The National Flood Insurance Program (NFIP) was set to expire on September 30, 2017 until President Donald Trump signed legislation reauthorizing the program for three more months. This gives Congress until December 8, 2017 to consider reforms to a program that is one of FEMAs most utilized tools when dealing with disaster relief caused by flooding. Past storms such as Katrina, Irene, Sandy, and most recently, Hurricanes Irma, Harvey, and Maria have renewed awareness in the NFIP.  Events such as these have made understanding the functions, issues, and pending expiration / potential renewal vital to industry and non-industry professionals alike.

What is the NFIP?

The NFIP was created by the Congress of the United States of America through the National Flood Insurance Act of 1968. The NFIP enables property owners in participating communities to purchase federally administered flood insurance.  Its purpose was to correct some of the shortcomings that were present in traditional flood control and flood relief programs.  The NFIP was created in order to:

  • Transfer burden
    • Move the costs of private property flood losses from the taxpayers to the floodplain property owners through flood insurance premiums.
  • Administer Financial Assistance
    • Provide residents and property owners in the floodplain with financial aid after flooding events, particularly smaller floods that do not warrant disaster aid.
  • Impose Sustainable Development
    • Guide development away from high risk flood zones.
    • Require that new and substantially improved buildings in a high risk zone be constructed in a manner that would minimize or prevent damage during a flood.

Why is the NFIP currently underwater?

NFIP premiums SHOULD reflect true flood risk. Historically, however, that was not the case. Any structure built before a community’s first Flood Insurance Rate Map was issued (i.e. a Pre-FIRM structure) received a subsidized premium; this policy had its consequences. Put simply, these “Pre-FIRM”, subsidized premiums are not high enough to cover flood losses on these structures. These artificially low premiums, along with multiple catastrophic storms in relatively short periods of time (e.g. Katrina, Rita, Wilma in 2005 and Harvey, Irma, and Maria in 2017) have put a big strain on the NFIP.   This strain, in the form of debt, has led to the program owing $25 billion to the U.S Treasury as of this writing. As more claims funnel into the system from Harvey, Irma, and Maria, the debt will only grow.

While recent legislation (Biggert-Waters Flood Insurance Reform Act 2012 & Homeowners Flood Insurance Affordability Act of 2014) has sought to right the ship, there is still a lot of work that needs to be done for the program to be solvent again.

Potential Reforms & Solutions

It’s clear that the NFIP is a very complex program and there isn’t one solution that will act as a fix all. This, coupled with the fact that many potential fixes may counteract each other, makes creating meaningful change a challenge.

For instance, from our intimate experience with the program, it seems that the subsidization of high risk structures (Pre-FIRM structures) and the push to private market insurance are its biggest liabilities.  The solutions to these issues, like others, also seem to work against one another. For instance, removing the subsidized premiums (already slowly happening as per the 2012 & 2014 legislation discussed earlier) will bring more money into the overburdened system, which is a good thing. However, the increase many homeowners are experiencing in their annual premiums is beginning to cause more inquiry into the private flood insurance market. In the end this would take money away from the program, so it’s a delicate balancing act.

Other possible solutions, like requiring flood insurance on ALL sales (or at least when the structure is within the 500 year floodplain), similar to home insurance, could potentially provide the NFIP with the funds necessary to ensure that all claims get paid by revenue from the system itself. The obvious issue and concern surrounding this approach being that it may not be received well by the public and cause backlash.

One thing is for certain, flooding will not stop and subsequent relief will always need to be available. Gaining some ground on our debt and getting the NFIP in a more solvent state is extremely important. It’s time that we really begin, as a nation, to delve into this problem and produce some real viable solutions.