Flood Insurance: Sifting through the Hype

At the beginning of each semester while I was in college, my accounting professor always posted an opening line on the chalkboard: “All withdrawals must be preceded by deposits”.

That sums up our problem these days with the National Flood Insurance Program administered by our federal government. The National Flood Insurance Program was started back in the 1960s when none of the private insurance carriers in the United States or abroad wanted to write flood insurance in the Continental United States. So the flood program, administered by FEMA, formulated a set of rates, proposed areas along the coastline which they designated as flood hazard areas and began selling this government-backed product.

The program until the 1990s was very much self-sufficient. The amount of premiums was enough to administer the program and pay the claims. But starting in the 1990s, the severity of the storms became greater each and every year. This hit a peak in 2005 with Hurricane Katrina hitting Louisiana and Alabama. Several other hurricanes that hit Florida, Alabama and Mississippi that year (Dennis, Rita, Wilma) were also more severe that our country has ever seen. And since 2007, the National Flood Insurance Program has been dealing well over a $20 billion deficit that nobody in Washington wants to address.

Most all of this was finally addressed during the first half of 2012 by the U.S. Congress with the passing of the Biggert-Waters Flood Insurance Reform Act of 2012. It was signed into law in July 2012. Most importantly the National Flood Insurance Program was reauthorized for a full five years. Provisions within the law will now give FEMA and the National Flood Insurance Program the right to increase the flood insurance premiums, adjust the maps governing flood hazard areas, decrease premium subsidies currently in effect and give the government a plan to eliminate the debt that the program has incurred.

The flood advisory maps currently being proposed were not the result of Hurricane Sandy and were not the result of a knee-jerk reaction by FEMA. They are result of reviews of flood patterns as well as weather patterns that the National Flood Insurance Program feels may affect the Coastal US. The 2012 Flood Reform Act does allow the program to look into finding private insurance companies to help take over the program. It would be my guess that if a private carrier would be willing to do this and offer a superior product, better than what is being offered by the NFIP, it would be at a much greater cost.

Our office has been in discussions with various experts from FEMA and private insurance companies, who are servicing agents for the National Flood Insurance Program, about the proposed rates increases. Many of the premiums being displayed right now are totally arbitrary. The flood advisory maps that were disseminated to the public are items that are being discussed and reviewed and will be subject to revision as time progresses. Any proposed future rates will all be dependent on compliance with some of these proposed elevations and participation in the program. It is safe to say that the rates that have been charged in the past have been subsidized rates that will be coming to an end this year.

The biggest myth here is that the flood program (NFIP) has unlimited funds or that this is a profitable entity. It is just not the case. This federal program is presently paying out millions of dollars more than they currently take in each year and with the implementation of the new Reform Act rates will be increasing each year until actuarial rates are achieved.