On May 23rd, Congress attempted to reauthorize the insolvent National Flood Insurance Program (NFIP) without any reforms for the 11th time, as part of a larger disaster assistance bill.
The NFIP has long been the plague of fiscally-minded taxpayers and the homeowners who are supposed to benefit from it. It’s worth taking a look at how the program works, and why reforms are so essential to any future reauthorization.
How the National Flood Insurance Program Works
Congress created the NFIP in 1968 as a response to the private market’s inability to provide flood insurance at an affordable rate. In addition to providing insurance, Congress tasked the NFIP with mapping flood risk and providing community-based floodplain management. The combination of providing accurate flooding risk, subsidizing higher premiums, and incentivizing building improvements was supposed to create a program that could provide flood insurance to all consumers.
But Does it Work?
However, many of the National Flood Insurance Program’s mechanisms work against each other, creating large inefficiencies and making reform difficult.
In any normal insurance market, customers would expect to pay premiums based on the risk they pose to the insurance company. Healthy people pay less in healthcare premiums, bad drivers pay more in auto insurance premiums.
However, in the government-run flood insurance market, NFIP premiums are supposed to be “risk-based,” but also “reasonable.” The government wants customers to pay premiums based on their flood risk, but also wants to make flood insurance affordable for all. To accomplish this, the government spends taxpayer dollars to subsidize some flood insurance plans.
But when the government is paying part of the premiums, it creates incentives to live in a flood-prone area. Customers are no longer bearing the full risk of their decision on where to live. Subsidized insurance allows people to buy properties in these high risk areas without paying the full cost of this decision.
The Government Accountability Office reported in 2014 that, as a result of these subsidized premiums, the NFIP ran a premium shortfall of $11-$17 billion dollars between 2002 and 2013. Essentially, the NFIP did not collect as much as one billion dollars of premium revenue per year because of Congress’ meddling in the market.
The government’s competing motivations for the NFIP have caused a death spiral and lead to the program becoming financially insolvent. With an increasing amount of people paying lower premiums for living in higher-risk areas, the NFIP has had no choice but to borrow from the Treasury to pay out their flood insurance claims. The program is currently 20.5 billion dollars in debt (not including 16 billion dollars of debt that the Treasury Department canceled in 2017).
The NFIP does not have enough money to perform some of its most vital functions, further exacerbating its problems.
For example, FEMA lags far behind goals set by Congress for mapping out the risk of flooding. It simply does not have the administrative or budgetary support to do so. Currently, 11 percent of mapping is “unverified,” and 39 percent is “unknown.” Without accurate flood-risk mapping, the NFIP cannot inform customers of their risk of flood loss or charge them at full-risk rates. This adds to the program’s financial insolvency.
Necessary Reforms
The NFIP needs complete and comprehensive reform to break this cycle.
Conservatives have put forward several reform ideas:
- Base coverage rates on the property values of local communities and states, not national averages. This means replacement costs will be more accurate, making the NFIP financially sounder.
- Tie premiums directly to the risk of flooding in an area based off of updated flood mapping.
- Allow community flood mapping in order to take the financial burden of this task off of FEMA
- Limit the coverage of “repetitive loss properties,” which are responsible for a disproportionately large number of NFIP claims. If a property is repeatedly suffering from flood damage, it should either undergo redesigns to prevent damage or move to a safer location.
- Use the updated flood map information and the risk-based premiums to allow a private market for flood insurance to compete with the government
Congress must do their job and approach the National Flood Insurance Program with total and comprehensive reform. They cannot continue to reauthorize a completely insolvent program with competing goals and misaligned incentives.