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

Rawle O. King
Specialist 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 congressional appropriations. The NFIP was selfsupporting 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 111th 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 scheduled to expire on September 30, 2011. 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, potentially adversely impacting the housing market.

In the 112th Congress, an important aspect of efforts to reform the NFIP involves FEMA’s ongoing update of its flood risk assessment processes and its public awareness and education initiatives under the Risk Mapping, Assessment and Planning (Risk MAP) program. As newly revised Flood Insurance Rate Maps (FIRMs) become effective across the country, many property owners 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 requirements.

On April 1, 2011, Representative Judy Biggert introduced H.R. 1309, Flood Insurance Reform Act of 2011, that would allow FEMA to suspend the mandatory flood insurance purchase requirement for up to three years if such relief is sought by a particular community. The bill would also phase in actuarial rates and reduce repetitive property loss claims and authorize FEMA and the U.S. Government Accountability Office (GAO) to study the feasibility of privatizing the NFIP. Another measure, H.R. 435, the National Flood Insurance Program Termination Act of 2010, would terminate the NFIP and related mandatory purchase and compliance requirements. The bill would authorize insurance interstate compacts to allow states to provide flood insurance.


Date of Report: May 9, 2011
Number of Pages: 33
Order Number: R40650
Price: $29.95

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