Federal Flood Insurance Payment History
Flooding is an expensive disaster that creates special problems that make it difficult for insurance companies to make a profit. As a result, private insurance companies usually don't offer it, and it usually isn't covered in most homeowners' insurance policies. Most flood insurance in the United States, though sold through private insurance brokers, is offered through the government-sponsored National Flood Insurance Program (NFIP). The rates offered under this program are subsidized by U.S. taxpayers, and the program must occasionally borrow from the Treasury.
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The Basics
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Under federal law, banks that want to sell their mortgages to federally sponsored underwriters must require homeowners at high risk of flooding to purchase flood insurance. The theory is this: A homeowner who loses everything in a flood, without the funds to rebuild, may simply stop paying his mortgage. Such scenarios leave the federal government on the hook because mortgage underwriters --- who bought mortgages from the banks --- could lose billions. High-risk properties are those with a 1 percent chance of flooding annually.
Significance
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According to FloodSmart, the average flood insurance premium was less than $570 per year in 2010. But data from the NFIP shows that in some years, the average rates the NFIP charged didn't cover the cost of disasters. In 2008, for example, the average policy cost $498. From that average policy, about $160 went to pay expenses and commissions; another $584 went to pay for disasters in that year. Because the NFIP was still repaying borrowings from previous disasters, including Hurricane Katrina in 2005, it shelled out an average of $145 per policy in interest and loan payments. The result? For every policy held by the NFIP in 2008, it lost about $391.
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Considerations
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The NFIP isn't designed to be profitable. In fact, it's barely designed to break even, because it must collect only enough money to cover losses in "the average loss year." While it might build up surpluses during years when losses are below average, above-average losses such as Hurricane Katrina can be disastrous. The NFIP was initially authorized to borrow about $1 billion from the U.S. Treasury to cover years when losses would exceed cash on hand. According to NFIP's 2010 Actuarial Rate Review, subsequent legislation has increased its borrowing capacity. According to the report, "In 1996 legislation was passed (and subsequently extended), providing an increase in borrowing authority from $1 billion to $1.5 billion in order to provide a greater cushion against potential losses. More recently, following the catastrophic hurricanes of 2005, the borrowing authority was increased three more times, so that it now stands at $20.775 billion." About $18 billion of the $20 billion authorized was outstanding at the time of the review. The NFIP lost $3,700 per policy in 2005.
Types
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Not all insurance rates are subsidized under the NFIP. After the law was enacted, rates were set very low to encourage participation. Those subsidies ended in the 1980s and 1990s. There are a couple of types of properties that do receive discounted insurance. Properties built before the law was enacted continue to receive subsidized insurance rates that are about 60 percent lower than a private insurance company would charge. Additionally, there are properties that have flooded more than once, known as repetitive-loss properties. About 1 percent of properties fit into this category. They cost the NFIP 30 percent of its losses.
Warning
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According to FloodSmart, about 25 percent of flood insurance claims come in from homes in areas designated low or moderate risk of flooding.
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References
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