It will take months to calculate the damage Hurricanes Harvey and Irma unleashed on Texas, Louisiana, Florida, and other states this summer: lives lost, homes destroyed, businesses wrecked, property damage in the tens of billions of dollars. But beyond everything else, these storms and their massive devastation have exposed deep problems in the Federal government’s principal tool to protect homeowners in such disasters, FEMA’s National Flood Insurance Program (NFIP).
FEMA provides NFIP coverage to home and business owners in communities that have adopted floodplain management plans. The program had over 5.1 million policies in place at the end of 2016 covering some $1.25 trillion in property value in 22,200 communities. Despite these impressive numbers, though, Hurricane Harvey showed serious gaps in the system. For starters, almost ninety percent of homeowners in the Harvey disaster area simply were not covered, having failed to buy available NFIP policies in advance. Further, the program stands over $24 billion in debt, the result primarily of unfunded massive losses from Katrina and Superstorm Sandy. Also, once claims start pouring in from the Harvey and Irma disaster areas (over 82,000 so far from Harvey victims alone), NFIP payments will soon to outstrip reserves, forcing it to borrow again and likely soon hit the program’s current statutory borrowing limit of about $30.4 billion.
All this, and the entire NFIP program is due to expire at the end of September (extended to December 8 as part of the recent budget deal), with Congress not yet having addressed key policy issues. And all this controversy creates uncertainty, which can only raise the already-high stress on homeowners and threaten to hinder recovery at the worst possible moment.
The roots of NFIP’s fiscal problems are deep and endemic. NFIP, with government backing, operates differently from private commercial insurers. Normal, private insurers must charge premium rates high enough to cover potential losses, build reserves, and pay operational costs. Otherwise, they risk bankruptcy, and state insurance commissioners review these rates to protect the system. But NFIP is different. Politics permeate the structure. Congress requires NFIP in many cases (affecting about 20 percent of policyholders) to charge premiums at subsidized rates far below the actual flood risk. Worse, it has provided no automatic mechanism to pay for the inevitable shortfalls when claims result. Even where NFIP attempts to charge full-risk rates, gaps in available data and outdated floodplain maps often stand in the way. The result is the creation of perverse incentives to build homes or offices in high-risk areas and a recipe for fiscal instability when disaster strikes.
Further, while Congress has tried to promote participation by requiring NFIP insurance on all home with mortgages from Federally-regulated lenders, the large numbers of uninsured properties affected by Hurricane Harvey shows the extent these have fallen short. For years, Congress, GAO, private insurers, and the agency itself have flagged these problems, resulting in two major statutory overhauls in recent years: the Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014. But once again, these two laws have worked at cross purposes. While the first mandated the elimination of most subsidized rates, the second largely repealed those eliminations.
Despite all these problems facing NFIP, though, the dilemma is not unique, and, in at least one similar case, solutions were found.
Three decades ago, in 1993, a similar crisis faced the US Agriculture Department’s Federal crop insurance program run by USDA’s Federal Crop Insurance Corporation (FCIC), the closest analog to NFIP in the Federal government. Like NFIP, FCIC crop insurance was created by Congress to provide government-backed coverage in an area that private carries traditionally had avoided because of its susceptibility to systemic loss. That summer, a massive once-in-500-year flood crippled the American heartland, destroying wide swaths of cropland along the Mississippi and Missouri Rivers and throughout the Central and Northern Plains. Farmers faced crop losses approaching $10 billion, plus massive damage to homes and rural infrastructure. Yet, there too, the principal Federal program designed to cover crop loss was, like NFIP today, exposed as starkly inadequate. Relatively few farmers purchased FCIC insurance back then and, as a result, Congress stepped in to pass an $8 billion ad hoc disaster bailout package – almost an annual occurrence during that period - which further undermined farmers’ willingness to buy insurance.
Farmers who did purchase FCIC policies often were deeply dissatisfied with the coverage. FCIC guarantees were based on outdated government-set county yields rather than individual farm production, were largely limited to major row crops, and based on old rating. The program posted regular losses as farmers and oversight bodies alike pointed to coverage gaps and program abuse.
The 1993 experience forced USDA to confront the problems with FCIC crop insurance. It took a sustained effort over three decades by three presidential administrations – Clinton, Bush, and Obama – and backed by consistent bipartisan Congressional support, to turn the situation around. Today, in 2017, FCIC insurance is ubiquitous in rural America. Over 90 percent of major crops are covered, guarantees have grown from $13 billion in 1993 to over $100 billion in recent years. During the same period, covered acres have almost quadrupled, from about 83 million to over 300 million. FCIC insurance guarantees today are tailored to individual production histories and specialized policies exist for more than 100 different crops. Large numbers of farmers willingly pay additional premiums for higher coverage levels and specialized policies covering revenue and margin. Claims are routinely paid within 30 days of farmers filing the required paperwork, losses levels consistently within target ranges, and the program’s “improper payment” rate, a government-wide measure of program integrity, has dropped to 2.2 percent, putting it in the upper tier of Washington programs.
Can National Flood Insurance benefit from the example of Federal Crop Insurance? Certainly, crop insurance and flood insurance differ in fundamental ways. Simplistic parallels don’t apply. But the two programs share a unique challenge of government-backed insurance programs: How to provide coverage on a businesslike basis that works seamlessly both for customers and taxpayers, all while building up, rather than disrupting, an existing robust private insurance industry.
The balancing act is not easy. But if crop insurance teaches anything, certain elements are essential, which Congress should consider as it acts to reauthorize NFIP over the coming week. In Part II of this series, I will talk about them in detail.