Roadmap to saving the National Flood Insurance Program

As the historic and devastating floodwaters in the south eastern US receded in early March, many residents relied on their federal flood insurance policies to help rebuild homes and businesses. But if lawmakers do not act soon to strengthen federal flood insurance for the future, when the next catastrophic storm hits the programme will be under even more pressure than it already is.

Congress created the National Flood Insurance Program (NFIP) in 1968 to provide flood insurance in exchange for community adoption and enforcement of ordinances that meet or exceed Federal Emergency Management Agency (FEMA) requirements to reduce the risk of flooding. Unfortunately, the NFIP is now suffering from chronic multibillion-dollar debt that threatens to compromise its fiscal integrity. If the status quo continues, the programme will not be sustainable.

The good news is that there are ways to shore up the programme’s finances.

Some insurers and public policymakers have called for allowing private insurers to play a role in the NFIP to stabilise the struggling programme, arguing that the government does not have the flexibility to establish rates that account for new risks posed by stronger storms and changing extreme weather conditions. Private insurers have experience in assessing flood risk and are more nimble in adapting to these changes.

Recent studies by FEMA—which oversees the NFIP—suggest that it is open to studying the option of reinsuring and privatising the programme. Reinsurance—insurance for insurance companies—is commonly used by insurers as a way to stabilise risks, reduce volatility in results and eliminate the likelihood that a catastrophic hurricane or flood could threaten the continuing viability of a company.

FEMA found that reinsuring the NFIP would, over time, stabilise its finances and provide a buffer in case of a serious financial hit. It would also make it work better for consumers.

Opening the flood insurance market to competition would stimulate innovation and, over time, better protect those in harm’s way. Homeowners and businesses would have access to rates that reflect accurate, up-to-date flood risks that let them know the full scale of flood risk they would face in case of a storm, encouraging mitigation and better risk mapping. These rates may be lower for many policyholders at risk of flooding.

Taxpayers who do not require flood insurance would also benefit from such a change. The NFIP is currently grappling with a $23 billion debt, which will eventually need to be paid down by taxpayers. Reinsurance will limit the NFIP’s overall future debt exposure, making it less likely that taxpayers will need to bail out the programme from future storms.

As storms become stronger and more unpredictable, we need to change the way we approach flood insurance to prepare for these new risks. Rather than maintaining the current approach exclusively, lawmakers should explore options that will better protect property owners around the country.

For years, Congress has been searching for ways to reform the NFIP and put it on a path to a financially stable future that will benefit all Americans. FEMA’s recent recommendations provide a potential roadmap for achieving this goal; now it is up to lawmakers to follow it and find solutions before the next devastating storm strikes.

Frank W Nutter is the president of the Reinsurance Association of America. He can be contacted at: nutter@reinsurance.org