Search Penny Hill Press

Friday, March 18, 2011

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.

Until 1986, the NFIP was funded, in part, by appropriations. 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 January 31, 2011, the outstanding debt and accrued interest cost stood at $17.775 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 111
th Congress enacted legislation to ensure that basic NFIP authorities remain in force while the debate continued on reform proposals. Legislation to reform and reauthorize the NFIP failed to pass the Senate in 2010, leaving the program with a temporary extension that will expire on September 30, 2011. Although the Federal Emergency Management Agency (FEMA) is now able to issue new policies, renew policies, increase coverage amounts, and pay claims, concerns remain that this latest extension, and the possibility of yet another lapse in authority after September 30, 2011, could result in uncertainty among lenders, borrowers, and policyholders.

In the 112
th Congress, one unintended consequence of efforts to reform the NFIP involves FEMA’s ongoing update of its flood hazard risk assessment processes—FEMA’s Map Modernization (Map Mod) program—and its public awareness and education initiatives. As newly revised Flood Insurance Rate Maps (FIRMs) become effective in NFIP-participating communities across the country, many property owners not previously required to be covered under a flood insurance policy are learning about new flood risk data currently being produced and disseminated by FEMA. FEMA is informing homeowners that their properties have been remapped into a special flood hazard area (SFHA) and, therefore, they are subject to the NFIP’s mandatory flood insurance purchase requirement.

On January 25, 2011, Representative Candice S. Miller introduced H.R. 435, the National Flood Insurance Program Termination Act of 2010, to terminate the NFIP and related mandatory purchase and compliance requirements. The bill would authorize interstate compacts to allow states to enter into agreements or compacts to make available to interested persons flood insurance coverage.

Date of Report: March 04, 2011
Number of Pages: 28
Order Number: R40650
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail
Penny Hill Press  or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.