On July 31, the Government Accountability Office (GAO) released their report on “Flood Insurance: FEMA’s New Rate-Setting Methodology Improves Actuarial Soundness but Highlights Need for Broader Program Reform,” conducted from March 2022 to July 2023.   GAO staff joined CSFI at our August 11 meeting to review the report with members.

The full report is accessible here.  Highlights are on PDF pages 2-3; GAO’s Objectives, Scope, and Methodology are on report pages 69-75; GAO’s Additional Data on Glidepath and Means-Based Assistance Estimates are on report pages 76-77; and FEMA’s response is on report pages 78-83.  The report “is not a technical review” and “did not verify calculations performed by the actuaries who developed the full-risk premiums.”

As part of the report, GAO has released an interactive map displaying “Current and full-risk flood insurance premiums and their affordability, by county.”  For each county, the map displays:

• 1. Median premium Dec. 2022
  2. Median full-risk premium
  3. Percent change
  4. Median affordability, Dec. 2022
  5. Median full-risk affordability
  6. Percent of occupied homes with NFIP policy

The report puts forward key findings, such as:

• Risk Rating 2.0 is aligning premiums with risk, but affordability concerns accompany the premium increases.
• A statutorily-required assessment has the effect of charging current and future policyholders for previously incurred losses, which violates actuarial principles and exacerbates affordability concern
• 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.

  The report makes recommendations for Congress:

1. 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.
2. Repeal the HFIAA surcharge and authorizing and require FEMA replace forgone revenue with actuarially determined premium adjustments.
3. Provide any affordability assistance for flood insurance through a means-based program that is reflected in the federal budget rather than through statutorily discounted premiums.
4. Address NFIP’s legacy and potential future debt…
5. Authorize and require FEMA to allow private flood insurance coverage to satisfy NFIP’s continuous coverage.
6. Authorize and require FEMA to offer risk based partial refunds for midterm cancellations of NFIP policies that are replaced by private flood insurance policies.

  The report also makes recommendations for FEMA, which FEMA has concurred with:

1. 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
2. Evaluate other means for incentivizing desirable community activities that cannot be actuarially justified but are currently a basis for discounts in CRS
3. 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.
4. Take steps to directly inform individual policyholders about Risk Rating 2.0 and make them aware of available information.
5. Take additional steps to make available to policyholders, agents, or both more detailed property-specific flood risk information to help them better understand the justification for individual premiums and potential savings associated with available mitigation options.

  FEMA has responded affirmatively to the report, and provided timelines for implementation of recommendations:

• 1. Begin implementation of new program design for CRS – December 31, 2027
  2. Complete CRS Communities Incentives report – August 29, 2025
  3. Publish Final Annual Actuarial Report – September 30, 2025
  4. Enhance policyholder communication productions and public-facing websites – April 30, 2024
  5. Pilot online quoting tool – April 30, 2025

In response to CSFI members’ questions, GAO has provided the following answers:

• 1. Q) Where are the recommendations for increased discounts for mitigation measures?
     • A) Reviewing the validity of FEMA’s calculations of discounts for mitigation measures was beyond the scope of this report.
  2. Q) We have no private market in Monroe County Florida (Florida Keys). Should FEMA have special consideration for areas with no competition? Should FEMA not enforce participation in the program?
     • A) This is ultimately a policy decision for Congress.  We’d note that, for the most part, the private flood market did not exist when Congress created the mandatory purchase requirements.  We acknowledge that NFIP premiums and a lack of a robust private market in certain areas create affordability challenges, particularly for those subject to the mandatory purchase requirement.  We believe a means-based assistance program that is recognized in the federal budget is the best way to address these challenges.
  3. Q) Does the report address ideas to lower the load? Economists suggest that the load needs to stay less than 40% for insurance to be attractive.
     • A) Presumably this is referring to the WYO expense allowances.  We mentioned these briefly in the report, but reviewing their validity was beyond the scope of this report.  We have done some previous work in this area and made a number of recommendations to FEMA.  We’d refer you to those reports:  GAO-17-36 and GAO-09-455.
  4. Q) What has GAO done to verify that FEMA’s algorithm for distributing aggregate premium need to individual properties faithfully determines individual property flood risk? There is no such showing in the documentation provided thus far.
     • A) Reviewing the premiums the methodology produced for each individual property was beyond the scope of this report.  We thoroughly reviewed the Risk Rating 2.0 methodology, including the underlying documentation, data, and assumptions.  We determined that FEMA applied actuarial principles to better align premiums with flood risk, representing a substantial improvement from its legacy ratemaking methodology.