Flood News
The good news is that the National Flood Insurance Program (NFIP) has been extended until Sept. 30, 2011.
The bad news is that the National Flood Insurance Program (NFIP) has been extended until Sept. 30, 2011.
It’s good news because at least property owners will have the option of the federal program and will not be penalized again for the inability of Congress to do its job. Home buyers, too, will not have to wait to close.
It’s bad news because the year-long, temporary reauthorization was granted without any accompanying financial or structural reforms needed to get the program back on sound financial footing for the future.
Without any legislative action, NFIP’s financial condition has improved slightly thanks to a rush in policyholders and only moderate losses since March 2009. FEMA was also able to make $600 million in payments to Treasury without increasing its borrowings. However, the program still faces a debt of $18.8 billion, attributable largely to catastrophic losses from the 2005 hurricane season, and having to borrow to pay them. NFIP is in no position to pay off this debt the way it is currently structured and funded.
NFIP is supposed to be funded with premiums collected from policyholders rather than with tax dollars. But its current design and politics have gotten in the way of that sensible financing plan. According to the General Accountability Office (GAO), the rates for nearly one in four NFIP policyholders are subsidized. Rates do not reflect the full risk of flooding, and NFIP allows “grandfathered” rates that mean that some property owners continue paying rates that do not reflect reassessments of their properties’ actual flood risk.
Partly due to its design and partly due to politics, NFIP can’t operate in some of the ways private insurers do. In one example that has receved some media attention, it cannot deny insurance on the basis of frequent losses as a private insurer would do. Thus it often provides policies for repetitive loss properties. These return customers represent only one percent of policies but account for 25 to 30 percent of claims.
Addressing these and other structural and financial challenges facing NFIP requires Congress to take actions involving trade-offs. The reality is that reducing subsidies will increase premiums, which, in turn, could deter people from buying coverage.
Beyond the funding issues, NFIP has a number of operational issues as well, including its oversight of the Write Your Own program involving payments to private insurers. These payments aren’t now factored into pricing, the GAO reports.
FEMA, which administers the NFIP, has made some progress improving administration even while Congress has delayed addressing the major money and structural reforms that are needed. There is no telling when Congress might finally act. So hopefully FEMA will continue trying to improve NFIP administration, thereby helping to build public confidence such that if and when Congress ever gets around to doing its job, NFIP will be in a better position to perform its own.