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

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

National Flood Insurance Program:
Background, Challenges, and Financial Status
Rawle O. King
Specialist in Financial Economics and Risk Assessment
June 12, 2012
Congressional Research Service
7-5700
www.crs.gov
R40650
CRS Report for Congress
Pr
epared for Members and Committees of Congress

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

Summary
Flooding is the most common and costly natural disaster in the United States. In 1968, Congress
established the National Flood Insurance Program (NFIP) to address the nation’s flood hazard
exposure and challenges inherent in financing and managing flood risks in the private sector. The
program has played a central role in U.S. flood risk management policy—that is, the prevention
and recovery from flooding disasters. Under the NFIP, the federal government (1) identifies areas
of flood risk; (2) encourages communities to implement measures to mitigate against the risk of
flood loss; and (3) provides financial assistance, through contracts of insurance, to help
individuals and small businesses recover rapidly from flood disasters.
Until 1986, the NFIP was financially self-supporting from policy premium revenue and fees that
covered all expenses and claim payments. However, because of its below-market insurance rates
and catastrophic hurricane-related floods in recent years, the NFIP has accrued a substantial debt
that as of September 30, 2011, stands at $17.75 billion. Under current law, the funds borrowed
from the U.S. Treasury must be repaid with interest. Because the NFIP cannot charge risk-based
premiums for all of its policies, hold loss reserve funds to offset unusually catastrophic losses, or
purchase reinsurance, the program faces a constant risk of financial insolvency. The NFIP
currently covers approximately 5.6 million households and businesses across the country for a
total of $1.25 trillion in exposure.
In response to congressional debate surrounding the reform and reauthorization of the NFIP and
intense hurricane-related floods in recent years, the Federal Emergency Management Agency
(FEMA) has led various efforts to identify areas for improvement within the NFIP. For example,
in 2010, FEMA established the NFIP Reform Working Group to undertake a multi-stage
comprehensive review and analysis of policy options for reforming the NFIP. Reform proposals
have been driven by policy concerns about the program’s actuarial soundness and the cost of
flooding, compliance with NFIP floodplain management requirements, building standards and
identifying flood risk, insurance policy sales and mandatory purchase requirements, and
environmental and development impacts of the NFIP. FEMA’s effort to rethink the NFIP has
resulted in a comprehensive series of policy recommendations designed to transition the NFIP
toward a more resilient, sustainable, and comprehensive approach to flood risk management.
The NFIP is currently at a regulatory crossroads, facing several trade-offs among four key public
policy goals: charging premium rates that reflect risks, limiting ad hoc federal spending on
disaster relief assistance, encouraging broad participation in the program, and encouraging private
markets to provide flood insurance. On May 17, 2012, the House passed H.R. 5740, the National
Flood Insurance Program Extension Act, to reauthorize the NFIP for 30 days and require FEMA
and the Government Accountability Office (GAO) to study privatizing a portion of the nation’s
flood risk and creating community-based flood insurance policies. On May 24, 2012, the Senate
passed H.R. 5740 after substituting language that would extend the program for 60 days, through
July 31, 2012, and require insurance premiums for second homes covered under the NFIP to rise
to actuarial levels. The House agreed to the Senate amendment on May 30, 2012, and the
President signed H.R. 5740 on May 31, 2012. The Senate may consider S. 1940, a bill to amend
the National Flood Insurance Act of 1968, to restore the financial solvency of the flood insurance
fund, and for other purposes, before the end of July 2012. S. 1940 has many provisions similar to
H.R. 1309, the Flood Insurance Reform Act of 2011, which the House passed on July 12, 2011.
FEMA reportedly supports a two-year reauthorization.
Congressional Research Service

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

Contents
Recent Developments ...................................................................................................................... 1
A Nation Exposed to Flood Risks.................................................................................................... 4
Economic Regulation and Recovery from Flood Hazards............................................................... 6
Evolution of the National Flood Insurance Program ....................................................................... 7
Lessons from Katrina and the 2008 Midwest Floods ................................................................ 9
Identification and Mapping of Flood Hazard Areas: Accuracy of Maps................................. 11
Financial Status.............................................................................................................................. 13
NFIP Treasury Borrowing ....................................................................................................... 15
Factors Affecting Financial Solvency...................................................................................... 17
Flood Insurance Premium Discounts ................................................................................ 17
Repetitive Flood Loss Properties ...................................................................................... 18
Mandatory Flood Insurance Purchase Requirement.......................................................... 20
Flood Hazard Mapping...................................................................................................... 20
Floodplain Management Regulations................................................................................ 22
Federal Multi-Peril Insurance Program............................................................................. 23
Reauthorization of the NFIP.................................................................................................... 24
Options for Managing and Financing Flood Risk.......................................................................... 24

Figures
Figure 1. Difference Between Total Premiums Written and Total Payments Made to
Policyholders Under the National Flood Insurance Program: 1978-2011.................................. 15

Tables
Table 1. Top 15 Significant Flood Events Covered by
the National Flood Insurance Program ......................................................................................... 5
Table 2. FEMA Flood Mapping Program Funding Levels: FY2011- FY2013.............................. 13
Table 3. NFIP Program Statistics................................................................................................... 14
Table 4. History of U.S. Treasury Borrowing Under
the National Flood Insurance Program ....................................................................................... 16
Table 5. Total Repetitive Flood Loss Properties in the NFIP: 1978–2011..................................... 19
Table A-1. Repetitive Flood Loss Properties in the National Flood Insurance Program............... 27

Appendixes
Appendix A. National Flood Insurance Program: Repetitive Flood Loss Properties .................... 27
Appendix B. Chronology of Public Laws That Reauthorized the National Flood Insurance
Program ...................................................................................................................................... 29
Congressional Research Service

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

Contacts
Author Contact Information........................................................................................................... 30

Congressional Research Service

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

he United States is a geographically diverse nation that is exposed to hydro-meteorological
(weather, climate, and water-related) hazards that each year cause widespread physical and
T economic damages and threaten human life and fragile ecosystems. In 1968 Congress
created the National Flood Insurance Program (NFIP) as a federal program for property owners in
participating communities. The policy objectives of the NFIP were to (1) identify and map the
nation’s regulated floodplains to make the public aware of flood hazards; (2) address the
escalating cost of federal disaster assistance for flood damaged buildings and their contents;
(3) allow property owners within communities that adopted and enforced a Federal Emergency
Management Agency (FEMA) approved floodplain management ordinance to purchase insurance
as a protection against flood losses; and (4) guide development and building practices to save
lives and reduce future property damage.1
The NFIP is at a crossroads. In almost every year since its inception, the NFIP has earned
sufficient premium revenue to pay flood losses incurred by policyholders. In catastrophic loss
years, the NFIP borrowed from the U.S. Treasury to meet revenue shortfalls. Because of
extraordinary losses incurred following the hurricanes in 2005, the program carries a debt of
$17.75 billion as of September 30, 2011. As it currently stands, there is a widespread consensus
that the NFIP faces financial, structural, and managerial challenges and may require significant
reforms to continue providing flood protection to homeowners and businesses.
This report provides an analysis of the NFIP and its financial status. It summarizes major
challenges facing the program, such as long-term financial solvency due to premium rates that do
not fully reflect risk. Other challenges include new flood maps that do not always accurately
communicate flood risk and effective design of flood mitigation programs to decrease flood risk
and better protect homes, businesses, and communities. The report also presents some alternative
approaches for managing and financing the flood losses, including allowing private markets to
provide flood insurance, and describes pending major flood insurance reform legislation.
Recent Developments
Flooding is an annual occurrence as snow melts and spring rains fill North America’s major rivers
and tributaries. In 2011, states along the lower Mississippi River and the upper Midwest adjacent
to the Missouri River suffered massive flooding not seen since the 1930s. Additional devastating
floods and storm surges are anticipated in the years to come, which raises a larger public policy
challenge for Congress because the U.S. government requires that homes located in high flood-
hazard areas purchase insurance as a condition for a federally backed mortgage. After major
floods in 1993, 2005, 2008, 2010, and 2011, it became apparent that many people who live in
high-risk areas and suffered flood damages either had not purchased flood insurance or had
allowed their insurance policies to lapse due to nonpayment. This resulted in significant
uninsured flood losses and increased emergency spending on federal disaster assistance for flood
victims.
FEMA’s efforts to remap the nation’s floodplains to more fully incorporate residual flood risk
behind levees has generated widespread criticism from property owners and local officials who
want to delay or avoid the issuance of new or revised flood maps, in many cases making it easier
to ignore flood risk. Residents and businesses in areas remapped into Special Flood Hazard Areas

1 FEMA administers the NFIP established by 42 USC §4001 et seq.
Congressional Research Service
1

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

(SFHA) face affordability issues given that many citizens with federally insured mortgages will
now be required to purchase flood damage protection. Citizens, local officials, and policymakers
have expressed concerns about FEMA’s recent decision (in the context of a nationwide Flood
Insurance Study) to de-accredit many levees because they no longer provide adequate protection
against the 100-year flood.
The NFIP is at a crossroads in the aftermath of intense hurricane-related floods in recent years
and perceptions of a nation facing increasing flood risk vulnerability. After more than 42 years, a
consensus has yet to emerge among disaster policy experts and policymakers as to whether a
program of mandatory federal flood insurance linked to government-issued flood hazard maps
and voluntary community-based floodplain management ordinances is financially feasible and the
most effective way to manage flood risk.2
Concerns have been expressed recently about the distribution of the NFIP’s costs and benefits
across income groups and geographic regions. Critics argue that the costs—financial risk and
ecological damage—are widely distributed to taxpayers across the country and the benefits, by
contrast, are enjoyed largely by wealthy counties and by a significant number of owners of
vacation homes.3 On the other hand, FEMA representatives argue that the program has succeeded
in many ways but remains financially vulnerable and would benefit from structural reforms.
According to FEMA, the costs associated with flood damage are reduced by nearly $1.7 billion a
year through community floodplain management and property owners purchasing flood
insurance.4 FEMA also reports that buildings constructed in compliance with NFIP building
standards suffer approximately 80% less damage annually than those not built to NFIP standards.5
The program expires on July 31, 2012, unless Congress acts to reauthorize it. Legislation to
reform and reauthorize the NFIP failed to pass in the 111th Congress, leaving the program with a
series of temporary lapses and short-term reauthorizations that, some say, has had a negative
impact on the confidence in the program among stakeholders, including state and local
governments, individual policyholders, mortgage lenders, and the private insurance industry.
Since the devastation caused by Hurricanes Katrina, Rita, and Wilma in 2005 and Ike in 2008,
Congress has sought to
• reform and strengthen the long-term viability of the NFIP with reforms that
included efforts to increase participation in the program,
• remap the floodplains to encourage communities and citizens to understand their
risks from flooding and mitigate against future flood damage, and
• charge premiums for repetitively damaged structures according to their “full risk”
premium.

2 The Role of the National Flood Insurance Program in Reducing Losses and Promoting Wise Use of Floodplains,
Howard C. Kunreuther and Gilbert F. White, at http://www.ucowr.org/updates/pdf/V95_A6.pdf.
3 See “Flooding the Market: The Distributional Consequences of the NFIP,” New York University School of Law,
Institute for Policy Integrity, J. Scott Holladay and Jason A. Schwartz, April 2010, at http://policyintegrity.org/
documents/Floodingthemarket.pdf.
4 Department of Homeland Security: Federal Emergency Management Agency, “National Flood Insurance Fund: Fiscal
Year 2013,Congressional Justification,” at http://www.fema.gov/pdf/about/budget/
11h_fema_nfi_fund_dhs_fy13_cj.pdf.
5 Ibid.
Congressional Research Service
2

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

The current authorization status of the NFIP in the 112th Congress, therefore, could be viewed
within the larger context of efforts to reform and modernize the NFIP, particularly with respect to
new flood maps, accreditation status of levees, and affordability of flood insurance. In 2011, some
insurance and reinsurance industry representatives and trade groups called for the privatization of
some portion of the nation’s flood risks and the development of community-based flood insurance
contracts. More broadly, there is emerging support for policy recommendations designed to
transition the NFIP toward a more resilient, sustainable, and comprehensive approach to flood
risk management.
Although FEMA is now able to issue new policies, renew policies, increase coverage amounts,
and pay claims, concerns about the possibility of yet another lapse in authority after July 31,
2012, could increase uncertainty and lessen buy-in among lenders, borrowers, and policyholders.
FEMA is asking Congress to enact a two-year reauthorization.
A lapse in NFIP authority after July 31, 2012, could be of concern to policymakers and
stakeholder groups for several reasons. First, access to a stable supply of flood insurance affects
the recovery of the U.S. housing market, as it affects the overall safety and soundness of
collateral backing the banking industry’s loan portfolios. Second, access to flood insurance
remains critical to the government’s mandatory flood insurance purchase requirement given that
homebuyers need to purchase flood insurance as a condition for obtaining mortgage financing
from federally regulated lenders on loans that are or will be secured by property located in SFHA.
Third, federal flood insurance ensures that appropriate claims are paid for the more than 5.6
million existing NFIP policyholders who depend on the NFIP for financial protection against
flooding.
On July 29, 2010, President Barack Obama signed into law H.R. 4899, the Supplemental
Appropriations Act of 2010,6 which requires FEMA and the U.S. Army Corps of Engineers
(USACE) to respond to disagreements expressed by communities about flood-control
infrastructure protection and flood risk mapping. FEMA was directed to create an interagency
task force that included USACE and the Office of Management and Budget (OMB) to track,
address, and where possible, resolve concerns stemming from FEMA mapping efforts in
communities. The task force has produced quarterly reports to the Committee on Appropriations
and other congressional committees of jurisdiction.
The 111th Congress ended without a reform bill being enacted into law. The key regulatory reform
issues debated in the 111th Congress that have carried over into the 112th Congress include
• concerns about long-term financial solvency of the National Flood Insurance
Fund, which may include requiring the NFIP to create a reserve fund;
• forgiving the U.S. Treasury debt;
• phasing in actuarial rates for non-residential, non-primary residences and
repetitive loss properties; and
• deciding whether to expand mandatory purchase requirements to other areas,
such as the 500-year floodplains.

6 P.L. 111-212; 124 Stat. 2303.
Congressional Research Service
3

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

Most disaster experts agree that (1) reform of the NFIP is needed because the program is
currently over $17 billion in debt and the nation is facing increasing flood risk vulnerabilities and
(2) there is uncertainty about whether reauthorization of NFIP without reforms will result in a
flood-risk management program capable of adequately protecting the public and reducing future
flood damages.
On July 12, 2011, the House of Representatives adopted H.R. 1309, the Flood Insurance Reform
Act of 2011, by a vote of 406 to 22. The bill would reauthorize the NFIP for five years, strengthen
the financial integrity and stability of the program, and increase the role of private markets in the
management of flood insurance risk. Specifically, H.R. 1309 would phase out premium subsidies
that have undermined the financial stability of the program; ensure FEMA flood maps are updated
and accurate so that people understand and can better prepare for their risk; streamline and
strengthen mitigation programs to help reduce flood risk and better protect flood-exposed
communities, homes, and businesses; and study ways to increase the role of private markets in the
management of flood insurance risk. On September 8, 2011, the Senate Committee on Banking,
Housing, and Urban Affairs adopted S. 1940, the Flood Insurance Reform and Modernization Act
of 2011, a bill to amend the National Flood Insurance Act of 1968, to restore the financial
solvency of the flood insurance fund, and for other purposes. S. 1940 has many provisions similar
to H.R. 1309.
On May 17, 2012, the House passed H.R. 5740, the National Flood Insurance Program Extension
Act, to reauthorize the NFIP for 30 days and require FEMA and Government Accountability
Office (GAO) to study privatizing a portion of the nation’s flood risk and create community-
based flood insurance policies. On May 24, 2012, the Senate passed H.R. 5740 after substituting
language that would extend the program for 60 days, through July 31, 2012, and require insurance
premiums for second homes covered under the NFIP to rise to actuarial levels. The House agreed
to the Senate amendment on May 30, 2012, and the President signed H.R. 5740, now P.L. 112-
123, on May 31, 2012. The Senate may consider S. 1940 before the end of July 2012. FEMA,
reportedly supports a two-year reauthorization.
A Nation Exposed to Flood Risks
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
policymakers because more than half of the U.S. population now lives 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

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,
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.
Congressional Research Service
4

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

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 15 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 800 deaths.10 The 2005 hurricanes
strengthened arguments that there may be a trend increase in the cost of floods and the frequency
of major flood disasters.
Table 1. Top 15 Significant Flood Events Covered by
the National Flood Insurance Program
(1978–March 31, 2012; $ nominal)
Number of
Average
Rank Event
Date
Paid Losses
Amount Paid
Paid Loss
1
Hurricane Katrina
Aug. 2005
167,856
$16,247,530,180
$96,950
2
Hurricane Ike
Sept. 2008
46,219
2,629,409,589
56,890
3
Hurricane Ivan
Sept. 2004
27,637
1,586,783,563
57,390
4
Tropical Storm Allison
June 2001
30,663
1,103,877,235
36,000
5
Louisiana Flood
May 1995
31,343
585,071,593
18,667
6
Hurricane Isabel
Sept. 2003
19,866
493,376,315
24,835
7
Hurricane Rita
Sept. 2005
9,513
472,268,681
49,645
8
Hurricane Floyd
Sept. 1999
20,438
462,281,156
22,619
9
Hurricane Opal
Oct. 1995
10,343
405,527,543
39,208
10
Hurricane Hugo
Sept. 1989
12,840
376,433,739
29,317
11
Hurricane Wilma
Oct. 2005
9,615
365,061,170
37,968
12 Nor’Easter
Dec.
1992
25,142
346,150,356
13,768
13 Midwest
Flood
June
1993
10,472
272,819,515
26,052
14
PA, NJ, NY Floods
June 2006
6,410
228,414,752
35,579
15 Nor’Easter
Apr.
2007
8,637
225,708,711
26,133
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.
The U.S. government has at times regulated 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

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.
10 24/7QuoteUS.com, 67 Worst Natural Disaster: The Last 103 Years, April 27, 2009, located at
http://www.247quoteus.com/general/67-worst-natural-disasters.
Congressional Research Service
5

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

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.
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.11
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
insolvency would not occur?
These were just a few of the key policy questions the nation faced on September 9, 1965, when
Hurricane Betsy, a Category 3 hurricane—the first natural disaster to generate over a billion
dollars in damages—hit the Louisiana coast, causing Lake Pontchartrain to spill its banks and
result in widespread flooding. There was no flood insurance because private insurers were
unwilling at the time to offer protection to offset flood losses. In response, Congress created the
NFIP in 1968 as a quid pro quo program that would regulate the nation’s floodplains with land

11 James Anderson, “Economic Regulation,” Encyclopedia of Policy Studies, Stuart S. Nagel, ed. (New York: Dekker
Publishers), 1994, p. 404.
Congressional Research Service
6

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

use controls and building requirements that communities located in SFHA must adopt and enforce
for property owners to be eligible for insurance under the program.
In general, 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 arguably 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 multi-peril 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.
Congressional Research Service
7

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

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.12 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.13
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 197314 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.

12 Dan R. Anderson, The National Flood Insurance Program: Problem and Potential, The Journal of Risk and
Insurance, 1974, vol.16 (4), p. 579-599.
13 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.
14 P.L. 93-234, 87 Stat 975.
Congressional Research Service
8

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

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.15 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 200416 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 112th 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 was covered under the
NFIP. The massive flood losses from Hurricanes Katrina and Rita financially overwhelmed the
NFIP. They 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 (3) the

15 P.L. 103-325, 108 Stat. 2255.
16 P.L. 108-264, 118 Stat. 712.
Congressional Research Service
9

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

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 112th Congress during policy deliberations on the reform and
reauthorization of the NFIP.
• Program Participation to Reduce Uninsured Losses. Many 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.17 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.

17 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.
Congressional Research Service
10

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

• 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.
Identification and Mapping of Flood Hazard Areas:
Accuracy of Maps
Under the NFIP, FEMA identifies and maps flood prone areas eligible to participate in the
program and makes flood hazard information available to all parties at a reasonable cost.18 FEMA
works with communities to develop new flood hazard data or revise existing data as part of a
flood insurance study, issues public notification about maps, and engages in education and
outreach to help ensure that community leaders and residents understand the mapping process and
the appropriate use of maps.

18 NFIP maps are available through FEMA’s Map Service Center, which is located at http://msc.fema.gov.
Congressional Research Service
11

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

Reliable flood risk data and the methodology for updating flood maps and educating residents
about flood risk contribute to mitigating future flood losses and promote the fiscal soundness of
the NFIP. However, FEMA has been criticized by community officials and property owners with
respect to flood-control infrastructure protection and its flood risk mapping process. Mapping
flood hazards requires accurate data collection and the latest engineering and flood modeling
digital mapping technologies to make sure that the maps reflect the highest quality of information
available to local communities and to FEMA.
Flood maps typically become outdated and inaccurate when they fail to reflect development or
natural changes in the environment.19 For example, the construction of roads and buildings create
impermeable surfaces that reduce the natural environment’s ability to absorb or delay water flows
and changes in drainage patterns—a situation that could increase flood risk in the affected area. In
addition, flood maps might not adequately consider coastal flood hazards such as cumulative
shoreline erosion or the loss of wetland, which serves as a natural buffer to storm surge and
reduces downstream flooding in inland areas. Flood maps must regularly be updated to reflect
these changes.
FEMA performs engineering studies as part of Flood Insurance Studies (FIS) to identify a
community’s flood risk (i.e., probability of flooding in a particular geographic area) and the
delineation of special flood hazard areas.20 The flood hazard assessment and mapping begins with
modeling of rainfall and storm tide records for the local areas. The data is then simulated to
determine the likely discharge that could result from storms of various probabilities. This
discharge data is applied to a cross section of the floodplain to estimate flood depths at various
locations. Once FEMA determines the flood depths in various areas on the flood map, the next
step is to calculate the depth of flooding for buildings in an area and calculate the dollar damages
using a vulnerability function (state-damage curve) derived from past flood events.21 The flood
elevation of the first floor of the structure relative to the flood depth on the floodplain determines
property-specific flood risk data to guide construction and insurance decisions.
FEMA used this flood hazard data to create Flood Insurance Rate Maps (FIRMs) that delineate
areas, known as SFHA, determined to have a 1% chance of flood in any given year (the “100-
year floodplain”). The 1%-annual-chance flood is a flood insurance standard, not a public safety
standard.
In 2003, FEMA began the Flood Map Modernization (“Map Mod”) program to update the
nation’s inventory of FIRMs to digital FIRMs (DFIRMs) for areas of the United States with the
greatest flood risk. Map Modernization provided updated DFIRMs for more than 92% of the U.S.
population. Table 2 shows recent funding levels for FEMA’s flood mapping program.

19 Before FEMA began its map modernization programs, many Flood Insurance Risk Maps (FIRMs) were 20-25 years
old and did not accurately reflect residual risk behind or below flood control structures, giving residents living behind
them a false sense of security.
20 Special Flood Hazard Areas are defined as Zones A, AO, A1-A30, AE, AR, AR/AO, AR/A1-A30, AR/AE, AR./AH,
Ar/A99, A99, AH, VO, V1-V30, VE, and V. These zones are highly susceptible to flooding. V-lettered zones are also
subject to wave action. Older maps use Zones B and C to represent areas of moderate and low flood risk. Newer maps
have replaced these designations with Zone X (shaded) and Zone X (unshaded), respectively.
21 A stage-damage curve is an estimate of damages as a percentage of value based on the depth of flooding experience.
Congressional Research Service
12

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

Table 2. FEMA Flood Mapping Program Funding Levels: FY2011- FY2013
($ in thousands)
Program
FY2011(Enacted)
FY2012 (Enacted)
FY2013 Pres. Budget
Flood Hazard Mapping & Risk
$204,131 $97,712 $89,329
Analysis, Risk Map
National Flood Insurance Fund,
$113,509 $117,706 $116,000
FIF, Flood Studies & Surveys
Total $317,640
$215,418
$205,329
Source: U.S. Department of Homeland Security, FEMA’s Office of Legislative Affairs.
According to FEMA, Map Mod successfully developed and delivered a new digital platform that
has enabled FEMA to make flood hazard data more widely available while providing
opportunities to focus on enhancing data accuracy and resolution issues. Other technologies are
also providing opportunities to focus efforts on raising risk awareness and building a risk
management framework to achieve sustainable actions to reduce and better manage flood risks
going forward.
In 2009, FEMA’s Map Mod program became the Risk Mapping, Assessment, and Planning (Risk
MAP) program that builds on flood hazard data and maps produced during the Map Mod
program.22 Risk MAP is an integrated flood risk management approach that weaves NFIP flood
hazard data into watershed-based risk assessments that serve as the basis for local hazard
mitigation plans and support community actions to reduce risk.
As Risk MAP has built upon this platform, FEMA has initiated projects for 37% of the U.S.
population through FY2011 and anticipates increasing that number to 43% by the end of FY2012.
Further, FEMA has provided to communities New, Validated or Updated Engineering (NVUE)
data for 54% of the miles mapped in the NFIP flood hazard inventory. By the end of FY2012,
FEMA will have initiated studies to cover approximately 61% of the inventory. In addition, in
FY2013, FEMA will continue the effort started in 2009 to update the nation’s coastal flood hazard
studies. The FY2013 investment will address the remaining coastal flood hazard data needs,
representing approximately 3,100 miles of open coast.
Financial Status
This section examines the current financial status of the program and borrowing from the
U.S. Treasury.
Table 3 shows that the NFIP currently has more than 5.6 million policies in force nationwide
covering approximately $1.2 trillion in property in almost 20,000 participating communities.
Policyholders paid $3.35 billion in premiums in 2011. The NFIP experienced six catastrophic loss
years—defined as payouts of $1 billion losses or more—in its 44-year history that severely tested
the financial resiliency of the program. These years include 1995, 2001, 2004, 2005, 2008, and
2011.

22 Federal Emergency Management Agency, “Risk MAP 2010-2014 Multi-Year Plan,” at http://www.fema.gov/library/
viewRecord.do?id=3587.
Congressional Research Service
13

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

Table 3. NFIP Program Statistics
(as of December 31, 2011; $ nominal)
Number of
Total Payments
Calendar
Policies in
Total Written
Total Face Value Total Number
Made to
Year
Force
Premium
of Coverage
of Claims Paid
Policyholders
1972-1977 NA
NA
NA
4,441 $18,035,658
1978 1,446,354
$111,250,585
$50,500,956,000
29,122
$147,719,253
1979 1,843,441
$141,535,832
$74,375,240,000
70,613
$483,281,219
1980 2,103,851
$159,009,583
$99,259,942,000
41,918
$230,414,295
1981 1,915,065
$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
$126,384,695
1987 2,115,183
$566,391,536
$165,053,402,000
13,400
$105,432,378
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
36,245
$661,658,285
1990 2,477,861
$672,791,834
$213,588,265,000
14,766
$167,896,816
1991 2,532,713
$737,078,033
$223,098,548,000
28,549
$353,681,702
1992 2,623,406
$800,973,357
$236,844,980,000
44,650
$710,225,154
1993 2,828,558
$890,425,274
$267,870,761,000
36,044
$659,059,461
1994 3,040,198
$1,003,850,875
$295,935,328,000
21,583
$411,075,128
1995 3,476,829
$1,140,808,119
$349,137,768,000
62,441
$1,295,578,117
1996 3,693,076
$1,275,176,752
$400,681,650,000
52,677
$828,036,508
1997 4,102,416
$1,509,787,517
$462,606,433,000
30,338
$519,537,378
1998 4,235,138
$1,668,246,681
$497,621,083,000
57,348
$886,327,133
1999 4,329,985
$1,719,652,696
$534,117,781,000
47,247
$754,970,800
2000 4,369,087
$1,723,824,570
$567,568,653,000
16,362
$251,720,536
2001 4,458,470
$1,740,331,079
$611,918,920,000
43,589
$1,277,002,489
2002 4,519,799
$1,802,277,937
$653,776,126,000
25,312
$433,644,094
2003 4,565,491
$1,897,687,479
$691,786,140,000
36,838
$780,492,440
2004 4,667,446
$2,040,828,486
$765,205,681,000
55,825
$2,232,042,331
2005 4,962,011
$2,241,264,140
$876,679,658,000
212,778
$17,713,105,660
2006 5,514,895
$2,604,844,133
$1,054,087,148,000
24,592
$640,623,771
2007 5,655,919
$2,843,422,049
$1,141,242,230,000
23,129
$612,351,594
2008 5,684,275
$3,066,729,200
$1,197,659,846,000
74,266
$3,450,249,017
2009 5,704,198
$3,202,267,224
$1,233,005,263,000
30,821
$772,390,723
2010 5,559,313
$3,348,222,091
$1,227,932,424,400
27,165
$708,992,043
2011 5,585,797
$3,477,338,993
$1,264,043,634,800
65,315
$1,847,881,892
Source: U.S. Department of Homeland Security, FEMA’s Office of Legislative Affairs.
Congressional Research Service
14

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

Figure 1 shows that over the period from 1978 to 2011, the NFIP experienced nine loss years
where flood loss payments exceeded premiums written.23 The 2005 hurricane season was a
watershed event in the history of the program. Hurricanes Katrina- and Rita-related losses in 2005
easily dwarf all previous loss years. The flood-related losses from the 2005 and 2008 hurricane
seasons resulted in substantial NFIP borrowing from the U.S. Treasury that resulted in the current
$17.75 billion in cumulative debt. (See Table 4.)
Figure 1. Difference Between Total Premiums Written and Total Payments Made to
Policyholders Under the National Flood Insurance Program: 1978-2011
($ nominal)
$4,000,000,000
$2,000,000,000
$0
-$2,000,000,000
-$4,000,000,000
-$6,000,000,000
-$8,000,000,000
-$10,000,000,000
-$12,000,000,000
-$14,000,000,000
-$16,000,000,000
-$18,000,000,000
8
80
2
4
86
8
90
2
94
6
8
0
2
04
6
08
0
197
19
198
198
19
198
19
199
19
199
199
200
200
20
200
20
201

Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.
NFIP Treasury Borrowing
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 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 2007-2009 period to pay claims from Hurricane Ike and the
Midwest floods of 2008.

23 These unusual flood loss years were 1978, 1979, 1980, 1983, 1989, 1995, 2004, 2005, and 2008.
Congressional Research Service
15

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

Table 4 shows the history of U.S. Treasury borrowing and repayments under the NFIP from 1981
to 2011. 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 $19.64 billion, which includes amounts to pay claims
from Hurricane Ike and the 2008 Midwest floods. It appears unlikely that the $17.75 billion in
debt to the U.S. Treasury, as of September 30, 2011, will be repaid within the next 10 years given
annual interest payments of about $1 billion and annual premium income of approximately $3.5
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 4. History of U.S. Treasury Borrowing Under
the National Flood Insurance Program
(as of September 30, 2011; $ nominal)
Fiscal Year
Amount Borrowed
Amount Repaid
Cumulative Debt
Prior to 1981a
$917,406,008 $0
$917,406,008
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
1984b
$200,000,000 $36,879,123 $213,120,877
1985 $0
$213,120,877
$0
1986-1993 $0
$0
$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
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
2003 (Nov-Sep)
$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 $0
$500,000,000
$18,500,000,000
2011
$0
$750,000,000
$17,750,000,000
Total $23,707,523,955
$5,957,523,955
$17,750,000,000
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency’s Office of
Legislative Affairs.
Congressional Research Service
16

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

Notes: Borrowings through 1985 were repaid from congressional appropriations. The NFIP did not borrow in
from 1986 through 1993. Since 1994, borrowings are repaid from premium and other income. The existing debt
outstanding is expected to be repaid with premium income or with congressional appropriations.
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 after late August 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 a flood hazard does occur, there are often 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, it may be useful to 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 may be of interest 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;
• 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 examine 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.24

24 U.S. Government Accountability Office, FEMA’s Rate-Setting Process Warrants Attention, GAO-09-12, October 31,
2008.
Congressional Research Service
17

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

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.”25 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.26 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
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

25 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.
26 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.
Congressional Research Service
18

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

the flood insurance claims filed and paid under the NFIP.27 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.28 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. Importantly, the annual increase in new RLPs is outpacing FEMA
mitigation efforts by a factor of 10 to 1. After the 1993 Midwest flood, FEMA and other federal
government agencies spent hundreds of millions to remove frequently flooded properties from the
floodplain.
Table 5 shows that since 1978, a total of 166,368 RLPs have had 496,178 claims paid, which
have cost the National Flood Insurance Fund a total of $12.1 billion in nominal dollars. The
Appendix A shows RLPs by state. The average claim for these properties was $24,388.
Table 5. Total Repetitive Flood Loss Properties in the NFIP: 1978–2011
(as of December 31, 2011: $ nominal)
Building Payments
$9,332,087,006
Contents Payments
$2,768,293,788
Total payments
$12,100,980,774
Average payment
$24,388
Number of Losses
496,178
Number of Properties
166,368
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.
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.
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.

27 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.
28 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.
Congressional Research Service
19

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

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.29 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.
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.30 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;31
(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; and (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

29 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.
30 CRS Report RS22945, Flood Insurance Requirements for Stafford Act Assistance, by Edward C. Liu.
31 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, pp. 104-116.
Congressional Research Service
20

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

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.32
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.33 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 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.34 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, FIS reports, and
related flood hazard map products.35 Only digital map images and digital geospatial flood hazard

32 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.
33 U.S. Government Accountability Office, Flood Map Modernization: Federal Emergency Management Agency’s
Implementation of a National Strategy, GAO-05-894, July 12, 2006.
34 For more information on FEMA’s Map Modernization, see FEMA Map Modernization: An Overview,
http://www.fema.gov/plan/prevent/fhm/mm_main.shtm.
35 U.S. Department of Homeland Security, Federal Emergency Management Agency, “FEMA: Availability of Flood
(continued...)
Congressional Research Service
21

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

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.36 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.37 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.38 Even in hazard-prone floodways and coastal areas, building
and rebuilding are allowed under NFIP standards, with the cost of insurance varying with
property elevation.
An important floodplain management issue for the 112th 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 11988.39 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.”40
Although the regulatory guidelines for E.O. 11988 are clearly outlined in 44 CFR Part 9, there has
arguably been a lack of clarity 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

(...continued)
Hazard Maps and Data,” Federal Register, vol. 73, no. 206, October 23, 2008, p. 63184.
36 Ibid.
37 44 CFR 59.21.
38National 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-
Wake-Up_Call_for_Central_U.S2.pdf.
39 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.
40 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.
Congressional Research Service
22

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

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.
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. 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 report in 2008 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.41

41 U.S. Government Accountability Office, GAO-08-504, National Catastrophe Insurance: Analysis of Proposed
Combined Federal Flood and Wind Insurance Program, April 25, 2008.
Congressional Research Service
23

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

Reauthorization of the NFIP
The NFIP has been reauthorized many times since the program’s inception. Appendix B shows
that since September 2008, there have been 11 short-term extensions on three occasions in 2010,
Congress allowed the NFIP to lapse, but then Congress extended it retroactively.42 On May 31,
2010, for example, FEMA’s authorization to issue flood insurance policies under the NFIP lapsed
for the third time in 2010, causing the program to experience a hiatus—a period without authority
to issue new or renewal policies or increase coverage on existing policies.43
A lapse in NFIP authority could be of concern to policymakers for several reasons. First, access to
a stable supply of flood insurance is important for the recovery of parts of the U.S. housing
market, and helps to address a risk to the banking industry’s loan portfolios. Second, access to
flood insurance remains critical to the government’s mandatory flood insurance purchase
requirement given that homebuyers need to purchase flood insurance as a condition for obtaining
mortgage financing from federally regulated lenders on loans that are or will be secured by
property located in SFHAs. Third, access to federal flood insurance is critical to ensure that
appropriate claims are paid for the more than 5.6 million existing NFIP policyholders who depend
on the NFIP as their main source of protection against flooding.
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
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.44

42 In 2004, Congress passed the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act to reauthorize the NFIP
through September 30, 2008 (P.L. 108-264; 118 Stat. 712). 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. On April 15, Congress passed P.L. 111-157 to extend
the program to May 31, 2010. On July 2, 2010, President Obama signed into law H.R. 5569 (P.L. 111-196) to extend
the program through September 30, 2010.
43 Flood insurance policies that were in force on the last day of effective Program authorization (May 31, 2010)
remained in force and claims under those policies were paid during the hiatus.
44 Association of State Flood Plain managers, Floodplain Management 2050: A Report of the 2007 Assembly of the
(continued...)
Congressional Research Service
24

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

What are possible policy options with regard to the current financial and management challenges
facing the NFIP? There are at least five.
• 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). LTFI coupled with mitigation
loans arguably would encourage investment in risk-reduction measures.45 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.
• Privatization of flood risk. 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 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

(...continued)
Gilbert F. White National Flood Policy Forum, November 6-7, 2007.
45 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.
Congressional Research Service
25

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

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. H.R. 1309, introduced in the 112th
Congress, would require FEMA and GAO to study the option for privatization of
the program and report to Congress.
In 2000, FEMA undertook a study with the assistance of accounting firm Deloitte
& Touche to explore alternative financing arrangements to reduce the need for
U.S. Treasury borrowing.46 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 OMB, this option was not
adopted because it was determined that the cost to borrow from the U.S. Treasury
was lower.
• Community-Based Flood Insurance Policy Contracts. 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 University of California,
Berkley, and Howard Kunreuther at the Wharton School, the University of
Pennsylvania are leading advocates for the long-term flood insurance contract
proposal.47
• Interstate Compacts for Flood Control and Management. In response to
recurring flooding on the Red River, Members of 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.48 Some disaster experts believe this could potentially
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 any request for an interstate compact were
presented to Congress, the state legislatures in North Dakota, South Dakota, and
Minnesota might 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.

46 Federal Emergency Management Agency, National Flood Insurance Program: Discussion of Financial Stabilization
Possibilities, FEMA Unpublished Internal Document, November 20, 2000.
47 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.
48 Officials Seek Long-Term Solution for Red River Flood Control, by Dan Gunderson, January 20, 2010,
http://minnesota.publicradio.org/display/web/2010/01/19/red-river-flood-plans/.
Congressional Research Service
26

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

Appendix A. National Flood Insurance Program:
Repetitive Flood Loss Properties
Table A-1. Repetitive Flood Loss Properties in the
National Flood Insurance Program
(as of December 31, 2011; $ nominal)
State Name
Building Payments Contents Payments
Total Payments
Average Payment Losses Properties
Alabama $402,612,962.16
$81,730,441.39
$484,343,403.55
$35,084.64
13,805
4,833
Alaska $972,686.23
$137,448.10
$1,110,134.33
$13,375.11
83
31
Arizona $7,732,063.08
$1,372,949.13
$9,105,012.21
$15,251.28
597
258
Arkansas $37,637,695.99
$9,726,561.34
$47,364,257.33
$21,249.11
2,229
808
California $155,312,672.34
$37,638,334.53
$192,951,006.87
$21,175.48
9,112
3,299
Colorado $1,010,193.40
$354,498.51
$1,364,691.91
$10,338.58
132
57
Connecticut $72,987,538.72
$21,270,677.91
$94,258,216.63
$18,053.67
5,221
1,667
Delaware $24,442,431.44
$13,222,588.18
$37,665,019.62
$34,778.41
1,083
395
District Columbia
$613,444.22
$16,919.85
$630,364.07
$19,101.94
33
14
Florida $1,074,522,754.69
$283,995,996.57
$1,358,518,751.26
$32,274.99
42,092
16,546
Georgia $103,724,414.09
$26,811,644.87
$130,536,058.96
$29,768.77
4,385
1,604
Guam $363,009.86
$52,467.45
$415,477.31
$13,849.24
30
14
Hawai $10,801,779.20
$2,274,003.49
$13,075,782.69
$24,953.78
524
187
Idaho $591,608.96
$100,132.05
$691,741.01
$10,980.02
63
24
Illinois $124,766,766.99
$27,723,077.14
$152,489,844.13
$12,761.72
11,949
3,954
Indiana $54,697,450.19
$10,569,246.21
$65,266,696.40
$16,143.14
4,043
1,467
Iowa $52,098,900.80
$12,491,664.61
$64,590,565.41
$23,694.26
2,726
1,033
Kansas $21,231,625.75
$9,189,450.32
$30,421,076.07
$24,278.59
1,253
445
Kentucky $89,312,937.78
$28,477,331.70
$117,790,269.48
$19,459.82
6,053
1,817
Louisiana $2,029,521,249.82
$646,722,728.26
$2,676,243,978.08
$27,472.04
97,417
29,472
Maine $10,313,173.36
$2,844,104.99
$13,157,278.35
$20,917.77
629
235
Maryland $43,185,640.35
$15,594,237.25
$58,779,877.60
$25,259.94
2,327
959
Massachusetts $131,940,529.86 $28,353,371.58
$160,293,901.44 $17,776.86
9,017
3,045
Michigan $13,402,503.32
$5,179,082.14
$18,581,585.46
$10,975.54
1,693
655
Minnesota $22,679,730.39
$3,707,955.03
$26,387,685.42
$16,298.76
1,619
644
Mississippi $456,372,579.11
$132,138,941.21
$588,511,520.32
$33,232.34
17,709
6,139
Missouri $224,032,976.31
$98,902,428.05
$322,935,404.36
$18,040.08
17,901
5,124
Montana $1,899,435.24
$225,584.67
$2,125,019.91
$13,889.02
153
68
Nebraska $9,232,709.39
$3,031,207.41
$12,263,916.80
$12,909.39
950
380
Nevada $6,955,148.57
$3,435,927.12
$10,391,075.69
$59,377.58
175
76
Congressional Research Service
27

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

State Name
Building Payments Contents Payments
Total Payments
Average Payment Losses Properties
New Hampshire
$17,452,959.68
$2,677,136.28
$20,130,095.96
$23,111.48
871
338
New Jersey
$715,423,006.56
$209,398,401.52
$924,821,408.08
$21,836.03
42,353
12,432
New Mexico
$1,187,339.29
$60,885.43
$1,248,224.72
$13,716.76
91
39
New York
$385,475,945.74
$104,436,883.54
$489,912,829.28
$16,433.96
29,811
10,712
North Carolina
$404,534,147.25
$69,935,397.40
$474,469,544.65
$19,658.17
24,136
8,664
North Dakota
$23,279,423.10
$2,517,270.79
$25,796,693.89
$29,448.28
876
379
Ohio $91,459,636.06
$29,487,550.73
$120,947,186.79
$19,237.66
6,287
2,268
Oklahoma $45,972,663.99
$14,183,242.06
$60,155,906.05
$19,405.13
3,100
958
Oregon $17,795,025.67
$5,818,442.24
$23,613,467.91
$26,237.19
900
339
Pennsylvania $446,636,272.49
$127,959,807.52
$574,596,080.01
$25,615.02
22,432
7,878
Puerto Rico
$17,228,403.79
$39,202,639.67
$56,431,043.46
$9,027.52
6,251
2,040
Rhode Island
$26,195,718.48
$13,469,137.25
$39,664,855.73
$35,798.61
1,108
396
South Carolina
$70,906,728.62
$15,600,759.95
$86,507,488.57
$22,958.46
3,768
1,486
South Dakota
$5,712,923.39
$686,932.13
$6,399,855.52
$16,161.25
396
175
Tennessee $50,621,555.88
$13,993,951.06
$64,615,506.94
$20,512.86
3,150
1,077
Texas $1,325,875,765.26
$468,960,530.48
$1,794,836,295.74
$27,567.06
65,108
20,395
Utah $942,899.43
$202,236.88
$1,145,136.31
$17,350.55
66
27
Vermont $5,712,953.83
$1,323,304.01
$7,036,257.84
$21,257.58
331
133
Virgin Islands
$13,714,143.86
$24,171,345.01
$37,885,488.87
$46,887.98
808
294
Virginia $281,880,147.26
$54,258,059.06
$336,138,206.32
$20,827.70
16,139
6,101
Washington $86,791,060.88
$17,829,587.55
$104,620,648.43
$26,777.74
3,907
1,360
West Virginia
$92,557,791.85
$40,038,260.89
$132,596,052.74
$17,001.67
7,799
2,991
Wisconsin $20,125,657.08
$4,758,741.43
$24,884,398.51
$17,055.79
1,459
624
Wyoming $236,225.06
$32,264.07
$268,489.13
$9,588.90
28
12
Total $9,332,687,006.11
$2,768,293,768.01
$12,100,980,774.12
$24,388.39
496,178
166,368
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.
Congressional Research Service
28

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

Appendix B. Chronology of Public Laws That
Reauthorized the National Flood Insurance Program
Presidential
Last Day of Effective
Lapse in NFIP
Signing Date
Public Law
Program Authority
Authority
September 30, 2008
P.L. 110-329; 122 Stat. 3575
March 6, 2009

H.R. 2638 (Price)—Consolidated Security,
Disaster Assistance, and Continuing
Appropriations Act, 2009 (Sec. 145)
March 6, 2009
P.L. 111-6; 123 Stat. 522
March 11, 2009

H.J.Res. 38 (Obey)—Continuing Appropriations
Resolution, 2009
March 11, 2009
P.L. 111-8; 123 Stat 988
September 30, 2009

H.Res. 184 (Obey)—Omnibus Appropriations
Act, 2009
October 1, 2009
P.L. 111-68; 123 Stat 2047
October 31, 2009

H.R. 2918 ( Wasserman Schultz)—Legislative
Branch Appropriations Act, 2010 (Sec. 129)
October 28, 2009
P.L. 111-83; 123 Stat. 2142
October 31, 2009

H.R. 2892 (Price)—Department of Homeland
Security Appropriations Act, 2010
October 30, 2009
P.L. 111-88; 123 Stat. 2904
December 18, 2009

H.R. 2996 (Dicks)—Department of the Interior,
Environment, and Related Agencies
Appropriations Act,2010 (Sec. 102)
December 19, 2010
P.L. 111-118; 123Stat. 3409
February 28, 2010
February 28, 2010
H.R. 3326 (Murtha)—Department of Defense
Appropriations Act, 2010 (Sec. 1005)
March 2, 2010
P.L. 111-144; 124 Stat 45
March 28, 2010
March 28, 2010
H.R. 4691 (Rangel)—Temporary Extension Act of
2010 (Sec. 8)
April 15, 2010
P.L. 111-157; 124 Stat 1116
May 31, 2010
May 31, 2010
H.R. 4851 (Levin)—Continuing Extension Act,
2010 (Sec. 7)
July 2, 2010
P.L. 111-196, §2(a); 124 Stat 1352
September 30, 2010

H.R. 5569 (Waters)—National Flood Insurance
Program Extension Act
September 30, 2010
P.L. 111-250, §2(a); 124 Stat 2630
September 30, 2011
October 1, 2011
S. 3814 (Vitter)—National Flood Insurance
Program Extension Act of 2010
October 5, 2011
P.L. 112-36 §130; 125 Stat. 390
November 18, 2012

H.R. 2608 (Graves)—Continuing Appropriations
Act, 2012
November 18, 2011
P.L. 112-55; 125 Stat 710
December 16, 2011

H.R. 2112 (Kingston)—Consolidated and Further
Continuing Appropriations Act, 2012, Div D (Sec.
101)
December 16, 2011
P.L. 112-67; 125 Stat. 769
December 17, 2011

H.J.Res. 94 (Rogers)—Making Further Continuing
Congressional Research Service
29

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

Appropriations for Fiscal Year 2012, and for
Other Purposes
December 17, 2011
P.L. 112-68; 125 Stat. 770
December 23, 2011

H.J. Res (Rogers)—Making Further Continuing
Appropriations for Fiscal Year 2012, and for
Other Purposes
December 23, 2011
P.L. 112-74, Div D, Title V, §573; 125 Stat. 985
May 31, 2012

H.R. 2055 (Culberson)—Consolidated
Appropriations Act, 2012
May 31, 2012
P.L. 112-123; H.R. 5740 (Biggert)—National Flood
July 31, 2012

Insurance Program Extension Act
Source: Congressional Research Service.

Author Contact Information

Rawle O. King

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

Congressional Research Service
30