Problems choke the National Flood Insurance Program

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The federal Government Account Office has issued a scathing report on the National Flood Insurance Program (NFIP), which it says is not actuarially sound, owes more than $18 billion to the U.S. Treasury and doesn’t have an effective system for managing data on flood insurance home insurance claims data.

The woeful condition of the program, which provides the vast majority of flood insurance to Americans, has long been known to the private home insurance companies that implement the program. Those companies say they hope the GAO report will spur Congress to make some much-needed changes to the beleaguered system.

“This should be a top priority for Congress as over 5.6 million American homes and businesses are protected by the National Flood Insurance Program,” says Tom Litjen, vice president for federal government relations for the Property Casualty Insurers Association of America (PCI), an industry trade group.

Background on the NFIP

The NFIP was established in 1968 as part of the Department of Housing and Urban Development (HUD). Five years later, flood insurance became mandatory for properties located in flood zones when those properties had mortgages from federally regulated lenders.

In 1977, private home insurance for floods was discontinued but HUD continued to use private insurance companies as agents for the federal program. Six years later, the Federal Emergency Management Agency, which had taken over management of the NFIP, agreed to allow private insurers to administer NFIP home insurance coverage under their own company names.

This Write Your Own Program was designed to increase participation among insurance companies, although the federal government continued to pay all program claims and associated costs.

Some private insurers now offer “excess” flood insurance to homeowners who have NFIP policies but want additional coverage, according to the Insurance Information Institute.

Congress allowed the NFIP to expire on Sept. 30, 2008, for a number of days. It was the first of several lapses allowed by Congress before reauthorizing the program. One lapse lasted for 53 days, and PCI estimates that during that period, 1,400 real estate transactions a day were delayed because the flood insurance required by mortgage lenders couldn’t be purchased.

What the GAO said

The GAO uncovered several troubling aspects of the current flood insurance system, including:

·     The program allows low rates to be “grandfathered” in for some property owners even though the flood risk for those properties is much higher than those rates would indicate.

·     The NFIP can’t deny flood insurance — even to properties that have repeated claims. These “repetitive loss” properties account for only 1 percent of all the properties insured through the program but make 20 percent to 30 percent of all the claims.

·     NFIP is still paying for losses from the 2005 hurricanes. Although it recently paid the Treasury $600 million, it still owes $18.8 billion.

·     NFIP is hamstrung by regulations that prevent it from building a capital surplus, buying reinsurance to cover catastrophic losses and raising rates to reflect the actual risk posed by some properties.

Home insurance companies concerned

Private insurance companies feel the flawed NFIP program can hurt their reputations. The periodic lapses in availability – during which property owners can’t purchase flood insurance, add coverage or renew a flood policy – puts insurance agents in the position of giving bad news to clients and halting the momentum of real estate transactions.

“Lapses in NFIP coverage have created greater uncertainty in the housing market and the economy,” Litjen said. “It’s left homes and businesses even more vulnerable to devastating floods.”

Flood insurance challenges

The insurance industry is hoping Congress will give the program, due to expire in September 2011, a long-term extension.

While an even more detailed GAO report is due out this spring, the office has already suggested that it thinks both FEMA and Congress need to correct NFIP problems.

FEMA needs to “acknowledge its management challenges and develop a plan of action,” the GAO said, including finding a way to make premiums reflect actual flood risks and strengthening its oversight of both the program and the insurance companies responsible for selling and servicing flood policies.

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