Order Code RS22394
Updated September 19, 2008
National Flood Insurance Program:
Treasury Borrowing in the Aftermath of
Rawle O. King
Analyst in Industry Economics
Government and Finance Division
In 2008, Hurricanes Ike, Gustav and Dolly made landfall in the United States,
causing widespread flood damages. Estimates of federal flood losses from these three
storms are not yet known. Exactly three years earlier, claims and expenses related to the
massive flooding caused by Hurricanes Katrina, Rita, and Wilma (KRW) had financially
overwhelmed the National Flood Insurance Program (NFIP). The program was selfsupporting from 1986 until 2005, covering all expenses and claim payments out of cash
flow of policy premiums and fees. The Federal Emergency Management Agency
(FEMA), the agency that administers the NFIP, paid $19.28 billion in KRW-related
claims as a result of the 2005 Gulf Coast hurricanes. This amount exceeds the $2.2
billion in premiums earned annually and its $1.5 billion borrowing authority from the
U.S. Treasury. As a result of the catastrophic property losses under the NFIP from
KRW, in September 2005, the Congress passed and the President signed into law
legislation to increase NFIP borrowing authority first to $3.5 billion (P.L. 109-65) and
then to $18.5 billion (P.L. 109-106) in November 21, 2005, and finally to $20.775
billion (P.L. 109-208) on March 23, 2006, to allow the agency to continue to pay claims.
FEMA estimates that the NFIP will need about $3 billion in additional borrowing
authority to cover the claims currently outstanding and a yet to be determined amount
for the 2008 hurricanes. Under current law, funds borrowed from the Treasury must be
On September 27, 2007, the House approved H.R. 3121, the Flood Insurance
Reform and Modernization Act of 2007, to reform the program while retaining its
original intent to keep rates affordable for people to buy the insurance. H.R. 3121 would
also increase the NFIP’s Treasury borrowing authority from $20.775 to $21.5 billion.
On November 1, 2007, Senator Christopher J. Dodd introduced S. 2284 to restore the
financial solvency of the program and to forgive the debt. This report will be updated
as events warrant.
In 2008, Hurricanes Ike, Gustav and Dolly made landfall in the United States,
causing a yet to be determined amount of federal flood losses. These three storms
occurred exactly three years after Hurricane Katrina struck the U.S. Hurricane Katrina
emerged as a pivotal event in the history of federal flood control policy. The storm
damage and subsequent massive flooding in the Gulf Coast and New Orleans from
Hurricane Katrina, estimated to have caused over $200 billion in damages and over 1,700
deaths, was the most costly disaster in recent U.S. history. Hurricane Katrina exposed the
fact that the cost of floods has continued to rise, as has the number of major flood
disasters. Flood-related property losses have risen to $6 billion a year, from
approximately $3.3 billion in the mid-1980s.1 Katrina also demonstrated the effectiveness
of the National Flood Insurance Program (NFIP) in managing the nation’s flood risk as
well as its limitations in handling a catastrophic flood event.
Congress created the NFIP with the passage of the National Flood Insurance Act of
19682 to provide insurance as an alternative to federal disaster assistance for individuals
living in flood-prone areas. The NFIP has dual missions of promoting positive land use
decision making and of reducing the overall cost to government of recovery costs due to
flooding. The NFIP provides incentives for communities to establish flood plain
management programs to control development in flood plain and promote flood-resistant
Under the NFIP, the federal government is required to take certain actions:
identify and map areas subject to flooding;
indemnify property owners against flood losses by making flood
insurance widely available at actuarially sound rates or with legally
mandated subsidies; and
reduce future flood-related losses through community floodplain
Since 1973, homeowners have had to buy flood insurance if they have federally
backed mortgages in flood zones. Today, the NFIP provides flood insurance to about 5.4
million homeowners, renters, and business owners in over 20,218 participating
communities, and generates $2.3 billion in premiums.
The NFIP has undergone major changes in response to significant flood events. For
example, the program was created after Hurricane Betsy devastated the Gulf Coast in
1965. Hurricane Agnes in 1972 led to the mandatory flood insurance requirements in
1973 that were designed to increase participation in the program. The Midwest flood of
Alex Frangos, “U.S. Launching a Massive Effort to Redraw Nation’s Flood Maps,” Wall Street
Journal, September 19, 2003, p. A 1.
P.L. 90-448; 82 Stat. 573.
1993 provided the impetus for strengthening lender compliance requirements in the
context of the mandatory purchase provisions in the 1994 National Insurance Reform
Act.3 Recognition of the impact of properties prone to repetitive flooding on the financial
condition of the program led to the passage of the Flood Insurance Reform Act of 2004.4
In the wake of Hurricane Katrina, a question has been raised as to whether the current
model for financing the NFIP — through premiums, fees, and treasury borrowing in highclaim years — remains the best alternative.
The devastation in the Gulf Coast caused by Hurricanes Katrina, Rita, and Wilma
(KRW), and predictions for more intense storms in the future, have raised broad public
policy concerns about the future viability of the NFIP, particularly in the event of another
catastrophic flood episode. A key policy issue for the 110th Congress is finding a way to
balance the financial and regulatory need to strengthen the program and ensure its future
viability and commitment to reduce the nation’s flood risks without undermining the
original intent of the program to keep rates affordable. Members of the 110th Congress
will likely be called upon to assess the NFIP’s current operations and accomplishments
and consider various alternatives to reform the program. The options for NFIP reforms
include eliminating the program, broadening its coverage from the 100-year flood plain
to the 500-year flood plain, and enhancing both the program’s actuarial soundness and the
accuracy of flood maps. Economists note that these flood insurance reforms could affect
the U.S. economy and have unintended impacts on home ownership, including property
values and the cost of mortgage credit.
Katrina’s Impact on the National Flood
The massive flood losses from the 2005 hurricane season, especially Katrina and
Rita, have financially overwhelmed the NFIP. The program had been self-supporting
from 1986 until 2005, covering all expenses and claim payments out of income from
premiums and fees. Operating losses occurred annually between 1972 and 1980 and in
the years 1983, 1984, 1989, 1990, 1992, 1993, 1995, 1996, 2004, and 2005. The Federal
Emergency Management Agency (FEMA), the agency that administers the program,
expects to pay approximately $20.7 billion in claims from KRW. This figure is almost
double the total amount paid out over the NFIP’s 39-year existence. According to FEMA,
between 1978 — when the program was transferred from the Department of Housing and
Urban Development to FEMA — and 2004, the NFIP earned $19.7 billion in premiums
and paid out $14.2 billion. Some 184,495 NFIP claims have been filed in response to
KRW. To place this number in context, prior to Katrina, the largest numbers of floodrelated claims from previous floods were from the Louisiana flood of May 1995 (31,264),
Hurricane Allison in June 2001 (30,296), and Hurricane Ivan in 2004 (28,137).5
P.L. 103-325; 108 Stat. 2255.
P.L. 108-264; 118 Stat. 712.
U.S. Department of Homeland Security, Significant Flood Events: 1978-December 31, 2007,
NFIP’s Treasury Borrowing
One result of the catastrophic nature of flood losses from KRW is that FEMA had
to stop payments to NFIP policyholders for the first time since the flood insurance
program began. Although the NFIP has been able to cover losses through the premiums
charged to all policyholders, total income generated from insurance premiums and
investments has at times been insufficient to pay claims in heavier loss years. In such
cases, the program has borrowed from the U.S. Treasury to cover losses and other
expenses in the short term.
Total flood insurance losses from KRW, estimated at $23 billion, significantly
exceeded the program’s $1.5 billion borrowing authority from the U.S. Treasury.
Consequently, in September 2005, the Congress passed and the President signed into law
legislation to increase NFIP borrowing authority to $3.5 billion.6 Subsequent legislation
that further raised borrowing authority to $18.5 billion was enacted in November, 2005.7
On March 23, 2006, the U.S. Congress approved S. 2275 to increase the borrowing
authority to $20.775 billion.8
Table 1 shows the history of Treasury borrowing and repayments under the NFIP
from 1981 to 2007. FEMA projects having to pay $20.697 in ultimate losses from KRW,
an amount that includes $1.26 billion in interest. As of July 31, 2008, FEMA had
borrowed $17.835 billion and repaid $225 million, leaving a current balance of $17,360.
Given that the NFIP insures $75 billion in property values in the three identified coastal
counties in Texas and the Houston metropolitan area impacted by Ike, it is likely that the
program will incur significant losses from this storm which will necessitate additional
Federal Response to Uninsured Flood Losses
Katrina’s devastation has required an unprecedented response from federal, state, and
local governments, as well as the private sector. Federal spending for post-disaster
assistance now totals $109 billion, plus more than $8 billion in tax relief.9 This $109
billion amount includes $89.6 billion in post-disaster assistance and $19.3 billion in
insurance claim payments under the NFIP. As of December 31, 2006, the NFIP had
borrowed $16.75 billion from the U.S. Treasury — an amount that far exceeds the
aggregate amount of claims paid in the history of the program.10 The $89.6 billion
appropriated by Congress includes $11.5 billion in U.S. Department of Housing and
P.L. 109-65; 119 Stat. 1998.
P.L. 109-106; 119 Stat. 2288.
P.L. 109-208; 120 Stat. 317.
Matt Fellowes and Amy Liu, “Federal Allocations in Response to Katrina, Rita and Wilma: An
Update,” The Brookings Institutions, located at [http://www.brookings.edu/metro/pubs/
U.S. Government Accountability Office, Hurricane Katrina: GAO’s Preliminary Observations
Regarding Preparedness, Response, and Recovery, GAO-06-442T (Washington: March 8, 2006),
Urban Development (HUD) Community Development Block Grant (CDBG) funds for
five states (Alabama, Florida, Louisiana, Mississippi, and Texas) affected by KRW.11 The
majority of the CDBG funds will be used to compensate homeowners in Louisiana and
Mississippi for the value of their homes, up to their insured value or $150,000, whichever
is less. Grants are now available to thousands of homeowners outside of Special Flood
Hazard Areas, commonly known as the flood plain or the flood zone, who were not
required by federal law to purchase flood insurance.
In addition to stimulating calls to reform the NFIP, Hurricane Katrina has rekindled
national debate as to whether the federal government should pay for catastrophe losses
that are not covered by insurance either because the damage was caused by excluded
perils, or because the insurance has become insolvent, or because the persons or entities
suffering the losses were not insured. Because a future mega-catastrophic event could
cripple the insurance industry’s financial base and disrupt recovery after the next major
disaster, there are renewed calls for federal disaster insurance.
There is a lack of consensus, however, among state officials and insurance
stakeholder groups about the viability of a federal catastrophe fund. Some segments of
the insurance industry maintain a federal catastrophe fund is not needed because either the
private sector remains capable of covering such risks or they are not willing to help with
financial assistance to residents of coastal areas.12 Supporters of this view argue that a
government solution would amount to a coverage subsidy for coastal residents at the
expense of those living further inland and increase the risk of taxpayers being forced to
cover losses. On the other hand, other insurers and their trade groups say there is not
enough capital in the catastrophe insurance market to handle a mega-catastrophe, and a
federal-state catastrophe funding approach would be the most effective way to mobilize
resources needed for disaster recovery and federal deficit reduction. Insurers and
regulators are also exploring ways to allow for insurers to accumulate tax-deferred
The NFIP is so deeply in debt from the 2004 and 2005 hurricane seasons that most
insurance analysts would agree it will be challenging for FEMA to repay the money
borrowed from the Treasury. The interest payments alone on NFIP’s Treasury borrowing
could reach $1 billion per year, which is half the program’s annual premiums, suggesting
the unlikelihood that FEMA will be able to repay the borrowed funds. Most disaster
experts and policymakers would agree that the program needs to be reformed, and some
have suggested the program should be restructured to operate more like a private insurer.
The 110th Congress is expected to act first to address solvency issues, particularly the
The CDBG funds were allocated as follows among the Gulf states: Alabama, $74.4 million;
Florida, $82.9 million; Louisiana, $6.2 billion; Mississippi, $5.1 billion; and Texas, $74.5
million. For more information, see CRS Report RL33330, Community Development Block Grant
Funds in Disaster Relief and Recovery, by Eugene Boyd.
Matt Brady, “War of Words Erupts Over Disaster Fund,” National Underwriter, Property &
Casualty, January 23, 2006, p. 6.
NFIP’s outstanding borrowing and repayment, and then undertake a legislative review and
possible overhaul of the program.
Table 1. History of U.S. Treasury Borrowing Under the National
Flood Insurance Program
(As of July 31, 2008, $ Constant)
Prior to FY1981
2008 to date
Source: U.S. Department of Homeland Security, Federal Emergency Management Agency’s Office of
Note: Borrowings through 1985 were repaid from congressional appropriations. Borrowings since 1994
have been repaid from premium and other income.
a. Balance forward from U.S. Department of Housing and Urban Development.
b. Figure for the $213.1 million in cumulative debt in 1984 were provided by FEMA. It reflects additional
cost outside of the insurance program.
c. Of the $100 million borrowed, only $11 million was needed to cover obligations.
d. The NFIP borrowed $300 million in 2005 to pay claims from the 2004 hurricane season. Note:
Hurricanes Katrina, Rita and Wilma struck in the fall of 2005, after the 2006 fiscal year began.