The National Flood Insurance Program (NFIP) was established in 1968 to reduce future flood risk and property damage in flood-prone areas. From coast to coast, the local communities dwelling in designated flood hazard areas are allowed to purchase a federal insurance alternative to protect against loss.
Each residence is responsible for paying a policy premium once a community adopts NFIP guidelines and protections. Premiums are based on the amount of coverage purchased, the selected deductible, the location, the age of the building, and other factors.
In theory, the premiums paid into the NFIP are supposed to cover the insurance claims reported after a storm. However, the Government Accountability Office has ranked the NFIP as high risk since 2005 because of its poor financial standing and excessive borrowing. Before Hurricane Sandy, the NFIP owed the Treasury Department nearly $20 billion because its revenues could not cover all claimed losses. When the borrowing limit was raised by $10 billion in 2013, it was clear something had to be done to fix an unsustainable program.
How to Fix the Program:
The Flood Insurance Reform Act of 2012 included many provisions that could rescue the program. One measure phases out and then completely ends subsidizing premiums for properties that have routinely been hit by storms or are second homes. Also, the act mandates FEMA to create a reserve fund that will pay down NFIP’s outstanding loans over time.
The most controversial measure is ending the premium subsidies. Currently, 80% of the 5.6 million Americans that have flood insurance pay their premiums without any subsidy. For the remaining 20%, the reform act will cause rate increases. But the program changes are necessary if the flood insurance program is to exist at all. In the meantime, Congress should examine expanding the options in helping families whose primary homes require some kind of protection.
Right now, unfortunately, large-scale reforms are difficult to pass, and the issue remains outside of the general public’s knowledge, for the most part. Flood insurance is a daunting prospect for fiscal conservatives, but cost-saving reforms do exist and should be pursued in order to keep the program functioning in a fiscally responsible manner.
- Biggert-Waters Flood Insurance Act Timeline Implementation 2012-2014
- Americans for Smart Natural Catastrophe Policy
- GAO High Risk List: National Flood Insurance Program