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National Flood Insurance Program Stretched To The Limit (Again) Following Hurricane Sandy

The National Flood Insurance Program (NFIP) fell in to serious debt following 2005’s Hurricane Katrina…on the order of some $18 billion, leaving the federal program designed to provide homeowners in flood prone areas with much needed coverage, virtually insolvent.  With the arrival and devastation of this year’s Hurricane Sandy, the program is once again in serious financial trouble.

Estimates are suggesting that Sandy will be the nation’s second worst storm when it comes to claims paid out by NFIP. Costs may reach as high as $7 billion during a time when the program is only allowed to add about $3 billion to its already considerable debt.

This past summer, Congress overhauled the program by allowing for substantial increases in premiums paid out by vacation homeowners and others with repeated flood problems. Critics are saying the program should not be bailed out again, at least not without Congress making even more radical changes.  The conventional wisdom is that the government is just throwing money to support a program that is going to create more victims and cost more money in the future.

The debt incurred by the NFIP makes the situation even worse because the act of simply covering the interest on the debt consumes up to $750 million a year, which makes it even harder to build up capital reserves for future catastrophes.

As of this writing, 44 members of the House of Representatives have called for Congress to appropriate whatever money is needed in order to help victims of the hurricane recover, and lawmakers are expected to do whatever is necessary to keep the program solvent.

The NFIP was established in 1968, and is mandatory for homeowners with a federally backed mortgage if they live in a flood prone area. Average annual premiums are around $615, but higher risk areas may see premiums as high as $3000.  The program collects about $3.5 billion in annual premiums, but for four of the past eight years, claims have been higher than the premiums collected, most notably in 2005 when Hurricanes Katrina, Wilma, and Rita caused more than $17 billion in damages. Most private insurers do not offer coverage for floods.

The costs associated with Sandy may have been higher if more people had signed up for the insurance, which is voluntary outside of the 100 year flood zones.  This would have created more premium dollars, although not enough to pay the claims.  Because so many homeowners have no flood damage insurance, that may prompt Congress to provide additional assistance, which of course further raises the cost to the Federal Treasury.

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