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. A three-prong 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. The NFIP today covers approximately 5.6 million households and businesses across the country for a total of $1.25 trillion in exposure. Major changes were made to the program in 1973, 1994, and 2004.

Legislation to strengthen and reauthorize the NFIP failed to pass the 111th Congress, 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.

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. 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 112th Congress is weighing the costs and benefits of enhancing risk management activities associated with a nationwide Flood Insurance Study (FIS) and the re-accreditation of levees based on the Federal Emergency Management Agency’s (FEMA’s) regulatory criteria. This requires revisiting U.S. flood-control policy in the context of (1) reforming and reauthorizing the NFIP; (2) seeking resolution of many of the underlying economic and engineering challenges relative to the condition of flood-control protection infrastructures; and (3) strengthening the coordination between FEMA, U.S. Army Corps of Engineers, and the U.S. Department of Agriculture with local homeowners, businesses, and the American taxpayers.

Several bills are before the 112th Congress to reform and reauthorize the NFIP. The Flood Insurance Reform Act of 2011, H.R. 1309, was reported by the House Financial Services Committee on May 13, 2011, and is awaiting a vote in the full House of Representatives. H.R. 1309 would reauthorize the NFIP for five years to September 30, 2016; suspend the mandatory flood insurance purchase requirement for up to three years; reduce rate subsidies and move to make the NFIP ultimately actuarially sound; and require FEMA and the U.S. Government Accountability Office (GAO) to study the feasibility of privatizing the NFIP. H.R. 435, the National Flood Insurance Program Termination Act of 2010, would terminate the NFIP and authorize insurance interstate compacts to allow states to provide flood insurance. S. 1091, the Consumer Option for an Alternative System to Allocate Losses (COASTAL) Act of 2011, would reauthorize the NFIP for five years and create a system for using data from federal agencies, such as the National Oceanic and Atmospheric Administration (NOAA), to help allocate total losses between wind and water when the structure is a total loss.


Date of Report: July 1, 2011
Number of Pages: 33
Order Number: R40650
Price: $29.95

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