Flood Insurance: FEMA's Rate-Setting Process Warrants Attention, Report to the Ranking Member, Committee on Banking, Housing, and Urban Affairs, U.S. Senate [open pdf - 633KB]
"Questions about the financial status of the National Flood Insurance Program (NFIP) have increased since the 2005 hurricanes, which left the program with an unprecedented $17.4 billion deficit--a debt that resulted in GAO placing NFIP on its high-risk list in March 2006. Among the concerns are the subsidized rates NFIP must provide for about 25 percent of the policies, mostly for older buildings in high-risk flood zones. And although fully risk-based rates are supposed to reflect actual flood risk, concerns have been raised that they do not. This report evaluates (1) the Federal Emergency Management Agency's (FEMA) process for setting full-risk rates to determine whether it produces rates that accurately reflect the risk of flooding and (2) the process that FEMA uses to set subsidized rates and their effect on the financial condition of NFIP. To do this work, GAO evaluated the NFIP rate model, examined data from FEMA, surveyed relevant literature, and interviewed other relevant agencies and risk-modeling firms. GAO recommends that FEMA (1) ensure that its rate-setting methods result in rates that accurately reflect flood risks and (2) collect data to analyze the impact of newly created grandfathered properties on the NFIP. FEMA generally concurred with both recommendations but expressed two reservations with our recommendation regarding rate setting."
Government Accountability Office: http://www.gao.gov/