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Extension of National Flood Insurance Program Caught Up In Political Partisanship

CHICAGO —In this era of sharp political differences, the need for a national flood insurance program is one area where just about everyone agrees. Even so, the program is a victim of Washington partisanship, actuaries were told at a general session of the Casualty Actuarial Society’s Annual Meeting on November 8.   

Both political parties agree in great detail on how to extend the 43-year-old National Flood Insurance Program (NFIP). But inter-party fights have kept the legislation from moving through the Senate, said Jimi Grande, senior vice president-federal and political affairs at the National Association of Mutual Insurance Companies.

Mr. Grande discussed the program with Jeffrey Kucera, senior consultant at Towers Watson, and Stuart Mathewson, senior actuary at Swiss Re and coauthor of a monograph on the program.

The NFIP began in 1968 after a string of national disasters. People living in the riskiest areas—the “100-year floodplain” —must buy flood insurance to qualify for a federally backed mortgage. For others, purchase is optional. A private insurer sells the insurance in conjunction with a homeowners policy and handles any claims. But the federal government bears the risk, reimbursing the private insurer for any flood claims it pays.

For four decades, the program was regularly renewed and extended. But it has languished in Congress for five years, receiving four temporary extensions. Several times it has lapsed, meaning homebuyers have been unable to close on their homes and government reimbursements have slowed down.

Aside from the political wrangling, the program’s current troubles stem from some problems inherent in flood insurance and in the federal program, Mr. Mathewson said.

Private insurers avoid bearing flood risk, Mr. Grande said, because the exposures aren’t independent. A flood that hits one home in a region will hit many other homes. An insurer that writes in that area will not be able to diversify their risk away.

Over the years, the program has become concentrated, with 69 percent of policies written in hurricane-prone states. Thirty-eight percent are sold in Florida, Mr. Mathewson said.

Generally, the only people who want the insurance are the ones likely to experience a flood. One percent of flood policies have had two claims or more, Mr. Mathewson said. They constitute about 38 percent of claims. There are 71,000 of these “repetitive loss properties.”

Another problem is that rates are based on flood maps, many of which haven’t changed in years. If the maps aren’t accurate, Mr. Mathewson said, the wrong people are forced to buy insurance. Further, he said, the program doesn’t charge an actuarially adequate rate. Program actuaries calculate what’s called a “full risk” or “actuarial” rate, and do a good job of estimating the expected losses, Mr. Mathewson added. But that rate is based on the long-term average flood loss, with only a small provision for a “mega-cat” —an extraordinarily large, unprecedented loss.

And even that’s not always the rate that’s charged. About 20% of the buyers pay a subsidized rate that is 40-45% less than the “full-risk” rate. Rates can’t increase more than 10 percent a year.

For its first three decades, the program brought in nearly $20 billion in premiums and paid a similar amount in claims. In 2005, the mega-cat hit: Hurricanes Katrina, Rita, and Wilma depleted the program. The program had to borrow more than $20 billion from the U.S. Treasury to cover claims. Given the program’s current structure, that loan won’t be repaid for decades, if ever.

To fix the program, legislation had to address the debt overhang and the structural problems. Current legislation seems to do that, Mr. Grande said.

The measure extends the program for five years, phases in actuarially fair rates, and raises the annual limit on premium increases to 20 percent. It also establishes a mapping council to update flood maps (the template upon which actuarially fair rates are built) and does so in a measured, careful way, so that key stakeholders—like homeowners, real estate agents, and municipalities—can share in the process.

The legislation passed the House of Representatives in a remarkably bipartisan vote of 406-22. The bill got bogged down in the Senate, however.

The fate of NFIP, with wide support from both political parties, is tied in with more contentious issues like the budget process. Eventual passage of a long-term extension is likely, but another short-term extension seems more likely when the program is set to expire on December 18, 2011.

Editor’s Note: On December 23, 2011, NFIP was reauthorized with an extension through May 31, 2012. President Obama signed the Fiscal Year 2012 omnibus appropriations bill that includes a provision extending the NFIP.

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