Time for Congress to Improve the National Flood Insurance Program

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Time for Congress to Improve the National Flood Insurance Program

November 14, 2003 3 min read
David John
Former Senior Research Fellow in Retirement Security and Financial Institutions
David is a former Senior Research Fellow in Retirement Security and Financial Institutions.

Congress has the opportunity to finally change one of the greatest weaknesses afflicting the National Flood Insurance Program (NFIP). 


Designed to reduce the cost of major disasters by allowing workers to insure their property against floods, NFIP has been saddled with having to repeatedly pay for rebuilding the same structures.  To make matters worse, most of these structures pay subsidized premiums that come nowhere close to covering the costs they impose on the program.


H.R. 253, the Two Floods and You Are Out of the Taxpayer's Pocket Act of 2003, which was introduced by Rep. Doug Bereuter and approved on September 5, 2003 by the House Financial Services Committee, would correct both of these problems.  


No similar bill exists in the Senate.  HR 253 would:

  • Establish two new programs designed to reduce repetitive claims.  Owners of buildings where claims have exceeded a certain level over the last 10 years would be offered the opportunity to flood proof their structure, raise its elevation, or to have it purchased by the government at fair market value before the most recent flood and demolished.  NFIP would choose which option would produce the greatest savings for the program in the shortest period of time.
  • Increase flood insurance premiums for that building to actuarial levels set to cover the cost of repeated claims if the building owner refuses to accept the offer.  The owner would be offered several different deductibles, with higher deductibles reducing the premiums. Under no circumstances would the property be denied coverage.

How NFIP Works
NFIP was created to reduce federal disaster aid by requiring homeowners in a flood plain to buy insurance that would replace government grants and loans.  FEMA estimates that federal disaster aid is reduced by $100 for every $300 worth of flood insurance that is sold.


Currently, the program insures 4.4 million properties located in nearly 20,000 communities that participate in NFIP.  In order to receive a mortgage from a federally insured financial institution, homeowners must buy flood insurance if their property is located in a floodplain.  The average homeowner's pays $300 a year for about $130,000 of coverage.  Homes can be covered up to $250,000 for the structure and up to $100,000 for contents.  Businesses can get up to $500,000 coverage for both the building and its contents.


Improving the program

NFIP estimates that 1 percent of its insured structures result in about 25 percent of its claims. Many of these building are among the 27 percent of NFIP-insured structures that pay subsidized premiums because they were built before flood insurance standards were imposed.


About 10,000 NFIP insured properties have had either four or more claims in the last 10 years or two or more that total more than the building's value.  One often cited example is an $114,000 house in Houston where NFIP paid 16 claims totaling $800,000 between 1989 and 1995.  That house has since been purchased by NFIP, but many other less extreme examples remain.  Other homeowners pay higher premiums to cover the costs of these repeat claims.


HR 253 would expand an existing program designed to either flood proof or tear down structures that have two or more claims of $5000 or more in the last ten years.  It also establishes a new pilot program to deal with structures that have an even higher amount of claims.  Both programs are financed by a combination of state and federal money.  While the enhanced effort to deal with repeat claims is important, there is no real reason why a new program is necessary.  It would have been more effective to simply strengthen the existing effort.


Under both programs, affected building owners would receive an offer from NFIP that reflects the fastest and most cost effective way to reduce the cost to the program.  If the owner refuses the offer, insurance rates would cease to be subsidized, and would rise to meet the actuarial cost of providing coverage.  Owners could appeal the new rates.


Creating Private Competition
When NFIP was created, private companies insured some homes and businesses against floods.  However, many structures could not get private coverage.  As the government program expanded, most private insurers have left the field.  This is not likely to change in the near term, but increasing the proportion of structures that pay actuarially based premiums may lure some private companies back into competing with NFIP. 


Legislation such as HR 253 is needed to reduce flood insurance costs, and hopefully to create private competition for NFIP.  Paying to repair or replace the same structures over and over makes little sense, and it is unfair to expect other homeowners to continue to subsidize these claims.


David John

Former Senior Research Fellow in Retirement Security and Financial Institutions