Thursday, January 30, 2014

The National Flood Insurance Program: Background and 2012 Reform

The following overview and related references are provided for background on the National Flood Insurance Program (NFIP), its history of financial insolvency, and the most recent (2012) substantive attempt to reform the program.
National Flood Insurance Program
Established in 1968 through the National Flood Insurance Act of 1968 (P.L. 90-448), the NFIP
is administered by the Federal Emergency Management Agency (FEMA) for two major objectives: first, to pool risk and help guarantee flood insurance availability; and second, to encourage the development of local floodplain management regulations and building standards that reduce flood risks, damages and costs.  Property owners in communities that have adopted FEMA’s Flood Insurance Rate Maps (known as “FIRMs”) become eligible for NFIP flood insurance policies.  The maximum coverage for single- and multi-family dwellings is $250,000. Commercial property owners can purchase policies covering up to $500,000 in losses.  Owners of residential properties within designated flood risk areas with federally-backed mortgages are required to purchase NFIP policies.

Unlike typical insurance policies (such as automobile or homeowner’s insurance), where insurers issue policies with risk-based premiums (i.e., policyholders that are more at risk pay more for their insurance coverage), the actual premiums that policyholders pay for flood insurance do not accurately reflect their property’s flooding risk.  This is because FEMA administers the NFIP by providing only limited (capped) coverage and by subsidizing many policies, including properties that are most at risk of flooding and buildings built prior to the adoption of FIRMs. 

Flood Insurance Premium Subsidies
As NFIP was first being implemented in the 1970s, premium subsidies were believed to be necessary because property owners in higher flood-risk areas could not accurately estimate flood risk (no flood insurance rate maps were available), and because the prospect of receiving subsidies was thought to provide an incentive for local communities to participate in the NFIP (by developing local floodplain management regulations and building standards). It was the intent of the federal government to phase out insurance premium subsidies as local floodplain management practices were strengthened.

Had that phase-out occurred as intended, the NFIP should have ultimately reduced the federal government’s responsibility for flood losses.  However, rate subsidies have remained in place, and the NFIP has become financially insolvent while failing to meet  the original 1968 Act objectives (noted above).  (When it cannot fulfill its claim responsibilities, the FEMA borrows money from the U.S. Treasury to pay its NFIP claims.)

National Flood Insurance Act Amendments
The NFIP has been amended several times since 1968 (including in 1973, 1982, 1994 and 2004).  Most recently, the Biggert-Waters Flood Insurance Reform Act of 2012 reauthorized the NFIP through September 30, 2017, and amended the 1968 law in an effort to improve the NFIP’s financial solvency and limit federal exposure to flood loss costs (the Biggert-Waters Act became law under Public Law No: 112-141).  The intent of the Act is to provide insurance premium rates that accurately reflect flood risk, based on the understanding that higher insurance costs are necessary to signal actual risk.

Based on flood risks represented by FIRMs, the Biggert-Waters Act would eliminate federal insurance subsidies and reduce a cap on annual premium increases, thus making flood insurance premiums more realistically risk-based than in the past. The Biggert-Waters Act also would eliminate insurance payments for properties that experience severe repetitive flooding losses.

Flood Insurance Rate Maps
FIRMs are used in part to determine flood insurance rates, control floodplain development through establishment of building codes, and communicate flood risk to the public. However, FIRMs are based on retrospective evaluations of past conditions and have been shown to be inaccurate predictors of future flood risk.  This inherent inaccuracy has been a major challenge to FEMA as it attempts to determine accurate flood risks and associated insurance rates.  Further, the inaccurate maps communicate a misleading message to property owners and local planning officials, as they attempt estimate risks related to developing, building or staying in flood-prone areas.  

FEMA is currently in the process of updating its maps through a Risk Mapping, Assessment and Planning (or “Risk MAP”) process designed to “deliver quality data that increases public awareness and leads to action that reduces risk to life and property,” according to FEMA.  The Risk MAP updates will almost certainly increase the number of properties that fall under the purview of NFIP, but will also very likely still underestimate the number of people and properties at risk of flooding; in part because Risk MAP updates are not permitted to incorporate future climate change-influenced flooding scenarios (predicated upon rising sea levels, or increased storm intensities, for example).
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