The National Flood Insurance Program is drowning in debt. Can it be saved?
With a debt load of $24.6 billion, the National Flood Insurance Program (NFIP) requires immediate changes to make it more fiscally sound. Proposed reforms range from updated flood maps and risk-based rates to natural flood mitigation initiatives and increased participation from private insurers.
Those proposals were outlined recently by SmarterSafer.org, a 30-group coalition which includes insurers, environmental organizations, as well as housing and taxpayer advocacy associations.
New Maps Needed
The reforms advocated by SmarterSafer.org literally begin at the ground level. The group urges the Federal Emergency Management Agency (FEMA), which oversees the NFIP, to update its outdated Flood Insurance Rate Maps, or FIRMs. In order to better assess the severity, impact and frequency of floods in certain areas, SmarterSafer recommends that FEMA implement cutting-edge technologies.
By leveraging precise and continually updated flood risk data, NFIP could then set rates for property owners accordingly. For low-income homeowners in high-risk areas who are unable to afford higher rates, SmarterSafer recommends government subsidies or providing them with the resources to design flood mitigation measures.
Another benefit of revised FIRMs is the ability for communities in “Flood Hotspots” to promote and undertake methods to abate flood destruction. Installing natural buffers against storm surges by preserving nearby wetlands will diminish potential flood damage — such measures, SmarterSafer notes, cost less than traditional man-made flood reduction structures.
The organization also endorses full transparency of flood data. Updated FIRMs ensure flood statistics are readily available to communities and potential homeowners. As a result, homebuyers would be armed with a property’s flood history, while communities would also benefit from data that informs long-term development decisions in flood-prone areas.
Private Market Involvement
SmarterSafer also advocates for more private insurer participation in the flood insurance marketplace. If more private insurers write flood insurance policies, consumers would have a wider range of options as far as terms and coverage limits are concerned. Private policies would still require approval from a state’s insurance commissioners, the organization stresses.
As it stands now, the NFIP remains the only insurance option for high-risk flood area property owners. Without it, they cannot obtain a mortgage. Insurance Journal notes, however, that some states like Florida have begun to experiment with private flood insurance on a small scale.
Private participation could ease some of the NFIP’s debt burden. Specifically, SmarterSafer supports the establishment of public-private partnerships and other risk-sharing initiatives as well as the implementation of financial instruments such as reinsurance and catastrophic bonds to alleviate the full weight of flood risk.
Some of those proposals have already become a reality. Since September of last year, FEMA has received two reinsurance packages to cover the cost of flood claims amassed by the NFIP. In early January, FEMA obtained more $1 billion in reinsurance from 25 reinsurers. Under the agreement, the reinsurers agreed to pay 26% of losses between $4 billion and $8 billion that occur until Jan. 1, 2018.
“A Major Focus”
SmarterSafer’s proposal may gain more traction this year as Congress grapples with NFIP debted that can be traced back to claims from Hurricanes Katrina and Sandy. Any decision on NFIP reform will likely come near the program’s expiration date in September.
Earlier this month, Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, said the program would be a “major focus” this year.
Citing the $1.6 billion that the NFIP borrowed from the Treasury in 2016, Rep. Hensarling said in a statement the program must be reformed. “We will pass legislation that begins the transition to a competitive, innovative and sustainable flood insurance market that gives consumers real choices,” he said.