National Flood Insurance Program:
Background, Challenges, and Financial Status

Rawle O. King
Analyst in Financial Economics and Risk Assessment
April 8, 2010
Congressional Research Service
7-5700
www.crs.gov
R40650
CRS Report for Congress
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repared for Members and Committees of Congress

National Flood Insurance Program: Background, Challenges, and Financial Status

Summary
In 1968, the U.S. Congress established the National Flood Insurance Program (NFIP) to address
the nation’s flood exposure and challenges inherent in financing and managing flood risks in the
private sector. Private insurance companies at the time claimed that the flood peril was
uninsurable and, therefore, could not be underwritten in the private insurance market. A three-
prong floodplain management and insurance program was created to (1) identify areas across the
nation most at risk of flooding; (2) minimize the economic impact of flooding events through
floodplain management ordinances; and (3) provide flood insurance to individuals and
businesses. Major changes were made to the program in 1973, 1994, and 2004.
Despite investing significant resources to identify flood risk and shape floodplain and coastal
development, flood costs have risen over the past recent decade. The unprecedented losses in
2005 from Hurricanes Katrina and Rita and the 2008 Midwest flood and Hurricanes Ike and
Gustav have focused national attention on hurricane risk and the impact of storm surge on
property, inland flooding on rivers, and the financial viability of the NFIP.
The NFIP was self-supporting from 1986 until 2005 as policy premiums and fees covered all
expenses and claim payments. In 2005, the NFIP incurred approximately $17 billion in flood
claims caused by Hurricanes Katrina, Rita, and Wilma. This amount exceeded the $2.2 billion in
annual premiums and the $1.5 billion in borrowing authority from the U.S. Treasury. As a result,
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 $20.775 billion (P.L. 109-208) on March 23, 2006. As of March 31, 2010, the
outstanding debt and accrued interest cost stood at $18.75 billion. Under current law, the funds
borrowed from the U.S. Treasury must be repaid with interest. The program, however, is not in a
position to repay the debt. At the conclusion of the 110th Congress, conferees attempted,
unsuccessfully, to resolve key differences in the House and Senate flood insurance reform bills
(H.R. 3121 and S. 2284).
The 111th Congress has acted to ensure that basic NFIP authorities remain in force while the
debate on reform proposals continues. Since 2009, the NFIP has been extended by a series of
bills. The authority of the Federal Emergency Management Agency (FEMA) to issue flood
insurance contracts, however, lapsed on March 28, 2010. Congress will likely consider
retroactively reauthorizing the NFIP when Members return from Easter recess on April 12, 1010.
Meanwhile, several flood insurance-related bills are currently before the 111th Congress.
Representative Taylor has introduced legislation (H.R. 1264) to add wind coverage to the NFIP.
Also, Representative Pallone has introduced H.R. 777 to suspend flood map changes until the
Administrator of FEMA submits a community outreach plan to Congress. H.R. 777 would also
create a tax credit for flood insurance premiums on property not previously in a mapped
floodplain but included on a new flood hazard map.

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National Flood Insurance Program: Background, Challenges, and Financial Status

Contents
Recent Developments.................................................................................................................. 1
Flood Insurance Authority Lapse........................................................................................... 1
Background ................................................................................................................................ 2
Economic Regulation and Recovery from Flood Hazards ............................................................ 4
Evolution of the National Flood Insurance Program .................................................................... 5
Lessons from Katrina and the 2008 Midwest Floods.............................................................. 7
Financial Status........................................................................................................................... 9
NFIP Treasury Borrowing ................................................................................................... 11
Factors Affecting Financial Solvency .................................................................................. 12
Flood Insurance Premium Discounts ............................................................................. 13
Repetitive Flood Loss Properties ................................................................................... 14
Mandatory Flood Insurance Purchase Requirement ....................................................... 15
Flood Hazard Mapping ................................................................................................. 16
Floodplain Management Regulations ............................................................................ 17
Federal Multi-Peril Insurance Program.......................................................................... 18
Options for Managing and Financing Flood Risk....................................................................... 19
Legislative Action ..................................................................................................................... 22

Tables
Table 1. Top Fifteen Significant Flood Events Covered by the National Flood Insurance
Program ................................................................................................................................... 3
Table 2. NFIP Program Statistics ............................................................................................... 10
Table 3. History of U.S. Treasury Borrowing Under the National Flood Insurance
Program ................................................................................................................................. 11
Table 4. Total Repetitive Flood Loss Properties in the NFIP: 1978 - 2009.................................. 15
Table A-1. Repetitive Flood Loss Properties in the National Flood Insurance Program.............. 23

Appendixes
Appendix. National Flood Insurance Program: Repetitive Flood Loss Properties ....................... 23

Contacts
Author Contact Information ...................................................................................................... 24

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National Flood Insurance Program: Background, Challenges, and Financial Status

his report provides an analysis of the National Flood Insurance Program (NFIP) and its
financial status, summarizes the major challenges facing the program, including issues
T affecting its long-term financial solvency, presents some alternative approaches for
managing and financing the flood losses and describes pending legislation on this issue.
Recent Developments
In March 2010, the National Weather Service reported massive flooding in several New England
communities in Massachusetts, Rhode Island, Connecticut, and Maine. Specific concerns have
been expressed by Members of Congress about the effects of recent flooding, including surface
water flooding in 2009 along the Red River that runs through Fargo, North Dakota, and
Moorehead, Minnesota, on the financial status of the NFIP given the NFIP has already had to
borrow $1.8 billion from the Treasury so far in 2009 to cover hurricanes and Midwest floods in
2008.
Flood Insurance Authority Lapse
Since 2008, the NFIP has been extended by a series of bills.1 The authority of the Federal
Emergency Management Agency (FEMA) to issue flood insurance contracts, however, lapsed on
March 28, 2010. Congress will likely consider retroactively reauthorizing the NFIP when
Members return from Easter recess on April 12, 1010. When Congress reconvenes, Members will
have two measures to consider, a 30-day and 9-month NFIP funding extension: H.R. 4851, the
Continuing Extension Act of 2010, would extend the NFIP through April 30, 2010; H.R. 4213
would extend the NFIP through December 31, 2010, as part of another measure on extending
benefits and tax cuts that expired at the end of 2009.2
As background, under the NFIP, lenders are prohibited from making, increasing, extending, or
renewing loans secured by improved real property or a mobile home located in a special flood
hazard area (SFHA) where federal flood insurance is available unless the building or mobile
home is covered by flood insurance.3 This requirement is satisfied with coverage obtained from
the NFIP.
During the lapse in FEMA’s authority to issue flood insurance contracts, increase coverage on
existing policies, and issue renewal policies, borrowers will not be able to obtain NFIP insurance
to close, renew, or increase loans secured by property located in SFHA until the NFIP is

1 On September 30, 2008, President George W. Bush signed into law H.R. 2638, the Consolidated Security, Disaster
Assistance, and Continuing Appropriations Act of 2009 (P.L. 110-329; 122 Stat. 3575, 3581), that included a provision
to extend the NFIP’s authority to issue new policies, increase coverage on existing policies, and issue renewal policies
until March 6, 2009. After approving a five-day continuing resolution that Congress passed and President Barack
Obama signed into law on March 6, 2009 (P.L. 111-6; 123 Stat 522), Congress passed the Omnibus Appropriations Act
of 2009, extending the NFIP through September 30, 2009 (P.L. 111-8; 123 Stat. 988). On July 29, 2009, the House
considered and passed H.R. 3139 under suspension of the rules to reauthorize the NFIP through March 6, 2010. On
March 2, 2010, Congress passed and the President signed into law H.R. 4691, which extended the NFIP through March
28, 2010.
2 The House approved H.R. 4851 on March 17, 2010, but without Senate approval the program’s funding ended
February 28, 2010. H.R. 4213 was approved by the full Senate in March and was sent back to the House for further
action when Congress adjourned on March 26, 2010.
3 42 U.S.C. § 4012a.
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reauthorized. To address consumer concerns about having to wait to close on the sale of a
property within an SFHA or current policyholder’s uncertainty about coverage for flood damages
during the lapsed period of NFIP authorization and the subsequent payment of flood claims,
FEMA and the Office of Thrift Supervision have issued informal guidance.4
Lenders have been instructed to continue to make loans subject to NFIP (and 12 C.F.R. Part 572)
regulations without requiring the borrower to obtain flood insurance coverage. The lender,
however, must “continue to make flood determinations, provide timely complete, and accurate
notices to borrowers, and comply with other part of the flood insurance regulations.”5 During the
lapsed period, the Office of Thrift Supervision will continue to require lenders to give borrowers
the notice of special flood hazards and availability of federal disaster relief, if applicable, as
required by 12 C.F.R. Part 572. Also, the lender must have “a system in place to ensure that
policies are obtained as soon as available following reauthorization for properties that are subject
to mandatory flood insurance coverage.”6
FEMA has indicated that flood insurance policies applied and paid for during the lapse period
will be deemed effective as of the date of application and payment. Therefore, there will be
coverage between the start of the lapse and the date of reauthorization for those borrowers who
apply and pay for NFIP flood insurance during the lapse.
With respect to applications for coverage and renewals of existing policies that are received by
NFIP before the lapse in the program, these applicants will receive coverage even if the effective
date of the policy is after the lapse starts.
The key to the success of this exceptional arrangement is twofold: Congress taking swift action to
reauthorize the NFIP when Members return from Easter recess on April 12, 2010, and the
authorization being retroactive to March 28, 2010. In lieu of quick congressional reauthorization
of the NFIP after a lapse, some Members support a longer-term NFIP reauthorization beyond
2010 that includes comprehensive reforms to ensure the program’s financial stability.
Background
Historically, floods have been among the most costly natural disasters in the United States.
Flooding along river banks has been a main public policy concern for years. An additional
challenge today is flooding caused by weather-related coastal hazards—hurricanes, storm surges,
and tornadoes—that are increasing in frequency and severity, creating an unprecedented threat to
U.S. coastlines and Midwestern states where floods that would historically occur once every 20
years are projected to happen every four to six years.7 This situation has become a concern of

4 See U.S. Department of Homeland Security, Federal Emergency Management Agency, “Recommendations/Guidance
for Possible NFIP Authority Lapse and Hiatus,” at http://www.nfipiservice.com/stakeholder/pdf/bulletin/w-09068.pdf;
U.S. Department of Homeland Security, Federal Emergency Management Agency, “NFIP Reauthorization Until March
28, 2010,” at http://www.nfipiservice.com/stakeholder/pdf/bulletin/w-10015.pdf; and U.S. Department of the Treasury,
Office of Thrift Supervision, “Lapse and Extension of FEMA Authority to Issue Flood Insurance Contracts,” at
http://files.ots.treas.gov/25338.pdf.
5 Ibid.
6 Ibid.
7 National Science and Technology Council, Climate Change Science Program and the Subcommittee on Global
Change Research, Weather and Climate Extremes in a Changing Climate - Regions of Focus: North America, Hawaii,
(continued...)
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policymakers because more than half of the U.S. population now live in coastal watershed
counties or floodplain areas and approximately 50% of the nation’s gross domestic product ($4.5
trillion in 2000) is generated in those Gulf and Atlantic coastal areas.8 One estimate from Lloyds
of London and Risk Management Solutions (RMS) predicts that flood losses along the Gulf and
Atlantic coastlines would increase 80% by 2030 with a one foot rise in the sea level.9 The
corresponding surge in economic losses from coastal hazards arguably demands a national policy
response to better manage the costs of existing coastal risks.
Table 1 provides a list of the top fifteen flood events in the United States in terms of NFIP
payouts. The devastation from Hurricane Katrina emerged as a pivotal event in the history of
federal flood control policy, with wind and flooding estimated to have caused over $200 billion in
economic damages (both insured and uninsured) and more than 1,700 deaths. Hurricane Katrina
convinced many of a trend increase in the cost of floods and the frequency of major flood
disasters.
Governments in the United States have a long history of regulating private economic activity for
the purpose of promoting economic recovery and protecting or supporting particular economic
groups. For example, economic uncertainty stemming from widespread flooding in the mid-
1960s, the need for economic relief and recovery for flood victims, and calls for a reduction in the
financial burden on taxpayers led to economic regulation of the nation’s floodplains and
insurance markets. The government became a regulator of certain economic activity in flood-
prone areas to reduce the physical and economic risks associated with flood hazards. In the
absence of a sufficient supply of insurance to meet societal demand, the government took action
to safeguard the economic interests of consumers, businesses, communities, and taxpayers.
Table 1. Top Fifteen Significant Flood Events Covered by the National Flood
Insurance Program
(1978- March 31, 2009; $ nominal)
Number of
Average
Rank Event
Date
Paid Losses
Amount Paid
Paid Loss
1
Hurricane
Katrina
Aug.
2005 166,682 $16,055,393,803 $96,324
2 Hurricane
Ike
Sept.
2008 43,926
2,331,208,210
53,071
3 Hurricane
Ivan
Sept.
2004 27,585
1,573,349,939
57,036
4
Tropical Storm Allison
June 2001
30,662
1,103,765,221 35,998
5
Louisiana
Flood
May
1995
31,343 585,072,008 18,667
6
Hurricane
Isabel Sept.
2003
19,850 491,504,384 24,761
7 Hurricane
Rita
Sept.
2005
9,468
463,278,852
48,931

(...continued)
Caribbean, and U.S. Pacific Islands, June 2008, at http://www.climatescience.gov/Library/sap/sap3-3/final-report/
sap3-3-final-all.pdf.
8 U.S. Commission on Ocean Policy, An Ocean Blueprint for the 21St Century, September 2004, at
http://oceancommission.gov/documents/full_color_rpt/000_ocean_full_report.pdf.
9 Lloyds of London and Risk Management Solutions, Coastal Communities and Climate Change: Maintaining
Insurability
, 2008, at http://www.lloyds.com/NR/rdonlyres/38782611-5ED3-4FDC-85A4-5DEAA88A2DA0/0/
FINAL360climatechangereport.pdf.
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Number of
Average
Rank Event
Date
Paid Losses
Amount Paid
Paid Loss
8
Hurricane
Floyd Sept.
1999
20,439 462,270,253 22,617
9
Hurricane
Opal
Oct.
1995
10,343 405,528,543 39,208
10
Hurricane
Hugo Sept.
1989
12,843 376,493,066 29,315
11 Hurricane
Wilma
Oct.
2005
9,599
363,036,286
37,820
12
Nor’Easter
Dec.
1992
25,141 346,151,231 13,768
13
Midwest
Flood
June
1993
10,472 272,827,070 26,053
14
PA, NJ, NY Floods
June 2006
6,410
226,830,179
35,387
15 Nor’Easter
Apr.
2007
8,628
224,814,700
26,056
Source: Federal Emergency Management Agency, U.S. Department of Homeland Security.
Economic regulation was accomplished in two ways. First, the government acted to limit the
discretion of individuals and companies engaged in economic activity in flood prone areas.
Depending on whether a building is located in a government-designated SFHA, flood insurance
may be required as a condition of obtaining a federally secured mortgage loan. Homeowners
typically discover they need flood insurance during the home-buying process that includes a
disclosure of where the property is located relative to the SFHA that is mapped on a flood
insurance rate map (FIRM).
Second, economic regulation was accomplished through “managerial regulation,” with the
government providing subsidized flood insurance for individuals and businesses in communities
that undertook specific steps to regulate the floodplain through land use zoning ordinances and
building standards.10
In the wake of Hurricanes Katrina, Rita, and Wilma in 2005, Hurricane Ike and the Midwest
floods of 2008, and the New England region floods in 2010, Members of Congress may wish to
examine the viability of the NFIP’s structure, function and financial solvency. Some also question
whether the government should continue to underwrite insurance in support of coastal
development and rebuilding in flood-prone areas. Meanwhile, federal expenditures for federal
relief payments and insurance claims in coastal communities and along riverbanks continue to be
a major challenge for the NFIP.
Economic Regulation and Recovery from Flood
Hazards

Congress has a responsibility through the “general welfare” and “interstate commerce” clauses of
the U.S. Constitution to promote national economic growth. One factor affecting the nation’s
economic well-being is the proper functioning of markets for natural disaster risk: do economic
markets provide a sufficient amount of insurance against flood hazards? Further, to the extent that
flood insurance exists, are the insuring firms sufficiently capitalized so that widespread

10 James Anderson, “Economic Regulation,” Encyclopedia of Policy Studies, Stuart S. Nagel, ed. (New York; Dekker
Publishers), 1994, p. 404.
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insolvencies would not occur? These were just a few of the key questions the nation faced in the
1960s, as hurricanes caused increased havoc along the U.S. Gulf and Atlantic coasts.
There were four very broad underlying causes for economic regulation—government
intervention—in the market for flood insurance in the 1960s. First, people insisted that social and
ethical values as well as economic values should be reflected in the operation of the economy.
Persons suffering economic distress or dislocation from flood hazards sought and received
governmental aid in dealing with their problem. The aid was in the form of disaster relief
assistance, subsidized flood insurance, and government spending on flood risk identification and
mapping.
Second, government action was viewed as being necessary to bring about more efficient
coordination and utilization of resources. Economic regulatory programs were thought to be
needed to prescribe certain land use zoning ordinances and building code standards to govern
economic or business behavior to reduce the physical and economic risks associated with coastal
hazards.
Third, as the nation experienced widespread flooding in the 1960s, people became interested in
their personal security and, thus, in shifting some or all of the risk of economic life from
themselves to government. In response, policymakers changed the way economic risk of flooding
was defined and the means of achieving security for the individual. Economic hazards, whether
man-made or natural, were initially considered inevitable or “acts of God” but came to be viewed
as public problems that required government action to protect individuals, businesses,
communities, and taxpayers. Government assistance in the form of subsidized insurance
premiums was viewed as a solution to reduce the future costs and risks of investing in flood-
prone areas.
Fourth, sole reliance on insurance markets for flood risks was not an option. This situation
provided a rationale for possible government intervention in the economy to ensure that the costs
and benefits of living in flood-prone areas were not ignored. Individuals and insurers at risk of
flooding, however, have in the past lacked the information necessary for the market system to
operate effectively. Insurers did not always have flood hazard maps, as they do now, and thus had
no reliable, consistent, and cost-effective way to identify and assess flood risk. Homeowners did
not and sometimes still do not, have the information needed to make rational economic decisions
about real estate investments. All this resulted in a misallocation of resources which required and
still requires government intervention to protect the public interest.
Evolution of the National Flood Insurance Program
Flood hazards in the United States, whether from hurricanes and the impact of storm surge on
property or inland flooding on rivers, lakes and streams, was largely deemed commercially
uninsurable. The standard multiperil homeowners insurance did not provide coverage against
flood hazards. Floods were perceived to be uninsurable for three reasons: (1) adverse selection
meant that only individuals in flood-prone areas would purchase coverage; (2) risk-based
premiums were too costly for the average household; and (3) insurers could not generate
sufficient premiums to insure against a catastrophic flood event. Government mapping of areas
prone to flooding, subsidized flood insurance, and floodplain management regulations were key
to the program’s structure and function. These concerns about flood insurance market failure led
to the passage of the National Flood Insurance Act of 1968.
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Traditional insurance principles indicated that private insurers would not be able to gather a large
enough pool of independent risks to allow the actuarial technique of “law of large numbers” to
reduce the risk. Most property owners in floodplains usually face the same flood hazard and their
risks tend to be highly correlated—not independent. Correlated risks means the insurer must
charge higher premiums to reflect a larger risk load or administrative cost that accounts for the
uncertainty faced by the insurer in predicting future losses of the pool. In other words, the
premium level that private insurers needed to adequately underwrite flood hazards would be so
high that few would be willing to purchase coverage.
The NFIP was a public policy response to the flood peril and escalating costs of taxpayer-funded
disaster relief for flood victims. Federally backed flood insurance was made available to home
and business owners in communities that voluntarily agreed to adopt and enforce floodplain
management ordinances designed to reduce flood-related property losses. The creation of the
NFIP marked a significant shift in U.S. flood control policy away from a “levee-only” flood
reduction approach towards a risk identification, risk financing and floodplain management
approach that was intended to foster individual responsibility and build local self-sufficiency in
terms of land-use zoning ordinances and construction standards.
Federal flood insurance was considered to be an economically efficient way to indemnify flood
victims and to have individuals internalize some of the risk of locating property in the
floodplains.11 The federal government would utilize its capacity to spread losses over time with
the NFIP’s ability to borrow money from the U.S. Treasury to offset program deficits. A federal
government insurance program, it was thought, could also link the availability of flood insurance
to land use regulation and building codes that would, in theory, reduce long-term flood risk.
Today, under the NFIP, the federal government is required to take certain actions to
• identify and map areas across the country that are at high risk of flooding;
• indemnify individuals and businesses against flood losses by making flood
insurance widely available at actuarially sound rates or with legally mandated
premium subsidies; and
• reduce future flood losses through floodplain management regulations and
actions.12
The NFIP has undergone major changes largely in response to significant flood events over the
years. For example, the program was created after Hurricane Betsy devastated the Gulf Coast in
1965. After Hurricane Agnes in 1972, recognizing the low market penetration of flood insurance,
Congress enacted the Flood Disaster Protection Act of 197313 to establish a mandatory flood
insurance purchase requirement for structures located in identified SFHA. After the 1973 Act,
federally regulated lenders were obligated to require flood insurance on any loan secured by
improved real estate in a FEMA-designated SFHA in a participating community.

11 Dan R. Anderson, The National Flood Insurance Program: Problem and Potential, The Journal of Risk and
Insurance
, 1974, vol.16 (4), p. 579-599.
12 Flood damage reduction is thought to be achievable through extensive flood control structures, such as levees and
dams and non-structural methods, including land use ordinances, buy-outs, and elevation of existing buildings and
roads.
13 P.L. 93-234, 87 Stat 975.
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After the 1993 Midwest floods, it became apparent to Congress that homeowners were still not
adequately complying with the mandatory insurance purchase requirement. The Midwest flood of
1993 provided the impetus for strengthening lender compliance through the mandatory purchase
provisions in the 1994 National Flood Insurance Reform Act.14 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 200415 which established a pilot program for the mitigation
of severe repetitive—loss properties (SRLPs) and the funding of mitigation activities for
individual SRLPs.
Although the NFIP faces many challenges, and there is widespread agreement that the program
needs to be reformed, the evidence continues to suggest broad support for the basic principle of
using an insurance pooling mechanism for those who have chosen to live in high-risk areas. Some
of the policy questions for the 111th Congress include the following: Is the NFIP currently
encouraging unwise construction in floodplains? Are taxpayers subsidizing unwise construction
as a result of inaccurate maps? If the program does encourage unwise construction or rebuilding
in high-risk areas without proper first-floor elevation, what steps should policymakers take to
keep the promises of safer construction made to taxpayers at the inception of the program? If
premiums are inadequate to finance programs, is Treasury debt the only answer?
Lessons from Katrina and the 2008 Midwest Floods
The 2008 Atlantic hurricane season was among the costliest on record for flood losses and
resulted in a large infusion of taxpayers’ money to cover uninsured disaster losses. Hurricane Ike
alone caused about $2.3 billion in NFIP claims along the coastal areas of Texas and Louisiana and
further inland, including many areas not typically subject to tropical rain events. In addition to
flooding from Hurricane Ike there was extensive 500-year flood damage in the Midwest that was
not anticipated by current out-of-date methodologies. According to FEMA, more than 11 million
people in nine Midwestern states were affected by the 2008 Midwest floods as major rivers in
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin
overflowed their banks and levees. Especially hard hit states were Iowa, Indiana, and Illinois,
where the river levels surpassed levels reached in the Great Flood of 1993.
Although the 2008 Midwest floods caused dozens of levees to be breached, destroying thousands
of homes and businesses, and inundating thousands of acres of agricultural cropland, the flooding
did not rank among the NFIP’s top 15 most costly events. Payments under the NFIP were
relatively low because of low flood insurance purchases in the affected areas. Similarly, although
the 1993 Midwest flood was the most devastating flooding in the region’s history, it ranks 13th
among the leading NFIP flood events with $273 million in NFIP claims.
In 2005, the devastating flooding caused by Hurricanes Katrina and Rita resulted in
approximately $200 billion in economic losses, of which $21.9 billion will likely be covered
under the NFIP. The massive flood losses from Hurricanes Katrina and Rita financially
overwhelmed the NFIP. It also focused public attention on (1) the economics of government risk-
bearing through federal flood insurance when private insurers do not offer affordable coverage;
(2) the exposure of the federal taxpayer to losses when program revenues do not cover costs; and

14 P.L. 103-325, 108 Stat. 2255.
15 P.L. 108-264, 118 Stat. 712.
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(3) the effectiveness, arguably limited, of the nation’s floodplain management strategy in
reducing federal disaster relief expenditures.
Several lessons emerged from Hurricane Katrina and the 2008 Midwest floods that could help
inform Members of the 111th Congress during policy deliberations on the reform and
reauthorization of the NFIP.
Program Participation to Reduce Uninsured Losses. Most homeowners do not
completely recognize or internalize their flood risk and are overly optimistic
about the magnitude of the flood risk to which they are exposed. Consequently,
the NFIP has not achieved the level of individual participation originally
envisioned by Congress. A study of the NFIP’s mandatory purchase requirement
nationwide conducted by the Rand Corporation indicated that only about 49% of
single family homes in SFHA are covered by flood insurance.16 In the absence of
flood insurance, the cost of repairing flood damaged property is usually borne
either by the property owner from their own financial resources, or by federal
relief payments instead of by flood insurance payments. This situation has
resulted in billions of dollars of uninsured property losses and arguably results in
higher social costs. The high degree of uninsured flood losses during the 2008
Midwest floods has raised the policy question of who should appropriately bear
the cost of the decision to live in potentially high-risk areas, including areas
behind flood control structures.
Inadequate Floodplain Management. The altering of rivers and streams by
construction of dams, levees, and other flood control structures arguably
increased the risk of major floods and development throughout the affected
floodplains. Policymakers learned that there are hidden costs to water resources
and flood control structures and that steps must be taken to reduce the risk of
future flood disasters. There is the recognition of the need to strengthen the NFIP
community land-use and building standards to reduce floodplain development,
improve public awareness of flood risk, and reduce cost to U.S. taxpayers. The
U.S. Army Corps of Engineers has undertaken cost-benefit analysis of water
resources projects. The findings of these studies could be used to better manage
the NFIP’s floodplain management standards.
Flood Risk Assessment and Mapping. Nationwide actuarial rates and
underwriting process may not reflect the actual flood risk in a given location.
Property owners affected by Hurricane Katrina and the 2008 Midwest floods may
have made location choices that did not consider all of the costs because of
inaccurate or outdated flood hazard maps. The price charged for federal flood
insurance could understate the risk; premiums may be too low or higher than the
actual risk would dictate. Economists note that if property owners had to incur
more of the cost of locating in flood-prone areas with the purchase of insurance,
they would make more efficient location decisions. Moreover, the maps did not
delineate areas of storm water and groundwater flooding or capture increases in
localized storm water runoff flooding resulting from development, deforestation,
and other land use changes.

16 Rand Institute for Civil Justice, “The National Flood Insurance Program’s Market Penetration Rate: Estimates and
Policy Implications,” http://www.rand.org/pubs/technical_reports/2006/RAND_TR300.pdf.
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Residual Risk Behind Levees. Flood damage in 2008 was relatively high
because of the over-reliance on levees and the false sense of security they
provide. Homeowners may have thought that because they resided behind a
certified levee, they were not subject to flood risk. There are significant potential
economic risks of not pricing or establishing sufficient loss reserves to cover
residual risks behind flood control structures. Based on the certification of levees
as providing at least protection from the 1% annual chance flood, property
owners may not be required to purchase flood insurance, yet they may face
significant uninsured losses if the levee is overwhelmed. FEMA has consistently
sought to communicate to the public the fact that certified levees do not eliminate
the risk of flooding. The lack of understanding of the national flood risk, the
inadequate communication of that risk, and diminished capabilities in flood risk
management due to inaccurate or out-of-date flood hazard maps have been
deemed major weaknesses in the program.
Inadequate Pricing of Flood Risks. The most costly flood in the 41-year history
of the NFIP was caused not by rainfall-river flooding but by breeched or
overtopped levees that did not protect the City of New Orleans from coastal
storm surges. According to FEMA, some 75%-80% of the area behind the levees
protecting New Orleans was designated SFHA (high-risk zone) due to rainfall
and there was an explicit flood insurance purchase requirement in effect in the
affected areas. Still, the NFIP assumed the levees were going to hold back storm
surge floods and the program did not adequately price the policies to reflect the
possible failure or overtopping of levees.
Availability of Federal Disaster Assistance. Flood victims may have thought, in
retrospect correctly, that the purchase of flood insurance was not necessary to
receive some compensation for flood related losses from the federal government.
The availability of federally-subsidized flood insurance in high-risk areas
arguably encouraged too many people to locate in flood-prone areas and to not
take appropriate steps to mitigate loss, leaving these financial losses to be either
uncompensated or transferred to third-parties, including taxpayers via federal
disaster assistance. Economists maintain that the assurance of federal assistance
in the event of a repeated disaster creates a “moral hazard” by lowering the
incentives to avoid risk. In some ways, this situation arguably counteracts one of
the original objectives of the NFIP, namely to minimize future flood damages and
the corresponding need for federal disaster relief.
Financial Status
This section examines the current financial status of the program and borrowing from the U.S.
Treasury.
Table 2 shows that the NFIP currently has more than 5.6 million policies-in-force nationwide
covering approximately $1.19 trillion in property in almost 20,000 participating communities.
Policyholders paid $3.1 billion in premiums in 2008. The NFIP experienced only one catastrophic
loss year, in 2005, in its 41-year history, and the Midwest floods of 2008 severely tested the
financial resiliency of the NFIP. In an attempt to both protect the NFIP’s integrity after the 2005
hurricanes and ensure FEMA had the financial resources to cover its existing commitments,
Congress passed, and the President signed into law, legislation to increase the NFIP’s borrowing
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authority to allow the agency to continue to pay flood insurance claims: first to $3.5 billion on
September 20, 2005; to $18.5 billion on November 21, 2005; and finally to $20.775 billion on
March 23, 2006. FEMA had to borrow another $2.6 billion over the 2007 through 2009 period to
pay claims from Hurricane Ike and the Midwest floods of 2008. The program’s outstanding debt
to the Treasury stands at $19.3 billion. FEMA is not likely to be able to repay the debt because of
the considerable amount of interest associated with that level of borrowing. Interest payments on
the program’s debt to the Treasury is almost $1 billion annually.
Table 2. NFIP Program Statistics
(as of January 31, 2009; $ nominal)
Total
Number of
Total Face
Payments
Calendar
Policies in
Total Written
Value of
Total Number
Made to
Year
Force
Premium
Coverage
of Claims Paid
Policyholders
1972-1977 NA
NA
NA
4,441 $18,035,656
1978 1,446,354
$111,250,585
$50,500,956,000
29,122 147,719,252
1979 1,843,441
141,535,832
74,375,240,000
71,652 493,008,836
1980 2,103,851
159,009,583
99,259,942,000
41,918 230,414,295
1981 1,915,965
256,798,488
102,059,859,000
23,261 127,118,031
1982 1,900,544
354,842,356
107,296,802,000
32,831 198,295,820
1983 1,981,122
384,225,425
117,834,255,000
51,584 439,454,937
1984 1,926,388
420,530,032
124,421,281,000
27,688 254,642,874
1985 2,016,785
452,466,332
139,948,260,000
38,676 368,238,794
1986 2,119,039
518,226,957
155,717,168,000
13,789 126,388,812
1987 2,115,183
566,391,536
165,953,402,000
13,399 105,422,538
1988 2,149,153
589,453,163
175,764,175,000
7,758 51,022,523
1989 2,292,947
632,204,396
265,218,590,000
36,247 661,668,435
1990 2,477,861
672,791,834
213,588,265,000
14,766 167,919,559
1991 2,532,713
737,078,033
223,098,548,000
28,554 353,684,967
1992 2,623,406
800,973,357
236,844,980,000
44,651 710,247,980
1993 2,828,558
890,425,274
267,870,761,000
36,044 659,069,808
1994 3,040,198
1,003,850,875
295,935,328,000
21,584 411,079,605
1995 3,476,829
1,140,808,119
349,137,768,000
62,441
1,295,581,467
1996 3,693,076
1,275,176,752
400,681,650,000
52,679 828,040,301
1997 4,102,416
1,509,787,517
462,606,433,000
30,338 519,505,659
1998 4,235,138
1,668,246,681
497,621,083,000
57,349 886,305,129
1999 4,329,986
1,719,652,696
534,117,781,000
47,246 754,971,355
2000 4,369,087
1,723,824,570
567,568,653,000
16,362 251,719,208
2001 4,458,470
1,740,331,079
611,918,920,000
43,588
1,276,986,570
2002 4,519,799
1,802,277,937
653,776,126,000
25,314 433,634,571
2003 4,565,491
1,897,687,479
691,786,140,000
36,833 779,908,320
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Total
Number of
Total Face
Payments
Calendar
Policies in
Total Written
Value of
Total Number
Made to
Year
Force
Premium
Coverage
of Claims Paid
Policyholders
2004 4,667,446
2,040,828,486
765,205,681,000
55,762
2,226,942,412
2005 4,962,011
2,241,264,140
876,679,658,000
211,954
17,646,657,418
2006 5,517,089
2,615,890,367
1,054,087,148,000
24,562 638,824,231
2007 5,653,949
2,854,071,096
1,139,822,517,000
23,003
$607,055,453
2008 5,610,895
$3,074,184,710
1,185,136,863,800
69,466
$3,045,743,940
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency’s Office of Legislative
Affairs.
NFIP Treasury Borrowing
Table 3 shows the history of U.S. Treasury borrowing and repayments under the NFIP from 1981
to 2009. The NFIP was self-supporting from 1986 until 2005, covering all administrative
expenses and claim payments out of premium income and fees. Since Hurricane Katrina struck in
August 2005, FEMA has had to borrow $19.3 billion, which includes amounts to pay claims from
Hurricanes Ike and the 2008 Midwest floods. It is unlikely that the $19.3 billion Treasury debt
will be repaid within the next 10 years given annual interest payments of about $900 million and
annual premium income of approximately $3.1 billion. Experts agree that even if FEMA
increased flood insurance rates up to the maximum amount allowed by law (10% per year), the
program would still not have sufficient funds to cover future obligations for policyholder claims,
operating expenses, and interest on debt.
Table 3. History of U.S. Treasury Borrowing Under the National Flood
Insurance Program
(as of March 31, 2010; $ nominal)
Fiscal Year
Amount Borrowed
Amount Repaid
Cumulative Debt
Prior to FY1981a
$917,406,008
$0
$917,406,088
1981 164,614,526
624,970,009
457,050,435
1982 13,915,000
470,965,435
0
1983 50,000,000
0
50,000,000
1984b 200,000,000
36,879,123
213,120,877
1985 0
213,120,877
0
1994c 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
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Fiscal Year
Amount Borrowed
Amount Repaid
Cumulative Debt
2001 600,000,000
345,000,000
600,000,000
2002 50,000,000
640,000,000
10,000,000
October 2001
0
10,000,000
0
2003 (Nov.-Sept.)
0
0
0
2004 0
0
0
2005d
300,000,000
75,000,000
225,000,000
2006 16,660,000,000
0
16,885,000,000
2007 650,000,000
0
17,535,000,000
2008 50,000,000
225,000,000
17,360,000,000
2009
1,987,988,421
347,988,421
19,000,000,000
2010 to date
0
250,000,000
18,750,000,000
Total
23,707,523,955
4,957,523,955
18,750,000,000
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency’s Office of Legislative
Affairs.
Notes: Borrowings through 1985 were repaid from congressional appropriations. Borrowings since 1994 have
been repaid from premium and other income.
a. Balance forward from U.S. Department of Housing and Urban Development.
b. Figure for the $213.1 million in cumulative debt in 1984 provided by FEMA reflects additional cost outside
of the insurance program.
c. Of the $100 million borrowed, only $11 million was needed to cover obligations.
d. NFIP borrowed $300 million in 2005 to pay claims from the 2004 hurricane season, but Hurricanes Katrina,
Rita and Wilma struck on August 29, 2005 and claims were submitted after the 2006 fiscal year began.
Factors Affecting Financial Solvency
Homeowners are required to purchase flood insurance coverage if they have a federally insured
mortgage. Many policyholders, however, cancel their NFIP policy after a few years pass and they
have not experienced a flood loss. As a result, when the flood hazard does occur, there are a large
number of uninsured flood victims and the federal government is usually called upon to provide
disaster assistance. In order to stabilize future government spending to compensate flood victims,
it is important to maintain the long-term financial solvency of the NFIP. In considering the NFIP’s
financial solvency, one should recognize two things: (1) the NFIP was not capitalized at inception
by Congress; and (2) the program does not operate under the traditional insurance definition of
fiscal solvency that requires the insurer to have sufficient capital/surplus to obtain authorization
to sell insurance policies.
With respect to the financial solvency of the NFIP, several issues are of concern to Congress,
including the following:
• flood insurance premium discount (i.e., actuarial soundness and premium rate
adequacy);
• repetitive loss properties’ disproportionate share of total losses in the program;
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• lack of enforcement of mandatory flood insurance purchase requirements;
• impact of outdated flood maps on the program;
• enforcement of floodplain management regulations; and
• debate over the inclusion of optional windstorm coverage in the NFIP policy.
The next six sections examines each of these concerns.
Flood Insurance Premium Discounts
The NFIP arguably faces a long-term solvency challenge because the program does not have a
financing mechanism for handling catastrophic losses other than borrowing from the federal
Treasury; annual premiums are not likely to cover the program’s long-term expenses, claim costs,
and interest and principal debt repayment to the U.S. Treasury. Taxpayers could therefore be
exposed to greater financial risks as a result of the potential for future catastrophic flooding.17
NFIP was not established on an actuarially sound basis since it charges less-than actuarial rates
for pre-FIRM structures. FEMA’s rate-setting structure is designed to generate premiums at least
sufficient to cover losses and loss adjustment expenses relative to the “historical average loss
year.”18 There is no contingent amount added to premium for profit margins in order to build a
surplus. When losses and expenses exceed premiums the program is authorized to borrow from
the U.S. Treasury but must repay the funds with interest. Thus, because the program does not
build loss reserves for the infrequent but very catastrophic loss years and rates are by statute
underpriced to make rates affordable, the program’s financial structure could impose negative
externalities on taxpayers. Federal taxpayers ultimately subsidize any financial shortfalls created
by the NFIP’s financial structure and the tendency to underprice the insurance coverage.
The NFIP uses a two-tier rate classification system that consists of “actuarial” rates and
“subsidized” rates.19 Actuarial flood insurance premiums are calculated based on the amount of
coverage, location, age, and building occupancy and, for a building in a SFHA, the elevation of
the building. Based on expected losses derived from flood probability estimates and adding
expected loss adjustments and other operating expenses (i.e., risk loading), FEMA is able to
calculate an actuarial rate. Buildings constructed after December 31, 1974 or after the publication
of a flood insurance rate map (FIRM) are charged an actuarial premium that reflects the
property’s risk of flooding.
Subsidized rates, on the other hand, are determined by a statutory mandate that requires rates to
be affordable so individuals are encouraged to participate. Owners of properties built prior to the
issuance of a community’s flood hazard map or January 1, 1974, usually pay subsidized rates and

17 U.S. Government Accountability Office, FEMA’s Rate-Setting Process Warrants Attention, GAO-09-12, Oct. 31,
2008.
18 In contrast, commercial insurance premiums are typically set at a level that covers expected losses and expenses plus
an amount for a profit margin. A portion of each premium dollar collected is then set aside in loss reserves which are
invested and the income used to pay claims and expenses.
19 A third category of premium discounts involve “grandfathered” policies that occur when a structure is built in
compliance with the local floodplain regulation in effect at the time of construction but is later placed in a different risk
zone when a flood map is changed. The structure is grandfathered so that pre-FIRM structures continue to pay the
subsidized rates.
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are exempted from the NFIP’s floodplain management standards. Even properties that are
remapped into higher-risk areas pay the subsidized rates, which further contributes to the
financial inadequacies of the NFIP.
Premium subsidies were initially considered necessary because occupants often did not
understand the flood risk when they built in floodplains (flood maps were not available), there
were no public safeguards prohibiting the occupancy on the floodplain, and premium subsidies on
pre-FIRM structures could provide an incentive to local communities to participate in the
program and discourage unwise future floodplains construction. Premium subsidies were
intended to be phased out over time as the number of pre-FIRM properties gradually diminished
when they were damaged and rebuilt or relocated under stronger floodplain management and
building codes. The NFIP requires all new and substantially improved buildings to be constructed
at or above the elevation of the 1%-annual-chance flood (100-year floodplain).
Repetitive Flood Loss Properties
Properties that experience repetitive flood losses, known as a “repetitive-loss properties” (RLP)
and “severe repetitive loss properties”(SRLP), account for a disproportionately large share of all
the flood insurance claims filed and paid under the NFIP.20 Historically, it is estimated that
approximately 1% of the properties insured under the NFIP have accounted for over a third of
claims paid. About one in 10 homes that suffer repetitive flood damages have cumulative flood
insurance claims that have exceeded the value of the house. 21 FEMA approximates that 90% of
all RLPs were built prior to December 31, 1974, or before the adoption of a FIRM—and, hence,
are subject to premium discounts.22 Importantly, the annual increase in new RLPs is outpacing
FEMA mitigation efforts by a factor of 10 to 1.23 After the 1993 Midwest flood, FEMA and other
federal government agencies spent hundreds of millions to remove frequently flooded properties
from the floodplain.
Table 4 shows that since 1978, a total of 148,148 RLPs have had 428,583 claims paid, which
have cost the National Flood Insurance Fund a total of $10.1 billion in nominal dollars. Table A-1
shows RLPs by state. The average claim for these properties was $23,591. According to FEMA,
there were 8,909 insured SRLP and 71,680 insured RLPs in the NFIP, as of February 28, 2009.
The agency awarded $34.9 million to mitigate 168 properties under the SRLP program and $28.1
million under the Repetitive Flood Claims program. The Inspector General at the Department of
Homeland Security estimates that it would cost about $1.8 billion to mitigate the current
inventory of SRLP.24

20 A repetitive loss property (RLP) is defined as an insured property that experiences two or more flood losses greater
than $1,000 within any 10-year period. A subset of RLPs, called severe repetitive loss properties (SRLP), have incurred
at least four NFIP claim payments of at least $5,000 each or the cumulative amount of such claims payments exceeds
$20,000 or for which at least two separate claims have been made with the cumulative amount of the building portion
of such claims exceeding the market value of the building.
21 U.S. Department of Homeland Security, Office of Inspector General, “FEMA’s Implementation of the Flood
Insurance Reform Act of 2004,” OIG-09-45, March 26, 2009, p. 4, at http://www.dhs.gov/xoig/assets/mgmtrpts/
OIG_09-45_Mar09.pdf.
22 Ibid.
23 Ibid, p. 13.
24 DHS Inspector General Report, p. 1.
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FEMA has undertaken several actions over the years to address the RLP problem. The initial
strategy, announced in 1999, was to identify the nation’s inventory of RLPs and focus on
structures that were substantially damaged (i.e., damaged 50% or more of market value) at which
time they would be reconstructed, elevated, or floodproofed to prevent future damage. One
reported difficulty has been reluctance and inconsistency at the local community level in
declaring structures substantially damaged.
Table 4. Total Repetitive Flood Loss Properties in the NFIP: 1978 - 2009
(as of February 28, 2009; $ nominal)
Building Payments
$7,686,059,344
Contents Payments
$2,424,908,942
Total payments
$10,110,968,286
Average payment
$23,591
Losses 428,583
Properties 148,148
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.
FEMA also pursued a strategy of phasing out premium subsidies on RLPs through voluntary
buyouts or the imposition of full actuarially based rates for RLP owners who refuse to accept
FEMA’s offer to mitigate the effect of flood damage. In addition, the agency incorporated special
incentives into the Community Rating System and provided data to states and communities to
help them address the RLPs.
The Flood Insurance Reform Act of 2004 required FEMA to establish the Repetitive Flood
Claims and the Severe Repetitive Loss Grant programs to provide funding to reduce or eliminate
the long-term risk of flood damage under the NFIP. The RFC grant program provides grants to
help states provide subgrants to local government to acquire properties and either demolish or
relocate the structure, or elevate or otherwise floodproof the structure. Congress has appropriated
$10 million annually to the RFC grant program since 2006. Going forward, a policy challenge
will be to find a way to mitigate RLP given that FEMA cannot directly compel property owners in
flood hazard areas to mitigate losses or impose actuarial rates on RLP.
Mandatory Flood Insurance Purchase Requirement
FEMA lacks nationwide data on the number of properties in floodplains: it is therefore difficult to
make an accurate assessment of NFIP market penetration. However, estimates of penetration rates
in the 100-year floodplain are arguably consistently low. A 2006 Rand Corporation study
estimated that about 49% of properties in SFHAs purchased NFIP flood insurance, and 1% of
properties outside SFHAs purchased insurance.25 Concerns have also been expressed about the
large number of homes that are not mortgaged and thus are not required to be insured against
flood risks. The low participation rates in flood-prone areas may be of concern to Congress.

25 Rand Institute for Civil Justice, “The National Flood Insurance Program’s Market Penetration Rate: Estimates and
Policy Implications,” at http://www.rand.org/pubs/technical_reports/2006/RAND_TR300.pdf.
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The intent and success of the NFIP rests on making insurance widely available and property
owners and renters purchasing coverage. Since 1973, federal regulations have required flood
insurance on all structures located in the 1% annual chance floodplain (100-year floodplain).
Also, since 1994, recipients of certain flood disaster assistance have been required to purchase
and hold flood insurance to protect against future flood losses, under penalty of receiving no
federal disaster aid in subsequent floods.26 Despite the existence of this mandatory flood
insurance purchase requirement, take-up rates for flood insurance have historically been low and
the federal government’s exposure to uninsured property losses from flooding remains
substantial. There are at least five possible explanations for the low market penetration for flood
insurance: (1) flood insurance is not seen as being worth the cost (i.e., a poor investment); (2) the
individual has misperceptions about low-probability risks and lacks information about the NFIP;27
(3) private insurance agents do not market NFIP policies; (4) lack of compliance with the
mandatory purchase requirement or failure to ensure that property owners maintain coverage for
the life of the loan; (5) many homeowners in risky areas either do not have a mortgage or have a
mortgage from an unregulated lender that is not subject to the mandatory purchase requirement.
Flood Hazard Mapping
FEMA is required by statute to identify and map the nation’s floodplain areas and to establish
flood-risk zones in such areas. FIRMs are used for setting flood insurance rates, regulating
floodplain development and communicating information about the 1%-annual-chance flood
hazard to those who live in floodplains. FIRMs also are used to determine whether property
owners are required by law to obtain flood insurance as a condition of obtaining mortgage loans
or other federally related financial assistance. Without accurate and updated flood hazard maps,
property owners and small businesses could underestimate their exposure to flood risks and make
poor financial decisions about protecting their properties (i.e., where to build and whether to
purchase flood insurance or take other measures to protect their properties).
A major challenge facing the NFIP is ensuring the accuracy of the nation’s inventory of FIRMS
and improving the mapping, communication, and management of flood-related data. Other flood
risk assessment and mapping issues that may be of concern to Congress include (1) the sudden
inclusion in a floodplain that can result from FEMA Map Modernization program; (2) large areas
that appear to be outside of SFHA that should actuarially be in the high-hazard area; (3) hazard
mitigation and local planning for capital investments behind suspect levees and below aging dams
so property owners will continue to be exempt from the mandatory purchase requirements;(4)
expiring Provisional Accredited levee agreements; and (5) certification/liability issues with levee-
like structures.28
When FEMA’s map modernization program began in 2003, nearly 70% of the nation’s 92,222
flood maps were more than 10 years old and many of these maps did not reflect the current flood
hazard risk or new estimation techniques. In many cases, water flow and drainage patterns have
changed due to surface erosion, land use and natural forces. The probability of inland and riverine

26 CRS Report RS22945, Flood Insurance Requirements for Stafford Act Assistance, by Edward C. Liu.
27 Howard C. Kunreuther, “The Changing Societal Consequences of Risks from Natural Hazards.” Annals of the
American Academy of Political and Social Science 1979, vol. 443, p. 104-116.
28 National Committee on Levee Safety, Recommendations for a National Levee Safety Program: A Report to Congress
from the National Committee on Levee Safety
, January 15, 2009, at http://www.iwr.usace.army.mil/ncls/docs/NCLS-
Recommendation-Report_012009_DRAFT.pdf.
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flooding in certain areas has changed along with these factors. Most experts agree that flood maps
with high-accuracy and high-resolution land surface elevation data would be helpful. The benefits
of accurate flood hazard maps include improved risk zone designations as well as insurance
premiums and building restrictions that reflect actual flood risks facing individuals and
businesses.
The Map Modernization program called for FEMA to produce a new nationwide Flood Insurance
Study (FIS) and the accompanying FIRMs.29 FEMA is now completing the update and conversion
to digital food hazard maps using new technologies such as Light Detection And Ranging
(LiDAR) and other remote sensing technologies within a geographic information system (GIS)
format to systematically update floodplain maps on a watershed scale.
Any community that currently participates in the NFIP, or is now identified as having flood
hazard prone areas in the FIS and on the new FIRMs, must officially adopt the county-wide FIS
and the accompanying FIRMs. Such official action is the most critical community action that
FEMA requires of all communities having flood hazard prone areas. Any participating
community failing to meet the FEMA map adoption deadline faces immediate suspension or
sanctions from the NFIP.
In October 2008, FEMA announced the discontinuation of the paper FIRMS, flood insurance
study (FIS) reports, and related flood hazard map products.30 Only digital map images and digital
geospatial flood hazard data will be distributed by FEMA and are equivalent to the paper maps
for official activities under the NFIP. The paper maps will still be available through the FEMA
Map Service Center. This change is expected to result in printing and distribution cost savings for
FEMA during the map modernization process by eliminating the need to generate large format
film negatives to support offset printing.31 FEMA has also announced its Risk Mapping,
Assessment, and Planning Strategy aims to follow-up to the Map Modernization initiative. The
new strategy aims to combine flood hazard mapping, risk assessment tools, and mitigation
planning into one seamless program.
Floodplain Management Regulations
FEMA is prohibited from providing flood insurance to property owners residing in communities
that do not participate in the NFIP.32 Local communities must adopt and enforce certain minimum
floodplain management ordinances as a condition of participation in the NFIP. FEMA estimates
that $1.2 billion in flood losses are avoided each year from community floodplain management
requirements. Efforts to guide construction and development away from high-risk areas through
community-based land use and zoning ordinances, however, have reportedly been subordinated to
building and elevation requirements that lead to further development of the floodplains, according
to the National Wildlife Federation.33 Even in hazard-prone floodways and coastal areas, building

29 For more information on FEMA’s Map Modernization, see FEMA Map Modernization: An Overview,
http://www.fema.gov/plan/prevent/fhm/mm_main.shtm.
30 U.S. Department of Homeland Security, Federal Emergency Management Agency,FEMA: Availability of Flood
Hazard Maps and Data,” Federal Register, vol. 73, no. 206, October 23, 2008, p. 63184.
31Ibid.
32 44 CFR 59.21.
33National Wildlife Federation, Heavy Rainfall and Increased Flooding Risk: Global Warming’s Wake-up Call for the
Central United States
, 2008, at http://www.nwf.org/extremeweather/pdfs/Heavy_Rainfall_and_Increased_Flooding-
(continued...)
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and rebuilding are allowed under NFIP standards, with the cost of insurance varying with
property elevation.
An important floodplain management issue for the 111th Congress is reconciling FEMA’s
implementation of its policy on federal assistance for recovery and hazard mitigation projects
located in coastal velocity zones—the so-called V zones on FIRMS—with that of other federal
departments and agencies charged with implementing Executive Order 11988.34 President Jimmy
Carter signed into law E.O. 11988 to require federal agencies to avoid direct and indirect support
of floodplain development by taking action “to reduce the risk of flood loss, to minimize the
impact of floods on human safety, health and welfare, and to restore and preserve the natural and
beneficial values served by floodplains in carrying out its responsibilities.”35
Although the regulatory guidelines for E.O. 11988 are clearly outlined in 44 CFR Part 9, there
have been inconsistencies and uncertainty in interpreting those guidelines to determine whether
officials are to support recovery and community development in V Zones. FEMA staff must (1)
determine eligibility and required elevation of all new construction in coastal high hazard areas
on the Gulf Coast; and (2) decide whether new structures or the costs of repair or replacement of
facilities in V Zones are eligible for FEMA funding. The decision to approve and obligate FEMA
recovery funds for public assistance projects located in V Zones is an essential element in the
reconstruction or redevelopment of coastal areas devastated by Hurricane Katrina.
Federal Multi-Peril Insurance Program
In the aftermath of Hurricanes Katrina and Rita, individuals and businesses in Louisiana,
Mississippi, and Alabama protested against what they claimed were inappropriate obstacles to the
payment of their property damage insurance claims. When insurance adjustors and damage
experts assessed the properties damaged by Hurricane Katrina, they were faced with the issue of
allocating damages between wind (a covered loss) and flood (an excluded loss). Post-Katrina
insurance claims litigation and the delays and economic uncertainty generated for consumers and
insurers raised concerns about post-event judicial interpretations of the scope of insurance
coverage. 36
One issue of contention that emerged from the wind vs. water claims dispute was the interest in
expanding the NFIP to allow policyholders to purchase optional wind coverage. In the 110th
Congress, the House passed H.R. 3121, the Flood Insurance Reform and Modernization Act, in
2007, that included an amendment offered by Representative Gene Taylor to expand the NFIP to
include wind damage insurance. When the Senate Banking Committee reported the Senate
companion bill, S. 2284, the legislation did not include the Taylor Amendment. No further action
occurred on either bill.

(...continued)
Wake-Up_Call_for_Central_U.S2.pdf.
34 U.S. Department of Homeland Security, Office of Inspector General, “FEMA Policy Related to Coastal Velocity
Zones,” OIG-09-71, May 27, 2009, at http://www.dhs.gov/xoig/assets/mgmtrpts/OIG_09-71_May09.pdf.
35 U.S. President Jimmy Carter, “Floodplain Management” Executive Order 11988, Federal Register, May 24, 1977, p.
26951, at http://www.fema.gov/plan/ehp/ehplaws/attachments-laws/eo11988.pdf.
36 For more information, see CRS Report RL33892, Post-Katrina Insurance Issues Surrounding Water Damage
Exclusions in Homeowners’ Insurance Policies
, by Rawle O. King.
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Proponents of adding the wind peril provision argue it is necessary to eliminate coverage disputes
when wind and flood both contribute to a loss. Optional wind coverage is also said to be needed
because of the difficulty that property owners have in obtaining affordable private wind coverage
in states along the Gulf and Atlantic coasts. Private insurers have dramatically increased
premiums and deductibles, reduced coverage or withdrawn altogether from these areas out of
concern about catastrophic risk exposure. In those areas, homeowners must instead purchase their
wind coverage from state pools, where the premiums can be prohibitively expensive.
Opponents of adding wind coverage to the NFIP believe that there is adequate wind coverage
capacity in every state through either the traditional private market or through the state residual
market program (e.g., wind pools). Some critics of the optional wind proposal would instead like
to see the development of federal programs to provide economic incentives to encourage the
adoption and enforcement of stronger building codes and other loss mitigation efforts. According
to these critics, expanding the NFIP to add wind coverage would dramatically increase the
exposure of the NFIP, losses to the federal government and the potential for huge taxpayer
subsidies. Concerns have also been expressed about the NFIP’s ability to determine actuarially
sound rates for the windstorm portion of this coverage and avoid wide-scale financial deficits in
the program following a catastrophic flood event. Even if actuarial rates are implemented they
may not produce sufficient premium income to bear program administration costs and losses in
the event of a catastrophic event.
The Government Accountability Office (GAO) issued a recent report that outlined some
difficulties that FEMA could face in implementing an optional wind coverage provision. Some of
the obstacles included (1) the concern about “adverse selection” or the likelihood that only those
property owners at highest risk would purchase coverage; (2) wind hazard prevention standards
that communities would have to adopt in order to receive coverage; (3) uncertainty about the
adoption of programs to accommodate wind coverage; (4) difficulties in establishing a new rate-
setting process; (5) enforcement of new building codes; and (6) administration and oversight of
the program.
A letter to President Barack Obama from a coalition of consumer, insurance and reinsurance
groups outlined a different approach to the insurance availability and conflict of interest concerns.
The coalition supports the creation of a bipartisan Commission on Natural Catastrophe Risk
Management and Insurance that consist of experts in areas such as insurance, reinsurance,
policyholder concerns, risk mitigation, public finance, flood hazard mapping, building standards,
emergency management and environmental issues.37 The Obama Administration has expressed
opposition to adding wind coverage to the NFIP based on the arguments that coverage was
available in the private sector and through state-sponsored wind pools.
Options for Managing and Financing Flood Risk
Despite investing significant resources in managing flood risk and minimizing future disaster
relief costs, the United States has not been able to curb the rising costs of flood damage. This was
the conclusion of the Gilbert F. White National Flood Policy Forum held in November 2007 at
George Washington University. The Forum brought together 92 diverse experts to consider the

37 Memorandum from Consumer Federation of American and other Organizations, National Catastrophe Policy
Legislation
, December 9, 2008, at http://smartnatcat.org/files/coalition_transition_memorandum.pdf.
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future of floodplain management under a “business-as-usual scenario” and under an alternative
scenario of aggressive action to address increasing flood risk in the Nation. The experts at the
forum concluded that (1) an unprecedented set of conditions (e.g., population growth and
migration, changes in climate, and degradation of water-based resources) now face the United
States that could increase flood losses more rapidly in the near future; and (2) existing programs
and policies at all levels are short-sighted, fragmented, focused on economic development at the
expense of sustainability and that future losses must be managed more pro-actively than in the
past.
What should the policy response be to the current financial and management challenges facing
the NFIP? There are five main policy options.
Reform and modernize the NFIP. Reform of the NFIP could include (1) a
gradual phase in of actuarial rates for non-residential properties, non-primary
residences and RLPs; (2) strengthening floodplain management regulations
designed to restrict development in high-risk areas, and require new construction
to be elevated three feet above the base flood elevation (BFE); (3) authorizing an
ongoing program to review, update, and maintain flood insurance program maps
and include 500-year floodplains and areas that are behind levees, downstream of
a dam, or in a coastal area that could see a major hurricane; (4) strengthening and
enforcing mandatory insurance purchase requirements; (5) forgiving the full debt
owed by the NFIP to the Treasury; (6) eliminating the current subsidy for older
structures and expand to include areas where a flood or storm surge is likely if a
weather event reaches catastrophic levels; (7) creating a catastrophe reserve fund
for extremely rare catastrophic loss years; and (8) encouraging private sector
incentives for participation.
Long-term flood insurance contracts (LTFI) coupled with mitigation loans
arguably would encourage investment in risk-reduction measures.38 The idea is
for private insurers to offer 5-, 10-, or 20-year flood insurance contracts
combined with long-term mitigation loans (e.g., for retrofitting, elevation, and
floodproofing of structures) tied to the mortgage. Mitigation loans would be
offered to help finance the high upfront costs associated with investing in
mitigation measures. The long-term flood insurance policies would have a
maturity that corresponds to the length of the mortgage on the property and the
policy would not terminate when the property owner sells the property.
The economic rationale for using LTFI to pre-fund disaster costs is that insurers,
generally, need guaranteed premiums for a long time period if rates are to be
based on expected losses. By lengthening the term of the property insurance
contract, and spreading the risk through a mandatory purchase requirement, LTFI
contracts could implicitly permit insurers to compensate for their present inability
to prepare adequately for rare and unpredictable flood events.
Shift flood insurance back into the private sector. FEMA has a responsibility
to examine the NFIP’s contingent liabilities and recommend ways to provide
financial stability to the federal flood insurance program. This activity is

38 See Carolyn Kouky and Howard Kunreuther, “Improving Flood Insurance and Flood Risk Management: Insights
from St. Louis, Missouri,” Resources for the Future, February 2009, at http://www.rff.org/rff/documents/rff-dp-09-
07.pdf.
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National Flood Insurance Program: Background, Challenges, and Financial Status

performed in conjunction with the program’s annual rate-setting process.
Recognizing the shortcomings of the current financing arrangement, two basic
alternatives have emerged: an all-hazard insurance approach and a federal-
insurance (reinsurance) framework that would enable private insurers to cover
more flood risks.
With the development of computer simulation catastrophe risk models and
remote sensing technologies, some private insurers have argued that flood
hazards are now insurable by private companies working in partnership with
government. Some economists have suggested that floods and other catastrophic
risks are now insurable because of insurer’s ability to transfer catastrophic risks
to the capital markets through securitization of the risk. In this context, FEMA
could require private insurers to “make available” private flood insurance
policies at actuarially determined prices in flood-prone areas with the federal
government providing federal reinsurance. FEMA could also open the NFIP to a
competitive bid contractor to have one firm take over the entire Write-Your-Own
program and the government reinsure the risk.
In 2000, FEMA undertook a study to explore alternative financing arrangements
to reduce the need for U.S. Treasury borrowing. FEMA was concerned about the
NFIP’s erratic cash flow and the potential for catastrophic losses within a short
period of time. The option that received the most attention was to create a
reinsurance vehicle to finance catastrophic losses. After review by the Office of
Management and Budget (OMB), this option was not adopted because it was
determined that the cost to borrow from the U.S. Treasury was lower.
Community Group Flood Insurance Policy. The local community purchases a
group policy from the NFIP on behalf of residents in a designated SFHA.
Policies are issued to all residents and paid either through property taxes or as a
utility payment. Professor Dwight Jaffee at Berkley and Howard Kunreuther at
the Wharton School are the leading advocates for the long-term flood insurance
contract proposal.39
Interstate Compacts for Flood Control and Management. In response to
recurring flooding on the Red River, Members of the 111th Congress may wish to
consider addressing the long-term flooding challenges facing residences along
the Red River Valley. One way to do this would be to create a Red River Valley
Interstate Compact Authority with the power to address water quality and
flooding issues in the Red River watershed. This could serve as a model for the
nation. Officials from North Dakota, South Dakota, and Minnesota envision this
entity as an efficient and cost-effective approach to handling the high cost of
maintaining dams and levees, land purchases for water retention, diversion of the
river, and reducing the time it takes to complete water management projects.
Before the request for an interstate compact is presented to Congress, the state
legislatures in North Dakota, South Dakota and Minnesota would need to
approve separate resolutions to set up the compact. The status quo is an ad hoc
approach with multiple states each responding to its own flood hazards and the
federal government providing post-disaster relief assistance.

39 Dwight Jaffee and Howard Kunreuther and E. Michael-Kerja, “Long-Term Insurance for Addressing Catastrophic
risk,” National Bureau of Economic Research Working Paper, August 2008.
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Legislative Action
At the conclusion of the 110th Congress, Senate Banking Committee Chairman Christopher Dodd
and House Financial Services Committee Chairman Barney Frank were working in conference to
resolve key differences in the House and Senate versions of flood insurance reform bills (H.R.
3121 and S. 2284). Some of the areas of change to the NFIP debated during the conference
included (1) ensuring long-term financial solvency of the National Flood Insurance Fund (i.e.,
whether to require the NFIP to establish a reserve fund, increase the limit on annual rate
increases, forgive the program’s outstanding Treasury debt, phase out subsidized premium for
some policyholders, and prohibit FEMA from subsidizing new ore previously unsubsidized
policies); (2) expanding mandatory coverage to more at-risk properties, including those beyond
flood control structures like levees and dams; (3) increasing the maximum coverage limits for all
classes of insurable property; (4) updating the nation’s flood hazard maps to include the 500-year
floodplain and areas that would be flooded if a dam or levee failed; (5) adding optional
windstorm coverage to the NFIP policy; and (6) strengthening mitigation of flood risk so
taxpayers can realize the NFIP’s promise of reducing taxpayer exposure in the future.
The 111th Congress has acted to ensure that basic NFIP authorities remain in force while the
debate on reform proposals continues. Since 2009, the NFIP has been extended by a series of
continuing resolutions attached to appropriations bills. The authority of FEMA to issue flood
insurance contracts, however, lapsed on March 28, 2010. Congress will likely consider
retroactively reauthorizing the NFIP when Members return from Easter recess on April 12, 1010.
Meanwhile, several flood insurance-related bills are currently before the 111th Congress.
Representative Taylor has introduced legislation (H.R. 1264) to add wind coverage to the NFIP.
Also, Representative Pallone has introduced H.R. 777 to suspend flood map changes until the
Administrator of FEMA submits a community outreach plan to Congress. H.R. 777 would also
create a tax credit for flood insurance premiums on property not previously in a mapped
floodplain but included on a new flood hazard map.
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Appendix. National Flood Insurance Program:
Repetitive Flood Loss Properties

Table A-1. Repetitive Flood Loss Properties in the National Flood
Insurance Program
(as of February 28, 2009; $ nominal)
State
Building
Contents
Total
Average
Name
Payments
Payments
Payments
Payment Losses Properties
Alabama $393,092,368.03
$79,103,294.37
$472,195,662.40
$35,296.43
13,378
4,746
Alaska 670,015.90
111,023.15
781,039.05
11,833.93
66
26
Arizona 6,416,295.62
1,301,575.04
7,717,870.66
13,708.47
563
245
Arkansas 14,589,085.43
6,300,487.87
20,889,573.30
15,270.16
1,368
492
California 149,890,383.20
36,748,972.80
186,639,356.00
21,015.58
8,881
3,247
Colorado 907,408.11
334,172.67
1,241,580.78
10,094.15
123
53
Connecticut 46,440,356.38
16,646,881.12
63,087,237.50
15,436.07
4,087
1,384
Delaware 21,147,972.41
12,319,920.72
33,467,893.13
35,794.54
935
345
District Columbia
581,743.34
16,919.85
598,663.19
20,643.56
29
12
Florida 1,027,255,883.88
273,673,719.91
1,300,929,603.79
32,092.40
40,537
16,061
Georgia 57,145,015.84
16,618,640.44
73,763,656.28
22,144.60
3,331
1,233
Guam 350,626.18
52,467.45
403,093.63
13,899.78
29
14
Hawai
9,493,533.40 2,199,862.67 11,693,396.07
24,669.61
474 170
Idaho 577,539.26
99,298.69
676,837.95
11,280.63
60
24
Illinois 97,910,660.14 23,307,974.88
121,218,635.02 11,716.47
10,346 3,440
Indiana 40,998,960.41
8,932,887.22
49,931,847.63
14,972.07
3,335
1,235
Iowa 39,851,921.99
8,898,364.76
48,750,286.75
21,131.46
2,307
907
Kansas 16,659,677.66
8,865,407.37
25,525,085.03
22,118.79
1,154
419
Kentucky 64,297,899.14
21,745,431.94
86,043,331.08
17,520.53
4,911
1,527
Louisiana 1,894,665,529.35
607,625,788.56
2,502,291,317.91
26,854.09
93,181
29,446
Maine
8,931,382.07 2,699,006.41 11,630,388.48
20,332.85
572 218
Maryland 38,362,365.25
14,378,881.58
52,741,246.83
26,397.02
1,998
851
Massachusetts 108,577,982.61 23,592,910.05 132,170,892.66
17,054.31
7,750 2,727
Michigan 11,138,124.96
4,672,158.33
15,810,283.29
10,347.04
1,528
596
Minnesota 18,346,566.93
3,042,146.81
21,388,713.74
15,299.51
1,398
573
Mississippi 418,196,518.64
124,798,955.97
542,995,474.61
32,686.94
16,612
5,842
Missouri 180,591,223.32
87,915,249.57
268,506,472.89
16,390.34
16,382
4,770
Montana 789,889.65
114,904.58
904,794.23
9,327.78
97
44
Nebraska 6,724,661.79
2,592,140.92
9,316,802.71
11,293.09
825
335
Nevada
6,955,145.75 3,436,879.89 10,392,025.64
59,383.00
175 76
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State
Building
Contents
Total
Average
Name
Payments
Payments
Payments
Payment
Losses Properties
New Hampshire
14,879,929.25
2,330,394.65
17,210,323.90
22,645.16
760
312
New Jersey
369,238,723.50
139,422,392.12
508,661,115.62
17,947.89
28,341
9,273
New
Mexico 1,101,361.25 49,475.85 1,150,837.10
13,228.01
87 38
New York
224,708,052.65
79,949,917.08
304,657,969.73
13,524.73
22,526
8,314
North Carolina
333,459,846.73
58,225,499.25
391,685,345.98
19,388.44
20,202
7,483
North
Dakota 10,321,744.29 1,518,550.88 11,840,295.17
23,492.65
504 224
Ohio 68,745,492.09
23,561,189.40
92,306,681.49
17,612.42
5,241
1,921
Oklahoma 42,380,779.14
13,113,203.88
55,493,983.02
19,024.33
2,917
908
Oregon 16,407,790.89
5,453,937.15
21,861,728.04
25,332.25
863
336
Pennsylvania 315,625,689.09
101,863,089.77
417,488,778.86
24,377.48
17,126
6,389
Puerto Rico
14,646,719.93
37,255,363.89
51,902,083.82
8,748.03
5,933
2,072
Rhode Island
10,400,456.25
8,187,606.70
18,588,062.95
29,089.30
639
213
South
Carolina 69,062,474.30 15,315,615.75 84,378,090.05
23,091.98
3,654 1,459
South Dakota
2,307,168.13
399,432.09
2,706,600.22
15,205.62
178
83
Tennessee 21,169,718.05
9,375,910.38
30,545,628.43
14,069.84
2,171
753
Texas 1,175,308,859.37
425,712,661.54
1,601,021,520.91
26,408.17
60,626
19,496
Utah 895,525.28
202,236.88
1,097,762.16
18,296.04
60
24
Vermont 1,491,997.34
537,561.24
2,029,558.58
13,530.39
150
64
Virgin Islands
11,595,843.24
18,351,300.44
29,947,143.68
46,357.81
646
246
Virginia 135,343,012.55
38,198,691.25
173,541,703.80
22,415.62
7,742
2,965
Washington 65,556,993.36
13,420,570.92
78,977,564.28
24,211.39
3,262
1,136
West
Virginia 82,966,263.98 36,112,490.50 119,078,754.48
16,529.53
7,204 2,806
Wisconsin 16,681,900.28
4,174,490.83
20,856,391.11
16,080.49
1,297
565
Wyoming 206,266.45
31,034.15
237,300.60
10,786.39
22
9
Total
$7,686,059,344.03 $2,424,908,942.18 $10,110,968,286.21 $23,591.62 428,583 148,148
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.

Author Contact Information

Rawle O. King

Analyst in Financial Economics and Risk
Assessment
rking@crs.loc.gov, 7-5975


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