The National Flood Insurance Program was created in 1968 to allow flood-prone communities to purchase insurance protection from the government. Overseen by the Federal Emergency Management Agency, the program was supposed to alleviate the need for emergency federal aid. Instead, communities still receive emergency aid in addition to insurance payments.
- The NFIP is “by design, not actuarially sound.”
- The NFIP has borrowed almost $20 billion from the U.S. Treasury and “is unlikely ever to be able to repay the entire amount.”
- Unlike private insurance companies, the NFIP is not structured to build capital surpluses, doesn’t purchase reinsurance to cover catastrophic losses, cannot accept or reject applicants in order to manage risk, and is legally constrained in its ability to raise rates as needed.
- Twenty-five percent of participants pay subsidized premium rates, which don’t reflect the full risk of flooding. Even “full-risk” premium rates may not reflect the actual risk of flooding.
- The NFIP must continue to insure properties that have suffered repeated losses. These “repetitive loss properties” represent only 1 percent of flood insurance policies but account for 25 to 30 percent of claims.
- FEMA doesn’t do a good job of managing the program. For instance, “FEMA continues to lack an effective system to manage flood insurance policy and claims data, despite having invested roughly 7 years and $40 million in a new system whose development has been halted because it did not meet user needs and was not ready to replace the legacy system.”
The program's financial problems reflect a broader government reluctance to restrain benefits. FEMA leaders and some lawmakers have tried to end the premium discounts and the multiple insurance payments, “but there's always been a few in Congress that have had enough political muscle to hold that back,” former FEMA assistant administrator David Maurstad said.