Because of frequent flooding of the Mississippi River during the 1960s and the rising cost of taxpayer funded disaster relief for flood victims, in 1968 Congress created the National Flood Insurance Program (NFIP). It has three mandates: to provide residential and commercial insurance coverage for flood damage, to improve floodplain management and to develop maps of flood hazard zones.
While the comprehensive section of an auto insurance policy covers flood damage to vehicles, there is no coverage for flooding in standard homeowners, renters or commercial property insurance policies. It is available in a separate policy from the NFIP and from a few private insurers.
Despite efforts to publicize this, many people exposed to the risk of floods still fail to purchase flood insurance.??It was the widespread flooding associated with Hurricane Katrina in 2005 that drew attention to the NFIP and set in motion debate about how to improve it. So far, Congress has not taken steps to significantly revamp the program.
• Reform Proposals, 2011: Legislation to reform the federal flood insurance program failed to pass the Senate in 2010, leaving the National Flood Insurance Program (NFIP) with $18 billion in debt and a temporary extension that will expire on September 30, 2011. The Federal Emergency Management Agency (FEMA), which runs the program, is seeking input on various alternatives from reform of the current program to dropping federal involvement in flood insurance altogether. It is also meeting with stakeholders, including insurers who currently participate in the “Write-Your-Own” flood insurance program, to ascertain whether they would be willing to shoulder some or all of the risk. Under the “Write-Your-Own” program, private insurers issue policies and adjust claims but the federal government retains responsibility for actual losses.
• The insurance industry is divided on this issue. On the one hand, there is the National Association of Mutual Insurance Companies (NAMIC), an organization that represents small insurance companies, which suggests that the best option would be to keep the current system but institute certain reforms, among them long-term reauthorization of the program to remove uncertainty and lapses in coverage; expansion of education and outreach programs to increase the percentage of homeowners living in flood-prone areas that purchase coverage; and actuarially sound rates to keep the program solvent.
• On the other hand, are the large insurers and reinsurers, the companies that insure insurance companies, who make a strong case for privatizing the NFIP. The Reinsurance Association of America suggests that the private sector could assume flood risk over time, possibly through a consortium of private sector underwriters supported by private reinsurance or by using the NFIP to issue and adjust policies but at actuarially sound rates. The actual risk of loss would then be transferred to the private reinsurance sector and capital markets instead of to the federal government as it is now.
• Earlier Reform Proposals: The House passed legislation in the 111th Congress that would have extended the NFIP to September 2015 and made permanent the pilot program for mitigation of severe repetitive loss properties. (This program is designed to reduce or eliminate the risk of flood damage to properties where flood claims have exceeded the market value of the property.) In addition, the measure increased coverage limits for damage caused by flooding, added optional coverage for extra living expenses coverage to compensate policyholders forced to move out of their homes and business interruption (income) coverage to help flooded businesses survive a shut-down period, among other provisions. But the bill died in the Senate.
• In the absence of any legislative agreement between the House and the Senate on funding the program for the long term, the NFIP was reauthorized for short periods of time under a series of continuing resolutions that extended funding for many different programs. After allowing the program to lapse four times, during which new policies could not be issued, leaving homeowners without the option of buying coverage and delaying thousands of real estate closing per day in flood-prone regions, in September 2010, as the last extension was close to its expiration date, both the House and the Senate extended the program for one year to September 30, 2011. Insurers hope that during this longer extension period Congress will take time to make significant and long-term changes in the program.
• Adding Coverage For Wind Damage: Legislators who promoted adding wind coverage to the NFIP’s policies as an option to reduce disputes over wind versus flood losses were defeated in the November 2010 election. The Obama administration, leading environmental groups, consumer advocates and taxpayer watchdogs were all opposed to the proposal.
• At hearings, insurers stressed that most government-run property insurance programs aimed at providing coverage to high-risk policyholders, such as coastal property owners, operate at a deficit. Regulators are under political pressures to keep rates down in both the private market and state-operated pools, which, in turn, leads to larger pools, as private insurers withdraw from high-risk areas, and to higher deficits. If rates for wind coverage are commensurate with the risk and wind coverage is optional, as was proposed, few homeowners would purchase it when they could obtain a much cheaper policy through the state.
• Mandatory Flood Insurance States: As a possible solution to the question “was the damage caused by wind or water?” South Carolina started requiring wind pool policyholders to purchase flood insurance in January 2008. Without it, they may not receive reimbursement for the full replacement cost of repairing storm damage. About 70 percent of wind pool policyholders already had flood coverage. As a result of the new law, several thousand additional residual market policyholders have now purchased it. Wind pool officials say the new mandate is designed to avert disputes about the exact cause of damage, a situation that may have held up some claim settlements after Hurricane Katrina. Most of the state is susceptible to flooding, they said. Several other states require that policyholders in state-sponsored property insurance programs purchase flood insurance.
• Government Accountability Office Studies: In a report published in September 2009, the Government Accountability Office (GAO) says that FEMA is overpaying insurers that manage flood insurance policies, under the “Write-Your-Own-Policy” program. Insurers participating in the WYO program issue flood insurance policies on their own letterhead and are paid for administration expenses. The GAO said FEMA should obtain more specific information on costs connected with the servicing and selling of flood insurance policies.
• This critique follows another GAO report, issued at the end of October 2008, that focused on the National Flood Insurance Program’s (NFIP) rate-setting practices. In many cases the NFIP uses outdated estimates of risk and, even when properties are reevaluated and put into higher risk zones, premiums do not always reflect the increased risk because of FEMA’s concern that a higher premium will cause policyholders to drop out of the program, the GAO noted. Some 25 percent of policies have subsidized rates, according to GAO estimates. Currently, the premiums collected do not cover the program’s operating expenses, claim costs and debt repayments to the U.S. Treasury. With the potential for more severe flooding in the future, the federal government and ultimately the taxpayers are exposed to ever-greater financial risks, especially in years of catastrophic flooding. The GAO suggested that FEMA ensure that its rate-setting methods result in rates that accurately reflect flood risks and that it determines the impact of the newly subsidized properties on the NFIP.
• Policies in Force: While the number of flood policies in force is growing, a significant portion of the population at risk of flooding still is not insured for flood damage, as the flooding in the Midwest in the spring of 2008 and after Hurricane Ike revealed. The latest available data show that in 2009, there were more than 5.7 million policies in force, compared with 5.0 million in 2005, the year of Hurricane Katrina, and 4.3 million in 1999. Premiums grew to $3.2.billion in 2009 from $2.2 billion in 2005. In 2009, 24,417 claims were paid even though no major hurricane struck the U.S. mainland, compared with 212,518 in 2005 and the cost of claims was $618 million, compared with $17.7 billion in 2005. Forecasters expect a higher than average number of storms in the 2010 hurricane season, raising the potential for a large number of flood claims.