National Flood Insurance Program
The National Flood Insurance Program is a program created by the Congress of the United States in 1968 through the National Flood Insurance Act of 1968. The NFIP has two purposes: to share the risk of flood losses through flood insurance and to reduce flood damages by restricting floodplain development. The program enables property owners in participating communities to purchase insurance protection, administered by the government, against losses from flooding, and requires flood insurance for all loans or lines of credit that are secured by existing buildings, manufactured homes, or buildings under construction, that are located in the Special Flood Hazard Area in a community that participates in the NFIP. U.S. Congress limits the availability of National Flood Insurance to communities that adopt adequate land use and control measures with effective enforcement provisions to reduce flood damages by restricting development in areas exposed to flooding.
Flood insurance was generally provided by private insurers beginning in 1895, but after the Great Mississippi Flood of 1927, most private insurers concluded that flood risk was uninsurable at a price that consumers could afford given the catastrophic nature of flooding, as well as difficulties in creating accurate risk assessments for policy pricing and risks of adverse selection.
The NFIP is managed and administered by the Federal Emergency Management Agency through the Federal Insurance and Mitigation Administration. The program is designed to provide an insurance alternative to disaster assistance to meet the escalating costs of repairing damage to buildings and their contents caused by floods. As of August 2017, the program insured about 5 million homes, the majority of which are in Texas and Florida. The cost of the insurance program was fully covered by its premiums until the end of 2004, but it has had to steadily borrow funds since, primarily due to Hurricane Katrina and Hurricane Sandy, accumulating $25 billion of debt by August 2017. In October 2017, Congress cancelled $16 billion of NFIP debt, making it possible for the program to pay claims. The NFIP owes $20.525 billion to the U.S. as of December 2020.
Floodplain definition
The Federal Emergency Management Agency defines the floodplain as the area that would be flooded by a base flood, which is "the flood which has a one percent chance of being equaled or exceeded in any given year". In this sense, a base flood is synonymous with a 100-year flood and a floodplain is synonymous with a special flood hazard area. This base flood "is used in the National Flood Insurance Program to indicate the minimum level of flooding to be used by a community in its floodplain management regulations." FEMA explains regulatory floodplains in some places including hills as "critical determinations are made by evaluating your community’s rainfall and river flow data, topography, wind velocity, tidal surge, flood control measures, building development and community maps."Scientists and engineers use statistical analysis of streamflow data to determine the likelihood of flood elevations. Theoretically, in any given year:
- a 100-year flood has a 1 percent chance of occurring and,
- a 500-year flood has as a 0.2 percent chance of occurring.
44 CFR § 9.4 defines parts of the floodplain as follows:
- Floodway means that portion of the floodplain which is effective in carrying flow, within which this carrying capacity must be preserved and where the flood hazard is generally highest, i.e., where water depths and velocities are the greatest. It is that area which provides for the discharge of the base flood so the cumulative increase in water surface elevation is no more than one foot.
- Flood Fringe means that portion of the floodplain outside of the floodway.
Implementation
The intent was to reduce future flood damage through community floodplain management ordinances and provide protection for property owners against potential losses through an insurance mechanism that requires a premium to be paid for the protection. In 2003, the GAO found that repetitive-loss properties cost the program about $200 million annually. Congress originally intended that operating expenses and flood insurance claims be paid for through the premiums collected for flood insurance policies. NFIP borrows from the U.S. Treasury for times when losses are heavy, and these loans are paid back with interest.
Between 1978 and 2014, the U.S. federal government paid more than $51 billion in claims under the National Flood Insurance Program.
From 2006, the NFIP has been directed by its Senior Executive, David Maurstad. A former Lieutenant Governor of Nebraska, he also serves as the Deputy Associate Administrator for FEMA's Federal Insurance and Mitigation division.
Reinsurance
The National Flood Insurance Program Reinsurance Program provides FEMA an additional method to fund the payment of flood claims after catastrophic flood events. Congress granted FEMA authority to secure reinsurance. FEMA is allowed to purchase reinsurance from the private reinsurance and capital markets by means of the following laws:- The Biggert-Waters Flood Insurance Reform Act of 2012 and,
- The Homeowner Flood Insurance Affordability Act of 2014
Amendments
The Biggert–Waters Flood Insurance Reform Act of 2012 modified the NFIP. At the conclusion of 2011, as Congress passed Biggert-Waters, the NFIP cumulative debt was over $17 billion. A core principle of Biggert-Waters was to change the NFIP premiums to match actuarial risk-based premiums that better reflected the expected losses and real risk of flooding. These changes included removing discounts to many policies which were being sold below actual actuarial risk targets and eliminating "grandfathering" of older rates.
In March 2014, President Obama signed the Homeowner Flood Insurance Affordability Act of 2013. The bill changed the process used to alter subsidized premiums and reinstated grandfathering of lower rates; effectively delaying the increases in flood insurance premiums to obtain risk-based premiums under Biggert-Waters and spreading the cost of the lost premiums over all of the remaining policy holders.
The National Flood Insurance Program was $24 billion in debt at the beginning of 2014 as a result of Hurricanes Katrina, Rita and Sandy. The passage of the HFIAA described above has concerned insurance and environmental observers that the delay in implementation of actuarial rates will leave taxpayers exposed to additional losses.