Congressional Research Service: 'Introduction to National Flood Insurance Program' (Part 3 of 3)

WASHINGTON, Jan. 7 (TNSrep) -- The Congressional Research Service issued the following report (No. R44593) on Jan. 6, 2023, entitled "Introduction to the National Flood Insurance Program:"

(Continued from Part 2 of 3)

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Nonparticipating Communities and Community Suspension

FEMA enforces two regulatory conditions - probation and suspension - for removing a participating community from the NFIP. Whether or not a particular community has either been placed on probation or suspended can be found using the NFIP's Community Status Book./132

Notably, a community cannot be removed from the NFIP because of increased or excess flood insurance claims and losses. Rather, probation and suspension only occur if the community fails to uphold its obligations related to floodplain management.

A community can be placed on probation by FEMA if it is found that it is failing to adequately enforce the floodplain management standards it has adopted. As established by regulations, probation can result in a fee of $50 being charged to all policyholders in the community while the community is given time to rectify FEMA's concerns regarding their implementation of the floodplain management standards. Ultimately, if the community does not correct its cited deficiencies after given time periods described in regulations, the community will be suspended from the NFIP by FEMA./133

A community can also be involuntarily suspended from the NFIP for either

* failing to adopt an approved floodplain map and an approved set of floodplain management standards within the time periods required by regulations; or

* repealing or revising its floodplain management standards to a level below the minimum standards set forth in regulations./134

A suspended community may be reinstated to the NFIP once the relevant errors or deficiencies provoking the suspension have been resolved to meet FEMA's specification.

Communities that have been suspended or those communities that do not participate in the NFIP can face significant consequences. Primarily, members of these communities are not able to purchase primary flood insurance through the NFIP, which may result in significant uninsured property risk in that community. However, communities may elect not to participate in the NFIP because they have very little flood risk to begin with, given their particular geography or climate.

In addition, if a community does not participate in, or has been suspended from, the NFIP but has been previously mapped by FEMA for flood hazards, it is difficult for the community and policyholders to access other forms of federal assistance for areas in the floodplain./135 For example, by law, no federal assistance may be provided for acquisition or construction purposes in an area that has been identified as having special flood hazards unless the property is covered by flood insurance./136 Likewise, federally backed mortgages still require flood insurance for properties in the SFHA, so these property-owners would be required to obtain such insurance in the private market. A community is allowed to leave the NFIP at its will, but the potential consequences of that decision are similar to those if the community has been suspended.

Funding

The funding for the NFIP is primarily maintained in an authorized account called the National Flood Insurance Fund (NFIF)./137 Generally, the NFIP has been funded through three methods:

* receipts from the premiums of flood insurance policies, including fees and surcharges;

* direct annual appropriations for specific costs of the NFIP; and

* borrowing from the U.S. Treasury when the balance of the NFIF has been insufficient to pay the NFIP's obligations (e.g., insurance claims).

This section of the report briefly discusses each of these three methods of NFIP funding.

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133 For additional details on probation, see 44 C.F.R. 59.24(b) and (c).

134 See 44 C.F.R. Sec.59.24(a) and (d).

135 For more on how individuals may receive assistance following a flood, see CRS Report R44808, Federal Disaster Assistance: The National Flood Insurance Program and Other Federal Disaster Assistance Programs Available to Individuals and Households After a Flood, by Diane P. Horn. For additional details on the effects of suspension, see FEMA's website at https://www.fema.gov/glossary/suspension.

136 42 U.S.C. Sec.4012a(a).

137 The NFIF is authorized by 42 U.S.C. Sec.4017.

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Premium Fees and Surcharges

As of June 30, 2022, the written premium, fees, and surcharges on approximately 4.88 million policies in force was about $4.6 billion./138 Included within the premiums are several fees and surcharges on flood insurance policies mandated by law. First, the Federal Policy Fee (FPF) was authorized by Congress in 1990 and helps pay for the administrative expenses of the program, including floodplain mapping and some of the insurance operations./139 The amount of the FPF is set by FEMA and can increase or decrease year to year. In April 2016, the FPF was set at a flat rate of $50 for SFIPs, and $25 for PRPs. In October 2017, the FPF was set at $25 for contents-only policies./140 The FPF is now $47 for all NFIP policies other than residential condominiums with more than 20 units, for which the FPF is reduced according to the number of units./141 Second, a Reserve Fund assessment was authorized by Congress in BW-12 to establish and maintain a Reserve Fund to cover future claim and debt expenses, especially those from catastrophic disasters./142 By law, FEMA is ultimately required to maintain a reserve ratio of 1% of the total loss exposure through the Reserve Fund assessment./143 As of December 2020, the amount required for the reserve fund ratio was approximately $13.3 billion./144 However, FEMA is allowed to phase in the reserve fund assessment to obtain the ratio over time, with an intended target of not less than 7.5% of the 1% reserve fund ratio in each fiscal year (so, using December 2020 figures, not less than approximately $1 billion each year).

Since April 2016, using its discretion, FEMA has charged every NFIP policy a Reserve Fund assessment. The Reserve Fund assessment has increased from its original status, in October 2013, of 5% on all SFIPs and 0% on PRPs to 15% of the premium charged for all policies./145 The reserve fund assessment was increased to 18% on April 1, 2020./146

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138 FEMA, Watermark, FY2022, Third Quarter, https://www.fema.gov/sites/default/files/documents/fema_fy22-q3watermark.pdf.

139 42 U.S.C. Sec.4014(a)(1)(B)(iii).

140 See FEMA, Flood Insurance Manual, Appendix J: Rate Tables, p. 3-49, revised April 2021, https://www.fema.gov/sites/default/files/documents/fema_nfip-flood-insurance-full-manual_102022.pdf.

141 See FEMA, Flood Insurance Manual: How To Write, p. 3-51, revised October 1, 2022, https://www.fema.gov/sites/default/files/documents/fema_nfip-flood-insurance-full-manual_102022.pdf.

142 Sec.100212 of P.L. 112-141, 126 Stat. 992, as codified at 42 U.S.C. Sec.4017a.

143 42 U.S.C. Sec.4017a(b).

144 Calculated by CRS using data provided by FEMA Congressional Affairs staff December 30, 2020.

145 See Federal Emergency Management Agency, Flood Insurance Manual, Appendix J: Rate Tables, p. J-16, revised October 2020, at https://www.fema.gov/sites/default/files/2020-09/fema_flood-insurance-manual-full-edition_apriloct2020.pdf.

146 Ibid.

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In addition to the Reserve Fund assessment, all NFIP policies are also assessed a surcharge following the passage of HFIAA./147 The amount of the surcharge is dependent on the type of property being insured. For primary residences, the charge is $25; for all other properties, the charge is $250./148 Revenues from these surcharges are deposited into the Reserve Fund.

Appropriations and Offsetting Receipts

Table 5 displays how Congress has appropriated and authorized offsetting receipts for the NFIP from FY2015 to FY2022. As provided for in law, all premiums from the sale of NFIP insurance are transferred to FEMA and deposited in the NFIF./149 Congress then authorizes FEMA to withdraw funds from the NFIF, and use those funds for specified purposes needed to operate the NFIP. In addition to premiums, Congress has also provided annual appropriations to supplement floodplain mapping activities. In addition to the mix of discretionary and mandatory funding levels indicated in Table 5, which are set in appropriations legislation, fluctuating levels of mandatory spending occur in the NFIP in order to pay and adjust claims on affected NFIP policies./150

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147 Sec.8(a) of P.L. 113-89, 128 Stat. 1023.

148 For a description of how the surcharge is applied to different policy types, see FEMA, The HFIAA Surcharge Fact Sheet, April 2015, https://dlnreng.hawaii.gov/nfip/wp-content/uploads/sites/11/2015/07/HFIAA-Surcharge-FactSheet_Final-April-2015.pdf.

149 42 U.S.C. Sec.4017(b).

150 This mandatory spending is authorized by 42 U.S.C. Sec.4017(d)(1). All other expenses using the NFIF must be authorized in appropriations acts, per 42 U.S.C. Sec.4017(f).

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Table 5. Budget Authority for the NFIP, FY2015-FY2022

Source: CRS analysis of P.L. 114-4, P.L. 114-113, P.L. 115-31, P.L. 115-141, P.L. 116-6, P.L. 116-93, P.L. 116-260, and P.L. 117-103.

a. Generally, for necessary expenses, including administrative costs, related to the Risk MAP program authorized by 42 U.S.C. Sec.Sec.4101, 4101a, 4101b, 4101c, 4101d, and 4101e.

b. The budgets from FY2017 include the amount of offsetting collections for flood insurance operations within the "operating expenses" activity, instead of the broader "salaries and expenses associated with flood management and flood insurance operations" activity as was done previously in P.L. 114-4 and P.L. 114-113.

c. Offsetting receipts for "floodplain management and flood mapping" can generally be viewed as supplementing the discretionary appropriation for "flood hazard mapping and risk analysis program."

d. The amount of interest paid on borrowed amounts for the U.S. Treasury fluctuates annually based on a number of factors, including the interest rate of the borrowing; the available funds for interest and principal payments after claims payments; the amount borrowed; how the debt is being serviced in loans, and fiscal decisions by FEMA to build the Reserve Fund as opposed to paying off principal and interest on the debt. FEMA reported interest payments of approximately $318.59 million in FY2015, $345.32 million in FY2016, $393.76 million in FY2017, $367.64 million in FY2018, $415.34 in FY2019, $216.82 in FY2020, $356.81 in FY2021, and $143.3 in FY2022 quarters 1 and 2 (sources: FEMA, Watermark, FY2022, Second Quarter, https://www.fema.gov/sites/default/files/documents/fema_fy22q2-watermark.pdf and FEMA, National Flood Insurance Program Debt Repayment Report, as of March 31, 2020, Report to Congress and the Secretary of the Treasury, May 17, 2021. Provided by FEMA Congressional Affairs staff. Not available online.

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Borrowing from the U.S. Treasury, NFIP Debt

Congress has authorized FEMA to borrow no more than $30.425 billion from the U.S. Treasury in order to operate the NFIP. The authorization for this borrowing would be reduced to $1 billion after September 30, 2022, were the NFIP to be allowed to lapse./151 In January 2017, the NFIP borrowed $1.6 billion due to losses in 2016 (the August 2016 Louisiana floods and Hurricane Matthew). On September 22, 2017, the NFIP borrowed the remaining $5.825 billion from the Treasury to cover claims from Hurricane Harvey, Hurricane Irma, and Hurricane Maria, reaching the NFIP's authorized borrowing limit of $30.425 billion./152 On October 26, 2017, Congress cancelled $16 billion of NFIP debt, making it possible for the program to pay claims for Hurricanes Harvey, Irma, and Maria./153 This represents the first time that NFIP debt has been cancelled, although Congress appropriated funds between 1980 and 1985 to repay NFIP debt./154 FEMA borrowed another $6.1 billion on November 9, 2017, to fund estimated 2017 losses, including those incurred by Hurricanes Harvey, Irma, and Maria and anticipated programmatic activities, bringing the debt up to $20.525 billion. The NFIP has not borrowed since 2017 and currently has $9.9 billion of remaining borrowing authority./155

The NFIP's debt to the U.S. Treasury cannot be tied directly to any single incident, as any insurance claim paid by the NFIP is in some way responsible for the existing debt of the NFIP (i.e., a dollar paid in claims, and therefore expended by the NFIP, following a minor flooding incident is no different than a dollar paid following a major hurricane). However, the NFIP was forced to borrow heavily to pay claims in the aftermath of three catastrophic flood seasons, the 2005 hurricane season (particularly Hurricanes Katrina, Rita, and Wilma), Hurricane Sandy in 2012, and Hurricanes Harvey, Irma, and Maria in 2017./156 For example, following Hurricane Sandy, Congress passed P.L. 113-1 to increase the borrowing limit of the NFIP from $20.775 billion to the current $30.425 billion. Prior to Hurricane Katrina in 2005, the NFIP had generally been able to cover its costs, borrowing relatively small amounts from the U.S. Treasury to pay claims, and then repaying the loans with interest.

The NFIP's debt is conceptually owed by current and future participants in the NFIP, as the insurance program itself owes the debt to the Treasury and pays for accruing interest on that debt through the premium revenues of policyholders. For example, from FY2006 to FY2022 (i.e., since the NFIP borrowed funds following Hurricane Katrina), the NFIP has paid $2.82 billion in principal repayments and $5.62 billion in interest to service the debt through the premiums collected on insurance policies./157

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151 42 U.S.C. Sec.4016(a).

152 FEMA, The Watermark, Fiscal Year 2018, First Quarter, vol. 1, March 21, 2018, at https://www.fema.gov/sites/default/files/2020-05/FIMA_Watermark_FY18_Q1.pdf.

153 P.L. 115-72, Title III, Sec.308.

154 Funds for "repayment under notes" were appropriated in P.L. 96-526, 94 Stat. 3053; P.L. 97-101, 95 Stat. 1425; P.L. 97-272, 96 Stat. 1169; P.L. 98-45, 97 Stat. 228; P.L. 98-371, 98 Stat. 1224; and P.L. 99-160, 99 Stat. 918.

155 FEMA, Watermark, FY2022, Second Quarter, https://www.fema.gov/sites/default/files/documents/fema_fy22-q2watermark.pdf.

156 For accounting of the NFIP's premium revenues and claims/loss data, see FEMA Watermark: National Flood Insurance Program Financial Statements, at https://www.fema.gov/flood-insurance/work-with-nfip/watermarkfinancial-statements.

157 FEMA, Watermark, FY2022, Second Quarter, https://www.fema.gov/sites/default/files/documents/fema_fy22-q2watermark.pdf.

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Currently the NFIP is paying over $1 million in interest per day on the debt accrued from past events. FEMA predicts that over the next 10 years the NFIP will pay an additional $5.8 billion in interest expenses, and will have paid $10.6 billion in total interest expenses by the end of FY2029./158

As required by law, FEMA submits semi-annual debt repayment reports to Congress on how the borrowed amount from the U.S. Treasury could be repaid within a 10-year period./159 The most recent report concluded that, although the NFIP's financial position is expected to improve over the time period, it is not possible for the NFIP, as currently structured, to fully repay $20.525 billion in debt over the next 10 years./160

Whether or not FEMA will ultimately be able to pay off the debt is largely dependent on future insurance claims, namely if a catastrophic flooding incident such as Hurricanes Harvey, Sandy, or Katrina occurs again and with what frequency. FEMA noted that the latest private sector catastrophe modeling demonstrates that such events are not outside the expected range of NFIP losses. A single storm in the United States the size of Hurricane Katrina or larger ($21.2 billion in present dollars) has a 1%-2% chance of occurring in any given year. A coastal flood event at least as large as Hurricane Sandy ($9.8 billion in present dollars), or an inland flood event at least as large as the 2016 Louisiana flood ($2.6 billion in present dollars) each have a 2%-5% chance of occurring in any given year./161

FEMA's current policy is to prioritize building up the NFIP's cash reserves over paying down principal./162 Under its current authorization, the only means the NFIP has to pay off the debt is through the accrual of premium revenues in excess of outgoing claims, and from payments made out of the growing Reserve Fund.

NFIP Purchase of Reinsurance

In HFIAA-14, Congress revised the authority of FEMA to secure reinsurance/163 for the NFIP from the private reinsurance and capital markets./164 The purchase of private market reinsurance reduces the likelihood of FEMA needing to borrow from the Treasury to pay claims. However, since FEMA is withdrawing funds from the Reserve Fund to pay for this reinsurance, it subsequently increases the cost of insurance to policyholders. FEMA's modeling of the NFIP portfolio before the reinsurance purchase suggested that there was a 17.2% chance of losses from an event exceeding $4 billion in 2017./165

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158 FEMA, National Flood Insurance Program Debt Repayment Report, as of March 31, 2020, Report to Congress and the Secretary of the Treasury, May 17, 2021, p. 11. Provided by FEMA Congressional Affairs staff.

159 See 42 U.S.C. Sec.4016(d), as enacted by Sec.100213(a) of P.L. 112-141 (BW-12).

160 FEMA, National Flood Insurance Program Debt Repayment Report, as of March 31, 2020, Report to Congress and the Secretary of the Treasury, May 17, 2021, p. 11. Provided by FEMA Congressional Affairs staff.

161 Ibid., pp. 3-4.

162 Ibid., p. 10.

163 Reinsurance is defined as a transaction between a primary insurer and another licensed (re)insurer where the reinsurer agrees to cover all or part of the losses and/or loss adjustment expenses of the primary insurer. See NAIC, Glossary of Insurance Terms, http://www.naic.org/consumer_glossary.htm#R.

164 See Sec.10 of P.L. 113-89, 128 Stat. 1025, as codified at 42 U.S.C. Sec.4081(e).

165 Ibid.

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In September 2016, FEMA secured its first placement of reinsurance for the NFIP, contracting for reinsurance cover which ran from September 19, 2016, through March 19, 2017, structured into two coverage layers. Under the first layer, the reinsurers would indemnify FEMA $1 million for flood claims losses that exceed $5 million. Under the second layer, the reinsurers would indemnify FEMA $1 million when the total losses from a single flood event exceed $5.5 billion./166

In January 2017, FEMA purchased $1.042 billion of insurance, to cover the period from January 1, 2017, to January 1, 2018, for a reinsurance premium of $150 million. Under this agreement, the reinsurance covered 26% of losses between $4 billion and $8 billion arising from a single flooding event. Claims paid by FEMA for Hurricane Harvey exceeded the $9 billion threshold, triggering the full 2017 reinsurance./167

In January 2018, FEMA purchased $1.46 billion of reinsurance to cover the period from January 1, 2018, to January 1, 2019, for a premium of $235 million. The agreement was structured to cover losses above $4 billion for a single flooding event, covering 18.6% of losses between $4 billion and $6 billion, and 54.3% of losses between $6 billion and $8 billion./168 In August 2018, FEMA entered into its first transfer of NFIP risk to private risk markets through an insurance-linked securities transfer, in the form of a three-year agreement with Hannover Re, a reinsurance company. Hannover Re acted as a "transformer," transferring $500 million of the NFIP's financial risk to the capital markets by sponsoring issuance of an indemnity-triggered catastrophe bond. Hannover Re indemnified FEMA for a portion of claims for a single qualifying flooding event that occurs between August 1, 2018, and July 31, 2021. The agreement was structured into two tranches. The first provided reinsurance coverage for 3.5% of losses between $5 and $10 billion, and the second for 13% of losses between $7.5 and $10 billion. FEMA paid a premium of $62 million for each of the first year and second year of coverage. Unlike the earlier reinsurance purchases, which covered all NFIP flood losses, the catastrophe bond applied only to flooding resulting directly or indirectly from a named storm and covers only the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Combined with the January 2018 reinsurance placement, FEMA transferred $1.96 billion of the NFIP's flood risk for the 2018 hurricane season to the private sector./169

In January 2019, FEMA purchased $1.32 billion of reinsurance to cover the period from January 1, 2019, to January 1, 2020, for a premium of $186 million. The agreement was structured to cover losses above $4 billion for a single flooding event, covering 14% of losses between $4 billion and $6 billion, and 25.6% of losses between $6 billion and $8 billion, and 26.6% of losses between $8 billion and $10 billion./170 FEMA issued a second catastrophe bond on April 16, 2019, to transfer an additional $300 million of the NFIP's financial risk to the capital markets. The agreement is structured to cover 2.5% of losses between $6 billion and $8 billion, and 12.5% of losses between $8 billion and $10 billion. FEMA paid a premium of $32 million for the first year of coverage and $38 million for the second year of coverage./171

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166 See FEMA, National Flood Insurance Program Reinsurance Program, at https://www.fema.gov/flood-insurance/work-with-nfip/reinsurance.

167 Email correspondence from FEMA Congressional Affairs Staff, August 2, 2019.

168 FEMA, National Flood Insurance Program (NFIP) Reinsurance Program, at https://www.fema.gov/floodinsurance/work-with-nfip/reinsurance.

169 Ibid. For additional information on this, see CRS Insight IN10965, The National Flood Insurance Program (NFIP), Reinsurance, and Catastrophe Bonds, by Diane P. Horn and Baird Webel.

170 FEMA, National Flood Insurance Program (NFIP) Reinsurance Program, at https://www.fema.gov/floodinsurance/work-with-nfip/reinsurance.

171 Ibid.

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In January 2020, FEMA purchased $1.33 billion of reinsurance to cover the period from January 1, 2020, to January 1, 2021, for a premium of $205 million. The agreement was structured to cover losses above $4 billion for a single flooding event, covering 10.25% of losses between $4 billion and $6 billion, 34.68% of losses between $6 billion and $8 billion, and 21.8% of losses between $8 billion and $10 billion./172 In February 2020, FEMA issued a third catastrophe bond to transfer an additional $400 million of the NFIP's financial risk to the capital markets. The agreement was structured to cover 3.33% of losses between $6 billion and $9 billion, and 30% of losses between $9 billion and $10 billion. FEMA paid a premium of $50.28 million for the first year of coverage./173

In January 2021, FEMA purchased $1.153 billion of reinsurance to cover the period from January 1, 2021, to January 1, 2022, for a reinsurance premium of $195.8 million./174 In February 2021, FEMA issued a third catastrophe bond to transfer an additional $575 million of the NFIP's financial risk to the capital markets for the period February 23, 2021, to February 22, 2024. FEMA paid a premium of $79.44 billion for the first year. The agreement was structured to cover 12.5% of losses between $6 and $7 billion and 22.5% of losses between $7 billion and $9 billion./175

In January 2022, FEMA purchased $1.064 billion of reinsurance to cover the period from January 1, 2022, to January 1, 2023, for a reinsurance premium of $171.9 million./176 The agreement was structured to cover 4.163% of losses between $4 and $6 billion, 26.565% of losses between $6 billion, and 22.453% of losses between $8 and $19 billion./177 In February 2022, FEMA issued a fourth catastrophe bond to transfer an additional $450 million of the NFIP's financial risk to the capital markets to cover the period February 23, 2022, to February 22, 2025, with a premium of $61.23 for the first year./178 The agreement was structured to cover 2.5% of losses between $6 and $7 billion, 5% of losses between $7 and $9 billion, and 32.5% of losses between $9 and $10 billion for a single flood event./179

According to FEMA, the NFIP has paid more than three times in reinsurance premiums than the amount it has claimed./180 However, the six traditional reinsurance payments (January 2017-2022) and five capital market placements (August 2018-February 2022) have not resulted in an increased rate for NFIP policyholders./181

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172 Ibid.

173 Ibid.

174 Ibid.

175 Ibid.

176 Ibid.

177 FEMA, "FEMA Announces Reinsurance Programa to Manage Future Flood Risk in 2022," press release, January 6, 2022, https://www.fema.gov/press-release/20220106/fema-announces-reinsurance-program-manage-future-flood-risk2022.

178 Ibid.

179 FEMA, "FEMA Expands Its Reinsurance Program, Transfers $450 Million in Flood Risk to Capital Markets," press release, February 23, 2022, https://www.fema.gov/press-release/20220223/fema-expands-its-reinsurance-programtransfers-450-million-flood-risk.

180 Email from FEMA Congressional Affairs Staff, November 15, 2021.

181 FEMA, National Flood Insurance Program's Reinsurance Program, https://www.fema.gov/flood-insurance/workwith-nfip/reinsurance.

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Expiration of Certain NFIP Authorities

The statute for the NFIP does not contain a comprehensive expiration, termination, or sunset provision for the whole of the program. Rather, the NFIP has multiple different legal provisions that generally tie to the expiration of key components of the program. Since the end of FY2017, 25 short-term NFIP reauthorizations have been enacted. These reauthorizations are listed in Table 6. The NFIP is currently authorized until September 30, 2023.

Unless reauthorized or amended by Congress, the following will occur after September 30, 2023:

* The authority to provide new flood insurance contracts will expire./182 Flood insurance contracts entered into before the expiration would continue until the end of their policy term of one year.

* The authority for NFIP to borrow funds from the Treasury will be reduced from $30.425 billion to $1 billion./183

Other activities of the program would technically remain authorized following September 30, 2023, such as the issuance of FMA grants./184 However, the expiration of the key authorities described above would have varied, generally serious effects on these remaining NFIP activities.

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182 42 U.S.C. Sec.4026.

183 42 U.S.C. Sec.4016(a).

184 See 42 U.S.C. Sec.4104c and 42 U.S.C. Sec.4104d.

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Table 6. Short-Term Extensions of the NFIP Since End of FY2017

Source: CRS analysis of legislation.

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The report is posted at: https://crsreports.congress.gov/product/pdf/R/R44593