Reform the National Flood Insurance Program, Report Recommends

Published March 7, 2017

Congress should reform the National Flood Insurance Program (NFIP) to reduce future risks associated with the flooding of property and minimize flood damage when it occurs, a new report recommends.

According to the report, these reforms would protect taxpayers, who have repeatedly backstopped the program, as well as the environment.

NFIP provides insurance coverage to homes and businesses at risk of flooding. It is a government program run by the Federal Emergency Management Agency (FEMA), and it is set to expire unless reauthorized by September 30, 2017.

The report—produced by, a coalition of environmentalists, taxpayer advocates, and housing organizations—says NFIP must be reformed to make it financially sustainable.

The study recommends FEMA produce more-accurate and up-to-date maps of areas prone to flooding, to ensure all properties at risk of damage are included in flood insurance requirements. The study also argues the government should set premiums based on a property’s relative risk of flooding and reduce or end its subsidies for premiums, so property owners will pay full costs for flood insurance.

The study says government should level the playing field for private flood insurance by reducing premium subsidies and requiring FEMA to purchase catastrophic bonds or reinsurance policies in the private market, as private insurers do. This latter reform is aimed at reducing taxpayers’ exposure to payouts and expanding consumer choice by creating a competitive market for flood insurance.

Accurate Pricing, Coverage Required

NFIP is supposed to be self-supporting, financed entirely by premiums. However, it has never charged premiums appropriate to the risk of flooding, and many homes that have received disaster recovery payouts don’t carry insurance, says R.J. Lehmann, a senior fellow at The R Street Institute.

“About 20 percent of policies, policies on homes that predate the NFIP’s creation in 1968, are not priced appropriately,” said Lehmann. “These homeowners are paying only a tiny fraction of what they should be paying in relation to the risk and history of their homes flooding.

“In addition, the flood maps FEMA relies on are badly out of date and need to be made accurate,” Lehmann said. “Every home in a floodplain with a mortgage from a federally regulated bank and every mortgage held by or backed by Fannie Mae, Freddie Mac, the FHA, or the VA at risk of flooding should have to buy flood insurance.”

Perpetual Debt

Unlike private insurance companies, which buy reinsurance policies to cover their payouts in years where they have large numbers of claims, NFIP uses taxpayers as its backstop, Lehmann says.

“The NFIP has not historically bought reinsurance,” Lehmann said. “Instead, it has relied on taxpayers to kick in when their claims exceeded their premiums. For a long time this wasn’t a problem, but in 2005 we had Hurricane Katrina, and then it got much worse in 2012, when we had Superstorm Sandy.

“Currently, the NFIP is $23 billion in debt to the U.S. Treasury, a debt it can’t realistically pay off,” said Lehmann. “It simply doesn’t receive enough in premiums to ever be able to pay back this debt.”

Calls for Phase-Out

For many decades, NFIP has subsidized construction in flood-prone areas, putting more property at risk, says Chris Edwards, director of tax policy studies at the Cato Institute.

“I generally agree with the thrust of the study’s reforms, but I would go further and phase out the NFIP completely,” Edwards said. “It would be better if the private sector offered unsubsidized insurance.”

Lehman also wants the government to encourage development of private markets for flood insurance.

“We’d also like to encourage private alternatives to government flood insurance,” said Lehmann.

“In the long run, this is the better solution than having the risk laid on the backs of the taxpayers.

“It’s going to take a little bit of time to prepare the private market to do what it needs to do in order to take on all the flood risks,” Lehmann said. “But I don’t think the study’s recommendations will be ignored, because Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, has made it clear he would like privatization of the NFIP.”

Kenneth Artz ([email protected]) writes from Dallas, Texas.


“National Flood Insurance Program Reform Proposal,”, January 2017: