National Flood Insurance Program: Background, Challenges, and Financial Status

Rawle O. King
Analyst in Financial Economics and Risk Assessment

In 1968, the U.S. Congress established the National Flood Insurance Program (NFIP) to address the nation's flood exposure and challenges inherent in financing and managing flood risks in the private sector. Private insurance companies at the time claimed that the flood peril was uninsurable and, therefore, could not be underwritten in the private insurance market. A threeprong floodplain management and insurance program was created to (1) identify areas across the nation most at risk of flooding; (2) minimize the economic impact of flooding events through floodplain management ordinances; and (3) provide flood insurance to individuals and businesses. Major changes were made to the program in 1973, 1994, and 2004.

The NFIP was self-supporting from 1986 until 2005 as policy premiums and fees covered all expenses and claim payments. In 2005, the NFIP incurred approximately $17 billion in flood claims caused by Hurricanes Katrina, Rita, and Wilma. This amount exceeded the $2.2 billion in annual premiums and the $1.5 billion in borrowing authority from the U.S. Treasury. As a result, Congress passed and the President signed into law legislation to increase NFIP borrowing authority first to $3.5 billion (P.L. 109-65) and then to $18.5 billion (P.L. 109-106) in November 2005, and finally to $20.775 billion (P.L. 109-208) on March 23, 2006. As of March 31, 2010, the outstanding debt and accrued interest cost stood at $18.75 billion. Under current law, the funds borrowed from the U.S. Treasury must be repaid with interest. The program, however, is not in a position to repay the debt.

The 111th Congress has acted to ensure that basic NFIP authorities remain in force while the debate continues on reform proposals. On May 31, 2010, however, FEMA's authority to issue or renew flood insurance policies or to increase coverage on existing policies under the NFIP lapsed for the third time this year. On July 2, 2010, President Barack Obama signed into law H.R. 5569, the National Flood Insurance Program Extension Act, to retroactively reauthorize the program from June 1, 2010, through September 30, 2010 (P.L. 111-196). Although FEMA is now authorized to issue new policies and pay claims, concerns remain about the possibility of yet another lapse in authority after September 30, 2010.

Meanwhile, on May 26, 2010, the House Committee on Financial Services reported H.R. 5114, the Flood Insurance Reform Priorities Act of 2010, to reauthorize the NFIP through FY2015 and to make certain reforms to the program. These reforms include (1) a phase-in of actuarial rates for non-residential properties and non-primary residences; (2) a delay in the effective date for the mandatory purchase of flood insurance for certain areas not previously designated as having a special flood hazard; (3) a five-year phase-in of flood insurance rates for newly mapped areas not previously designated as having special flood hazard; (4) an increase in the annual limitation on premium increases; (5) the establishment of the Office of Flood Insurance Advocate; and (6) commission of several studies on expanding mandatory flood insurance purchase requirements for low-income families, and building codes. A vote on H.R. 5114 is expected in the House of Representatives in mid-July 2010. There is no similar measure in the Senate.

Several other flood insurance-related bills are currently before the 111th Congress: H.R. 1264 would add wind coverage to the NFIP; H.R. 777 would suspend flood map changes until the Administrator of FEMA submits to Congress a community outreach plan.


Date of Report: July 9, 2010
Number of Pages: 27
Order Number: R40650
Price: $29.95

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