The National Flood Insurance Program – Everything you need to know

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The National Flood Insurance Program (NFIP) was established in 1968 when the US Congress approved the National Flood Insurance Act of 1968. Under the supervision of the Federal Emergency Management Agency (FEMA), the program offers federally supported flood coverage to more than five million households and small businesses in more than 22,000 communities in the US.

Over the past five decades, NFIP has provided an insurance alternative for disaster relief, to protect communities against the rising costs of flood damage. The program also provides advice for flood advice and building codes in participating communities and it requires flood insurance for all loans or credit lines that are secured by existing buildings, new buildings or buildings under construction, that are located in a community that participates in the NFIP.

Although the program was introduced with the National Flood Insurance Act of 1968, it was really in the making since The Great Mississippi Flood of 1927 that FEMA & # 39; s chief executive of NFIP described David Maurstad as "the biggest flood disaster in history In the decades following The Great Mississippi Flood – which flooded 27,000 square miles to a depth of 30 feet – various administrative and legislative proposals were submitted to determine how to manage the country's flood risk.

It was only when Hurricane Betsy struck in 1965, remembered as one of the deadliest and most costly storms in American history, that Congress really focused on finding a solution to the American flood problem. They came up with a program with support from the private sector and involvement of American communities. The NFIP was born.

Who can buy a flood insurance from NFIP?

Anyone who lives in a high-risk area or has a business or special flood hazard area (SFHA) can get flood insurance from NFIP. This becomes a requirement for residents and entrepreneurs who live or work in an SFHA if they have received a loan from a federally regulated and insured lender. The law states that they must take out flood insurance during the term of that loan.

You can also purchase NFIP insurance if you live or have a business outside of an assigned SFHA. In areas with moderate to low risk, policyholders may be eligible for a cheaper policy, called a preferential risk policy.

How much coverage can you buy?

According to a FEMA consultant, homeowners can insure a home for up to $ 250,000 and its contents for up to $ 100,000. Meanwhile, renters can cover their belongings for up to $ 100,000. Company space owners can insure a building and its contents for up to $ 500,000 each. FEMA says the average premium for an annual flood insurance is around $ 700.

Rate cards and flood insurance zones

Flood maps show areas with a high, medium and low flood risk. They are used by communities to set minimum building requirements and they are used by lenders to determine the requirements for flood insurance.

High-risk areas, or SFHA & # 39; s, are shown on FEMA flood maps as zones that begin with the letters A or V. They are also known as 100-year flood areas, meaning that in a given year there is a flood probability of 1%. In these zones, there is a one in four chance of flooding during a 30-year mortgage. All private and homeowners in these zones, who have mortgages from federally regulated or insured lenders, must purchase flood insurance.

Moderate areas and low-risk areas, or non-SFHAs, are shown on the flood maps as zones starting with the letters B, C, or X (or a shaded X). Flood insurance is not required in these areas, but it is highly recommended by FEMA. In addition, some flood maps contain zones that begin with the letter D. These are areas that have not been studied or that have an indefinite risk of flooding.

Criticism of the FEMA flood maps

A report published by the Department of Homeland Security Inspector General in 2017 showed that many FEMA maps may not reflect the actual flood risk or are out of date.

"Without accurate identification and mapping processes, floodplain management and oversight, FEMA cannot provide citizens with a reliable representation of their true flood vulnerability or ensure that [NFIP] rates reflect the real risk of flooding, "the report said.

In recent years, FEMA has spent more than $ 200 million updating the flood maps. However, a study released in February 2018 by Environmental Research Letters discovered that more than 40 million Americans are exposed to a serious flood risk at the 100-year flood or 1% level – roughly three times more than the risk suggested by FEMA flood maps. The agency is under pressure to update its maps to more accurately reflect the country's flood risk.

What is it & # 39; write your own program & # 39 ;?

From the offset, the NFIP is based on a "very strong public-private partnership," Maurstad explains. Essentially, FEMA's NFIP has a cooperative relationship with a number of private private insurers (Write Your Own), allowing participating real estate and accident insurance companies to write and maintain the standard water insurance policy in their own name. The WYO companies receive an expense allowance for the written policy and the processed policies, but FEMA remains responsible for the losses.

"Today, NFIP relies on 63 of the leading real estate insurance companies in the country to manage the program on our behalf," Maurstad said in an NFIP 50-year anniversary video in 2018. "In addition to those 63 companies, we also have a handful of suppliers that these companies and also support our NFIP direct program, to which policyholders have access if they are not related to any of the 63 companies.

"In the 22,000 communities participating in the NFIP program, each owner of a property in those communities has access to the program through NFIP direct or the WYO companies – and the WYO companies are supported by their agencies. Thousands of insurance agents all over the country sell and advise our product to their customers and our customers, and you also have the independent experts who help the policyholder in the event of a disaster or claim through that claim journey.The public-private partnership is unique in the sense that you have great business support and then you have a lot of support for small businesses throughout the nation. That is actually one of the strengths of the program. "

NFIP financing … and debts

The NFIP is mainly funded by an authorized federal account, the National Flood Insurance Fund (NFIF). It is generally funded by receipts from flood insurance premiums and Treasury loans when the NFIF's pot is not sufficient to pay the obligations of the NFIP – that is, the insurance claims. The problem is that over the years the program has had to borrow more and more from the Treasury, which led to considerable debts. Aggressive back-to-back Atlantic hurricane seasons in 2017 and 2018 have really put the spotlight on the struggling finances of the program.

According to the CRS analysis of data from FEMA Congressional Affairs, the NFIP borrowed around $ 7,425 billion in 2017, paid nothing back and registered a cumulative debt of $ 30,425 billion. In 2018, the struggling program borrowed $ 6.1 billion, paid nothing back, and registered a cumulative debt of $ 20.525 billion. A $ 16 billion debt was canceled on October 26, 2017, to enable the program to pay for hurricanes Harvey, Irma and Maria.

Reauthorization misery

The congress must periodically renew the legal power of NFIP to work. This is called reauthorization. In recent years, the re-authorization of NFIP has changed into a political war zone, with neither party willing to control the program and to commit to necessary reforms. This has resulted in a series of ongoing short-term extensions or stop-gap measures that Congress has gone through. The program is currently in the 10th short-term extension since the last long-term authorization expired on September 30, 2017.

R.J. Lehmann, director of finance, insurance and trade policy at the R Street Institute, said in July 2018 (after the seventh authorization of the current law): "The NFIP is untenable as it is and Congress cannot ignore its problems. Even after Congress moved to wipe $ 16 billion from the agency's debt in 2017, it still owes taxpayers about $ 20.5 billion, with Congressional Budget Office projects losing an average of $ 1.4 billion each year.

"In the past 20 years, the NFIP has been re-authorized 41 times [now 44 times] and 38 times Congress has started to expand it without adopting the necessary reforms. That cycle must end. There are simple, common sense, two-fold proposals to address the problems associated with this: from stimulating the private coverage market to investing in mapping and mitigation, to tackling repetitive loss traits. We cannot afford any further delays. The time for action is now. "

An interpreter about the emerging private flood market will be published shortly. Stay tuned.