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National Flood Insurance Back at Busted

500 to 1,000 percent rate hikes promised to keep National Flood Insurance afloat. But an abort by Congress spared coastal property owners, spiked taxpayers and put the federal flood program back at busted.

A sports car sits partially submerged in sand and water along the remnants of State Road 182, in Gulf Shores, Sept. 16, 2004, in the aftermath of Hurricane Ivan.

A sports car sits partially submerged in sand and water along the remnants of State Road 182, in Gulf Shores, Sept. 16, 2004, in the aftermath of Hurricane Ivan.

AP Photo/St. Petersburg Times, Kinfay Moroti

The National Flood Insurance Program, the primary source of flood insurance coverage for most coastal residents, condo developments and businesses, is busted. As in broke. There is no money left in the coffers to pay claims arising from the next major natural disaster.

What’s more, it’s been this way for close to a decade, since the staggering costs associated with Hurricane Katrina’s assault on the Gulf Coast left the federal program, which is administered by the Federal Emergency Management Agency, more than $19 billion in the hole. Storms since then, including Hurricane Sandy on the eastern seaboard, have only made the deficit bigger, somewhere in the neighborhood of $25 billion at last count.

Everyone agrees on the problem — the premiums charged by the federal program are too low in relation to the actual flood risks faced by coastal residents. But no one can agree how to fix the system.

Now, even with a new flood insurance law set to take effect in June, insurance agents, officials in coastal towns and politicians alike say the National Flood Insurance Program is as flawed as it ever was. And it is no closer to being able to cover the spiraling costs associated with storm damage in the new era of super storms.

“You can’t fix the situation unless you have money,” says Norris Cole, a coastal insurance executive with Gulf Shores Insurance Agency.  “Our Congress is not going to put the money out there to fix the problem, and they are afraid to charge people the money to fix it. We still have the $19 billion that FEMA incurred on Katrina. Even with all the money coming in to the National Flood Insurance Program every year, they couldn’t even pay the interest on that debt. It’s all about money. Is it going to be fixed? No, because it’s the government and there aren’t enough smart people in Washington to solve this.”

Cole says the government is forced to handle flood insurance for residents in flood prone areas because the private insurance industry sees it as a money-losing proposition.

“It’s like the wind insurance pool run by the state. I doubt very seriously you’d find private insurers willing to take on that kind of risk,” Cole says. “It’s not just coastal residents. In the Mississippi River valley, the Missouri River valley, they’ve had terrible problems with flooding. Then you have these people who’ve settled on the Mississippi from Missouri to Louisiana. They don’t want to leave, and they expect the government to cover it when they lose everything, just like on the coast. There is no easy fix.”

The National Flood Insurance Program was created in 1968, in the wake of Hurricane Betsy, with the goal of making “flood insurance available on reasonable terms and conditions.” In effect, that meant making flood insurance available with heavy government subsidies, rather than forcing people to pay what insurance regulators call “full risk rates,” meaning what the private insurance companies would charge to cover flood zones. 

The full cost of those government subsidies became apparent after Hurricane Katrina, when the massive losses led U.S. Sen. Richard Shelby to warn that the program needed to be reformed. Premiums needed to be raised, he argued, so the program could meet claims and be what insurance executives describe as “actuarially sound.”

“We stand at a crossroads. We can reform this program, or we can continue to allow it to flounder,” he said at the time, as senators from other coastal states lined up to oppose any meaningful change. It wasn’t just the coastal politicians standing against reform. An important block of leaders from Midwest states, where hundreds of thousands of people live in flood-prone areas, has also steadfastly opposed reforming the flood program.

Their objection has been that raising premiums so they were more in line with actual risk would discourage development and force some residents to leave coastal communities or the hundreds of towns built on the banks of the nation’s biggest rivers, from Minnesota to Mississippi.

“When you start talking to people who have $600,000 to $1 million homes down here, when you start telling them their flood insurance is going to cost $10,000 a year, it doesn’t sit well, even though they can afford it,” Cole says. “But that’s the way it is. If you can’t afford it, you can’t afford to live here. You may as well pack up and leave.”

With the growing consensus on climate change, the increasing number of major storms with catastrophic flooding, and the growing deficit building up in the federal flood program, the idea of reforming the system gained ground.

Congress passed the Biggert-Waters Act in 2012, which was designed to at least stop the bleeding by raising premiums and setting new insurance rules for both new and old development. The goal was to get the program out of the red and make it actuarially sound. The bill represented an end to decades of federally subsidized insurance.

Some homeowner premiums went up more than 1,000 percent over the previous year. More than 70,000 homeowners were affected in Louisiana, Mississippi and Alabama, with tens of thousands more in Florida and Texas. The outcry was intense.

“One guy was paying $800 a year, but after Biggert-Waters, his bill was $38,000 for the same coverage,” says a coastal insurance agent who asked to remain anonymous. “They were putting people out of their homes because they couldn’t pay their bills. Then they couldn’t sell their houses because no one would take on the flood insurance.”

Coastal residents all around the nation flooded their local politicians with similar tales. Congress took note.

“We all know there is an increase in flooding. We all know the huge damage Katrina and Sandy caused. But to put it on the backs of homeowners, as FEMA was doing by both increasing rates and expanding flood zones beyond what flood zones should be made no sense,” said Sen. Charles Schumer, D-NY, on the Senate floor.

Schumer was part of a group that proposed the newly passed Homeowner Flood Insurance Affordability Act. That act was designed to roll back most of the provisions of the Biggert-Waters Act, particularly the mandatory insurance rate hikes. It capped any annual rate hikes in the federal program at 18 percent.

“Eighteen percent is still not as low an amount as we would like, but it certainly is not a 700, or 2,000, or 5,000 percent increase, which is what people were getting,” Schumer said in a speech defending the bill last month.

Shelby voted against it. Asked for comment, his office referred Business Alabama to a speech Shelby gave in January.

“One of the goals of the reforms was to ensure that the 5.6 million flood insurance policy holders could collect on their policies if they were ever to suffer a flood loss — something that cannot be guaranteed by a flood insurance program that is currently $25 billion in debt. The program is bankrupt and only operating by the grace of the American taxpayer.”

As it stands now, about the only sure bet is that the National Flood Insurance Program will continue to fall deeper and deeper into debt with every passing storm.

Ben Raines is a freelance writer for Business Alabama. He lives in Fairhope.

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