Order Code RS22394
Updated June 6, 2006
CRS Report for Congress
Received through the CRS Web
National Flood Insurance Program: Treasury
Borrowing in the Aftermath of Hurricane
Katrina
Rawle O. King
Analyst in Industry Economics
Government and Finance Division
Summary
Claims and expenses related to the massive flooding caused by Hurricanes Katrina,
Rita, and Wilma have financially overwhelmed the National Flood Insurance Program
(NFIP). The program was self-supporting from 1986 until 2005, covering all expenses
and claim payments out of cash flow of policy premiums and fees. The Federal
Emergency Management Agency (FEMA), the agency that administers the NFIP,
incurred liabilities estimated to total at least $23 billion as a result of the 2005 Gulf
Coast hurricanes, exceeding the $2.2 billion in premiums earned annually and its $1.5
billion borrowing authority from the U.S. Treasury. As a result of the catastrophic
property losses under the NFIP from Katrina, Rita, and Wilma, in September 2005, the
Congress passed and the President signed into law legislation to increase NFIP
borrowing authority first to $3.5 billion (P.L. 109-65) and then to $18.5 billion (P.L.
109-106) in November, 2005, and finally to $20.8 billion (P.L. 109-208) on March 23,
2006, to allow the agency to continue to pay claims.
FEMA estimates that the NFIP will need about $3 billion in additional borrowing
authority to cover the claims currently outstanding. Under current law, funds borrowed
from the Treasury must be repaid. However, most disaster experts would agree that
FEMA will not be able to repay the current debt.
Members of the 109th Congress will likely be called upon to assess the NFIP’s
current operations and accomplishments. They might also consider various alternatives
to reform the program while retaining its original intent to keep rates affordable for
people to buy the insurance, thereby contributing towards pre-funding their recovery
from a flood disaster.
This report will be updated as events warrant.
Congressional Research Service ˜ The Library of Congress

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Introduction
The 2005 Atlantic hurricane season broke all records for hurricanes and tropical
storms in a single year since modern storm recordkeeping began. There were 27 named
storms in 2005, of which 14 were hurricanes, including Katrina, Rita, and Wilma.
Additionally, 2005 saw three Category 5 hurricanes, which is the highest number in a
season and equals half of the total number of Category 5 hurricanes on record.
Hurricane Katrina and the storm’s aftermath will likely emerge as a pivotal event
in the history of federal flood control policy.1 The storm damage and subsequent massive
flooding in the Gulf Coast and New Orleans from Hurricane Katrina, estimated to have
caused over $200 billion in damages and over 1,700 deaths, was the most costly disaster
in recent U.S. history. Hurricane Katrina exposed the fact that the cost of floods has
continued to rise, as has the number of major flood disasters. Flood-related property
losses have risen to $6 billion a year, from approximately $3.3 billion in the mid-1980s.2
Katrina also demonstrated the effectiveness of the National Flood Insurance Program
(NFIP) in managing the nation’s flood risk as well as its limitations in handling a
catastrophic flood event.
Congress created the NFIP with the passage of the National Flood Insurance Act of
19683 to provide insurance as an alternative to federal disaster assistance for individuals
living in flood-prone areas. The NFIP has dual missions of promoting positive land use
decision making and of reducing the overall cost to government of recovery costs due to
flooding. The NFIP provides incentives for communities to establish flood plain
management programs to control development in flood plain and promote flood-resistant
construction.
Under the NFIP, the federal government is required to take certain actions:
! identify and map areas subject to flooding;
! indemnify property owners against flood losses by making flood
insurance widely available at actuarially sound rates or with legally
mandated subsidies; and
! reduce future flood-related losses through community floodplain
management measures.
Since 1973, homeowners have had to buy flood insurance if they have federally
backed mortgages in flood zones. Today, the NFIP provides flood insurance to about 4.8
million homeowners, renters, and business owners in over 20,118 participating
communities, and generates $2.2 billion in premiums.
1 For more information on the congressional interest in federal flood control policy see, CRS
Report RL32972, Federal Flood Insurance: The Repetitive Loss Problem, by Rawle O. King.
2 Alex Frangos, “U.S. Launching a Massive Effort to Redraw Nation’s Flood Maps,” Wall Street
Journal, Sept. 19, 2003, p. A 1.
3 P.L. 90-448; 82 Stat. 573.

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The NFIP has undergone major changes in response to significant flood events. For
example, the program was created after Hurricane Betsy devastated the Gulf Coast in
1965. Hurricane Agnes in 1972 led to the mandatory flood insurance requirements in
1973 that were designed to increase participation in the program. The Midwest flood of
1993 provided the impetus for strengthening lender compliance requirements in the
context of the mandatory purchase provisions in the 1994 National Insurance Reform
Act.4 Recognition of the impact of properties prone to repetitive flooding on the financial
condition of the program led to the passage of the Flood Insurance Reform Act of 2004.5
In the wake of Hurricane Katrina, a question has been raised as to whether the current
model for financing the NFIP — through premiums, fees, and treasury borrowing in high-
claim years — remains the best alternative.
The devastation in the Gulf Coast caused by Hurricanes Katrina, Rita, and Wilma,
and predictions for more intense storms in the future, have raised broad public policy
concerns about the future viability of the NFIP, particularly in the event of another
catastrophic flood episode. A key policy issue for the 109th Congress is finding a way to
balance the financial and regulatory need to strengthen the program and ensure its future
viability and commitment to reduce the nation’s flood risks without undermining the
original intent of the program to keep rates affordable. Members of the 109th Congress
will likely be called upon to assess the NFIP’s current operations and accomplishments
and consider various alternatives to reform the program. The options for NFIP reforms
include eliminating the program, broadening its coverage from the 100-year flood plain
to the 500-year flood plain, and enhancing both the program’s actuarial soundness and the
accuracy of flood maps. Economists note that these flood insurance reforms could affect
the U.S. economy and have unintended impacts on home ownership, including property
values and the cost of mortgage credit.
Katrina’s Impact on the National Flood
Insurance Program
The massive flood losses from the 2005 hurricane season, especially Katrina and
Rita, have financially overwhelmed the NFIP. The program had been self-supporting
from 1986 until 2005, covering all expenses and claim payments out of income from
premiums and fees. Operating losses occurred annually between 1972 and 1980 and in
the years 1983, 1984, 1989, 1990, 1992, 1993, 1995, 1996, 2004, and 2005. The Federal
Emergency Management Agency (FEMA), the agency that administers the program,
expects to pay approximately $23 billion in claims from Hurricanes Katrina, Rita, and
Wilma. This figure is almost double the total amount paid out over the NFIP’s 37-year
existence. According to FEMA, between 1978 — when the program was transferred from
the Department of Housing and Urban Development to FEMA — and 2004, the NFIP
earned $19.7 billion in premiums and paid out $14.2 billion. Some 257,549 NFIP claims
have been filed in response to Katrina, Rita, and Wilma. To place this number in context,
prior to Katrina, the largest numbers of flood-related claims from previous floods were
4 P.L. 103-325; 108 Stat. 2255.
5 P.L. 108-264; 118 Stat. 712.

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from the Louisiana flood of May 1995 (31,264), Hurricane Allison in June 2001 (30,296),
and Hurricane Ivan in 2004 (28,137).6
NFIP’s Treasury Borrowing
One result of the catastrophic nature of flood losses from Hurricanes Katrina, Rita,
and Wilma is that FEMA had to stop payments to NFIP policyholders for the first time
since the flood insurance program began. Although the NFIP has been able to cover
losses through the premiums charged to all policyholders, total income generated from
insurance premiums and investments has at times been insufficient to pay claims in
heavier loss years. In such cases, the program has borrowed from the U.S. Treasury to
cover losses and other expenses in the short term.
Table 1 shows the history of Treasury borrowing and repayments under the NFIP
from 1981 to 2005. When flood losses exceed the program’s revenue, the NFIP is
authorized to borrow up to $1.5 billion from the U.S. Treasury but must repay with
interest what is borrowed.7 In 2005, the program borrowed $300 million from the U.S.
Treasury, due primarily to the 2004 hurricane season. Hurricanes Katrina, Rita, and
Wilma struck in the fall of 2005, after the 2006 fiscal year began.
In 2005, the NFIP incurred a $1.04 billion net income loss. Total flood insurance
losses from Katrina, Rita, and Wilma, estimated at $23 billion, significantly exceeded the
program’s $1.5 billion borrowing authority from the U.S. Treasury. Consequently, in
September 2005, the Congress passed and the President signed into law legislation to
increase NFIP borrowing authority to $3.5 billion8. Subsequent legislation that further
raised borrowing authority to $18.5 billion was enacted in November, 2005.9
During congressional testimony before the Senate Banking Committee, FEMA
indicated the NFIP would exceed the $18.5 billion borrowing limit by mid-February 2006,
and would need an additional $5.6 billion to pay claims.10 On March 23, 2006, the U.S.
Congress approved S. 2275 to increase the borrowing authority to $20.8 billion.11
6 See [http://www.fema.gov/nfip/sign1000.shtm], visited Jan. 30, 2006.
7 P.L. 104-208; 110 Stat. 3009. The Omnibus Consolidated Appropriations Act of 1997 included
a provision to increase the NFIP’s borrowing authority for FY1997 to $1.5 billion from $1
billion.
8 P.L. 109-65; 119 Stat. 1998.
9 P.L. 109-106; 119 Stat. 2288.
10 U.S. Congress, Senate Committee on Banking, Housing and Urban Affairs, Testimony of David
I. Maurstad, Acting Director and Federal Insurance Administrator, Mitigation Division, Federal
Emergency Management Agency, Department of Homeland Security, Proposals to Reform the
National Flood Insurance Program, 109th Cong., 1st sess., (Washington: GPO, 2006), p. 1.
11 P.L. 109-208.

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Table 1. History of Treasury Borrowing and Repayments
Under the National Flood Insurance Program
(as of August 31, 2005)
Fiscal Year
Amount Borrowed
Amount Repaid
Cumulative Debt
Prior to FY1981 *
$ 917,406,008
$ 0
$ 917,406,088
1981
164,614,526
624,970,099
457,050,435
1982
13,915,000
470,965,435
0
1983
50,000,000
0
50,000,000
1984
20,000,000
36,879,123
213,120,877
1985
0
213,120,877
0
1994 **
100,000,000
100,000,000
0
1995
265,000,000
0
265,000,000
1996
423,600,000
62,000,000
626,600,000
1997
530,000,000
239,600,000
917,000,000
1998
0
395,000,000
522,000,000
1999
400,000,000
381,000,000
541,000,000
2000
345,000,000
541,000,000
345,000,000
2001
600,000,000
345,000,000
600,000,000
2002
50,000,000
640,000,000
10,000,000
October 2002
0
10,000,000
0
2005
300,000,000
75,000,000
225,000,000
Total
$4,359,535,534
$4,134,535,534
$225,000,000
Source: Federal Emergency Management Agency’s Office of Legislative Affairs.
Note: Borrowings through 1985 were repaid from congressional appropriations. Borrowings since 1994 have been
repaid from premium and other income.
* Balance forward from U.S. Department of Housing and Urban Development.
** Of the $100 million borrowed, only $11 million was needed to cover obligations.
The NFIP is so deeply in debt from the 2004 and 2005 hurricane seasons that most
insurance analysts would agree it will be challenging for FEMA to repay the money
borrowed from the Treasury. The interest payments alone on NFIP’s Treasury borrowing
could reach $1 billion per year, which is half the program’s annual premiums, suggesting
the unlikelihood that FEMA will be able to repay the borrowed funds. During hearings
on the NFIP before the Senate Banking Committee held on January 25 and February 2,
2006, most witnesses agreed the program needs to be reformed, and some went as far as
to suggest the program should be restructured to operate more like a private insurer.
Given the urgent need to avoid a lapse in paying claims, Congress is expected to act first
to increase the borrowing authority by $3 billion to cover the remaining claims from the
2005 hurricanes, and then undertake a legislative review and possible overhaul of the
program.
Federal Response to Uninsured Flood Losses
Katrina’s devastation has required an unprecedented response from federal, state, and
local governments, as well as the private sector. The federal government has committed
more than $87 billion in spending and $8 billion in tax relief for the residents of the Gulf
Coast and New Orleans. These funds, which were included in the Department of Defense
Appropriations legislation, include $11.9 billion for Community Development Block

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Grants to address the uninsured flood loss problem. The grants would be used to address
the needs of homeowners. Funds will be allocated, in grants of up to $150,000, to certain
eligible homeowners whose primary residences were destroyed or severely damaged
following Hurricanes Katrina and Rita.
Other Legislative Action
Several bills are pending in Congress that would reform the NFIP. On March 16,
2006, the House Financial Services Committee approved H.R. 4973, the Flood Insurance
Reform and Modernization Act, that would implement reforms designed to bring more
consumers into the NFIP and gradually reduce premium subsidies for properties built
before flood insurance rate maps (FIRMs) were developed. On May 25, 2006, the Senate
Committee on Banking, Housing, and Urban Affairs approved in Executive Session the
Flood Insurance Reform and Modernization Act of 2006. The Senate legislation, which
does not yet have a number, would strengthen the NFIP by making the program more
actuarially sound by phasing out premium subsidies on vacation homes, businesses, and
severe repetitive loss properties built before the introduction of FIRMs on or before
December 31, 1974, or before the effective date of an initial FIRM for the area.
S. 2005, introduced by Senator Jack Reed, would require FEMA to cooperate with
state and community mapping efforts to establish, update, and monitor flood-risk zone
data and estimate rates of loss caused by floods in flood-risk zones. The bill was referred
on November 14, 2005, to the Senate Committee on Banking, Housing, and Urban
Affairs, but no further action had been taken at the time of this writing.

In addition to stimulating calls to reform the NFIP, Hurricane Katrina has rekindled
national debate as to whether the federal government should pay for catastrophe losses
that are not covered by insurance either because the damage was caused by excluded
perils, or because the insurance has become insolvent, or because the persons or entities
suffering the losses were not insured. Because a future mega-catastrophic event could
cripple the insurance industry’s financial base and disrupt recovery after the next major
disaster, there are renewed calls for federal disaster insurance. There is a lack of
consensus, however, among state officials and insurance stakeholder groups about the
viability of a federal catastrophe fund. Some segments of the insurance industry maintain
a federal catastrophe fund is not needed because either the private sector remains capable
of covering such risks or they are not willing to help with financial assistance to residents
of coastal areas.12 Supporters of this view argue that a government solution would
amount to a coverage subsidy for coastal residents at the expense of those living further
inland and increase the risk of taxpayers being forced to cover losses. On the other hand,
other insurers and their trade groups say there is not enough capital in the catastrophe
insurance market to handle a mega-catastrophe, and a federal-state catastrophe funding
approach would be the most effective way to mobilize resources needed for disaster
recovery and federal deficit reduction. Insurers and regulators are also exploring ways to
allow for insurers to accumulate tax-deferred catastrophe reserves.
12 Matt Brady, “War of Words Erupts Over Disaster Fund,” National Underwriter, Property &
Casualty, Jan. 23, 2006. p. 6.

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