Virtually everybody agrees the National Flood Insurance Program is broken. After all, the program is about $24 billion in debt, courtesy of a series of natural disasters starting with 2005’s Hurricane Katrina and exacerbated by years of actuarially inadequate rates propped up by subsidized premiums.
Yet consensus on reform has proven quite hard to achieve, as have congressional reauthorizations of the program. A few years ago, there was even an attempt to expand the already debt-ridden program to include windstorm coverage. As opponents of the proposed expansion pointed out, the private insurance market already provided windstorm coverage, albeit at a price some policyholders might balk at.
The failure to come to terms with reform has led to brief lapses in the program, which didn’t do any wonders for the real estate market, as federally backed loans in flood-prone areas must be backed by NFIP coverage. A significant reform in 2012, which among other things opened the way for actuarially based rating, was partially rolled back two years later after NFIP policyholders facing meaningful rate hikes let their members of Congress know their displeasure.
Why is reform so difficult?
One reason is that the reform debate is philosophical as well as economic, says Joel Kopperud, The Council’s vice president of government affairs.
“This debate falls into the philosophical debate of what the role of the federal government is,” he says. “Some are focused on budget issues and actuarial soundness; others are focused on making sure Americans are covered.”
Another reason is that the debate over the scope and cost of the program doesn’t break down neatly along party lines, says Frank Nutter, president of the Reinsurance Association of America. Instead, regional issues come into play, which is hardly surprising given more than half of the policies are issued in three states—Florida, Louisiana and Texas. “You get strong support from Democrats and Republicans [in coastal states] for continuing a program that has subsidies built into it.”
Don Griffin, vice president of personal lines for the Property Casualty Insurers Association of America, agrees NFIP is “more a coastal and riverine issue.” He says many of the areas that have lots of subsidies are in populous states.
“Subsidized insurance for those who live in flood-prone areas—including wealthy property and business owners—should be viewed as entitlements that have been around just about as long as Medicare and Medicaid,” says Robert Hartwig, co-director of the Center for Risk and Uncertainty Management at the University of South Carolina’s Darla Moore School of Business.
“As the current healthcare debate and debacle illustrate, once an entitlement genie is out of the bottle, it’s almost impossible to get it back in.”