The NFIP was originally created by Congress to transfer U.S. flood insurance risk to private insurers. However, in 1978, (when private insurance carriers assumed over 40% of the nation's flood insurance risk), NFIP administrators used a loophole in the law to remove private flood insurers from the flood insurance marketplace thus essentially nationalizing the nation's flood insurance industry.
While it has helped many people recover from flood events, in almost every other instance, it has not helped to facilitate the private flood insurance market and has cost taxpayers about $40 billion so far. Congress should act to transform the NFIP from a government-subsidized monopoly into what Congress originally intended it to be -- a facilitator of privately underwritten flood insurance and an insurer of last resort.
Five Steps to a Self-Correcting NFIP
In a May 2019 letter to Congressional leadership, the four most recent administrators of FEMA, which houses the NFIP, expressed concern over the NFIP:
".....the National Flood Insurance Program .....is in desperate need of reform. Change is needed to allow the NFIP to pay off its debt and serve its purposes."
There are five simple reforms that will leverage the strength of competition to cure the negative outcomes delivered by the NFIP monopoly.
1. Assure Meaningful NFIP Rate Increases
Beginning in 2013, the NFIP was directed by Congress to increase rates ranging from 25% to 5% per year depending on categories defined by Congress until actuarially valid pricing was achieved.
Rather than achieving overall increases, NFIP data indicate that rates per hundred of insured value remained essentially static for most structures at about $.27 during 2013, 2014 and 2015, but then sank to about $.266 in 2016 and down even further to $.255 in 2017 for an overall rate decrease of about 0.1%.
Under its Congressional mandate, the NFIP could have increased the overall rate by a significantly larger percentage than it has and by now, might easily have achieved an average overall rate of $0.35 to $0.60. Had the NFIP taken such increases, it would have already generated many billions of dollars in additional premium and borrowed billions less from taxpayers.
Greater competition will see that rate correlates more closely with risk while greater efficiencies drive down overall rates without taxpayer bailouts.
2. Reduce the Number of Repetitive Loss Properties
In that same May 2019 letter to Congressional leadership, the four most recent administrators of FEMA expressed concern over the NFIP's funding of repetitive losses:
"By incentivizing Americans to live in vulnerable areas without taking steps to mitigate the risk, the NFIP gives property owners a false sense of security," they wrote. "In the absence of reforms, costs in taxpayer dollars and lives lost will only get worse."
Congress should require the NFIP to publish the location of all repetitive loss properties so they may be properly rated by the private flood insurance market. To incentivize mitigation of these properties, the NFIP should be required to initiate ascending deductibles for repetitive loss properties that increase with each claim. This may inconvenience repetitive loss property owners, but it is necessary to be fair to the rest of the Americans that are currently rebuilding these structures repeatedly.
3. Assure That 'Risk Rating 2.0' Increases NFIP Income
Under the NFIP's proposed new rating method referred to as Risk Rating 2.0, the NFIP aims to use methods pioneered by the private flood insurance market to more accurately determine the flood risk of an individual property.
Congress should assure that 2.0 actually captures enough premium to fund 100% of expected losses.
4. Create Accurate Flood Zones
In a recent report, CoreLogic found that 23% of U.S. homes are at high or moderate risk of flood, but are located outside official FEMA flood zones. In Florida, 54% of homes fall into this category.
This study, along with others, indicates that the nation's flood insurance premium pool can easily be doubled.
5. End Anti-Consumer, Anti-Taxpayer NFIP Rules
It appears that only Congress will be able to pressure the NFIP to step back from two practices that limit consumer choice in flood insurance and guarantee continuing taxpayer losses.
First, Congress must disallow NFIP rules that prohibit NFIP policyholders from getting a premium refund when a policy is canceled prior to its expiration and coverage is replaced with a private flood policy. There is no practical reason to continue this abusive practice.
Second, Congress must end NFIP's "continuous coverage" rule, which requires policyholders to "remain loyal" to the NFIP or risk having their rates go up should they choose to return to the NFIP from the private market.
What to Do Next ?
You can make a difference. Contact Congress and tell your representatives that by taking these five simple steps, they can flip a switch that will automatically restore the original intent of Congress and turn a money-losing government-sponsored monopoly into a problem-solving insurer of last resort. They can reduce flood insurance costs for all Americans as competition drives efficiency and lowers prices.
About Craig Poulton
Poulton is chief executive officer of Salt Lake City-based Poulton Associates, LLC, which administers the country’s largest private flood insurance program, the Natural Catastrophe Insurance Program at CATcoverage.com. Follow him on Twitter @nciptweets.