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With Rising Water Comes Rising Rates

A New Attempt to Rescue the NFIP Looms as Another Reauthorization Approaches

With the upcoming expiration of the National Flood Insurance Program (NFIP) looming, flood insurance is back on the forefront as a topic of discussion. The program, set to expire May 31, was temporarily reauthorized by the president Dec. 21, 2018. This was the 10th short-term reauthorization of the NFIP since September 2017 with two brief lapses during that time. It is unlikely that the program will be allowed to lapse again in May for any significant amount of time, but if it does, the effect on the housing market could be severe.

Properties located in a Special Flood Hazard Area are required to have flood insurance as a condition of any federally backed loan, and since no new flood policies may be obtained during a lapse, an estimated 1,400 loans per day could be delayed or canceled. If the program does lapse, a buyer can try to obtain coverage through the private market or by assuming the current NFIP policy from the seller if they have one in place.

One of the main reasons for the many temporary reauthorizations is the substantial debt that the NFIP owes the U.S. Department of the Treasury. When the program was developed in 1968, it wasn’t designed to cover catastrophic events. It uses borrowing power from the treasury in some cases to cover claims, and by 2000, that debt had reached $600 million.

However, things changed dramatically when Hurricane Katrina hit in 2005, and the debt increased to over $16.8 billion by 2006. “Since the 2005 hurricane season, the NFIP has made six principal repayments totaling $2.82 billion and has paid $4.2 billion in interest. The program is currently paying nearly $400 million annually in interest,” said Diane Horn, flood insurance and emergency management analyst with the Congressional Research Service. By 2018, despite $16 billion in forgiveness by Congress, the debt exceeded $20.5 billion, with an expected additional annual deficit of $1.4 billion.

What is clear is that the NFIP is broken and the way to fix it is simple—bring in more money than what goes out. Congress made an attempt to head things in the right direction with the Biggert-Waters Reform Act of 2012, which required flood policies to be rated on the actual risk, thereby removing any subsidies or grandfathering. In theory, it made sense, but applying new rules to old structures simply doesn’t work.

This was evident when Biggert-Waters went into effect and brought the housing market to a screeching halt. Although the act included a cap on annual increases, new policies, like those that would be obtained for a new home purchase, were subject to the full risk rate all at once. Without grandfathering or subsidies, the full risk rate can be over $1 million dollars for a condominium tower on the beach or over $50,000 for a modest single-family home–per year. Congress had to act fast to make an adjustment, so in 2014, it passed the Homeowner Flood Insurance Affordability Act (HIFAA). This reinstituted subsidies and grandfathering, even for a new purchase, but called for higher annual rate increases for subsidized policies.

Although Biggert-Waters and HFIAA ensured that premiums would move in the right direction to create a more solvent program, natural disasters moved at a faster pace. Severe storms and flooding in Louisiana resulted in $2.46 billion in losses in August 2016. Hurricanes Harvey, Irma, and Maria hit in September 2017 and caused flood losses in excess of $10 billion.

 Significant Floods

HURRICANE MICHAEL 10/2018 3,490 $201,562,277 $57,754
HURRICANE FLORENCE 09/2018 13,754 $648,333,990 $47,138
HURRICANE MARIA 09/2017 640 $38,050,370 $59,454
HURRICANE IRMA 09/2017 21,920 $1,054,248,877 $48,095
HURRICANE HARVEY 09/2017 76,257 $8,908,547,689 $116,823
HURRICANE MATTHEW 10/2016 16,586 $654,394,214 $39,455
LOUISIANA SEVERE STORMS AND FLOODING 08/2016 26,976 $2,468,493,541 $91,507
TORRENTIAL RAIN – TEXAS 04/2016 7,437 $471,517,374 $63,402
LATE WINTER SEVERE STORMS 03/2016 5,318 $283,711,582 $53,349
2015 EARLY MIDWEST WINTER STORMS 12/2015 2,257 $99,533,799 $44,100
SOUTH CAROLINA FLOODING OCT 2015 10/2015 3,975 $139,808,193 $35,172
TEXAS FLOODING MAY JUN 2015 05/2015 6,774 $468,799,696 $69,206
FLORIDA FLOODING APR 2014 04/2014 2,145 $111,780,211 $52,112

Source: FEMA

With the NFIP debt currently at $20.5 billion, the next effort to stabilize the program comes from FEMA in a proposal dubbed “Risk Rating 2.0.” This rating model is described to more accurately rate a property based on the individual risk and replacement cost, rather than the blanket rate assigned per the flood zone. The rates for single-family homes are set to be released in April 2020 and take effect Oct. 1, 2020. It is unclear when it will be implemented for other property types.

FEMA says the changes will result in lower premiums for some but higher premiums for others. It doens’t take a detective to guess which way the majority of policies will lean. Likely Risk Rating 2.0 will reduce the cost of flood policies for those properties located outside of Special Flood Hazard Areas, which would help to close the coverage gap on currently uninsured properties. The rest will increase—considerably. The question is, how fast?


Michelle Newton is a condominium associations and flood insurance specialist with Insurance Office of America. She can be reached at

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