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Government-subsidized flood insurance premiums are about half of full-risk price

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Missouri River flooding

Matthew Brown/AP

This year’s flooding through the mid-section of the country raises fresh questions about government-subsidized flood insurance.

The National Flood Insurance Program, run by FEMA, provides subsidized flood insurance to policyholders living in flood-prone regions. In 2005, the program had to borrow from the U.S. Treasury to cover losses from the catastrophic hurricanes that year, including Katrina, and still has an outstanding debt of $17.8 billion. NFIP’s need to borrow to cover claims in years of catastrophic flooding, along with management challenges at FEMA, has raised concerns about the program’s long-term stability. NFIP has landed on GAO’s high-risk list since 2006.

To participate in NFIP, communities agree to enforce regulations for land use and new construction in high-risk flood zones and enforce state floodplain management plans to reduce future flood damage. More than 20,000 communities participate in NFIP. To encourage program participation, the program does not charge all participants rates that reflect the full risk of flooding to their properties. The percentage of subsidized properties was expected, but almost one out of four policies is based on a subsidized rate.

FEMA has tried, unsuccessfully, to reduce the number of properties that have experienced repeated losses. Repeat property losses account for just 1 percent of NFIP’s insured properties but are responsible for 25 percent to 30 percent of claims. Despite FEMA’s efforts, the number of repetitive loss properties increased from 76,202 in 1997 to 132,100 in 2011, an increase of 73 percent. FEMA can also raise premium rates for property owners who refuse mitigation offers.

According to the Government Accountability Office, subsidized premium rates are generally 40 percent to 45 percent of the full-risk price. The average annual subsidized premium was $1,121 in 2010, discounted from the $2,500 to $2,800 that FEMA said would be required to cover the full risk of loss.

Because many premium rates charged by NFIP do not reflect the full risk of loss, the program is less likely to be able to pay claims in years with catastrophic losses, as occurred in 2005, and may need to borrow from Treasury. Raising the cost of the premiums would decrease costs to taxpayers but make the insurance unaffordable for many current taxpayers. If policyholders leave the program, it could increase the amount of federal assistance needed after a disaster.

Virtually no private market for flood insurance exists for most residential and commercial properties. Unlike private insurance companies, NFIP does not purchase reinsurance to cover catastrophic losses. As a result, NFIP has had to borrow from Treasury after the fact.

GAO criticized FEMA for significant management challenges in areas that affect its administration of NFIP. FEMA has not finalized strategic guidance for NFIP, and lacks goals, objectives and performance measures to assess the program’s effectiveness.

“Collaboration between program and support offices that administer NFIP has been ineffective, leading to challenges in effectively carrying out some key functions, including information technology, acquisition, and financial management,” the GAO said.

For example, FEMA invested about seven years and $40 million to modernize NFIP’s policy and claims management system, only to cancel the project in 2009 for failing to meet user expectations. FEMA still relies of NFIP’s costly 30-year-old system.

FAST FACT: In special flood hazard areas where property owners with loans from federally insured or regulated lenders are required to purchase flood insurance, as few as 50 percent of the properties had flood insurance in 2006.