National Flood Insurance Program by Jac Sykes and Chris Kirkland

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National Flood Insurance Programby Jac Sykes and
Chris Kirkland
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Todays Presentation

• The Program in a nutshell
• Hows it working so far?
• Some positives
• Some Unintended Consequences
• What can be done?
• Conclusion

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1968 National Flood Insurance Program (NFIP)

• Contains three components
• Flood Insurance
• Intended to reduce costs of floods to taxpayers
• Provide alternative to disaster assistance
• Reduce costs of repairing damage to building and
  their contents caused by flooding

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NFIP Continued

• Floodplain Management
• envisions that perhaps in 50 to 60 years that
  flood prone areas would be replaced with properly
  constructed buildings
• Land use regulations that guide new development
  and substantial improvements in existing
  floodplains.
• Flood Hazard Mapping
• Creates broad-based awareness of the flood
  hazards
• Provides the data needed for floodplain
  management programs
• Actuarially rate new construction for flood
  insurance

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NFIP

• Available for homeowners, renters and business
  owners in participating communities
• voluntary
• Covers all types of flooding from heavy rains,
  melting snow, inadequate drainage systems, failed
  protective devices such as levees and dam as well
  as tropical storms and hurricanes.

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Purpose

• Created in response to the rising cost of
  taxpayer funded relief for flood victims
• Designed to provide an alternative to disaster
  assistance and to reduce the escalating costs of
  damage repair to buildings and their contents
  from the results of floods and flooding
• Intended to encourage flood precautions and
  discourage development in high-risk flood zones

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Enforcement

• Managed by the Mitigation Division of Federal
  Emergency Management Agency (FEMA)
• FEMA oversees the flood plain management and
  mapping components of the program

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1973 Changes

• Rollie Craps   Fortune, Arkansas "The bad news
  is, we gave up the fancy trip to Las Vegas to buy
  flood insurance. The good news is, the riverboats
  can now bring the gambling right to our front
  door."

• Amendment added which requires flood insurance to
  borrow money from any bank or lending company
  that was federally insured (FDIC)

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NFI Program versus Federal Disaster Assistance

• Federal Disaster Assistance available only if
  flood is declared a disaster by the president
• Average 50,000 disaster assistance loan is
  311/month

• Floods are largest natural disaster risk in the
  US
• NFI is 370/ year

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Insurance 101

• Insurance is based on risks
• Higher risk more expensive insurance
• Rates for the NFIP average 450-900 but
  actuarial rates would be 10,000-18,000
• Private companies do not insure high risk areas
  but the federal government does!

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• Although private insurance companies do not
  acquire any risks, private companies can earn
  commission for selling federal policies
• Commissions total around 165 million/ year

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Low rates lead to increased development

• Unnaturally low rates disillusion people about
  possible risk 38 of real risks
• Flood insurance has increased flood plain
  development density by 18 and at the waters
  edge development by 40
• Without flood insurance, development density is
  20-30 less in high risk area compared to lower
  risk area

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• Closed gate communities are possible only because
  of NFIP
• NFIP allows ocean to be sold as an amenity rather
  than liability increase in developers,
  residents, and tourists increase in beach front
  structures
• Real Estate agents advertise the cheap insurance
  to encourage sales

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Build Here
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• In 1950s Myrtle Beach structures were built off
  the ocean in the 60s and 70s hotels and
  buildings began to crowd the beach

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• 60 of NFIP properties are vacation homes however

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• Taxpayer money finances the construction of
  infrastructure
• Taxpayer money finances beach replenishment
  projects

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Development and the Ocean

• Barrier islands and coastal areas are transitory
  by nature
• Structures built in these areas are not

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More Problems

• Coverage is not denied to anyone/ anywhere
• No land use controls
• Land use decisions made by local governments
• 2.3 million buildings in the riskiest areas

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Resulting in

• 1 of NFIP participants are responsible for 25
  of claims
• Of these repeat claims many are part of 27 of
  participants that pay subsidized premiums because
  their structures were built before flood
  insurance requirements
• 10,000 NFIP properties have had 4 or more claims
  in the last 10 years or 2 or more that cost more
  the property itself

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Example

• House in Houston valued at 114,000 received 16
  claims totaling 800,000 in 6 years

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And more problems

• Subsidies
• 30 of NFIP properties are subsidized
• Results in 450 million shortfall/ year
• Valid point without subsidies, policies would be
  too expensive, people would not purchase
  insurance thus relying on disaster assistance
• Borrows money from the federal reserves

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Flood Plain Ordinances

• Encourages flood precautions
• Lacks resources for large scale mitigation
  efforts
• Regulations results from the need to correct
  subsidies
• Can require the elevation of buildings
• Does subsidize some precautious costs
• FEMA has bought out or elevated nearly 23,000
  properties nationwide
• Flood damage is reduced by nearly 1 billion a
  year in communities implementing sound floodplain
  management requirements and by property owners
  purchasing flood insurance

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• Claims to be self sufficient
• Borrows from the reserve intent to pay back with
  interest
• Makes money on all but subsidized policies
• Encourages low risk owners to purchase policy
• For every 3 paid in flood insurance claims, 1
  in disaster assistance payments is saved
• Studies show that we will save 2-3 for every 1
  we invest in this effort

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• Statistics based on old standards and do not
  account for new developments

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Current Program- Participation

• 20,000 communities in US and territories
  participate in the program
• By 1999 the number of flood insurance policies
  rose from 2.8 million to more than 4 million.

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However

• Participation does not necessarily represent
  success since it is required by the 1973
  amendment
• According to Flood Zone Correction Inc. 90 of
  all FEMA Special Flood Hazard Areas (SFHA) were
  misdiagnosed

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Winners versus Losers

• Real estate companies, builders/ developers,
  flood plain homeowners

• Wetland, coastal, riparian ecosystems and
  communities that suffer from increased
  development
• Policy holders fooled by subsidized rates
  encouraged to build in risk areas and
  subsequently suffered personal loses
• Policy holders that do not believe their flood
  risk merits insurance but were unable to obtain
  loans without NFI
• Taxpayers

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Revision Considerations

• Make sure costs are transferred from taxpayers to
  property owners
• Emphasize voluntary buyouts and pre-disaster
  planning
• Land use restrictions
• No coverage in high risk areas

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Revision Considerations Continued

• Make use of state and local funds and management
  plans
• Study and utilize natural effects of water
  systems
• Research effects
• Focus on local communities, tailoring plans to
  locations

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Resolve

• Although the National Flood Insurance Program was
  intended to relieve disaster assistance stress
  and encourage flood precautions, it instead, has
  encouraged development in flood plains increasing
  the number of properties affected by floods.
• With possible revisions the policy can be revised
  to consider specific land uses to achieve the
  originally intended effects.

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Questions?
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Sources

• Freudenthal, Dan. A message for the President.
  Flood Zone Correction. Inc. Retrieved from
  www.floodzonecorrection.com on 3/2/2005.
• Dean, Cornelia. The Midwest Flooding Many
  Questioning Value of U.S. Flood Insurance. The
  New York Times. July 19, 1993.
• John, David C. Time for Congress to Improve
  the National Flood Insurance Program. The
  Heritage Foundation Policy Research and Analysis.
  November 14, 2003.
• Knudson, T and Vogel, N. Momentum.
• Slowly builds for flood-control reform. The
  Gathering Storm. 1997. Retrieved from
  www.sacbee.com on 3-2-2005.
• Myers, Mary Fran. The National Flood Insurance
  Program as a Nonstructural Mitigation Measure.
  U.S.-Italy Research Workshop on the
  Hydrometeorology, Impacts, and Management of
  Extreme Floods. November 1995.
• www.abcnews.com. Taxpayers Get Soaked by
  Governments Flood Insurance. September 20,
  2004. Commentary by John Stossel. Retrieved
  3/2/2005.
• WWW.fema.gov. Flood Insurance About National
  Flood Insurance. Retrieved 3/2/2005.
• www.fema.gov. Mitigation Division National
  Flood Insurance Program. Retrieved 3/2/2005.
• www.fema.gov. Flood Insurance Association of
  State Floodplain Managers. Remarks by Jo Ann
  Howard. June 20, 2000. Retrieved 3/2/2005.