But Selling More at Subsidized Premiums Could Sink Flood Program
There are a number of communities across the country where more flood insurance policies should be sold given their populations and flood risk. They include dozens of counties that have had multiple flood disasters but are not part of the federal flood insurance program.
The “catch-22” for policymakers is that while the communities may need the coverage, selling more policies in these areas would likely add to the losses that undermine the financial stability of the national program. That’s because the premiums charged would not reflect the actual risk in those communities and would be subsidized, unless Congress changes the pricing formula.
The U.S. Government Accountability Office (GAO), which researches issues at the request of members of Congress, recently reported on the current subsidization of federal flood insurance premiums and options for reducing the subsidization.
The GAO noted that while it constitutes a declining percentage of all National Flood Insurance Program (NFIP) policies, the number of properties receiving subsidized premium rates has grown since 1985; by 2007 it was at its highest point in almost 30 years. The Federal Emergency Management Agency (FEMA) attributes the growth to several factors, including:
- a growing number of mortgages with mandatory flood insurance,
- the longer-than-expected life of the structures that are eligible for subsidies,
- increased awareness of the dangers of floods from several major recent disasters, and
- increased NFIP marketing efforts.
According to the GAO, more than half of the subsidized policies are concentrated in five states with relatively high flood risk: California, Florida, Louisiana, New Jersey and Texas. Current low participation rates — around 50 percent of single-family homes in high-risk areas — leave room for substantial growth in the number of NFIP policies, many of which would be likely to receive subsidized rates.
The policies receiving subsidized rates have been a financial burden on the program, with total claims exceeding premiums by $962 million from 1986 through 2004, before the large losses from the 2005 hurricanes, the report indicates.
In reforming NFIP, Congress is expected to evaluate the effect of subsidized premium rates while balancing the public policy goals of charging actuarially honest premium rates, encouraging broad program participation through affordable rates, and limiting costs to taxpayers.
GAO identified places (See “Areas with Flood Policy Sales Potential” below) where sales of flood policies appear to lag behind the need; that is, areas of the country that appear to have higher populations and flooding risks relative to their policy volumes when compared to other areas, and thus have the potential for increases in the number of NFIP policies. Of course, an increase in market penetration would likely bring an increase in the number of subsidized policies, GAO noted.
Areas with Flood Policy Sales Potential
GAO compared the number of NFIP policies in a given area as of September 2006 with the total number of county flood declarations from January 1980 to June 2008, cumulative flood claims payments from January 1978 to April 2008, and population as of 2004 for counties and 2005 for states. The following are examples where there is flood policy sales potential, GAO found.
1. Some Midwestern and Northeastern states and counties that appeared to have a higher history of flood losses relative to policy counts than other areas of the country:
- The five combined states of Iowa, Michigan, Minnesota, Missouri, and Wisconsin, when compared to Collier County, Fla., had more county flood disaster declarations (2,092 versus 12), significantly more flood claims payments ($704 million versus $12.5 million), and a much larger population (28.9 million versus 297,000), but a similar number of NFIP policies (80,572 versus 85,246).
- Maine, when compared to Idaho, had significantly more flood claim payments ($36.3 million versus $4.8 million) and county flood disaster declarations (159 versus 42), but a similar number of NFIP policies (7,891 versus 7,079). The states also had similar populations: 1.3 million for Maine and 1.5 million for Idaho.
- Wisconsin, when compared to Rhode Island, had many more county flood disaster declarations (276 versus 11), but had similar flood claims payments ($32.7 million versus $34.2 million). Although Wisconsin has a much larger population (5.5 million versus 1 million), it has a similar number of NFIP policies (12,945 versus 14,432).
- Iowa, when compared to New Mexico, had almost 10 times more county flood disaster declarations (558 versus 56), and about eight times more in flood claims payments ($65.9 million versus $8 million) but almost 30 percent fewer policies (10,185 versus 14,455). Iowa’s population was larger than New Mexico’s (2.9 million versus 2 million)
- The four combined states of Kansas, Nebraska, South Dakota, and North Dakota, when compared to Oregon, had more county flood disaster declarations (1,346 versus 124) and three times more in flood claims payments ($244.8 million versus $76.7 million), but a similar number of policies (30,683 versus 29,780) for a much larger population (6 million versus 3.6 million).
2. Counties with flood disaster declarations but no communities in NFIP.
GAO found 66 counties that had flood disaster declarations but no communities that had joined NFIP. Below are selected examples from those counties.
- Clay County, Ala., (population 14,092) has had seven flood declarations.
- San Francisco County, Calif.,(744,230) has had three flood declarations.
- Henry County, Iowa, (20,258) has had six flood declarations.
- Winneshiek County, Iowa, (21,188) has had seven flood declarations.
- Adair County, Ky., (17,575) has had six flood declarations.
- Dallas County, Mo., (16,328) has had eight flood declarations.
3. Counties with flood disaster declarations but very few NFIP policies.
GAO found 14 counties, all with populations more than 100,000, with one or more flood declarations but very few NFIP policies. These included:
- Potter County, Texas, (118,000) has had three flood disaster declarations but had only six policies.
- Bibb County, Ga., (155,000) has had four flood disaster declarations but had only 13 policies.
- Carroll County, Ga., (102,000) has had six flood disaster declarations but had only 83 policies.