Can National Flood Insurance Program stay above water?

Marcus Pickett

In a tough economy, some government programs struggle to stay afloat, including the National Flood Insurance Program NFIP), which is billions of dollars in debt. In March 2011, a House subcommittee hearing gave lawmakers and insurance industry representatives a chance to weigh in on draft legislation that would establish NFIP's future.

Meanwhile, U.S. Rep. Candice Miller, R-Mich., has introduced legislation that would gradually eliminate the program by Dec. 31, 2013. The bill also seeks to eliminate the NFIP's flood plain mapping, which can raise home insurance premiums in certain high-risk areas.

What is the National Flood Insurance Program?

NFIP is a federal program that provides flood insurance coverage, which is usually excluded from standard home insurance policies. By spreading the risk over a larger number of homeowners, NFIP allows them to purchase flood insurance from the federal government at a more affordable cost than private insurance allows.

The program was enacted in 1968 and must be reauthorized periodically by Congress. The current reauthorization expires Sept. 30, 2011.

Pros and cons

NFIP is $17.75 billion in debt, according to a press release from U.S. Rep. Judy Biggert, R-Ill., chairwoman of the Insurance, Housing and Community Opportunity Subcommittee which held the hearing in March 2011). Although the subcommittee supports reauthorizing NFIP, its draft legislation reviewed at the hearing proposes significant alterations, including maximum coverage limits, flood mapping reforms and elimination of controversial rate subsidies, which force property owners in low-risk areas to subsidize those in flood-prone areas.

Like many federal programs, NFIP has pros and cons:

  • Pro: Without this national program, certain areas and homeowners would be "in jeopardy," according to Biggert. In high-risk areas, private insurers would have no incentive to issue flood insurance policies because a single hurricane could bankrupt them.
  • Con: The availability of subsidized flood insurance may encourage people to build homes in floodplains and coastal areas, raising insurance costs for everybody else. In fact, Miller argues that Michigan property owners pay more into the system than they'll ever get out of it.
  • Pro: Communities can opt of NFIP, allowing them to decide whether the program is right for them.
  • Con: Although communities can opt of the administrative costs, the program is, nevertheless, kept afloat by taxpayer dollars. Miller argues that Michigan taxpayers have become NFIP's "personal ATM."

Do low-risk areas even need flood insurance?

Much of the controversy surrounding NFIP stems from the question of whether homeowners who live where flooding is rare actually benefit from the program.

A provision was added to the subcommittee's draft bill reflecting Miller's arguments. It's a point the American Insurance Association AIA) has made as well. In a statement before the hearing, AIA encouraged the subcommittee to make sure that flood insurance premiums "reflect the true costs to taxpayers."

However, NFIP's website points out that every state has seen and continues to be susceptible to catastrophic flood damage, and that about 25 percent of all flood insurance claims come from areas with a usually moderate to low risk of flooding.

Life after NFIP

If NFIP is not reauthorized, private insurers would fill the void, according to Miller, leaving those in high-risk areas to, as she puts it, "pay their own freight."

However, property owners who live in locations with a substantial flood risk often are required by mortgage lenders to supplement their home insurance with flood insurance. Without NFIP, property owners may have to pay extremely expensive private insurance premiums that are out of their reach financially.

And that's assuming that enough private insurers step in to fill NFIP's void. Currently, many private insurance companies make money on flood insurance only by participating in NFIP's "Write Your Own" program. The program encourages private companies to write policies by paying them an allowance for certain costs.

One solution may be Miller's proposal to allow states to enter into "regional compacts" if they want to. Through these compacts, states could agree to spread out risk evenly, much as NFIP does, to make flood insurance more affordable for property owners.

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