Rawle O. King
Specialist in Financial Economics and Risk Assessment
In late October 2012, Hurricane Sandy caused widespread flood-related property damage in coastal areas of states throughout the Northeast and the mid-Atlantic region. The storm exposed vulnerabilities in the region’s public transportation and infrastructure and underscored the nation’s growing exposure to extreme weather events, sea-level rise, and coastal flooding. Although the full economic cost of Sandy will not be known for years, the storm has resulted in substantial federal disaster recovery assistance, including tens of billions for flood and hurricane protection and coastal restoration, and the rebuilding of mass transit systems and housing.
Government payouts under the National Flood Insurance Program (NFIP) are estimated to be between $12 billion and $15 billion in flood insurance claims. In the immediate aftermath of Sandy, this amount quickly exceeded the $4 billion in cash and remaining borrowing authority from the Treasury Department. By January 2013, the NFIP had processed more than 140,000 claims for Sandy-related damages totaling about $1.7 billion. To protect the financial integrity of the NFIP and ensure that the NFIP has the financial resources to cover its existing commitments following the devastation caused by Sandy, the Obama Administration requested that Congress pass legislation to increase the NFIP’s borrowing authority. On January 4, 2013, Congress passed, and the President two days later signed into law, H.R. 41 to provide a $9.7 billion increase in the NFIP’s borrowing authority, from $20.725 billion to $30.425 billion, to pay flood claims related to Hurricane Sandy.
Policymakers have expressed views on several flood management challenges facing the NFIP. These challenges include finding ways to (1) improve the accuracy of flood risk assessment and mapping of hurricane and coastal storm hazard areas; (2) strengthen the financial sustainability of the NFIP in the face of expected future extreme weather events (climate change), sea-level rise, and coastal flooding; (3) address potential affordability challenges associated with mandatory purchase requirements and implementation of full actuarial premium rates, beginning in 2014; (4) reduce the likelihood of future emergency supplemental spending to finance recurring recovery expenditures by making communities stronger and more resilient; (5) address uncertainty surrounding human settlement patterns and the NFIP’s ability to contain the nation’s growing exposure to floods; and (6) explore the creation of effective hazard-reduction strategies—linked to land use planning techniques (and construction standards)—to direct development and people out of, and away from, flood-prone areas.
Early in 2012, Congress passed and President Barack Obama signed into law the Biggert-Waters Flood Insurance Reform Act of 2012, P.L. 112-141. The law reauthorized the NFIP through September 30, 2017, and made a number of reforms to strengthen the future financial solvency and administrative efficiency of the NFIP. In the wake of Sandy, Congress might choose to consider policy options to achieve greater sustainability and cost savings by addressing long-term flood management challenges. Options include the use of flood policies (10-20 years, rather than 1 year), privatization of flood risk, issuance of community based flood insurance contracts, and regulatory and tax changes to encourage financial innovation in financing recovery from largescale natural disasters.
This report provides an analysis of flood risk management, summarizes major challenges facing the NFIP, and outlines key reforms enacted in the Flood Insurance Reform Act of 2012. The report identifies and presents some key remaining flood management issues for congressional
consideration, and concludes with a discussion of policy options for the future financial management of flood hazards in the United States.
Date of Report: February 6, 2013
Number of Pages: 44
Order Number: R42850
Price: $29.95
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