Search Penny Hill Press

Monday, July 2, 2012

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

Rawle O. King
Specialist in Financial Economics and Risk Assessment

Flooding is the most common and costly natural disaster in the United States. In 1968, Congress established the National Flood Insurance Program (NFIP) to address the nation’s flood hazard exposure and challenges inherent in financing and managing flood risks in the private sector. The program has played a central role in U.S. flood risk management policy—that is, the prevention and recovery from flooding disasters. Under the NFIP, the federal government (1) identifies areas of flood risk; (2) encourages communities to implement measures to mitigate against the risk of flood loss; and (3) provides financial assistance, through contracts of insurance, to help individuals and small businesses recover rapidly from flood disasters.

Until 1986, the NFIP was financially self-supporting from policy premium revenue and fees that covered all expenses and claim payments. However, because of its below-market insurance rates and catastrophic hurricane-related floods in recent years, the NFIP has accrued a substantial debt that as of September 30, 2011, stands at $17.75 billion. Under current law, the funds borrowed from the U.S. Treasury must be repaid with interest. Because the NFIP cannot charge risk-based premiums for all of its policies, hold loss reserve funds to offset unusually catastrophic losses, or purchase reinsurance, the program faces a constant risk of financial insolvency. The NFIP currently covers approximately 5.6 million households and businesses across the country for a total of $1.25 trillion in exposure.

In response to congressional debate surrounding the reform and reauthorization of the NFIP and intense hurricane-related floods in recent years, the Federal Emergency Management Agency (FEMA) has led various efforts to identify areas for improvement within the NFIP. For example, in 2010, FEMA established the NFIP Reform Working Group to undertake a multi-stage comprehensive review and analysis of policy options for reforming the NFIP. Reform proposals have been driven by policy concerns about the program’s actuarial soundness and the cost of flooding, compliance with NFIP floodplain management requirements, building standards and identifying flood risk, insurance policy sales and mandatory purchase requirements, and environmental and development impacts of the NFIP. FEMA’s effort to rethink the NFIP has resulted in a comprehensive series of policy recommendations designed to transition the NFIP toward a more resilient, sustainable, and comprehensive approach to flood risk management.

The NFIP is currently at a regulatory crossroads, facing several trade-offs among four key public policy goals: charging premium rates that reflect risks, limiting ad hoc federal spending on disaster relief assistance, encouraging broad participation in the program, and encouraging private markets to provide flood insurance. On May 17, 2012, the House passed H.R. 5740, the National Flood Insurance Program Extension Act, to reauthorize the NFIP for 30 days and require FEMA and the Government Accountability Office (GAO) to study privatizing a portion of the nation’s flood risk and creating community-based flood insurance policies. On May 24, 2012, the Senate passed H.R. 5740 after substituting language that would extend the program for 60 days, through July 31, 2012, and require insurance premiums for second homes covered under the NFIP to rise to actuarial levels. The House agreed to the Senate amendment on May 30, 2012, and the President signed H.R. 5740 on May 31, 2012. The Senate may consider S. 1940, a bill to amend the National Flood Insurance Act of 1968, to restore the financial solvency of the flood insurance fund, and for other purposes, before the end of July 2012. S. 1940 has many provisions similar to H.R. 1309, the Flood Insurance Reform Act of 2011, which the House passed on July 12, 2011. FEMA reportedly supports a two-year reauthorization.

Date of Report: June 12, 2012
Number of Pages: 34
Order Number: R40650
Price: $29.95

Document available via e-mail as a pdf file or in paper form.

To Order:
R40650.pdf  to use the SECURE SHOPPING CART


Phone 301-253-0881

For email and phone orders, 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.

Follow us on TWITTER at or #CRSreports