In year marked by historic floods, Congress may reform insurance program swimming in debt

As residents in parts of the Midwest experienced record flooding this spring, discussions began on Capitol Hill about the future of the National Flood Insurance Program.

Created in 1968, the NFIP was enacted due to the higher disaster-relief costs being incurred by taxpayers and the difficulty of getting flood risks underwritten in the private insurance market.

Forty-three years later, the program itself is now under water, upwards of $17 billion in debt. Originally funded in part by appropriations, the NFIP was financially self-sustaining (through the premiums and fees paid into it) from 1986 to 2005. Its financial condition changed dramatically, though, in the latter part of the last decade due to the devastation wrought by four different Atlantic hurricanes.

Along with the current debt problem, another factor has spurred interest in restructuring the NFIP — the possibility of more frequent natural disasters in the future. According to a 2008 National Science and Technology Council report, floods in areas such as the Midwest that typically occurred every 20 years are now projected to happen every four to six years due to changes in climate.

The program has already been through three major reforms, including changes in 1994 (following the Midwest floods of 1993) that led to stricter purchase provisions based on the flood risks of communities and homes.

Despite this change, however, concerns remain that purchases of flood insurance in flood-prone areas are too low. Without this insurance, the property owner must repair damages out of personal funds or secure taxpayer-funded relief payments.

A 2006 report by the RAND Corporation estimated that only 49 percent of property owners in special flood-hazard areas had NFIP policies; the market penetration rate is even less in the Midwest (an estimated 22 percent).

Several factors contribute to the low participation rate, despite the requirement that flood insurance be purchased, according to a March study done by the Congressional Research Service. Those factors include decisions by the property owner not to maintain coverage over the life of the home loan and instances in which the homeowner either does not have a mortgage or has it through an unregulated lender.

Long list of potential reforms
Earlier this year, a congressional subcommittee approved a bill (HR 1309) to reauthorize the NFIP through September 2016.

The chair of that subcommittee, Republican U.S. Rep. Judy Biggert of Illinois, says the measure includes important reforms that will “restore the financial integrity of NFIP.” Those reforms include better mapping of flood areas; applying actuarially sound pricing to determine premium rates (many property owners receive below-market rates through the NFIP); and directing the Federal Emergency Management Agency to better manage risk.

Under the legislation, FEMA’s role in the program would change; for example, the agency would be given the authority to demolish and rebuild flood-damaged properties if it were deemed a cost-effective flood-mitigation strategy. In addition, the bill seeks to incorporate the private insurance and reinsurance markets more into the NFIP.

Some members of Congress also want to ensure that FEMA’s map modernization program does not place an undue burden on people with residences or businesses in floodplains. FEMA is in the process of reviewing what areas are considered floodplains, and property owners in newly mapped flood zones might have to purchase flood insurance.

Meanwhile, the recent experiences of some states in the Midwest might help shape some of the eventual reforms. For example, two effective flood-mitigation strategies have been to acquire at-risk property and to elevate property in high-risk floodplains. After the 2008 floods in Iowa, the state analyzed its disaster-mitigation projects since 1990 and discovered that those efforts prevented possible damages to 834 properties in 2008, thus avoiding $50 million in flood-related damages.

Another possible NFIP reform is to increase state involvement. For example, the CRS study says an interstate compact among the states of North Dakota, South Dakota and Minnesota might help address flooding problems in the Red River Valley by helping officials better maintain dams and levees and make crucial land purchases.