Federal Flood Insurance is a Winner, Warts and All

Even in the red, the National Flood Insurance Program deserves a long-term fix.

If ever there were a valuable government backstop for insurance, the 44-year-old National Flood Insurance Program is it.

With $1.26 trillion in insurance in force through February of this year, covering 5.6 million policyholders, the program reassures homeowners and businesses that they will be made whole in case of loss from flooding.

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With the private market unwilling to cover flood under standard policies, and unlikely to do so in the future with the predicted rise of sea levels from climate change, finding an alternative to securing property vulnerable to flooding is vital to national interests.

Without such a program, there's no guarantee that the private market would paddle to the rescue in the event lawmakers decided to sink it.

Critics like to point to the NFIP's spotty management, and to its recent debt load of $17 billion, which was incurred mostly in the wake of the $23 billion in claims paid out in connection with the 2005 hurricane season.

All true. But since its founding in 1968 to stem the rising cost of taxpayer-funded emergency relief, much of the flood program has flowed smoothly. It has paid out more than $38 billion in claims since 1978, and it has played an important role in improving building standards in flood-prone areas.

Available in more than 20,000 communities around the country, the program is exactly the kind of long-term government program designed to protect the well-being of its citizens and the value of property. In short, the NFIP amounts to good public policy.

The NFIP has problems, I'll grant you that. It hasn't prevented development in high-risk flood areas, it continues to insure property with repeated losses, about a quarter of the policies are rated at less than actuarial rates, and half of all flood damage occurs outside the Special Flood Hazard Area, according to a review by the Government Accountability Office.

But all of this only means that the flood program is ripe for reform. A greater role by the private sector is among the reform alternatives being explored by FEMA. In fact, private insurers already play a role in the flood program -- by insuring property in excess of the program's government-mandated limits.

Improving the flood insurance program is a political not a technical issue, and the answer isn't to automatically turn to the private sector.

The answer lies in reforming a program we already have, and that for the most part has already proved its worth.

CYRIL TUOHY is managing editor of Risk & Insurance®. He can be reached at ctuohy@lrp.com.

July 24, 2012

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