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

In 1968, Congress created the National Flood Insurance Program (NFIP) to address the increasing costs of taxpayer-funded disaster relief for flood victims and the increasing amount of damage caused by floods. This report provides an analysis of the NFIP and its financial status; summarizes the major challenges facing the program, including issues affecting its long-term financial solvency; presents some alternative approaches for managing and financing the flood losses; and describes pending legislation on this issue.

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 Prepared 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 T 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 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 floodhazard 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 6 • 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. 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 communitybased 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. 112123, 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) Rank Event Date Number of Paid Losses Amount Paid Average 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 floodprone 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 16 P.L. 103-325, 108 Stat. 2255. 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 “100year 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 Analysis, Risk Map $204,131 $97,712 $89,329 National Flood Insurance Fund, FIF, Flood Studies & Surveys $113,509 $117,706 $116,000 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) Calendar Year 1972-1977 Number of Policies in Force Total Written Premium Total Face Value of Coverage NA NA NA Total Number of Claims Paid Total Payments Made to Policyholders 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 20 10 20 08 20 06 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 80 19 78 -$18,000,000,000 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 Prior to 1981a Amount Borrowed Amount Repaid Cumulative Debt $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 $0 $213,120,877 $0 1985 1986-1993 1994c $0 $0 $0 $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 $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 $23,707,523,955 $5,957,523,955 $17,750,000,000 2005d Total 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 leveelike 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/NCLSRecommendation-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. 38 National 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_FloodingWake-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 ratesetting 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 allhazard 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-0907.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 Losses Properties $402,612,962.16 $81,730,441.39 $484,343,403.55 $35,084.64 13,805 4,833 $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 $613,444.22 $16,919.85 $630,364.07 $19,101.94 33 14 $1,074,522,754.69 $283,995,996.57 $1,358,518,751.26 $32,274.99 42,092 16,546 $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 Hawaii $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 $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 Alabama Alaska District Columbia Florida Georgia Massachusetts Congressional Research Service Average Payment 27 National Flood Insurance Program: Background, Challenges, and Financial Status State Name Building Payments Contents Payments Total Payments New Hampshire $17,452,959.68 $2,677,136.28 $20,130,095.96 Losses Properties $23,111.48 871 338 $715,423,006.56 $209,398,401.52 $924,821,408.08 $21,836.03 42,353 12,432 $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 $50,621,555.88 $13,993,951.06 $64,615,506.94 $20,512.86 3,150 1,077 $1,325,875,765.26 $468,960,530.48 $1,794,836,295.74 $27,567.06 65,108 20,395 $942,899.43 $202,236.88 $1,145,136.31 $17,350.55 66 27 $5,712,953.83 $1,323,304.01 $7,036,257.84 $21,257.58 331 133 $13,714,143.86 $24,171,345.01 $37,885,488.87 $46,887.98 808 294 $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 $9,332,687,006.11 $2,768,293,768.01 $12,100,980,774.12 496,178 166,368 New Jersey New Mexico Tennessee Texas Utah Vermont Virgin Islands Virginia Total Average Payment $24,388.39 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 Signing Date Public Law Last Day of Effective Program Authority September 30, 2008 P.L. 110-329; 122 Stat. 3575 H.R. 2638 (Price)—Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009 (Sec. 145) March 6, 2009 March 6, 2009 P.L. 111-6; 123 Stat. 522 H.J.Res. 38 (Obey)—Continuing Appropriations Resolution, 2009 March 11, 2009 March 11, 2009 P.L. 111-8; 123 Stat 988 H.Res. 184 (Obey)—Omnibus Appropriations Act, 2009 September 30, 2009 October 1, 2009 P.L. 111-68; 123 Stat 2047 H.R. 2918 ( Wasserman Schultz)—Legislative Branch Appropriations Act, 2010 (Sec. 129) October 31, 2009 October 28, 2009 P.L. 111-83; 123 Stat. 2142 H.R. 2892 (Price)—Department of Homeland Security Appropriations Act, 2010 October 31, 2009 October 30, 2009 P.L. 111-88; 123 Stat. 2904 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 H.R. 3326 (Murtha)—Department of Defense Appropriations Act, 2010 (Sec. 1005) March 2, 2010 P.L. 111-144; 124 Stat 45 H.R. 4691 (Rangel)—Temporary Extension Act of 2010 (Sec. 8) April 15, 2010 P.L. 111-157; 124 Stat 1116 H.R. 4851 (Levin)—Continuing Extension Act, 2010 (Sec. 7) May 31, 2010 July 2, 2010 P.L. 111-196, §2(a); 124 Stat 1352 H.R. 5569 (Waters)—National Flood Insurance Program Extension Act September 30, 2010 September 30, 2010 P.L. 111-250, §2(a); 124 Stat 2630 S. 3814 (Vitter)—National Flood Insurance Program Extension Act of 2010 September 30, 2011 October 5, 2011 P.L. 112-36 §130; 125 Stat. 390 H.R. 2608 (Graves)—Continuing Appropriations Act, 2012 November 18, 2012 November 18, 2011 P.L. 112-55; 125 Stat 710 H.R. 2112 (Kingston)—Consolidated and Further Continuing Appropriations Act, 2012, Div D (Sec. 101) December 16, 2011 December 16, 2011 P.L. 112-67; 125 Stat. 769 H.J.Res. 94 (Rogers)—Making Further Continuing December 17, 2011 Congressional Research Service Lapse in NFIP Authority December 18, 2009 February 28, 2010 March 28, 2010 February 28, 2010 March 28, 2010 May 31, 2010 October 1, 2011 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 H.J. Res (Rogers)—Making Further Continuing Appropriations for Fiscal Year 2012, and for Other Purposes December 23, 2011 December 23, 2011 P.L. 112-74, Div D, Title V, §573; 125 Stat. 985 H.R. 2055 (Culberson)—Consolidated Appropriations Act, 2012 May 31, 2012 May 31, 2012 P.L. 112-123; H.R. 5740 (Biggert)—National Flood Insurance Program Extension Act July 31, 2012 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