Posted on 27 Aug 2010
The Federal Emergency Management Agency's (FEMA) National Flood Insurance Program is the primary flood insurer for the nation, dating back to 1968 when it was created by law at a time when private companies stopped covering flood damage. Currently the program insures 5.6 million properties nationwide and aims to be self-sustaining by paying claims from premiums it collects yet is failing miserably, bleeding red ink.
According to a USA TODAY review, a major reason for FEMA's major losses is the program's indecipherable practice of paying people to rebuild over and over in the nation's worst flood zones while also discounting insurance rates by up to $1 billion a year for flood-prone properties.
Along with the huge losses from Hurricane Katrina, the generous benefits have forced the program to seek an unprecedented $19 billion taxpayer bailout.
"If this were a private insurer, it would be bankrupt," said Robert Hartwig, president of the Insurance Information Institute.
An illustration of the program's failing is one home in Wilkinson County, Mississippi, which has been flooded a whopping 34 times since 1978.
Extraordinary as the damage may be, even more extraordinary is that an insurer has paid claims on that home every time, required no flood proofing, never raised premiums after a claim and vowed to continue insuring the house. Forever.
The home's value is $69,900. Yet the total insurance payments are nearly 10 times that: $663,000.
It's no surprise that the insurer faces huge financial problems.
The insurer? The federal government, by way of FEMA. The home is just one of a growing number of repeatedly flooded properties whose owners have collected billions of dollars from an insurance program regulated by Congress and run by the government insurer.
A USA TODAY review of FEMA records found that the owners of 19,600 homes and commercial buildings worth $25,000 or more have collected insurance payments that exceed the value of their property. The records exclude property addresses.
In Fairhope, Ala., the owner of a $153,000 house has received $2.3 million in claims. A $116,000 Houston home has received $1.6 million. The payments are for damage to homes and what's inside.
"It's the ultimate statement on the failure of the nation's strategy to deal with flooding and flood risk," said environmentalist David Conrad of the National Wildlife Federation, who has received FEMA's Outstanding Public Service Award for promoting flood safety. "It does seem to fit Albert Einstein's definition of insanity — to somehow expect something different when you do the same thing over and over again."
USA TODAY also found that the owners of 370,000 second homes and rental houses get huge insurance discounts. Wealthy resort areas such as Hilton Head Island, S.C., and Longboat Key, Naples and Sanibel, Fla., have some of the largest numbers of second homes and rentals getting the discounts.
The program's financial problems reflect a broader government reluctance to restrain benefits. FEMA leaders and some lawmakers have tried to end the premium discounts and the multiple insurance payments, "but there's always been a few in Congress that have had enough political muscle to hold that back," former FEMA assistant administrator David Maurstad said.
The inaction has helped worsen the program's finances. Lawmakers would not approve a bailout "until the program was substantively reformed" to strengthen finances, Maurstad said.
That has added costs. The $17 billion the program borrowed from taxpayers for Katrina claims created such large interest payments that another $1.7 billion had to be borrowed to pay routine losses in subsequent years. Interest payments to the Treasury since 2006 have cost $2.4 billion alone. The program has repaid just $600 million in principal.
"The size of the current debt creates an unstable financial situation," Homeland Security Secretary Janet Napolitano, who oversees FEMA, said in a 2009 letter to House Financial Services Committee Chairman Barney Frank.
The Congressional Budget Office says premium discounts and claims will add $900 million a year to the debt.
And the National Oceanic and Atmospheric Administration warns that flooding will increase in the future because sea levels are projected to rise.
"Our inability to get this right is putting tens of thousands of people at risk," said Rep. Earl Blumenauer, an advocate of program reform. "It is putting the federal taxpayer on the hook for tens of billions of dollars. And we are going to see in the next decade, if we are not able to make more concerted progress, a continued string of unpleasant stories about property loss, about lives lost."
Flooding is the most costly and lethal type of natural disaster, causing about $6 billion a year in damage and killing roughly 140 people annually, federal figures show. Roughly 97% of the U.S. population lives in a county that has experienced a flood disaster since 1980, a 2007 congressional report found.
FEMA Administrator Craig Fugate says the debt results partly from Congress restraining insurance rates to encourage the purchase of coverage, which is required for property owners with a federally backed mortgage. Homeowners can buy up to $350,000 of coverage, more than 10 times FEMA's maximum post-disaster grant. Insurance reduces the need for disaster aid, paid for by taxpayers.
As a government program, federal flood insurance covers anyone. It's similar to state-run programs that insure homeowners and drivers who cannot get private coverage. Policies cannot be canceled, and individual premiums cannot be raised based on claims payments.
"It is not run as a business," Fugate said.
Congress' Government Accountability Office said in April that the program is "by design, not actuarially sound" because it has no cash reserves to pay for catastrophes such as Katrina and sets rates that "do not reflect actual flood risk."