National Flood Insurance: Crisis and Renewal

Abstract

While the magnitude of 2005's hurricane-related flood losses may have been improbable, the eventual bankruptcy of the NFIP was not. The program was never designed to charge full risk-based rates or to build the reserves necessary to meet its financial commitments. By failing to charge prices that reflect the value of the flood insurance in-force, the NFIP has been accumulating unfunded liabilities that eventually would have to be financed by taxpayers, and eventuality that has arrived. If the NFIP is to remain in operation without exposing taxpayers to undue burdens, then dramatic programmatic reforms are necessary. In the process of designing a sustainable NFIP, Congress should also look at other problems with the program, including its potential to induce commercial and residential development in areas prone to flooding, its low participation rates, and its often contradictory interaction with other federal disaster assistance programs. Specifically, Congress should phase out explicit subsidies, expand mandatory flood-insurance purchase requirements, grant FEMA more flexibility to increase NFIP rates, and investigate ways to increase property owners' compliance with mandatory purchase requirements.