As spring flood season approaches in Northeast coastal regions, as well as in the upper Midwest, the National Flood Insurance Program is coming under fire and, possibly, under the Congressional budget axe. After a series of stopgap measures to fund the program for a few months at a time, Congress last year voted to fund the NFIP for a full year, through September 30, 2011. But with a new Republican majority in the House, the program, long criticized for its cost and fiscal unsoundness, is in fresh trouble. Congresswoman Candice Miller, Republican from Michigans 10th district, introduced legislation to terminate the NFIP effective in December of 2013, and to end the Federal Emergency Management Agencys authority to designate flood zones nationwide, according to a report in the Insurance and Financial Adviser ( Congress asked to end National Flood Insurance Program in 2013, by Bob Graham). Text of Representative Millers bill is posted at the Library of Congress Thomas website (H.R.435 -- National Flood Insurance Program Termination Act of 2010). In a statement on her website, Miller said, The National Flood Insurance Program is a typical Washington boondoggle with an endless bureaucracy overseeing out-of-control spending ( Miller: End the National Flood Insurance Program). Like any Washington program, the NFIP has its constituency in this case, the five million policyholders who have subsidized insurance for flood damage (in fact, the only flood insurance available in America), and the insurance agencies who make money issuing policies and managing claims for the program. But in a time of across-the-board belt-tightening, opponents of the program will have plenty of ammunition. The U.S. Government Accountability Office (GAO), a non-partisan research agency of the Congress, reports that its analysis has found weaknesses in NFIP management and operations, including financial reporting processes and internal controls, and oversight of contractors place the program at risk. GAO reports on the program are archived at the High Risks and Challenges page of the agencys website. As described by GAO, the NFIP program is a classic example of reverse Darwinism: the survival of the unfittest. Says GAO:
While Congress and FEMA intended that NFIP be funded with premiums collected from policyholders rather than with tax dollars, the program is, by design, not actuarially sound. NFIP cannot do some of the things that private insurers do to manage their risks. For example, NFIP is not structured to build a capital surplus, is likely unable to purchase reinsurance to cover catastrophic losses, cannot reject high-risk applicants, and is subject to statutory limits on rate increases. In addition, its premium rates do not reflect actual flood risk. For example, nearly one in four property owners pay subsidized rates, full-risk rates may not reflect the full risk of flooding, and NFIP allows grandfathered rates that allow some property owners to continue paying rates that do not reflect reassessments of their properties' flood risk. Further, NFIP cannot deny insurance on the basis of frequent losses and thus provides policies for repetitive loss properties, which represent only 1 percent of policies but account for 25 to 30 percent of claims. NFIP's financial condition has improved slightly due to an increase in the number of policyholders and moderate flood losses, and since March 2009, FEMA has taken some encouraging steps toward improving its financial position, including making $600 million in payments to Treasury without increasing its borrowings. However, it is unlikely to pay off its full $18.8 billion debt, especially if it faces catastrophic loss years. Operational and management issues may also limit efforts to address NFIP's financial challenges and meet program goals.
Only time will tell whether Millers proposal to scrap the program entirely can pass both houses of Congress and gain the Presidents signature. But given the anti-spending momentum on Capitol Hill, the risk of NFIPs demise is one risk the insurance industry is taking seriously. Said Ryan Young, senior director of federal government affairs for the Independent Insurance Agents & Brokers of America, A lot of legislators will want to cut budgets, and that could put the flood insurance program in a bad position.