Fixing the National Flood Insurance Program

More than 5 million homeowners and businesses rely on the federally-run National Flood Insurance Program (NFIP) for protection from flooding, but with each passing year, the program’s design flaws and mismanagement are nudging it closer to insolvency.

Despite repeated bailouts by Congress, the NFIP continues to lose an estimated $1.4 billion each year. The program’s debt to the U.S. Treasury now exceeds $20 billion, which no one expects it to ever pay back.

But the NFIP’s problems are largely self-inflicted.

The program’s fundamental flaw is that the premiums homeowners pay rarely reflect covered risk. Underpricing policies encourages over-development in areas vulnerable to flooding, while over-pricing deters property owners from purchasing coverage at all. In fact, recent estimates suggest that between 60 and 99 percent of Americans affected by recent disasters did not have flood insurance.{mosads}

The NFIP recently announced that it plans to upgrade its rating methodology to more closely align premiums with risk, but it remains to be seen whether these measures will go far enough to stabilize its finances.

One major handicap to properly assessing the risk of flood damage is that many of the flood maps the NFIP uses to set premiums and allocate resources are decades out of date. Some communities rely on maps created in the 1970s, leaving policymakers and residents without the information needed to make informed decisions about their flooding risk.

But it’s not just the age of the NFIP’s maps; even newer maps are poor predictors of flood risk because they don’t take into account relevant factors like rapid rain accumulation, building codes, or expected population growth.

A recent Inspector General report found that only 42 percent of the NFIP’s maps “adequately identified the level of flood risk.” The report concluded, “Without accurate floodplain identification and mapping processes, management, and oversight, FEMA cannot provide members of the public with a reliable rendering of their true flood vulnerability or ensure that NFIP rates reflect the real risk of flooding.”

On top of inadequate mapping, the NFIP does not do enough to reduce flood losses and help communities become more resilient to flooding. Preparing for disasters is crucial – studies have shown that for every $1 invested in mitigation, society saves $6 in rebuilding costs.

Buildings that are damaged and rebuilt over and over again without adequate mitigation measures are a significant drain on the NFIP’s finances. A $70,000 home in Mississippi, for instance, filed 34 claims with the NFIP from 1978 to 2010 worth $663,000 – more than 9 times the value of the house. A $153,000 house in Alabama has received $2.3 million in claims (15 times its value). Years back, an investigation by USA Today found that owners of 19,600 homes and commercial buildings have collected insurance payments from the NFIP that exceed the value of their property.

Overall, properties like these, which represent about 1-2 percent of the NFIP’s total policies, have been responsible for 30 percent of claims since the program’s inception. The NFIP should end this wasteful practice.

Aligning premiums with risk, improving mapping procedures, and creating stronger incentives to make homes and businesses stronger and more resilient to floods would go a long way toward setting the NFIP of firm financial footing.

In addition, Congress should consider expanding the private sector’s role in flood protection, which the NFIP itself has acknowledged could be a fruitful path. Private market participation would give consumers a broader selection of coverage options, often at cheaper rates than what the NFIP offers, while reducing taxpayers’ exposure to flood losses. To this end, Representative Royce’s GRATER Act is a positive step in getting the private sector to assume these market risks.

Consumers and taxpayers deserve better. Congress shouldn’t wait to enact meaningful reform to a program millions of families count on when disaster strikes.

Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.