The National Flood Insurance Program cannot afford to continue providing coverage against floods while paying off the claims from Hurricane Katrina, according to the Congressional Budget Office.

In a letter to Sen. Judd Gregg (R-N.H.) the chairman of the Senate Budget Committee, CBO Acting Director Donald Marron said the NFIP's “current financial situation is unsustainable.” Additionally, Marron said the Federal Emergency Management Agency, which oversees the NFIP, “lacks the financial resources to cover the program's costs and the authority to make changes that might ensure that future obligations could be met.” Specifically, he pointed to the NFIP's need for about $3 billion more to pay claims related to Hurricane Katrina and other storms in 2005, which must be provided by Congress.

Marron also noted that the interest alone on what the NFIP has already borrowed to pay claims will amount to roughly $1 billion annually. “Even if FEMA increases the premiums charged for flood insurance by the maximum percentage allowed by law, premium income in the next several years is unlikely to cover claims, debt service, and other costs of the program,” he said. Compounding the problem, Marron said, is that the NFIP does not operate on an actuarial basis and many property owners pay premiums that do not reflect the full risk to their properties. “Thus, over the long term, premium income will be insufficient to cover the program's costs,” he said.

Marron added, “If this policy of subsidizing certain types of properties continues, it can be expected to lead to a shortfall of about $1.3 billion a year over the long term for currently insured properties.”

The CBO examined the main NFIP reform bill, HR 4973, the Flood Insurance Reform and Modernization Act, Marron said, and has determined that the bill, which would gradually eliminate the subsidies for nonresidential buildings and second or vacation homes, would increase receipts from flood insurance premiums by about $1.5 billion over the next 10 years. Although eliminating the subsidies entirely would put the NFIP on firmer ground financially for the future, Marron said the program still would not be able to make up for past losses.

The CBO also looked at a more radical idea — eliminating the NFIP entirely. Elimination of the program would save the government about $1.3 billion annually, minus the increased amount of disaster relief spending the government had to pay.

“For many years, the availability of flood insurance through the private market has been quite limited,” he said. “How the private insurance market for flood insurance might change in the absence of a federal program is unknown.

“If private flood insurance did not become widely available, it is likely that the government would end up paying for some of the losses from floods in the form of appropriations for disaster relief.”

This article originally appeared in The National Underwriter P&C. For the complete article, please click here.

Special Reports /

Katrina Loss Keeps Flood Program In the Red

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