Try to imagine that you’re stranded in the ocean, struggling to keep your head above water. Someone finally throws you a life preserver, but you find out it’s full of holes and isn’t going to keep you afloat. It’s a devastating feeling to be thrown a lifeline, only to discover it isn’t strong enough to provide the help you need. This could be the unfortunate reality for many people who count on the National Flood Insurance Program (NFIP) for financial protection in the event of a flood. The NFIP was established in the late 1960s and provides government-issued flood insurance to people in participating communities that enforce floodplain management ordinances established by the Federal Emergency Management Agency (FEMA). However, the NFIP has found itself in rough waters, currently drowning in $23 billion of debt. Millions of Americans depend on the NFIP to rebuild after a natural disaster, but with the program steadily sinking into financial crisis, many are questioning the program’s ability to pay claims. Flood insurance reform is needed, and with a new administration getting settled on Capitol Hill, many are curious what the future holds for the NFIP.
For more than a decade, the United States has endured an unprecedented level of flooding following a series of natural disasters (such as Hurricanes Katrina, Ike and Sandy). Flood insurance claims have far exceeded the amount of NFIP funds available to pay for the insured losses. Demand on this already-strained program doesn’t seem to be letting up, and with five million policyholders relying on this coverage, it’s time for change.
Since its inception, additional legislation has been enacted to fiscally strengthen the NFIP and better inform its mapping / insurance rate setting. The program is currently focused on a variety of improvement efforts, including:
- Adjusting premium increases
- Issuing new rates and map updates
- Supporting mitigation
- Providing special advocacy to help policyholders
better understand the program
While this is a good start, it’s not nearly enough.
Starting at the Top
With the recent administration change, it may seem like a difficult time for government rivals on major issues to come together and work toward solutions for struggling federal programs. However, the necessity for program reform is great and in order to successfully enact change, government leaders must agree that the NFIP helps protect the financial solvency of homeowners and taxpayers, and that it should be reauthorized long-term. The government should also do more to encourage resiliency and provide incentives for policyholders to build on (or relocate to) higher ground, away from coasts and waterways. With appointees to the U.S. Department of the Treasury and U.S. Department of Homeland Security (where the NFIP is now housed), the Trump administration could move quickly to replace defective regulations. This could potentially change certain NFIP practices that perpetuate the federal ownership of flood insurance. It is likely that the Trump administration will support the passage of the Flood Insurance Market Parity and Modernization Act (which was passed in the House of Representatives in April 2016 but stalled in the Senate). This measure is intended to correct defective language that was added to the 2012 reauthorization of the NFIP and has subsequently caused a number of legal issues for the federal lending regulators.
From Public to Private
As the administration works to improve the NFIP’s solvency, it is also time to push for private forms of flood insurance. When flood insurance was proposed in the 1950s, primary insurers couldn’t charge affordable premiums and profit from these policies. This ultimately led to the creation of the NFIP, and over the years, insurance companies haven’t been able to compete with the government-provided policies. However, the government’s most recent extension of the NFIP included rate hikes to help get the program out of debt. These increases have sparked interest from insurance companies that could potentially compete in the flood insurance market if rates continue to go up. Affordability has been a critical issue for years as policymakers have tried to keep rates down through subsidies, but creating a pathway for private insurers to enter this market could give consumers more viable options for mitigating flood risk.
Time Is Ticking
The NFIP’s charter expired in September 2017. Our Risk Management Team will continue to keep readers updated on this issue as it takes shape over the ensuing months and years.
This article originally appeared in the 2017 | ISSUE TWO of the SilverLink magazine, under the title “Almost Under Water — New Administration Raises Hopes for a Sinking NFIP” To receive a complimentary subscription to the SilverLink magazine, sign up here.