy Carter

Ranking Member

Subcommittee on Emergency Management and Technology

Committee on Homeland Security

House of Representatives

The National Flood Insurance Program (NFIP) has competing policy

objectives: being fiscally solvent while keeping flood insurance affordable

for policyholders. Balancing these objectives has been challenging over

the years, and a historical focus on affordability has come at the expense

of solvency. In particular, Congress has required the Federal Emergency

Management Agency (FEMA) to allow many policyholders to pay

discounted premiums that do not fully reflect their properties’ flood risk.

This approach has contributed to a shortfall in revenue and insufficient

funds to pay claims, causing FEMA to borrow about $36.5 billion from the

Letter

Page 2 GAO-23-105977 Flood Insurance

Department of the Treasury since 2005. For these reasons, we placed

NFIP on our High-Risk List in 2006.

The ratemaking methodology used until recently by FEMA has

contributed to these challenges.

This legacy methodology had become

outdated, as it had remained largely unchanged since NFIP was created

in 1968. To modernize its ratemaking methodology and better align

premiums with underlying flood risk at the individual property level, FEMA

developed a new methodology called Risk Rating 2.0 and began

implementing it in October 2021. Under Risk Rating 2.0, most

policyholders will continue to experience premium increases.

While

these increases will help move NFIP toward fiscal solvency and more

accurately signal to homeowners the flood risk of their property, they will

also amplify affordability concerns.

In April 2017, we outlined a road map for comprehensive reform that,

among other things, addresses the trade-offs between solvency and

affordability.

Since September 2017, NFIP has been operating under a

series of short-term reauthorizations without comprehensive reform. In

September 2023, NFIP’s current authorization will expire.

We performed our work under the authority of the Comptroller General in

light of congressional interest in FEMA’s new ratemaking methodology

and NFIP’s impending reauthorization. This report examines (1) the

actuarial soundness of the new methodology, (2) how premiums are

changing for policyholders, (3) efforts to make flood insurance affordable

for policyholders, (4) options for addressing program debt, (5) the

potential implications of Risk Rating 2.0 for the private flood insurance

market, and (6) FEMA’s efforts to promote policyholder understanding of

Risk Rating 2.0.

GAO, High Risk: Efforts Made to Achieve Progress Need to Be Maintained and

Expanded to Fully Address All Areas, GAO-23-106203 (Washington, D.C.: Apr. 20, 2023).

Ratemaking is the process used to determine what prices (premiums) an insurer

charges.

Under the previous methodology, policyholders did not experience premium decreases.

However, under Risk Rating 2.0, about 19 percent of policyholders experienced an

immediate decrease in premiums.

GAO, Flood Insurance: Comprehensive Reform Could Improve Solvency and Enhance

Resilience, GAO-17-425 (Washington, D.C.: Apr. 27, 2017).

Page 3 GAO-23-105977 Flood Insurance

To examine the actuarial soundness of Risk Rating 2.0, we reviewed

FEMA documentation and actuarial assumptions and methods used to

develop premiums. We also reviewed the premiums, assessments,

surcharges, and fees that policyholders pay and the costs these charges

are designed to cover. Finally, we interviewed FEMA officials and an

actuarial association and compared the methodology and results against

actuarial standards and principles.

To examine how premiums are changing for policyholders, we analyzed

NFIP policy data and Census Bureau data by geography and household

income.

We also used a statistical technique to estimate the probability

that NFIP policyholders identify as a particular race or ethnicity and

analyzed premium changes by these factors.

To examine efforts to make insurance affordable for policyholders, we

reviewed legislative proposals as well as policy goals established in our

prior work.

We analyzed NFIP policy data to estimate the time it might

take for FEMA to transition current policyholders to full-risk premiums and

the continued federal cost until the transition is completed. We accounted

for annual premium increase caps, inflation rates, flood risk, and NFIP

policy renewal, and we analyzed alternate scenarios for each of these

assumptions to determine how our estimates might change. We also

analyzed NFIP policy data and census data to estimate the potential

costs associated with providing means-based affordability assistance for

flood insurance.

To examine options for addressing program debt, we analyzed NFIP

policy data and reviewed our previous work on NFIP, as well as reports

from the Congressional Budget Office, Congressional Research Service,

We assessed the reliability of NFIP data we analyzed by reviewing relevant

documentation; testing the data to identify missing data, outliers, and any obvious errors;

and comparing our results to published data. We also interviewed FEMA officials and

reviewed relevant documentation. We determined that the NFIP data we analyzed were

sufficiently reliable for the purposes of our report.

We assessed the reliability of these estimates by conducting a literature review on the

accuracy of the technique and by examining the completeness and distributions of the

estimates for NFIP policyholders. We determined that the data were sufficiently reliable for

estimating the race or ethnicity of NFIP policyholders.

See GAO-17-425.

Page 4 GAO-23-105977 Flood Insurance

FEMA, and others. We assessed the options against actuarial standards

as well as policy goals we established in prior work.

To examine the potential implications of Risk Rating 2.0 for the private

flood insurance market, we analyzed NFIP policy data and data from the

National Association of Insurance Commissioners (NAIC) on private flood

insurance.

We also interviewed private insurers and reviewed laws and

regulations that affect private insurers’ ability to provide flood insurance.

We assessed these laws and regulations against policy goals we

established in prior work.

To examine FEMA’s efforts to promote policyholder understanding of Risk

Rating 2.0, we reviewed NFIP policy documents, FEMA’s web materials,

and training materials for agents and Write Your Own (WYO) insurers.

We also interviewed FEMA officials and insurance agent associations.

We compared this information against FEMA’s strategic plan. A more

detailed description of our scope and methodology is included in

appendix I.

We conducted this performance audit from March 2022 to July 2023 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 believe that

the evidence obtained provides a reasonable basis for our findings and

conclusions based on our audit objectives.

Congress first proposed providing flood insurance in the 1950s, after it

became clear that private insurance companies could not profitably

provide flood coverage. Specifically, limited knowledge of flood risk at the

time made it difficult for insurers to determine accurate premiums. This

uncertainty, combined with the catastrophic nature of flooding, would

have required premiums that many consumers might not have been able

to afford. In 1968, Congress created NFIP to help reduce the escalating

costs of providing federal flood assistance to repair damaged homes and

We assessed the reliability of these data by comparing data elements to totals from other

sources. We also interviewed NAIC officials about the accuracy and limitations of the data

and their process for ensuring reliability. We determined that the data were sufficiently

reliable to describe trends in the private flood insurance market.

FEMA’s WYO program allows private insurers to sell and service policies and adjust

claims for NFIP.

Background

Page 5 GAO-23-105977 Flood Insurance

businesses.

NFIP was also intended to address the policy objectives of

identifying flood risk, offering reasonable insurance premiums to

encourage program participation, and promoting community-based

floodplain management.

Community participation in NFIP is voluntary. For a community’s

residents to purchase flood insurance through the program, the

community must participate in NFIP.

Participation requires communities

to meet certain requirements, including enforcing regulations for land use,

building standards, and new construction in special flood hazard areas

(SFHA).

FEMA uses community assistance visits and community

assistance contacts to oversee community enforcement of NFIP

requirements. Community assistance visits are on-site assessments of a

community’s floodplain management program and its knowledge and

understanding of NFIP’s floodplain management requirements.

In 1990, FEMA implemented a voluntary incentive program for

communities participating in NFIP called the Community Rating System

(CRS) to recognize and encourage community floodplain management

activities that exceed the minimum NFIP requirements. According to

FEMA, CRS’s goals are to reduce and avoid flood damage to insurable

property, strengthen and support the insurance aspects of NFIP, and

foster comprehensive floodplain management. Communities may apply to

join CRS if they are in full compliance with the minimum NFIP floodplain

management requirements. FEMA groups CRS communities into classes

based on their ratings. Communities can improve their ratings by earning

CRS credits for activities such as increasing public information about

flood risks, preserving open space, taking steps to mitigate flood damage,

and preparing residents for floods. Policyholders in these communities

Pub. L. No. 90-448, Tit. XIII, 82 Stat. 476, 572 (1968).

On June 1, 2023, 10 states and multiple local jurisdictions filed a lawsuit in the Eastern

District of Louisiana against FEMA alleging, among other claims, that Risk Rating 2.0 is

inconsistent with the objective of making flood insurance available when necessary at

reasonable rates and that the agency’s actions violated legal requirements of notice and

comment rulemaking. Louisiana, et. al. v. Mayorkas, Case No. 2:23-cv-01839 (E.D. La.

June 1, 2023). We do not address this lawsuit or any legal authorities discussed in the

lawsuit in this report.

As of May 2023, FEMA had identified 24,767 communities across the United States. Of

these, 22,621 (91 percent) participated in NFIP.

SFHAs are land areas that would be submerged by the floodwaters of the “base flood”—

a flood that has a 1 percent chance of being equaled or exceeded in any given year.

Community Participation,

WYO Program, and

Purchase Requirements

Page 6 GAO-23-105977 Flood Insurance

receive a discount on their flood insurance premiums ranging from 5 to 45

percent, depending on the community’s rating.

Consumers can purchase NFIP policies from a licensed property and

casualty agent. Most agents sell policies underwritten through FEMA’s

WYO program, which allows private insurers to sell and service policies

and adjust claims for NFIP. To become a WYO insurer, private insurers

enter into an arrangement with FEMA to issue flood policies in their own

name. The insurers must have experience in property and casualty

insurance lines, be in good standing with state insurance departments,

and be capable of selling and servicing the policies. WYO insurers do not

assume any risk, and they receive an expense allowance for their

services (currently about 30 percent of the premium a policyholder pays).

Agents can also contract directly with FEMA to sell NFIP policies under

the agency’s NFIP Direct program.

Consumers pay the same premium,

regardless of how they purchase their policy.

Generally, homeowners with federally backed mortgages in SFHAs have

been required by law to purchase flood insurance since 1973.

As part of

its role in administering NFIP, FEMA develops floodplain maps—

historically known as Flood Insurance Rate Maps (FIRM)—that provide

the basis for identifying which properties are required to purchase flood

insurance by delineating the boundaries of SFHAs.

Properties located in

these areas that have certain federally backed mortgages are subject to

the mandatory purchase requirement for flood insurance.

In October 2021, FEMA began implementing a new methodology for

calculating flood insurance premiums, known as Risk Rating 2.0.

Beginning on October 1, 2021, all new NFIP policyholders were required

to pay the full-risk premium determined using Risk Rating 2.0, and all

renewing policyholders were able to opt into Risk Rating 2.0 if it lowered

As of January 2020, approximately 88 percent of NFIP policies were sold by companies

participating in the WYO program, and 12 percent of policies were sold through the NFIP

Direct Servicing Agent.

42 U.S.C § 4012a. Federally backed mortgages are those made, insured, or guaranteed

by federally regulated lenders or federal agencies, or purchased by the government-

sponsored enterprises for housing—Fannie Mae and Freddie Mac.

FEMA floodplain maps also serve as the basis for local floodplain management

standards that communities must adopt and enforce as part of their NFIP participation.

Prior to Risk Rating 2.0, FEMA also used its floodplain maps to set premiums.

Risk Rating 2.0 and

Authority for Premium

Increases

Page 7 GAO-23-105977 Flood Insurance

their premium.

Beginning on April 1, 2022, all NFIP policyholders

became subject to the new methodology as their policies were renewed,

so that as of April 1, 2023, all NFIP policies were subject to Risk Rating

2.0.

Under the legacy methodology, some properties (also known as “pre-

FIRM” properties) paid discounted “subsidized” premiums if they were

built before floodplain maps for their area were published and flood risk in

those locations was properly understood. Other policies paid discounted

“grandfathered” premiums when a new flood map placed them into a

flood zone that would have increased their premiums; these properties’

premiums continued to be based on the previous, lower-risk flood zone.

Premium increases for renewing NFIP policies are generally limited by

statute.

For most policies, FEMA is prohibited from increasing premiums

by more than 18 percent per year.

FEMA is also required by law to

increase premiums by 25 percent per year for certain other policies until

they reach full risk, such as those covering pre-FIRM secondary

residences, businesses, and severe repetitive loss properties.

FEMA is

to increase premiums from 5 to 15 percent per year for certain other

policies, including those covering properties that were built before flood

maps were available for their area.

FEMA refers to its premiums that encompass all of the elements of the individual risk

transfer as full-risk premiums.

NFIP policies generally have a 1-year term. We refer to annual premium amounts that

reflect the policy term.

42 U.S.C. § 4015(e).

FEMA also is prohibited from increasing premiums for certain groups of policies with the

same flood risk classification by more than 15 percent per year on average. Such groups

include properties that were built before flood maps were available for their area and

properties that pay discounted premiums because they were newly mapped into an SFHA

on or after April 1, 2015, if the applicant gets flood insurance coverage within a year of the

mapping.

A severe repetitive loss property is an NFIP-insured structure that has incurred flood-

related damage for which (a) four or more separate claims have been paid that exceeded

$5,000 each and cumulatively exceeded $20,000, or (b) at least two separate claim

payments have been made under such coverage, with the cumulative amount of such

claims exceeding the fair market value of the insured structure. 42 U.S.C. § 4104c(h); 42

U.S.C. § 4014(h).

Page 8 GAO-23-105977 Flood Insurance

FEMA generally pays claims and funds its operations from premium

revenue from policyholders. In addition to paying for flood claims and

adjustment expenses, FEMA uses premium revenue to pay other costs,

including WYO expense allowances, interest on debt, operating

expenses, and mitigation grants.

FEMA offers coverage to homeowners, renters, and businesses for

buildings and their contents.

In addition to premiums for building and

contents coverage, NFIP policyholders pay separate assessments,

surcharges, and fees (see table 1).

Table 1: National Flood Insurance Program (NFIP) Policyholder Assessments, Surcharges, and Fees

Charge

Authority

Purpose

Amount

FEMA authority

Reserve fund

assessment

Biggert-Waters Flood

Insurance Reform Act of

2012 (codified as

amended at 42 U.S.C. §

4017a)

Establish and maintain a

reserve fund to cover

future claim and debt

expenses, especially

those from catastrophic

disasters

18% of current premium

per policy starting on

April 1, 2020 (previously

15% since April 2016)

The Federal Emergency

Management Agency

(FEMA) has limited

authority to determine the

amount (statute specifies

a reserve fund target and

minimum annual

payments into the fund

until the target is

reached).

Homeowner

Flood Insurance

Affordability Act

surcharge

Homeowner Flood

Insurance Affordability

Act of 2014 (codified at

42 U.S.C. § 4015a)

Offset the cost of

discounted premiums

$25 for primary

residences; $250 for all

other properties

FEMA has no authority to

determine the amount or

eliminate the surcharge

before statutory

requirements for full-risk

premiums are generally

universally met—that is,

nearly all NFIP policies

must be at full-risk, with

some exceptions.

Federal Policy

Fee

Omnibus Budget

Reconciliation Act of

1990 (codified as

amended at 42 U.S.C. §

4014 (a)(1)(B)(iii))

Pay for administrative

expenses incurred in

carrying out flood

insurance and floodplain

mapping activities

$47 for all policies under

Risk Rating 2.0

(previously $50 and $25,

depending on policy type,

since October 2017)

FEMA has certain

authority to determine the

amount.

Source: GAO. | GAO-23-105977

NFIP’s maximum coverage limit for one-to-four-family residential policies is $250,000 for

buildings and $100,000 for contents. For nonresidential policies, the maximum coverage

limit is $500,000 per building and $500,000 for the building owner’s contents. NFIP

policies offer a variety of deductible options. Renters can purchase contents-only

coverage. FEMA also offers Increased Cost of Compliance coverage, which provides up

to $30,000 to help cover the cost of mitigation measures following a flood loss when a

property is declared to be substantially or repetitively damaged.

NFIP Funding Structure

and Flow of Funds

Page 9 GAO-23-105977 Flood Insurance

Note: In addition to premiums, which are based on risk, NFIP policyholders pay separate

assessments, surcharges, and fees.

For example, a hypothetical single-family primary residence had been

paying an annual premium of $1,017 prior to Risk Rating 2.0. Under Risk

Rating 2.0, FEMA determined that this hypothetical policyholder should

be paying $2,200 to reflect the full risk of loss of the insured property.

Because this policy is subject to an 18 percent statutory cap on annual

premium increases, in the first year FEMA can only raise the premium by

18 percent, from $1,017 to $1,200. Therefore, in the first year of Risk

Rating 2.0, the policyholder receives a $1,000 discount relative to the full-

risk premium of $2,200. The policyholder then pays $288 in additional

assessments, surcharges, and fees, bringing the total payment to $1,488.

The premium will increase each year, subject to the statutory caps, until

the full-risk premium is reached. Figure 1 illustrates the costs for this

hypothetical policyholder in the first year under Risk Rating 2.0.

Page 10 GAO-23-105977 Flood Insurance

Figure 1: Policyholder Costs for a Hypothetical National Flood Insurance Program Policy

FEMA also has reinsurance agreements and borrowing authority from

Treasury to fulfill its obligations. Collections are deposited into an

Page 11 GAO-23-105977 Flood Insurance

insurance fund, and some are transferred to a reserve fund (see fig. 2).

In most years, NFIP premium revenue is sufficient to pay claims and

generate a cash surplus. In years when losses exceed premium revenue,

FEMA uses any amounts in these funds to pay claims, first from the

insurance fund and then, if necessary, from the reserve fund. When

individual or accumulated losses in a year exceed a certain threshold,

FEMA can receive payouts from its reinsurance agreements. When

revenue, reinsurance, and any accumulated surplus are insufficient,

FEMA has authority to borrow from the Treasury.

Figure 2: National Flood Insurance Program (NFIP) Flow of Funds

Note: All policyholder payments are deposited into the National Flood Insurance Fund, but the

reserve fund assessment and Homeowner Flood Insurance Affordability Act (HFIAA) surcharge are

transferred into the National Flood Insurance Reserve Fund.

The National Flood Insurance Fund was established in the U.S. Treasury by the

National Flood Insurance Act of 1968. The National Flood Insurance Reserve Fund was

established by the Biggert-Waters Flood Insurance Reform Act of 2012 to help meet future

NFIP obligations and principal and interest payments on any outstanding Treasury loans

(42 U.S.C. § 4017a). Specifically, FEMA is required to establish a reserve fund with a

balance equal to 1 percent of the sum of the total potential loss exposure of all

outstanding flood insurance policies in force in the prior fiscal year. FEMA’s total exposure

in fiscal year 2022 was $1.28 trillion, which equates to a target reserve fund balance of

$12.8 billion for fiscal year 2022. FEMA is required to contribute at least 7.5 percent of its

target balance each year until it achieves the target reserve fund balance. This equates to

a reserve fund contribution of $960 million for fiscal year 2022.

42 U.S.C. § 4016. Congress authorized FEMA to borrow from the Treasury when

needed, up to a preset statutory limit. Originally, Congress authorized a borrowing limit of

$1 billion and increased it significantly in 2005 and 2013. The limit currently stands at

$30.425 billion.

Page 12 GAO-23-105977 Flood Insurance

In developing Risk Rating 2.0, FEMA applied actuarial principles to better

align premiums with flood risk, representing a substantial improvement

from its legacy ratemaking methodology. The methodology and process

FEMA used to develop full-risk premiums in Risk Rating 2.0 generally

reflect statutory premium requirements and relevant actuarial principles

and standards.

According to FEMA, Risk Rating 2.0 was the first change in its ratemaking

methodology since the 1970s. The legacy methodology had become out

of date for several key reasons, including that it largely based premiums

on a property’s height relative to the base flood elevation and broadly

defined flood zone and charged the same premium nationwide based on

these characteristics.

The legacy rating methodology also did not

capture many potential flood sources or reflect flood risk from

catastrophic events. We previously identified a number of challenges with

this ratemaking process.

42 U.S.C. § 4014(a). Casualty Actuarial Society, Statement of Principles Regarding

Property and Casualty Ratemaking (Arlington, Va.: May 7, 2021). The Actuarial Standards

Board’s relevant Actuarial Standards of Practice include 12 (Risk Classification for All

Practice Areas); 23 (Data Quality); 25 (Credibility Procedures); 29 (Expense Provisions in

Property/Casualty Insurance Ratemaking); 30 (Treatment of Profit and Contingency

Provisions and the Cost of Capital in Property/Casualty Insurance Ratemaking); 38

(Catastrophe Modeling); 39 (Treatment of Catastrophe Losses in Property/Casualty

Insurance Ratemaking); 53 (Estimating Future Costs for Prospective Property/Casualty

Risk Transfer and Risk Retention); and 56 (Modeling).

Under the legacy methodology, SFHAs included two categories of flood zones: A (high-

risk noncoastal) and V (high-risk coastal). Non-SFHAs generally included three

categories: B, C, and X (low to moderate risk).

See GAO, National Flood Insurance Program: Continued Progress Needed to Fully

Address Prior GAO Recommendations on Rate-Setting Methods, GAO-16-59

(Washington, D.C.: Mar. 17, 2016) and Flood Insurance: FEMA’s Rate-Setting Process

Warrants Attention, GAO-09-12 (Washington, D.C.: Oct. 31, 2008).

Risk Rating 2.0

Significantly Improves

Ratemaking, but

Certain Aspects of

NFIP Limit Actuarial

Soundness

With Risk Rating 2.0,

FEMA Improved

Ratemaking by Applying

Actuarial Principles

Page 13 GAO-23-105977 Flood Insurance

Under Risk Rating 2.0, FEMA better aligns premiums with flood risk and

takes advantage of new technology and advances in the insurance

industry’s understanding of flood risk. For instance, Risk Rating 2.0 does

the following:

• Ties premiums to individual property flood risk rather than to

broadly defined flood zones. Premiums under the legacy

methodology relied heavily on a structure’s flood zone as depicted on

FEMA’s floodplain maps.

Structures within each flood zone

generally were rated similarly, meaning that while properties may

have had different premiums because of other variables (e.g.,

occupancy type and elevation), the premium did not vary based on

the property’s particular geographic location within the zone. Risk

Rating 2.0 calculates premiums based on the characteristics of each

individual insured structure and no longer uses the flood zone.

• Integrates input from commercial catastrophe models.

Catastrophe models are computerized processes that simulate

potential losses due to catastrophic events, such as floods.

Their

use has become standard practice in the insurance industry since

they were first developed in the 1980s. The models have evolved

significantly as technology has advanced and exposure data have

improved. Under Risk Rating 2.0, FEMA uses catastrophe models to

estimate the annual losses from potential flood events.

• Accounts for more sources of flooding. The previous methodology

accounted only for coastal and riverine flooding, but Risk Rating 2.0

also includes pluvial (rainfall), Great Lakes, coastal erosion, and

tsunami flooding.

• Accounts for the replacement cost value of the property. NFIP

residential coverage is generally limited to $250,000. Although the

legacy methodology did not adjust premiums based on the value of

the insured property, insured homes with values above the $250,000

limit still affected NFIP’s risk exposure. For example, $250,000 in

coverage was priced the same for a $250,000 home as for a $5

million home. However, this approach was inequitable because the

same flooding event is likely to cause more damage to a higher-value

structure. For example, $250,000 in damage to a $250,000 home—a

FEMA floodplain maps are the official maps of communities on which FEMA has

delineated the SFHA and base flood elevations applicable to the community.

Actuarial standards of practice define a catastrophe model as a model of low-frequency

events with high-severity or widespread potential effects. Catastrophe models may be

used to explain a system, to study effects of different components, or to derive estimates.

Page 14 GAO-23-105977 Flood Insurance

total destruction of home value—would occur only with an infrequent

severe flood event. In contrast, $250,000 of damage to a $5 million

home—a destruction of just 5 percent of home value—could occur

with far less severe and more frequent flood events. As a result, the

$5 million home has a much higher probability of incurring $250,000 in

damage than does a $250,000 home, and should have a higher

premium. By not accounting for this difference in probabilities, the

legacy rating methodology tended to undercharge homes that are

more expensive and overcharge homes that are more modest. By

incorporating replacement cost value into its ratemaking, Risk Rating

2.0 more accurately accounts for differences in flood risk from

properties of different values.

In its Risk Rating 2.0 ratemaking process, FEMA incorporates the

damage or loss estimates of multiple catastrophe models, which include

commercial models as well as FEMA models that use data from other

government agencies, including the U.S. Army Corps of Engineers.

These models do not produce suggested premium rates, but FEMA uses

the output of these models in its ratemaking process. According to FEMA,

the agency makes use of multiple catastrophe models because, although

each model has its own strengths, no single model adequately covers all

circumstances. For example, FEMA uses data from the U.S. Army Corps

of Engineers to model damage and losses in areas behind levees, and it

uses data from the National Oceanic and Atmospheric Administration and

other agencies to model coastal flooding. Catastrophe models, including

those used by FEMA, are generally based on simulations and thus

involve some amount of uncertainty.

NFIP is statutorily required to develop premiums that are actuarially

sound.

According to actuarial principles, an actuarially sound premium

is an estimate of the expected value of future costs of the individual risk

transfer.

These expected costs include insurance claims, claims-related

42 U.S.C. § 4014(a).

Casualty Actuarial Society, Statement of Principles. Further, the Actuarial Standards

Board sets standards for appropriate actuarial practice in the United States through the

development and promulgation of Actuarial Standards of Practice, which describe the

procedures an actuary should follow when performing actuarial services and identify what

the actuary should disclose when communicating the results of those services. According

to Actuarial Standard of Practice 1, “actuarial soundness” has different meanings in

different contexts and might be dictated or imposed by an outside entity. In rendering

actuarial services, if the actuary identifies a process or result as “actuarially sound,” the

actuary should define the meaning of “actuarially sound” in that context.

Page 15 GAO-23-105977 Flood Insurance

expenses, commissions, operational expenses, reinsurance costs, and a

provision for retained risk.

Actuarial principles also state that an

actuarially sound premium should be reasonable and should not be

excessive, inadequate, or unfairly discriminatory. In developing Risk

Rating 2.0, FEMA followed the statutory definition of actuarial rates and

followed recognized actuarial principles and actuarial standards of

practice.

FEMA refers to its premiums that encompass all of the

elements of the individual risk transfer as full-risk premiums.

The process of ratemaking under Risk Rating 2.0 included three core

components: creating market baskets representative of single-family

homes, estimating NFIP’s aggregate target premium, and allocating

individual premiums to policyholders. Creating market baskets involved

grouping U.S. single-family homes with several of the same risk factors

using geographic information system data and commercially available

data.

FEMA incorporated the market baskets into catastrophe models

from several vendors and modeled NFIP’s flood risk using policy data as

of May 31, 2018. According to FEMA officials, they updated their

assumptions using data as of May 31, 2020.

FEMA then developed NFIP’s aggregate target premium—the total

premium for the entire program—using the average annual losses

generated from the catastrophe models, as well as provisions for WYO

expense allowances, loss adjustment expenses, and the net cost of

reinsurance and retained risk.

FEMA then used the aggregate target premium to determine individual

policyholder premiums based on the risk factors of their insured

properties and the potential flood sources. FEMA used rating variables,

Reinsurance is insurance for insurers. The net cost of reinsurance includes the excess

of reinsurance premiums paid to the reinsurer over recoveries for claims from the

reinsurer. Retained risk is the exposure that an insurer chooses to cover itself rather than

transferring it to a third party, such as a reinsurer, and includes the risk of random

variation from expected costs plus the risk of systematic underestimation of expected

costs. In private-sector contexts, a provision for risk is also referred to as a cost of capital.

The statutory definition of an actuarial rate is one that covers all costs, as prescribed by

principles and standards of practice in ratemaking adopted by the American Academy of

Actuaries and the Casualty Actuarial Society, including an estimate of the expected value

of future costs, all costs associated with the transfer of risk, and the costs associated with

an individual risk transfer with respect to risk classes, as defined by FEMA. 42 U.S.C. §

4014 (a)(1)(B)(iv).

Data sources included the U.S. Geological Survey, the National Oceanic and

Atmospheric Administration, and the U.S. Army Corps of Engineers.

Page 16 GAO-23-105977 Flood Insurance

which are characteristics that have been shown through analysis to

correlate with the likelihood of losses. When developing rating factors,

FEMA compared the annual expected losses derived from the

catastrophe models to NFIP’s historical losses from January 1, 1992, to

June 30, 2018, and adjusted accordingly. Specifically, FEMA compared a

range of modeled losses for each market basket of properties to the

historical losses experienced by actual policies within that market basket

to verify whether the historical losses fell into the model’s estimated

range.

FEMA performed a rating factor analysis by peril separately for single-

family homes not protected by a levee, single-family homes protected by

a levee, and non-single-family homes.

FEMA’s analyses identified a set

of rating factors that reflect several characteristics:

• location (including distance to flooding sources and elevation relative

to flooding sources);

• structural characteristics (including occupancy type, foundation type,

first floor height, number of floors, construction type, existence of flood

openings, and location of machinery and equipment); and

• replacement cost value, coverage, and deductible amounts.

All of these rating factors combined allow FEMA to group policyholders

with similar risks together to help determine the full-risk premium. FEMA

officials told us they plan to review and update premiums to continue

using the best available data, science, and models. They also plan to

account for changes in other factors, such as flood risk and their

understanding of it, as well as changes in inflation, expenses, fees, and

policyholder population.

In addition to premiums, NFIP policyholders pay separate charges that

are determined outside of the actuarial ratemaking process. These

additional charges are not proportional to the individual risk of the insured

property and result in some policyholders being charged more than the

actuarial cost of the risk transfer.

Risk Rating 2.0 accounts for the level of risk reduction that levees provide to the

buildings located behind them. Levees reduce flood risk but do not eliminate it. According

to FEMA, limitations of levees include their capacity to reduce flooding in leveed areas

(from overtopping) and their ability to perform adequately during flood events, and this

information is fundamental in assessing the risk.

Some Additional

Policyholder Charges Limit

Actuarial Soundness

Page 17 GAO-23-105977 Flood Insurance

• Reserve fund assessment. FEMA is statutorily required to establish

and maintain a reserve fund to provide additional funds to cover future

claims and debt expenses, especially those from catastrophic

disasters. Specifically, FEMA must move toward a target balance of 1

percent of insurance-in-force by making minimum annual

contributions of 7.5 percent of the target balance until the fund

reaches the target.

FEMA does so by implementing a reserve fund

assessment, which FEMA has set at 18 percent of the premium since

2020.

FEMA applies the reserve fund assessment to the discounted

premium rather than the full-risk premium. As a result, the

assessment is not proportional to the actual risk of the property.

FEMA officials told us that they view the reserve fund assessment as

a capitalization charge that is separate from the full-risk premium.

However, FEMA also includes in its full-risk premium a risk load for

the risk of future catastrophic losses, in accordance with actuarial

principles. As a result, the statutorily required reserve fund

assessment results in policyholders paying a charge for catastrophic

losses in two places, and being at risk of overpaying the cost of risk

transfer, especially policyholders paying full-risk premiums.

• Homeowner Flood Insurance Affordability Act (HFIAA)

surcharge. The HFIAA surcharge, which was statutorily established

and offsets the cost of discounted premiums, is set at $25 for primary

residences and $250 for other properties. Because the HFIAA

surcharge is a flat amount, it is not tied to the risk of the individual

42 U.S.C. § 4017a(b)(1),(d)(1).

FEMA initially set the reserve fund assessment at 5 percent but increased it to 15

percent in April 2016 and 18 percent in April 2020.

For example, a policyholder who pays a full-risk premium would pay a higher reserve

fund assessment than a policyholder with the same risk who pays a discounted premium.

FEMA is required to develop rates based on actuarial principles and in consideration of

risk to include operating and administrative expenses. 42 U.S.C. § 4014. This includes a

risk load for catastrophic losses, according to FEMA officials. Further, FEMA officials

stated that Risk Rating 2.0 includes this catastrophic load in the premium and that this

premium must be deposited into the National Flood Insurance Fund. Additionally, FEMA is

generally required by statute to increase premiums to fund the reserve fund to meet the

target or reserve ratio for the year. 42 U.S.C. § 4017a. FEMA officials stated that the

reserve fund assessment should not be viewed as an actuarial charge, but as a

congressional mandate. Additionally, FEMA officials stated that the reserve fund

assessment is subject to the aggregate annual premium increase cap of 18 percent a

year. According to FEMA, due to this constraint, policyholders who are paying their full-

risk rate will be charged the full reserve fund assessment, while those policyholders

receiving a premium increase discount will not pay the full reserve fund assessment.

Additionally, all premium increases to build up the reserve fund must be deposited into the

reserve fund. 42 U.S.C. § 4017a.

Page 18 GAO-23-105977 Flood Insurance

property, and while the $25 surcharge for primary residences is

relatively small, the $250 surcharge for other properties is not. In

addition, while the HFIAA surcharge offsets the cost of discounted

premiums, it is charged to all policyholders, including those already

paying the full-risk premium, so that these policyholders are partially

subsidizing policyholders paying discounted premiums. The amount of

the HFIAA surcharge is set in statute, so FEMA lacks the authority to

eliminate or reduce it until statutory requirements for full-risk

premiums are generally universally met—that is, nearly all NFIP

policies must be at full-risk, with some exceptions.

Because the full-risk premium covers the full cost of the risk transfer,

including a risk load, policyholders paying the full-risk premium plus the

reserve fund assessment and the additional HFIAA surcharge are paying

more than the actuarially determined cost of insurance. Moreover, the

size and duration of the reserve fund assessment will vary with claims

experience. For example, if the reserve fund is used to help pay claims in

a catastrophic loss year, the reserve fund assessment might need to be

increased, extended, or reinstated to reach the target balance. This would

result in current or future policyholders paying for past losses, in violation

of actuarial principles.

To the extent that the reserve fund assessment and HFIAA surcharge are

not proportional to the individual risk of the insured property or result in

policyholders paying more than an actuarially justified cost of the risk

transfer, the total costs a policyholder pays will not be actuarially sound.

Specifically, FEMA cannot ensure that the amounts charged align with the

flood risk of specific properties, which limits the ability of these charges to

accurately signal flood risk and results in some policyholders overpaying

and others potentially underpaying. Were Congress to authorize and

require FEMA to incorporate the reserve fund assessment, to the extent

necessary based on actuarial principles, into the risk charge within the

full-risk premium, it would enhance the actuarial soundness of the total

costs policyholders pay. Further, were Congress to repeal the HFIAA

surcharge and authorize and require FEMA to replace forgone revenue

with actuarially determined premium adjustments, it would enhance the

actuarial soundness of the total costs policyholders pay.

Premium discounts provided under the CRS program are not actuarially

justified and are paid for, in large part, through a cross-subsidization by

policyholders not receiving the discount. As previously discussed, FEMA

uses premium discounts ranging from 5 to 45 percent to promote CRS

program goals: to reduce and avoid flood damage to insurable property,

CRS Discounts Are Not

Actuarially Justified

Page 19 GAO-23-105977 Flood Insurance

to strengthen and support the insurance aspects of NFIP, and to foster

comprehensive floodplain management.

As a community engages in

additional eligible activities, its residents become eligible for larger

premium discounts.

FEMA officials told us they set full-risk premiums so that after applying

the CRS discounts, the total premium revenue within each state

represents the full aggregate risk of all policies in that state. This

approach results in a cross-subsidy because policyholders outside of

CRS communities are paying higher premiums than are actuarially

justified to subsidize the discounts that policyholders in participating CRS

communities receive.

Further, it is likely that policyholders receiving the CRS discount are

paying lower premiums that do not fully reflect their flood risk. The

amounts of CRS discounts—both to individual properties and program-

wide—are not closely linked to potential loss reduction of currently

insured properties. While the activities that FEMA promotes through CRS

are important, few of them directly mitigate flood risk in the policy

period.

FEMA officials told us that CRS helps improve future resilience

to flood risk but does little to reduce the estimated flood losses of the

properties NFIP currently insures.

For example, four eligible activities

reduce potential flood damage: floodplain management planning,

acquisition and relocation, flood protection, and drainage system

maintenance.

However, CRS provides discounts for 15 other activities

related to public information, mapping and regulations, and warning and

response that do not reduce the potential for flood damage to currently

As of May 2023, 22,621 communities participated in NFIP. As of April 2023, 1,504 NFIP

communities received a CRS discount, and 454 received a discount of at least 20 percent.

Until October 2021, discounts were available only to properties in SFHAs, but under

Risk Rating 2.0, FEMA provides discounts to all policies in a participating community.

Broadly speaking, resilience is the ability to prepare and plan for, absorb, recover from,

and more successfully adapt to actual or potential adverse events.

FEMA defines floodplain management planning as the adoption of flood hazard

mitigation or natural functions plans using the CRS planning process, or conducting

repetitive loss area analyses. Acquisition and relocation refer to acquiring insurable

buildings and relocating them out of the floodplain and leaving the property as open

space. Flood protection of the insured building includes activities such as floodproofing,

elevation, or minor structural projects. Drainage system maintenance includes annual

inspections of channels and retention basins and maintenance of the drainage system’s

flood-carrying and storage capacity

Page 20 GAO-23-105977 Flood Insurance

insured properties.

While we recognize the value of such activities, it is

not actuarially justifiable to incentivize them through premium discounts or

through overcharging policyholders outside of CRS communities. FEMA

has not evaluated the actuarial benefits of these other activities in terms

of loss mitigation or other means of incentivizing them.

In addition, FEMA officials stated that some of the rating variables used in

Risk Rating 2.0 already account for the reduced flood risk that results

from certain CRS activities in calculating full-risk premiums. For example,

one rating variable is a property’s elevation height in relation to flood

sources. Elevating properties is one activity a community could undertake

to receive a CRS discount. As a result, some properties could receive

lower premiums because they are elevated and also receive a CRS

discount for being located in a community that is working to elevate

properties. At the same time, nonelevated properties in the community

would still receive the CRS discount without having received any risk-

reduction benefit from the community’s activities.

Actuarial principles suggest that the amount of premium discount should

align with the amount of loss reduction for each individual property.

Further, while statute requires FEMA to apply CRS discounts, it does not

prescribe the amount of the discounts or the specific community activities

FEMA should use to determine them.

Rather, it says that FEMA should

provide CRS discounts based on the estimated reduction in flood risk

from the measures adopted by the community.

If FEMA does not adjust CRS ratings so that only community activities

that can be actuarially justified to reduce flood risk contribute toward a

community’s rating and does not incorporate discounts into the full-risk

premium based on the actuarial evaluation of risk reduction, then

premiums will not be actuarially sound, and policyholders will continue

over- or underpaying premiums. Further, by evaluating other means of

incentivizing desirable community-wide activities that cannot be

Public information activity categories include elevation certificates, map information

service, outreach projects, hazard disclosure, flood protection information, flood protection

assistance, and flood insurance promotion. Mapping and regulations activity categories

include floodplain mapping, open space preservation, higher regulatory standards, flood

data maintenance, and stormwater management. Warning and response activity

categories include flood warning and response, levees, and dams.

42 U.S.C. § 4022(b).

Page 21 GAO-23-105977 Flood Insurance

actuarially justified, FEMA could help ensure such activities continue if

they are no longer incentivized through CRS discounts.

Implementing Risk Rating 2.0 is helping FEMA to address NFIP’s

historical premium inadequacy and overall actuarial soundness, but

Congress and the public do not have certain information on the new

methodology and NFIP’s long-term fiscal outlook.

FEMA has communicated Risk Rating 2.0’s actuarial soundness and

NFIP’s fiscal outlook to Congress through three primary means:

• Legislative reform proposals. In May 2022, the Department of

Homeland Security submitted to Congress 17 legislative proposals

that included establishing a “Sound Financial Framework.”

According to FEMA, the framework would call for NFIP to pay all

claims for a flood event that has a 5 percent chance of being

exceeded in any given year—about $10.5 billion, similar to claims

from Hurricane Harvey in 2017. Congressional action on an

emergency supplemental appropriation would be needed only if

claims exceeded this amount. FEMA said this framework would

require the implementation of several reforms.

FEMA estimated the

framework would result in a 75 percent likelihood that NFIP could

manage flood events up to the established ceiling and have a positive

balance in its available funds at the end of a 10-year period.

• Budget request. In its 2024 budget request, FEMA estimated the

budgetary effects of its proposed reforms for establishing the

framework.

FEMA also requested an equalization payment to cover

what it estimated to be the cost of premium discounts in fiscal year

2024.

Department of Homeland Security, Legislative Reform Package (Washington, D.C.: May

11, 2022).

To achieve the Sound Financial Framework, FEMA proposed (1) canceling the existing

debt, (2) eliminating interest on future debt, (3) decreasing NFIP’s borrowing authority

from $30.425 billion to two-thirds of total expected premiums in force in the following fiscal

year, (4) directing annual equalization payments to cover premium shortfalls from

discounted premiums, (5) allowing the ability to transfer funds between the insurance and

reserve funds, (6) eliminating the Reserve Fund Ratio, and (7) eliminating the HFIAA

surcharge.

Office of Management and Budget, Budget of the U.S. Government, Fiscal Year 2024—

Department of Homeland Security (Washington, D.C.: Mar. 9, 2023).

FEMA Has Not Fully

Reported on Risk Rating

2.0’s Actuarial Soundness

and Its Effect on NFIP’s

Fiscal Exposure

Page 22 GAO-23-105977 Flood Insurance

• Debt report to Congress. In August 2022, FEMA submitted to

Congress a report on NFIP’s debt as of March 2022.

The report

communicated the uncertainty of flood losses, NFIP’s estimated

annual losses for a 10-year period, and projections of NFIP’s debt and

financial position over this period.

In addition to these reports, FEMA posted on its website a report from its

actuarial contractor that describes the actuarial modeling and data

sources used in developing Risk Rating 2.0 premium rates.

These communications provide important information on NFIP, but

Congress and the public lack some information because these

communications are fragmented and incomplete. For example, FEMA’s

Sound Financial Framework communicates NFIP’s estimated capacity if it

were to receive annual equalization payments for the cost of premium

discounts and if its other requested reforms were implemented. However,

FEMA did not estimate NFIP’s current capacity (absent these reforms) or

estimate its future capacity for either scenario. The framework also does

not include a plan to regularly update these estimates. Further, FEMA has

designed full-risk premiums under Risk Rating 2.0 based on an estimated

average annual loss target but has not incorporated this estimate into

these communications. Moreover, while FEMA estimated premium

revenue and shortfalls for a 10-year period when preparing its budget

request, the actual budget request only included the estimates for 2024.

In addition, the 10-year projections in FEMA’s budget request and debt

report included a single baseline scenario rather than a range of

scenarios that would illustrate the uncertainty of NFIP’s future financial

condition.

One of FEMA’s strategic objectives is empowering risk-informed decision-

making, and FEMA’s strategic plan states that the availability of, access

to, and understanding of future conditions data and modeling within

FEMA must be expanded.

In this regard, a comprehensive annual

actuarial report could help better inform Congress and the public about

Department of Homeland Security, National Flood Insurance Program Semi-Annual

Debt Repayment Report, March 31, 2022 (Washington, D.C.: Aug. 30, 2022).

Federal Emergency Management Agency, 2022–2026 FEMA Strategic Plan: Building

the FEMA Our Nation Needs and Deserves (Washington, D.C.: 2021).

Page 23 GAO-23-105977 Flood Insurance

Risk Rating 2.0’s actuarial soundness and NFIP’s fiscal outlook.

Ensuring that such a report is informed by relevant actuarial standards

would enhance its usefulness and credibility.

Elements of a comprehensive annual actuarial report could include

communicating the accuracy and adequacy of NFIP’s premiums in

managing the program’s fiscal exposure. The report could also

communicate the target loss level that full-risk premiums are designed to

cover, the uncertainty associated with the full-risk premium, and the

likelihood that the estimated premium revenue will cover the target loss

for the policy year. Further, the report could evaluate and communicate

estimated premium revenue and shortfall, the likelihood of additional

Treasury borrowing, and NFIP’s short- and long-term fiscal outlook under

a variety of scenarios for future claims experience and policy renewals,

lapses, and new policies. Without a comprehensive annual actuarial

report on Risk Rating 2.0’s soundness and NFIP’s fiscal outlook, available

information for overseeing the program will continue to be fragmented

and incomplete.

As noted earlier, a key goal of Risk Rating 2.0 is to more closely align

premiums with individual property flood risk. Because legacy premiums

on many policies do not fully reflect the underlying flood risk, aligning

Examples of comprehensive annual reports for other programs that involve actuarial

assessments of risk include the annual trustees’ reports for Social Security and Medicare

and the annual projections report produced by the Pension Benefit Guaranty Corporation.

For more information, see, for example, Actuarial Standards of Practice 41 (Actuarial

Communications), 46 (Risk Evaluation in Enterprise Risk Management), 47 (Risk

Treatment in Enterprise Risk Management), and 56 (Modeling).

Risk Rating 2.0 Is

Aligning Premiums

with Risks, but Some

Policyholders Face

Increasing

Affordability Concerns

Premiums Are Increasing

for Many Policies but Will

Better Reflect Flood Risk

Page 24 GAO-23-105977 Flood Insurance

premiums with risks will require premium increases on most policies.

of December 2022, NFIP policyholders paid a median annual premium of

$689.

However, the median annual full-risk premium was $1,288.

As a

result, the median premium will need to increase by almost 90 percent to

reach full risk.

However, different policies will require different premium changes to align

them with actual risk and reach full-risk premiums. For example, 35

percent of policies will require an increase of less than 100 percent, while

about 9 percent will require an increase of 300 percent or more (see fig.

3). Overall, about 66 percent of policies still required premium increases

as of December 2022. In September 2021, under the legacy

methodology, FEMA considered about 22 percent of its policies to be

paying premiums that were less than full risk.

In contrast, the fact that

66 percent of policies are paying less than full-risk premiums under Risk

As discussed previously, NFIP policyholders pay premiums, which are based on risk, as

well as separate assessments, surcharges, and fees. In this section, we analyzed the

entire amount a policyholder pays, including building premium, contents premium,

Increased Cost of Compliance premium, severe repetitive loss premium, reserve fund

assessment, HFIAA surcharge, Federal Policy Fee, and probation surcharge. CRS

discounts, when applicable, are also reflected. For simplicity and clarity, in this section we

refer to the total policyholder payments as “premiums.”

For condominiums, NFIP offers a Residential Condominium Building Association Policy,

which covers all units within a condominium. As a result, it is necessary to adjust for the

number of condominium units to determine the number of policies. We account for the

number of condominium units when reporting the aggregate number of NFIP policies, but

otherwise we treat these condominium policies as single policies.

FEMA determined full-risk premiums for policies subject to Risk Rating 2.0, which

includes new policies beginning October 1, 2021, and renewed policies beginning April 1,

2022. We analyzed NFIP data for policies in effect on December 31, 2022, which included

full-risk premiums that were valid as of that date for 89 percent of NFIP policies. Our

analysis excludes the remaining policies, which were due for renewal from January 1,

2023, to March 31, 2023, because FEMA had not yet determined their full-risk premiums.

Full-risk premiums are FEMA’s best estimates of the premium that would need to be

charged to cover the estimated cost of the risk transfer and associated expenses for the

year FEMA determined them. As noted earlier, FEMA officials told us they will modify

premiums as input factors change (such as housing values and flood risk) and as they

continue to improve their understanding of flood risk.

FEMA’s estimates of full-risk rates reflect current WYO expense allowances (about 30

percent of the premium a policyholder pays). As premiums increase with implementation

of Risk Rating 2.0, the amount of expense allowance per policy will increase. Any changes

to the compensation structure would affect the calculation of full-risk rates.

Under the legacy methodology, subsidized and grandfathered premiums were

considered less than full risk.

Page 25 GAO-23-105977 Flood Insurance

Rating 2.0 indicates that the legacy system significantly underestimated

flood risk and that Risk Rating 2.0 is correcting this underpricing.

Figure 3: Estimated Future Premium Changes under Risk Rating 2.0, as of

December 2022

Note: This analysis includes the 89 percent of policies subject to Risk Rating 2.0 and in effect on

December 31, 2022. The remaining 11 percent of policies were due for renewal from January 1,

2023, to March 31, 2023, at which point FEMA determined their full-risk premiums. About 19 percent

of policies in effect on September 30, 2021, received premium decreases under Risk Rating 2.0. The

“at full risk” category includes these policies; new policies, most of which were subject to full-risk

premiums; and policies that reached full-risk premiums upon renewal because the required increase

was less than the statutory cap on annual premium increases for those policies.

While FEMA is increasing premiums for most policies, it has reduced

premiums on about 19 percent of policies, which indicates that FEMA has

determined that the anticipated cost of insuring these properties is lower

than it had previously determined. According to FEMA, many of these

properties have lower replacement cost value, and by accounting for it,

Risk Rating 2.0 is able to offer a lower premium. FEMA is implementing

the full amount of these premium decreases immediately upon policy

renewal, whereas it must phase in premium increases, often over many

years, as required by law.

FEMA had been increasing premiums for a number of years prior to

implementing Risk Rating 2.0. In implementing previous reforms, FEMA

increased premiums by an average of 6 to 11 percent in each year from

2015 to 2021. Under the previous methodology, FEMA was unable to

Page 26 GAO-23-105977 Flood Insurance

calculate full-risk premiums for many of its policies.

Even if FEMA had

not implemented Risk Rating 2.0, it would still have had the authority to

increase most premiums by 18 percent annually until it determined it had

collected enough to pay for expected losses in the aggregate. However,

FEMA would not have known if it was charging a full-risk premium for any

individual property. Because Risk Rating 2.0 allows FEMA to calculate

full-risk premiums for all policies, FEMA can determine when each policy

no longer requires an annual increase to reach full risk. By better aligning

premiums with flood risks, Risk Rating 2.0 provides an actuarial

justification for these premium increases and helps reduce NFIP’s net

cost to the federal government—that is, the government’s fiscal exposure.

To align premiums with flood risk, premium increases, on average, will be

greater in some states than in others. Policies requiring the highest

premium increases under Risk Rating 2.0 are also those that were

previously the most heavily underpriced. For example, all five Gulf Coast

states—Alabama, Florida, Louisiana, Mississippi, and Texas—are in the

highest premium increase group (see fig. 4). With high premium

increases skewed toward Gulf Coast states where flood risk is higher and

most (61 percent) of NFIP’s policies are concentrated, Risk Rating 2.0 is

correcting a geographical pricing imbalance and addressing a historical

source of fiscal exposure.

Under the legacy methodology, FEMA required elevation certificates to determine

premiums for full-risk policies. However, it generally did not require elevation certificates

for subsidized policies because it did not use elevation information for determining

subsidized premiums. Because FEMA lacked elevation for these policies, it was not able

to calculate their full-risk rates. See GAO, Flood Insurance: More Information Needed on

Subsidized Properties, GAO-13-607 (Washington, D.C.: July 3, 2013).

Gulf Coast States Are

among Those Most

Underpriced and

Requiring the Largest

Premium Increases

Page 27 GAO-23-105977 Flood Insurance

Figure 4: Median Percent Change from Legacy NFIP Premium to Full-Risk Premium under Risk Rating 2.0, by State, as of

December 31, 2022

Legend: NFIP = National Flood Insurance Program

The five non-Gulf Coast states experiencing high premium increases—

Connecticut, Hawaii, New Hampshire, New Jersey, and West Virginia—

account for 5 percent of NFIP policies. For more detailed information on

Page 28 GAO-23-105977 Flood Insurance

premiums as of December 31, 2022, and full-risk premiums, percent

change, and affordability, see the interactive graphic available at

http://www.gao.gov/products/gao-23-105977.

Further, many of the states with the lowest premiums as of December 31,

2022, are those with higher flood risk, further indicating historical

underpricing and explaining the premium increases under Risk Rating

2.0. As discussed previously, many policies have not yet reached their

full-risk premiums under Risk Rating 2.0. For example, nearly every

southeastern coastal state is in the group of states with the lowest median

premiums as of December 31, 2022 (see fig. 5). However, these are also

among the states with the highest risk of hurricane and coastal flooding

combined, and they have historically accounted for a majority of NFIP

claims.

Page 29 GAO-23-105977 Flood Insurance

Figure 5: Median NFIP Premium, by State, as of December 31, 2022

Legend: NFIP = National Flood Insurance Program

Page 30 GAO-23-105977 Flood Insurance

Affordability concerns are growing as NFIP premiums continue to

increase over time until reaching full-risk premiums. We estimated the

affordability of each NFIP policy by expressing the full-risk premium as a

percentage of the median household income of the census tract in which

the insured property is located.

We then calculated the median

percentage in each state. Under Risk Rating 2.0, the median percentage

of household income represented by the full-risk premium will exceed 1

percent in 45 states and will equal or exceed 2 percent in 10 states (see

fig. 6). Some proposals for means-based assistance for flood insurance

use a certain percentage of household income or area median income as

thresholds for determining policyholder eligibility for assistance. Most

policyholders in a number of states—particularly along the Gulf of Mexico,

throughout Appalachia, and into the Northeast—likely will exceed these

thresholds as FEMA continues transitioning to full-risk premiums.

In addition to creating affordability concerns, increasing premiums also

have the potential to negatively affect property values and the associated

property tax revenues. For example, for properties located in areas where

homeowners must purchase flood insurance, an increase in required

annual expenses could decrease the purchase price potential buyers

could afford. Lower property values could then lead to lower property tax

revenues. However, flood insurance is not required on a majority of

properties, and not all property owners will be affected similarly by an

increase in a single cost component of owning a home. As a result, our

analysis focuses on affordability as a whole rather than changes in

property value.

To estimate the household income of each policyholder, we used the median household

income of the census tract in which the insured property is located, according to the

Census Bureau’s American Community Survey. We calculated affordability for all primary

residential, noncondominium policies for which full-risk rates were available. FEMA

research indicates that policyholder incomes are higher than nonpolicyholder incomes,

which means that current policies may be more affordable than we report here. Federal

Emergency Management Agency, An Affordability Framework for the National Flood

Insurance Program (Washington, D.C.: Apr. 17, 2018), 11.

Page 31 GAO-23-105977 Flood Insurance

Figure 6: Median Full-Risk NFIP Premiums as a Percentage of Household Income, by State, as of December 31, 2022

Legend: NFIP = National Flood Insurance Program

Note: This analysis assumes the household income of NFIP policyholders is equal to the median

income of the census tract where the insured property is located, according to the Census Bureau’s

American Community Survey. It includes all primary residential, noncondominium policies for which

full-risk premiums were available as of December 31, 2022.

Page 32 GAO-23-105977 Flood Insurance

Under Risk Rating 2.0, premiums and changes in premiums are relatively

similar by race and ethnicity, but affordability varies.

Full-risk premiums

generally will increase for all races and ethnicities we analyzed (see table

2).

Table 2: Estimated Median National Flood Insurance Program (NFIP) Premiums, by

Race and Ethnicity

Racial/ethnic group

Premium as of

December 31, 2022

Full-risk

premium

Percent difference

in medians

All policies

$688

$1,282

86%

Black or African American

$687

$1,281

86%

White

$689

$1,281

86%

Hispanic or Latino

$664

$1,288

94%

Asian

$688

$1,295

88%

Source: GAO analysis of Federal Emergency Management Agency and Census Bureau data. | GAO-23-105977

Note: This analysis estimates the race and ethnicity of NFIP policyholders using the Bayesian

Improved Surname Geocoding method. Full-risk premiums are for policies that have renewed under

Risk Rating 2.0 as of December 31, 2022.

For Black policyholders, however, the premium paid as of December 31,

2022, constitutes a higher percentage of their estimated household

income than all other racial and ethnic groups, and their full-risk

premiums are expected to do so once fully implemented (see fig. 7). This

is because the median household income of Black policyholders is

estimated to be lower than that of policyholders of other races and

In this report, we use the term “Black” to refer to “Black or African American” and

“Hispanic” to refer to “Hispanic or Latino.”

We used the Bayesian Improved Surname Geocoding (BISG) method to predict the race

and ethnicity for policyholders of residential, noncondominium NFIP policies, based on

their surname and residential location. Several studies have validated BISG estimates

against self-reported racial data collected through administrative or survey sources in the

health care and financial sectors. BISG makes estimates by calculating the probability that

a person with a given surname and residential location will identify with selected racial and

ethnic groups based on data from the Census Bureau. For other reports in which we have

used this methodology, see GAO, Tax Equity: Enhanced Evaluation Could Improve

Outreach to Small Business Owners, GAO-22-104582 (Washington, D.C.: Aug. 3, 2022)

and Social Security Administration: Remote Service Delivery Increased during COVID-19,

but More Could Be Done to Assist Vulnerable Populations, GAO-23-104650 (Washington,

D.C.: Nov. 17, 2022). For more details on our methodology, see app. I.

Premium Increases Are

Similar by Race and

Ethnicity, but Less

Affordable for Black

Policyholders

Page 33 GAO-23-105977 Flood Insurance

ethnicities.

Asian and Hispanic policyholders, on average, will pay

slightly lower percentages of their incomes for flood insurance than White

and Black policyholders as FEMA transitions to full-risk premiums.

Figure 7: Affordability of National Flood Insurance Program (NFIP) Premiums, by

Race and Ethnicity

Note: This analysis assumes that the household income of NFIP policyholders is equal to the median

income of the census tract where the insured property is located, according to the Census Bureau’s

American Community Survey. It estimates race and ethnicity of policyholders using the Bayesian

Improved Surname Geocoding method.

We estimated the household income of policyholders using the median household

income of the policyholder’s census tract, according to the 2019 5-year estimate of the

Census Bureau’s American Community Survey. Using this method, we estimate that Black

NFIP policyholders have a median income of $54,676, compared with $81,605 for all

policyholders.

Page 34 GAO-23-105977 Flood Insurance

To address affordability concerns, Congress has capped annual premium

increases on NFIP policies, requiring FEMA to transition from discounted

to full-risk premiums gradually.

We refer to the period of a policy’s

transition to its full-risk premium as a “glidepath.” Because policies on a

glidepath pay discounted rather than full-risk premiums, they cause a

shortfall in NFIP premium revenue, which is equal to the difference

between the full-risk premium and the premium actually paid. For

example, a hypothetical NFIP policy currently paying a $500 premium

with an estimated full-risk premium of $1,000 and subject to an 18

percent annual premium increase cap would have a premium shortfall of

$351 (net of WYO expenses) in the first year and would reach its full-risk

premium in 2028 (see fig. 8). This policy would have incurred a total

shortfall of $1,477 in its 6 years on the glidepath.

42 U.S.C. § 4015(e). Policies are subject to annual rate increase caps ranging from 5 to

25 percent until they reach their full-risk rates. About 85 percent of policies, including

those for most primary residences, are subject to an 18 percent cap. The transition will

take multiple years for policyholders whose increase necessary to reach full risk exceeds

the statutorily allowed 1-year increase. We use “discounted” to refer to premiums that are

not yet full risk and therefore result in a premium shortfall. As discussed previously, other

statutory discounts exist, such as CRS discounts. FEMA plans to review full-risk premiums

annually, and these premiums include many rating factors. As these factors change, the

full-risk premium is likely to change to reflect FEMA’s most current understanding of flood

risk. It also is possible that events may occur that change the models’ loss estimates more

significantly.

The total premium shortfall is net of WYO expenses. The total premium shortfall before

WYO expenses is $2,121.

Means-Based

Assistance Could

Address Affordability

More Transparently

and Efficiently Than

Discounted Premiums

Statutory Caps Address

Affordability by Slowing

the Transition to Full-Risk

Premiums, but Allow

Significant Revenue

Shortfalls to Continue

Page 35 GAO-23-105977 Flood Insurance

Figure 8: Illustration of the Premium Shortfall and Transition to Full-Risk Premium

for a Hypothetical National Flood Insurance Program Policy

Note: These calculations assume that the premium actually paid increases 18 percent annually and

that the full-risk premium increases annually to account for inflation and increases in flood risk.

As of December 31, 2022, 66 percent of NFIP policies that had renewed

since April 1, 2022, were on the glidepath. We estimated the following:

• Policies on the glidepath will result in a total premium shortfall of $2.7

billion in 2023.

• By 2037, 95 percent of policies will reach full-risk premiums.

• By 2049, virtually all policies will reach full-risk premiums.

Our estimates include several assumptions. Our shortfall calculations do not account for

assessments, surcharges, and fees. We increased full-risk premiums for inflation and

changes in flood risk and increased premiums actually paid by applicable annual premium

increase caps. We also assumed that all policies on the glidepath would renew NFIP

coverage and that policies would keep the same coverage and deductible amounts until

reaching full-risk premiums. Further, we assumed that policies that had not yet renewed

under Risk Rating 2.0 would follow a glidepath similar to those of policies that had

renewed. By 2049, 99.99 percent of policies would have reached full risk. Finally, we

calculated the total premium shortfall net of WYO expenses. In fiscal year 2023, FEMA

agreed to pay WYO insurers 29.7 percent of premiums. The present value of the total

shortfall is $23 billion (using a discount rate of 2.82 percent as of December 31, 2022).

Full results of our analysis are included in app. II.

Page 36 GAO-23-105977 Flood Insurance

• The total premium shortfall will be $26.7 billion (see fig. 9).

Figure 9: Estimated Premium Shortfall and Percentage of National Flood Insurance Program Policies at Full-Risk Premiums,

by Calendar Year

Note: Shortfall calculations start in April 2022 when renewing policies became subject to Risk Rating

2.0. The total estimated glidepath shortfall is $26.7 billion (present value of $23 billion as of

December 31, 2022).

Our model for estimating the duration and cost of policies on the glidepath

included four key inputs—annual premium increase caps, inflation rates,

flood risk, and NFIP policy renewal.

Changing each input resulted in

different estimates. For example, we found that lowering the annual

premium increase cap (currently 18 percent for most policies) to 9 percent

for all policies would significantly extend the glidepath (for 95 percent of

policies) from 15 to 34 years. It would also increase the total premium

shortfall from $26.7 billion to $69 billion (see fig. 10). By comparison,

increasing the annual premium increase cap to 25 percent for all policies

In our sensitivity analysis, we incorporated alternative inflation, flood risk, annual rate

increase caps, and NFIP renewal rates and changed these assumptions individually while

holding the others at the baseline level.

Page 37 GAO-23-105977 Flood Insurance

would shorten the glidepath to 11 years and reduce the shortfall to $18

billion.

Figure 10: National Flood Insurance Program Policies Remaining on the Glidepath under Alternative Annual Premium

Increase Caps, by Year

Note: The baseline scenario (gray line) assumes current annual premium increase caps, which are 18

percent for most policies but range from 5 to 25 percent.

We also found that higher inflation would slightly increase the shortfall

amount. For the alternative scenarios, we assumed inflation would be 1

percentage point higher or lower in the first year and converge to the

baseline over 5 years. Higher inflation would increase the total shortfall

from $26.7 billion to $27 billion. By comparison, lower inflation would

reduce the shortfall to $26 billion.

For this sensitivity analysis, we chose a lower premium increase cap of 9 percent to

reflect a level that has been specifically proposed in legislation and a higher rate cap of 25

percent to reflect the highest current premium increase cap for certain properties. The

present values of the total shortfalls are $48 billion and $16 billion, respectively, for the 9

and 25 percent rate cap scenarios.

For the baseline inflation estimate, we used projections from the Congressional Budget

Office, The Budget and Economic Outlook: 2023 to 2033 (Washington, D.C.: February

2023). The present values of total shortfalls are $23 billion and $22 billion under the higher

and lower inflation scenarios, respectively.

Page 38 GAO-23-105977 Flood Insurance

Changing flood risk has little effect on our model’s estimates because the

projected increases in flood risk are smaller when annualized and are

projected to increase in severity by 2100.

Under both alternative

scenarios, the glidepath would remain at 15 years (for 95 percent of

policies), and the total shortfall would change by less than $1 billion.

Premium shortfalls would be reduced if policyholders on the glidepath

dropped their insurance. For example, if 6 percent of policies on the

glidepath choose not to renew each year, this would reduce the total

estimated shortfall from $26.7 billion to $19 billion.

However, to the

extent that policyholders drop coverage in a way that significantly

changes NFIP’s distribution of risk among all policies, FEMA would have

to change premiums to reflect the new distribution of risk.

Further, to the

extent that these policyholders do not replace their NFIP coverage with

private flood coverage, resilience would decline and fiscal exposure could

increase as former policyholders increase their reliance on disaster

assistance.

Current policy addresses affordability through discounted premiums by

capping annual premium increases, but this approach has several

limitations.

• Hides fiscal exposure. The discounted premiums and the resulting

premium shortfalls generate fiscal exposure that is not transparent to

Congress and the public. Specifically, the premium shortfalls have

contributed to the $36.5 billion in borrowing from Treasury since 2005.

While these costs were incurred when the discounted premiums were

charged, they were not evident until years later when FEMA had to

borrow from Treasury. In other words, the policy decision to address

affordability by charging discounted premiums prevented NFIP from

building a surplus in lower-loss years that it could have used to pay

For the flood risk estimates, we used projections from the Office of Management and

Budget, Analytical Perspectives: Budget of the United States Government, Fiscal Year

2023 (Washington, D.C.: Mar. 28, 2022). These projections estimated that NFIP’s gross

average annual losses would increase by 7 to 13 percent by 2050 and 40 to 84 percent by

2100. Using the 2050 projections, we calculated a baseline annual flood risk increase of

0.31 percent, the midpoint between the alternative scenarios of 0.22 and 0.40 percent.

We assumed that nonrenewals would be randomly distributed among the policies on the

glidepath. The present value of the total premium shortfall is $17 billion as of December

31, 2022.

The ability to spread risk across a portfolio depends on the diversification of the risks

covered by those policies. An insurer can diversify its risks by insuring risks that are more

independent of each other—that is, that are less likely to cause losses at the same time.

Discounted Premiums

Hide Fiscal Exposure,

Address Affordability

Poorly, and Hinder Private-

Market Growth

Page 39 GAO-23-105977 Flood Insurance

some of the claims in higher-loss years. As mentioned previously,

prior to Risk Rating 2.0, FEMA was unable to reliably calculate NFIP’s

total annual premium shortfall because it lacked full-risk premium

information for many of its policies. However, Risk Rating 2.0 allows

FEMA to calculate full-risk premiums for all policies.

• Addresses affordability poorly. Discounted premiums are not tied to

a policyholder’s ability to pay, in terms of both the amount of the

discounts and who receives them. As a result, some policyholders

who do not need assistance are likely still receiving it (or are receiving

more than they need), thus unnecessarily increasing fiscal exposure.

Concurrently, some policyholders are likely not receiving enough

assistance to make their flood insurance affordable, which may

reduce consumer participation if policyholders drop coverage because

they cannot afford it. Policyholders subject to the mandatory purchase

requirement, however, do not have the option of dropping coverage if

premiums become unaffordable. In addition, because full-risk

premiums are being implemented through gradual but steady

premium increases, the affordability assistance is temporary. As the

discounts are phased out, fiscal exposure will decrease, but

affordability concerns will increase, potentially further reducing

consumer participation and resilience. Moreover, reaching the end of

the glidepath does not mean premiums will not increase further.

Premiums can increase for a number of reasons, including increased

repair costs or higher estimates of the frequency and severity of

flooding events.

• Hinders private-market growth. Discounts also make NFIP

premiums lower than are actuarially justified. Private insurers told us

this undercuts the premiums they are able to charge and places them

at a competitive disadvantage. This impedes private-market growth

and limits insurance options for homeowners. It also increases fiscal

exposure to the extent that NFIP continues to cover risk exposure that

the private sector could otherwise assume.

We previously identified several policy goals for flood insurance reform.

These include requiring transparency of the federal fiscal exposure,

encouraging consumer participation, promoting flood risk resilience, and

minimizing federal fiscal exposure (including by encouraging private-

sector involvement). However, the current approach to addressing

affordability does not achieve these goals because Congress provides

assistance by capping annual premium increases rather than through a

See GAO-17-425.

Page 40 GAO-23-105977 Flood Insurance

means-based program that is reflected in the federal budget. Addressing

affordability through a means-based assistance program that is

recognized in the federal budget, rather than through discounted

premiums, could make the premium shortfall costs transparent and could

lessen the need for large program borrowing in the future.

It could also

improve Congress’s ability to oversee the program and the public’s ability

to scrutinize it. A means-based assistance program would also be a long-

term solution to address affordability that could target assistance more

effectively and encourage consumer participation and private sector

involvement.

A policy decision to design a means-based assistance program would

require additional decisions about eligibility, including income-level

requirements, the amount of assistance desired for each level of income,

and the types of policyholders who would be eligible. Each of these

decisions ultimately involves balancing costs with encouraging consumer

participation. For example, costs could be limited by providing assistance

only to certain categories of current NFIP policyholders. However,

providing assistance to future NFIP policyholders could encourage

greater consumer participation. Further, providing assistance to private-

market policyholders could further encourage consumer participation

while treating NFIP and the private market equitably.

We estimated the cost and number of recipients of a means-based

assistance program for which only current NFIP policyholders of primary

single-family residences would be eligible.

We assumed a means-based

assistance program would replace the glidepath, so any policy receiving

assistance would immediately convert to the full-risk premium. We

considered two alternatives for determining the assistance amount: (1)

We have reported that setting up and administering an assistance program would incur

some administrative costs. See GAO, National Flood Insurance Program: Options for

Providing Affordability Assistance, GAO-16-190 (Washington, D.C.: Feb. 10, 2016).

All costs of flood insurance—full-risk premiums as well as any assessments,

surcharges, or fees—would be considered in determining eligibility for assistance and how

much assistance to offer. As such, we refer to the total policyholder payments as

“premiums” in this section. We based our estimates on elements of several recent

proposals. Most proposals limit assistance to policyholders with low or moderate

household income. Some proposals also feature other eligibility criteria, including

accounting for wealth in the means test and further limitations based on federal poverty

guidelines. Because we cannot include these criteria, we may overestimate cost. All

assessments, surcharges, and fees levied by NFIP on policies are included in the

premium amount that is used to determine eligibility for and level of assistance. Full

results of our analysis are included in app. II.

Key Considerations for

Means-Based Assistance

Include Cost, Consumer

Participation, and Effects

on the Private Market

Page 41 GAO-23-105977 Flood Insurance

covering the amount of the premium that exceeded a certain percentage

of household income and (2) covering a certain percentage of the

premium.

The first alternative also would restrict eligibility to policyholders whose

household income was below a certain percentage of the area median

income (AMI). For instance, a policyholder with household income of

$40,000 where the AMI is $80,000 would be at 50 percent of AMI. This

policyholder would be eligible as long as the AMI threshold was set at or

above 50 percent. If the policyholder’s premium was $900 and assistance

covered the portion of the premium that exceeded 1 percent of household

income, the policyholder would be responsible for paying 1 percent of

household income ($400) and the assistance would cover the remaining

$500.

The first alternative would cost the federal government roughly $585

million to $2.0 billion in the first year and cover roughly 470,000 to 1.6

million policyholders (see fig. 11).

The estimates vary depending on the

level at which the assistance begins (either 1 or 2 percent of household

income) and the policyholders who are determined to be eligible (those

with household incomes below either 80, 100, or 120 percent of AMI).

The Department of Homeland Security proposed a means-tested assistance program for

flood insurance that would offer a graduated premium discount to current and new NFIP

policyholders with household income at or below 120 percent of AMI. This proposal is

similar to the second alternative we discuss. See Department of Homeland Security,

Legislative Reform Package.

The cost of a means-based assistance program depends on a number of parameters,

including policyholder eligibility and level of support. We discuss our methodology in more

detail in app. I.

We estimated policyholder incomes using the median household income of the census

tract in which the insured property is located. As previously mentioned, this may

understate policyholder incomes, and therefore overstate the cost of affordability

programs.

Page 42 GAO-23-105977 Flood Insurance

Figure 11: Cost Estimates of a Means-Based Assistance Program—Alternative 1

The second alternative would provide premium discounts on a sliding

scale, whereby the discount would increase as a policyholder’s household

income decreased relative to AMI. These estimates assume discounts of

40, 60, and 80 percent for AMI thresholds at 100, 80, and 50 percent,

respectively. The same policyholder cited above, with a $900 premium

and household income of $40,000 in a county with an AMI of $80,000,

would receive assistance covering 80 percent of the premium ($720),

leaving the policyholder to pay the remaining $180 (see fig. 12). This

second alternative would cost the federal government roughly $1.3 billion

in the first year and cover roughly 1.5 million policyholders.

Page 43 GAO-23-105977 Flood Insurance

Figure 12: Cost Estimates of a Means-Based Assistance Program—Alternative 2

Providing means-based assistance to current NFIP policyholders likely

would be more cost-effective than providing assistance through

discounted rates because it would be targeted to policyholders who need

it. As previously mentioned, we estimated that providing assistance

through discounted rates will cost about $3.9 billion in 2023. In contrast,

we estimated that the cost of means-based assistance would be

significantly less, ranging from $585 million to $2.0 billion in the first year.

Additional modifications to eligibility could help further limit the cost of a

means-based assistance program or encourage the participation of more

or different consumers. For instance, to decrease costs, FEMA could

restrict eligibility to properties with high flood risk, exclude repetitive loss

properties from receiving assistance, or require mitigation to receive

assistance. To increase coverage, FEMA could make new NFIP

policyholders, private-market policyholders, or both eligible for assistance.

Restricting eligibility based on property flood risk or purchase

requirements. Restricting assistance would reduce program costs. For

example, assistance could be restricted to policyholders required to

purchase insurance (because they generally do not have the option of

dropping coverage if they cannot afford it) or to those with properties

exceeding a certain threshold of flood risk (because they generally have

more need for protection). FEMA does not track which policies are

subject to the mandatory purchase requirement, but properties in SFHAs

Page 44 GAO-23-105977 Flood Insurance

can serve as an upper bound approximation.

We estimated that

restricting assistance to policyholders in SFHAs would reduce program

costs to between roughly $380 million and $1.3 billion for the first

alternative, depending on the eligibility thresholds chosen. However, we

and others have reported that some of FEMA’s floodplain maps

designating high-risk areas are outdated.

We have also reported that

expanding the mandatory purchase requirement could increase consumer

participation and enhance resilience.

As a result, flood risk metrics other

than the SFHA boundary line could be useful in determining eligibility.

Excluding repetitive loss properties. According to the Department of

Homeland Security, unmitigated repetitive loss properties make up about

2.5 percent of NFIP policies, but such policies have accounted for a

disproportionate share of claims. For example, as of December 2021, 48

percent of NFIP claims by dollar value had been paid to properties with

two or more losses. This high risk of flood loss makes their premiums—

and thus their potential assistance cost—high. Excluding these properties

from assistance could limit costs and discourage development in high-risk

areas.

Incorporating mitigation into affordability assistance. Premiums help

to signal flood risk, and with higher premiums, policyholders have a

greater incentive to undertake mitigation efforts to reduce their flood risk

and premiums. Conversely, premium assistance can reduce incentives

for mitigation, so incorporating mitigation into assistance could help

preserve and increase resilience while addressing affordability. For

example, the program could provide up-front assistance for mitigation

Generally, the mandatory purchase requirement applies to properties in SFHAs with

federally backed mortgages (those made, insured, or guaranteed by federally regulated

lenders or federal agencies, or purchased by the government-sponsored enterprises for

housing—Fannie Mae and Freddie Mac).

See GAO, FEMA Flood Maps: Better Planning and Analysis Needed to Address Current

and Future Flood Hazards, GAO-22-104079 (Washington, D.C.: Oct. 25, 2021); Elyssa L.

Collins et al., “Predicting Flood Damage Probability across the Conterminous United

States,” Environmental Research Letters, vol. 17 (2022); and Natural Resources Defense

Council and Association of State Floodplain Managers, Inc., Petition Requesting That The

Federal Emergency Management Agency Amend Its Regulations Implementing the

National Flood Insurance Program (Jan. 5, 2021). As discussed previously, FEMA no

longer uses these maps for setting premiums under Risk Rating 2.0. However, FEMA still

uses them for determining mandatory purchase requirements and setting local floodplain

management standards.

See GAO-17-425.

Page 45 GAO-23-105977 Flood Insurance

measures. This approach would entail larger initial costs, but in the long

term it would reduce the risk of loss and the amount of premium

assistance needed, as well as the need for federal disaster assistance.

Further, several studies have proposed pairing mitigation assistance with

premium assistance by requiring mitigation financed through a low-

interest loan and providing a means-tested voucher.

Expanding eligibility to new NFIP policyholders. Making assistance

available to property owners who do not yet have NFIP coverage could

increase consumer participation and enhance resilience. However, it is

difficult to estimate the number of new policyholders that affordability

assistance might attract to NFIP, and consequently the level of assistance

necessary to meet that demand. Studies have found that NFIP

policyholders were price-sensitive to premium changes, indicating that

affordability assistance likely would increase NFIP take-up.

The number

of NFIP policies has also been steadily decreasing in recent years. At the

beginning of 2019, NFIP had 5.11 million policies.

As of December

2022, NFIP had 4.77 million policies, which includes a reduction of

175,000 policies (3.5 percent) since Risk Rating 2.0 implementation

began in October 2021 (see fig. 13). Premiums increased every year

during this period, and some former policyholders might want to reenroll if

affordability assistance were available.

Carolyn Kousky and Howard Kunreuther, “Addressing Affordability in the National Flood

Insurance Program,” Journal of Extreme Events, vol. 1 (2014); Wendy Zhao, Howard

Kunreuther, and Jeffrey Czajkowski, “Affordability of the National Flood Insurance

Program: Application to Charleston County, South Carolina,” Natural Hazards Review, vol.

17, no. 1 (February 2016); and National Research Council of the National Academies,

Affordability of National Flood Insurance Program Premiums—Report 1 (Washington,

D.C.: March 2015). The National Academies issued its second report in 2016, which

proposed procedures with which FEMA might analyze policy options. See National

Academies of Sciences, Engineering, and Medicine, Affordability of National Flood

Insurance Program Premiums—Report 2 (Washington, D.C.: 2016).

See Larry Baeder and David Evans, Insights into Consumer Demand for Flood

Insurance: Trends in Take-Up (San Francisco, Calif.: Milliman, September 2021) and

Jacob Bradt, Carolyn Kousky and Oliver Wing, “Voluntary Purchases and Adverse

Selection in the Market for Flood Insurance,” Journal of Environmental Economics and

Management, vol. 110 (2021).

Policy numbers in this section account for each unit within a Residential Condominium

Building Association Policy as a separate policy.

Page 46 GAO-23-105977 Flood Insurance

Figure 13: Number of National Flood Insurance Program Policies, 2019–2022

Note: Policy numbers account for each unit within a Residential Condominium Building Association

Policy as a separate policy.

Further, we estimated that only about 3.9 percent of occupied housing

units had NFIP flood insurance, indicating the potential for significant

growth in flood insurance take-up, especially with assistance increasing

affordability. To limit demand from new policyholders, expanding eligibility

to new NFIP policyholders could be combined with restricting eligibility

based on purchase requirements or flood risk. Because most

homeowners subject to the mandatory purchase requirement already

have an NFIP policy (exceptions include those with a private-market

policy or not in compliance), such restrictions could help limit cost

increases.

Expanding eligibility to private-market policyholders. Providing

assistance for private flood insurance policyholders could allow private

flood insurance premiums to compete fairly with NFIP premiums and

therefore promote the private market. Specifically, private flood insurers

For more information on the mandatory purchase requirement, see GAO, National Flood

Insurance Program: Congress Should Consider Updating the Mandatory Purchase

Requirement, GAO-21-578 (Washington, D.C.: July 30, 2021).

Page 47 GAO-23-105977 Flood Insurance

told us that providing assistance only for NFIP policies would put them at

a competitive disadvantage because many NFIP customers would pay

lower premiums. They said they generally supported an assistance

program if private-market policyholders were eligible. They also said that

because of privacy concerns, private flood insurers would not want to be

responsible for examining policyholders’ tax-related documents and

determining eligibility. As with expanding eligibility to new NFIP

policyholders, this modification could increase consumer participation and

enhance resilience, but it could also be combined with eligibility

restrictions to limit demand and costs.

NFIP owed $20.5 billion to Treasury as of April 2023, and not addressing

this legacy debt—and the structural issues that caused it—will likely result

in increased debt.

It will also delay NFIP’s actuarial soundness, worsen

policyholder affordability concerns, and reduce consumer participation.

FEMA covers NFIP flood claims and program expenses primarily by using

insurance premiums, assessments, surcharges, and fees paid by

policyholders. When revenue, reinsurance, and any accumulated surplus

are insufficient, FEMA has authority to borrow from Treasury. Before

2005, NFIP was mostly self-sustaining, but since then, NFIP has had to

borrow $36.5 billion to pay claims.

NFIP’s borrowing has followed

catastrophic flood events, most notably Hurricane Katrina in 2005,

Hurricane Sandy in 2012, and Hurricane Harvey in 2017 (see fig. 14).

Absent congressional action, the program’s debt likely will continue to

The private residential flood market made up 7 percent of the total residential flood

market as of December 2021.

We refer to the debt that has built up to date as the legacy debt, as distinct from

additional debt that might accrue in the future.

Congress appropriated funds to retire NFIP’s approximately $200 million debt to

Treasury in 1985. NFIP also had intermittent debt in the 1990s, reaching nearly $1 billion

in 1997, but it paid off the debt in subsequent years. Congress forgave $16 billion of NFIP

debt in October 2017.

Options Exist to

Address NFIP’s

Legacy Debt and the

Potential for Future

Debt

NFIP’s Current Debt

Delays Actuarial

Soundness and

Exacerbates Affordability

Concerns

Page 48 GAO-23-105977 Flood Insurance

grow as the caps on annual premium increases are slowing the transition

to full-risk premiums.

Figure 14: National Flood Insurance Program Annual Year-End Outstanding Debt to the Department of the Treasury, Fiscal

Years 1995–2022

NFIP’s debt largely is a result of premium inadequacy, due to the policy

decision to prioritize affordability over solvency. This is because requiring

FEMA to charge discounted premiums that did not reflect the full risk of

loss left NFIP with inadequate funds to pay claims in some years.

Specifically, FEMA has been statutorily required to offer discounted

premiums for certain properties since the program’s inception. While

NFIP had relatively little debt for nearly 40 years, the subsidized

premiums prevented NFIP from building a surplus that could have helped

cover some of the higher-loss years and reduced or avoided some of the

borrowing that began in 2005. In other words, while the cost of the

subsidized premiums did not become evident until 2005 when it began

materializing in debt, the costs began accruing when FEMA charged the

discounted premiums. If FEMA had been able to charge full-risk

premiums, it might have built up more funds that would have enabled it to

Page 49 GAO-23-105977 Flood Insurance

pay a greater portion of those larger losses in 2005 and after and given it

additional revenue in those years.

NFIP’s debt raises concerns about the actuarial soundness of the

program, the program’s affordability for policyholders, and consumer

participation.

Actuarial soundness concerns. Although FEMA was prevented from

collecting full-risk premiums from previous policyholders, it is statutorily

required to repay the debt and any accrued interest using revenue from

current and future policyholders.

From fiscal years 2006 through 2022,

FEMA paid an annual average of $336 million in interest on the debt, but

it has not made any repayments of principal since 2014, and Congress

forgave $16 billion of principal in October 2017.

Debt arising from the

experience of previous policyholders is not a cost associated with the risk

of current policyholders. Therefore, requiring FEMA to repay this debt and

the resulting interest expenses obliges FEMA to charge current and future

policyholders, which is not actuarially justified.

42 U.S.C. § 2414(e). NFIP debt normally has a 3-year maturity unless Treasury grants

an exception for a longer maturity. Principal and interest payments are permitted at any

time, and the debt may be repaid or refinanced at maturity.

FEMA is required to repay the debt, but it can refinance the debt as long as the total

debt is less than the borrowing limit. FEMA has not paid principal on the debt since 2014

because it has prioritized building NFIP’s reserve fund. FEMA is statutorily required to

maintain a reserve fund, with a target balance of at least 1 percent of insurance-in-force

(42 U.S.C. § 4017a(b)(1)), and to make a minimum annual payment into the fund of 7.5

percent of the target balance until the fund balance reaches the target amount. According

to FEMA, interest payments will continue to consume a significant amount of revenue that

would otherwise serve to grow the reserve fund for future catastrophic events, particularly

when interest rates rise.

Statutory requirements to repay program debt and build a reserve fund preceded Risk

Rating 2.0 and operate outside of the Risk Rating 2.0 ratemaking process. FEMA created

full-risk premiums to be prospective and therefore does not include provisions for interest

expenses on its debt, nor for repayment of its debt, when calculating them. However,

FEMA uses revenue from current policyholders to make these interest payments.

Generally, revenue from premiums and the Federal Policy Fee goes into the insurance

fund, and revenue from the reserve fund assessment and HFIAA surcharge goes into the

reserve fund. FEMA makes interest payments using the insurance fund first, and if

necessary, the reserve fund. The requirement to pay interest on legacy debt effectively

slows FEMA’s ability to achieve the target reserve fund balance, and in turn, requires

FEMA to charge current and future policyholders a higher reserve fund assessment, or to

charge a reserve fund assessment for a longer period of time, than would otherwise be

necessary.

Page 50 GAO-23-105977 Flood Insurance

Affordability concerns. Charging current or future policyholders to

service the debt also exacerbates affordability concerns. From fiscal

years 2017 through 2022, FEMA made annual interest payments ranging

from $300 million to $438 million—or the equivalent of $63 to $92 per

policyholder per year.

Moreover, FEMA has no realistic prospect of repaying the debt as

currently structured. FEMA also has reported that repayment of the

legacy debt is beyond NFIP’s current capability.

Further, the statutory

annual premium increase caps result in premium shortfalls that make

additional future debt more likely. For example, repaying the legacy

debt—plus future debt we estimated could accrue due to glidepath

shortfalls—in 30 years at 2.5 percent interest would require an annual

payment of about $1.9 billion.

NFIP collected $3.24 billion in premiums

in fiscal year 2022. Therefore, this payment would have required a 60

percent surcharge per policyholder in the first year.

Consumer participation concerns. NFIP policyholder decreases have

accompanied premium increases, and such a surcharge likely would

cause many more policyholders to drop their NFIP coverage. Some of

these policyholders might replace their coverage with a private-market

policy—especially those policyholders subject to the mandatory purchase

requirement. However, some policyholders would choose to drop

coverage altogether, leaving them unprotected from flood risk, reducing

resilience, and increasing reliance on federal disaster assistance. Further,

having fewer NFIP policyholders to repay the debt would necessitate

higher surcharges and likely cause more policyholders to leave NFIP.

According to FEMA, even with the implementation of Risk Rating 2.0, NFIP would be

unable to make consistent principal repayments sufficient to improve overall fiscal

solvency. FEMA estimated that NFIP could reasonably be expected to accrue an

additional $15 billion of debt in 10 years. See Department of Homeland Security,

Legislative Reform Package, and National Flood Insurance Program Semi-Annual Debt

Repayment Progress Report, March 31, 2022, Report to Congress and the Secretary of

the Treasury (Washington, D.C.: Aug. 30, 2022).

We assumed a 2.5 percent interest rate for FEMA debt based on the interest rate for the

current FEMA debt, trending slightly higher. We estimated that premium shortfalls would

contribute $24.5 billion in additional debt during this 30-year repayment period.

The surcharge percentage would need to change in future years as NFIP premium

collections and debt levels change.

Page 51 GAO-23-105977 Flood Insurance

Addressing the legacy debt would require action by Congress. Two

options for doing so are canceling the debt and modifying the repayment

terms.

Canceling the debt. One option for addressing the $20.5 billion legacy

debt would involve canceling it (or alternatively, eliminating the

requirement that FEMA repay it).

This would free current and future

policyholders from paying for obligations they were not responsible for

incurring and address the existing inequity by allowing current and future

policyholders to pay only for their own flood risk. Further, it would make

insurance more affordable, thus encouraging consumer participation and

resilience. Congress has used this option before when it canceled $16

billion in NFIP debt in October 2017.

In one sense, canceling the debt transfers costs to taxpayers because

current and future policyholders would no longer be paying interest on the

debt. However, because it is not likely that current and future

policyholders will be able repay the debt under current rules, the cost has

essentially already been transferred to taxpayers. This transfer largely

occurred each time FEMA sold a policy at statutorily required discounted

premiums. Further, the 2017 debt cancellation did not require an

appropriation.

Modifying debt repayment. Alternatively, addressing the debt could

involve defining a plan to repay the legacy debt and any future debt that is

estimated to accrue through an additional surcharge on policyholders.

Such a plan could include modified terms of repayment, such as forgiving

some or all interest charges. Such a plan also could include immediately

charging full-risk premiums to all policyholders—thereby eliminating the

In May 2022, FEMA submitted to Congress a 104-page list of 17 legislative proposals

that, among other things, proposed canceling the debt, decreasing NFIP’s borrowing

authority to two-thirds of expected premiums in force in the following year, implementing a

plan to manage the program to a 1-in-20 occurrence loss level (about $10.5 billion, similar

to claims from Hurricane Harvey in 2017), eliminating interest on future debt, and requiring

any need for future debt to be funded through emergency supplemental appropriations.

See Department of Homeland Security, Legislative Reform Package.

On September 22, 2017, FEMA borrowed $5.825 billion from the Treasury and reached

NFIP’s authorized borrowing limit of $30.425 billion. On October 26, 2017, Congress

canceled $16 billion of NFIP debt to enable FEMA to pay claims for Hurricanes Harvey,

Irma, and Maria. On November 9, 2017, FEMA borrowed an additional $6.1 billion,

increasing the debt to $20.525 billion.

Options for Addressing the

Legacy Debt Include

Canceling the Debt or

Modifying Repayment

Page 52 GAO-23-105977 Flood Insurance

premium shortfall and reducing the likelihood of future debt.

However,

all of these options would involve substantial costs to future policyholders,

which would both exacerbate affordability concerns and charge

policyholders premiums significantly greater than are actuarially justified.

If interest was eliminated and all policyholders were charged full-risk

premiums, repaying the debt in 30 years would require an annual

payment of about $663 million. At NFIP’s fiscal year 2022 premium

revenue, the annual payment would require a 20 percent surcharge per

policyholder. This $663 million annual payment is significantly less than

repaying the debt with interest while allowing discounted premiums to

continue, which would increase the likelihood of future debt requiring

repayment and require an annual payment of about $1.9 billion, or a 60

percent surcharge per policyholder (see fig. 15). Taken independently,

immediately charging full-risk premiums to all policyholders would do

more to reduce the annual repayment costs (which would come to

approximately $963 million) than would eliminating interest (which would

bring costs to approximately $1.5 billion).

Figure 15: Estimated Effects of Various Requirements for Repaying National Flood

Insurance Program (NFIP) Debt over 30 Years

Note: Under the scenarios that keep premium shortfalls in place, we assume the debt will increase

each year by the amount of the premium shortfall. As a result, FEMA would be paying off both the

legacy debt and this estimated future debt. The surcharge percentage is the total annual payment as

a percentage of NFIP’s $3.24 billion in premium collections in fiscal year 2022. The surcharge

Immediately charging full-risk rates would reduce the annual payment required to repay

the debt because doing so would eliminate premium shortfalls, and therefore the likelihood

of increases in future debt. As discussed previously, replacing the glidepath with means-

based assistance could help address affordability concerns arising from immediately

charging full-risk rates.

Page 53 GAO-23-105977 Flood Insurance

percentage would need to change in future years as NFIP premium collections and debt levels

change.

This approach of eliminating interest on the debt and allowing FEMA to

charge full-risk premiums to all policyholders would recoup some costs for

taxpayers. It would also create a plan to repay the debt, rather than

allowing it to continue in perpetuity. However, it would worsen the inequity

for current and future policyholders by requiring them to pay for the loss

experience of previous policyholders. Further, a 20 percent surcharge

could exacerbate affordability concerns and cause some policyholders to

drop coverage, thus reducing consumer participation and harming

resilience. The surcharge could also increase costs for any future means-

based assistance program or reduce the net amount of help individuals

receive because the program would have to provide more assistance to

make flood insurance costs affordable.

The rollout of more actuarially sound premiums does not mean that

additional borrowing will not be needed in the future. The cap on annual

premium increases means that most policyholders will continue to pay

discounted premiums for years to come. Congress could eliminate this

source of future borrowing risk by removing the cap on annual premium

increases so that actuarial, full-risk premiums can be charged, or by

appropriating funds to make up for the discounted premiums. Congress

could also provide means-based premium assistance in combination with

either of these options.

These actions would reduce NFIP’s need to borrow in the future, but not

eliminate it. The program would still be subject to both “modeling risk” and

“sequencing risk.” Modeling risk is the inherent risk that even the best up-

to-date flood models, using reasonable assumptions and methods, are

not guaranteed to be accurate and could underestimate certain aspects of

flood risk. Sequencing risk is the risk that even if the models accurately

forecast average flood risk over time, there will be both good and bad

flood years around that average. If the bad flood years happen first, the

program will need to borrow. Sequencing risk is especially acute with

catastrophic floods.

Even if NFIP were to collect revenue sufficient to meet long-term

expected losses, the magnitude, volatility, and geographic concentration

of flood risk means that catastrophic events will happen and might exceed

what NFIP can financially manage without relying on additional funding.

As a result, it is important to consider options that could help NFIP reduce

the likelihood of future borrowing and establish clear expectations for the

Options for Addressing

Future Debt Include

Purchasing Additional

Reinsurance and

Changing Financing of

Catastrophic Losses

Page 54 GAO-23-105977 Flood Insurance

program’s capabilities. Two of these options are purchasing additional

reinsurance and changing the financing of catastrophic losses.

Purchasing additional reinsurance. One option for addressing potential

future debt is for FEMA to secure more reinsurance coverage for

catastrophic losses from the private reinsurance and capital markets.

Doing so would allow FEMA to price some of its flood risk up front

through the premiums it pays to reinsurers rather than borrowing from

Treasury after a flood, thus reducing the volatility of future catastrophic

losses.

A key benefit of reinsurance is to transfer and manage risk rather than to

reduce NFIP’s long-term fiscal exposure. However, even if FEMA were to

collect sufficient revenue to meet long-term estimated losses, FEMA

might not be able to fully address its future debt through reinsurance.

Specifically, the amount of reinsurance FEMA can purchase depends on

the amount of coverage reinsurers are willing to sell, the price they are

willing to charge, and the coverage provided. In fact, reinsurance costs

have increased in recent years, and FEMA has purchased less coverage.

Reinsurance likely will not lower the average cost of NFIP policies

because reinsurers charge premiums to compensate for the risk they

assume.

In addition, since NFIP must pay fair market premiums for private

reinsurance coverage, reinsurance cannot fully address future debt as

long as NFIP revenues remain actuarially inadequate. With inadequate

NFIP revenue, reinsurance recoveries from occasional catastrophic

events can help delay the accumulation of future debt in the short-term,

but cannot fully address it.

Changing financing of catastrophic losses. Another option is to define

NFIP’s program capacity and require FEMA to manage the program to

this capacity before requiring additional funding. This would include

establishing an annual risk threshold for the maximum amount of losses

FEMA has entered into two types of reinsurance agreements with private entities:

traditional reinsurance and capital markets reinsurance. Traditional reinsurance

agreements reimburse FEMA directly if losses from an event covered by the reinsurance

agreement exceed a certain threshold. Since 2017, FEMA has entered into 1-year

traditional reinsurance agreements each calendar year. Capital markets reinsurance

consists of catastrophe bonds issued to a large number of bondholders who agree to

release a portion of their bond principal to FEMA if losses from a covered event exceed

the threshold. FEMA’s current catastrophe bonds have a 3-year maturity.

Page 55 GAO-23-105977 Flood Insurance

that NFIP would be expected to cover based on its premium revenue. For

example, FEMA estimated in November 2021 that a risk threshold of a 1-

in-20 occurrence flood for NFIP currently is about a $10.5 billion event,

approximately the size of Hurricane Harvey.

Under this option, FEMA

would use the risk threshold as one of its ratemaking objectives when

developing full-risk premiums.

In the occasional cases when the annual losses exceed the threshold,

Treasury could fund claims through the Disaster Relief Fund and, if

needed, through an emergency supplemental appropriation.

Financing

future shortfalls as needed would avoid recreating debt and the potential

for charging future policyholders to repay it, which would improve equity,

affordability, consumer participation, and resilience. Further, Treasury

would effectively serve as a reinsurer to NFIP, so this option likely would

be less costly than FEMA purchasing private-sector reinsurance if

Treasury were to choose not to charge FEMA premiums for the cost of

the risk transfer. Alternatively, Treasury could choose to charge estimated

fair market rates for the risk transfer, but could provide a more reliable

source of capital than might be available at certain times in the private

markets.

100

Policy decisions regarding how to address legacy debt and potential

future debt have implications for current and future policyholders. Debt

arising from the loss experience of prior generations of policyholders is

not a cost associated with the risk of current and future policyholders, and

therefore charging a policyholder to pay it is not actuarially justified.

Further, we previously identified policy goals for flood insurance reform,

including encouraging consumer participation, promoting flood risk

resilience, and minimizing federal fiscal exposure.

101

Without statutory

See Department of Homeland Security, Legislative Reform Package. A “1-in-20

occurrence flood” is a flood event with losses having a 5 percent probability of being

equaled or exceeded in any given year.

FEMA’s Disaster Relief Fund is the primary source of federal disaster assistance for

state and local governments when a disaster is declared. The Disaster Relief Fund is

appropriated no-year funding, which allows FEMA to fund, direct, coordinate, and manage

response and recovery efforts—including certain efforts by other federal agencies and

state and local governments, among others—associated with domestic disasters and

emergencies. No-year funding refers to appropriations that remain available for obligation

for an indefinite period of time.

100

Treasury likely would need to estimate fair market rates because the private

reinsurance market might not always offer coverage at levels sought by NFIP.

101

See GAO-17-425.

Page 56 GAO-23-105977 Flood Insurance

changes to address the legacy debt and determine an approach for

addressing potential future debt, NFIP’s debt likely will continue to grow

without any prospect of repaying it. As a result, NFIP’s fiscal solvency will

be delayed and issues of policyholder equity and affordability will persist.

There will also be increased risk to consumer participation in flood

insurance and resilience to flood risk.

Selected private insurers told us that current NFIP premiums generally

were lower than what they would need to charge to profitably underwrite

flood risk. We have also reported that discounted NFIP premiums

undercut private-sector premiums, place private insurers at a competitive

disadvantage, impede private-market growth, and ultimately limit

insurance options for policyholders.

102

While Risk Rating 2.0 may help to

address these concerns by implementing full-risk premiums, it does not

yet appear to have significantly affected the private flood insurance

market because the transition to full-risk premiums will take many years.

The private insurers told us they had not experienced a discernable

change in their flood insurance portfolios since Risk Rating 2.0 was

implemented, although some said other factors, such as inflation and the

housing market, could also be affecting their growth.

103

The private flood insurance market has grown, both in absolute terms and

relative to NFIP, according to data NAIC began collecting in 2018. From

2018 to 2022, the private market grew from 372,000 policies and $404

million in direct written premium to 641,000 policies and almost $1.3

billion in direct written premium.

104

Relative to NFIP, the private market

share grew from 7 to 12 percent of policies and from 8 to 22 percent of

direct written premium during this period (see fig. 16).

102

See GAO, Flood Insurance: Potential Barriers Cited to Increased Use of Private

Insurance, GAO-16-611 (Washington, D.C.: July 14, 2016).

103

We interviewed six private insurers in September and October 2022, approximately 12

months after FEMA began implementing Risk Rating 2.0 for new policies and 6 months

after implementation for renewals. Private insurers said much of their business comes

from new home purchases, so a slowing housing market would slow their growth.

104

From 2018 to 2022, the number of NFIP policies decreased by about 356,000 policies.

During this same period the private market grew by about 269,000 policies. It is likely that

some policyholders that dropped NFIP coverage replaced their flood coverage with a

private insurer. Written premium is the contractually determined amount charged on new

and renewing policies by the insurer to the policyholder based on the expectation of risk,

policy benefits, and expenses associated with the coverage provided by the policy.

Risk Rating 2.0 Has

Not Yet Significantly

Affected the Private

Insurance Market, but

Some NFIP Rules

Hinder Market Growth

Page 57 GAO-23-105977 Flood Insurance

Figure 16: Private Flood Insurance Share of Flood Insurance Policies, by Number of

Policies

Note: Policy counts are as of December 31 of each year and account for each unit within a

Residential Condominium Building Association Policy as a separate policy.

Commercial flood insurance accounted for much of this increase, with the

private market share growing from 25 to 47 percent of all commercial

flood insurance policies. Private insurers told us their commercial policies

were particularly competitive because private insurers can offer a

commercial policy that covers multiple buildings and locations, while NFIP

requires separate policies for each insured building, which incurs

additional expenses. Other industry officials told us that the growth in the

private market share of commercial policies might be due to greater

awareness of flood risk among risk managers of commercial real estate.

Private insurers also told us that a key factor contributing to the growth of

the residential private flood insurance market was a 2019 interagency rule

from federal financial regulators requiring lenders to accept private

Page 58 GAO-23-105977 Flood Insurance

insurance for compliance with the mandatory purchase requirement.

105

The private insurers also said they are able to offer higher coverage limits

and broader coverage options than NFIP, which has helped them

compete.

106

Although the private market has grown in recent years, we have

previously reported on several barriers to private-sector involvement in

flood insurance.

107

Private insurers told us that two of these barriers, in

addition to discounted NFIP premiums, continue to impede private-market

growth.

• Continuous coverage rules. NFIP policyholders who receive

discounted premiums must maintain continuous flood insurance

coverage through NFIP to continue receiving the discounts.

Specifically, if a former NFIP policyholder who changed flood

coverage to a private insurer wants to repurchase NFIP coverage, the

policyholder must do so at full-risk premiums rather than rejoining the

glidepath. As a result, many NFIP policyholders may be reluctant to

consider private flood insurance policies out of concern that they

would be unable to return to NFIP at the discounted premium if the

private insurer were to significantly increase its premium or decide to

stop providing coverage. However, according to FEMA, the agency

lacks the legal authority to recognize private flood insurance policies

as continuous coverage.

• Lack of NFIP partial refunds. NFIP policyholders also are unable to

obtain partial refunds if they cancel their policy before the end of their

term (typically 1 year) and replace it with a private policy. To avoid

losing money, an NFIP policyholder must therefore consider private

coverage only near the end of the policy term. However, private

insurers told us this window is often too short, so many NFIP

policyholders are effectively unable to convert to private coverage.

105

Specifically, the Biggert-Waters Act requires federal regulators to direct lenders to

accept private-market policies that meet the statutory definition of private flood insurance,

and the regulators implemented this requirement, effective in July 2019. Loans in Areas

Having Special Flood Hazards, 84 Fed. Reg. 4953 (Feb. 20, 2019).

106

NFIP’s maximum coverage limit for one-to-four-family residential policies is $250,000

for buildings and $100,000 for contents. For nonresidential policies, the maximum

coverage limit is $500,000 per building and $500,000 for the building owner’s contents.

Many private flood insurers offer higher coverage limits and broader coverage, such as

coverage of basement contents and living expenses.

107

See GAO-17-425; GAO-16-611; and GAO, Flood Insurance: Strategies for Increasing

Private Sector Involvement, GAO-14-127 (Washington, D.C.: Jan. 22, 2014).

Page 59 GAO-23-105977 Flood Insurance

FEMA previously began allowing partial refunds for midterm

cancellations in October 2018 but ceased doing so in March 2019

because it determined it lacked legal authority to do so.

FEMA officials said there is a seasonal component to flood risk,

meaning that flood losses tend to occur during certain periods each

year in some areas. For example, in the Southeast, most flooding

occurs during hurricane season in the summer and fall. As a result, if

FEMA were to provide refunds for midterm cancellations on a strict

pro-rata basis, they would not be actuarially sound. For example, to

be actuarially sound, a 1-year policy canceled after 6 months likely

would receive more or less than a 50 percent refund, depending on

when the cancellation occurred in relation to the timing of the policy

term relative to the seasonality of flood risk. If most of the risk

occurred in the first 6 months, less than a 50 percent refund would be

given.

We previously identified several policy goals for flood insurance reform,

including promoting flood risk resilience, minimizing federal fiscal

exposure (including by encouraging private-sector involvement), and

encouraging consumer participation.

108

However, because FEMA’s

interpretation of the law finds that FEMA lacks the legal authority to allow

private coverage to satisfy the continuous coverage requirement or to

allow partial refunds for midterm cancellations, NFIP policy rules

discourage NFIP policyholders from seeking private coverage. This slows

the growth of the private flood insurance market and limits options for

consumers, both of which could result in less consumer participation in

flood insurance and therefore less flood resilience, as consumers are not

protected from the financial risk of flooding. Discouraging NFIP

policyholders from seeking private coverage also results in FEMA

maintaining risk and exposure that the private sector could otherwise

assume. Finally, to the extent that fewer property owners have flood

insurance, reliance on federal disaster assistance could increase,

ultimately increasing federal fiscal exposure.

108

See GAO-17-425.

Page 60 GAO-23-105977 Flood Insurance

FEMA has developed and released substantial information to explain Risk

Rating 2.0, relying primarily on WYO insurers to communicate the new

methodology to policyholders. Specifically, FEMA developed guidance

and training to enable WYO insurers to communicate with policyholders

on Risk Rating 2.0. FEMA also developed two websites to describe the

new methodology and make information available to NFIP insurers and

policyholders. Such information includes overview material, summaries of

changes, and detailed technical documents explaining the methodology,

data sources, and premium calculation. FEMA also developed documents

describing the specific characteristics and variables it uses to calculate

premiums under Risk Rating 2.0 and the discounts policyholders could

receive by undertaking actions to mitigate their flood risk. FEMA

presented this information online in several formats, including video,

interactive graphics, fact sheets, technical documents, and a frequently

asked questions page.

FEMA also provided data on how premiums would change under Risk

Rating 2.0, including the percentage of policies that would experience

premium decreases and increases and the magnitude of the premium

changes. These data included profiles tailored to individual states, as well

as downloadable data at the county and zip code levels. Further, FEMA

conducted training sessions and published training materials on its

websites to inform insurers and agents who would be selling and

servicing policies under Risk Rating 2.0 and interacting with

policyholders.

FEMA has not provided policyholders with comprehensive information

about Risk Rating 2.0 and its implications for mitigation and their

individual premiums. Specifically, FEMA provided general policy

information to policyholders, but according to FEMA officials, this

information included only one minor reference to Risk Rating 2.0 as being

a new ratemaking methodology. These mailings included a cover letter

with a short introduction to flood insurance, the actual flood insurance

policy, and policy declaration pages that summarize coverage and

premiums. The policy declaration pages included information such as

FEMA Has Released

Detailed Information

on Risk Rating 2.0,

but Has Not Provided

It to Policyholders

FEMA Has Developed and

Released Substantial

Information on Risk Rating

2.0, Largely Targeted to

Insurers

FEMA Has Not Provided

Policyholders Complete

Information about the New

Methodology and Its

Implications

Page 61 GAO-23-105977 Flood Insurance

property characteristics; flood zone; replacement cost value; the full-risk

premium; applicable premium discounts; policy assessments, surcharges,

and fees; the total annual premium charged; and the history of the

property’s NFIP flood claims.

However, none of this information explained to policyholders the new

methodology or its implications for mitigation and their individual

premiums or referred policyholders to FEMA’s Risk Rating 2.0 website

where rate methodology documents and other resources could be found.

Further, FEMA did not notify policyholders about the new ratemaking

methodology before implementing it.

Instead, FEMA officials told us they relied on WYO insurers and

insurance agents to communicate with policyholders and inform them

about Risk Rating 2.0, which they said was consistent with how they

communicated with policyholders before Risk Rating 2.0. FEMA officials

said they focused on developing guidance and training to support WYO

insurers and agents in policyholder communications. However, FEMA did

not establish any requirements to ensure that insurers and agents

communicated this information to policyholders on FEMA’s behalf.

As a result, policyholders may be uncertain about the Risk Rating 2.0

methodology generally and about how it applies to them individually,

including the justification for their individual premiums and the potential

savings associated with mitigation options. Officials from two associations

representing insurance agents told us policyholders have expressed

concern over premium increases and generally do not understand Risk

Rating 2.0, including how it produces premiums and what factors affect

those premiums. Policyholders also had questions about potential

savings associated with available mitigation options, such as elevation or

floodproofing. For example, officials from insurance agent associations

said policyholders asked agents how mitigating their flood risk could

reduce their premium.

Furthermore, agent association officials told us some agents generally felt

unequipped to explain Risk Rating 2.0 to policyholders and fully answer

their questions. Although FEMA has disclosed details of its ratemaking

methodology and the variables it uses on its website, association officials

said agents and policyholders cannot use them to calculate the same

information they could under FEMA’s legacy ratemaking methodology.

Under the legacy methodology, agents could consult FEMA’s rating

manual to determine why premiums may have changed and how

mitigation measures might affect premiums. However, Risk Rating 2.0

Page 62 GAO-23-105977 Flood Insurance

involves a more sophisticated modeling approach, which uses an

automated ratemaking mechanism that did not exist under the legacy

methodology.

As a result, Risk Rating 2.0 is more difficult for agents to explain to

policyholders than the legacy methodology. The new methodology is

complex and incorporates a greater number of flood risk variables. FEMA

officials told us that this sophistication was necessary to be consistent

with methods used by private insurers and to ensure that premiums

reflect an individual property’s flood risk. They added that because Risk

Rating 2.0 allows agents to obtain an instant quote from an automated

quoting system without consulting a detailed manual, insurance agents

can obtain a premium and write a policy more easily.

One of FEMA’s strategic objectives is empowering risk-informed decision-

making.

109

To build long-term resilience, the strategic plan stresses the

importance of individuals understanding risk and having resources and

capacity to mitigate or reduce it. The strategic plan also notes the

importance of accurate information about risk, and of data tools,

guidance, and public messaging that ensure highly technical information

is explained in easily understood, relatable ways. The plan states this will

enable individuals and communities to better understand technical

information to inform decision-making.

FEMA has not provided NFIP policyholders with comprehensive

information about Risk Rating 2.0, or otherwise made them aware of it.

Therefore, policyholders may not be fully informed about how Risk Rating

2.0 affects them and how they can reduce their premiums through

mitigation. Enhancing communication with policyholders to improve their

understanding of Risk Rating 2.0 as well as its implications for individual

premiums and mitigation possibilities could help policyholders make more

informed decisions about their flood risk and the risk-reducing effect of

potential mitigation efforts, thus helping advance FEMA’s resilience goals.

FEMA’s $36.5 billion in NFIP borrowing from Treasury since 2005

underscores the need for reforming the program. However, finding

common ground on reform has been difficult, largely because of the

competing goals of making the program solvent while keeping premiums

affordable for policyholders. Our April 2017 report outlined a road map for

109

Federal Emergency Management Agency, 2022–2026 FEMA Strategic Plan.

Conclusions

Page 63 GAO-23-105977 Flood Insurance

comprehensive reform to help bridge that divide, but much-needed reform

has yet to materialize.

110

However, through Risk Rating 2.0, FEMA has taken an important step to

help move the program toward solvency and actuarial soundness by

better aligning premiums with the underlying flood risk of the individual

properties it insures. Therefore, full implementation of this improved

ratemaking methodology is essential. FEMA could take several steps to

improve this effort, but addressing the program’s broader solvency and

affordability challenges will also require congressional action. Specifically,

challenges remain in the following areas:

• Additional policyholder charges. Policyholders pay two charges

that are not proportional to the risk of the insured property. Until

Congress authorizes and requires FEMA to incorporate these charges

into the full-risk premium, the total amounts paid by policyholders may

not be actuarially justified, and some policyholders could be over- or

underpaying.

• CRS discounts. CRS discounts are not actuarially justified because

they are paid for by policyholders not receiving the discount and are

not proportional to the risk reduction they provide. If FEMA were to

adjust CRS to incorporate discounts into the full-risk premium based

on the actuarial evaluation of risk reduction, it could ensure that full-

risk premiums are actuarially sound and that policyholders are paying

fair premiums. Further, if FEMA were to evaluate other means for

incentivizing desirable community activities that cannot be actuarially

justified, it could help ensure that such activities continue if they are

no longer incentivized through CRS discounts.

• Actuarial communication. Congress does not have key information

on Risk Rating 2.0, such as the loss levels that premiums are

designed to cover, the associated uncertainty, and estimated revenue

and shortfalls for the current and future years, as well as NFIP’s fiscal

outlook. By annually reporting on these items, FEMA could improve

understanding of Risk Rating 2.0 and better enable Congress to

oversee NFIP.

• Affordability. Addressing affordability through discounted premiums

and caps on annual premium increases has several limitations.

Specifically, this approach is not cost-effective because the discounts

are not targeted based on need. The approach also addresses

affordability poorly because some policyholders needing assistance

110

See GAO-17-425.

Page 64 GAO-23-105977 Flood Insurance

are not receiving it, and it is temporary. In addition, this approach

lacks transparency, and it hinders private-market growth by providing

artificially low premiums. A means-based assistance program is one

way Congress could address affordability more cost-effectively by

targeting it based on need. This also would increase the transparency

of the costs of affordability assistance by replacing discounted rates

and premium shortfalls with full-risk premiums and explicit assistance

in the budget. Further, replacing discounted premiums with assistance

that also could be used for private policies would promote private-

market growth. Finally, by addressing affordability needs more

effectively, Congress could encourage more policyholders to maintain

coverage, resulting in greater resilience to flood risk and less reliance

on disaster assistance.

• Program debt. NFIP’s debt to Treasury largely is a result of

discounted premiums that FEMA has been statutorily required to

provide. Charging current policyholders to repay the debt is not

actuarially justified, and the associated costs exacerbate affordability

concerns. Further, it is unlikely that FEMA will ever be able to repay

the debt as currently structured. Attempts to do so likely would lead

some policyholders to drop coverage altogether, leaving them

unprotected from flood risk, reducing resilience, and increasing

reliance on federal disaster assistance. Without actions to address the

legacy debt—for example, by canceling it or creating different

repayment terms—and the potential for future debt, NFIP’s debt likely

will continue to grow, actuarial soundness will be delayed, and

affordability concerns will increase.

• NFIP rules affecting private insurers. NFIP rules related to

continuous coverage and cancellation refunds are barriers to private-

sector growth. By authorizing and requiring FEMA to allow private

coverage to satisfy NFIP’s continuous coverage requirement and to

offer risk-based partial refunds for midterm cancellations that are

replaced by private policies, Congress could encourage policyholders

to seek private coverage and thereby help to decrease federal fiscal

exposure.

• Policyholder communication. Because FEMA has not

communicated directly with policyholders about Risk Rating 2.0,

policyholders may have questions about the methodology and its

implications for their individual premiums and mitigation. By taking

additional steps to improve policyholders’ awareness and

understanding of Risk Rating 2.0 and making available more detailed

property-specific information about premiums and potential mitigation

Page 65 GAO-23-105977 Flood Insurance

savings, FEMA could help policyholders make more informed

decisions about their flood risk and promote mitigation and resilience.

For NFIP to achieve long-term solvency and other policy goals, it will be

important for FEMA and Congress to take multiple actions to address a

number of challenges. In particular, actions are needed to address the

current and potential future debt as well as the conditions that caused the

debt to accumulate over time. While actions to address the existing debt

are essential, without elements such as full-risk premiums that are

actuarially sound and an appropriated, means-based assistance program,

NFIP’s debt problems will likely persist. As NFIP’s reauthorization

approaches, Congress and FEMA have the opportunity to address the

program’s long-standing challenges and place it on a path to achieve

fiscal solvency while addressing affordability.

We are recommending the following six matters for congressional

consideration:

Congress should consider authorizing and requiring FEMA to incorporate

the reserve fund assessment, to the extent necessary based on actuarial

principles, into the risk charge within the full-risk premium. (Matter for

Consideration 1)

Congress should consider repealing the HFIAA surcharge and authorizing

and requiring FEMA to replace forgone revenue with actuarially

determined premium adjustments. (Matter for Consideration 2)

Congress should consider providing any affordability assistance for flood

insurance through a means-based program that is reflected in the federal

budget rather than through statutorily discounted premiums. Options that

Congress might consider include allowing assistance to be used for

private policies and shortening or ending the period of discounted

premiums for those that do not qualify for assistance. (Matter for

Consideration 3)

Congress should consider addressing NFIP’s legacy and potential future

debt and should consider the best means for doing so. Options for

addressing the legacy debt include canceling the debt or creating specific

repayment terms funded by a transparent premium surcharge. Options for

addressing future debt include providing funding to make up for the

statutorily-generated premium shortfall, allowing immediate transition to

full-risk rates accompanied by a means-based assistance program,

Matters for

Congressional

Consideration

Page 66 GAO-23-105977 Flood Insurance

changing the financing of catastrophic losses, and enabling FEMA to

purchase additional reinsurance. (Matter for Consideration 4)

Congress should consider authorizing and requiring FEMA to allow

private flood insurance coverage to satisfy NFIP’s continuous coverage

requirement. (Matter for Consideration 5)

Congress should consider authorizing and requiring FEMA to offer risk-

based partial refunds for midterm cancellations of NFIP policies that are

replaced by private flood insurance policies and authorizing and requiring

FEMA to implement these refunds in an actuarially sound manner.

(Matter for Consideration 6)

We are making the following five recommendations to FEMA:

The Assistant Administrator of FEMA’s Federal Insurance Directorate

should adjust CRS by calculating a community’s rating based only on

community activities that reduce flood risk and by incorporating discounts

into the full-risk premium based on the actuarial evaluation of risk

reduction. (Recommendation 1)

The Assistant Administrator of FEMA’s Federal Insurance Directorate

should evaluate other means for incentivizing desirable community

activities that cannot be actuarially justified but are currently a basis for

discounts in CRS. (Recommendation 2)

The Assistant Administrator of FEMA’s Federal Insurance Directorate

should publish an annual actuarial report that includes the loss levels that

full-risk premiums are designed to cover and that current discounted

premiums are able to cover, and the associated uncertainty; the

estimated premium revenue and shortfall for current and future years; and

an evaluation of NFIP’s fiscal outlook, including projections of future debt.

(Recommendation 3)

The Assistant Administrator of FEMA’s Federal Insurance Directorate

should take steps to directly inform individual policyholders about Risk

Rating 2.0 and make them aware of available information.

(Recommendation 4)

The Assistant Administrator of FEMA’s Federal Insurance Directorate

should take additional steps to make available to policyholders, agents, or

both more detailed property-specific flood risk information to help them

Recommendations for

Executive Action

Page 67 GAO-23-105977 Flood Insurance

better understand the justification for individual premiums and potential

savings associated with available mitigation options. (Recommendation 5)

We provided a draft of this report to the Department of Homeland Security

for review and comment. In its comments, reproduced in appendix III, the

Department of Homeland Security agreed with our recommendations,

stating that it has proposed legislation to address some of the concerns

noted in our report. This legislation includes a proposal to create a

means-tested affordability program to assist low- and moderate-income

policyholders. The department also stated that it would continue to

enhance communication with policyholders directly and through NFIP

insurers. The Department of Homeland Security also provided technical

comments, which we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional

committees and the Secretary of Homeland Security. In addition, the

report is available at no charge on the GAO website at

https://www.gao.gov.

Agency Comments

Page 68 GAO-23-105977 Flood Insurance

If you or your staff have any questions about this report, please contact

Alicia Puente Cackley at (202) 512-8678 or [email protected], or Frank

Todisco at (202) 512-2700 or [email protected]. 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 key contributions to this

report are listed in appendix IV.

Alicia Puente Cackley

Director, Financial Markets and Community Investment

Frank Todisco

Chief Actuary, Applied Research and Methods

Appendix I: Objectives, Scope, and

Methodology

Page 69 GAO-23-105977 Flood Insurance

This report examines the Federal Emergency Management Agency’s

(FEMA) new methodology for setting premiums for the National Flood

Insurance Program (NFIP), known as Risk Rating 2.0. Specifically, we

examined (1) the actuarial soundness of the new methodology, (2) how

premiums are changing for policyholders, (3) efforts to make flood

insurance affordable for policyholders, (4) options for addressing program

debt, (5) the potential implications of Risk Rating 2.0 for the private flood

insurance market, and (6) FEMA’s efforts to promote policyholder

understanding of Risk Rating 2.0.

To address the first objective, our actuaries reviewed actuarial and other

ratemaking documents provided by FEMA.

We also reviewed FEMA

documents and statutory requirements on premiums, assessments,

surcharges, and fees; reinsurance; historical rate reviews; and financial

reports for NFIP. We reviewed all FEMA data sources used for

developing the full-risk premiums and FEMA’s methodology for selecting

the data and ensuring data quality and credibility. To examine the

actuarial soundness of premiums, we reviewed the actuarial assumptions

and methods FEMA used to develop the target losses for the policy year.

We also reviewed FEMA’s actuarial analysis on risk classifications, the

rationale for actuarial assumptions applied, and the actuarial models used

to develop rating factors, including commercial catastrophe models and

FEMA models that use data from other government agencies, such as the

U.S. Army Corps of Engineers. We reviewed the structure of the full-risk

premium and the factors that affect the full-risk premium and the total

policyholder payment. We also evaluated the reasonableness of FEMA’s

findings and conclusions included in its actuarial documents. We

interviewed FEMA officials and an actuarial association. Finally, we

The actuarial analyses and reviews in this report were performed by Senior Actuary Lijia

Guo, Ph.D., ASA, MAAA, and Chief Actuary Frank Todisco, FSA, MAAA. Collectively, the

actuaries responsible for this review meet the American Academy of Actuaries’

qualification standards with respect to their educational background, designated

professional standing, and experience.

Appendix I: Objectives, Scope, and

Methodology

Appendix I: Objectives, Scope, and

Methodology

Page 70 GAO-23-105977 Flood Insurance

compared the methodology and results against actuarial standards and

principles.

In performing this analysis, we relied on actuarial reports and

documentation provided by FEMA. We reviewed the documents for

reasonableness but did not audit them for accuracy. To the extent that

there are material deficiencies in completeness and accuracy in FEMA’s

actuarial reports, the actuarial premium estimates may be materially

different from those shown in the reports had these deficiencies not been

present. This review is not a technical review, and we did not verify the

accuracy of the calculations performed by the actuaries who developed

the full-risk premiums.

To address the second, third, and fourth objectives, we analyzed data

from FEMA’s PIVOT database on NFIP policies as of December 31,

2022.

We used these data to determine the premiums that FEMA was

charging NFIP policyholders and compared them to the full-risk premiums

that FEMA determined policyholders should be paying according to Risk

Rating 2.0. We assessed the reliability of these data by interviewing

FEMA officials and reviewing documentation on PIVOT. We also tested

the data by identifying missing data, outliers, and any obvious errors, and

comparing our results to published data. We determined that the data

were sufficiently reliable for the purposes of our analyses.

Because FEMA does not collect income information for NFIP

policyholders, we estimated policyholder household income using the

Casualty Actuarial Society, Statement of Principles Regarding Property and Casualty

Ratemaking (Arlington, Va.: May 7, 2021). The Actuarial Standards Board’s relevant

Actuarial Standards of Practice include 12 (Risk Classification for All Practice Areas); 23

(Data Quality); 25 (Credibility Procedures); 29 (Expense Provisions in Property/Casualty

Insurance Ratemaking); 30 (Treatment of Profit and Contingency Provisions and the Cost

of Capital in Property/Casualty Insurance Ratemaking); 36 (Statements of Actuarial

Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves); 38

(Catastrophe Modeling); 39 (Treatment of Catastrophe Losses in Property/Casualty

Insurance Ratemaking); 41 (Actuarial Communications); 43 (Property/Casualty Unpaid

Claim Estimates); 46 (Risk Evaluation in Enterprise Risk Management); 47 (Risk

Treatment in Enterprise Risk Management); 53 (Estimating Future Costs for Prospective

Property/Casualty Risk Transfer and Risk Retention); and 56 (Modeling).

For condominiums, NFIP offers a Residential Condominium Building Association Policy,

which covers all units within a condominium. As such, it is necessary to adjust for the

number of condominium units to determine the number of policies. We account for this

when reporting the aggregate number of NFIP policies, but otherwise we treat these

condominium policies as single policies. We also excluded from our definition of

“commercial policy” a small number of nonresidential policies insuring mobile and

manufactured homes.

Appendix I: Objectives, Scope, and

Methodology

Page 71 GAO-23-105977 Flood Insurance

median household income of the census tract in which the insured

property was located, according to data from the Census Bureau’s 5-year

American Community Survey for 2015–2019.

To further answer the second objective, we used a statistical technique

called Bayesian Improved Surname Geocoding (BISG) to estimate the

probability that existing NFIP policyholders identified with one of five

racial and ethnic groups. These groups were

• Asian, Native Hawaiian, or Pacific Islander, non-Hispanic;

• Black or African American, non-Hispanic;

• Hispanic, any race;

• White, non-Hispanic; and

• all other groups.

Using this method, we combined data from two public release files from

the 2010 Census of Population and Housing on racial and ethnic

identification. We obtained aggregate data from the 2010 Census

Surname File on the probability that a respondent having a given

surname reported identifying with one of the groups above. We obtained

aggregate data from Summary File 1 on the number of adults in each

census block group who identified with each racial and ethnic group. We

compared the racial and ethnic groups from each file to data with prior

evidence of predictive accuracy, and we applied the BISG method as

described in the literature.

We assessed the reliability of these estimates

by conducting a literature review on the accuracy of BISG and by

examining the completeness and distributions of the estimates for NFIP

policyholders. Our prior work describes the BISG method in more detail.

To answer the third objective, we reviewed legislative proposals and

policy goals identified in our prior work.

We analyzed NFIP policy data to

Marc N. Elliott et al., “A New Method for Estimating Race/Ethnicity and Associated

Disparities Where Administrative Records Lack Self-Reported Race/Ethnicity,” Health

Services Research, vol. 43, no. 5, part I (October 2008): 1730–1732, and Kosuke Imai

and Kabir Khanna, “Improving Ecological Inference by Predicting Individual Ethnicity from

Voter Registration Records,” Political Analysis, vol. 24, no. 2 (Spring 2016): 263–272.

GAO, Tax Equity: Enhanced Evaluation Could Improve Outreach to Small Business

Owners, GAO-22-104582 (Washington, D.C.: Aug. 3, 2022).

GAO, Flood Insurance: Comprehensive Reform Could Improve Solvency and Enhance

Resilience, GAO-17-425 (Washington, D.C.: Apr. 27, 2017).

Appendix I: Objectives, Scope, and

Methodology

Page 72 GAO-23-105977 Flood Insurance

estimate the time it might take for FEMA to transition current

policyholders to full-risk premiums and the continued unappropriated

federal cost until the transition is completed. Our analysis focused on

NFIP policies on the glidepath—those that had not yet reached full-risk

premiums by December 31, 2022. Because new NFIP policies must pay

full-risk premiums, we assumed that premium shortfalls would come from

renewing NFIP policies on the glidepath from 2022 onwards.

To calculate premium shortfalls in calendar year 2022, we used PIVOT

data to subtract actual premiums from estimated full-risk premiums for

NFIP policies in force under Risk Rating 2.0 from January 1, 2022, to

December 31, 2022. Because Risk Rating 2.0 was fully implemented after

April 1, 2022, some NFIP policies had not yet renewed under Risk Rating

2.0 from January 1, 2022, to March 31, 2022, and did not renew under

Risk Rating 2.0 until between January 1, 2023, and March 31, 2023. For

calendar year 2023, we assumed that the average shortfalls and the time

it will take these policies to reach full-risk premiums will be the same as

the Risk Rating 2.0 policies we observed in 2022.

Our projection of premium shortfall from 2023 onward includes baseline

and alternative scenarios on (1) future full-risk premiums, (2) future

premiums actually charged (which would be less than full risk while

policies are still on the glidepath), and (3) the annual policy renewal rate.

In our baseline projection, we assumed that policies on the glidepath

would renew with NFIP each year until they reach full-risk premiums.

To project future premium shortfalls, we used inflation projections from

the Congressional Budget Office and NFIP gross annual loss projections

due to increased flood risks developed by the Office of Management and

Budget. For the future full-risk premiums, we assumed they would

increase with the projected annual inflation and annualized percent

increase in flood risks. For future charged premiums, we assumed that

the existing statutory annual premium increase caps would apply until

policies on the glidepath reach their full-risk premiums. We analyzed the

sensitivity of our estimates to our assumptions on inflation, flood risks,

annual reductions in the number of policies due to nonrenewal, and

annual premium increase caps by calculating the estimates using

alternative assumptions. Our shortfall calculations do not account for

assessments, surcharges, and fees. We calculated the total premium

shortfall net of WYO expenses. In fiscal year 2023, FEMA agreed to pay

WYO insurers 29.7 percent of premiums. We determined the present

value of premium shortfalls using a discount rate of 2.82 percent, based

on the 10-year average of Treasury spot rates, as of September 30, 2022.

Appendix I: Objectives, Scope, and

Methodology

Page 73 GAO-23-105977 Flood Insurance

We compared policyholders’ estimated household income to the annual

area median income of the area in which the property was located, as

determined by the Department of Housing and Urban Development. We

used these data and the property’s full-risk premium from PIVOT to

determine policyholders’ eligibility for assistance and the amount of

assistance they might receive under different potential means-based

assistance criteria. We also reviewed studies on flood insurance

affordability and legislative proposals for a means-based assistance

program for NFIP.

The PIVOT data contained 9 months of policy renewal data under Risk

Rating 2.0. We created our estimates of premium shortfall and the cost of

means-based assistance by extrapolating values obtained from 9 months

of data to 12 months, and assuming that declines in the number of

policies observed from April through December 2022 continued for the

period January through March 2023. To assess the need for and viability

of a means-based assistance program, we compared effects of current

affordability strategies to policy goals for flood insurance reform.

To address the fourth objective, we analyzed NFIP policy data,

reinsurance documents, and financial statements. We also reviewed our

previous work on NFIP, as well as reports from the Congressional Budget

Office, Congressional Research Service, FEMA, and others. We

assessed the options for addressing program debt against actuarial

standards and policy goals we established in prior work.

To address the fifth objective, we assessed the size and makeup of the

private flood insurance market using data from the National Association of

Insurance Commissioners’ (NAIC) data call on the number and total direct

written premium of private flood insurance policies. We assessed the

reliability of these data by comparing data elements, including private

insurer direct written premium and number of policies sold, with totals

from other NAIC publications, such as NAIC’s annual industry report, and

the raw data. We also interviewed NAIC officials about the accuracy and

limitations of the data and their process for ensuring reliability of the data.

We determined that the data were sufficiently reliable to determine the

number and total direct written premium of private flood insurance policies

in the United States.

GAO-17-425.

Appendix I: Objectives, Scope, and

Methodology

Page 74 GAO-23-105977 Flood Insurance

We also interviewed six private flood insurers to obtain their views on

how, if at all, the implementation of Risk Rating 2.0 might be affecting

their companies and the overall private flood insurance market and any

challenges to private insurer growth. We used the NAIC data to identify

larger private flood insurers by direct written premium. We also used

these data to identify insurers with a variety of experience writing

residential and commercial policies, as well as those that did and did not

participate in NFIP’s Write Your Own program. Finally, we reviewed laws

and regulations that affect private insurers’ ability to provide flood

insurance and assessed these laws and regulations against policy goals

we established in prior work.

To address the sixth objective, we reviewed materials available on

FEMA’s website related to Risk Rating 2.0, including FEMA’s Flood

Insurance Manual, rating methodology guide, and discount guide. We

analyzed flood insurance policy materials that FEMA sends to

policyholders to determine the extent to which FEMA notified

policyholders of Risk Rating 2.0 changes. Further, we analyzed training

materials FEMA created for agents and Write Your Own insurers to

determine what information FEMA provided to these groups to inform

them about Risk Rating 2.0 and assist policyholders with their policies.

We compared these materials against several criteria, including FEMA’s

strategic plan and policy goals we established in prior work.

In addition,

to understand how FEMA communicated premium changes to insurers,

agents, and policyholders, we interviewed FEMA officials and two

associations representing insurance agents that work with NFIP

policyholders.

For all objectives, we reviewed relevant laws and regulations, relevant

FEMA documents, our prior reports, and academic publications on flood

insurance, and we interviewed FEMA officials. We also attended the

National Flood Conference in June 2022, which included discussion of a

number of topics related to Risk Rating 2.0 and flood insurance reform.

We conducted this performance audit from March 2022 to July 2023 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 believe that

GAO-17-425.

Appendix I: Objectives, Scope, and

Methodology

Page 75 GAO-23-105977 Flood Insurance

the evidence obtained provides a reasonable basis for our findings and

conclusions based on our audit objectives.

Appendix II: Additional Data on Glidepath and

Means-Based Assistance Estimates

Page 76 GAO-23-105977 Flood Insurance

We estimated the time it might take for the Federal Emergency

Management Agency to transition current policyholders to full-risk

premiums and the continued unappropriated federal cost until the

transition is completed. Our estimates included four key inputs: annual

premium increase caps, inflation rates, flood risk, and National Flood

Insurance Program (NFIP) policy renewal. Changing each input resulted

in different estimates (see table 3).

Table 3: Glidepath Time and Premium Shortfall Estimates

Scenario

Year when 95 percent

of policies reach

full risk

Total shortfall

(in billions)

Present value of

total shortfall

(in billions, 2022)

Baseline

2037

$26.7

$22.9

Alternate assumptions: statutory caps on annual premium increases

Increase all premium increase caps to 25 percent

2033

17.5

15.8

Decrease 18 percent premium increase caps to 9

percent

2055

67.2

46.4

Decrease all premium increase caps to 9 percent

2056

69.3

48.3

Alternate assumptions: inflation

Higher inflation

2037

27.2

23.3

Lower inflation

2037

25.0

21.5

Alternate assumptions: flood risk

Higher flood risk

2037

26.4

22.6

Lower flood risk

2037

25.8

22.1

Alternate assumptions: policy nonrenewal

3 percent nonrenewal

2036

22.1

19.2

6 percent nonrenewal

2034

19.2

16.9

Source: GAO analysis of Federal Emergency Management Agency data. | GAO-23-105977

Note: The baseline scenario assumes that all policies on the glidepath would renew National Flood

Insurance Program coverage and that flood risk would increase by 0.31 percent annually. The

alternate inflation scenarios assume that inflation would be 1 percentage point higher or lower in the

first year and converge to the baseline over 5 years. The higher and lower flood risk scenarios

change the annual increases in flood risk to 0.40 percent and 0.22 percent, respectively. The present

value amounts were determined using a discount rate of 2.82 percent.

We estimated the cost and number of recipients of a means-based

assistance program for which only current NFIP policyholders of primary

single-family residences would be eligible (see table 4). We also

estimated how these numbers would change by limiting eligibility to

policyholders with properties in special flood hazard areas. We used two

alternatives for determining the assistance amount. The first alternative

would cover the amount of the premium that exceeded a certain

Appendix II: Additional Data on Glidepath

and Means-Based Assistance Estimates

Appendix II: Additional Data on Glidepath and

Means-Based Assistance Estimates

Page 77 GAO-23-105977 Flood Insurance

percentage of household income (1 or 2 percent) and restrict eligibility to

policyholders whose household income was below a certain percentage

of the area median income (80, 100, or 120 percent). The second

alternative would provide premium discounts on a sliding scale, whereby

the discount would increase (from 40 to 80 percent) as a policyholder’s

household income decreased relative to area median income (from 100 to

50 percent).

Table 4: Estimated Participants and Costs of Alternative Means-Based Assistance Programs

Alternative 1

Alternative 2

AMI eligibility threshold

≤ 80%

≤ 100%

≤ 120%

≤ 80%

≤ 100%

≤ 120%

≤ 100%

Percentage of household income at

which assistance begins

1% 2% n/a

All policies

Eligible policyholders

756,159

1,236,585

1,555,816

473,894

718,359

875,569

1,549,904

Total cost of federal assistance

(first year, dollars in millions)

$907

$1,556

$2,030

$585

$969

$1,237

$1,308

Policies in special flood hazard areas only

Eligible policyholders

378,710

632,449

795,342

259,556

410,009

508,641

721,209

Total cost of federal assistance

(first year, dollars in millions)

$559

$977

$1,287

$383

$646

$840

$752

Legend: AMI = area median income; n/a = not applicable

Source: GAO analysis of Federal Emergency Management Agency data. | GAO-23-105977

Note: This analysis assumes that a means-based assistance program would replace the glidepath, so

any policy receiving assistance would immediately convert to the full-risk premium. The assistance

would cover all costs of flood insurance, which include premiums as well as any assessments,

surcharges, or fees.

Appendix III: Comments from the Department

of Homeland Security

Page 78 GAO-23-105977 Flood Insurance

Appendix III: Comments from the

Department of Homeland Security

Appendix III: Comments from the Department

of Homeland Security

Page 79 GAO-23-105977 Flood Insurance

Appendix III: Comments from the Department

of Homeland Security

Page 80 GAO-23-105977 Flood Insurance

Appendix III: Comments from the Department

of Homeland Security

Page 81 GAO-23-105977 Flood Insurance

Appendix III: Comments from the Department

of Homeland Security

Page 82 GAO-23-105977 Flood Insurance

Appendix III: Comments from the Department

of Homeland Security

Page 83 GAO-23-105977 Flood Insurance

Appendix IV: GAO Contacts and Staff

Acknowledgments

Page 84 GAO-23-105977 Flood Insurance

Alicia Puente Cackley at (202) 512-8678 or [email protected]

Frank Todisco at (202) 512-2700 or [email protected]

In addition to the contacts named above, Patrick Ward (Assistant

Director), Christopher Forys (Analyst in Charge), Xiang Bi, Dylan

Desjardins, Lijia Guo, Jocelyn Kuo, Jill Lacey, Sailaja Ledalla, Matthew

Levie, Scott McNulty, Marc Molino, Angela Pun, Steve Ruszczyk, Jessica

Sandler, Jennifer Schwartz, and Jeff Tessin made key contributions to

this report.

Appendix IV: GAO Contacts and Staff

Acknowledgments

GAO Contacts

Staff

Acknowledgments

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