After Harvey, Flood Insurance Needs Reform

August 31, 2017

- Contacts: Jeff Emerson (202) 226-0471; Sarah Rozier (202) 226-2467

After Harvey, flood insurance needs reform

'Flood insurance enabled rather than managed development along coasts and other flood-prone areas -- ultimately putting more people and property at risk'

Aug. 30, 2017

Congress must be generous in helping to repair the damage, to lives and to property, from Hurricane Harvey. The full extent of the destruction may not be known for a long time but is evidently catastrophic, just as the damage wrought by Katrina and Sandy was. Even as they demonstrate that they have a heart, lawmakers must also show that they have some brains. Specifically, the United States is long overdue for smart reforms to one of the major government institutions designed to help people cope with the risk of natural disaster: the National Flood Insurance Program (NFIP), which has underwritten a total of 5 million policies providing homeowners and some businesses $1.2 trillion in coverage.

Now almost half a century old, the NFIP grew out of what was, at the time, a basic reality of the insurance business: Flooding risks were actuarially imponderable, so insuring against them was uneconomic for the private sector, especially in places such as the hurricane-prone Gulf of Mexico. To fill the gap, the federal government offered coverage on two conditions: that local communities would take appropriate land-use and other measures to prevent development in risky low-lying areas; and that homeowners would pay actuarially sound premiums.

Elegant in theory, the plan gradually succumbed to real estate interests, with the result that flood insurance enabled rather than managed development along coasts and in other flood-prone areas -- ultimately putting more people and property at risk than might otherwise have been the case. As it happens, well-to-do people benefit disproportionately from this program; they're the ones who tend to build big houses on the beach. The NFIP has spent many millions of dollars to repair properties that have been repeatedly flooded.

Prior to Katrina, the NFIP was nevertheless generally able to pay for coverage through the premiums it collected. Massive losses from that storm and Sandy, however, have driven it into de facto bankruptcy; the program has been forced to borrow more than $24 billion from the treasury to pay claims, a debt that was nearly unpayable even before Harvey hit. At the moment, the program has $1.7 billion on hand, plus $5.8 billion left on its line of credit with the Treasury -- and some 373,000 policyholders in the Harvey flood zone who will expect to get paid.

Coincidentally, the program is due for reauthorization on Sept. 30. Ideally, this deadline would galvanize Congress to ensure enough money is available to pay current commitments, while reforming NFIP for the future. What's needed are tougher flood-risk mitigation requirements, more realistic premiums and encouragement for private-sector involvement in the business, based on modern technology that may enable insurance companies to underwrite risks they could not have underwritten in the 1960s.

Recent history, alas, doesn't make us optimistic: Congress did reform the program on a bipartisan basis in 2012, only to see much of that undone under pressure from coastal-state lawmakers in 2014, after Sandy. "There is a tide in the affairs of men, which taken at the flood, leads on to fortune," Shakespeare wrote. Congress, though, tends to go with the political flow.

Sent from the Committee on Financial Services

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