The National Flood Insurance Program (NFIP) was established in 1968 when US Congress passed the National Flood Insurance Act of 1968. Overseen by the Federal Emergency Management Agency (FEMA), the program provides federally backed flood insurance coverage to over five million households and small businesses in more than 22,000 communities across the US.
For the past five decades, the NFIP has been providing an insurance alternative to disaster assistance, in order to protect communities against the escalating costs of flood damage. The program also provides flood plain advice and building code regulations in participating communities, and it requires flood insurance for all loans or lines of credit that are secured by existing buildings, new buildings, or buildings under construction, that are situated within a community that participates in the NFIP.
While the program was introduced with the National Flood Insurance Act of 1968, it had really been in the making since The Great Mississippi Flood of 1927, which FEMA’s chief executive of the NFIP David Maurstad described as “the largest flood disaster in the history of the country.” In the decades following The Great Mississippi Flood - which left 27,000 square miles inundated up to a depth of 30 feet - various administrative and legislative proposals were tabled to determine how to manage the flood risk of the country.
It wasn’t until Hurricane Betsy struck in 1965, remembered as one of the deadliest and costliest storms in US history, that Congress really focused its attentions on finding a solution to the US flood problem. They came up with a program that included private sector support and involved participation by American communities. The NFIP was born.
Who can purchase flood insurance from the NFIP?
Anyone who lives in or has a business in a high-risk area, or a special flood hazard area (SFHA), can get flood insurance from the NFIP. This becomes a requirement for residents and business owners who live or work in an SFHA if they have acquired a loan from a federally regulated and insured lender. The law states they must carry flood insurance for the life of that loan.
You can also purchase NFIP insurance if you live or own a business outside of a mapped SFHA. In moderate to low-risk areas, policyholders may be eligible for a lower-cost policy, called a preferred risk policy.
How much coverage can you buy?
According to a FEMA advisory, homeowners can insure a home for up to $250,000 and its contents for up to $100,000. Meanwhile, renters can cover their belongings for up to $100,000. Commercial property owners can insure a building and its contents for up to $500,000 each. FEMA says the average premium for an annual flood insurance policy is approximately $700.
Flood insurance rate maps and zones
Flood maps show areas of high, moderate and low-flood risk. They’re used by communities to set minimum building requirements, and they’re used by lenders to determine flood insurance requirements.
High-risk areas, or SFHAs, are shown on FEMA’s flood maps as zones beginning with the letters A or V. They’re also known as 100-year floodplains, which means there’s a 1% probability of flooding in any given year. In these zones, there’s at least a one in four chance of flooding during a 30-year mortgage. All home and business owners in these zones, who have mortgages from federally regulated or insured lenders, must buy flood insurance.
Moderate and low-risk areas, or non-SFHAs, are shown on the flood maps as zones beginning with the letters B, C, or X (or a shaded X). Flood insurance isn’t required in these areas, but it is strongly recommended by FEMA. Furthermore, some flood maps include zones beginning with the letter D. These are areas that are unstudied or have undetermined flood hazards.
Criticism of FEMA’s flood maps
A report published by the Department of Homeland Security Inspector General in 2017 found that many of FEMA’s maps may not reflect actual flood risk, or are out of date.
“Without accurate floodplain identification and mapping processes, management, and oversight, FEMA cannot provide members of the public with a reliable rendering of their true flood vulnerability or ensure that [NFIP] rates reflect the real risk of flooding,” the report said.
FEMA has spent over $200 million in recent years updating its flood maps. However, a study released in February 2018 by Environmental Research Letters found that more than 40 million Americans are exposed to serious flood risk at the 100-year-flood or 1% level – roughly three times more than the risk FEMA’s flood maps suggest. The agency is under pressure to update its maps to more accurately reflect the country’s flood risk.
What is the ‘Write Your Own Program’?
From the offset, the NFIP has relied upon a “very strong public-private partnership,” explained Maurstad. Essentially, FEMA’s NFIP has a collaborative relationship with a number of Write Your Own (WYO) private insurance providers, which enables participating property and casualty insurance companies to write and service the standard flood Insurance policy in their own names. The WYO companies get an expense allowance for the policies written and claims processed, but FEMA retains responsibility for the losses.
“Today, the NFIP relies on 63 of the leading property insurance companies in the nation to administer the program on our behalf,” said Maurstad in an NFIP 50th anniversary video in 2018. “In addition to those 63 companies, we also have a handful of vendors that support those companies and also support our NFIP direct program, which policyholders can access if they don’t have a relationship with one of the 63 companies.
“In the 22,000 communities that participate in the NFIP program, every property owner in those communities can access the program through NFIP direct or the WYO companies – and the WYO companies are supported by their agency partners. Thousands of insurance agents around the country sell and advise our product with their customers and our customers. Then you also have the independent adjusters who are helping the policyholder at the time of a disaster or claim through that claims journey. The public-private partnership is unique in the sense that you have large company support and then you have a lot of small business support throughout the nation. That’s actually one of the strengths of the program.”
NFIP funding … and debts
The NFIP is funded primarily from an authorized federal account called the National Flood Insurance Fund (NFIF). It’s generally funded by receipts from the premiums of flood insurance policies and borrowing from the Treasury when the NFIF’s pot is insufficient to pay the NFIP’s obligations – aka, the insurance claims. The problem is, over the years, the program has had to borrow more and more from the Treasury, racking up considerable debts. Aggressive back-to-back Atlantic hurricane seasons in 2017 and 2018 have really turned the spotlight on the program’s struggling finances.
According to CRS analysis of data provided by FEMA Congressional Affairs, the NFIP borrowed approximately $7.425 billion in 2017, paid back nothing, and recorded a cumulative debt of $30.425 billion. In 2018, the struggling program borrowed $6.1 billion, paid back nothing, and recorded a cumulative debt of $20.525 billion. A debt of $16 billion was cancelled on October 26, 2017, to make it possible for the program to pay claims for Hurricanes Harvey, Irma and Maria.
Congress must periodically renew the NFIP’s statutory authority to operate. This is called reauthorization. In recent years, NFIP reauthorization has turned into a political war zone, with neither party willing to take control of the program and commit to necessary reforms. This has resulted in a series of ongoing short-term extensions, or stop-gap measures passed through Congress. The program is currently in its 10th short-term extension since its last long-term authorization expired on September 30, 2017.
R.J. Lehmann, The R Street Institute’s director of finance, insurance and trade policy, said in July 2018 (after the current law’s seventh reauthorization): “The NFIP is unsustainable as currently constructed and Congress cannot continue to ignore its problems. Even after Congress moved in 2017 to erase $16 billion of the agency’s debt, it still owes taxpayers roughly $20.5 billion. The Congressional Budget Office projects it will lose an average of $1.4 billion every year.
“Over the past 20 years, the NFIP has come up for reauthorization 41 times [now 44 times] and 38 times Congress has moved to extend it without adopting any needed reforms. That cycle must end. There are simple, common sense, bipartisan proposals to fix the issues that ail it: from encouraging the market for private coverage to investing in mapping and mitigation, to addressing repetitive loss properties. We cannot afford any more delays. The time for action is now.”
An explainer about the emerging private flood market will be published soon. Stay tuned.