Flood Insurance Program Running Out of Money

Again:

The National Flood Insurance Program (NFIP) says it needs to borrow an additional $5.6 billion to cover claims and expenses for 2006. Projections indicate that its payments will reach its existing $18.5 billion borrowing limit by early- to mid- February 2006.

I missed the hearing on this last Wednesday. It looks like the program will have to pay out over $23 billion dollars in claims, which is more than it has paid out in its 37-year history all together.

In November 2005, FEMA was authorized by Congress to borrow up to $18.5 billion, up from $3.5 billion, which was upped in September 2005 from $1.5 billion. Now FEMA is asking for $5.6 billion more.

First impression: Before September 2005 FEMA could only pay out $1.5 billion? How is that being prepared for an emergency? Yes, FEMA can ask for a higher borrowing limit, but:

David Walker, head of the Government Accountability Office, said he did not think the program would ever be able to repay the money it was borrowing to pay the Katrina claims.

So, they can borrow the money, but they have no way to repay it. Now that’s a plan.

This is how the National Flood Insurance Program makes money and pays out claims:

The program takes in about $2.2 billion a year in premiums and fees, [program director David] Maurstad said. In recent years it usually paid out about $1 billion in claims annually, but much of the rest of the money is eaten up by administrative expenses, he said.

What does that mean for you and me? Higher rates:

Donald Marron, acting director of the Congressional Budget Office, told the committee that policyholders with discounts pay an average of $710 instead of the average $1,800 they would pay based on actual risk.

More expensive flood insurance is better than no flood insurance, and the program needs to be funded somehow. If future floods all over the nation keeping sucking money out of the treasury not allocated for it, politicians like Banking Committee Chairman Sen. Richard Shelby (R-Ala.) might get their wish to eliminate it:

"The program now stands bankrupt," Shelby, an Alabama Republican, said.

***

"I would ask why we ever created it, but we did," Shelby said of the program after the hearing.

I would answer that we created the program because Americans live in flood plains. And I think all of us, having seen what happened during Katrina, understand that we will have to pay more to live where we live. If we pay more, though, we better get what we pay for.

There is no plan yet to raise rates. However, any “reform” of the flood insurance program has to include higher rates. Here are some recommendations from the hearing:

* Phase out subsidies for homes built to existing flood standards or built before flood maps were made. This would by definition raise rates for those home owners, adding $1.3 billion a year to the program.

* Require homeowners in the 500-year flood plain to buy flood insurance. Currently, homeowners in the 100-year flood plain, or houses likely to flood once every 100 years or with a 1% chance in any one year, are required to buy flood insurance. This won’t necessarily raise rates, but will result in more people having to pay the (most likely) higher rates that didn’t have to pay anything or very little before.

* Extend requirement to properties protected by levees and dams. That doesn’t really apply to New Orleans because we weren’t protected by our levees. Okay, that’s sarcasm. Of course that applies to us, so more people will be paying the (most likely) higher rates.

* Enforce requirements on mortgage lenders and homeowners to get flood insurance. The program director in the hearings estimated only 40 to 60 percent of homeowners in the 100-year flood plain have flood insurance policies.

Get out your checkbooks.