The National Flood Insurance Program (NFIP)

Flood Insurance NFIP

Do you remember the old song, “How High’s the water, Papa”? With the answer, “five feet high and rising!” Well, just about every year at this time the conversation regarding flood levels occupies a place in our conversation almost every day. This year is no exception. In fact, with record snowfall in our mountains and high springtime temperatures here in North Idaho and Western Montana, our Lake Pend Oreille (pronounced Ponderay) is about one month ahead of where it should be for its normal pool level. There is some discussion that if the lake only rises an average of 2 inches per day for the next 30 days it will be 5 feet above the level it should be at. This won’t really affect floating docks, which can move up and down on their piers, but docks which are built at a stationary position will be in danger of being broken up by the the water rising underneath them, tearing them from their moorings. It also means many homes which were built just above historically high water marks will be in jeopardy of being damaged by flooding. The Corp of Engineers who manage the lake has placed a no wake designation within 500 feet of the shore line for boats in an effort to help reduce the erosion caused by the high water along the shoreline.

Flood Insurance Defined

So what constitutes a flood? According to the definition found in the National Flood Insurance Program (NFIP) administered by Federal Emergency Management Agency (FEMA) a flood condition is defined as a general and temporary condition of partial or complete inundation of two or more acres and two or more properties of normally dry land. Flood damage can only be caused by the following water sources:

1. Overflow of inland or tidal waters
2. Unusual and rapid accumulation or runoff of surface waters from any source
3. Mudflow
4. Collapse of land along the shore of a lake or similar body of water as a result of erosion
5. Undermining caused by waves or currents of water exceeding anticipated cyclical levels that result in a flood as defined above.

While NFIP uses the above definition for flood, the National Oceanic and Atmospheric Administration National Weather Service (NOAA NWS) simply defines it as any high flow, overflow or inundation by water which causes or threatens damage.

This definition differentiation may not be too meaningful when one is considering purchasing flood insurance protection, but it may be important if the insurance company offering flood insurance uses the NOAA NWS definition as it appears to not consider mudflow in its definition for coverage. It would only take a moment to have that answered as you approach your agent for your private flood insurance policy. According to the FEMA records, 98% of U.S. counties are impacted by flooding events, which includes the mudflow issue; so if you are in an area susceptible to mudflow, make sure your flood insurance protection policy uses the NFIP definition.

Creation of NFIP

Just as the “Great Fire of London, 1666” in which 13,000 houses were destroyed by fire prompted the economist Nicholas Barbor and some of his associates to start the first fire insurance company “Insurance Office for Houses” in 1681, so it was with “The 1927 Great Mississippi River Flood” destruction covering  27,000 miles in 10 states taking 246 lives and costing $400,000 million, the most destructive natural event in U.S. history which gave rise to the need for something to be done for future natural events. Unlike the creation of public fire insurance companies by private industry to meet the catastrophic damage caused by fire, flood insurance needed the resources of the federal government to meet the potential expenses of flood loss.

This is evidenced by the 2005 Hurricane Katrina damages ranging 90,000 miles from Texas to Florida, taking a death toll of 1833, and costing 108 billion dollars in property loss due to wind or flooding. In 2005 the NFIP paid out for flood damages 16.25 billion, 170,000 claims with an average per claim at close to $96,000. No insurance company could have weathered that catastrophic year, let alone damages which would come annually after that.

Though these flooding events continued to occur across the nation, it wasn’t until 1968 when Congress created the National Flood Insurance Program (NFIP) allowing property owners to participate in purchasing insurance protection administered by the government against losses from flooding. Along with consumers being able to purchase coverage, the bill also required flood insurance for all loans or lines of credit that are secured by existing buildings, manufactured homes, or buildings under construction that are located in communities that participate in the NFIP.

Scope of NFIP

The three aspects of NFIP are:

1. Floodplain identification and mapping
2. Floodplain management
3. Flood insurance.

Flood insurance under NFIP is sold to owners of property located in NFIP communities through two mechanisms:

1. State licensed property and casualty insurance agents and brokers who deal directly with FEMA
2. Through private insurance companies with a program created in 1983 known as Write Your Own (WYO)

NFIA Flood Insurance Policies

Once the NFIP was created, it was determined various risks had different exposures needing to be addressed so three types of policies were formulated

1. Dwelling policy form covering dwellings and/or contents:
   1. Detached, single-family, non-condominium residence with incidental occupancy limited to less than 50% of the total floor area;
   2. Two-to-four family, non-condominium building with incidental occupancy limited to less than 25% of the total floor area;
   3. Dwelling unit in residential condominium building;
   4. Residential townhouse / rowhouse;
   5. Manufactured mobile homes.
2. General Property Policy Form–Issued to owners or lessees of non-residential buildings or units or residential condominium buildings that are not insurable under Residential Condominium Association policy (RCAP). Policy provides building and/or contents for these and similar “other residential risks”:
   1. Hotel or motel with normal guest occupancy of 6 months or more;
   2. Apartment building;
   3. Residential cooperative building;
   4. Dormitory;
   5. Assisted living facility;
   6. And non-residential risks:
   7. Shop, restaurant, or other businesses;
   8. Mercantile building;
   9. Grain, bin, silo, or other farm buildings;
   10. Agricultural or industrial processing facility;
   11. Factory;
   12. Warehouse;
   13. Pool house, clubhouse, or other recreational building;
   14. House of worship;
   15. School;
   16. Hotel or motel with guest occupancy of less than 6 months;
   17. Licensed bed-and-breakfast inn;
   18. Retail;
   19. Nursing home;
   20. Non-residential condominium;
   21. Condominium building with less than 75% of its total floor area in residential use;
   22. Detached garage;
   23. Tool shed;
   24. Stock, inventory or other commercial contents.
3. Residential Condominium Building Association Policy (RCBAP) form–provides building coverage and, if desired, coverage of commonly owned contents for residential condominium building with 75% or more of its total floor area in residential use.

(For terms, conditions, coverages explanations, additional definitions go to www.fema.gov/media/library/assets/documents/18108 and 18118.)

When any of the above policies are written, the policy contract along with declaration page will give effective dates, inception dates, and specific amounts of coverage for buildings or contents. When application for flood insurance is made, agent will determine several criteria to be used for premium calculations i.e. Pre FIRM (Flood Insurance Rate Map) buildings with beginning construction or substantial improvement  on or before Dec. 31, 1974, or before effective date of the initial FIRM for the community or Post FIRM buildings built after Dec.31, 1974. He or she will also use flood plain map zone to identify proper premium calculations to be factored into the rate.

The Write your Own Insurance Program (WYO)

“Write Your Own” (WYO) is a rather misleading term. It is only describing the agreement NFIP has in allowing private insurance companies to issue and service the three types of policies issued by NFIP.

This partnership was created in 1983 with the intent on the part of NFIP to increase its policy base and geographical distribution of policies. They wanted to improve service through the infusion of Insurance Industry knowledge and provide the insurance industry with experience with direct operating expenses with flood insurance.

After Hurricane Isabel the Flood Insurance Reform Act of 2004 was enacted in an attempt to deal with repetitive loss properties which during Hurricane Isabel cost 200 million of damages in areas where losses were repetitive.  It also mandated insurance agents receive flood insurance training to provide better service.

In another attempt to make NFIP more efficient, the Biggert-Waters Flood Insurance Reform Act of 2012 (BW 12 )was passed reauthorizing NFIP through 2017 to make sure help would be available to communities and policyholders. It also declared enough money should be raised through premium payments to fund losses and administration expenses (never happened). Also discussed was the possibility of privatizing NFIP (on going). It also updated funding for the mapping program and gave new guidelines for requirements for lending institutions.

Since the first NFIP policies were written until May 2017 the NFIP program has grown to 3.2 million policies in force, 3.7 billion in annual premiums, and 1.2 trillion coverage in force. Yet in 2017 the NFIP program was showing a $25 billion deficit. This deficit is covered by the NFIP borrowing from the U.S. Treasury, and at some point the Treasury will have to be reimbursed. It appears this program needs a major workover or a total replacement.

Alternative Solution

The idea which seems to make the most sense is getting the Federal government out of the administration of natural disaster situations  Let the private insurance industry players with all their expertise and experience with handling claims and developing actuarially-sound premiums devise the way private insurance policyholders across the nation can participate. State insurance commissioners meeting with industry leaders could formulate what some are calling a “National Disaster Fund” which would be available to cover unexpected catastrophes. It wouldn’t take too long with the information we have and technology available to see how much it would really cost to include flooding and earthquake into the equation for premium calculations.

These two perils of flood and earthquake, which are not covered by existing private homeowner insurance policies, would be lumped together with all other insurable perils with funding being made available through private carriers backed up by a strong national disaster fund administered by the private sector. This could open up another private enterprise which would undoubtedly function much more financially efficient than any government agency.

Some hard realities would have to be faced, i.e., people continuing to build in fire prone areas, in historical flood areas, or close to known volcano activity. Those are areas where people who have a choice should not expect others to accommodate that lifestyle. Some other disparities like high crime rate areas for theft, vandalism, malicious mischief are perhaps more difficult to work with because they are societal driven issues.

With other changes which are impacting the marketing of insurance, now would be a good time to open a dialogue regarding flood insurance and other natural disaster insurances as to how they could be more efficiently administered to the buying public. An editorial written by Sun Sentinel Editorial Board dated and copy written May 8, 2018, has some intriguing thoughts which could be used as a springboard to further discussion. Since it is copywritten, I would simply refer you to read it on the internet under “National disaster fund would more fairly spread the risk”/Editorial.

(Though not quoting directly from FEMA articles, much credit is given by this author to information gleaned from government articles and videos ie “NFIP Perspectives: History and background of NFIP,” www.fema.gov/media-library/assets/ videos/108044, and www.fema.gov/media-library/assets/documents/18118.)

A Key to the Acronyms Used in This Document

National Flood Insurance Program, Program Description, Federal Emergency Management Agency, Federal Insurance and Mitigation Administration, August 1, 2002