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 and the federal bureaucracy to do their jobs.

It’s bad news because the year-long reauthorization was granted without any accompanying reforms to get the program back on sound financial footing.

The major problems with the NFIP, as with most things in life, center around money. But in this case, the remedy doesn’t have to mean taking taxpayers’ dollars.

A rush in policyholders and only moderate losses since March 2009 have helped NFIP’s financial condition slightly. 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. NFP is in no position to pay off this debt the way it is currently structured.

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 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 allow some property owners to continue paying rates that do not reflect reassessments of their properties’ flood risk.

Partly due to its design and partly due to politics, NFIP can’t operate in some of the ways private insurers do. For one, it cannot deny insurance on the basis of frequent losses and thus it often provides policies for repetitive loss properties. These represent only one percent of policies but account for 25 to 30 percent of claims.

Addressing these structural and financial challenges facing NFIP requires Congress to take actions involving trade-offs. The reality is that reducing subsidies could 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 has made some progress on 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. FEMA should continue trying to improve NFIP administration, thereby helping to build public confidence that if and when Congress ever gets around to doing its job, NFIP will be in a better position to perform its duties.

Topics Flood