Flood Insurance Program Overcome by Debt

Published: Fri 18 Jun 2010

Larry Roth

Flood Insurance Program Overcome by Debt

Begun in 1968, the National Flood Insurance Program insures homeowners living in flood-prone regions that private companies deem too risky to cover.

The flood insurance program was self-sustaining through the premiums of policyholders until 2005, when devastating Hurricanes Katrina and Rita saturated the NFIP with huge claims. Now the program is floundering as it drowns in debt.

To be exact, the program has over $19 billion in debt, and it does not collect sufficient premiums to pay for all of the claims and risk. Homeowners pay premiums well below market rates for national flood insurance in most cases.

"For most properties, premiums would probably have to be about twice as high as they are today to even help the program get anywhere near to breaking even," explained Mark Calabria, the Cato Institute's Director of Financial Regulation Studies in Washington, D.C.

"Even getting the rates to be 'fair' doesn't get anywhere near to paying the deficit," he adds.

The problem exists in regions that are flooded repeatedly-where homes are recurrently lost and rebuilt. Although just one percent of properties insured by the NFIP fall into this repetitive-loss category, they are responsible for about 40 percent of the insurance claims.

At the top of the list for repetitive-loss properties is Louisiana, with $2.5 billion paid in claims. Next on the list is Texas, with over $1.5 billion paid out, trailed by Florida, Mississippi, and New Jersey. According to a National Wildlife Foundation report, one in ten repetitive-loss properties has claims that are higher than the value of the home. Recently, the National Flood Insurance Program spent over $400,000 to raise a Pennsylvania home by ten feet. In the last few years, over $800,000 of flood claims have been filed for losses related to that house, while its value is just $500,000.

"Perhaps the thing to do is to, if a property has been damaged or destroyed by flood more than once perhaps the government ought to say you can rebuild there, but you have to at your own dime," explained Eric Goldberg of the American Insurance Association.

Currently, the National Flood Insurance Program is expired. Renewal legislation is tied up in Congress, which leaves hundreds of thousands of Americans without flood protection during hurricane season.