NFIP Seeks $5.6B Loan; Sen. Shelby Vows Rating Overhaul

By | January 27, 2006

The National Flood Insurance Program (NFIP) says it needs to borrow an additional $5.6 billion to cover claims and expenses for 2006. Projections indicate that its payments will reach its existing $18.5 billion borrowing limit by early- to mid- February 2006.

The 2005 hurricane season has resulted in payments totaling more than $13.5 billion to date, nearly matching the total amount paid out over the NFIP’s 37-year existence, David I. Maurstad, acting director and federal insurance administrator with the Federal Emergency Management Agency, told the Senate Banking Committee.

The 2004 hurricane season resulted in more than 75,000 claims totaling close to $2 billion paid out in NFIP coverage, according to officials.

Maurstad noted that from 1986 up until the 2005 hurricane season, the NFIP has been self-supporting. During periods of high losses, the NFIP has borrowed from the U.S. Treasury.

“Our authority to borrow from the Treasury is an essential part of the
NFIP’s financing design for heavy loss years,” he said in seeking the additional $5.6 billion authority.

Congress increased the NFIP’s borrowing authority to $18.5 billion in November due to Hurricanes Katrina, Rita and Wilma.

For the future, Maurstad encouraged Congress to reduce existing rate subsidies and require more property owners to buy into the program. But he stopped short of recommending a major reform of the program.

“The 2005 hurricane season has presented the NFIP with numerous challenges on a variety of fronts,” the FEMA official told lawmakers. said. “However, it is important to remember that these challenges are not the result of a broken program; rather, they are the result of the most catastrophic back-to-back hurricane seasons this nation has ever experienced.”

However, Senate Banking Committee Chairman Sen. Richard Shelby (R-Ala.) maintains that the program is “bankrupt” and in need of a major overhaul.

“Under the present structure, assuming no major floods, it would take FEMA decades or more to re-pay the U.S. Treasury the amount it borrowed for Katrina related claims alone. We cannot, however, assume there will be no major floods,” Shelby said.

He promised to closely scrutinize “every aspect of the program to determine how to restructure it to put it in sustainable working order.”

Shelby criticized the program’s rating structure under which the rates for a quarter of property owners are subsidized. He also said there are deficiencies in the mapping used to establish the pricing levels for covered properties.

“All told, the subsidies have drained billions of dollars from the program, leaving it financially incapable of meeting its true responsibilities,” he maintained.

Compounding its financial deficiencies, the program has encouraged some to take financial risks where maybe they shouldn’t, according to Shelby. “Where prior to the program, there were areas where construction did not occur because financing was not available for it, we now see expensive homes and commercial properties,” he said.

Shelby, who was one of the Republicans most resistant to renewal of the federal terrorism reinsurance program, expressed similar concerns over the government acting as an insurer, claiming that he sees “very close parallels between this matter and others where it has been suggested that the federal government should take on the role of insurer of last resort.”

“Frankly, we should recognize that the bankrupt flood insurance program provides us a case study for any such deliberations. Furthermore, should we consider extending public liabilities in any such fashion, we will do it knowing full well the sum total of the additional responsibilities we are placing on the taxpayers’ shoulders,” he said.

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