With hurricane season under way, severe weather hitting the Midwest and mid-Atlantic states this week, and clean-up still ongoing from Superstorm Sandy -- what will you do if your house is flooded?
If you’re covered by the National Flood Insurance Program (NFIP), as are 5.6 million property owners, your losses will be covered. But the insurance program is under its own fiscal black cloud.
Payments to property owners after Sandy exhausted the cash on hand and borrowing authority that NFIP had last year. Unlike private-sector insurance companies, NFIP is taxpayer-backed and can borrow from the Treasury. Congress had to pass legislation in January to increase NFIP’s borrowing authority by nearly $10 billion, to $30.4 billion, to cope with Sandy claims; $6.4 billion in borrowing authority remains.
But due to past storms, especially Hurricanes Katrina and Rita in 2005 -- which cost the NFIP nearly $17 billion -- the program owes the Treasury $24 billion, up from $17.8 billion before Sandy. As of last November, it had not repaid any principal on its loan since 2010, according to the government’s fiscal watchdog, the Government Accountability Office (GAO).
All this puts the NFIP on the GAO’s list of “high risk” federal programs.
One problem with NFIP is low participation -- too few property owners are buying insurance, which means inadequate revenue flowing in to the program to pay claims.
Actuary Stuart Mathewson, who is a member of the American Academy of Actuaries’s Natural Catastrophe Subcommittee, said “the key issue in getting flood insurance to be financially viable is that we need wider participation.”
In an attempt to make the insurance program viable, a reform bill signed into law by President Barack Obama last summer -- just a few months before Sandy hit -- tries to improve the flood zone mapping done by the Federal Emergency Management Agency (FEMA) and stiffens the penalties on mortgage lenders who fail to require flood insurance, as is mandated by federal law.
Most notably, the law phases in increases in the premiums that must be paid by about 20 percent of property owners in the NFIP program.
But there’s pressure led by Sen. Mary Landrieu, D-La., supported by national homebuilders and relators groups, to delay the premium increases.
And even with the reforms in last year’s law, the GAO warned that the NFIP “likely will not generate sufficient revenues to repay the billions of dollars borrowed from the Treasury to cover claims from the 2005 hurricanes or future catastrophic losses.”
Last year’s reforms “eventually will help move it (NFIP) toward actuarially sound (insurance) rates, but there are still other issues,” Mathewson said. “The American Academy of Actuaries believes that the rates themselves still will not be sufficient to handle very large events such as Katrina and Sandy.”
The fiscal pressure comes at a time when the National Oceanographic and Atmospheric Administration estimates that this hurricane season, which started June 1 and runs for six months, there’s a 70 percent likelihood of three to six major hurricanes.
As risks rise, premiums should too – and that was one of the goals of the 2012 reform law.
While no one knows whether this year or next year another catastrophic storm on the scale of Katrina or Sandy will hit, “if there is an increase in frequency of large occurrences, there would have to be increased premiums to cover that contingency,” Mathewson said.
But if premiums are too high, property owners won’t buy the insurance. Then, if a catastrophic flood hits, those homeowners might put political pressure on Congress to cover their losses through emergency spending -- defeating the purpose of having an insurance program in the first place.
“That’s clearly the dilemma,” said Mathewson. “We need wider participation, but higher premiums can lead to lower participation.”
Yet if premiums aren’t raised to reflect actual risk, then the insurance program will become insolvent -- and again, taxpayers will need to bail it out.
As Landrieu tried to offer her amendment to delay the premium increases, she told the Senate the increases are “going to blow up the dreams of people who built their homes according to official flood maps, who did everything they were supposed to do under the official flood maps, and then when those maps changed, their rates then can go up 25 percent, compounded for the next 5 years, not only pricing them out of the market but making their homes unsellable, and it affects banks in these communities. “
The National Association of Realtors said its members “have expressed significant concern about rate quote increases as FEMA modernizes and updates the flood maps, particularly in coastal communities.” The realtors group said FEMA should study “whether low and middle-income homeowners would be priced out of their homes due to higher flood insurance premiums.”
The higher premiums aren’t just a Louisiana problem, Landrieu noted, pointing out that several of the top 10 states affected by the premium hikes are in the Northeast -- Connecticut, Massachusetts, New York, New Jersey and Pennsylvania -- but the top 10 also includes Ohio and California.
She said, “Maybe some of these rates need to go up … What I am disagreeing with is the rapid rate in which it is going to happen, and it is going to have catastrophic effects on many communities.”