The National Flood Insurance Program: Critical Issues and Needed Reforms

The Environmental and Energy Study Institute (EESI) held a briefing on the National Flood Insurance Program (NFIP). Established by Congress in 1968, NFIP provides affordable, government-administered flood insurance to property owners, renters, and businesses. However, the NFIP is more than just an insurance program, it is also intended to be a floodplain management and flood risk mitigation program. NFIP requires participating communities to adopt and enforce minimum construction and land use regulations that make them less vulnerable to flooding. With over 5 million flood insurance policies in force, the NFIP is the single largest source of flood insurance for homeowners and small businesses.

HIGHLIGHTS

 

Diane Horn, Analyst in Flood Insurance and Emergency Management, Government and Finance Division, Congressional Research Service (CRS)

• The purpose of the National Flood Insurance Program (NFIP) is to:
  • reduce federal expenditures on disaster assistance through insurance and mitigation,
  • reduce flood risk through adoption of floodplain management standards, and,
  • provide access to insurance for properties that might not otherwise be able to obtain it.
• NFIP has 5.1 million policies in 22,381 communities, with $1.3 trillion in coverage.
• All 50 states and some territories have experienced flooding since 2010.
• Communities voluntarily adopt and enforce floodplain management standards in order to participate in NFIP.
• NFIP is not designed to deal with truly extreme events. And, unlike other federal disaster assistance, NFIP was intended to be funded from premiums, with occasional borrowing from the Treasury (with interest payments).
• NFIP reached its statutory borrowing limit of $30.425 billion in September 2017. In October 2017, Congress cancelled $16 billion of the debt, but the program had to borrow another $6.1 billion in November 2017, raising the debt to $20.525 billion.
• Annual revenue from premiums totals $4.76 billion.
• FEMA estimates NFIP mitigation prevents $1.87 billion in flood losses, annually.
• If NFIP is allowed to expire on 5/31/19:
  • Borrowing authority will be reduced from $30.425 billion to $1 billion.
  • Issuing of federally-backed mortgages in Special Flood Hazard Areas (SFHA) that require flood insurance will be halted. A 53-day reauthorization delay in 2010 affected 40,000 mortgages.
• Major outstanding issues:
  • Outstanding debt cannot be repaid solely through premiums.
  • Barriers to private sector involvement need to be examined, but private fees must help pay for mitigation and mapping.
  • There is no national requirement for property owners to disclose flood risk. It varies by state.
• The Congressional Research Service and the Congressional Budget Office will be doing NFIP seminars in June (one on the House side and one on the Senate side). The dates will be announced on CRS's website.

 

Chad Berginnis, CFM, Executive Director, Association of State Floodplain Managers (ASFPM)

• NFIP’s four “legs,” insurance, mapping, regulations, and mitigation, must be considered together in order for the program to work. Changing only one leg of the stool may have unintended consequences.
• Only one third of stream and coastal miles in the United States have flood mapping. Fortunately, covered areas are the most likely to have the greatest amount of damage (because of population density, etc), but federally-backed insurance cannot be issued in other areas.
• 100-year (1% annual chance) and 500-year (0.2% annual chance) flood-risk areas are shown on NFIP maps.
• The National Flood Mapping Program supplements mapping funded by NFIP premiums.
• Existing mapping does not currently consider areas of future risk due to development and climate change, residual flood risk from thousands of dams and levees, and urban flooding from heavy rainfall.
• Communities must adopt minimum standards for mapped flood hazard areas.
• We’re building tomorrow’s flood problems, today. Unfortunately, NFIP minimums do not steer development away from flood hazard areas such as tributaries.
• Many people mistakenly presume that all communities have and enforce the most current building codes, which is not the case according to the Federal Alliance for Safe Homes (FLASH). While Congress does not prescribe or enforce local building codes or zoning regulations, it can equip state/local governments to do so. For example, NFIP’s floodplain management standards have not been updated since the 1970s/80s.

 

Samantha Medlock, CFM, Executive Vice President, North America Head of Capital, Science & Policy, Willis Towers Watson; Adjunct Professor of Law, The Santa Barbara & Ventura Colleges of Law

• NFIP was authorized to secure private reinsurance through the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowners Flood Insurance Affordability Act of 2014.
• In 2017, FEMA secured $1.042 billion in reinsurance coverage from 25 reinsurers. In 2018, FEMA secured $1.46 billion in coverage from 28 reinsurers and received $8 billion after Hurricane Harvey. And, in 2019, FEMA secured $1.32 billion in coverage from 28 reinsurers.
• It has been historically difficult to model floods in order to calculate risk. Technological barriers have made it difficult to adequately generate a complete view of flood hazards, and, without a private market, commercial vendors didn’t invest resources in developing a model.
• FEMA maps only determine if a risk is in or out of a flood zone, without providing information on potential flood depths or other factors, such as rainfall, flow rates, water surface elevation, wind speed, and temperature.
• There is no consistent methodology for developing flood maps across the country, so many areas have maps that are outdated. They're based on old technology, do not take into account new construction and development, or neglect water getting to the rivers as well as coming out of them. Older maps have not been digitized.
• NFIP could move to a "parametric" insurance model, to improve its responsiveness. The traditional "indemnity” insurance model pays on actual losses, and requires loss adjustment, which can delay payments. “Parametric” insurance is faster, with payment upon a triggering event defined by independent agency data (USGS, NOAA). It is simple and easy to understand.
• Relying too much on NFIP, rather than investing in mitigation, can affect community bonding rates. Hurricane Harvey damaged approximately 80 percent of structures in Aransas County, near Corpus Christie, TX. Sixty percent of residents were displaced and the town of Rockport’s credit was downgraded based on the rating agency’s view of potential tax base deterioration and revenue declines.

 

Questions

Doesn’t availability of flood insurance encourage building in flood plains?

• That can be an issue, though there are other reasons, too. Some cities are changing zoning laws to make sure buildings do not return to flood-prone areas. We need more laws like the 1982 Coastal Barriers Protection Act, which preserved relatively undeveloped coastal barriers along the Atlantic and Gulf coasts as natural areas and restricted federal expenditures that encourage development, such as federal flood insurance. A significant issue is that communities often repeal regulations after disasters to enable quick rebuilding in hazardous areas.
• Reinsurance and bonds can also pay to move people out of the floodplains.

What is the estimated cost and schedule to complete flood mapping?

• In 2015, the cost was estimated at from $4 to $7.5 billion, with the schedule unknown, due to lack of consistent funding. Last year, $448 million was funded ($262 million directly and $186 million from premiums). Representative Maxine Waters (D-CA) has called for $1 billion per year over a five-year period.
• Maps are supposed to be reviewed and updated every five years to account for rapid development that can contribute to flooding.

Does encouraging private flood insurance put NFIP at risk?

• Private policies should help fund all NFIP activities, including mapping, regulations, and mitigation. Private flood insurance should augment and not poach from the federal program.

Final observations:

• The University of Pennsylvania’s Wharton Risk Center studied flood insurance programs around the world, and found NFIP to be the best existing program because it is the only one that links insurance and mitigation.
• The NFIP's sizable debt is vulnerable to interest rate changes. They may go up.
• Mitigation [investment] is much cheaper than disaster relief [appropriations].

 

As flood risks grow around the nation, this is an important time for Congress to reform and update this vital 50-year old program to better protect people and property. Without appropriate action, a warming climate coupled with continued development in flood-prone areas will raise the human and economic toll of flood disasters while taxpayer dollars are squandered on risky, business-as-usual practices. The NFIP has reached an important crossroads. After ten temporary extensions since 2017, the NFIP is set to expire on May 31. The program is popular, but it is more than $20 billion in debt, despite the cancellation of $16 billion in debt by Congress in October 2017. Flooding is the most pervasive and costly natural disaster in the United States, and climate change is exacerbating extreme weather events. Warmer temperatures lead to more water evaporation, which makes downpours more frequent and intense, leading to more flooding. Since the 1980s, the U.S. has experienced a $100 billion increase in total flood losses each decade; however, NFIP losses did not show a significant increase until the 2005 hurricane season. Fast-paced, inadequately regulated development in areas prone to flooding is also a major cause of such rising expenses.

This briefing provided a basic understanding of the National Flood Insurance Program, its history, its challenges, and reforms needed. The panel provided important background and highlighted new strategies for improving NFIP’s financial stability and for reducing the impacts of future floods on vulnerable populations and communities.