Every year, floods cause significant property damage throughout America. Years ago, private insurers had difficulty providing economically viable flood insurance, so the government stepped in to subsidize the process. The National Flood Insurance Program (NFIP), administered by the Federal Emergency Management Agency (FEMA), was created in 1968 to provide flood insurance to properties that are at significant risk.
Unfortunately, NFIP does not appear to be economically viable either. The program had racked up a debt of approximately $25 billion before the effects of the difficult 2017 hurricane season. Congress has already provided a $16 billion bailout through debt forgiveness, and the Government Accountability Office still considers FEMA unlikely to ever pay off its remaining debt of over $20 billion.
Congress intended NFIP to be supported through interest on the premiums paid by policyholders, but payouts in difficult years go well beyond income. Hurricane Katrina made 2005 a huge NFIP budget-buster, producing an almost $16 billion deficit. 2012 came in a distant second with a nearly $6 billion deficit, and 2017 is likely to produce a massive deficit as well.
Why is the program in such trouble? NFIP has two major problems – the agency can't charge premium rates that cover the true cost, and certain areas require disproportionate help.
It shouldn't be surprising that hurricane-prone coastal areas and areas near large rivers file the most claims – but it is surprising that a mere 12 U.S. counties make up one-third of all flood insurance claims since 1978. Three counties near the Texas and Louisiana coasts lead the way. Jefferson Parish and Orleans Parish in Louisiana are the top two counties, followed by Harris County in Texas. All three have over 100,000 claims filed since 1978.
The remaining nine counties are in the same Louisiana/Texas coastal area, areas in New York and New Jersey affected by Superstorm Sandy, or in south Florida (Miami-Dade and Broward). The common threads are strong hurricanes affecting densely populated coastal areas.
Such areas tend to have higher home prices by definition – aside from hurricane risk, they are generally desirable places to live with properties in high demand. Data from Zillow shows that two-thirds of all flood insurance claims placed since 1978 come from counties with median home values well above the national median. Flood claims become disproportionately expensive, adding to NFIP's financial challenges.
NFIP is hamstrung in several directions on risk assessments and premiums. Many flood plain maps are outdated and don't reflect increased development that removed natural drainage space or changing climate patterns. Properties built prior to 1975 are protected from premium rates proportionate to the flooding risk, as are structures built before the first flood insurance rate map was published for that area. Buildings that are remapped into higher levels of risk are grandfathered into their current premium, and can't be charged rates reflecting their true risk.
As a result, over 30,000 "repetitive loss properties" in flood-prone-areas are constantly bailed out. Without some type of Federal buyout program, these homeowners can have more incentive to rebuild than to move – but, as a nation, can we afford a massive buyout to change that incentive?
Removing NFIP entirely leaves homeowners in flood-prone areas in a terrible dilemma. Property values would plummet and insurance rates would skyrocket in those areas, making homeownership difficult for many families and undercutting the ability to sell an existing home in a flood plain.
Congressional representatives from coastal districts are obviously wary of NFIP cuts. While it's true that people choose to live in these areas, in some cases, this would displace people from homes they've grown up in and lived in their entire lives – and lower-income residents may have no viable relocation options.
Most Congressional solutions are aimed at finding the middle ground of raising premiums and lowering discounts while improving flood risk assessment. Hopefully, the burden will be tilted toward affected homeowners instead of being spread across all taxpayers – but Congressional history suggests otherwise.
Congress has been unable to agree on how to solve the NFIP puzzle, but time is running out. As of this writing, NFIP reauthorization is still in limbo. On the day a three-month extension signed by President Trump was set to expire in December 2017, the President signed another four-week extension. Congress now has until January 19, 2018, to get proposed reauthorization legislation to the President's desk. While existing polices will be honored, renewals and new policies can't be issued without reauthorization.
We'll see if Congress takes any steps to make the program more sound, gives up and throws more money at it or simply lets it die and leave flood-prone landowners to fend for themselves.
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