Swamped by Losses, U.S. Flood Insurance Program Faces a Deadline

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The National Flood Insurance Program has been swamped by billions in claims, and Congress is looking for ways to bail it out.

The federal program—the only flood insurance available for most American homeowners—is set to expire on Friday. Congress is expected to pass a short-term extension, as it has done several times since the fall. But if it fails to do so, the government would stop selling or renewing flood insurance, which would lead to the collapse of thousands of home deals, because mortgage lenders require the insurance for properties in flood zones.

And the program has larger, long-term problems, which are only expected to worsen as climate change raises sea levels and increases the risk of catastrophic storms like last year’s Harvey, Irma, and Maria.

“We know flooding is the most common and costly natural disaster in the United States, and it’s not getting better anytime soon,” says Laura Lightbody, who directs the Pew Charitable Trusts’ project on weather-related catastrophes. “We’ve got to face the problem head-on. These events are happening not only more frequently, but [also] in places that no one would have predicted.”

The flood insurance program owes billions to the U.S. Treasury, as a result of losses racked up since Hurricane Katrina devastated Louisiana in 2005.

The Treasury debt had soared to almost $25 billion, but President Donald Trump recently signed a bill forgiving $16 billion of that amount. But billions more in losses are expected to roll in as a result of 2017’s storms, pushing up the debt again.

The federal program serves about 5.1 million households, which pay an average $700 a year in premiums—though those annual fees can run into the thousands for homes with the highest risk.

The federal government started offering the coverage in 1968. At the time, private insurance companies avoided flood risk, which they considered too unpredictable. The program, which is part of the Federal Emergency Management Agency, was able to support itself most years—until Katrina hit, that is.

Monster storms are roiling the program

Since then, the seemingly endless procession of monster storms—including some of the most damaging hurricanes to ever hit America in 2017—have roiled the waters for the program. The basic problem is simple: The program, which subsidizes about 20% of the policies written, is not collecting enough to cover losses. Congress passed a bill in 2012 that would raise premiums, but after an outcry from homeowners in flood areas, some of those premium increases were reversed.

Now, Congress has new ideas on how to solve the program’s woes. The House of Representatives recently passed a bill that would save money by cutting the amounts paid to private insurers that sell and service the policies (but don’t carry the actual risk). The House bill would also encourage private insurers to enter the market, improve flood mapping, and cap annual increases on homeowners’ premiums.

The SmarterSafer Coalition—a group of environmental, housing, taxpayer, and insurance groups that is seeking reforms on flood insurance—supports the House bill. But it says it would also like to see premiums rise more, so that they reflect the real cost of flooding. They say that would discourage construction in flood-prone areas.

But critics of that approach say that if premiums become unaffordable for lower- and middle-income homeowners already living in flood plains, they will drop the coverage. Then, when a flood hits, the government would end up paying more in disaster relief.

The Senate hasn’t passed a bill, but a bipartisan group of senators from coastal states—including Florida and New Jersey—have proposed the Sustainable, Affordable, Fair, and Efficient (SAFE) Flood Insurance Reauthorization Act, which would reauthorize the flood insurance program for six years. Like the House bill, it would cut the amount paid to the private insurance companies that sell and service the flood policies. And it would make it easier for homeowners to collect on claims after a flood, after complaints from homeowners that payouts were mishandled after Hurricane Sandy devastated parts of New York and New Jersey in 2012.

SAFE would also subsidize premiums for some homeowners, based on financial need. And it would put more money into buying out properties that have flooded repeatedly, and returning them to green space—an idea supported by the Natural Resources Defense Council. It would also increase the amount that homeowners could get for elevating their homes, from $30,000 to $100,000—a more realistic number, given the actual cost of the work.

Unlike the House bill, the Senate proposal wouldn’t encourage private insurers to enter the market. Critics of that idea fear that private companies would scoop up the least risky policies, leaving the bigger risks to the government.

The Congressional Budget Office recently estimated that the federal program was running at an annual deficit of about $1 billion. The shortfall comes mostly from coastal areas. In inland regions, homeowners with flood insurance pay more than they take back in claims, while coastal homeowners, on average, get back more than they put into the program.

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