Journal of Insurance Regulation
Cassandra Cole and Kathleen McCullough
Co-Editors
Vol. 33, No. 5
The State of the National Flood Insurance
Program: Treading Water or Sinking Fast?
Stephen G. Fier
Kevin M. Gatzlaff
David M. Pooser
JIR-ZA-33-05
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Editorial Board of the
Journal of Insurance Regulation
Vacant, Chair
Robert Hoyt, Ph.D.
University of Georgia
Athens, GA
James L. Nelson, Esq.
Austin, TX
Ex Officio
Julienne Fritz, NAIC
Director, Insurance Products & Services Division
Editorial Staff
Editors
Cassandra Cole and Kathleen McCullough
Florida State University
Tallahassee, FL
Legal Editor
Kay G. Noonan, J.D.
NAIC General Counsel
Editorial Review Board
Cassandra Cole, Florida State University, Tallahassee, FL
Lee Covington, Insured Retirement Institute, Arlington, VA
Brenda Cude, University of Georgia, Athens, GA
Ernst Csiszar, University of South Carolina, Columbia, SC
Robert Detlefsen, National Association of Mutual Insurance Companies,
Indianapolis, IN
Sholom Feldblum, Liberty Mutual Insurance Co., Boston, MA
Bruce Ferguson, American Council of Life Insurers, Washington, DC
Kevin Fitzgerald, Foley & Lardner, Milwaukee, WI
Bob Ridgeway, America’s Health Insurance Plans, Washington, DC
Robert Gibbons, International Insurance Foundation, Wayne, PA
Martin Grace, Georgia State University, Atlanta, GA
Scott Harrington, University of Pennsylvania, Philadelphia, PA
Robert Hoyt, University of Georgia, Athens, GA
Robert Klein, Georgia State University, Atlanta, GA
Alessandro Iuppa, Zurich North America, Washington, DC
Andre Liebenberg, University of Mississippi, Oxford, MS
J. Tyler Leverty, University of Iowa, Iowa City, IA
Kathleen McCullough, Florida State University, Tallahassee, FL
Mike Pickens, Mike Pickens Law Firm, Little Rock, AR
Harold Skipper, Georgia State University, Atlanta, GA
David Snyder, American Insurance Association, Washington, DC
David Sommer, St. Mary’s University, San Antonio, TX
Sharon Tennyson, Cornell University, Ithaca, NY
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The State of the National
Flood Insurance Program:
Treading Water or
Sinking Fast?
Stephen G. Fier*
Kevin M. Gatzlaff**
David M. Pooser***
Abstract
The primary source of flood insurance for property owners in the United
States since the 1960s has been the National Flood Insurance Program (NFIP). The
program has been a valuable resource to those in need of flood coverage while the
private insurance market largely avoided the flood peril. Although the federal
program currently fills an important void that exists within the insurance market,
the NFIP has not been without its critics. Over the past decade, the NFIP has
received constant criticism directed at its subsidized rate structure, its debt to the
U.S. Treasury and its long-term viability. In this paper, we discuss the history of
the NFIP and flood insurance in the U.S., perceived weaknesses of the NFIP,
recent legislation related to the NFIP, and recommendations that have been offered
to improve the current flood insurance market in the U.S.
* Assistant Professor, University of Mississippi, 338 Holman Hall, University, MS 38677;
[email protected].
** Assistant Professor, Ball State University, 357 Whitinger Business Building,
2000 W. University Avenue, Muncie, IN; [email protected].
*** Assistant Professor, St. John’s University, 101 Murray Street, Room 504, New York, NY
10007; [email protected].
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
Introduction
It has long been recognized that private insurers in the U.S. insurance market
view the flood risk as uninsurable (Anderson, 1974). In order to provide a stable
insurance solution to property owners in flood-prone areas, the U.S. Congress
created the National Flood Insurance Program (NFIP) through the passage of the
National Flood Insurance Act of 1968 (NFIA). By passing the NFIA and creating
the NFIP, Congress was able to provide many property owners with flood
insurance coverage while simultaneously encouraging communities across the
country to emphasize flood loss mitigation and building ordinance management.
However, while the NFIP has been successful in increasing the availability of
flood insurance coverage across the U.S., the program has faced several financial
and non-financial problems that have called into question the way in which the
program is structured and administered. Some of the most commonly cited
problems that exist within the NFIP include increasing financial deficits, a
continued adverse selection problem, uncertainty regarding the extension of the
program and concerns regarding the administration of the Write Your Own
(WYO) program that is used to market flood insurance to consumers.
As a result of some of the aforementioned problems, legislators have actively
worked to alleviate these issues by recommending various changes to the NFIP.
Several recommendations were made over the past decade, but one of the most
recent legislative attempts to address the problems that plague the NFIP was
passed through Congress in the form of the Biggert-Waters Flood Insurance
Reform and Modernization Act of 2012 (Biggert-Waters Act). In addition to
extending the NFIP for an additional five years, the Biggert-Waters Act
implemented several changes to the program, including a phasing out of (and in
some cases outright removal of) premium subsidies for certain properties, as well
as greater oversight of expense reimbursement for WYO participants (NAIC,
2012). At the time of passage, many legislators, insurers and regulators heralded
the legislation as a step in the right direction for the NFIP. However, as the
Biggert-Waters Act began to be implemented, it became apparent that the use of
actuarially fair (non-subsidized) rates would not simply increase insurance
premiums, but that increases could be dramatic, with some insureds experiencing
increases of up to 3,000% (Pettus, 2013). These rate increases resulted in an outcry
from affected homeowners and uncertainty within some housing markets,
ultimately leading to legislation that substantially modified the key provisions of
the Biggert-Waters Act (Simpson, 2014a). While the Biggert-Waters Act was
eventually altered through the passage of the Homeowner Flood Insurance
Affordability Act, the rate increases and initial fallout from the Biggert-Waters
Act have led to further debate regarding the current state of the NFIP, as well as
the future of flood insurance in the U.S.
The remainder of this paper is organized as follows. We first provide a brief
overview of the NFIP’s history and discuss its creation, as well as the role of
private insurers in the NFIP. The evidence suggests that while the NFIP represents
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
a public-private partnership between the federal government and private insurers,
the market is highly concentrated and relies heavily on the top 10 WYO
participants to market nearly 80% of total federal flood insurance policies. Next,
we address some of the problems that currently exist within the NFIP and concerns
from regulators, legislators, insurers and consumers. These problems include
(among others) a lack of involvement in the market by private insurers, increasing
financial deficits in the NFIP, a reliance on large subsidies to encourage some
property owners to purchase policies, and a program structure that allows for
continued adverse selection to exist. We then discuss NFIP-related legislation that
was recently passed in an effort to alleviate some of these problems, and we
outline the costs and benefits of that legislation. Finally, we review the
recommendations outside of recent legislation that have been proposed to fix what
many view as a flawed system for providing flood insurance coverage.
The NFIP and the WYO Program
The National Flood Insurance Program
Prior to 1927, property owners in the U.S. had the ability to obtain coverage
for flood losses through “several dozen” insurers in the private insurance market
by adding the flood peril to the other perils that were covered in fire insurance
policies (King, 2005; Scales, 2006). However, in 1927, major flooding took place
along the Mississippi River, resulting in 250 deaths and between $250 million and
$350 million in total losses across seven states (Risk Management Solutions,
2007). Following the large losses from the flooding in 1927 and 1928, private
insurers began to cease writing flood coverage (King, 2005). During this period of
time, the federal government began to work on developing solutions to mitigate
flood losses. This was done in part through the Flood Control Act of 1936, which
created a program that was intended to structurally control floods (Pasterick,
1998).1 Following the passage of the Flood Control Act, the most prevalent
method of providing disaster assistance to victims was through the use of federal
disaster loans and grants. Over time, however, concern began to grow about the
increasing costs associated with this federal assistance (Pasterick, 1998).2 It took
more than three decades after the passage of the Flood Control Act and four
decades after the floods along the Mississippi River for the federal government to
formally create a federal program to address flood insurance in the U.S.3
1. It has been argued that the attempt to structurally control floods actually further
encouraged individuals to “encroach” on flood-prone areas (Maloney and Dambly, 1976).
2. King (2005) notes that some of the major concerns at this time included: 1) continued
growth in vulnerable areas; 2) the lack of long-run effectiveness of the flood controls; and 3) the
unpredictable nature of the disaster relief payments.
3. See The American Institutes for Research et al. (2005) for a more detailed chronology of
events related to the NFIP’s development.
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
Congress created the National Flood Insurance Program (NFIP) following the
passage of the National Flood Insurance Act of 1968 (NFIA). While some
legislation related to a federal flood insurance program had been enacted prior to
1968, it was not until after large flood-related losses from Hurricane Betsy in 1965
that movement was made towards the creation of a federal flood insurance
program.4 The passage of the NFIA in 1968 and the creation of the NFIP were
necessitated not only as a result of past large flood losses, but also because private
insurers did not view flood as an insurable peril.5,6 While there were several
reasons for this perspective, some of the insurers’ primary concerns included:
1) areas that experienced recurring flood activity were almost certain to experience
future losses; 2) given the frequency and severity of flood events, the premiums
required to offer such coverage would be economically unfeasible for insureds in
flood-prone areas; and 3) adverse selection was likely to be a major problem in the
flood insurance market (Anderson, 1974).
Given the large prior flood losses and the insurance industry’s unwillingness
to offer flood insurance, Congress passed the NFIA in 1968. The purpose of the
NFIA was twofold: 1) it would encourage communities to focus on greater flood
loss mitigation through improved building codes and zoning ordinances; and 2) the
NFIA would increase the availability of flood insurance coverage by allowing the
federal government to offer coverage to communities that utilized floodplain
management (Federal Emergency Management Agency (FEMA), 2011).7 The
combination of insurance coverage tied to community involvement in floodplain
management meant that insureds could receive coverage (possibly at subsidized
rates) while communities would improve mitigation standards designed to reduce
future flood-related losses (Anderson, 1974).
4. The Federal Flood Insurance Act (FFIA) of 1956 was enacted but was not implemented
due to a lack of involvement and interest by private insurance companies (Michel-Kerjan, 2010).
Anderson (1974) notes that the FFIA of 1956 had many provisions that were similar to those
found in the NFIA of 1968.
5. The standard NFIP flood policy defines “flood” as: “1. A general and temporary
condition of partial or complete inundation of two or more acres of normally dry land area or of
two or more properties (at least one of which is your property) from: a) overflow of inland or
tidal waters; b) unusual and rapid accumulation or runoff of surface waters from any source;
c) mudflow, 2. Collapse or subsidence of land along the shore of a lake or similar body of water
as a result of erosion or undermining caused by waves or currents of water exceeding anticipated
cyclical levels that result in a flood as defined in A.1.a. above.”
6. While this represents the experience in the U.S., it should be noted that experience differs
outside of the U.S. For instance, several European countries also commonly experience flood
losses and have developed other methods to treat these exposures (outside of government
intervention), including involvement by the private insurance market. As one example, Medders,
McCullough and Jager (2011) note that flood insurance is not subsidized by the state in Germany
and that premiums tend to be high.
7. While we focus almost exclusively on the insurance component of the NFIP program,
prior studies have more explicitly investigated the mitigation aspects of the NFIP and the more
general decision to mitigate (e.g., Kelly and Kleffner, 2003; Michel-Kerjan, 2010; Carson,
McCullough and Pooser, 2013).
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
As an initial evaluation of the NFIP, we present data that illustrate the role
that the NFIP plays in the U.S. flood insurance market. Table 1 presents historical
information pertaining to policies in force, premiums and coverage limits for
federal flood policies issued between 1978 and 2012. The table suggests that as of
2012, nearly 5.63 million flood insurance policies were in force in the U.S.,
accounting for total coverage limits of more than $1.29 trillion and total earned
premiums of almost $3.35 billion. The table also shows that the average price of
coverage is around $0.25 per $100 of coverage and that the average policy in 2012
provided coverage of $229,707.8,9
When examining the development of the federal flood insurance market over
the 10-year period from 2003 to 2012, there is evidence of significant growth.
Specifically, Table 1 shows that there was more than a 20% increase in the total
number of policies issued between 2003 and 2012. Even more striking is the
growth in the coverage limits, which jumped from $691.78 billion to $1.29 trillion.
This amounts to an 87% increase in coverage limits during the 10-year span. The
increase in coverage limits is most dramatic during the one-year period following
Hurricane Katrina (from 2005 to 2006), when the number of policies in force
increased by 14% and the coverage limits increased by 20%.10 The trends in
policies in force and premiums earned by the NFIP are also illustrated in Figure 1
and Figure 2. It is likely that these increasing trends are a function of several
factors, including greater awareness of the flood peril, more pervasive knowledge
that the flood peril is not covered under the standard homeowners’ insurance
policy, and the fact that development along the U.S. coastlines continues to
increase, despite the potential for flood-related losses.11 Figure 1 illustrates that
significant growth in earned premiums and coverage limits occurred in the mid2000s despite a sharp decline in home values beginning in 2007.
8. The information contained in Table 1 does not differentiate between dwelling form
coverages and general property form coverages. The dwelling form is used for residential
property (one- to four-family residential buildings) and limits coverage to $250,000 for the
building and $100,000 for personal property (FEMA, 2014a). The general property form is for
commercial entities (five or more residential buildings and non-residential buildings) and limits
coverage to $500,000 for buildings and $500,000 for personal property (FEMA, 2014b).
Additionally, Table 1 does not differentiate between those property owners in the emergency
program and those in the regular program.
9. These values are a rough approximation of the average cost and do not consider locationbased differences, which can greatly influence the rate.
10. The evidence that demand increased following the occurrence of Hurricane Katrina in
2005 is consistent with the findings of Browne and Hoyt (2000), who find that the demand for
flood insurance increased following the experience of past flood losses.
11. Kriesel and Landry (2004) find that nearly 50% of eligible properties in sample coastal
areas participate in the NFIP.
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
Table 1:
Historical Trends in the NFIP from 1978 to 2012
All data for values presented above are obtained from the Federal Emergency Management Agency
(www.fema.gov/statistics-calendar-year). Values presented in the column titled “Premiums Per $100
Coverage” are calculated as the ratio of Earned Premiums to Coverage. Values presented in the column
titled “Average Policy Size” are calculated as the ratio of Coverage to Policies in Force.
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
Figure 1:
Federal Flood Insurance Premiums Earned and Median Home Value
in the U.S., 1978-2012
Flood insurance premium data for values presented above are obtained from the Federal Emergency
Management Agency (www.fema.gov/statistics-calendar-year/total-earned-premium-calendar-year).
Home value data for values presented above are obtained from the U.S. Census Bureau
(www.census.gov/const/uspriceann.pdf). Home value data are only available through 2010.
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
Figure 2:
Federal Flood Insurance Policies in Force, 1978-2012
All data for values presented above are obtained from the Federal Emergency Management Agency
www.fema.gov/policy-claim-statistics-flood-insurance/policy-claim-statistics-flood-insurance/policyclaim-13-14).
The NFIP’s presence across the U.S. is shown in Table 2, which presents
NFIP participation and policy information for the 50 states and the District of
Columbia. Not surprisingly, we find that the greatest take-up rates are within those
states that are most subject to potential flood-related losses. Specifically, we find
that the three states with the most policies in force are: 1) Florida; 2) Texas; and
3) Louisiana. Each of these three states has significant coastal exposure and, thus,
relatively high risk of flood-related losses (particularly as a result of hurricanes).
However, while each of the top three states are highly susceptible to flood losses,
two of the three experienced negative policy growth between 2011 and 2012. This
trend is consistent with a national average reduction in policies of roughly 2%.
Table 2 also presents the number of claims in 2012, total claim payments, the total
dollar amount of claims per policy in force and the average value of each claim.
While the national average of claims per state in 2012 was 1,874, this number is
skewed by the states affected by Superstorm Sandy; New Jersey, New York and
Pennsylvania reported more than 54,000 claims in 2012. Nationwide, average total
claims payments per state for 2012 were $47 million, with the average dollar loss
per policy equal to $951 and the average dollar amount per claim made equal to
nearly $18,000.
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
Table 2:
Federal Flood Insurance by State in 2012
All data for values presented above are obtained from the Federal Emergency Management Agency
(www.fema.gov/policy-claim-statistics-flood-insurance/policy-claim-statistics-flood-insurance/policyclaim-13-0). Policy growth values represent the change from Oct. 1, 2011, through Sept. 30, 2012.
Values presented in the column titled “$ Claim Per Policy” are calculated as the ratio of Total Claim
Payments to Policies in Force. Values presented in the column titled “$ Average Claim” are calculated
as the ratio of Total Claim Payments to Total Number of Claims.
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
The Write Your Own Program
The WYO program is a partnership between the NFIP and private insurance
carriers that the federal government created in 1983 in an effort to increase the
geographic distribution of flood insurance policies, improve the servicing of
policies by taking advantage of private insurer knowledge and allow private
insurers to interact with consumers in the flood insurance market (Government
Accountability Office, 2009). Under the WYO program, private insurers offer
standardized flood insurance coverage to insureds but do not bear the underwriting
risk associated with these policies.12 Rather, the federal government assumes the
financial risks associated with writing flood insurance while the WYO participants
market the policies, write the policies under their own names, service the policies,
and investigate and pay any claims associated with the policies. In return for
issuing and administering the policies, WYO participants receive a portion of the
flood insurance premiums to pay for marketing, administrative costs and operating
expenses (Government Accountability Office, 2009).13 As the Government
Accountability Office (GAO) noted, as of September 2008, about 90 WYO
participants issued and administered approximately 97% of the NFIP policies in
force (Government Accountability Office, 2009). The top 20 writers of federal
flood insurance in 2012 are presented in Table 3, along with the total federal flood
direct premiums written and the proportion of firm-specific premiums to total
industry federal flood premiums written. More than $2.8 billion in direct
premiums were written in the federal flood line of business in 2012.14 As presented
in Table 3, the federal flood insurance market is highly concentrated, with the
top 10 insurers writing more than 75% of premiums.15
12. Three standard flood insurance coverage forms exist under the NFIP: the dwelling form,
the general property form and the residential condominium building association policy form.
13. According to a 2009 GAO study, WYO insurers received the following expense
allowances: 1) 15% of net premiums written for commission expenses; 2) 15.2% of net premiums
written in 2007 to cover operating expenses; 3) 0.5% to 2% of net premiums written for incentive
bonuses; 4) flat fees to cover claims ranging from $60 to $1,250 for claims up to $50,000 and
percentage fees between 2.1% and 3% of the claim loss; 5) 3.3% per claim loss incurred for
claims processing; and 6) additional amounts to cover additional loss adjustment expenditures
(including engineering, adjusting, litigation and appraisal) (GAO, 2009).
14. As reported in Table 1, FEMA reports a total of approximately $3.35 billion in direct
premiums earned in 2012. We attribute part of the difference between the value we calculate and
the values calculated by FEMA to the fact that while FEMA reports that more than 80 private
insurers write the federal flood line of business, only 69 insurers in the NAIC InfoPro database
report positive premiums written in this line. We provide a listing of the 84 insurers participating
in the 2014 WYO program as reported by FEMA in the Appendix.
15. While Travelers Group was the sixth-largest writer of federal flood insurance coverage
in 2012, it announced in August 2013 that it would no longer offer federal flood insurance
coverage (Insurance Journal, 2013).
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
Table 3:
Top 20 Writers of Federal Flood Insurance
Data for ranking of the top 20 writers of federal flood insurance are obtained from the NAIC InfoPro
database. Direct premiums written are reported in the column titled “Total Federal Flood Premiums
($millions).” The column titled “Percent of Federal Flood Premiums” represents the proportion of
industry-wide federal flood premiums written by a given entity. All entities listed above are groups,
with the exception of Auto Club South Insurance Co.
Problems and Concerns with the NFIP
and the WYO Program
Although the NFIP was initially credited with providing a solution to the
absence of private insurers in the flood insurance market, over time several critical
problems began to emerge within the NFIP and the WYO program. Problems that
have affected the NFIP’s operations include significant financial deficits caused by
large losses and subsidized rates, continued adverse selection and moral hazard
within the flood market, uncertainty surrounding the NFIP, and inefficiencies in
the administration of the WYO program.
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
Financial Deficits
The NFIP’s most commonly cited problem is that since the enactment and
implementation of the NFIA of 1968, the rates for many of the most at-risk
insureds have been subsidized in order to encourage greater community and
consumer participation in the flood insurance program. Prior to the passage of the
Biggert-Waters Act in 2012, approximately 21% of NFIP policies (approximately
1.15 million policies) received subsidies, while the remaining 79% were charged
the “full-risk rates” (Government Accountability Office, 2013).16 Although less
than a quarter of all NFIP policies were receiving subsidies, the GAO (2013)
report notes that almost all of those subsidized policies protect structures that were
located in high-risk locations. Additionally, while nearly 80% of NFIP
policyholders pay the “full-risk rates” (i.e., an actuarially fair premium), the GAO
has stated that those rates may not fully capture the risk of flooding due to
outdated flood maps and inaccurate data regarding the probability of flooding
(Government Accountability Office, 2010).
Although the NFIP’s premium structure was sufficient to cover flood losses
prior to 2005, this can mostly be credited to the fact that past flood losses were less
costly than losses recorded in the last decade and that policies were more
geographically diversified; i.e., not concentrated in flood-prone areas. Within the
last decade, several significant flood-related events occurred that rapidly
deteriorated the NFIP’s financial standing. As illustrated in Table 4, in terms of
nominal dollar losses, the NFIP’s five highest flood loss years all occurred in the
2000s. The losses that occurred in three of those years were greater than premiums
that the NFIP collected in those particular years (King, 2013). Due to the premium
shortfalls, the NFIP has relied on borrowing from the U.S. Treasury to cover the
cost of paying claims since 2005 (King, 2013).17 By 2013, the NFIP’s deficit had
grown to approximately $24 billion (Kousky and Kunreuther, 2013). Figure 3
presents the cumulative debt of the NFIP from 2005 through 2011, as reported in
King (2013).
16. According to a 2010 GAO report, subsidized policyholders pay a premium equal to
roughly 35% to 40% of the actuarially fair premium.
17. While the NFIP has become reliant on debt since 2005, it had borrowed funds from the
Treasury prior to 2005 (King, 2005). However, prior to 2005, the largest cumulative debt had
always been less than $1 billion and was commonly less than $500 million.
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
Table 4:
NFIP Significant Flood Events
The Federal Emergency Management Agency (FEMA) defines a significant flood event as a flood
event that results in 1,500 claims or more. Significant flood events are identified through FEMA
(www.fema.gov/significant-flood-events). No significant flood events were reported by the NFIP for
1987 or 1990. The five years resulting in the largest payments (in nominal dollars) for significant flood
events are highlighted above.
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
Figure 3:
NFIP Cumulative Debt, 2005-2011
Values presented above are in millions, and all values are obtained from King (2013).
Adverse Selection, Moral Hazard and Repetitive Loss Properties
Another problem the NFIP faces is adverse selection. One reason why private
insurers have largely avoided the flood insurance market is that the individuals and
businesses that demand flood insurance are often those most likely to experience a
loss, especially because many of the NFIP’s policyholders are located in high-risk
flood zones.18 The existence of moral hazard within the federal flood insurance
market further compounds this issue. Specifically, when the NFIP was created,
there was no deterrent for policyholders who experienced a loss to rebuild outside
high-risk flood zones. This meant that policyholders could experience a flood loss,
rebuild their property at the same high-risk location and then experience
subsequent flood losses. (These locations are commonly referred to as “repetitive
loss properties.”).19 The NFIP’s decision to provide insurance for high risk
property, to offer no deterrence to rebuilding homes and businesses in flood-prone
areas, and the fact that rates were often subsidized meant there was little incentive
or reason for policyholders to rebuild their homes and businesses in safer
locations. There is significant anecdotal evidence that adverse selection and moral
hazard are both present in the NFIP market. For example, it has been reported that
a home in Mississippi that was valued at $69,900 had been flooded 34 times
during a 32 year period. Over the course of those 32 years, a total of $663,000 in
18. Some of their properties were built before Flood Insurance Rate Maps (FIRMs) were
developed for their communities. FEMA reports that nearly 580,000 policies issued on pre-FIRM
primary residences receive subsidies (FEMA, 2013a).
19. FEMA defines a repetitive loss property as any property that experiences two or more
flood losses that are greater than $1,000 during a 10-year period.
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
benefits was paid to cover flood-related damages to that home (Frank, 2010). In
another instance, an Alabama home valued at $153,000 cost the NFIP $2.3 million
in claims (Frank, 2010).
Evidence suggests that the total number of repetitive loss properties is
relatively low within the NFIP, but that aggregate claims attributed to these
properties are significant. While these repetitive loss properties represent only a
small fraction of the total number of homes covered under the federal flood
insurance program (roughly 1%), historically they have accounted for nearly 38%
of total program claims (Government Accountability Office, 2004). One way in
which Congress has attempted to address the problem of repetitive loss properties
is through the passage of the Bunning-Bereuter-Blumenauer Flood Insurance
Reform Act of 2004 (BBB Act). The BBB Act created a pilot program that
provided grants to severe repetitive loss properties.20 The grant allowed high-risk
property owners to mitigate against future potential flood losses. Under the pilot
program, owners of severe repetitive loss properties could receive the grant offer
(once FEMA awarded the grant to the given state) and choose to either accept the
grant or reject the grant; however, those who declined the grant could be charged
higher flood insurance premiums in the future. While a major goal of the BBB Act
was to reduce the number of severe repetitive loss properties, a 2009 report from
the U.S. Office of Inspector General states that “[t]he number of repetitive and
severe repetitive loss properties and insurance claims has steadily increased over
the past eight years and is outpacing FEMA mitigation efforts.”
Uncertainty Surrounding the NFIP Program
The NFIA of 1968 included a provision that called for the expiration of the
NFIP in 1997.21 Thus, the NFIPs continuation is reliant on Congress’ ability
to pass extensions. Following the large flood losses stemming from
Hurricane Katrina and Hurricane Rita, considerable time was spent developing a
plan to modernize the NFIP and minimize/avoid the financial strains that had
enveloped the program. Because of the vigorous debate (and disagreements) that
ensued regarding viability and modernization of the NFIP, uncertainty surrounding
the NFIP’s future developed because the program had operated for several years
entirely on the basis of short-term extensions. Specifically, from 2008 to 2012, the
NFIP was extended 17 times, and it was allowed to lapse twice (Widmer, 2012).
20. The language of the BBB Act defines a severe repetitive loss property as a property that
meets the following conditions: a) the property consists of one to four residences; b) the property
is covered by federal flood insurance; c) the property had experienced four or more claims
payments under the flood policy, with each claim exceeding a $5,000 threshold and the total
amount exceeding a $20,000 threshold; or d) the property had experienced at least two or more
claims payments with the total amount exceeding the total value of the property
(BBB Act, 2004) .
21. Section 1319 of the NFIA contains the “Expiration of Program” provision, which states,
“No new contract for flood insurance under this chapter shall be entered into after September
30, 1997.”
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
It was not until the passage of the Biggert-Waters Act (discussed below) that
Congress agreed upon a long-term (five-year) extension of the NFIP.
The short-term extensions caused uncertainty for property owners, the real
estate market and insurers, as there were concerns over whether flood insurance
coverage would be available for homes with the highest risk for flood loss. For
many homeowners, flood insurance is required in order to receive federal financial
assistance (either through the Federal National Mortgage Association or the
Federal Home Loan Mortgage Corporation) to purchase or build a home in a
Special Flood Hazard Area (SHFA).22 If NFIP coverage is allowed to lapse or,
based on legislative changes, when uncertainty exists regarding the NFIP’s future,
current property owners in SFHAs and those considering purchasing property in
SFHAs are affected. Uncertainty over the NFIP’s future affects the entire real
estate market in flood-prone areas, often causing buyer reticence and potentially
reducing home values (The Times-Picayune, 2014; Garrison, 2014; Ballard, 2014;
Koba, 2014). While the Biggert-Waters Act affords stakeholders the peace of mind
that the NFIP will be in effect for five years, the future may hold that legislators
will again rely on short-term extensions for a program that protects millions of
property owners.
While regulators and legislators are most worried about the impact of NFIP
uncertainty on consumers, uncertainty surrounding the NFIP also affects the U.S.
private insurance industry.23 There is evidence that the private insurance industry
is willing to write flood insurance for homeowners and small business owners, but
that their willingness is being tempered by the uncertain future of the NFIP,
especially with regard to the NFIP’s premium structure (Scism, 2014; Singer,
2014). Private insurers struggle to compete against a subsidized premium
22. This requirement was created through the passage of the Flood Disaster Protection Act
of 1973 and is restated in the National Flood Insurance Reform Act of 1994.
23. For instance, State Farm announced in 2010 that it would cease participation in the
WYO program. The decision to exit the program was due to “… numerous stop-starts to the
program since 2002, and because procedural changes in claims handling are forcing it to divert
too much of its resources to the program” (Postal, 2010).
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
structure, keeping many participants out of the market.24 We discuss this element
of the NFIP below.
Inefficiencies in the Administration of the WYO Program
The WYO program is the primary method the federal government uses to
market flood insurance coverage to property owners and to administer the claims
associated with flood-related losses. As noted previously, the WYO program
represents a public-private relationship in which private insurance companies write
flood insurance coverage, while the federal government bears the underwriting
risk associated with the policies. The WYO program has been instrumental in
providing policies to property owners, but some critics have argued that the WYO
program has several inefficiencies that cause further financial strain on the NFIP.
One of the biggest concerns is that, according to some sources, the WYO
participants (i.e., private market insurance companies) are overcompensated for
the services that they provide. A 2009 GAO report concluded that some of the
problems that exist in the WYO program include: 1) FEMA did not know what
proportion of payments going to WYO participants were necessary to cover
expenses versus what proportion represented insurer profit; 2) FEMA did not
ensure that WYO participants complied with the NFIP requirements; and
3) FEMA’s bonus structure was not aligned with long-term goals of the NFIP. It is
seemingly in the best interest of the federal government to continue this
relationship with the insurance industry, as it allows the industry greater exposure
and experience in the flood insurance market while also providing policyowners
with potentially more responsive service than would be received otherwise.
However, given the current financial strains the NFIP faces, it is clear that one
source of potential improvement would be to focus on the manner in which WYO
participants are compensated, while recognizing that one of the largest WYO
participants, writing nearly 8% of all flood insurance policies (see Table 3),
24. It should be noted that there is a private market for flood insurance in the U.S., although
the market is small relative to the total U.S. flood market, and coverage is typically limited to
dwellings and businesses with values that exceed NFIP limits. Browne and Halek (2010) indicate
that the private insurance market accounts for 50,000 to 75,000 voluntarily placed flood
insurance policies, while the NFIP accounts for more than 5 million policies. While insurers do
offer this excess coverage, evidence suggests that consumers do not typically take advantage of
this option. The relatively low take-up rate is likely due to a number of factors, including lack of
availability of coverage, cost and consumer preference. As Wells noted (2006), excess coverage
is offered on a voluntary basis, and many insurers that offer this coverage are reluctant to offer
the coverage in those areas that are likely to be most affected by floods. Additionally, some
consumers may prefer to either select the coverage that will satisfy their bank’s minimum
requirements or opt for the least costly coverage. Finally, it is possible that some agents do not
inform insureds of the existence of excess coverage. For instance, following Hurricane Katrina,
there were several errors and omissions claims against insurance agents asserting that agents
failed to disclose the existence of this coverage to consumers (Wells, 2006).
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
recently withdrew from the market.25 This suggests that the fears of carrier
overcompensation may be unfounded or that program requirements may act as a
deterrent for some private insurers.
Recent NFIP Legislation
The Biggert-Waters Flood Insurance Reform and Modernization
Act of 2012
The Biggert-Waters Act is the largest single legislative reform to the NFIP
since its inception (Lehrer, 2013). The Biggert-Waters Act was passed in an effort
to reduce the federal government’s subsidization of flood insurance and,
ultimately, reduce the financial strain of the NFIP on taxpayers.26 As discussed
briefly above, the Biggert-Waters Act introduced numerous changes to the NFIP.
Notably, premium subsidies for “second homes, business properties, severe
repetitive loss properties or substantially improved/damaged properties” were to
be phased out until premiums reflected actuarially fair rates (NAIC, 2012);
premiums for new policies needed to be actuarially fair; and the cap on premium
increases had been increased from 10% to 20% per year for all properties except
those mentioned above (which were allowed to increase up to 25% per year).
Additionally, the Biggert-Waters Act mandated FEMA to create new flood maps,
which would help determine the rate structure and rate changes for the NFIP. The
Biggert-Waters Act also allowed the NFIP to purchase reinsurance from private
reinsurers in order to reduce the financial strain of the NFIP on taxpayers.
As previously mentioned, the Biggert-Waters Act mandated that premiums for
new policies be actuarially sound. In effect, this allowed current property owners
to continue to benefit from significant subsidies in some cases, while delaying the
imposition of new, actuarially fair rates until the subsidies were gradually phased
out or until the title to the property changed hands. This provision most affected
pre-FIRM primary residences because flood insurance subsidies are concentrated
in these properties. The effect of this policy change was potential disruption in the
real estate market, which was an important major consideration in the eventual
passage of the Homeowner Flood Insurance Affordability Act (discussed below).
While the Biggert-Waters Act also authorized or mandated numerous other
changes to the NFIP and FEMA, the changes listed above, which may have had
the greatest impact on the NFIP’s future, were especially important to the
25. In August 2013, Travelers announced its intention to withdraw from the flood insurance
market, describing it as “… a small, non-core part of our business” while noting that “… exiting
the program eliminates the operational complexity associated with maintaining separate
underwriting and claim processes required for participating.” (Insurance Journal, 2013).
26. Subsidies are largely concentrated among pre-FIRM primary residences and in high-risk
and undetermined-risk areas (FEMA, 2013b).
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
U.S. private insurance market. Since before the NFIP’s inception, there has been
no stable private insurance market for flood coverage in the U.S. One of the
primary reasons given for the lack of a private market is that insurance cannot
generally cover catastrophic risks. However, private insurance coverage has been
available for hurricanes, earthquakes, tornadoes and other catastrophic perils for
decades. So, perhaps more importantly than the flight from catastrophe risk,
private insurers have not been present in the flood insurance market because of
premium subsidies the NFIP provided to consumers. By phasing out premium
subsidies and increasing rates on many of the NFIP’s insureds, it was believed that
the Biggert-Waters Act may have eventually created a path for private insurers to
enter and compete in the U.S. flood insurance market.
While private entities in the U.S. sell some flood insurance each year, there
has not been a stable flood insurance market for individuals, families and small
businesses since the passage of the NFIA. With the passage of the Biggert-Waters
Act in 2012, a private insurance market began to emerge. Reports indicated that
some private insurers established initial markets in Florida, Connecticut and other
states (Scism, 2014; Singer, 2014).
Reaction to the Biggert-Waters Act
Following the passage of the Biggert-Waters Act, legislators and insurance
industry representatives both praised its passage as it would finally provide for a
long-term extension of the NFIP after four years of short-term extensions.
Additionally, subsidies would be phased out, which would reduce the financial
strains on the program. However, as implementation of the Biggert-Waters Act
began, it became apparent that some property owners would experience significant
increases in flood insurance rates, in some instances as high as 3,000% (Pettus,
2013). The Biggert-Waters Act sheltered some properties from drastic rate
increases through “grandfathering,” but properties that were sold were subject to
the full (unsubsidized) rates. Some believed the rate increases could adversely
affect the housing market in flood-prone areas by stifling demand for high-risk
homes. The loss of such subsidies could substantially affect a purchaser’s
valuation of a property. For instance, Harrington (2013) notes one scenario in
which a home could be sold, and the annual flood insurance premium could
increase from $1,400 to $9,500—an increase of more than 6.5 times the original
premium. With uncertainty surrounding the future of premium subsidies in the
NFIP and the knowledge that flood insurance rates for many properties could
increase substantially, the potential existed for property purchasers to demand
lower real estate prices to account for an expected increase in annual flood
insurance premiums.27
27. There is evidence linking risk of catastrophic damage to home value in prior literature.
Dumm, Sirmans, and Smersh (2011) find that homes in coastal regions of Florida sell for
significantly higher values if the homes are built to withstand stronger natural disasters
(e.g., hurricanes and windstorms).
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
While property-owners voiced concern regarding the potential rate increases,
the uncertainty surrounding these increases could also directly affect insurers.
Some consumers would likely attribute the imposition of the NFIP’s new rates that
the Biggert-Waters Act mandated to the WYO insurers that issue and service the
policies. Anticipated negative reactions resulting from dramatic rate increases may
have induced some insurers to consider reducing their participation in the
WYO program.28
Given the strong response from property owners and other stakeholders, many
legislators pushed to have the Biggert-Waters Act repealed or delayed.29 As
additional fallout, Mississippi filed a lawsuit against FEMA arguing that the rate
increases were excessive and resulted from the use of inaccurate data. Several
states—including Alabama, Florida, Louisiana, Massachusetts and South
Carolina—supported the Mississippi suit through “friend of the court” briefs
(Postal, 2013).
The Homeowner Flood Insurance Affordability Act of 2014
As a result of the concerns about the potential immediate impact that the
Biggert-Waters Act could have on property owners, Congress substantially
modified the Biggert-Waters Act through the passage of the Homeowner Flood
Insurance Affordability Act of 2014 (HFIA Act).30 Under the HFIA Act, the
immediate premium increases that the Biggert-Waters Act required are
ameliorated for some policyholders. For pre-FIRM primary residences receiving
subsidies, annual premium increases are subject to a minimum of 5% and a
maximum of 18%, as opposed to the 25% immediate annual increases that
Biggert-Waters imposed. The changes to older pre-FIRM non-primary residences,
business properties and severe repetitive loss properties are mostly unaffected by
the HFIA Act; these properties will continue to experience potential dramatic
premium increases (as required by the Biggert-Waters Act) until actuarially sound
rates are achieved. Additionally, while the Biggert-Waters Act called for new
policies to be charged the “full risk rate,” the HFIA Act repeals that provision and
allows property owners to purchase new policies at the subsidized rates (Simpson,
2014b). These rates will continue while the NFIP develops new guidelines
(FEMA, 2014c). To help support subsidies for high-risk properties, all
policyholders in the NFIP will now pay a surcharge—$25 for primary residential
properties and $250 for commercial or secondary residential properties—to a
reserve fund (Simpson, 2014b). Each of the aforementioned components of the
28. We thank an anonymous reviewer for this insight.
29. This strong reaction from those with subsidized policies is consistent with the findings
of Landry and Jahan-Parvar (2011), who report that property owners with subsidized flood
insurance coverages are much more sensitive to changes in the price of insurance.
30. The HFIA Act was signed into law by President Barack Obama on March 21, 2014
(Hofmann, 2014).
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
HFIA Act delays the rate increases that were initially intended to allow the NFIP
to more directly address the financial problems that have plagued the program.
While the provisions noted above have been some of the most commonly
discussed, several other important provisions that relate to the program’s rate
structure are also found in the HFIA Act. For example, property-specific
mitigation features that are not part of the insured structure are allowed to be
considered when setting rates. The HFIA Act also encourages FEMA to offer
coverage such that the premium is no greater than 1% of the total coverage, and
FEMA must report to Congress those cases where the premium exceeds 1% of the
coverage amount (Postal, 2014).31 In addition, the HFIA Act mandates new
mapping and affordability studies (FEMA, 2014c). Finally, a provision for refunds
to certain policyholders is created, where refunds apply to those paying the fullrisk rate after July 6, 2012, and may apply to others who renewed their policies
after the HFIA Act was enacted and experienced premium increases of greater
than 18% (FEMA, 2014c). While the HFIA Act did not undo all of the changes to
the NFIP that the Biggert-Waters Act initiated, it repealed the removal of premium
subsidies for primary homeowners and the reduction in rate increases for many
property-owners. Thus, the HFIA Act nullifies the largest (and arguably most
significant) changes contained within the Biggert-Waters Act and represents a
liability for taxpayers because the NFIP will revert to a subsidized and insufficient
premium structure. However, the HFIA Act will help bolster real estate markets in
coastal and flood-prone areas and likely provides immediate relief to the real estate
market for pre-FIRM primary residences. Additionally, as a result of halting or
delaying insurance premium increases, the HFIA Act may increase the value of
coastal homes, leading to a larger property tax base for local communities.
In addition to legislative efforts to alter and repeal provisions found in the
Biggert-Waters Act, several states have begun to discuss whether the federal flood
insurance market is the most effective method to provide flood insurance to
property owners or whether some other options beyond the federal market should
be considered. For example, the West Virginia House of Representatives passed
legislation to lessen the effects of the Biggert-Waters Act on property owners,
creating a private market option to allow insureds to purchase coverage limits
equal to their mortgage balance rather than replacement cost of the dwelling
(Associated Press, 2014). The Florida Senate also recently passed a bill that
attempts to encourage a private flood insurance market, and some insurers have
begun selling flood insurance in Florida’s admitted market (Elmore, 2014).32 With
more than 2 million NFIP policies in force, Florida represents the largest potential
private insurance market for the flood risk.
While some legislators, property owners and special interest groups argued in
favor of the repeal or delay of the provisions in the Biggert-Waters Act, insurers
31. For example, if a residential property has a NFIP policy with a $250,000 limit, the
annual premium should be no greater than $2,500.
32. At of the time of this writing, the Florida House of Representatives is considering a
companion bill.
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
appeared to favor the Biggert-Waters Act and the move to reduce and/or eliminate
the subsidies that are provided to the highest risk properties. The HFIA Act
allowed some, but not all, of the subsidies to remain in place, at least temporarily.
As discussed previously, several major hurdles must be overcome before insurers
are comfortable offering flood insurance and assuming the underwriting risk
associated with the flood line of business. While the Biggert-Waters Act did not
eliminate all of those hurdles, it did open the door for private insurers to eventually
enter the market and offer coverage at an actuarially fair rate. The HFIA Act slows
the implementation of the subsidy phase-out, but it continues a path for private
insurers to enter the market. Without the removal of the subsidies that are
currently available to high-risk property owners in the federal flood insurance
program, private insurers are unlikely to enter the flood market to any
significant degree.
Proposed Changes to the U.S. Flood
Insurance Market
Given the recent pushback due to the passage of the Biggert-Waters Act,
several potential solutions to the issue of flood insurance in the U.S. have been
offered, with some of the recommendations moving away from the federal
program that has been in place over the past 50 years. Below we detail some of the
recommendations that have been proposed.
Increased Involvement by the Private Insurance Market
One potential solution that legislators and insurance regulators have offered is
increased involvement by the private insurance market. As mentioned previously,
the federal government underwrites the majority of flood insurance policies, and
most private insurers are only involved in the marketing and claims settlement
process. It has been reported that the Florida Office of Insurance Regulation has
been in discussions with private insurers to encourage them to write flood
coverage outside of the NFIP system (Klas, 2013). However, this plan could be at
risk; while some insurers have shown interest in entering the flood insurance
market, a recent GAO report suggests that the rate increases associated with the
Biggert-Waters Act are necessary for insurers to enter the market (Government
Accountability Office, 2014). The report suggests that in addition to increased
rates, private insurers would be more inclined to enter the market if the federal
government provided coverage for those properties that the private market did not
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
want to insure and/or the federal government served a role as a reinsurer for floodrelated losses.33
There is precedent for the government acting as a reinsurer to a private
insurance market reluctant to sell catastrophic risks policies. At the federal level,
the Terrorism Risk Insurance Act provides reinsurance against catastrophic loss
from terrorism losses, allowing the private market to confidently continue to offer
coverage (Kunreuther and Pauly, 2005). At the state level, Florida administers the
Florida Hurricane Catastrophe Fund, which was established after Hurricane
Andrew in 1993 to provide state-backed reinsurance to Florida property insurers
(Harrington and Niehaus, 2001). Insurers have also indicated that regulators would
need to provide insurers with flexibility in ratemaking. They argue that this
flexibility would be necessary as there is not sufficient data to ensure that
calculated rates are appropriate.
A private flood insurance market would help alleviate some of the federal
government’s (and, ultimately, the taxpayers’) liability for future flood events by
allowing insurers to charge risk-based premiums to high-risk homeowners. A
private insurance market could also help homeowners with home values above the
NFIP’s $250,000 coverage limit find single-insurer coverage, allow homeowners
to insure their dwelling on a replacement cost rather than actual cash value basis,
and increase the flexibility in flood insurance policy conditions (Browne and
Halek, 2010).
Creation of a State Insurance Pool
Another option that legislators have mentioned as an alternative to federal
flood insurance coverage is the creation of state insurance pools, which will act as
insurers of last resort for property owners. This idea has been practiced in Florida
through the Citizens Property Insurance Corporation. Originally, Citizens’ goal
was that the state insurance pool would act as an insurer of last resort for those
homeowners with the highest risk of hurricane damage. Similarly, state-run flood
insurance pools could provide coverage at rates lower than those the NFIP
provides (Bacchus, 2013). However, if it is believed that the NFIP’s rates are
already below actuarially fair levels, the creation of an insurer that will offer even
lower rates might only act to transfer future financial losses associated with
underpricing from the federal government to the states. Some legislators question
the validity of this concern, noting that over the past 20 years, Floridians paid
33. With the NFIP’s continued reliance on subsidized rates, one potential outcome is that
insurers could cherry-pick the lower-risk properties and then allow the high-risk properties to
remain with the NFIP. Some argue that this is currently the case, and that those carriers that are
currently writing private market flood coverage only write coverage for high-valued properties
that face a low risk of flood loss (Jacobs, 2014). However, others argue that even if carriers were
to try to cherry-pick in the flood market, it could prove difficult as property owners that face a
low or moderate risk of flood loss may be less likely to demand coverage because they are less
likely to face a loss (Friedman and Singh, 2014).
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
$16 billion in premiums to the NFIP but received less than $4 billion in claims
payments (Klas, 2013).
Use of Long-Term Property Insurance Coverage
Another alternative that researchers have offered is the creation of long-term
property insurance coverage tied to specific properties. Specifically, Jaffee,
Kunreuther and Michel-Kerjan (2010) propose the use of long-term property
insurance contracts that are attached to the property, and they directly address the
role that long-term contracts could have in the flood insurance market. Under the
arrangement that Jaffee et al. discussed (2010), the NFIP contract would either
have a fixed premium for the entire policy term (with a term lasting between five
and 20 years) or an adjustable premium where the policy is guaranteed renewable.
The policy would be attached to the property, regardless of who the owner is. The
authors also argue that the NFIP could offer a loan program that would be used to
fund property mitigation projects, which would ultimately reduce flood losses in
the future. The authors contend that this type of long-term arrangement would
reduce insurance premium volatility and would also encourage property owners to
invest in protection against flood losses for the property.
Maintain the Status Quo
A final option that legislators across the U.S. have discussed is to simply
repeal (or partially repeal) the Biggert-Waters Act or delay the provisions found in
the legislation. Given the recent passage of the HFIA Act, this option is clearly
one preferred route for addressing the difficult issues associated with the NFIP. As
noted previously, the passage of the HFIA Act effectively allows for some rate
increases, but subsidies still remain in effect.34 The passage of the HFIA Act could
have an adverse effect by inhibiting private insurer involvement in the flood
insurance market, as many insurers have publicly stated they would be less
inclined to enter the flood insurance market because the problems that have caused
insurers to avoid the market would still remain. A recent GAO (2014) report
acknowledged the potential effects of a delay or repeal of the Biggert-Waters Act
by stating that such action “… may reinforce private insurers’ skepticism that they
would ever be permitted to charge adequate rates and make their participation
unlikely in the foreseeable future.” Although it was known that such an action
would likely stall efforts to increase the level of private insurer involvement in the
flood market and would do little to improve the NFIP’s current financial status,
passage of the HFIA Act was largely viewed as politically wise for those
legislators with constituents who are located in high-risk locations. This
development indicates that the status quo is likely to remain, and it may be largely
dependent on state government (rather than federal government) to take measures
34. The HFIA accounts for the subsidies by charging all property owners a $25 annual
assessment for primary residences and $250 for other properties (Simpson, 2014b).
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
necessary to increase the level of active involvement by the private insurance
market.
Conclusion
The private insurance market has long characterized the U.S. flood insurance
market as uninsurable. This long-held belief is primarily attributable to the
relatively common frequency with which major flood events occur in the U.S., the
presence of significant adverse selection in the market, moral hazard created and
sustained by the financing function provided through the NFIP, and evidence that
suggests that the most at-risk property owners are unwilling to pay an actuarially
fair rate. Because of the absence of profit-making conditions, the private market
has mostly been unwilling to enter the market, and the federal government has
underwritten coverage for flood losses through the NFIP. While the NFIP has been
effective in delivering flood insurance to those property owners that demand
coverage, the last decade has proven to be difficult for the NFIP as budget deficits
have reached record levels, while premiums remain artificially low and property
development continues in flood-prone regions.
Given the financial and operational challenges that the NFIP has faced over
the past decade, successful solutions will require an understanding of how the
federal flood insurance market developed, how it currently operates, the problems
that it currently faces, and the alternatives that have been proposed to make the
program viable for the long-term. The evidence suggests that while the program
has been operating for decades, the significant increase in catastrophic floodinducing events and the continued property development in flood-prone areas
make it incredibly difficult for the NFIP to remain viable in its current form. With
the program currently more than $24 billion in debt, legislators will need to make
difficult decisions regarding the overall financial structure of the program if it is to
survive and operate without additional borrowing. While opinions vary with
regards to the methods that should be used to improve the financial position of the
NFIP, ultimately regulators, insurers and legislators must continue to work
together to either fix the current program or develop new market-based solutions
to ensure that property owners in the future will have access to this
necessary coverage.
© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
Appendix
2014 Write Your Own (WYO) Participants
A total of 84 insurers participated in the WYO program in 2014. WYO participant information for 2014
is obtained from the Federal Emergency Management Agency (www.fema.gov/wyo_company).
© 2014 National Association of Insurance Commissioners
The State of the National Flood Insurance Program
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© 2014 National Association of Insurance Commissioners
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© 2014 National Association of Insurance Commissioners
Journal of Insurance Regulation
Guidelines for Authors
Submissions should relate to the regulation of insurance. They may include
empirical work, theory, and institutional or policy analysis. We seek papers that
advance research or analytical techniques, particularly papers that make new
research more understandable to regulators.
Submissions must be original work and not being considered for publication
elsewhere; papers from presentations should note the meeting. Discussion,
opinions, and controversial matters are welcome, provided the paper clearly
documents the sources of information and distinguishes opinions or judgment
from empirical or factual information. The paper should recognize contrary views,
rebuttals, and opposing positions.
References to published literature should be inserted into the text using the
“author, date” format. Examples are: (1) “Manders et al. (1994) have shown. . .”
and (2) “Interstate compacts have been researched extensively (Manders et al.,
1994).” Cited literature should be shown in a “References” section, containing an
alphabetical list of authors as shown below.
Cummins, J. David and Richard A. Derrig, eds., 1989. Financial Models of
Insurance Solvency, Norwell, Mass.: Kluwer Academic Publishers.
Manders, John M., Therese M. Vaughan and Robert H. Myers, Jr., 1994.
“Insurance Regulation in the Public Interest: Where Do We Go from Here?”
Journal of Insurance Regulation, 12: 285.
National Association of Insurance Commissioners, 1992. An Update of the NAIC
Solvency Agenda, Jan. 7, Kansas City, Mo.: NAIC.
“Spreading Disaster Risk,” 1994. Business Insurance, Feb. 28, p. 1.
Footnotes should be used to supply useful background or technical
information that might distract or disinterest the general readership of insurance
professionals. Footnotes should not simply cite published literature — use instead
the “author, date” format above.
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of the paper. They should have descriptive titles and helpful explanatory notes
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Journal of Insurance Regulation
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