NAR Background: National Flood Insurance Program (NFIP)

NAR supports renewing and strengthening the long-term viability of the federal flood insurance program, as well as maintaining funding to update and improve the accuracy of flood maps.

Why is the federal government in the flood insurance business?

  • Each year the federal government spends billions of dollars on disaster relief to flood victims – all at taxpayer expense.
    • Floods claim more lives and property than any other natural disaster.
    • Flood disasters have been declared in every state in the past 5 years alone.
    • Floods are not only coastal issues; they occur anywhere it rains.
    • Flood zones exist along coasts, rivers, lakes, streams, creeks, as well as areas inland where there is a significant pluvial (heavy rainfall) risk.
    • Flood losses (more than 25% of flood insurance claims and disaster aid) come from outside of the so-called “flood zones.”
  • If more properties were insured for flood damage, fewer owners would turn to taxpayers for disaster relief after the next major flood.
  • The problem is misinformation, which creates a market failure for flood insurance.
    • "I've never flooded." – Most people don’t believe there is flood risk until their home is underwater. In fact, there is a 74-percent chance of not flooding for 30 years in the special flood hazard areas designated by FEMA.
    • "Costs too much." Because only the “high-risk” property owners will buy flood insurance, this “adverse selection” will distort the market and drive up rates until many cannot afford flood insurance.
    • "Just takes one." One flood can bankrupt an insurance company, so they will have to set rates high enough to cover their expected losses, including a normal rate of return. Because the rates must be set so high, few property owners will see flood insurance as worth buying.
  • The National Flood Insurance Program (NFIP) provides an insurance alternative to taxpayer-funded disaster relief.
    • Requires periodic reauthorization by Congress to provide flood insurance.
    • Partners with private insurance companies to sell insurance policies based on coverage terms and rates set by FEMA.
    • Reduces the information barrier by mapping the flood risk for many communities.
    • Mandates flood insurance for a federally backed mortgage in FEMA special flood hazard areas, where there is at least a 1% annual risk of flooding.
    • Averts billions of dollars in property damage each year because communities must adopt and enforce flood building codes and standards as a condition for joining NFIP.
    • Enables 5.5 million property owners in 20,000 communities to protect themselves rather than relying on taxpayers so history won't repeat itself. See NFIP's chronology

Why is the NFIP tens of billions of dollars in debt?

  • The 50-year-old NFIP was not designed for the series of catastrophic floods since 2005.
  • As a result, the program has had to borrow from the Treasury in order to cover claims in some years.
  • However, the borrowing must be fully repaid plus interest to compensate taxpayers.
  • Taxpayers would still be “on the hook” for the borrowing if NFIP ends, but a terminated program won't be able to generate new premiums to help reduce the loan balance.

Are some states low risk because historically they have paid more in premiums than they received in claims?

  • That may appear to be the case but historic data won't predict record-breaking events like Katrina.
  • All it takes is one major flood in a population center to wash away any state "surplus."
  • Just ask the Gulf Coast before Hurricane Katrina or New England before Sandy.
  • One must consider a state's current “exposure” (i.e., how many properties could pay-out at any given time); not just how much has historically been paid in vs. out.
  • For example, from 1978-2008, Florida paid four times in premiums what it's claimed over the same period, yet:
    • According to CoreLogic, half-a-trillion dollars of Florida property value is currently exposed to storm surge, the most costly and destructive form of flooding. It wouldn't take a very large hurricane before Florida was no longer deemed a “donor” state.
    • In fact, the most damaging storm in U.S. history was the 1926 Great Miami Storm which, had it happened in 2005, would has cost $140-$160 billion – dwarfing Katrina's $80-billion price tag.
  • Just because a state has dodged the flood “bullet” for a few decades, it doesn't mean its luck won't run out tomorrow. If it happened once, it can happen again.

What about the reports of an emerging private flood insurance market?

  • There is now a sizeable and growing private flood insurance market writing first-dollar coverage in high and low risk flood zones.
  • Many of these companies are offering better coverage at lower cost than NFIP today because:
    • Private companies will underwrite the risk property-by-property whereas NFIP maps at the community level and may inadvertently include lower risks.
    • Private companies will charge rates that better align to the individual property risk, while NFIP charges national average rates that are too high for some and too low for others.
  • Note: NFIP policyholders will lose eligibility for grandfathered rates if they allow their NFIP coverage to lapse -- even if buying private flood insurance is the reason.

Chronology of Major Flood Events

2017 – Biggert-Waters Reauthorization expired; NFIP’s insurance-writing authority is currently being extended short-term while Congress continues working on reforms.

2014 – “Grimm-Waters” Act amends Biggert Waters and applies the gradual phase-out of subsidies to all older properties.

2013 – Superstorm Sandy strikes New England; NFIP borrowing now totals $24 Billion.

2012 – “Biggert Waters” Act reauthorizes NFIP through 2017 and will gradually phase-out subsidies for older properties except at the time of sale.

2008-12 – NFIP extended 18 times and twice allowed to shutdown stalling 40,000 home sales a month.

2005 – Hurricane Katrina strikes the Gulf Coast becoming costliest hurricane in U.S. history; NFIP borrows $17 billion from taxpayers to cover claims from the 2005 storm season.

2004 – “Bunning-Bereuter” Act reauthorizes NFIP through 2008 and attempts to phase-out subsidies to the 1% of properties with “severe repetitive losses” accounting for disproportionate share of NFIP claims; however, loopholes prevent full implementation of this pilot project.

1994 – NFIP amended to strengthen lender enforcement of the mandatory purchase requirement.

1983 – NFIP supplemented through Write-Your-Own program which allows NFIP to continue setting rates and coverage terms but contract with private insurance companies to service individual policies on FEMA's behalf.

1973 – NFIP amended to require flood insurance for a mortgage in the mandatory purchase zones.

1968 – NFIP created as insurance alternative to rising cost of fully taxpayer-funded disaster relief.

1965 – Hurricane Betsy strikes Gulf Coast becoming first in U.S. history to cost a billion dollars.

1956 – Federal Flood Insurance Act authorizes program which isn't funded; the American Insurance Association finds that flood insurance is not commercially feasible.

1950 – Disaster Relief Act creates the first permanent system for post-disaster aid.

1930-50 – Government funds a series of flood-control projects and flood-specific disaster loans.

1929 – Private insurance industry abandons coverage of flood losses.

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Flood Insurance

The National Flood Insurance Program provides hundreds of thousands of dollars of flood coverage where required for a federally backed mortgage.