Order Code RS22394
Updated January 25, 2007
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 110th 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.

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Introduction
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 5.1
million homeowners, renters, and business owners in over 20,118 participating
communities, and generates $2.3 billion in premiums.
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
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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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 110th 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 110th 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 38-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
from the Louisiana flood of May 1995 (31,264), Hurricane Allison in June 2001 (30,296),
and Hurricane Ivan in 2004 (28,137).6
4 P.L. 103-325; 108 Stat. 2255.
5 P.L. 108-264; 118 Stat. 712.
6 See [http://www.fema.gov/business/nfip/statistics/sign1000.shtm], visited Jan. 30, 2006.

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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 2006. 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.
Table 1. History of Treasury Borrowing and Repayments
Under the National Flood Insurance Program
(as of December, 2006)
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
2006
16,750,000,000
$0
16,975,000,000
Total
$21,109,535,534
$4,134,535,534
$16,975,000,000
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.
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.

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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 On March
23, 2006, the U.S. Congress approved S. 2275 to increase the borrowing authority to
$20.8 billion.10
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. Federal spending for post-disaster
assistance now totals $109 billion, plus more than $8 billion in tax relief.11 This $109
billion amount includes $89.6 billion in post-disaster assistance and $19.3 billion in
insurance claim payments under the NFIP. As of December 31, 2006, the NFIP had
borrowed $16.75 billion from the U.S. Treasury — an amount that far exceeds the
aggregate amount of claims paid in the history of the program.12 The $89.6 billion
appropriated by Congress includes $11.5 billion in U.S. Department of Housing and
Urban Development (HUD) Community Development Block Grant (CDBG) funds for
five states (Alabama, Florida, Louisiana, Mississippi, and Texas) affected by Hurricanes
Katrina, Rita, and Wilma.13 The majority of the CDBG funds will be used to compensate
homeowners in Louisiana and Mississippi for the value of their homes, up to their insured
value or $150,000, whichever is less. Grants are now available to thousands of
homeowners outside of Special Flood Hazard Areas, commonly known as the flood plain
or the flood zone, who were not required by federal law to purchase flood insurance.
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
8 P.L. 109-65; 119 Stat. 1998.
9 P.L. 109-106; 119 Stat. 2288.
10 P.L. 109-208; 120 Stat. 317..
11 Matt Fellowes and Amy Liu, “Federal Allocations in Response to Katrina, Rita and Wilma: An
Update,” The Brookings Institutions, located at [http://www.brookings.edu/metro/pubs/
20060712_katrinafactsheet.pdf#search=%22community%20development%20block%20grant
%20and%20katrina%20flood%20relief%22].
12 U.S. Government Accountability Office, Hurricane Katrina: GAO’s Preliminary Observations
Regarding Preparedness, Response, and Recovery
, GAO-06-442T, (Washington: Mar. 8, 2006),
p. 38.
13 The CDBG funds were allocated as follows among the Gulf states: Alabama, $74.4 million;
Florida, $82.9 million; Louisiana, $6.2 billion; Mississippi, $5.1 billion; and Texas, $74.5
million. For more information, see CRS Report RL33330, Community Development Block Grant
Funds in Disaster Relief and Recovery
, by Eugene Boyd.

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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.14 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.
Concluding Remarks
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. Most disaster
experts and policymakers would agree that the program needs to be reformed, and some
have suggested the program should be restructured to operate more like a private insurer.
The 110th Congress is expected to act first to address solvency issues, particularly the
NFIP’s outstanding borrowing and repayment, and then undertake a legislative review and
possible overhaul of the program.
14 Matt Brady, “War of Words Erupts Over Disaster Fund,” National Underwriter, Property &
Casualty
, Jan. 23, 2006. p. 6.