The Question That Hurricane Irene Poses For The NFIP And The Future of Flood Insurance

Although Hurricane Irene pales in comparison to Hurricane Katrina, the National Flood Insurance Program (NFIP) has already had to deal with massive flooding throughout the Midwest. The compiled cost of natural disasters that have occurred this year in the United States have strained the allocated coffers of the NFIP in an already depressed economy, while the federal government continues to deal with an increasing national debt.  Putting all these elements together could spell out disaster for the NFIP as well as taxpayers. Many Americans have fallen on hard times and are financially stressed but only few have been reluctant to spend the money to buy a flood insurance policy with images of Hurricane Katrina still flashing in their head.  For those residents who opted to forego flood insurance in high risk areas, it’s a gamble, and many have gone bust with the amount of unforgiving natural disasters that have stricken the nation this year. While some have gambled on it not flooding, most residents in high-risk areas have a flood insurance policy, and that’s where the NFIP can get into some trouble.

The question that Hurricane Irene poses is whether the NFIP will be stretched too much, as it was in 2005 with Hurricane Katrina.  2011, thus far, has been one of the most costly years in the form of natural disasters, with approximately 10 of them bringing a $1 billion price tag or more.  With hurricane season just beginning to awaken, there seems to be an extremely high statistical probability that there will be at least one more disaster costing close to, or more than, $1 billion.  Due to the fact that the federal government can, and has, undercut the private sector in the cost of insurance premiums for flood management, to the point that they are way under market value, the NFIP has been in the red and will more likely stay there if the weather keeps trending the way it has this year.

The NFIP doesn’t work like other insurers.  The federal government is nearly the only option for insuring homeowners against damage from flooding.  The Federal Emergency Management Agency (FEMA) manages the NFIP under its Mitigation Division.  FEMA doesn’t retain capital to cover losses and expenses if there happens to be a particularly bad year, but instead only generates enough premiums to cover loses and expenses of an average year. When claims filed by homeowners exceed the amount generated by premiums, the NFIP, like most government programs, does what it always does, and does best.  They borrow.  In 2005, the amount of destruction that Hurricanes Katrina and Rita did well exceeded the amount generated through premiums and forced the signing of a bill to raise the amount the NFIP could borrow from the government by 13-fold.

What does all this mean?  It means that those in high risk flood zones will continue to pay way less for flood insurance than if they had to purchase a policy from an independent carrier in the private sector.  It also means that when premiums are surpassed by the cost of claims, the NFIP will borrow more from the government, making it less and less of a fiscally responsible and economically feasible program.  In essence, taxpayers will be paying the cost of the repairs to cover the damage of those homes built in high risk flood zones, while the homeowners continue to pay below market premiums for their flood insurance policy.  However, some property owners with a policy through the NFIP have become frustrated with the program.  Margaret Wert of New Jersey is one of those homeowners who is ready to walk away after Hurricane Floyd and now Irene have damaged her house beyond what the NFIP provided as payout to cover the damage. Read more about this at http://www.insurancejournal.com/news/national/2011/08/31/212924.htm and see the full article entitled, Can Flood Insurance Handle Irene Losses?, by Ben Berkowitz.

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