Research & Commentary: National Flood Insurance Program Reauthorization

Published February 14, 2012

Reauthorization of the National Flood Insurance Program (NFIP) has been a political football in recent years, with Congress unwilling to commit to reform. Since its statutory authorization expired in 2008, NFIP has been kept running through a series of short-term reauthorizations, most recently in December 2011, when the program was extended until May 31, 2012. 

Originally designed to be self-sustaining, NFIP currently owes the U.S. Treasury Department more than $17 billion and has no practical way ever to repay it. In addition, although many of the program’s founders claimed it would promote wetlands conservation, it has in fact provided a subsidy for the development of wetland areas. 

Legislation that would significantly change NFIP is now under consideration. The Flood Insurance Reform Act (HR 1309) and its companion bill in the Senate, the Flood Insurance Reform and Modernization Act, would reauthorize NFIP for five years while making several changes to how the program operates, including the setting of premium rates, flood mapping, and new requirements for properties within a flood plain. The bills also would allow the Federal Emergency Management Agency, which administers NFIP, to buy private reinsurance to reduce the government’s risk exposure. 

Proponents of these reforms, which include both insurance companies and environmental groups, argue only a relatively small number of policyholders—perhaps 10 to 15 percent of the flood insurance book of business—will see rate increases under the bill. Improvements to mapping also could change which properties are determined to be in hundred-year flood zones, although the history of mapping revisions has shown that roughly equal numbers of properties tend to be added and dropped from flood insurance zones. 

Reform proponents also warn that with NFIP more than $17 billion in debt, the program could collapse altogether in the near future if its finances aren’t stabilized. The Flood Insurance Reform Act is designed to put NFIP on sound financial footing and stave off such a collapse. 

Opponents argue the reforms would push NFIP toward privatization and force some property owners to pay more for coverage. They also question the flood-mapping process, the impact on property owners newly mapped into flood zones, and whether properties protected by levies and other mitigation structures should be made to purchase flood insurance. Some oppose reform because they benefit directly from the current system. The flood program currently provides significant subsidies to people—many of them quite well-off—with properties in flood-prone areas. The reauthorization significantly reduces those subsidies, particularly for commercial properties and vacation homes and those that have suffered repeated losses. 

In addition to preserving the program for the future, the reform proposals would offer environmental benefits for coastal, wetlands, and river valley regions. Current public policy encourages destruction of wetlands and other environmentally sensitive areas; the reform bills would make it far less attractive for developers to build in such areas. 

The following articles examine flood insurance reauthorization and the National Flood Insurance Program from multiple perspectives. 

Congress Stuck on NFIP Band Aids
Arthur D. Postal of the National Underwriter writes in this Property and Casualty 360 article about the struggles Congress has had in reaching agreement on a long-term extension of the National Flood Insurance Program. Postal highlights several obstacles to a long-term reauthorization, including pure politics, specific concerns about the legislation, and short timetables for approval and passage.

Senate, House Have Different Views on Future of National Flood Insurance Program
Jaime L. Brockway of Insurance and Financial Advisor Web News examines the two National Flood Insurance Program reform bills currently before Congress and speaks with several proponents about why they believe the reforms are needed.

Managing Flood Risk
Kenneth P. Green of the American Enterprise Institute studies the public policy options for modernizing the National Flood Insurance Program, including reforms that would reduce or remove perverse incentives that cause expanded development in flood-prone areas, measures that undermine people’s inclination to buy insurance or pay the full cost of risk, and third-party risk subsidization.

FIRE Podcast—Eli Lehrer: Flood Insurance Reform Legislation
Matthew Glans of The Heartland Institute speaks with Heartland Institute Vice President Eli Lehrer about the flood insurance reform legislation currently being considered in Congress.

Watery Marauders: How the Federal Government Retarded the Development of Private Flood Insurance
Eli Lehrer of The Heartland Institute examines the development of the National Flood Insurance Program and its negative effects on the growth of private flood insurers.

Subsidizing Disaster
Christy Black of the National Center for Policy Analysis examines the National Flood Insurance Program and the consequences of subsidizing home construction in flood-prone areas.

GAO Report Slams FEMA Management of National Flood Insurance Program
The Heartlander digital magazine reports on a recent Government Accountability Office study criticizing the Federal Emergency Management Agency’s management of the National Flood Insurance Program.

Moral Hazard in Action: Who Insures Against Floods and Why?
Writing for Consumers’ Research, John Hood explains how the National Flood Insurance Program can skew the perception of flood risk, inducing homeowners to build in flood-prone areas, with disastrous results.

Congress to Mull Major Reforms to National Flood Insurance Program
The Heartlander digital magazine examines several measures Congress will be considering to reform or even eliminate the debt-ridden National Flood Insurance Program.

Research & Commentary: Windstorm Expansion of the National Flood Insurance Program
The Heartland Institute examines a proposed expansion of the National Flood Insurance Program through the addition of windstorm coverage.

Federal Flood Insurance: The Repetitive Loss Problem
The Congressional Research Office outlines the evolution of the National Flood Insurance Program and examines the repetitive loss problem, the primary cause of its costs overruns.

Research & Commentary: Flood Mitigation, Levees, and Flood Maps
This Research & Commentary examines the role of levees in flood mitigation, the importance of accurate flood mapping, and the effects of map changes on flood insurance.