Each year, the federal government spends billions of dollars on disaster relief to flood victims—all at taxpayer expense. While floods claim more lives and property than any other natural disaster, it’s important to note that flood disasters have been declared in every state in the past five years alone. Floods are not only coastal issues, either—they can occur along rivers, lakes and creeks. In fact, 25 percent of flood losses come from outside “flood zones.” If more properties were insured for flood damage, fewer owners would turn to taxpayers for disaster relief after the next major flood.
The National Flood Insurance Program (NFIP), which is up for renewal in 2017, provides an insurance market alternative to taxpayer-funded disaster relief. NFIP flood insurance is purchased by homeowners through private insurance companies, but is administered by the Federal Emergency Management Agency (FEMA), which sets rates and coverage terms. The NFIP averts billions of dollars in property damage each year because communities must adopt and enforce flood building codes and standards as a condition for joining the NFIP. Flood insurance is required for a federally related mortgage where there’s a 26 percent chance of flooding over 30 years (i.e., a 1 percent annual risk).
From 1986-2005, the NFIP was self-sufficient, bringing in more premiums than it paid out. Then Hurricane Katrina struck, and the program has had to borrow $25 billion from taxpayers in order to cover several catastrophic loss years in a row. The program wasn’t designed for losses of this magnitude and is now making minimum interest payments of $400 million per year at an average of 50 basis points. Terminating the program will not wipe away the debt; therefore, a major focus of reauthorization will involve pushing as much risk to the private market as possible.
When the NFIP was created, there was no private market, but now, several private flood insurance companies are writing first-dollar coverage in higher-risk flood zones. These private companies will charge rates that better align with the individual property risk, while the NFIP charges national average rates that are too high for some and too low for others. On the other hand, private companies will not be able to insure all 5 million NFIP properties, so they’ll be more selective, which may lead to raising rates or dropping coverage after floods. Also, the NFIP considers this a “coverage lapse,” so properties won’t be eligible for a lower rate if they leave the program and a private market policy doesn’t work out.
When REALTORS® arrive in D.C. for NAR’s Legislative Meetings & Trade Expo, they’ll encourage federal lawmakers to renew and strengthen the long-term viability of the federal flood insurance program, as well as maintain funding to update and improve the accuracy of flood maps. The NFIP program must be reauthorized every five years, and NAR urges Congress to reauthorize the program before it expires at the end of September 2017. REALTORS® also support the creation of a vibrant private flood insurance market to provide a variety of products to property owners looking to meet their individual flood insurance needs. NAR supports the Flood Insurance Market Parity and Modernization Act, which unanimously passed the House of Representatives but was not considered by the Senate, as a solid first step in the development of private market options for property owners.
Sarah Young is the director of Real Estate Services for the National Association of REALTORS®.
This column is brought to you by the NAR Real Estate Services group.
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