Superstorm Sandy Will Test Federal Flood Insurance Program

Superstorm Sandy is threatening to drag the U.S. government’s debt-ridden flood insurance program back into the political crosshairs just months after Congress attempted to put the controversial program on a sound financial footing.

It is unclear if claims from Sandy, which delivered a wallop to the Northeast, will exceed the $3.7 billion the National Flood Insurance Program can spend before Congress needs to authorize more funds.

The largest private provider of NFIP policies, Wright Flood, said it expects Sandy will be the second-worst insured flood loss in U.S. history, behind 2005’s Hurricane Katrina. That disaster, with $17.7 billion in claims, plunged NFIP into debt that the government has said may never be fully repaid from premiums.

“It had become crystal clear, and it will probably become a little bit more clear post-Sandy, that the premium structure was woefully inadequate,” said Tom Santos, vice-president for federal affairs at the American Insurance Association, a trade group.

Santos noted that changes included in legislation passed in July will address some long-standing issues. Critics complain the NFIP subsidizes people who live and build in dangerous and environmentally sensitive flood zones from the coasts to the Midwest.

So far budget-focused lawmakers have been careful to not openly attack the program. But once Sandy’s flood damage is tallied, there could be renewed calls for subsidy cuts if the Federal Emergency Management Agency has to ask for permission to borrow more money to run the program, which would add to its debt of close to $18 billion.

In July, Congress passed a five-year funding plan that will update risk maps, phase-in higher premiums for more risk-prone areas, cut subsidies for flood insurance for vacation homes, and make changes to encourage private sector competition and gradually reduce the program’s debt.

Knowing the changes are coming may give lawmakers more comfort in agreeing to raise its borrowing cap, due to the extraordinary circumstances of the October storm, said a House Republican aide on background.

Lawmakers will watch to ensure the reforms take hold, but would be reluctant to start another battle over the program’s future so soon after coming to a five-year deal.

“This was a very solid bill, and we’re going to want to see it have a chance to take effect before we reopen that debate, I think,” the Republican aide said.

Smaller Claims Than Katrina

It is too early to tell whether Sandy’s flood damages will exceed the program’s resources. Wright Flood is receiving about 3,000 claims a day, said Patty Templeton-Jones, chief operating officer. That will rise as people return to their houses.

In total, she said FEMA is expecting claims on at least 80,000 policies after Sandy; Wright will handle about a quarter. But the claims may be smaller than usual. Like Hurricane Irene last year, many of the affected homes have basements, which receive only limited insurance coverage and take on most of the water that would otherwise flood the rest of the house.

The average payout on Irene claims was just under $30,000. Multiplied by 80,000 policies, that would imply a payout for Sandy of around $2.4 billion — well within the program’s $3.7 billion cushion.

“It is a contract between the insured and the federal government and I just don’t see that ever not being honored,” Templeton-Jones said.