Congress wrestles with fate of National Flood Insurance Program

Leah Shepherd

With hurricane season approaching, Congress is weighing whether to reauthorize a federal program that partially subsidizes flood insurance for homeowners in flood-prone areas.

A U.S. Senate panel held a hearing May 9 to ponder the future of the National Flood Insurance Program (NFIP). The program is set to expire May 31, unless Congress reauthorizes it before then. Several bills have been introduced to extend NFIP funding, but none has passed. The program has received several short-term, last-minute extensions in recent years.

Sen. John Tester, D-Mont., said at the hearing that another short-term extension is likely, as he thinks federal lawmakers will be unable to pass longer-term legislation before May 31. “We’ve been down this road before, and we’ve seen how unproductive and destructive lapses of the program can be,” said Tester, chairman of the subcommittee that held the hearing.

If the program expires, coverage from NFIP no longer would be available. That means homeowners would have to pay for flood-related damages out of pocket. In addition, people who intend to buy or refinance a home in a floodplain wouldn’t be able to do so.

Standard home insurance policies usually do not cover losses from flooding. There’s a 26 percent chance of being hit by a flood during the life of a 30-year mortgage in areas that are a high risk of flooding, according to NFIP. Flood damage to cars may be covered by auto insurance, but only if you have optional comprehensive coverage.

Reauthorization and reform

Todd Klietz, a floodplain administrator from Montana, urged lawmakers to reauthorize the program — with some reforms — to encourage property owners to make improvements to reduce the risk of flood damage.

“The American taxpayer is increasingly unwilling to provide financial support for those who have time and time again received handouts post-flood who then do absolutely nothing to prevent future damages, as they know Uncle Sam will be there — check in hand — to quite literally bail them out again,” Klietz said.

David Sampson, CEO of the Property Casualty Insurers Association of America, a trade group, also advocated for reauthorization as long as the program is revamped.

“The NFIP is both statutorily unable to charge adequate rates and often unwilling to raise prices by even the amount they are allowed, despite their massive accumulated debt. … The NFIP is fiscally unsustainable in its current path and must be reformed,” Sampson said in his testimony.

The history of NFIP

According to the U.S. Government Accountability Office, NFIP owes $18.5 billion to the federal government.

Congress established NFIP in 1968 to allow homeowners, renters and business owners to buy insurance from the government to protect themselves against flood losses.

The Federal Emergency Management Agency (FEMA) administers the program. Participating communities agree to adopt and enforce a floodplain management ordinance to reduce flood risks, and the federal government makes flood insurance available to residents. NFIP paid $709 million in flood insurance claims to homeowners, renters and business owners in 2010.

Federal subsidies

Some policyholders receive government subsidies on their flood insurance premiums; others do not. In the Senate bill that the banking committee approved last year, government subsidies would end for commercial buildings, second and vacation homes, homes with frequent or significant flood damage.

Sampson favors ending government subsidies for NFIP, which would dramatically raise consumers’ insurance premiums.

“Government insurance subsidies can create a moral hazard by encouraging overbuilding and discouraging consumer risk mitigation. This results in greater ultimate costs to taxpayers,” he said.

Jon Jensen, government affairs chairman for the Independent Insurance Agents and Brokers of America trade group, agreed: “Subsidized properties experience as much as five times more flood damage than structures that are charged full-risk rates. Customers that are paying a full actuarial rate have a vested interest to take measures to reduce the economic damages associated with floods.”

The average flood insurance policy costs $600 a year, according to NFIP.

Sarah Murdock, senior policy adviser for the Nature Conservancy, a nonprofit environmental organization, said at the congressional hearing that the subsidies promote building in coastal zones and floodplains, contributing to destruction of ecosystems that provide “a natural defense” for people and property.

The cost of gaps and delays

Gaps or delays in reauthorizing NFIP create extra costs, uncertainty and bureaucracy for homeowners and the housing market.

“Gaps in flood insurance coverage cause significant disruption in the housing markets. Homebuyers in flood zones with a federally backed mortgage are required to purchase flood coverage before the property can be closed on,” Sampson said.

In addition to NFIP, some private insurers offer flood insurance, but that option may not be available in flood-prone areas where coverage is needed most. Fourteen percent of American homeowners had flood insurance in 2011, up from 10 percent the year before, according to the nonprofit Insurance Information Institute.

“Just because most of the United States had dry and mild winter weather doesn’t mean flood risks have altogether disappeared,” says Michael Barry, a spokesman for the Insurance Information Institute. “Largely due to the limited winter snowfall, for the first time in four years, no area of the country faces in 2012 a high risk of major to record spring flooding, according to the federal government. But some states have still been deemed as being at above-normal risk of flooding.”