Filed Under:Risk Management, Weather Risk

Can a debt-burdened flood program take on Hurricane Harvey?

Homes are surrounded by floodwaters from Tropical Storm Harvey Tuesday, Aug. 29, 2017, in Spring, Texas. (AP Photo/David J. Phillip)
Homes are surrounded by floodwaters from Tropical Storm Harvey Tuesday, Aug. 29, 2017, in Spring, Texas. (AP Photo/David J. Phillip)

WASHINGTON, DC – The news coming out of Texas, Houston in particular, has been heartbreaking.

Indeed, the Federal Emergency Management Agency Administrator Brock Long told CNN that “FEMA is going to be there for years.” The state of Louisiana and other parts of the Gulf Coast are now facing some peril from the remnants of Hurricane Harvey as well.

All in all, Hurricane Harvey is a storm that has rivaled Hurricane Katrina in misery and destruction.

Related: Dismantling the NFIP monopoly

In a larger sense it has also served to highlight — just as Katrina did — the weaknesses of the National Flood Insurance Program. It just so happened that Harvey roared ashore with the NFIP set to expire at the end of September unless reauthorized by Congress. The program is also in debt by some $25 billion in large part because of Hurricane Katrina as well as Superstorm Sandy. How much further into the red Hurricane Harvey will push the program remains to be seen.

How we got in this mess

To be fair, the NFIP was a mess long before Hurricane Katrina made her unwelcome debut. The program was poorly organized for the first 40 or so years of its existence, says Brad Hubbard, a civil engineer and owner of National Flood Experts, where he works evaluating properties in Florida to determine whether they have been correctly zoned by FEMA. He’s also the author of Flood Money: The Guide to Moving Your Property from the Flood Line.

In the early days NFIP did not allow for reinsurance or a surplus account, Hubbard tells — meaning that if the NFIP made money in a given year, it didn’t save it for the next year should an event were to happen.

“Since floods are generally large and catastrophic, this made very little sense; and when the large events of the last 20 years hit, there was no surplus account to help fund the claims,” he said.

“The NFIP also pays around $300 million per year in interest on loans from the Treasury. These are all things that have debilitated the NFIP in the past and make it difficult for future success.”

Fortunately in the past few years, the NFIP has made great strides in purchasing reinsurance, which reduces its risk in large events such as Hurricane Harvey, Hubbard says.

Could it be discontinued?

Still, though, the NFIP has had a few near death experiences in Congress and with a September renewal deadline looming — together with Congress’ packed schedule for this Fall — it is fair to worry what the market would look like without it.

It wouldn’t be pretty, at least not in the short term, says Valrie Chambers, an associate professor of accounting at Stetson University in Florida.

Related: Draft legislation to overhaul National Flood Insurance Program released

Consider that one of tenants in the call for tax reform is the elimination of all itemized deductions except mortgage insurance and charitable contributions. That would mean, she told, that casualty losses would no longer be deductible.

“If the NFIP ends, I would expect regional real estate markets to be skewed and more bankruptcies to occur,” she said.

That is one scenario but coming on the heels of Hurricane Harvey it is hard to imagine Congress taking such a politically unpalatable step. Indeed, even the normally cash-strapped FEMA is likely to get what it needs for this crisis, says Daniel Hahn, a faculty member at the Miami-based Barry University as well as a full time emergency manager in Florida.

“Due to politics FEMA will probably get the money they need for this disaster, so will Louisiana,” he tells “Anyone voting against the renewal of the NFIP next month after seeing what is happening in Texas is committing political suicide, and politicians do not do that often or in great numbers.”

Homes are surrounded by floodwaters from Tropical Storm Harvey Tuesday, Aug. 29, 2017, in Spring, Texas

Homes are surrounded by floodwaters from Tropical Storm Harvey Tuesday, Aug. 29, 2017, in Spring, Texas. (AP Photo/David J. Phillip)

What would NFIP reform look like?

Another option would be a comprehensive review and reform of the program — something that many Congresspeople have been calling for. There is arguably a need for this.

Beyond Hurricane Harvey, there are longer-term pressures that could cause the program to unwind or at least further weaken.

Dennis Toft, an environmental attorney at New Jersey-based Chiesa Shahinian and Ginatomasi likens the situation to health insurance: As more people participate — due to FEMA’s new mapping — and the risks increase, the program is more likely to become insolvent absent change.

Limit risks through government action

In any reform of the program, the first question that should be decided is whether there are ways to limit the risks through further governmental action, he tells “This could include further buyouts of flood-prone homes, stepped-up enforcement of building code requirements, educating the public about changes building owners can make to reduce premiums — such as raising the elevation of occupied floors — and other similar measures.

“In addition to taking risk reduction measures, a decision should be made about the extent of government subsidies for the program and whether the federal government is willing to support the NFIP to keep premiums lower,” he said.

“Even if an effort is made to shift the program to the private sector, care must be taken so that flood insurance premiums do not become cost prohibitive for many existing property owners.”

Indeed, previous attempts to reform NFIP have not meet with raging success.

Related: NFIP challenges & reform options from the American Academy of Actuaries

A substantial increase in homeowner premiums was later reduced in the face of financially overburdened constituents, Michelle Rudd, a partner at Stoel Rives who focuses on land use issues notes.

“Something must, however, be done,” she told

Focus on emergency preparedness?

Rudd, too, has her ideas about possible program modifications and suggests they should focus on emergency preparedness.

“One option is improving the collection and distribution of information,” she said. “In terms of the collection of information, the NFIP reform should facilitate better information by providing financial assistance and authority for local governments to use new technology to improve the mapping of flood hazard areas. And, regardless of the potential pushback from the current administration, the updated mapping needs to recognize and account for the anticipated impacts of climate change and the related increase in extreme weather events expected.”

Ultimately, though, Rudd said, a revamped NFIP may wind up making its largest investment in simply moving people out of the floodplain.

“By providing funds to assist local governments in buying property in the floodplain, human life can be protected and the land used for water storage during flood events and open space or other creative uses the rest of the time,” she said.

Stating the obvious, this would not be a simple solution, she said. The value of these properties is reduced by their location within the floodplain, for starters and a payment of fair market value may not provide these property owners with enough money to locate outside of the floodplain.

Debt forgiveness for NFIP

Another possible solution for the NFIP would be debt forgiveness or some variation thereof, and then introducing an element of private-sector competition. Some Congresspeople would like to see flood policies written by private insurers, so at least they are more reflective of the true risks. The NFIP would become viable for the long term as well.

Related: Offering private flood insurance in California: Golden Bear's experience

“If the federal government forgave the debt currently owed and allowed the NFIP to operate more like a private insurance company, it would then have the opportunity to succeed in what it was designed to do,” Hubbard of National Flood Experts says. After all, “In the past four calendar years since Hurricane Sandy, the NFIP has collected over $8.2 billion more in premiums than in claims it paid out. This money, plus reinsurance, would most likely be enough to cover the expected losses in Texas.”

In short it looks as though NFIP has found its secret to success: purchasing reinsurance and creating a surplus account. It would also help if its flood insurance agents sold more insurance in non-high risk areas, Hubbard added.

“Forgiving the current debt and allowing them to start over with a clean slate and better practices would help immensely in the process,” he said.

Erika Morphy ( has been writing about commercial real estate at for more than 10 years, covering the capital markets, the Mid-Atlantic region and national topics. 

Originally published on Globe St.. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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