This year marks the 50th anniversary
of the National Flood Insurance
Program (NFIP), and the program is definitely showing
its age. As natural disasters have increased in frequency,
flaws in the foundation of the program that were previously
manageable are beginning to widen, highlighting the need
for reforms.
Administered through the U.S. Federal Emergency Management
Agency (FEMA), the NFIP was created in 1968
as a result of the destruction caused by Hurricane Betsy
across Florida and Louisiana. Prior to Hurricane Betsy,
the government did not collect or maintain enough data
on floods for insurers to create an actuarial table. Insurers
must be able to calculate the probability of an event in
order to insure against it, so virtually no flood insurance
was available to consumers. Once the need for flood insurance
became clear in the aftermath of the storm, the U.S.
government created flood maps, gathered data and created
the NFIP.
For decades, the NFIP functioned reasonably well, but
as extreme weather and strong hurricanes have become
more frequent, the financial toll on the program has
greatly increased. Of the $337 billion in insured losses
from disaster events in 2017 alone, $330 billion was caused
by natural disasters—a nearly 90 percent increase from
the previous 10-year average. The NFIP was not allowed
to carry over a surplus, meaning if the program ever made
more money than it paid out in claims in a given year,
it could not save it for the following year should a flood
event occur.
Inevitably, in years when major flood events have
occurred, the NFIP has had to borrow from the U.S.
Department of the Treasury to pay claims from major
natural disasters. As of March 2017, FEMA’s debt from the
NFIP stood at $24.6 billion. However, later that same year,
the devastation from Hurricanes Harvey, Irma and Maria
created many more claims than FEMA was unable to pay.
The U.S. Congress passed the Additional Supplemental Appropriations for Disaster Relief
Requirements Act to provide assistance
and canceled $16 billion of the
NFIP’s debt that October. As of February
of this year, FEMA’s debt stood at
$20.5 billion.
BOMA International
advocates for
flexibility, ideally
allowing high-value
properties that are
currently forced
to buy additional
private insurance
coverage to be
exempt from
the mandatory
NFIP policy
purchase.
The NFIP also has a paperwork
problem. Any building that must
carry flood insurance is required to
first purchase a policy through NFIP.
Because the program only covers up
to $500,000 for a commercial building
and an additional $500,000 for a building’s
contents, many buildings also
must carry private coverage. BOMA
International
continues to advocate
for flexibility,
ideally allowing
high-value
properties that are
currently forced
to buy additional
coverage to be
exempt from the
mandatory NFIP
policy purchase.
This would greatly
simplify the
process of acquiring
the needed
coverage for a
building and enhance the private
insurance marketplace by creating
a larger, more robust and actuarially
diverse buying pool. Between heavy
debt, premiums insufficient to pay
for claims, onerous policy structures,
protection gaps and a risk pool that
needs both reassessment and reform,
the NFIP is in need of major repairs.
Over the last few years, Congress
has passed short-term reauthorizations
to fund the program for a few
months at a time. Each time an expiration
date nears, policyholders are
forced to wring their hands and hope
that a slow-moving legislative body
acts quickly. Each time, legislators on
both sides of the political aisle suggest
that next time they will make room
for the changes that are needed to
enhance and maintain the financial
solvency of the program. Currently,
the program is funded until November
30, 2018. Buoyed by bipartisan support, the program has been kept
from lapsing, but meaningful reform
is still needed.
In 2017, the U.S. House of Representatives
passed a reform package to
expand and improve NFIP that would
have addressed many of commercial
real estate’s concerns. The bill then
stalled and was never voted on in
the U.S. Senate. With the NFIP set to
expire the following day, Congress
did successfully pass an extension of NFIP in July, extending the program
through November of this year.
Because of the new deadline, the program
will need another extension during
the post-election lame-duck legislative
session, which is likely to prove
challenging in a divided Congress.
As flood events continue to increase
in frequency and severity, it is important
for Congress to enact reforms
soon to keep the program solvent for
future disasters.
This article was originally published in the September/October 2018 issue of BOMA Magazine.