As Congress begins its final weeks before the upcoming
elections, the National Flood Insurance Program (NFIP)
reauthorization appears as if it might finally be considered in
conference committee. However, the conference report on the
reauthorization of the NFIP should not be bogged down by
irresponsible expansion into coverage of wind damage.
While the House bill (H.R. 3121) provides for expanding an NFIP
that is deeply in debt and requiring it to offer a completely new
type of insurance that is already available from the private
sector, the Senate version does not include this unwise expansion.
Although an amendment on wind insurance was offered during the
Senate consideration, it received only 19 votes. However,
supporters of the new product have vowed to continue their efforts
in the conference committee despite a veto threat if such language
is included. Legislators should resist any expansion of
the NFIP, and, if wind insurance is added to the program, the
President should follow through with his veto threat.
The NFIP and How It Works
Congress originally created the NFIP to reduce the vast amount
spent on federal disaster aid. In short, it requires all homeowners
in a flood plain (defined as an area with a 1 percent chance of
flooding each year) to purchase insurance that replaces government
grants and loans. FEMA estimates that for every $300 in flood
insurance claims that are paid, federal disaster aid is reduced by
In average years the NFIP is self-sufficient. The amount taken
in from premiums roughly equals the amount paid in claims and spent
on operating expenses. The NFIP normally collects approximately $2
billion in premiums and fees per year, and between 1994 and 2004,
it paid out around $867 million annually. The program is also
allowed to borrow up to $3.5 billion from the Treasury Department
in the event of a major disaster.
However, in 2005, flaws in the program were exposed. Hurricanes
Katrina and Rita inundated the program with claims and forced the
government to increase the NFIP's borrowing authority to
approximately $20.8 billion, up from the initial $1.5 billion. The
Senate version forgives the borrowing that was necessary to pay
Katrina-related claims. However, the fact that NFIP was unable to
pay those claims from its own resources demonstrates the need for
further reform and not expansion.
The Case Against Including Wind
Expanding the NFIP in any way is fiscally irresponsible. Some
believe if coverage against wind-caused damage is provided at
unsubsidized rates, the revenue brought in would cover the real
cost of providing the insurance. But a study by Towers Perrin
reveals that the proposed wind insurance program would actually run
regular operational deficits. Even if Congress forgives the
amount that the NFIP already owes, increasing its costs by running
additional deficits is a step in the wrong direction.
Affordable wind insurance is readily available through many
private sector companies. There is no need to replace these
providers with a public-sector program that is already in trouble
and has no expertise in administering a wind insurance program. As
the experience of states such as Florida has shown, once politics
are involved, it becomes very difficult to set premiums in a way
that accurately reflects the costs of potential losses.  Instead, politicians tend to influence
the program to set unrealistically lower premiums to keep their
constituents happy and worry about the potential liability only
Furthermore, including wind insurance in the conference
committee version would undoubtedly kill the bill, because the Bush
Administration says that it will veto any reauthorization bill that
includes such an expansion. In September 2007 the White House released
a Statement of Administration Policy stating: "If the final bill
presented to the President includes provisions to expand the NFIP
to include coverage for windstorm damage, his senior advisors will
recommend he veto the bill." Including wind insurance will only endanger
the entire program by delaying its reauthorization.
Don't Catch the Wind
When Congress considers NFIP reauthorization, it should resist
the urge to include wind insurance. Fundamentally, the NFIP is a
bankrupt and failing program in urgent need of reform. The
Senate-passed bill takes modest steps toward improving this
program, but any expansion of NFIP's coverage or new product lines
will only lead to additional bailouts from the taxpayers. The
upcoming conference negotiations provide an opportunity to fix a
program that has a history of mismanagement and financial problems.
Unfortunately, the House version not only falls short of reform but
expands a failing program. The conference report should reflect the
positive parts of the Senate bill, including the refusal to include
wind insurance coverage. To do otherwise would be to invite a veto.
Congress should begin the process of fixing the NFIP instead of
recklessly expanding it.
David C. John is a senior
research fellow and Stephen Keen is research assistant in The
Heritage Foundation's Thomas A. Roe Institute for Economic Policy
John, "Fixing Flood Insurance Before the Next Disaster," p. 1.