NAR Background: National Flood Insurance Program (NFIP)

The government identified the need to start selling flood insurance following Hurricane Betsy in 1965. In 1968, the NFIP was born.

Each year, the federal government spends billions of dollars on disaster relief for flood victims—all at taxpayer expense.

• Floods claim more lives and property than any other natural disaster.
• Flood disasters have been declared in every state in the past 5 years alone.
• Floods are not only coastal issues; they occur anywhere it rains.
• Flood zones exist along coasts, rivers, lakes, streams, creeks, as well as areas inland where there is a significant pluvial (heavy rainfall) risk.
• Flood losses (more than 25% of flood insurance claims and disaster aid) come from outside of the so-called “flood zones.”

If more properties were insured for flood damage, fewer owners would turn to taxpayers for disaster relief after the next major flood.

The problem is incomplete information, which creates a market failure for flood insurance. Here are the top three myths that perpetuate the issue:

• "I've never flooded." Most people don’t believe the risk until they flood but it is not unusual for homes in very-high-risk FEMA zones to not flood for 30 years. In fact, homes outside these zones receive more than 25 percent of NFIP claims and one-third of the federal post-disaster assistance.
• "Costs too much." People tend to focus on the NFIP rates where only the “high-risk owners tend to buy and this “adverse selection” can drive up rates to unaffordable levels.  The truth is these areas represent only a tiny portion of the U.S. and otherwise flood insurance is widely available and inexpensive for the vast majority of the population.
• "It’s over-priced." Few property owners see flood insurance as worth buying because the rates can be considerable. However, in order to protect taxpayers, Congress requires FEMA to set most rates like a private insurance company, which means that the average rate must be set high enough to cover the long run  expected cost of insuring the property..  Nevertheless, when you add up all the pain, suffering and uncertainty associated with flooding, just the peace of mind alone from having flood coverage might more than justify the cost.
• The National Flood Insurance Program (NFIP) provides an insurance alternative to taxpayer-funded disaster relief.
  • Requires periodic reauthorization by Congress to provide flood insurance.
  • Partners with private insurance companies to sell insurance policies based on coverage terms and rates set by FEMA.
  • Reduces the information barrier by mapping the flood risk for many communities.
  • Mandates flood insurance for a federally backed mortgage in FEMA special flood hazard areas, where there is at least a 1% annual risk of flooding.
  • Averts billions of dollars in property damage each year because communities must adopt and enforce flood building codes and standards as a condition for joining NFIP.
  • Enables 5.5 million property owners in 20,000 communities to protect themselves rather than relying on taxpayers so history won't repeat itself. See NFIP's chronology

• The 50-year-old NFIP was not designed for the series of floods since 2005.
• Currently, the program is structured to borrow from the U.S. Treasury when premiums are insufficient to cover the claims in catastrophic years.
• However, this borrowing is unlikely to be fully repaid plus interest in order to compensate taxpayers.
• In order for this to change, Congress would have to fundamentally restructure the NFIP to increase revenue and/or reduce the program’s expected losses over the long run.
• While there have been many NFIP proposals to do this, phasing out subsidized rates and shifting risk to the private market are the only two options to consistently pass Congress.
• Ending NFIP won’t solve the problem because taxpayers would still be “on the hook” for any borrowing, but a terminated program won't be able to generate new premiums in order to help.

• Floods are low-probability, high-cost events which means one cannot rely on historic data to predict the record-breaking events.
• All it takes is one major flood in a population center to wash away any state "surplus."
• Just ask the Gulf Coast before Hurricane Katrina or New England before Sandy.
• One must consider a state's current “risk exposure” (i.e., how many properties could pay-out at any given time); not just how much has historically been paid in vs. out.
• For example, from 1978-2008, Florida paid four times in premiums what it's claimed over the same period, yet:
  • According to CoreLogic, half a trillion dollars of Florida property value is currently exposed to storm surge, the most costly and destructive form of flooding. It wouldn't take a very large hurricane before Florida was no longer deemed a “donor” state.
  • In fact, the most damaging storm in U.S. history was the 1926 Great Miami Storm which, had it happened in 2005, would have cost $140-$160 billion – dwarfing Katrina's $80-billion price tag.

Just because a state has dodged the flood “bullet” for a few decades, it doesn't mean its luck won't run out tomorrow. If it happened once, it can happen again.

• There is now a sizeable and growing private flood insurance market that writes first-dollar coverage in high and low-risk flood zones.
• Many of these companies are offering better coverage at a lower cost than NFIP today because:
  • Private companies will underwrite the risk property-by-property, whereas NFIP maps at the community level and may inadvertently include lower risks.
  • Private companies will charge rates that better align with each individual property’s risk, while NFIP has charged national average rates by flood zone until recently.

Note: NFIP policyholders will lose eligibility for grandfathered rates if they allow their NFIP coverage to lapse -- even if buying private flood insurance is the reason.

Present – NFIP’s insurance-writing authority is currently being extended short-term while Congress continues working on the next long-term reauthorization measure.

Oct. 2021 – FEMA begins phasing in a new flood insurance pricing system called Risk Rating 2.0: Equity in Action after nearly a decade of collaborating with numerous flood risk experts, scientists and stakeholders, including NAR.

2017 – The last 5-year reauthorization of the NFIP (Biggert-Waters) expires.

2014 – The “Grimm-Waters” Act amends Biggert-Waters and applies the gradual phase-out of subsidies to all older properties.

2013 – Superstorm Sandy strikes New England; NFIP borrowing now totals $24 Billion.

2012 – The “Biggert-Waters” Act reauthorizes the NFIP through 2017 and gradually phases out subsidies for older properties except at the time of sale.

2008 – The NFIP was extended 18 times and twice allowed to shut down, stalling 40,000 home sales a month.

2005 – Hurricane Katrina strikes the Gulf Coast, becoming the costliest hurricane in U.S. history; NFIP borrows $17 billion from taxpayers to cover claims from the 2005 storm season.

2004 – The “Bunning-Bereuter” Act reauthorizes NFIP through 2008 and attempts to phase out subsidies to the 1% of properties with “severe repetitive losses” accounting for 25% of the NFIP claims; however, loopholes prevent full implementation of this pilot project.

1994 – NFIP is amended to strengthen lender enforcement of the mandatory flood insurance purchase requirement.

1983 – NFIP is supplemented through the Write-Your-Own program, which allows NFIP to continue setting rates and coverage terms but contract with private insurance companies to service individual policies on FEMA's behalf.

1973 – NFIP is amended to require flood insurance for a mortgage in the mandatory purchase zones.

1968 – NFIP is created as an insurance alternative to the rising cost of fully taxpayer-funded disaster relief and shifts public policy toward building standards, mapping, mitigation and prevention.

1965 – Hurricane Betsy strikes Gulf Coast becoming first in U.S. history to cost a billion dollars. Government decides that its “flood control” public policy is no longer sustainable.

1956 – Federal Flood Insurance Act authorizes first government-backed insurance program, which isn't funded; the American Insurance Association finds that flood insurance is not commercially feasible.

1950 – The Disaster Relief Act creates the first permanent system for post-disaster aid.

1930-50 – The government attempts to manage flooding through a series of flood-control projects and loans, but the same communities flood, rebuild, and repeat.

1929 – Private insurance industry generally begins excluding flood damage from the standard home insurance policy.