Congressional Research Service Issues Insight Paper on National Flood Insurance Program Borrowing Authority

WASHINGTON, April 2 -- The Congressional Research Service issued the following Insight white paper (No. IN10784) on April 1, 2024, by Diane P. Horn, flood insurance and emergency management specialist.

Here are excerpts:

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National Flood Insurance Program Borrowing Authority

This Insight evaluates the National Flood Insurance Program (NFIP) borrowing authority to receive loans from the Treasury and the current financial situation of the NFIP.

NFIP Funding

Funding for the NFIP is primarily maintained in an authorized account called the National Flood Insurance Fund (NFIF). The NFIP is funded from receipts from the premiums of flood insurance policies, including fees and surcharges; direct annual appropriations for specific costs of the NFIP (only for flood mapping); and borrowing from the Treasury when the NFIF's balance has been insufficient to pay the NFIP's obligations (e.g., insurance claims). Since the end of FY2017, 30 short-term NFIP reauthorizations have been enacted. For further details of these reauthorizations, see CRS Insight IN10835, What Happens If the National Flood Insurance Program (NFIP) Lapses? The current reauthorization is set to expire on September 30, 2024. These extensions did not increase the NFIP's borrowing limit or provide additional funds to the NFIP.

NFIP Borrowing Authority

The NFIP was not designed to retain funding to cover claims for truly extreme events; instead, the National Flood Insurance Act of 1968 allows the program to borrow money from the Treasury for such events. For most of the NFIP's history, the program has been able to cover its costs, borrowing relatively small amounts from the Treasury to pay claims and to repay the loans with interest. Only current and future participants in the NFIP are responsible for repaying NFIP debt, 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. Since 2005, the NFIP has made six principal repayments totaling $2.82 billion and has paid $6.17 billion in interest. The program paid $309 million in interest in FY2023, accruing $1.7 million in interest daily.

Table 1 shows NFIP borrowing, repayments, and debt from FY1980 to FY2024. Comparable figures are not available before 1980. When the NFIP was established, the borrowing limit was $250 million. In 1973, the borrowing limit was increased to $500 million, or $1 billion with Presidential approval. The borrowing limit was increased to $1.5 billion in 1996; however, borrowing at that level was not required before 2005. The largest debt was $917 million in 1997, which was reduced to zero by the end of FY2003. Congress increased the level of borrowing to pay claims in the aftermath of the 2005 hurricane season (particularly Hurricanes Katrina, Rita, and Wilma). Congress increased the borrowing limit to $18.5 billion in November 2005 and further increased the borrowing limit to $20.775 billion in March 2006. In July 2010, the borrowing limit was decreased to $20.725 billion. In 2013, following Hurricane Sandy, Congress increased the borrowing limit to the current $30.425 billion.

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Table 1. NFIP Borrowing FY1980 to FY2024 (nominal dollars)

Sources: CRS analysis: data 1980-2017 provided by FEMA Congressional Affairs, November 20, 2017. Data since 2017 from NFIP Watermark financial statements.

a. The $16 billion of debt was cancelled rather than repaid (P.L. 115-72, Title III, Sec.308).

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In January 2017, the NFIP borrowed $1.6 billion for flood losses in 2016 and debt repayments. On September 22, 2017, FEMA borrowed the remaining $5.825 billion from the Treasury, reaching the NFIP's authorized borrowing limit of $30.425 billion. On October 26, 2017, $16 billion of NFIP debt was cancelled to make it possible for the program to pay claims for Hurricanes Harvey, Irma, and Maria. This represents the first time NFIP debt has been cancelled, although Congress appropriated funds between 1980 and 1985 to repay NFIP debt. FEMA borrowed another $6.1 billion on November 9, 2017, to fund estimated 2017 losses, including those incurred by Hurricanes Harvey, Irma, and Maria, increasing the debt to $20.525 billion. The NFIP has not borrowed from Treasury since 2017.

The NFIP currently has $9.9 billion of remaining borrowing authority. As of March 13, 2024, the NFIP had $3.739 billion available to pay claims, with $760 million in the NFIF and $2.979 billion in the Reserve Fund.

The NFIP transfers a portion of its risk to the private sector through the purchase of reinsurance and the issuance of catastrophe bonds. The NFIP's first large reinsurance purchase was in January 2017, when FEMA purchased $1.042 billion of reinsurance, structured to pay 26% of losses between $4 billion and $8 billion arising from a single flooding event. Claims for Hurricane Harvey exceeded $9 billion, triggering a full reinsurance claim. Since then, the NFIP has not claimed any reinsurance, as no storms have reached the threshold for claims.

The NFIP could claim over $1.9 billion in reinsurance in 2024. In order for the NFIP to claim on these policies, losses for a single named storm would have to reach $7 billion for the 2024 traditional reinsurance, $6 billion for the 2021 and 2022 catastrophe bonds, $7 billion for the 2023 catastrophe bond, and $8 billion for the 2024 catastrophe bond.

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The white paper is posted at: https://crsreports.congress.gov/product/pdf/IN/IN10784