Insurance Underwater; Huge Losses Put Federal Plan In The Red, Review Finds

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August 26, 2010 Thursday FINAL EDITION

SECTION: NEWS; Pg. 1A

LENGTH: 1824 words

HEADLINE: Insurance underwater; Huge losses put federal plan in the red, review finds

BYLINE: Thomas Frank

In Wilkinson County, Miss., a home has been flooded 34 times since 1978.

Extraordinary as the damage may be, even more extraordinary is that an insurer has paid claims every time, required no flood proofing, never raised premiums after a claim and vowed to continue insuring the house. Forever.

The home's value is $69,900. Yet the total insurance payments are nearly 10 times that: $663,000.

It's no surprise that the insurer faces huge financial problems.

The insurer? The federal government.

The Mississippi home is one of a growing number of repeatedly flooded properties whose owners have collected billions of dollars from an insurance program regulated by Congress and run by the Federal Emergency Management Agency.

FEMA's National Flood Insurance Program is the nation's main flood insurer, created by law in 1968 as private companies stopped covering flood damage. The program insures 5.6 million properties nationwide and aims to be self-sustaining by paying claims from premiums it collects.

Instead it's running deeply in the red. A major reason, a USA TODAY review finds, is that the program has paid people to rebuild over and over in the nation's worst flood zones while also discounting insurance rates by up to $1 billion a year for flood-prone properties.

Along with the huge losses from Hurricane Katrina, the generous benefits have forced the program to seek an unprecedented $19 billion taxpayer bailout.

"If this were a private insurer, it would be bankrupt," said Robert Hartwig, president of the Insurance Information Institute, an industry think tank.

A USA TODAY review of FEMA records found that the owners of 19,600 homes and commercial buildings worth $25,000 or more have collected insurance payments that exceed the value of their property. The records exclude property addresses.

In Fairhope, Ala., the owner of a $153,000 house has received $2.3 million in claims. A $116,000 Houston home has received $1.6 million. The payments are for damage to homes and what's inside.

"It's the ultimate statement on the failure of the nation's strategy to deal with flooding and flood risk," said environmentalist David Conrad of the National Wildlife Federation, who has received FEMA's Outstanding Public Service Award for promoting flood safety. "It does seem to fit Albert Einstein's definition of insanity -- to somehow expect something different when you do the same thing over and over again."

USA TODAY also found that the owners of 370,000 second homes and rental houses get huge insurance discounts. Wealthy resort areas such as Hilton Head Island, S.C., and Longboat Key, Naples and Sanibel, Fla., have some of the largest numbers of second homes and rentals getting the discounts.

The program's financial problems reflect a broader government reluctance to restrain benefits. FEMA leaders and some lawmakers have tried to end the premium discounts and the multiple insurance payments, "but there's always been a few in Congress that have had enough political muscle to hold that back," former FEMA assistant administrator David Maurstad said.

The inaction has helped worsen the program's finances. Lawmakers would not approve a bailout "until the program was substantively reformed" to strengthen finances, Maurstad said.

That has added costs. The $17 billion the program borrowed from taxpayers for Katrina claims created such large interest payments that another $1.7 billion had to be borrowed to pay routine losses in subsequent years. Interest payments to the Treasury since 2006 have cost $2.4 billion alone. The program has repaid just $600 million in principal.

"The size of the current debt creates an unstable financial situation," Homeland Security Secretary Janet Napolitano, who oversees FEMA, said in a 2009 letter to House Financial Services Committee Chairman Barney Frank, D-Mass.

The Congressional Budget Office says premium discounts and claims will add $900 million a year to the debt.

And the National Oceanic and Atmospheric Administration warns that flooding will increase in the future because sea levels are projected to rise.

"Our inability to get this right is putting tens of thousands of people at risk," said Rep. Earl Blumenauer, D-Ore., an advocate of program reform. "It is putting the federal taxpayer on the hook for tens of billions of dollars. And we are going to see in the next decade, if we are not able to make more concerted progress, a continued string of unpleasant stories about property loss, about lives lost."

Flooding is the most costly and lethal type of natural disaster, causing about $6 billion a year in damage and killing roughly 140 people annually, federal figures show. Roughly 97% of the U.S. population lives in a county that has experienced a flood disaster since 1980, a 2007 congressional report found.

FEMA Administrator Craig Fugate says the debt results partly from Congress restraining insurance rates to encourage the purchase of coverage, which is required for property owners with a federally backed mortgage. Homeowners can buy up to $350,000 of coverage, more than 10 times FEMA's maximum post-disaster grant. Insurance reduces the need for disaster aid, paid for by taxpayers.

As a government program, federal flood insurance covers anyone. It's similar to state-run programs that insure homeowners and drivers who cannot get private coverage. Policies cannot be canceled, and individual premiums cannot be raised based on claims payments.

"It is not run as a business," Fugate said.

Congress' Government Accountability Office said in April that the program is "by design, not actuarially sound" because it has no cash reserves to pay for catastrophes such as Katrina and sets rates that "do not reflect actual flood risk."

Raising insurance rates or limiting coverage is hard. "The board of directors of this program is Congress," Fugate said. "They are very responsive to individuals who are being adversely affected."

Fugate convened 100 experts and officials last November to discuss possible reforms. "What we found is that there wasn't a consensus," he said.

Despite problems, officials say the program reduces damage by forcing communities to control development in flood zones as a condition of enabling their residents to buy insurance. About 20,000 communities take such steps, which Napolitano says averted $16 billion in losses since 2000.

But the USA TODAY review shows that federal and local officials have failed to take steps urged by government reports, and that the program heavily subsidizes people to live in the nation's most flood-prone areas. Among the findings:

*Lawmakers and FEMA leaders have long recognized the problem of properties that repeatedly flood. But some efforts to pay homeowners to move or elevate houses have fallen short. A program established by a 2004 law has spent just $110 million of the $310 million Congress has allocated, in part because FEMA took three years to launch the program.

Some communities shun the federal money because they must pay 25% of moving or elevation costs and because peoples' insurance rates would rise if they refuse to move or elevate a home.

*Local officials flout federal law and let people rebuild heavily flooded properties without taking required steps to prevent future damage.

Communities with flood insurance must require people to elevate homes that are being rebuilt after sustaining flood damage that exceeds 50% of the home's value. At least six government or independent reports since 1980 found local officials ignoring the mandate so as to save homeowners money.

FEMA says it took steps since the 1990s to encourage local officials to require home elevation.

Yet the problem persisted after Katrina, when federal inspectors found thousands of Gulf Coast homeowners evading elevation requirements.

"It's a significant problem," said Larry Larson, executive director of the Association of State Floodplain Managers. "These properties will just get flooded again."

*The owners of 1.2 million older buildings, including 370,000 second homes and rentals, enjoy insurance discounts that encourage them to leave their homes in dangerous flood areas.

Discounts reduce an annual premium to about $1,200 on average from about $2,800, and go to buildings built before 1975. Congress ordered the discounts for homes built before a local flood risk was known to avoid charging people high premiums for a pre-existing condition.

But the discount has created problems. By lowering a homeowner's annual costs, it "artificially inflates the value" of homes by $24,000 on average, a 2006 FEMA-commissioned study said.

And that added value discourages property owners from elevating or moving their homes because once a building no longer faces high flood risk, the discount is not available, the study said.

"This subsidy increases financial risk to the (program)," the study said.

FEMA proposed in 1999 phasing out some discounts but dropped the idea because it lacked money to help people move or elevate their homes.

*Millions of properties facing substantial flood risk are exempt from local flood-zone laws because FEMA maps show them lying outside a flood zone.

This occurs because a 1968 federal law defines a flood zone as an area with a 1% annual chance of flooding. Yet floods often strike outside that area, and have cost the insurance program $9 billion in claims since 1978, USA TODAY found. That's about 25% of all insurance payments.

A FEMA-commissioned study found there are 3 million to 7 million "flood-prone buildings" outside flood zones. Developers had "intentionally positioned" buildings just outside the zones "to avoid mandatory flood insurance purchase provisions and floodplain regulation."

*Thousands of communities ignore voluntary flood-prevention measures urged by FEMA, such as increasing building-elevation requirements and moving flood-prone properties. Most of the biggest, most flood-prone municipalities are taking such steps, which earn their residents discounts on insurance premiums of up to 45%.

But many communities don't take extra steps, including flood-prone areas such as St. Bernard and Plaquemines parishes on the Louisiana coast, Galveston city and county in Texas, and Hancock and Jackson counties on Mississippi's coast.

Those six communities have cost the insurance program $4.5 billion in claims since 1978, USA TODAY found. Each ranks in the top 20 in terms of claims paid among insurance program's 20,000 communities.

Galveston planning director Wendy O'Donohoe said the city may take some steps but hadn't because "staffing limitations ... limited the city's ability to do certain things that the (voluntary) program may have required."

Roy Sedwick, executive director of the Texas Floodplain Management Association, said the number of communities ignoring the voluntary program is "terrible -- almost a joke."

"If you apply FEMA's minimum standards in your floodplain, you're going to have flood problems," Sedwick said. "Minimal standards are not enough."

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